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UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

FORM 20-F

[   ] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b)
OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

[X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
  SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended January 31, 2012

OR

[   ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

[   ] SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 0-18701

POLYMET MINING CORP.(Exact name of Registrant as specified in its charter)

British Columbia, Canada(Jurisdiction
of incorporation or organization)

Suite 390  3600 Lysander Lane, Richmond, British Columbia
V7B 1C3(Address of principal executive offices)

Douglas Newbyc/o Poly Met Mining
Inc.444 Cedar Street, Suite 2060St Paul, Minnesota 55101Tel: 651-389-4105Fax: 651-846-5849E-mail: dnewby@polymetmining.com(Name,
telephone, e-mail and/or facsimile number and address of Company contact
person)

Securities registered or to be registered pursuant to Section
12(b) of the Act:

Common Shares, without par value(Title
of Class)

i

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Name of each exchange on which registered

NYSE AmexToronto Stock Exchange

Securities registered or to be registered pursuant to Section
12(g) of the Act: None

Securities for which there is a reporting obligation pursuant to
Section 15(d) of the Act: None

Indicate the number of outstanding shares of each of the
issuer's classes of capital or common stock as of the close of the period
covered by the annual report. 174,738,124

Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities Act. [ 
 ] Yes     [X]  No

If this report is an annual or transition report, indicate by
check mark if the registrant is not required to file reports pursuant to Section
13 of 15(d) of the Securities Exchange Act of 1934.[   ]
Yes     [X]  No

Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past ninety days. [X] 
Yes     [   ] No

Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any, every Interactive
Date File required to be submitted and posted pursuant to Rule 405 of Regulation
S-T (232.405 of this chapter) during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such files).
Yes [   ]     No [   ]

As a foreign private issuer that prepares its financial
statements in accordance with International Financial Reporting Standards
(IFRS) as issued by the International Accounting Standards Board (IASB), the
Registrant is required to submit to the SEC and post on its corporate website
Interactive Data Files (as defined by Item 11 of Regulation S-T) pursuant to
Rule 405 of Regulation S-T.

However, it is the view of the SECs Division of Corporation
Finance and Office of the Chief Accountant that the Registrant is not required
to submit to the SEC and post on its corporate website Interactive Data Files
until the SEC specifies on its website an IFRS taxonomy for use by foreign
private issuers in preparing their Interactive Data Files.

As of the submission date of this Annual Report on Form 20-F,
  the SEC has not specified an IFRS taxonomy for the Registrant to use in preparing
  its Interactive Data Files.

Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated filer. See
definition of accelerated filer and large accelerated filer in Rule 12b-2 of
the Exchange Act. (Check one)

|Large accelerated filer [   ] | Accelerated filer [X] | Non-accelerated filer [   ]
|----------------------------- | --------------------- | ---------------------------

Indicate by check mark which basis of accounting the registrant
has used to prepare the financial statements included in this filing:

|U.S. GAAP [   ] | International Financial
      Reporting Standards as issued | Other [   ]
|--------------- | ----------------------------------------------------------- | -----------
|                | by the International Accounting
      Standards Board [X]   |            

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If Other has been checked in response to the previous
question, indicate by check mark which financial statement item the registrant
has elected to follow. Item 17 [   ]     Item
18 [   ]

If this is an annual report, indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)
[   ] Yes     [X]  No

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TABLE OF CONTENTS

Part
      IITEM1.
    IDENTITY
      OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS
    1ITEM2.
    OFFER
      STATISTICS AND EXPECTED TIMETABLE
    1ITEM3.
    KEY
      INFORMATION
    2ITEM4.
    INFORMATION
      ON THE COMPANY
    11ITEM5.
    OPERATING
      AND FINANCIAL REVIEW AND PROSPECTS
    29ITEM6.
    DIRECTORS,
      SENIOR MANAGEMENT AND EMPLOYEES
    40ITEM7.
    MAJOR
      SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
    45ITEM8.
    FINANCIAL
      INFORMATION
    48ITEM9.
    THE
      OFFER AND LISTING
    50ITEM10.
    ADDITIONAL
      INFORMATION
    51ITEM11.
    QUANTITATIVE
      AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
    59ITEM12.
    DESCRIPTION
      OF SECURITIES OTHER THAN EQUITY SECURITIES
    60Part
      IIITEM13.
    DEFAULT,
      DIVIDEND ARREARAGES AND DELINQUENCIES
    60ITEM14.
    MATERIAL
      MODIFICATIONS TO THE RIGHT OF SECURITY HOLDERS AND USEOF PROCEEDS
    60ITEM15.
    CONTROLS
      AND PROCEDURES
    60ITEM16A.
    AUDIT
      COMMITTEE FINANCIAL EXPERT
    62ITEM16B.
    CODE
      OF ETHICS
    62ITEM16C.
    PRINCIPAL
      ACCOUNTANT FEES AND SERVICES
    62ITEM16D.
    EXEMPTIONS
      FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
    63ITEM16E.
    PURCHASES
      OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATEDPURCHASERS
    63ITEM16F.
    CHANGES
      IN REGISTRANTS CERTIFYING ACCOUNTANT
    63ITEM16G.
    CORPORATE
      GOVERNANCE
    63ITEM16H.
    MINE
      SAFETY DISCLOSURE
    63Part
      IIIITEM17.
    FINANCIAL
      STATEMENTS
    64ITEM18.
    FINANCIAL
      STATEMENTS
    64ITEM19.
    EXHIBITS
    65


Financial Statements:

Managements
      Responsibility for the Financial Statements
    F-1Independent Auditor's Report
    F-2Consolidated
      Balance Sheet
    F-5Consolidated
      Statements of Loss and  Comprehensive Loss
    F-6Consolidated
      Statements of Changes in Shareholders Equity
    F-7Consolidated
      Statements of Cash Flows
    F-8Notes
      to Consolidates Financial Statements
    F-9


|SIGNATURES     | 68
|-------------- | --
|CERTIFICATIONS | 69

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This Annual Report on Form 20-F (this “Annual Report”) contains statements that constitute "forward-looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These statements appear in a number of different places in this Annual Report and can be identified by words such as "expects", “anticipates”, "believes", "intends", "estimates", “potential”, “possible”, "projects", "plans", and similar expressions, or statements that events, conditions or results “will”, “may”, “could”, or “should” occur or be achieved or their negatives or other comparable words.  Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements that may be expressed or implied by such forward-looking statements. The statements, including the statements contained in Item 3D “Risk Factors”, Item 4B “Business Overview”, Item 5 “Operating and Financial Review and Prospects” and Item 11 “Quantitative and Qualitative Disclosures About Market Risk”, are inherently subject to a variety of risks and uncertainties that could cause actual results, performance or achievements to differ significantly. Forward-looking statements include statements regarding the outlook for our future operations, plans and timing for our exploration and development programs, statements about future market conditions, supply and demand conditions, forecasts of future costs and expenditures, the outcome of legal proceedings, and other expectations, intentions and plans that are not historical fact.  Our actual results may differ materially from those in the forward-looking statements due to risks facing us or due to actual facts differing from the assumptions underlying our predictions.  Some of these risks and assumptions include:

- completion of environmental review;
- obtaining permits on a timely
  bases;
- general economic and business conditions, including changes in interest
  rates and exchange rates;
- prices of natural resources, costs associated with mineral exploration and
  development, and other economic conditions;
- natural phenomena;
- actions by government authorities, including changes in government
  regulation;
- uncertainties associated with legal proceedings;
- changes in the resources market;
- future decisions by management in response to changing conditions;
- our ability to execute prospective business plans, and
- misjudgments in the course of preparing forward-looking statements.

All forward-looking statements included in this Annual Report
are based on information available to us on the date of this Annual Report. We
expressly disclaim any obligation to update publicly or otherwise these
statements, whether as a result of new information, future events or otherwise
except to the extent required by law, rule or regulation. You should not place
undue reliance on forward-looking statements. You should carefully review the
cautionary statements and risk factors contained in this and other documents
that we file from time to time with the Securities and Exchange Commission (the
SEC).

PART I

ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND
ADVISORS

Not required.

ITEM 2. OFFER STATISTICS AND EXPECTED
TIMETABLE

Not required.

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ITEM 3. KEY INFORMATION

A.         
 Selected Financial Data

The following selected financial information, as of and for the
years ended January 31, 2012 and 2011 has been derived from our audited
consolidated financial statements, which are included elsewhere in this Annual
Report. The selected financial data as of and for the years ended January 31,
2010, 2009 and 2008 have been derived from our audited consolidated financial
statements not included in this Annual Report. Our consolidated financial
statements have been prepared in accordance with International Financial
Reporting Standards (IFRS) as issued by the International Accounting Standards
Board (IASB), effective with our transition to IFRS on February 1, 2010.
Previously, our consolidated financial statements were prepared in accordance
with Canadian Generally Accepted Accounting Principles (CGAAP). Material
measurement differences between CGAAP and accounting principles in the United
States applicable to us were described in our previous consolidated financial
statements.

The following table summarizes certain selected financial information
  as at and for our fiscal years ended January 31, 2012, 2011, and opening balance
  sheet as at February 1, 2010 reported under IFRS. The selected financial data
  should be read in conjunction with the consolidated financial statements and
  related notes thereto and other information included elsewhere in the Annual
  Report.

Selected Financial Data  IFRS ($'000s, except loss per
share and weighted average shares)

Year
    
    
    Year
    
    
    OpeningEnded
    
    
    Ended
    
    
    Balance1/31/12
    
    
    1/31/11
    
    
    Sheet2/1/10Revenue
    $
    
    
    $
    Income (loss) from Operations
    $
    
    
    $
    Net Loss
    $
    (3,045
    )
    $
    (6,662
    )Loss Per Share
    $
    (0.02
    )
    $
    (0.04
    )Diluted Net Loss Per Share
    $
    (0.02
    )
    $
    (0.04
    )Dividends Per Share
    $
    
    
    $
    Weighted Average Shares
    
    160,358,498
    
    
    149,444,955Working Capital
    $
    16,375
    
    $
    4,199
    
    $
    16,313Total Assets
    $
    189,571
    
    $
    156,736
    
    $
    149,692Long-Term and Convertible
    $
    32,690
    
    $
    29,406
    
    $
    33,395DebtShareholders Equity
    $
    132,366
    
    $
    102,417
    
    $
    97,645Share Capital including Share Capital Premium
    $
    170,566
    
    $
    143,248
    
    $
    132,066


The following table summarizes certain selected financial
information as at and for our fiscal years ended January 31, 2010, 2009 and 2008
as previously reported under CGAAP. The 2010 income statement information is
presented in accordance with CGAAP and may not be appropriate as a comparative
basis. The selected financial data should be read in conjunction with the
consolidated financial statements and related notes thereto and other
information included elsewhere in the Annual Report.

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Selected Financial Data  CGAAP ($'000s, except loss per
share and weighted average shares)

Year
    
    
    Year
    
    
    YearEnded
    
    
    Ended
    
    
    Ended1/31/10
    
    
    1/31/09
    
    
    1/31/08Revenue
    $
    
    
    $
    
    
    $
    Income (loss) from Operations
    $
    
    
    $
    
    
    $
    Net Loss
    $
    (9,023
    )
    $
    (5,523
    )
    $
    (4,124
    )Loss Per Share
    $
    (0.06
    )
    $
    (0.04
    )
    $
    (0.03
    )Diluted Net Loss Per Share
    $
    (0.06
    )
    $
    (0.04
    )
    $
    (0.03
    )Dividends Per Share
    $
    
    
    $
    
    
    $
    Weighted Average Shares
    
    139,456,827
    
    
    137,187,927
    
    
    133,697,572Working Capital
    $
    16,313
    
    $
    3,582
    
    $
    16,558Total Assets
    $
    139,648
    
    $
    101,599
    
    $
    88,485Long-Term and Convertible Debt
    $
    33,782
    
    $
    24,006
    
    $
    10,834Shareholders Equity
    $
    97,567
    
    $
    70,335
    
    $
    68,437Share Capital
    $
    132,066
    
    $
    105,312
    
    $
    104,615


Unless otherwise indicated, all monetary amounts in this Annual
Report are expressed in United States dollars, our reporting currency.

B.           Capitalization
and Indebtedness

Not Applicable

C.          
Reasons for the Offer and Use of Proceeds

Not Applicable

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D.           Risk
Factors

Factors that could cause our actual results to differ
materially from those described in the forward-looking statements contained in
this Annual Report and other documents we file with the SEC.

RISKS RELATING TO OUR BUSINESS

We may experience delays, higher than expected costs,
difficulties in obtaining environmental permits and other obstacles when
implementing our capital expenditure projects.

We are investing heavily in various facets of our NorthMet Project, which comprises the NorthMet copper-nickel-precious metals ore body and the Erie Plant, a large processing facility located approximately six miles from the ore body in the established mining district of the Mesabi Range in northeastern Minnesota, USA (the "NorthMet Project"). The NorthMet Project is subject to a number of risks that may make it less successful than anticipated, including:

- delays or higher than expected costs completing the environmental review
  process necessary before construction and operating permits can be issued;
- delays in the issuance of permits after completion of the environmental
  review process;
- delays or higher than expected costs in obtaining the necessary equipment or services to build and operate the NorthMet Project, and
- adverse mining conditions may delay and hamper our ability to produce the
  expected quantities of minerals.

Our future activities could be subject to environmental laws
  and regulations which may have a materially adverse effect on our future operations,
  in which case our operations could be suspended or terminated.

We are subject to a variety of federal, provincial, state and
local statutes, rules and regulations designed to, among other things:

- protect the environment, including the quality of the air and water in the
  vicinity of exploration, development, and mining operations;
- remediate the environmental impacts of those exploration, development, and
  mining operations;
- protect and preserve wetlands and endangered species, and
- mitigate negative impacts on certain archeological and cultural sites.

We are required to obtain various governmental permits to
conduct exploration, development, construction and mining activities at our
properties. Obtaining the necessary governmental permits is often a complex and
time-consuming process involving numerous U.S. or Canadian federal, provincial,
state, and local agencies. The duration and success of each permitting effort is
contingent upon many variables not within our control. In the context of
obtaining permits or approvals, we must comply with known standards, existing
laws, and regulations that may entail greater or lesser costs and delays
depending on the nature of the activity to be permitted and the interpretation
of the laws and regulations implemented by the permitting authority. The failure
to obtain certain permits or the adoption of more stringent permitting
requirements could have a material adverse effect on our business, operations,
and properties and we may be unable to proceed with our exploration and
development programs.

Federal legislation and implementing regulations adopted and
administered by the U.S. Environmental Protection Agency ("EPA"), Army Corp of
Engineers ("USACE"), Forest Service ("USFS"), Bureau of Land Management, Fish
and Wildlife Service, Mine Safety and Health Administration, and other federal
agencies, and legislation such as the Federal Clean Water Act, Clean Air Act,
National Environmental Policy Act, Endangered Species Act, and Comprehensive
Environmental Response, Compensation, and Liability Act, have a direct bearing on U.S. exploration,
development and mining operations. Due to the uncertainties inherent in the
permitting process, we cannot be certain that we will be able to obtain required
approvals for proposed activities at any of our properties in a timely manner,
or that our proposed activities will be allowed at all.

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Compliance with statutory environmental quality requirements
described above may require significant capital outlays, significantly affect
our earning power, or cause material changes in our intended activities.
Environmental standards imposed by federal, state, or local governments may be
changed or become more stringent in the future, which could materially and
adversely affect our proposed activities.

Because the price of metals fluctuate, if the prices of
metals in our ore body decrease below a specified level, it may no longer be
profitable to develop our NorthMet Project for those metals and we will cease
operations.

Prices of metals are determined by some of the following
factors:

- global and regional supply and demand;
- political and economic conditions and production costs in major metals
  producing regions of the world;
- the strength of the United States dollar, and
- expectations for inflation.

The aggregate effect of these factors on metals prices is
impossible for us to predict. In addition, the prices of metals are sometimes
subject to rapid short-term and/or prolonged changes because of speculative
activities. The current demand for and supply of various metals affect the
prices of copper, nickel, cobalt, platinum, palladium and gold, but not
necessarily in the same manner as current supply and demand affect the prices of
other commodities. The supply of these metals primarily consists of new
production from mining. If the prices of copper, nickel, cobalt, platinum,
palladium and gold are, for a substantial period, below our foreseeable costs of
production, we could cease operations.

We are dependent on our key personnel.

Our success depends on key members of our management.  The loss of the services of one or more of such key management personnel could have a material adverse effect on us.  Our ability to manage exploration and development activities, and hence our success, will depend in large part on the efforts of these individuals.  We face intense competition for qualified personnel, and we cannot be certain that we will be able to attract and retain such personnel.

We may not be able to raise the funds necessary to develop
our mineral properties. If we are unable to raise such additional funds, we will
have to suspend or cease operations.

We will need to seek additional financing to complete
development and construction of our NorthMet Project. Sources of such external
financing include future equity offerings, advance payments by potential
customers to secure long-term supply contracts, grants and low-cost debt from
certain state financial institutions, and commercial debt secured by our
NorthMet Project. If we cannot raise the money necessary to continue to explore
and develop our property, we will have to suspend or cease operations.

Our metals exploration and development efforts are highly
speculative in nature and may be unsuccessful.

As a development stage company, our work is speculative and
involves unique and greater risks than are generally associated with operating
businesses.

The development of mineral deposits involves uncertainties,
which careful evaluation, experience, and knowledge cannot eliminate. Few
properties explored are ultimately developed into producing mines. It is impossible to ensure that the current development program we
have planned will result in a profitable commercial mining operation.
Significant capital investment is required to achieve commercial production from
successful exploration efforts.

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We are subject to all the risks inherent to the mining industry, which may have an adverse affect on our business operations.

We are subject to all of the risks inherent in the mining
industry, including:

- Success in discovering and developing commercially viable quantities of
  minerals is the result of a number of factors, including the quality of
  management, the interpretation of geological data, the level of geological and
  technical expertise and the quality of land available for exploration;
- Exploration for minerals is highly speculative and involves substantial
  risks, even when conducted on properties known to contain significant
  quantities of mineralization, and most exploration projects do not result in
  the discovery of commercially mineable deposits of ore;
- Operations are subject to a variety of existing laws and regulations
  relating to exploration and development, permitting procedures, safety
  precautions, property reclamation, employee health and safety, air and water
  quality standards, pollution and other environmental protection controls, all
  of which are subject to change and are becoming more stringent and costly to
  comply with;
- A large number of factors beyond our control, including fluctuations in
  metal prices and production costs, inflation, the proximity and liquidity of
  precious metals and energy fuels markets and processing equipment, government
  regulations, including regulations relating to prices, taxes, royalties, land
  tenure, land use, importing and exporting of minerals and environmental
  protection, and other economic conditions, will affect the economic
  feasibility of mining;
- Substantial expenditures are required to construct mining and processing
  facilities;
- Title to mining properties may be subject to other claims, and
- In the development stage of a mining operation, our mining activities could
  be subject to substantial operating risks and hazards, including metal bullion
  losses, environmental hazards, industrial accidents, labor disputes,
  encountering unusual or unexpected geologic formations or other geological or
  grade problems, encountering unanticipated ground or water conditions, cave-
  ins, pit-wall failures, flooding, rock falls, periodic interruptions due to
  inclement weather conditions or other unfavorable operating conditions and
  other acts of God. Some of these risks and hazards are not insurable or may be
  subject to exclusion or limitation in any coverage which we obtain or may not
  be insured due to economic considerations.

As a result of all of these factors, we may run out of money,
in which case we will have to suspend or cease operations.

Our actual mineral reserves and mineral resources may not
conform to our established estimates.

The figures for mineral reserves and mineral resources stated
in this Annual Report are estimates and no assurances can be given that the
anticipated tonnages and grades will be achieved or that the indicated level of
recovery will be realized. Market fluctuations and the prices of metals may
render reserves and mineral resources uneconomic. Moreover, short-term operating
factors relating to the mineral deposits, such as the need for the orderly
development of the deposits or the processing of new or different grades of ore,
may cause a mining operation to be unprofitable in any particular accounting
period.

There is no assurance that any of our mineral resources, not
currently classified as mineral reserves, will ever be classified as mineral
reserves under the disclosure standards of the SEC.

Item 4.D of this Annual Report discusses our mineral resources in accordance with Canadian National Instrument 43-101 – Standards of Disclosure for Mineral Projects (“NI 43-101”).  Resources are classified as “measured resources”, “indicated resources” and “inferred resources” under NI 43-101.  However, U.S. investors are cautioned that the U.S. Securities and Exchange Commission ("SEC") does not recognize these resource classifications. There is no assurance that any of our mineral resources, not currently classified as mineral reserves, will be converted into mineral reserves under the disclosure standards of the SEC.

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We have had no production history and we do not know if we
will generate revenues in the future.

While we were incorporated in 1981, we have no history of
producing minerals. We have not developed or operated any mines, and we have no
operating history upon which an evaluation of our future success or failure can
be made. We currently have no mining operations of any kind. Our ability to
achieve and maintain profitable mining operations is dependent upon a number of
factors, including our ability to successfully build and operate mines,
processing plants and related infrastructure ourselves.

We may not successfully establish mining operations or
profitably produce metals at any of our properties. As such, we do not know if
we will ever generate revenues or profits.

We have a history of losses, which we expect will continue
for the future. If we do not begin to generate revenues or find alternate
sources of capital, we may either have to suspend or cease operations.

As a development stage company with no holdings in any producing mines, we continue to incur losses and expect to incur losses in the future. As of January 31, 2012, we had an accumulated deficit of $81.8 million. We may not be able to achieve or sustain profitability in the future. If we do not begin to generate revenues or find alternate sources of capital, we may either have to suspend or cease operations.

We may not have adequate or any insurance coverage for some
business risks that could lead to economically harmful consequences to
us.

Our businesses are generally subject to a number of risks and
hazards, including:

- industrial accidents;
- railroad accidents;
- labor disputes;
- environmental hazards;
- electricity stoppages;
- equipment failure, and
- severe weather and other natural phenomena.

These occurrences could result in damage to, or destruction of,
mineral properties, production facilities, transportation facilities, or
equipment. They could also result in personal injury or death, environmental
damage, waste of resources or intermediate products, delays or interruption in
mining, production or transportation activities, monetary losses and possible
legal liability. The insurance we maintain against risks that are typical in our
business may not provide adequate coverage. Insurance against some risks
(including liabilities for environmental pollution or certain hazards or
interruption of certain business activities) may not be available at a
reasonable cost or at all. As a result, accidents or other negative developments
involving our mining, production or transportation facilities could have a
material adverse effect on our operations.

The mining industry is an intensely competitive industry,
and we may have difficulty effectively competing with other mining companies in
the future.

We face intense competition from other mining and producing
companies. In recent years, the mining industry has experienced significant
consolidation among some of our competitors, as a result these companies may be
more diversified than us. We cannot assure you that the result of current or
further consolidation in the industry will not adversely affect us.

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In addition, because mines have limited lives, we must periodically seek to replace and expand our reserves by acquiring new properties. Significant competition exists to acquire properties producing, or capable of producing, copper, nickel and other metals.

If we are unable to successfully manage these risks, our growth
prospects and profitability may suffer.

We may be subject to risks relating to the global economy.

Recent market events and conditions, including disruptions in the international credit markets and other financial systems and the deterioration of global economic conditions could impede our access to capital or increase the cost of capital. These unprecedented disruptions in the current credit and financial markets have had a significant material adverse impact on a number of financial institutions and have limited access to capital and credit for many companies. These disruptions could, among other things, make it more difficult for us to obtain, or increase our cost of obtaining capital and financing for our operations. Our access to additional capital may not be available on terms acceptable to us or at all.

As a result of current global financial conditions, numerous financial institutions have gone into bankruptcy or have been rescued by government authorities. As such, we are subject to the risk of loss of our deposits with financial institutions that hold our cash.

RISKS RELATED TO THE OWNERSHIP OF OUR SHARES

We may experience volatility in our share price.

Our common shares are listed for trading on the Toronto Stock Exchange and on the NYSE Amex.  Our shareholders may be unable to sell significant quantities of our common shares into the public trading markets without a significant reduction in the price of our shares, if at all. The market price of our common shares may be affected significantly by factors such as changes in our operating results, the availability of funds, fluctuations in the price of metals, the interest of investors, traders and others in development stage public companies such as us and general market conditions. In recent years the securities markets have experienced a high level of price and volume volatility, and the market price of securities of many companies, particularly small capitalization development companies similar to us, have experienced wide fluctuations, which have not necessarily been related to the operating performances, underlying asset values, or the future prospects of such companies.  There can be no assurance that future fluctuations in the price of our shares will not occur.

A large number of shares will be eligible for future sale
and may depress our share price.

Our shares that are eligible for future sale may have an
adverse effect on the price of our common shares. As of January 31, 2012 there
were 174,738,124 of our common shares outstanding. The average trading volume
for the three months prior to January 31, 2012 was approximately 51,000 shares
per day on the Toronto Stock Exchange and 232,000 shares per day on the NYSE
Amex. Sales of substantial amounts of our common shares, or a perception that
such sales could occur, and the existence of options or warrants to purchase
common shares and debt convertible into common shares at prices that may be
below the then current market price of our common shares, could adversely affect
the market price of our common shares and could impair our ability to raise
capital through the sale of our equity securities.

Your ownership interest, voting power and the market price
of our common shares may decrease because we have issued, and may continue to
issue, a substantial number of securities convertible or exercisable into our
common shares.

We have issued common shares, options, restricted stock, restricted stock units, convertible debt and warrants to purchase our common shares to satisfy our obligations and fund our operations (see Item 5.A).  Since we currently do not have a source of revenue, we will likely issue additional common shares, options, warrants or other securities exercisable for or convertible into our common shares to raise money for our continued operations or as non-cash incentives to our own and our subsidiaries' directors, officers, and key employees.  If conversions of warrants and/or options into common shares or additional sales of equity occur, your ownership interest and voting power in us will be diluted and the market price of our common shares may decrease.

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Under our 2007 Omnibus Share Compensation Plan, as amended and restated (the “Plan”), the aggregate number of our common shares that may be issuable pursuant to the Plan may not at any time exceed the greater of (i) 10% of our issued and outstanding common shares and (ii)18,592,888 common shares, representing 13.62% of our outstanding common shares at the time of the approval of the Plan, of which 3,967,500 common shares are reserved for issuance as awards other than options under our bonus share incentive plan (the "Bonus Plan") which we established for our directors and key employees.  As of January 31, 2012 the aggregate number of common shares issuable pursuant to the Plan was 14,625,388 shares.

Upon any issuances or exercise of awards granted pursuant to the Plan being issued, the ownership interests and voting power of existing shareholders may be further diluted.

We have a Shareholders Rights Plan Agreement and certain
employment and management contracts that contain provisions designed to
discourage a change of control.

A Shareholders Rights Plan between us and our shareholders effective as of June 27, 2007, modified on June 17, 2008 and reapproved by shareholders on July 13, 2011 and certain employment and management agreements contain provisions that could discourage an acquisition or change of control without our board of directors’ approval.  Under the Shareholders’ Rights Plan, if a shareholder individually or in concert with other shareholders acquires 20% or more of our outstanding common shares without complying with the Shareholders’ Rights Plan or without the approval of our board of directors, all holders of record will have a right to receive one common share for each common share owned.  We have also entered into agreements with certain key employees and officers that contain severance provisions in the event of a take-over bid.  The Shareholders’ Rights Plan and the preceding agreements may make it more difficult for a third party to acquire control of us, even if such a change of control is more beneficial to shareholders.

Because we believe that we will be classified as a passive
foreign investment company (a PFIC), U.S. holders of our common shares may be
subject to United States federal income tax consequences that are worse than
those that would apply if we were not a PFIC.

Because we believe that we will be classified as a passive
foreign investment company, U.S. holders of our common shares may be subject to
United States federal income tax consequences that are worse than those that
would apply if we were not a PFIC, such as ordinary income treatment plus a
charge in lieu of interest upon a sale or disposition of our common shares even
if the shares were held as a capital asset. See Certain United States Federal
Income Tax Consequences at Item 10(E).

Absence of Dividends

We have never declared or paid cash dividends on our common
shares and do not anticipate doing so in the foreseeable future. There can be no
assurance that our board of directors will ever declare cash dividends, which
action is exclusively within its discretion. Investors cannot expect to receive
a dividend on our common shares in the foreseeable future, if at all.

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Increased Costs and Compliance Risks as a Result of Being a
Public Company

Legal, accounting and other expenses associated with public company reporting requirements have increased significantly in the past few years.  We anticipate that general and administrative costs associated with regulatory compliance will continue to increase as a result of governance requirements, including requirements under the Sarbanes-Oxley Act of 2002, as well as new rules implemented by the SEC, Canadian Securities Administrators and the TSX.  We expect these rules and regulations to significantly increase our legal and financial compliance costs and to make some activities more time consuming and costly.  There can be no assurance that we will continue to effectively meet all of the requirements of these regulations, including Sarbanes-Oxley Section 404 and Canadian National Instrument 52-109 – Certification of Disclosure in Issuer’s Annual and Interim Filings (“NI 52-109”). Any failure to effectively implement new or improved internal controls, or to resolve difficulties encountered in their implementation, could harm our operating results, cause us to fail to meet reporting obligations or result in management being required to give a qualified assessment of our internal controls over financial reporting or our independent registered public accounting firm providing an adverse opinion regarding management’s assessment.  Any such result could cause investors to lose confidence in our reported financial information, which could have a material adverse effect on our share price.  We also expect these rules and regulations may make it more difficult and more expensive for us to obtain director and officer liability insurance, and it may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage.  As a result, it may be more difficult for us to attract and retain qualified individuals to serve on our board of directors or as executive officers.  If we fail to maintain the adequacy of our internal controls, our ability to provide accurate financial statements and comply with the requirements of the Sarbanes-Oxley Act and/or NI 52-109 could be impaired, which could cause our share price to decrease.

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ITEM 4. INFORMATION ON THE COMPANY

A.           History
and Development of the Company

PolyMet Mining Corp. was incorporated under the British
ColumbiaCompanies Act and continued under the Business Corporations
Act(British Columbia) in British Columbia, Canada on March 4, 1981, under
the name Fleck Resources Ltd., which we changed to PolyMet Mining Corp. on June
10, 1998.

Our principal executive office is situated at 390  3600
Lysander Lane, Richmond, B.C V7B 1C3, Canada. Our phone number is (604)
248-0939. Our registered and records office is located at our legal counsels
offices situated at 2500  700 West Georgia Street, Vancouver, B.C. V7Y 1B3,
Canada. Our operational headquarters are located at P.O. Box 475, 6500 County
Road 666, Hoyt Lakes, Minnesota 55750-0475, United States.

We are a reporting issuer in the following Canadian provinces: Alberta, British Columbia, and Ontario. Our common shares have been listed on the Toronto Stock Exchange (TSX) since February 1, 2007 and on the TSX Venture Exchange (TSX-V) from April 13, 1984 to January 31, 2007 under the symbol "POM" and since June 26, 2006, our common shares have been listed on the NYSE Amex under the symbol “PLM”.

Our registrar and transfer agent is Computershare Investor
Services Inc. of 9th Floor, 100 University Avenue, Toronto, Ontario M5J 2Y1,
Canada.

During the years ended January 31, 2012, 2011, and 2010 we made net investments of $16.137 million, $16.519 million, and $17.754 million, respectively to acquire property, advance the environmental review, and perform work following completion of the Definitive Feasibility Study (“DFS”) on our NorthMet Project.

All of these expenses were incurred at our NorthMet Project and were funded from the proceeds of equity and convertible debt financings.  Since completion of the DFS in September 2006, these expenditures and the Erie Plant acquisition have been capitalized.

B.           Business
Overview

We are a development stage company engaged in the exploration
and development of natural resource properties. Currently our sole mineral
property is the NorthMet Project.

In the years ended January 31, 2012, 2011, and 2010, we
conducted exploration, development and acquisition activities only and did not
conduct any operations that generated revenues. Thus, we rely principally on
equity or debt convertible into equity financings to fund our projects and
expenditures.

Since 2003, we have focused on commencing commercial production
on our NorthMet Project. We have focused our efforts on four main areas:

Acquisition of the Erie Plant.
The Erie Plant is a large processing facility and associated infrastructure
located approximately six miles west of our NorthMet ore body. On November 15,
2005 and December 20, 2006 we entered into a total of three Contracts for Deed
with Cliffs Erie LLC, a subsidiary of Cliffs Natural Resources Inc. (formerly
Cleveland Cliffs, Inc.) (Cliffs), under which we now own a 100,000 ton-per-day
crushing and milling facility, a railroad and railroad access rights connecting
the Erie Plant to the NorthMet ore body, tailings facilities, 120 railcars,
locomotive fueling and maintenance facilities, water rights and pipelines, large
administrative offices on site and approximately 6,000 acres to the east and
west of and contiguous to the existing tailing facilities.

Environmental and permitting.  To commence commercial production at our NorthMet Project, various regulatory approvals are needed. In October 2005, the Minnesota Department of Natural Resources ("MDNR") published its Environmental Assessment Worksheet Decision Document establishing the MDNR as the lead state agency and the USACE as the lead federal agency (together the “Lead Agencies”) for preparation of an Environmental Impact Statement (“EIS”) for our NorthMet Project.

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In November 2009, the Lead Agencies
published the PolyMet Draft EIS, which marked the start of a period for public
review and comment that ended on February 3, 2010. During this period, the Lead
Agencies held two public meetings and received more than 3,700 submissions
containing approximately 22,000 separate comments, including an extensive
comment letter from the EPA in its role as reviewer of projects that could
impact the environment.

On June 25, 2010 the Lead Agencies
announced that they intended to complete the EIS process by preparing a SDEIS
that incorporates a proposed land exchange with the USFS Superior National
Forest and expands government agency cooperation. The USFS joined the USACE as a
federal co-lead agency through the completion of the EIS process. In addition,
the EPA has joined the effort as a cooperating agency. The MDNR remains the
state co-lead agency.

On October 13, 2010 the USACE and the
USFS published a Notice of Intent to complete the SDEIS, which will:

| |  | Supplement and supersede the Draft EIS and respond to concerns identified
    by the US EPA and other comments on the Draft EIS, and
| |  | ------------------------------------------------------------------------------------------------------------------------------------
| |  | Incorporate potential effects from the proposed land exchange between the
    USFS Superior National Forest and us.                 

Once the SDEIS is completed, it will be
made available for public review prior to preparation of the Final EIS.
Completion of the Final EIS and a subsequent Adequacy Decision by the MDNR and
Record of Decision by the federal agencies are necessary before the land
exchange can occur and various permits required to construct and operate the
NorthMet Project can be issued.

Prior to receipt of these permits, we
intend to secure production debt financing that would be available upon receipt
of key permits, with construction slated to start upon availability of
construction finance.

Engineering and feasibility. We
retained Bateman Engineering Pty. of Brisbane, Australia (Bateman) as the
coordinating consultant to prepare a DFS. In September 2006 we reported that the
DFS confirmed the economic and technical viability of our NorthMet Project.

Bateman was responsible for completing
the process design and detail engineering and cost estimates for the plant and
infrastructure. This work was supported by other firms that provided
geo-statistical reviews of the ore body, mine planning and scheduling of ore and
waste, and assessment of the market for the metals and intermediate products
planned to be produced.

Since September 2006 we have completed
additional drilling and expanded the reserves. In May 2008 we completed an
internal update of the DFS (the DFS Update) which contemplates an initial
stage in which we would sell concentrate during completion of construction and
commissioning of the hydrometallurgical plant that was contemplated in the DFS.
This approach has the advantage of staging capital costs so that the
hydrometallurgical plant can be funded in part from cash flow from sales of
concentrate, and it reduces our reliance on delivery of long lead-time equipment
before we start commercial production.

In February 2011 we announced that we
plan to build the NorthMet Project in two phases, the first to produce and
market concentrates containing copper, nickel, cobalt and precious metals, and
the second to process the nickel concentrate through a single autoclave,
resulting in production and sale of high grade copper concentrate, value added
nickel-cobalt hydroxide, and precious metals precipitate products.

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Financing and corporate development.  Since 2003 we have raised approximately $145 million from equity private placement financings and the exercise of warrants issued as part of those financings.  We have also issued $25 million initial principal debentures and have a loan of $4 million secured by land acquired with proceeds from the loan.

In October 2008, we entered into a
strategic partnership with Glencore AG (Glencore) whereby Glencore agreed (i)
to purchase up to $50 million of our floating rate secured debentures, of which
$25 million has been issued, which are exchangeable into our common shares, and
(ii) to purchase all of our production of concentrates, metal, or intermediate
products on market terms at the time of delivery, for at least the first five
years of production. We also appointed Stephen Rowland, a senior executive at
Glencore, to our Board of Directors, and a senior technical representative of
Glencore to join our Technical Steering Committee.

$7.5 million of the debentures were
issued in October 2008, $7.5 million were issued in December 2008, $5.0 million
were issued in June 2009, and $5 million were issued in August 2009. The final
$25 million debentures were not issued and any commitments in connection with
the final $25 million were cancelled in November 2010. We also issued to
Glencore warrants to purchase 6.25 million of our common shares at any time
prior to September 30, 2011 at $5.00 per share if exercised before the NorthMet
Project entered into commercial production.

In November 2009, we entered into an
agreement with Glencore whereby, in two installments, Glencore purchased $25
million of our common shares at $2.65 per share. The first installment of $10
million closed on November 23, 2009 and the second installment of $15 million
closed on January 26, 2011. We also decreased the exercise price of the warrants
issued in October 2008 to $3.00 per share.

In November 2010, we entered into a
further agreement with Glencore whereby:

| |  | Glencore agreed to purchase 15 million of our common shares at $2.00 per
  share in three tranches over the subsequent two years.                                                                                                                                                           
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Glencore agreed to extend the maturity date of the $25 million (initial
  principal) debentures issued to Glencore under the 2008 financing to September
  30, 2012.                                                                                                                        
| |  | We agreed to cancel Glencore's commitment to purchase and our commitment
  to issue $25 million debentures that had not been issued under the October
  2008 agreement and to cancel the warrants issued as part of the October 2008
  agreement and amended in the November 2009 agreement.
| |  | We issued warrants to purchase 3 million of our common shares at $2.00 per
  share at any time until December 31, 2015.                                                                                                                                                                     

On January 17, 2011 and July 15, 2011 Glencore funded the first and second $10 million tranches of the November 2010 financing agreement and we issued a total of 10 million of our common shares to Glencore.  The final $10 million will be funded and we will issue an additional 5 million common shares to Glencore no later than October 15, 2012.

In December 2011, we entered into a
further agreement with Glencore whereby:

| |  | Glencore agreed to purchase 13.333 million common shares at $1.50 per share.                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | We issued warrants to purchase 2.6 million of our common shares at $1.50 per share at any time until December 31, 2015, subject to mandatory exercise if the 20-day volume weighted average price ("VWAP") of our common shares is equal to or greater than 150% of the exercise price and we provide notice to Glencore that we have received permits necessary to start construction of the North Met Project and availability of senior construction finance, in a form reasonably acceptable to Glencore.    
| |  | Glencore agreed to extend the maturity date of the $25 million initial
  principal debentures issued to Glencore under the October 2008 transaction to
  the earlier of i) PolyMet giving Glencore 10 days notice that PolyMet has
  received permits necessary to start construction of the NorthMet project and
  availability of senior construction finance, in a form reasonably acceptable
  to Glencore, and ii) September 30, 2014.                                                                      
| |  | We amended the terms of the warrants issued in November 2010 to decrease
  the exercise price from $2.00 per share to $1.50 per share and to provide for
  mandatory exercise of the warrants if the 20-day VWAP of our shares is equal
  to or greater than 150% the exercise price and we provide notice to Glencore
  that we have received permits necessary to start construction of the North Met
  Project and availability of senior construction finance, in a form reasonably
  acceptable to Glencore.

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On June 18, 2011 we closed a loan from the Iron Range Resources and Rehabilitation Board (“IRRRB”), an economic development agency with no regulatory oversight for mine permitting activities. The loan is secured by land acquired with the proceeds of the loan, carries a fixed interest rate of 5% per annum, compounded annually if not paid, and is repayable on the earlier of June 30, 2016 or the date which the related land is exchanged with the USFS.  PolyMet issued warrants giving the IRRRB the right to purchase up to 400,000 shares of our common shares at $2.50 per share at any time until the earlier of June 30, 2016 and one year after permits are received.

C.          
Organizational Structure

Poly Met Mining, Inc., incorporated in Minnesota, USA on
February 16, 1989, is our only material, wholly owned operating subsidiary.

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D.           Property,
Plant and Equipment

Property - NorthMet Project, Minnesota, USA

Our primary mineral property is the NorthMet Project, which
comprises the NorthMet copper-nickel-precious metals ore body and the nearby
Erie Plant facilities.

In the years ended January 31, 2012, 2011, and 2010, we
conducted exploration, development and acquisition activities only and did not
conduct any operations.

(a)           History

The NorthMet ore body is located immediately south of the
eastern end of the historic Mesabi Iron Range in northeastern Minnesota. Mining
in the Iron Range dates back to the 1880s when high grade iron ore known as
hematite was first mined commercially. During the 1940s and 1950s, with
reserves of hematite dwindling, the iron industry began to focus on taconite, a
lower-grade iron ore. Eight large crushing, grinding, milling and pelletizing
facilities were built by various iron and steel companies to process the
taconite, including the Erie Plant that we acquired in November 2005.

In the 1940s, copper and nickel were discovered nearby,
following which, in the 1960s, United States Steel Corporation (US Steel)
drilled what is now our NorthMet ore body. US Steel investigated the deposit as
a high-grade, underground copper-nickel resource, but considered it to be
uneconomic based on its inability to produce separate, clean nickel and copper
concentrates with the metallurgical processes available at that time. In
addition, prior to the development of the autocatalyst market in the 1970s,
there was little market for platinum group metals (PGMs) and there was no
economic and reliable method to assay for low grades of these metals.

In 1987, the Minnesota Natural Resources Research Institute
(NRRI) published data suggesting the possibility of a large resource of PGMs
in the base of the Duluth Complex. In 1989, we acquired a 20-year renewable
mining lease over the property from US Steel and commenced an investigation into
the potential for mining and recovery of copper, nickel, and PGMs. We re-assayed
pulps and rejects from the previous US Steel drilling to obtain data on the
PGMs. Sequentially we entered into joint venture agreements with Nerco and
Argosy Mining, which assisted in identifying and quantifying potential PGM
values. However, the challenge of producing separate concentrates of saleable
copper and nickel remained.

In the mid-90s, we began investigating the use of alternative
metallurgical processes, including bio-leaching and pressure oxidation. In 1998
we focused on a hydrometallurgical technology that uses autoclaves, which are
vessels operating at high temperature, high pressure, and in an oxygen-enriched
environment, to oxidize the sulfidic ores and leach the metals therein. This
technology was developed in the 1950s and has been used commercially in the
copper, nickel, cobalt, and gold mining industries since the 1980s.

In July 2000, we entered into a joint venture arrangement with
North Limited (North), a major Australian mining company, to advance the
NorthMet project (which did not include the Erie Plant at that time) to
commercial production. Under the joint venture arrangement, North had the
opportunity to earn an 87.5% interest in the NorthMet project by producing a
feasibility study and funding 100% of the total capital costs to develop the
project.

In August 2000, Rio Tinto Limited (“Rio Tinto”) acquired North. Subsequently, Rio Tinto decided not to proceed with the NorthMet Project and we exercised our 30-day pre-emptive right, under a “change of control” clause, to terminate the joint venture arrangement.  As a result, we regained a 100% interest in the NorthMet Project.

Following completion of metallurgical pilot plant work in November 2000, we commissioned a pre-feasibility study on the project that was completed in April 2001.  The pre-feasibility study contemplated a 50,000 metric tonne-per-day (55,000 short tpd) operation and anticipated the construction of a new, stand-alone processing plant to produce copper, nickel and cobalt metals on site.  The study found the economics of the NorthMet Project were unacceptably low owing to the capital cost of building a new plant facility combined with low metal prices prevailing at that time.  No further work was done until March 2003, when a new management team took over our Company and commenced a detailed review of the project.

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The new management team believed that acquisition of the Erie
Plant had the potential to substantially reduce the capital cost and to simplify
the permitting process which could improve the project economics.

By a Memorandum of Understanding dated December 5, 2003 and an
option agreement dated February 14, 2004, we obtained an option (the Cliffs
Option) to acquire certain property, plant, and equipment located near our
NorthMet ore body from Cliffs. As consideration for the Cliffs Option, we paid
$500,000 prior to January 31, 2004 and issued to Cliffs 1,000,000 of our common
shares on March 30, 2004, valued at $229,320 to maintain our exclusive rights
until June 30, 2006. On September 15, 2005 we reached agreement with Cliffs on
the terms for the early exercise of our option and expansion of the assets to be
acquired to include 100% ownership of the Erie Plant (the Asset Purchase
Agreement). Under this agreement we agreed to pay Cliffs $1 million in cash,
6.2 million of our common shares, and commence quarterly payments of $250,000
starting on March 31, 2006 for a total of $2.4 million plus interest at 4% per
annum on the outstanding balance. The final payment was made on June 30, 2008.

On November 15, 2005, we consummated the Asset Purchase
Agreement and completed the acquisition thereunder.

On September 14, 2006, we entered into an agreement through two
separate contracts for deed with Cliffs whereby we would acquire property and
associated rights (Cliffs II.) We closed the transaction on December 20, 2006.

The Erie Plant facility includes land, crushing and milling equipment, extensive spare parts, plant site buildings, real estate, tailings impoundments and workshops, access to extensive mining infrastructure, a railroad connection to the site of the NorthMet ore body, a 120-railcar fleet, locomotive fueling and maintenance facilities, water rights and pipelines, large administrative offices on site and approximately 6,000 acres to the east and west of and contiguous to our existing tailings facilities.

The purchase price for Cliffs II consisted of 2 million of our
common shares valued at $6.16 million and $15 million in cash to be issued and
paid in three tranches, comprising:

- $1 million in cash, paid at closing;
- $7 million in cash payable in quarterly installments of $250,000 commencing December 31, 2006. Interest on the outstanding amount was payable quarterly from December 31, 2006 at the Wall Street Journal Prime Rate, and
- $7 million in cash payable in quarterly installments of $250,000 commencing on December 31, 2009 with a balloon payment of any unpaid balance due on December 31, 2011. Interest began to accrue on the outstanding amount beginning on December 31, 2009 and was payable quarterly at the Wall Street Journal Prime Rate.

We also assumed certain liabilities associated with the
property.

We repaid the outstanding balance of the two $7 million notes
plus accrued interest on December 21, 2011 and therefore, as of January 31, 2012
we have no further obligations to Cliffs other than the assumed environmental
liabilities.

Since inception, we have a cumulative deficit of $81.8 million, much of which has been incurred directly and indirectly in connection with our NorthMet Project.  These expenditures supported drilling, sampling, assaying, environmental, metallurgical testing, and the pre-feasibility studies.

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The following diagram illustrates the location of the NorthMet
  Project.

Figure No. 1 NorthMet Project Map



(b)           Location
/ Access / Climate

The NorthMet Project covers a total of approximately 16,700
acres or 25.9 square miles comprising two areas: the NorthMet mine site totaling
approximately 4,300 acres or 6.5 square miles of leased mineral rights and the
Erie Plant site totaling approximately 12,400 acres or 19.4 square miles of
freehold land located approximately six miles west of the mine site. The
property is located in St. Louis County in the Mesabi Range District about 60
miles north of Duluth, Minnesota. The NorthMet Project is easily accessible via
state and county roads. The surfaced County Highway 666 links the plant to the
town of Hoyt Lakes, itself approximately 25 miles east of Virginia, Minnesota
which is located on State Highway 53. The mine site is accessible by an
all-season gravel road from the plant site and a private railroad crosses the
property immediately south of the deposit and runs to the plant site. The plant
site is serviced by commercial railroad which connects into the US national and
Trans-Canadian railroad systems, as well as a private railroad providing access
to port facilities located on Lake Superior. Three high-voltage power lines
owned by Minnesota Power supply the plant site and there is ready access to
industrial electric power at the mine site.

The northern Minnesota climate is continental, characterized by
wide variations in temperature. The temperature in the nearby town of Babbitt
averages -14oC (7oF) in January and 19oC (66oF) in July. The average annual
precipitation is 28 inches with approximately 30% during the months from
November to April and 70% from May through October.

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(c)           Claims
and ownership

(i)           NorthMet
Leases

Pursuant to two lease agreements, we lease certain lands
covering 4,282 acres or 6.5 square miles located in St. Louis County, Minnesota,
known as the NorthMet Project:

- Pursuant to an agreement dated January 4, 1989, subsequently amended and
      assigned, we lease 4,162 acres from RGGS Land & Minerals Ltd., L.P (RGGS).
      During the year ended January 31, 2005, US Steel assigned the lease to RGGS.
      The initial term of the renewable lease was 20 years and called for total
      lease payments of $1.450 million. We can indefinitely extend the 20-year
      term by continuing to make $150,000 annual lease payments on each successive
      anniversary date. All lease payments have been paid or accrued to January
      31, 2012.
      We can, at our option, terminate the lease at any time by giving written
      notice to the lessor not less than 90 days prior to the effective termination.
      The lease payments are considered advance royalty payments and will be deducted
      from future production royalties payable to RGGS, which range from 3% to
      5% based on the net smelter return that we receive. Our recovery of the
      advance royalty payments is subject to the lessor receiving an amount not
      less than the amount of the annual lease payment due for that year.
- Pursuant to an agreement effective December 1, 2008, we lease 120 acres
      that are encircled by the RGGS property from LMC Minerals (LMC).
      The initial term of the renewable lease is 20 years and calls for minimum
      annual lease payments of $3,000 on each successive anniversary date until
      our project commences commercial production, or for the first four years,
      whichever is the shorter, after which the minimum annual lease payment increases
      to $30,000. The initial term may be extended for up to four additional five-year
      periods on the same terms. All lease payments have been paid to January
      31, 2011.
      The lease payments are considered advance royalty payments and will be deducted
      from future production royalties payable to LMC, which range from 3% to
      5% based on the net smelter return that we receive. Our recovery of the
      advance royalty payments is subject to the lessor receiving an amount not
      less than the amount of the annual lease payment due for that year.

(ii)           The
Erie Plant

The Erie PlantAs set forth under the Asset Purchase Agreement, we have assumed certain ongoing site-related environmental and reclamation obligations of Cliffs in connection with the Erie Plant.  Once we obtain our permit to mine and Cliffs is released from its obligations by certain state agencies, we will be directly obligated to comply with applicable environmental and reclamation obligations.  Prior to Cliffs' acquisition of the plant from LTV Steel and prior to our acquisition of the plant from Cliffs, both Cliffs and ourselves undertook environmental assessments and concluded that there were no material liabilities other than the ultimate closure and reclamation of the site.  Until operating permits are granted to us, Cliffs remains the “Regulated Party” for such obligations although, as part of the Asset Purchase Agreement, we have indemnified Cliffs for such costs.

The Erie Plant comprises a large crushing, grinding and milling
facility that was built by a consortium of steel companies in the mid-1950s and
processed low grade iron ore known as taconite that was transported to the
facility by railroad from nearby mines. In the mid-1980s, the consortium was
consolidated into a single owner  LTV Steel. Pickands-Mather and its successor
Cliffs operated the plant on behalf of the owners, processing approximately
100,000 tons per day of taconite ore. The plant was shut down in 2001 when LTV
Steel filed for bankruptcy protection. Since then it has been maintained
initially by Cliffs and, since November 15, 2005, by us. The plant did not
operate during the 12 months ended January 31, 2012.

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The plant is located approximately six miles west of our
NorthMet ore body, about five miles north-northwest of the town of Hoyt Lakes,
itself located about 25 miles west of Virginia, Minnesota. The plant site covers
approximately 12,400 acres, or 19.4 square miles, and is powered by electricity
from local power lines.

The plant facilities include two rail dump pockets, two primary
60 gyratory crushers, eight secondary 36 gyratory crushers, seven tertiary
seven-foot standard cone crushers, 14 seven-foot short-head crushers, 30 mill
circuits each comprising one 12x 14' rod mill and one 12x 14' ball mill, three
12'x 24' regrind mills, maintenance facilities and spare parts, extensive
conveyors, feeders, bins, auxiliary facilities and offices, established
infrastructure including a 225 MVA high voltage electrical substation, water
supply, roads, tailings basins and rail facilities.

With the completion of Cliffs II, we also own a 120-railcar
fleet, locomotive fueling and maintenance facilities, water rights and
pipelines, and large administrative offices on site.

Until the plant was closed in 2001, Cliffs had undertaken
numerous programs to update and modernize control systems. The plant is
generally in good physical condition and was operating at or near full capacity
prior to its closure. We are not yet utilizing the Erie Plant but we have
examined the plant in detail and have restarted certain pieces of equipment and
believe it to be serviceable.

We plan to use approximately one-third of the historic
productive capacity to crush and grind material that we expect to mine from the
NorthMet deposit. We intend to construct new facilities to recover copper metal,
nickel and cobalt hydroxides, and precious metal precipitates.

On January 28, 2010, Cliffs received a notice of intent to sue
pursuant to Section 505 of the Clean Water Act on behalf of the Center for
Biological Diversity, Save Lake Superior Association and the Indigenous
Environmental Network. Pursuant to the notice, these environmental groups
intended to file a lawsuit in Federal court for alleged violations by Cliffs
Erie of National Pollutant Discharge Elimination System ("NPDES") permits at
three separate locations on the Cliffs Erie property.

On April 6, 2010 Cliffs entered a consent decree with the Minnesota Pollution Control Agency (MPCA) under which it is obligated to proceed with both short and long-term mitigation of the alleged violations.  As the indemnifying party, we are working closely with Cliffs on fulfillment of Cliff’s obligations under the consent decree.  In 2010, Cliffs submitted short-term mitigation plans, which we participated in preparing.  Field study activities were completed in 2010 and 2011 and short-term mitigations were initiated in 2011 as outlined in the plans.  Long Term Mitigation Plans were submitted to the MPCA in April of 2012.  The MPCA is expected to review and respond to those plans by mid 2012.

As of January 31, 2012 we estimate the total indemnification
liability (including the additional liabilities associated with the consent
decree) to be approximately $25.8 million and, based on the expected timing of
such payments, our cost of capital, and anticipated inflation rates, we made a
provision of $22.8 million in our financial statements at that date under IFRS.

This is our best estimate of the future liability. However,
there is substantial uncertainty related to the cost of implementation of the
Long Term Mitigation Plan related to uncertainty about applicable water quality
standards, the engineering scope and cost of mitigation required to meet those
standards, and responsibility for the financial liability. Outcomes that are
unfavorable to us could result in material additional liability.

(d)           Permitting
and Environmental

We commenced the environmental review and permitting process in
early 2004. In October 2005, the MDNR published its Environmental Assessment
Worksheet Decision Document establishing the MDNR as the lead state agency and
the USACE as the lead federal agency (together the Lead Agencies) for
preparation of an EIS for the project. In 2006 these Lead Agencies selected an
independent environmental contractor (the EIS Contractor) to prepare the EIS.
The EIS Contractor is Environmental Resources Management, a leading global provider of
environmental, health and safety, risk, and social consulting services. The EIS
Contractor team included members with expertise and experience in mining
sulfidic ores. Several other government agencies (including the USFS, the Bois
Forte Band of Chippewa and the Fond Du Lac Band of Lake Superior Chippewa)
joined the EIS preparation team as Cooperating Agencies, which brought their
special expertise to the process.

- 19 -

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In January 2007, we submitted a Detailed Project Description
(DPD) to state and federal regulators. The DPD laid out our development plans
and proposed environmental safeguards including a mine plan, a wetland
mitigation plan, air and water quality monitoring plans and a closure plan with
closure estimate. Since then, we have submitted a supplemental DPD as well as
more than 100 supporting research studies, including comprehensive mine waste
characterization studies, water quality modeling and air quality modeling.

Under state and federal guidelines and regulations, a Draft EIS
identifies the environmental impact of a proposed project as well as evaluating
alternatives and ways to mitigate potential impacts. We were involved in the
process of alternative/mitigation development and had input into the technical
and economical feasibility of potential alternatives and mitigations. The EIS
Contractor prepared a series of preliminary versions of the Draft EIS that were
reviewed and commented on by the Lead Agencies, other governmental agencies, and
PolyMet.

In November 2009, the Lead Agencies published the PolyMet Draft
EIS with formal notification of publication in the Minnesota Environmental
Quality Board (EQB) Monitor and the Federal Register, which started a 90-day
period for public review and comment, which ended on February 3, 2010. During
this period, the lead Agencies held two public meetings  one in the town of
Aurora, MN near the project location and one in Blaine, MN in the metropolitan
Minneapolis-St. Paul area.

The Lead Agencies received more than 3,700 submissions
containing approximately 22,000 separate comments, including an extensive
comment letter from the EPA in its role as reviewer of projects that could
impact the environment.

On June 25, 2010 the Lead Agencies announced that they intended
to complete the EIS process by preparing a Supplemental Draft EIS ("SDEIS) that
incorporates a land exchange proposed with the USFS Superior National Forest
land exchange and expands government agency cooperation. The USFS joined the
USACE as a federal co-lead agency through the completion of the EIS process. In
addition, the EPA has joined the effort as a cooperating agency. The MDNR
remains the state co-lead agency.

On October 13, 2010 the USACE and the USFS published a Notice of Intent to complete the SDEIS, which will:

- Supplement and supersede the Draft EIS and respond to concerns identified
  by the EPA and other comments on the Draft EIS, and
- Incorporate potential effects from the proposed land exchange between the
  USFS Superior National Forest and us.

Public review of the scope of the land exchange ended on
November 29, 2010. The Notice of Intent stated that the proposed land exchange
would eliminate conflicts between the United States and private mineral
ownership and consolidate land ownership to improve Superior National Forest
management effectiveness and public access to federal lands. The proposed
exchange is in accordance with Forest Service Strategic Plan Goals to provide
and sustain long-term socioeconomic benefits to the American people, conserve
open space, and sustain and enhance outdoor recreation activities.

The NorthMet mine site encompasses approximately 2,840 of the
6,650 acres of land proposed for exchange to private ownership; the remaining
federal property would improve intermingled and inefficient ownership patterns
and eliminate conflicts if minerals development were to expand in the future.

The lands that would be received by the Superior National
Forest consist of forest and wetland habitat as well as lake frontage. These
lands would enhance public recreation opportunities and complement existing federal ownership by eliminating or reducing private
holdings surrounded by Superior National Forest land.

- 20 -

---

On February 1, 2012 we reported continued progress toward
completion of the SDEIS. ERM, the Lead Agencies' environmental consultant, has
completed a significant amount of work on the document, which will comprise nine
chapters. The first four chapters, comprising over 400 pages and including more
than 100 figures, have been drafted and are being reviewed by the Lead Agencies.

Other important milestones achieved as at February 1, 2012
include:

- Approval of air emission estimates.
- Approval of cumulative visibility, acid deposition, and fiber impact
  evaluation reports.
- Completion of geotechnical stability modeling with results now under
  review.
- Completion of direct wetland impact evaluation and wetland mitigation
  plans, which are now under review.
- Completion of hazardous materials assessment; threatened, endangered and
  sensitive species analysis; assessments of wildlife and heritage resources;
  and wetland/floodplain analysis reports for the lands involved in the land
  exchange, which have been delivered to the USFS for review.
- Delivery by us of updated project documents including the detailed project
  description, mine plan, reclamation and waste disposal plans, and extensive
  data packages.

As SDEIS preparation moves into the final stages, the Lead
Agencies have completed a detailed assessment of tasks outstanding and the
timeline. The key task is completion of detailed environmental modeling,
including quality assurance/quality control plans as well as generation,
verification, review, and documentation of modeling input data and model
assumptions.

Once all aspects of modeling have been completed, the results
will be incorporated into a preliminary SDEIS that will be available for review
by the Cooperating Agencies (including the EPA). Comments from the Cooperating
Agencies will be incorporated as appropriate, which will then be published for
public review and comment. A final EIS will incorporate comments, after which a
subsequent Adequacy Decision by the MDNR and Record of Decision by the federal
co-lead agencies are necessary before the land exchange can occur and various
permits required to construct and operate the project can be issued.

A number of permits will need to be issued by the MDNR, the
MPCA and the USACE before construction can begin - the major permits are:

U.S.
Army Corps of Engineers

- Section 404 Individual Permit for Impacted Wetlands

Minnesota
Department of Natural Resources

- Permit to Mine
- Water Appropriations Permit
- Dam Safety Permit
- Wetland Replacement Plan

Minnesota
Pollution Control Agency

- National Pollutant Discharge Elimination System (NPDES) Permit (storm
  water)
- State Disposal System (SDS) Permit
- Air Emissions Permit

As of January 31, 2012, we had spent approximately $40.3 million on environmental review and permitting activities comprising $6.5 million expensed prior to October 2006 and $33.8 million since October 2006.

- 21 -

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(e)           History
of Exploration

Cautionary Note to United States Investors
          Concerning Estimates of Measured, Indicated and Inferred ResourcesThis section uses the terms ”measured resources”, ”indicated resources”, and ”inferred resources”.  We advise United States investors that while these terms are recognized and required by Canadian regulations (under NI-43-101), the SEC does not recognize them.  United States investors are cautioned not to assume that any part or all of the mineral deposits in these categories will ever be converted to reserves. In addition, “inferred resources” have a great amount of uncertainty as to their existence and economic and legal feasibility.  It cannot be assumed that all or any part of an Inferred Mineral Resource will ever be upgraded to a higher category.  Under Canadian Rules, estimates of Inferred Mineral Resources may not form the basis of Feasibility or Pre-Feasibility Studies, or economic studies except for a Preliminary Assessment as defined under NI 43-101.  United States investors are cautioned not to assume that part or all of an inferred resource exists, or is economically or legally mineable.Important Notes and Assumptions Throughout.1. **The
          terms Mineral Resources and Reserves as used herein conform to the definitions**
          contained in NI 43-101.2.
          Reserves are contained within the envelope of Measured & Indicated
          Mineral Resource. Mineral Resources are not Reserves and do not
          have demonstrated economic viability.3.
          Mineral Resources and Reserves have been calculated using the following
          metal prices: Copper - $1.25/lb, Nickel - $5.60 per pound, Cobalt
          - $15.25/lb, Palladium - $210 per ounce, Platinum - $800 per
          ounce and Gold - $400 per ounce.4. **Base
          Case economics for the purpose of the Technical Report to NI 43-101standards
          are the** weighted average of the three-year trailing (60%)
          and two-year forward (40%) market prices using July 31, 2006
          as a reference for the three-year trailing price and average forward
          prices during July 2006 for forward prices. Specifically, these
          prices are: Copper - $2.25/lb, Nickel - $7.80 per pound, Cobalt -
          $16.34/lb, Palladium - $274 per ounce, Platinum - $1,040 per ounce
          and Gold - $540 per ounce.5. **The
          copper equivalent grade is calculated by multiplying the grade of each
          metal by the metal** price (in the same units) used in reserve
          and resource modeling (see note 3) and dividing the product by
          the copper price.6. **The
      Net Metal Value (NMV) is calculated by summing the product of the grade of
      each metal,** the metal price (in the same units) used in
      reserve and resource modeling (see note 3), the expected metal
      recovery, and the expected payment terms.


Prospectors first discovered copper and nickel near Ely,
Minnesota about 20 miles north of NorthMet in the 1940s. Subsequently, the Bear
Creek Mining Company conducted a regional exploration program resulting in the
discovery of the Babbitt deposit (northeast of NorthMet). US Steel began an
exploration program in the Duluth Complex in the late 1960s and over the next
few years drilled 112 core holes into the NorthMet property (then called Dunka
Road) to an average depth of 1,200 feet. In 1991, Nerco drilled an additional 2
shallow holes.

From 1998 through a winter drill program in 2006/7, we have conducted
  a series of drilling programs totaling 243 holes for approximately 146,000 feet
  of core and reverse circulation drilling. These holes, combined with recompilation
  of all prior work, for a total of 357 diamond and reverse circulation holes
  aggregating to approximately 280,000 feet, were the basis of our most recent
  resource and reserve estimates. Since the summer of 2007 we have drilled an
  additional 80 shallow holes totaling 26,000 feet, which were not incorporated
  into our 2007 Technical Report under NI 43-101. Total drilling is 437 holes
  to an average depth of 700 feet.

- 22 -

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Mineral Resources and Reserves

Within the overall mineralized envelope defined by these
exploration programs, the DFS defined measured and indicated mineral resources
above the 500-foot elevation (approximately 1,120 feet below surface.) On August
9, 2007 we reported that measured and indicated mineral resources at the
NorthMet Project had increased by 51% to 638 million short tons from the 422
million short tons reported in the DFS. The revised mineral resource estimates
are based on the same cut-off grades used in the DFS  namely a Net Metal Value
(NMV) of $7.42 per ton, reflecting mine planning at a copper price of $1.25
per pound and a nickel price of $5.60 per pound  see notes to the following
table.

The increase in mineral resources reflects two changes:

- Data from the calendar 2007 drill program which confirmed the continuity of
  the main mineralized zone and the size of the Magenta Zone, which was extended
  down dip and to the west. These changes contributed 149 million short tons to
  the increase in measured and indicated mineral resources.
- Extension of the overall mineral envelope to approximately 1,620 feet below
  surface (0  elevation), compared with the prior cutoff at approximately
  1,120 feet below surface (500  elevation). This change contributed 67
  million short tons to the increase in measured and indicated mineral
  resources.

As a result, measured and indicated mineral resources have
increased by 216 million short tons to 638 million short tons and inferred
mineral resources have been expanded to 252 million short tons from 121 million
short tons  all on the DFS cut-off grade. Details of the mineral resources are
set out in the following table.

Updated Mineral Resources compared with DFS



| | 1. | Mineral resources have been calculated using the following metal prices: Copper - $1.25/lb, Nickel - $5.60 per pound, Cobalt - $15.25 per pound, Palladium - $210 per ounce, Platinum - $800 per ounce and Gold - $400 per ounce.           
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 2. | The NMV is calculated by summing the product of the grade
      of each metal, the metal price (in the same units) used in resource
      modeling, the expected metal recovery, and the expected payment terms as
      set out in the DFS.

The resource estimate update was completed by a team from the
Toronto office of Wardrop Engineering working closely with PolyMets chief
geologist, at the time, Richard Patelke. A NI 43-101 compliant report describing
this increase was issued in September 2007 and has been filed on PolyMets
website (www.polymetmining.com) and on SEDAR at www.sedar.com. Pierre Desautels of Wardrop and Richard
Patelke of PolyMet are the Qualified Persons for this report.

- 23 -

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On September 26, 2007 PolyMet reported that proven and probable
mineable reserves at the NorthMet Project had increased by 51% to 275 million
short tons from the 182 million short tons reported in the DFS.

These reserves are constrained to mineable blocks associated
with material contained in the measured and indicated resource blocks in the DFS
for which detailed mining cost estimates, infrastructure planning, and waste
rock stockpile locations were prepared as part of a larger study supporting the
DFS. It should be noted that the inferred resources were not included in the DFS
or in this interim reserve update.

In conjunction with this increase in reserves, the strip
(waste:ore) ratio for the revised mine plan declined to 1.46:1 from 1.66:1.

Updated Reserves compared with DFS

Short Tons
    Copper
    Nickel
    Cobalt
    Precious Metals(millions)
    (%)
    (%)
    (%)
    (oz/st)
    (g/mt)Updated Reserve
      EstimateProven
    118.1
    0.30
    0.09
    0.008
    0.011
    0.368Probable
    156.5
    0.27
    0.08
    0.008
    0.010
    0.327Proven and Probable
    274.7
    0.28
    0.08
    0.008
    0.010
    0.337Waste
    401.2Strip Ratio
    1.46DFSProven
    80.4
    0.32
    0.09
    0.008
    0.012
    0.406Probable
    101.3
    0.30
    0.08
    0.007
    0.011
    0.385Proven and
      Probable
    181.7
    0.31
    0.08
    0.008
    0.012
    0.395Waste
    302.3Strip Ratio
    1.66


| | 1. | The terms Mineral Resources and Reserves as used herein
      conform to the definitions contained in NI 43- 101.                                                                                                                                        
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 2. | Mineral Resources and Reserves have been calculated using
      the following metal prices: Copper - $1.25/lb, Nickel - $5.60 per pound,
      Cobalt - $15.25/lb, Palladium - $210 per ounce, Platinum - $800 per ounce
      and Gold - $400 per ounce.

The reserve estimate update was completed by a team from the
Toronto office of Wardrop Engineering working closely with our team of Don
Hunter and Richard Patelke. Gordon Zurowski of Wardrop and Don Hunter of PolyMet
were the Qualified Persons.

(f)           Geology
and Mineralization

The geology of northeastern Minnesota is predominantly
Precambrian in age. Approximately 1.1 billion years ago, mid-continent rifting
resulted in mafic volcanism and associated intrusions along a portion of the
Midcontinent Rift System, which extends from Ohio, through the Lake Superior
region to Kansas. The Midcontinent Rift consists of three parts: thick lava
flows, intrusive rock and overlying sedimentary rock. There are three major
intrusive complexes: the Coldwell Complex of Ontario, the Mellen Complex along
the south shore of Lake Superior and the Duluth Complex along the north shore.

The Duluth Complex hosts the NorthMet mineralization. The
Complex extends in an arcuate belt from Duluth to the northeastern tip of
Minnesota. Emplacement of the intrusion appears to have been along a system of
northeast-trending normal faults that form half-grabens stepping down to the
southeast. The magma was intruded as sheet-like bodies along the contact
between the Early Proterozoic sedimentary rocks of the Animikie Group and the
mafic lava flows of the North Shore Volcanic Group.

- 24 -

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The Duluth Complex is represented by the Partridge River
intrusion which overlays the Biwabik Iron Formation  the Partridge River
intrusion is locally sub-divided into seven troctolitic units:

| | • | Unit 7 and Unit 6  texturally homogeneous
      plagioclase-rich troctolite, each with a persistent ultramafic base. Units
      6 and 7 are each about 400 ft. thick.                                                                                                                                                                                                                                                                                                                           
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | • | Unit 5  coarse grained anorthositic troctolite (300 ft.)
      grading down to Unit 4.                                                                                                                                                                                                                                                                                                                                                                                                           
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | • | Unit 4  homogeneous augite troctolite and troctolite,
      with a less persistent ultramafic horizon. The contact between Unit 4 and
      Unit 5 is difficult to establish and the two units may actually be a
      single unit.                                                                                                                                                                                                                                                              
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | • | Unit 3  the most easily recognized unit because of its
      mottled appearance due to olivine oikocrysts. It is fine grained
      troctolitic anorthosite to anorthositic troctolite. Average thickness is
      250 ft. but locally can be up to 500 ft.                                                                                                                                                                                                                                      
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | • | Unit 2  homogeneous troctolite with abundant ultramafic
      units and a generally persistent basal ultramafic. This unit shows the
      most variation in thickness and may be locally absent. Units 2 & 3 are
      modeled as a single package for resource estimation.                                                                                                                                                                                                                     
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | • | Unit 1  the most heterogeneous unit, both texturally and
      compositionally. Grain size is generally coarser at the top of the unit
      and fines downward. The unit contains abundant inclusions of the footwall
      rock and is noritic towards the base. This is the main sulfide mineral
      bearing unit. Two internal ultramafic layers are generally present. Unit 1
      is probably the result of multiple pulses of magma injection. Average
      thickness is about 450 ft.

The general trend of the sedimentary rocks at the base of the
NorthMet deposit is striking east-northeast and to dipping to the southeast
about 15-25°, and the Partridge River intrusion appears to follow this general
trend.

The majority of the rock at NorthMet is unaltered, with a minor
alteration found along fractures and micro-fractures, consisting of serpentine,
chlorite and magnetite replacing olivine, uralite and biotite replacing
pyroxene, and sausserite and sericite replacing plagioclase. Sulfide
mineralization does not appear to be directly related to the alteration.

The metals of interest at NorthMet are copper, nickel, cobalt,
platinum, palladium, gold and lesser amounts of rhodium and ruthenium. In
general, the metals are positively correlated with copper mineralization, cobalt
being the main exception. Unit 1 mineralization is found throughout the deposit.
A less extensive mineralized zone is found in Units 4, 5, and 6 in the western
part of the deposit, it is copper-rich relative to sulfur, and moderately
enriched in PGMs.

Sulfide mineralization consists of chalcopyrite, cubanite,
pyrrhotite and pentlandite with minor bornite, violarite, pyrite, sphalerite,
galena, talnakhite, mackinawite and valleriite. Sulfide minerals occur mainly as
blebs interstitial with plagioclase, olivine and augite grains, but also occur
within plagioclase and augite grains, as intergrowths with silicates, or as fine
veinlets. The percentage of sulfides varies from trace to about 5%. Palladium,
platinum and gold are associated with the sulfides.

The NorthMet deposit has been identified over a length of
approximately 2.5 miles and has been found to a depth of more than 2,600 feet.
It is covered by a thin layer of glacial till but otherwise reaches to the
surface at the northern edge.



- 25 -

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(g)           Development
Plans

Our development plans were set out in our DFS prepared by
  Bateman in September 2006. This contemplated the development of a new open pit
  mine at our NorthMet ore body, using rail infrastructure we acquired as part of
  Cliffs II to transport approximately 32,000 tons of ore per day from the mine
  site to our Erie Plant, where we would use our existing facilities to crush and
  mill the rock. The finely ground material would then pass to a new flotation
  circuit with waste material sent to existing waste tailings facilities and the
  concentrate being passed to a new hydrometallurgical plant that we plan to build
  at the Erie Plant site.

We believe that we have completed exploration work required for
the initial phases of production at NorthMet, however, we may need to conduct
further in-fill drilling during the anticipated life of the project. Since
publication of the DFS, we have recognized the commercial potential to sell
concentrates during the construction and commissioning of the new
hydrometallurgical facilities.

DFS Update

On May 20, 2008 we reported revised plans and cost estimates
for construction and operating costs. These revised plans included:

- the sale of concentrate during the construction and commissioning of new
  metallurgical facilities resulting in a shorter pre-production construction
  period and reduced capital costs prior to first revenues ($312 million versus
  $380 million) despite the inclusion of an estimated $65 million of additional
  measures to protect the environment;
- the new metallurgical facilities to be constructed during initial
  production and sales of concentrate. We anticipate that much of the additional
  $290 million of capital costs, including $20 million of additional
  environmental measures, will be largely funded from cash flow from initial
  operations;
- mine plans (based on copper at $1.25 per pound) reflect the increase in
  reserves and decrease in stripping ratio reported on September 26, 2007, the
  use of 240-ton trucks, and owner versus contract mine operations, and
- $77 million of mining equipment, which was assumed to be provided by a
  mining contractor in the DFS has been incorporated as an operating lease in
  updated operating costs.

On February 2, 2011 we reported a further refinement to the
development plan whereby we propose to build the project in two phases:

- Phase I: produce and market concentrates containing copper, nickel, cobalt
  and precious metals, and
- Phase II: process the nickel concentrate through a single autoclave,
  resulting in production and sale of high grade copper concentrate, value added
  nickel-cobalt hydroxide, and precious metals precipitate products.

The changes reflect continued metallurgical process and other
project improvements as well as improved environmental controls that are being
incorporated into the SDEIS. The analysis is based on likely metal market
conditions. The advantages, compared with the earlier plan, include a better
return on capital investment, reduced financial risk, lower energy consumption,
and reduced waste disposal and emissions at site.

Approximately $127 million of the total $602 million in total
capital costs, and of the $290 million capital costs for the larger scale
metallurgical facilities described in the 2008 DFS Update was attributed to the
second autoclave and the copper circuit.

We plan to provide a detailed project update when the project
development plans now being analyzed in the SDEIS are finalized. This detailed
project update will include revised mine plans, process and project
improvements, and will incorporate the latest environmental controls.

Saleable Products 
  The DFS describes three products from NorthMet. During
construction and commissioning of the hydrometallurgical plant, we anticipate
that we will sell separate copper and nickel concentrates. Once the
smaller-scale hydrometallurgical plant is operational, our long term products
will comprise copper concentrate, a mixed hydroxide of nickel and cobalt that will
be shipped to a third-party processor to produce nickel and cobalt metals, and a
precious metals precipitate that will be shipped to a third-party refiner for
production of palladium, platinum and gold.

- 26 -

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On September 4, 2008 we announced that we had reached an
agreement with Glencore whereby Glencore would purchase our production of
concentrates, metals, or intermediate products at prevailing market terms at the
time of delivery for at least the first 5 years of production. We executed the
agreement on October 31, 2008 as part of a strategic alliance between us and
Glencore.

Capital Costs 
  Our May 2008 DFS Update set out that, on a like-for-like basis
(excluding scope changes), the total capital cost had increased to $516.8
million. This increase reflects both cost inflation and design scope changes
since the DFS, including facilities needed to ship concentrate during the
construction and commissioning of the new hydrometallurgical plant. This staged
approach shortens the initial construction period, makes the project less
sensitive to the delivery schedule for long lead time equipment such as
autoclave vessels, and means that we can commence operations of the mine, the
existing crushing and milling plant, the existing tailings disposal facilities,
and the new flotation circuit, before starting the new hydrometallurgical plant.

In addition to these scope changes and the effect of inflation,
we anticipate spending an additional $85.1 million on measures to protect the
environment, over and above the measures contemplated in the DFS. $76.6 million
for mining equipment that was assumed to be provided by a mining contract in the
DFS has been incorporated as an operating lease in updated operating costs.

May 2008 DFS Update Capital Costs (US dollars,
millions)

|                                   |  |              |  |  | Change   |  |  | Initial
      Concentrate | 
|---------------------------------- |  | ------------ |  |  | -------- |  |  | ------------------------- | 
|                                   |  | Full Project |  |  | from DFS |  |  | Sales                     | 
|                                   |  |              |  |  |          |  |  |                           | 
|Definitive Feasibility Study       |  | 379.8        |  |  |          |  |  | 138.7                     | 
|Escalation and other scope changes |  | 137.0        |  |  | 36%      |  |  | 108.9                     | 
|Total                              |  | 516.8        |  |  |          |  |  | 247.6                     | 
|Environmental measures             |  | 85.1         |  |  |          |  |  | 64.7                      | 
|Total change                       |  | 222.1        |  |  | 58%      |  |  | 173.6                     | 
|TOTAL                              |  | 601.9        |  |  |          |  |  | 312.3                     | 
|                                   |  |              |  |  |          |  |  |                           | 

In February 2011 we announced that we had simplified the
metallurgical process whereby we plan to build one hydromet circuit to process
nickel concentrate, and continue producing and marketing copper concentrate over
the long term. This revised process eliminates the planned copper
solvent-extraction/electro-winning circuit. These elements represented
approximately $127 million of the total $602 million capital costs, but have no
effect on the capital cost for the concentrates-only phase of the project.

May 2008 DFS Update Operating Plans and Costs 
  The overall mining and operating plan remains the same as that
defined in the DFS and which forms the basis of the plan being analyzed in the
environmental impact statement. We intend to mine 32,000 tons of ore per day for
an operating life of twenty years, processing a total of 224 million tons of
ore. The mine plan continues to be based on the following metal prices: copper -
$1.25/lb, nickel - $5.60 per pound, cobalt - $15.25/lb, palladium - $210 per
ounce, platinum - $800 per ounce, and gold - $400 per ounce.

Operating costs per ton of ore processed have increased to
$13.33 from $11.02 in the DFS reflecting higher fuel, mine equipment, and other
consumable costs, as well as general inflation. The cost of mining and
delivering ore to the plant is now estimated at $4.31 per ton compared with
$3.80 per ton in the DFS. The increase in mining costs has been partially offset
by the lower strip ratio, larger mining equipment, and owner versus contractor
operation.

- 27 -

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The economic analysis is based on SEC-reserve standards using
prices at the time, namely the three-year trailing average at April 30, 2008.
This price deck is: copper - $2.90/lb, nickel - $12.20/lb, cobalt - $23.50/lb,
palladium - $320/oz, platinum - $1,230/oz, and gold - $635/oz. While these
prices are somewhat higher than those used on the economic analysis in the DFS,
the price are slightly below the three-year average at the end of our fiscal
2009 year, namely: copper - $3.13/lb, nickel - $12.45/lb, cobalt - $27.34/lb,
palladium - $342/oz, platinum - $1,343/oz, and gold - $733/oz.

The DFS Update prices translate into copper cash costs of $1.05 per pound using a co-product basis to calculate costs, compared with the DFS estimate of $0.81 per pound. Taking revenues from the other metals as a deduction against costs, the co-product basis shows a cost of $(0.28) per pound compared with $0.06 per pound in the DFS.

We plan to further update the DFS during the course of our
current fiscal year to reflect all project changes that are being incorporated
into the SDEIS.

Economic Summary - May 2008 DFS Update Highlights

Key economic metrics include earnings before interest, tax,
depreciation, and amortization (EBITDA) which is projected to increase to $217.3
million on average over the first five years of operations from $175.3 million
estimated in the DFS. The net present value of future cash flow (after tax)
discounted at 7.5% is estimated to be $649.4 million compared with $595.4
million in the DFS, and the after tax internal rate of return is now estimated
at 30.6% compared with 26.7% in the DFS. The table below also sets out the
affect on EBITDA of a 10% change in each metal price.





- 28 -

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(h)          
Regulations and Government Rules

The mining industry has been subject to increasing government
  controls and regulations in recent years. We have obtained all necessary permits
  for exploration work performed to date and anticipate no material problems
  obtaining the necessary permits to proceed with further development.

ITEM 4A. UNRESOLVED STAFF COMMENTS

None.

ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS

(a)           Operating
Results

This discussion and analysis should be read in conjunction with our consolidated financial statements.  Our functional currency is the United States dollar and our financial statements are prepared in accordance with IFRS as issued by the IASB, effective with the Company’s transition to IFRS on February 1, 2011. Previously, the Company’s consolidated financial statements were prepared in accordance with CGAAP.  Fiscal 2010 income statement information is presented in accordance with CGAAP and may not be appropriate as a comparative basis.  Material measurement differences between CGAAP and accounting principles in the United States, applicable to the Company, were described in the Company’s previous consolidated financial statements.

Summary of Events During the Fiscal Year Ended January 31,
2012

During the year ended January 31, 2012, and through the date of
the filing of this Annual Report, we continued to advance our NorthMet Project
including the activities noted below.

On February 2, 2011 we announced that we had simplified the
proposed metallurgical process and now plan to build the project in two phases:

- Phase I: produce and market concentrates containing copper, nickel, cobalt
  and precious metals, and
- Phase II: process the nickel concentrate through a single autoclave,
  resulting in production and sale of high grade copper concentrate, value added
  nickel-cobalt hydroxide, and precious metals precipitate products.

Previous plans included a second autoclave and a copper solvent
extraction/electro-wining (SX-EW) circuit to produce copper metal along with
value added nickel-cobalt hydroxide and precious metals precipitate products.
The changes reflect continued metallurgical process and other project
improvements as well as improved environmental controls that are being
incorporated into the SDEIS. The advantages, compared with the earlier plan,
include a better return on capital investment, reduced financial risk, lower
energy consumption, and reduced waste disposal and emissions at site.
Approximately $127 million of the total $602 million capital costs estimated in
the May 2008 DFS Update will not be incurred in this revised plan.

On March 10, 2011 we appointed Alan R. (Al) Hodnik and Michael
M. (Mike) Sill to our Board of Directors.

On April 15, 2011 we reported that the Company and the Lead
Agencies expect to finalize detailed work plans for the SDEIS by May 2011. The
detailed project, which includes the simplified metallurgical process and
reduction in capital costs that we announced on February 2, 2011, will then be
modeled to predict environmental impacts of the project. The third party
contractor hired by the lead agencies will then prepare a preliminary
supplemental draft Environmental Impact Statement, which will be reviewed by the
Lead Agencies, cooperating agencies (including the US Environmental Protection
Agency and tribal governments) and ourselves. Once that review process has been
completed, the SDEIS will be finalized for publication and public comment.

- 29 -

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On April 15, 2011 the Board of the Iron Range Resources and Rehabilitation Board (“IRRRB”) reapproved a secured loan to our subsidiary, Poly Met Mining, Inc. of up to $4 million.  The loan closed on June 28, 2011, is secured by the land acquired, carries a fixed interest rate of 5% per annum, compounded annually if not paid, and is repayable on the earlier of June 30, 2016 or the date which the related land is exchanged with the USFS.  PolyMet issued warrants giving the IRRRB the right to purchase up to 400,000 of our shares at $2.50 per share at any time until the earlier of June 30, 2016 and one year after permits are received.

On July 15, 2011 the Company sold to Glencore 5 million common shares at $2.00 per share pursuant to the November 2010 private placement agreement.  In a separate transaction, Glencore acquired 9.2 million of our common shares from Cliffs, representing that company's entire holding of our common shares.

On September 19, 2011 we reported that completion of the SDEIS
was taking longer than had been anticipated due to the time the Lead Agencies
were spending receiving and considering input from Cooperating Agencies during
the planning process, an important step in producing an adequate and defensible
SDEIS. In addition, some time was lost because of the Minnesota state government
shutdown in July.

We also announced that the Governor of Minnesota had announced
important strengthening of the state's management of the environmental review
and permitting process for mining projects, comprising two elements: creation of
a Mining Coordinator position to oversee and coordinate the environmental review
and permitting process for mining projects, and creation of a Mining Sub-Cabinet
comprised of the Commissioners of the DNR, the MPCA, the Department of
Employment and Economic Development ("DEED"), and the IRRRB.

On December 6, 2011 we sold to Glencore 13,333,333 common shares at $1.50 per share and issued warrants to purchase 2,600,000 of our common shares at $1.50 per share at any time until December 31, 2015, subject to mandatory exercise if the 20-day volume weighted average price of our shares is equal to or greater than 150% the exercise price and we provide notice to Glencore that we have received permits necessary to start construction of the North Met Project and availability of senior construction finance, in a form reasonably acceptable to Glencore.  Approximately $7.0 million was used to repay all outstanding notes payable to Cliffs.

On December 6, 2011 the Company and Glencore also amended some
of the existing financing agreements comprising:

- The maturity date of the Tranche A-D debentures (collectively, the "Issued Debentures") was extended from September 30, 2012 to the earlier of i) us giving Glencore 10 days notice that we have received permits necessary to start construction of the NorthMet project and availability of senior construction finance, in a form reasonably acceptable to Glencore (the "Early Maturity Event"), and ii) September 30, 2014.
- Upon occurrence of the Early Maturity Event, the initial principal and
  capitalized interest will be exchanged into common shares of PolyMet at $1.50
  per share. The Issued Debentures were issued in four tranches (Tranches A-D)
  between October 2008 and September 2009.
- The warrants issued to Glencore in November 2010 (the "2010 Warrants") have been amended such that Glencore has the right to purchase 3 million of our common shares at $1.50 per share at any time until December 31, 2015, subject to mandatory exercise if the 20-day volume weighted average price of our shares is equal to or greater than 150% the exercise price and we provide notice to Glencore that we have received permits necessary to start construction of the NorthMet Project and availability of senior construction finance, in a form reasonably acceptable to Glencore.

The final tranche of the 2010 private placement, comprising the
sale of 5 million common shares at $2.00 per share no later than October 15,
2012 is unaffected by the amendments to the financing agreements, as are the off
take and marketing agreements whereby Glencore will market all of PolyMet's
products for a minimum of five years from the start of commercial production at
NorthMet.

- 30 -

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Summary of Operating Results

As of January 31, 2012, we operated in one segment, the
exploration and development of the base and precious metals at our NorthMet
Project. Head office comprises general and administrative costs, share based
compensation expense, financing expenses, foreign exchange interest income,
assets, purchase of property, plant and equipment and amortization reported by
the Canadian head office. 2010 operating loss information is presented in
accordance with CGAAP and may not be appropriate as a comparative basis.

|                       |   | NorthMet |  |   | Head Office |  |   | Consolidated | 
|---------------------- | - | -------- |  | - | ----------- |  | - | ------------ | 
|                       |   | Project  |  |   | ($000s)    |  |   | ($000s)     | 
|2012                   |   | ($000s) |  |   |             |  |   |              | 
|                       |   |          |  |   |             |  |   |              | 
|Segment operating loss | $ | 1,025    |  | $ | 2,020       |  | $ | 3,045        | 
|                       |   |          |  |   |             |  |   |              | 
|Identifiable assets    | $ | 173,336  |  | $ | 16,235      |  | $ | 189,571      | 
|                       |   |          |  |   |             |  |   |              | 
|                       |   |          |  |   |             |  |   |              | 
|                       |   |          |  |   |             |  |   |              | 
|2011                   |   |          |  |   |             |  |   |              | 
|                       |   |          |  |   |             |  |   |              | 
|Segment operating loss | $ | 1,631    |  | $ | 5,031       |  | $ | 6,662        | 
|                       |   |          |  |   |             |  |   |              | 
|Identifiable assets    | $ | 147,726  |  | $ | 9,010       |  | $ | 156,736      | 
|                       |   |          |  |   |             |  |   |              | 
|                       |   |          |  |   |             |  |   |              | 
|                       |   |          |  |   |             |  |   |              | 
|2010                   |   |          |  |   |             |  |   |              | 
|                       |   |          |  |   |             |  |   |              | 
|Segment operating loss | $ | 892      |  | $ | 8,131       |  | $ | 9,023        | 
|                       |   |          |  |   |             |  |   |              | 
|Identifiable assets    | $ | 118,257  |  | $ | 21,391      |  | $ | 139,648      | 

On November 12, 2010, we announced that we had renegotiated our
debenture financing with Glencore. The agreed amendments to the debenture
financing are as follows:

- The maturity date, and therefore accounting for accretion, of the Issued
  Debentures was extended from September 30, 2011 to September 30, 2012. The
  Issued Debentures were issued in four tranches between October 2008 and
  September 2009. The total initial principal of the Issued Debentures is $25
  million with $4.018 million of accrued interest as of January 31, 2012. The
  amended Issued Debentures were exchangeable into our common shares at $4.00
  per share.
- Cancellation of Glencores commitment to purchase, and our commitment to
  issue, $25 million of Tranche E Debentures which were to be issued upon
  publication of the Final Environmental Impact Statement, receipt of a term
  sheet for construction financing, and other customary conditions.
- Cancellation of warrants to purchase 6.25 million of our common shares
  issued in October 2008 and amended in November 2009.
- Issuance of warrants to purchase 3 million of our common shares at $2.00
  at any time until December 31, 2015.

On November 12, 2010, we announced that we had entered into a
definitive agreement with Glencore to sell in a private placement 15 million
common shares at $2.00 per share for gross proceeds of $30 million, before
deducting estimated offering expenses. Completion of the sale of these shares
and funding are expected to occur in the following three tranches
subject, in each case, to certain closing conditions:

- 31 -

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- Tranche 1 of $10 million closed on January 17, 2011;
- Tranche 2 of $10 million closed on July 15, 2011, and
- Tranche 3 of $10 million will close no later than October 15, 2012.

Glencore has a right of first refusal to provide all material
financings, subject to regulatory approval, if it owns 10% or more of our issued
and outstanding shares and, if it owns more than 5% of our issued and
outstanding shares, Glencore has the right to participate in any equity-related
financing to maintain its partially diluted ownership interest.

In accordance with IFRS, the November 2010 transactions, whereby our existing convertible debt at that date with a book value of $26.546 million was deemed to have been extinguished and reissued, all of the costs associated with the transaction have been recorded as a non-cash expense of $2.931 million

Year ended January 31, 2012 compared with the year ended
January 31, 2011

Overall.Our focus for the fiscal year ended January 31,
2012 was to provide the Lead Agencies with input into the SDEIS and permit work
at our NorthMet Project and to obtain additional financing.

Loss for the year.During the year ended January 31,
2012, we incurred a loss of $3.045 million ($0.02 loss per share) compared to a
loss of $6.662 million ($0.04 loss per share) in 2011. The decrease in the net
loss for the current year was primarily attributable to:

- $2.931 million non-cash loss on refinancing of convertible debt during the prior year;
- our decision, in the prior year, to review alternatives for construction financing and not to renew our agreement with BNP Paribas Loan Services (which was to advise and assist us in all aspects of preparation for construction finance) which expired on July 31, 2010. As such, $1.830 million, $1.197 million of which was non-cash related to the fair value of warrants issued, recorded as a deferred financing cost asset was written off the consolidated statement of loss in the prior year, and
- a gain of $72,000 on assets held for sales in the current year (January 31, 2011 – loss of $520,000).

These items were partially offset by:

- an increase in share based compensation in the current year period to $625,000 compared to a recovery in the prior year period of $119,000 including $212,000 (January 31, 2011 – nil) relating to board and other management changes;
- director’s fees and expenses of $248,000 (January 31, 2011 - nil);
- a non-cash future income tax recovery related to expiration of share
  purchase warrants previously issued of $657,000 (January 31, 2011 
  $1,390,000), and
- an increase in professional fees to $740,000 (prior year period -
  $365,000) due to increased corporate activities.

Year ended January 31, 2011 compared with the year ended
January 31, 2010

Overall.Our focus for the fiscal year ended January 31,
2011 was to provide the Lead Agencies with input into the SDEIS and permit work
at our NorthMet Project, obtain additional financing and to continue to develop
the NorthMet Project including updating the mineral reserves and mineral
resources estimates and preparing for construction.

Loss for the year. 2010 operating loss information is
presented in accordance with CGAAP and may not be appropriate as a comparative
basis. During the year ended January 31, 2011, we incurred a loss of $6.662 million ($0.04 loss per share) compared to a loss of
$9.023 million ($0.06 loss per share) in 2010. The decrease in the net loss for
the period was primarily attributable to:

- 32 -

---

- A non-cash future income tax recovery related to expiration of share
  purchase warrants previously issued of $1,390,000 (January 31, 2010  $nil);
- A non-cash reversal of previously recorded stock-based compensation costs
  relating to board and other management changes resulting in a credit of
  $119,000 in the current year (January 31, 2010  expense of $915,000);
- A non-cash charge of $4.920 million for the amendment of share purchase
  warrants in the prior year period (current year period - $nil), and
- Investor relations and financing expenses of $420,000 due to the filing of
  an F-3 registration statement during the prior year period (current year
  period - $118,000).

These items were partially offset by the non-cash costs associated with extending the term of our debentures by a year, the fair value of the amendments to the Glencore warrants, which resulted in a non-cash charge of $2.931 million to our income statement.  A further offset to the decrease in reported net loss derived from our decision to review alternatives for construction financing and not to renew our agreement with BNP Paribas Loan Services, which agreement was to advise and assist us in all aspects of preparation for construction finance, which expired on July 31, 2010.  As such, the $1.830 million, $1.197 million of which was non-cash related to the fair value of warrants issued, recorded as a deferred financing cost asset was written off the consolidated statement of loss in the current year.  In addition, we recorded a loss of $520,000 in the current year period as a result of our decision to reclassify an asset as held for sale and write-down its carrying value to fair value less cost to sell.

(b)          
Liquidity And Capital Resources

Financing Activities

On November 12, 2010, we entered into an agreement with
Glencore whereby Glencore agreed to purchase 15 million of our common shares at
$2.00 per share in three tranches to occur no later than certain agreed dates,
and according to our needs based on a budget to be agreed. The first two
tranches of 5 million shares for gross proceeds of $10 million were funded on
January 17, 2010 and July 15, 2011. The remaining tranche, for gross proceeds of
$10 million, will close on or before October 15, 2012. Transaction costs for the
first tranche totaled $106,000.

On November 24, 2009 we closed the first tranche of an equity financing with Glencore for 3,773,585 of our common shares at $2.65 per share for gross proceeds of $10 million.  On January 26, 2010, we closed the second tranche of the equity financing with Glencore of an additional 5,660,377 common shares at $2.65 per common share for gross proceeds of $15 million.  Transactions costs for these two financings totaled $499,000.

During the year ended January 31, 2011 we issued 845,000 common
shares (prior year period  775,000) upon exercise of options for proceeds of
$808,000 (prior year period - $477,000) and nil common shares (prior year period
167,954) upon exercise of share warrants for proceeds of $nil (prior year period
- $494,000).

On August 27, 2009, we announced that we had filed a universal
shelf registration on Form F-3 with the SEC. This universal shelf registration
allows us to have the option to offer and sell, from time to time in one or more
offerings, up to $500 million of our debt securities, common shares, warrants
and units.

On October 31, 2008, we entered into a financing with Glencore
for an aggregate of $50 million floating rate secured debentures due on
September 30, 2011 issued by PolyMet US and guaranteed by the Company. The
debentures bear interest at 12-month US dollar LIBOR plus 4%. Interest is
payable in cash or by increasing the principal amount of the Debentures, at
Glencores option. The debentures are secured by all of our assets. The
debentures were exchangeable into our common shares at Glencores option at
$4.00 per share.

- 33 -

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On October 31, 2008, we issued to Glencore warrants to purchase
6.25 million our common shares at $5.00 if exercised before the NorthMet Project
produced a total of 20,000 metric tonnes of concentrate, or $6.00 thereafter.

On November 17, 2009, we agreed to modify certain terms of the
above transaction. Under the new terms the warrants entitled Glencore to
purchase 6.25 million of our common shares at $3.00 and expired on September 30,
2011. The incremental $158,000 increase in the fair value of the warrants due to
the warrant exchange was debited to warrant amendment expense and credited to
contributed surplus. Separately in November 2009, we agreed to modify the terms
of the final $25 million Tranche E of the $50 million Debenture with Glencore
such that Tranche E, if drawn, could be exchanged at $2.65 per share.

On November 12, 2010, we announced that we had agreed upon additional modification of certain terms of the above transaction:

- the maturity date of the Debentures was extended from September 30, 2011
  to September 30, 2012;
- Glencores commitment to purchase, and our commitment to issue, $25
  million of Tranche E Debentures, which were to be issued upon publication of
  the Final Environmental Impact Statement and other conditions, were cancelled;
- warrants to purchase 6.25 million of our common shares at $3.00 at any
  time until September 30, 2011 issued to Glencore were cancelled, and
- we issued warrants to purchase 3 million of our common shares at $2.00 at
  any time until December 31, 2015.

During the year ended January 31, 2010 we issued 775,000 shares
(prior year period  262,800) upon exercise of options for proceeds of $477,000
and 167,954 shares upon exercise of share warrants for proceeds of $494,000.

During the year ended January 31, 2008, we issued 15 million units at $2.75 per unit, with each unit comprising one common share and one-half of one warrant (for accounting purposes, the value of the units was bifurcated between the common shares and the warrants) and 520,000 warrants for finders' fees related to the transaction.  Each whole warrant was exercisable into a common share at a price of $4.00 at any time until October 13, 2008 (see amendment below), subject to an early trigger if the 20-day volume weighted average price of the common shares was $6.00 or more.  On October 10, 2008, we announced that we had received the consent from the holders of more than two-thirds of the 8,020,000 warrants issued as part of the April 2007 private placement to exchange those warrants into:

- 4,010,000 warrants, each warrant entitling the holder to purchase one of our common shares at $3.00 per share at any time until the sooner of 30 calendar days after publication of the draft Environmental Impact Statement by the State of Minnesota in the State’s Environmental Quality Board Monitor and October 13, 2009, and
- 4,010,000 warrants, each warrant entitling the holder to purchase one of our common shares at $5.00 if exercised before the NorthMet Project has produced a cumulative total of 20,000 metric tonnes of concentrate, or $6.00 thereafter and prior to August 31, 2011.  We can accelerate the expiration of the warrants if our volume-weighted 20-day average share price trades at a 50% premium to the exercise price applicable at any time.

In October 2009, we received the consent from holders of more than two-thirds of the above warrants to exchange the 4,010,000 warrants due to expire on October 13, 2009 for 4,010,000 warrants, each warrant entitling the holder to purchase one of our common shares at $3.00 at any time until the sooner of 30 calendar days after publication of the draft Environmental Impact Statement by the State of Minnesota in the State’s Environmental Quality Board Monitor and December 31, 2009.  The incremental $1,005,000 increase in the fair value of the warrants due to the warrant exchange was debited to warrant amendment expense and credited to contributed surplus.

- 34 -

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In November 2009, we received the consent from holders of more than two-thirds of the above warrants to exchange the 4,010,000 warrants due to expire the earlier of 30 calendar days after publication of the draft Environmental Impact Statement by the State of Minnesota in the state’s Environmental Quality Board Monitor and December 31, 2009 for 4,010,000 warrants, each warrant entitling the holder to purchase one of our common shares at $3.00 at any time until the sooner of 21 business days after publication of the final Environmental Impact Statement by the State of Minnesota in the State’s Environmental Quality Board Monitor and December 31, 2010.  The incremental $3,757,000 increase in the fair value of the warrants due to the warrant exchange was debited to warrant amendment expense and credited to contributed surplus.

Warrants to purchase 167,954 of our common shares had been
exercised prior to January 31, 2010 and, on December 31, 2010 warrants to
purchase 3,842,046 of our common shares at $3.00 expired. We recorded a future
income tax recovery as the expiration of the warrants triggered a capital gain
for tax purposes, which was offset by the application of tax losses carried
forward resulting in a credit of $1,219,000.

Year Ended January 31, 2012

Cash used in investing activities for the year ended January
31, 2012 was $16.137 million compared with $16.519 million in the year ended
January 31, 2011, with the decrease being primarily due the sale of the used
drill, partially offset by purchasing land for the USFS land exchange with funds
received from the loan from the IRRRB.

Cash used in operating activities in the year ended January 31,
2012 was $2.955 million compared to cash used in the prior year of $3.068
million. The variance in cash is primarily due to changes in non-cash working
capital balances and the above noted operating variances.

Cash provided by financing activities for the year ended January 31, 2012 was $26.209 million (prior year - $8.666 million). The current year activity was primarily due to the Glencore financings and the IRRRB loan and the issuance of share capital on the exercise of share options for $902,000 (prior year - $808,000), partially offset by the repayment of $8.500 million of debt (prior year - $2 million).

Cash used in investment activities for the year ended January 31, 2012 was $16.137 million compared with $16.519 million in the year ended January 31, 2011, with the decrease being primarily due to
the sale of the used drill,  partially offset by purchasing land for the USFS land exchange with funds received from the loan from the IRRRB.

Total cash for the year ended January 31, 2012 increased by
$7.117 million for a balance of $17.478 million compared to the year ended
January 31, 2011 where cash decreased $10.921 million to a balance of $10.361
million.

Substantially all cash and equivalents are held in United
States currency.

As at January 31, 2012 we had working capital of $16.375
million compared with working capital of $4.199 million at January 31, 2011
consisting primarily of cash of $17.478 million (January 31, 2011 - $10.361
million), trade and other receivables of $440,000 (January 31, 2011 - $318,000),
prepaid expenses of $934,000 (January 31, 2011 - $636,000), asset held for sale
of $nil (January 31, 2011 - $3.420 million); accounts payable and accrued
liabilities of $1.679 million (January 31, 2011 - $2.444 million), the current
portion of the notes to Cliffs of $nil (January 31, 2011 - $6.750 million) and
the current portion of environmental rehabilitation provision of $828,000
(January 31, 2011 - $1.408 million). The Company expects to repay the $4 million
IRRRB loan plus capitalized interest from working capital or additional
financing and to either exchange the debentures into equity or repay them from
additional financing or from operations once commercial production has
commenced. The Companys cash is primarily held in deposits and bearer deposits
of a major Canadian bank and does not include any exposure to asset-backed
commercial paper.

The consolidated financial statements have been prepared on a
going concern basis which contemplates the realization of assets and the
settlement of liabilities in the normal course of operations.

Should we wish to continue to further advance the NorthMet
Project to commercial production we will require additional funds. As we have no
operating revenues, the only source of liquidity consists primarily of cash from
proceeds of project debt, other debt and equity financing.

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Debt

Pursuant to Asset Purchase Agreements, our wholly owned
subsidiary Poly Met Mining, Inc. signed three notes payable to Cliffs in the
amounts of $2,400,000, $7,000,000 and $7,000,000, respectively. The first note
was fully repaid in prior years and the second two notes were fully repaid in
December 2011.

On June 30, 2011 PolyMet closed a $4 million loan from the
IRRRB. At the same time, the Company exercised its options to acquire two tracts
of land totaling approximately 5,300 acres of forests, wetlands, and lakes with
high recreational value that are included as part of the proposed land exchange
with the USFS. The loan is secured by the land acquired, carries a fixed
interest rate of 5% per annum, compounded annually if not paid, and is repayable
on the earlier of June 30, 2016 or the date which the related land is exchanged
with the USFS. PolyMet has issued warrants giving the IRRRB the right to
purchase 400,000 of our common shares at $2.50 per share at any time until the
earlier of June 30, 2016 or one year after permits are received.

Pursuant to a financing agreement with Glencore, we have entered into convertible debenture agreements for $25 million. As part of a December 2011 transaction, the term of the $25 million initial principal debentures were extended from September 30, 2012 to the earlier of i) PolyMet giving Glencore ten days notice that PolyMet has received permits necessary to start construction of the NorthMet Project and availability of senior construction finance, in a form reasonably acceptable to Glencore (the "Early Maturity Event"), and ii) September 30, 2014, on which date all principal and interest accrued to such date will be due and payable.  Glencore has the right to exchange some or all of the debentures at any time.  Upon occurrence of the Early Maturity Event, the initial principal and capitalized interest will be exchanged into common shares of PolyMet at $1.50 per share.

As at January 31, 2012 the outstanding long term debt was as
follows:

| |                                |   | January 31, 2012 |   |   | January 31, 2011 |  
| | ------------------------------ | - | ---------------- | - | - | ---------------- | -
| |                                |   |                  |   |   |                  |  
| | Notes payable                  | $ | 3,450            |   | $ | 8,500            |  
| | Accrued interest and accretion |   | 222              |   |   | 25               |  
| | Convertible debt               |   | 29,018           |   |   | 27,631           |  
| | Total debt                     |   | 32,690           |   |   | 36,156           |  
| | Less current portion           |   | (-               | ) |   | (6,750           | )
| |                                |   |                  |   |   |                  |  
| | Long term debt                 | $ | 32,690           |   | $ | 29,406           |  

We anticipate using working capital, additional financing and
funds from operations once commercial production has commenced to meet the above
payment obligations to IRRRB and Glencore.

(c)          
Research and Development, Patents and Licenses, Etc.

We do not engage in any research and development activities and
have no patents or licenses that are materially important to us.

(d)          
Trend Information

There are no major trends which are anticipated to have a
material effect on the Company's financial condition and results of operations
in the near future.

(e)          
Off-Balance Sheet Arrangements

None.



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(f)          
Tabular Disclosure of Contractual Obligations

The following table lists as of January 31, 2012 information
  with respect to the Companys known contractual obligations:

Payments due by period ($000s)*Total*
      
      
      Less than
      
      
      1  3 years
      
      
      3  5 years
      
      
      More thanContractual Obligations
      
      
      
      
      1
        year
      
      
      
      
      
      
      
      
      5
        yearsTrade payables and accrued liabilities
      $
      1,679
      
      $
      1,679
      
      $
      -
      
      $
      -
      
      $
      -Long-term debt obligations
      
      38,146
      
      
      -
      
      
      33,132
      
      
      5,014
      
      
      -Environmental rehabilitation provision
      
      25,828
      
      
      828
      
      
      582
      
      
      538
      
      
      23,880Firm Commitments
      
      2,200
      
      
      2,145
      
      
      55
      
      
      -
      
      
      -Total
      $
      67,853
      
      $
      4,652
      
      $
      33,769
      
      $
      5,552
      
      $
      23,880


Long-term debt obligations (including the current portion) are comprised of long-term and convertible debt balances, are set out in this table on an undiscounted basis and include anticipated interest.  Asset retirement obligation represents the undiscounted obligation at January 31, 2012.  Contractual obligations of the Company in the above table exclude future option payments required to maintain the Company’s interest in certain mineral properties.

(g)           Critical
Accounting Policies

Our consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in Canada (IFRS as of
February 1, 2010 and CGAAP before that date) that require management to make
assumptions and estimates that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities as at the date
of the financial statements. Significant estimates used in the preparation of
these consolidated financial statements include, amongst other things, expected
economic lives of plant and equipment, anticipated costs of asset retirement
obligations including the reclamation of mine site, valuation of options and
share purchase warrants, and the assessment of impairment in value of long lived
assets.

Mineral Property, Plant and Equipment

Plant and equipment are recorded at historical cost less
accumulated depreciation and if applicable, accumulated impairment losses.
Subsequent costs are included in the assets carrying amount or recognized as a
separate asset, as appropriate, if it is probable that the future economic
benefits embodied within the part will flow to the Company and its cost can be
measured reliably. The carrying amount of a replaced part is derecognized. All
other repairs and maintenance are charged to the income statement during the
year in which they are incurred. Plant and equipment is depreciated over the
estimated life of the related assets calculated on a unit of production or
straight-line basis, as appropriate.

Depreciation of plant and equipment is calculated using the
cost of the asset, less its residual value, on a straight-line basis over the
estimated useful life of the asset. Estimated useful lives are as follows:

|Leasehold improvements  | Straight-line over the term of the lease
|----------------------- | ----------------------------------------
|Furniture and equipment | Straight-line over 10 years             
|Computers               | Straight-line over 5 years              
|Computer software       | Straight-line over 1 year               

Mineral property, plant and equipment related to the NorthMet
Project will begin to be amortized, mainly on a units of production basis, at
the time the project commences operations. The Company conducts an annual review
of residual balances, useful lives and depreciation methods utilized for mineral
property, plant and equipment. Any changes in estimate that arise from this
review are accounted for prospectively.



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Impairment of Non-Financial Assets
  The carrying amounts of our non-financial assets, including
mineral property, plant and equipment, are reviewed at each reporting date to
determine whether there is any indication of impairment. If any such indication
exists, then the assets recoverable amount is estimated. The recoverable amount
of an asset is the greater of its value in use and its fair value less costs to
sell. In assessing value in use, the estimated future cash flows are discounted
to their present value using a pre-tax discount rate that reflects current
market assessments of the time value of money and the risks specific to the
asset. An impairment loss is recognized if the carrying amount of an asset
exceeds its estimated recoverable amount. An impairment loss previously recorded
is reversed if there has been a change in the estimates used to determine the
recoverable amount.

Share-Based Payments and Share Purchase Warrants
  All share-based payment awards made to directors, employees and
non-employees are measured and recognized using a fair value based method. For
directors and employees, or those providing services similar to employees, the
fair value of the award is measured at the date of the grant and recognized as
an expense over the vesting period. The amount recognized as an expense is
adjusted to reflect the number of awards for which the related service and
non-market vesting conditions are expected to be met on the vesting date. Stock
options issued to non-employees are recognized based on the fair value of the
goods or services received.

For directors, employees and non-employees, the fair value of the award is accrued and charged either to operations or mineral property, plant and equipment, with the offsetting credit to warrants and share-based payment reserve, on a graded method over the vesting period.  If and when stock options are ultimately exercised or performance share units or restricted share units or restricted stock vest, the applicable amounts from the warrants and share-based payment reserve are transferred to share capital.

We issue share purchase warrants in connection with certain
equity transactions. The fair value of the warrants, as determined using the
Black-Scholes option pricing model, is credited to the warrants and share-based
payment reserve. The recorded value of share purchase warrants is transferred to
share capital upon exercise.

When we amend the terms of either share options or share purchase
  warrants, the incremental change in the fair value of the options or warrants
  due to the amendment is booked to warrant amendment expense and the warrants
  and share-based payment reserve.

Provisions
  Provisions for environmental rehabilitation associated with
mineral property, plant and equipment, are recognized when the Company has a
present legal or constructive obligation that can be estimated reliably, and it
is probable that an outflow of economic benefits will be required to settle the
obligation. Provisions are determined by discounting the expected future cash
flows at a pre-tax rate that reflects current market assessments of the time
value of money and the risks specific to the liability. The increase in the
provision due to the passage of time is recorded as finance income and costs
expense.

Upon initial recognition of provisions for environmental
rehabilitation, a corresponding increase to the carrying amount of the related
asset is recorded and amortized over the life of the asset. The estimates are
based principally on legal and regulatory requirements. Following initial
recognition of the environmental rehabilitation provision, the carrying amount
of the liability is increased for the passage of time and adjusted for changes
to the current market-based discount rate, or changes in the amount and timing
of the underlying cash flows needed to settle the obligation.

It is possible that our ultimate reclamation and closure liabilities could change as a result of changes in regulations, changes in the extent of environmental remediation required, changes in the means of reclamation or changes in cost estimates.  Our operations may in the future be affected from time to time in varying degrees by changes in environmental regulations, including those for future removal and site restoration costs.  Both the likelihood of new regulations and their overall effect upon us may vary greatly and are not predictable.

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Financial Assets
  All financial assets are initially recorded at fair value and
designated upon inception as one of the following four categories: held to
maturity, available for sale, loans and receivables or at fair value through
profit or loss (FVTPL). Financial assets classified as FVTPL are measured at
fair value with unrealized gains and losses recognized through profit and loss.
Financial assets classified as loans and receivables and held to maturity are
measured at amortized cost using the effective interest method less any
allowance for impairment. The effective interest method is a method of
calculating the amortized cost of a financial asset and of allocating interest
income over the relevant period. The effective interest rate is the rate that
exactly discounts estimated future cash receipts (including all fees paid or
received that form an integral part of the effective interest rate, transaction
costs and other premiums or discounts) through the expected life of the
financial asset, or, where appropriate, a shorter period. Financial assets
classified as available for sale are measured at fair value with unrealized
gains and losses recognized in other comprehensive loss except when there is
objective evidence that the asset is impaired, the cumulative loss that had been
recognized in other comprehensive loss shall be reclassified from equity to
profit or loss as a reclassification adjustment. Transactions costs associated
with FVTPL financial assets are expensed as incurred, while transaction costs
associated with all other financial assets are included in the initial carrying
amount of the asset.

Financial Liabilities and Equity Instruments
  Financial liabilities are recognized when the Company becomes a
party to the contractual provisions of the instrument. Financial liabilities at
amortized cost include trade payables and long term debt. Trade payables are
initially recognized at the amount required to be paid, less, when material, a
discount to reduce the payables to fair value. Subsequently, trade payables are
measured at amortized cost using the effective interest method. Long term debt
is recognized initially at fair value, net of any transaction costs incurred,
and subsequently at amortized cost using the effective interest method.
Financial liabilities are classified as current liabilities if payment is due
within twelve months. Otherwise, they are presented as non-current liabilities.

All financial liabilities are initially recorded at fair value
and designated upon inception as FVTPL or other financial liabilities. Financial
liabilities classified as other financial liabilities are initially recognized
at fair value less directly attributable transaction costs. After initial
recognition, other financial liabilities are subsequently measured at amortized
cost using the effective interest method. The effective interest method is a
method of calculating the amortized cost of a financial liability and of
allocating interest expense over the relevant period. The effective interest
rate is the rate that exactly discounts estimated future cash payments through
the expected life of the financial liability. Financial liabilities classified
as FVTPL include financial liabilities held for trading and financial
liabilities designated upon initial recognition as FVTPL. Derivatives, including
separated embedded derivatives, are also classified as held for trading unless
they are designated as effective hedging instruments. Transaction costs on
financial liabilities classified as FVTPL are expensed as incurred. At the end
of each reporting period subsequent to initial recognition, financial
liabilities at FVTPL are measured at fair value, with changes in fair value
recognized directly in profit or loss in the period in which they arise. The net
gain or loss recognized in profit or loss excludes any interest paid on the
financial liabilities.

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ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND
EMPLOYEES

A.           Directors
and Senior Management

Each Director serves until the next annual general meeting of
shareholders or until his/her successor is duly elected, unless his/her office
is vacated in accordance with our Articles of Incorporation.

Vacancies on the Board of Directors are filled by election from
nominees chosen by the remaining Directors and the persons filling those
vacancies will hold office until the next annual general meeting of
shareholders, at which time they may be re-elected or replaced. (For more
details on the process for nominating directors, see our Nominations Committee
Charter, referenced hereto as Exhibit 11.2. )

The following is a list of the names and ages of our directors
and executive officers:

Name
    
    Age
    
    PositionW. Ian L. Forrest
    
    73
    
    Co-Chairman,
      Independent DirectorFrank L. Sims
    
    61
    
    Co-Chairman, Independent DirectorJoseph Scipioni
    
    58
    
    Director, President, and Chief ExecutiveDouglas J. Newby
    
    53
    
    OfficerBradley H. Moore
    
    51
    
    Chief Financial OfficerNiall Moore
    
    50
    
    Executive Vice President, Environmental &
      Governmental Affairs Corporate Secretary and Group ControllerDavid Dreisinger
    
    54
    
    Independent DirectorAlan R. Hodnik
    
    52
    
    Independent DirectorWilliam Murray
    
    63
    
    DirectorStephen Rowland
    
    50
    
    Independent DirectorMichael M. Sill
    
    50
    
    Independent Director


W. Ian L. Forrest has served as a member of our board of
directors since October 2003, and as our Co-Chair since January 2011. Mr.
Forrest previously served as Chairman of our board until February 5, 2008. He
also serves on our audit, compensation, and nominating and corporate governance
committees. Having played an important role in our revival in 2003, he was
appointed Chairman in May 2004. Mr. Forrest is a member of the Institute of
Chartered Accountants of Scotland and continues to practice as a public
accountant in Geneva, Switzerland. Mr. Forrest has more than 30 years of
experience with public companies in the resource sector. His experience
encompasses the areas of promotion, financing, exploration, production and
company management. He has also participated in several notable projects
including Gulfstream's North Dome gas discovery, Qatar, Reunion Mining's
Scorpion zinc, Namibia, which was subsequently developed by Anglo American, and
Ocean Diamond Mining, which pioneered the independent diamond dredging industry
off the west coast of southern Africa. He also served as a director of MGold
Resources Inc. until October, 2011 and Belmore Resources (Holdings) plc until
July, 2011 when it was acquired by Lundin Mining Ltd. He currently serves on the
boards of Georex SA and Poros SAS. Mr. Forrest was a director of Viatrade plc,
which was put into receivership in August 2009. Mr. Forrest currently resides in
Vaud, Switzerland.

Frank L. Sims has served as a member of our board of
directors since February 2008, and as our Co-Chair since January 2011. He also
serves on our audit, compensation, and nominating and corporate governance
committees. Mr. Sims has held a series of progressively senior positions with
Cargill, Incorporated between 1972 and his retirement in December 2007. Most
recently he served as Corporate Vice President. Minnesota-headquartered Cargill
is an international provider of food, agricultural and risk management products
and services. Mr. Sims currently serves on the board of Piper Jaffray Companies.
Mr. Sims has previously served on the board of Tennant Company, as Vice-Chair of
the U.S. Marine Transportation System National Advisory Council, was a Chairman
of the board of the North American Export Grain Association, and as Chairman of the Federal
Reserve Bank of Minneapolis. Mr. Sims currently resides in Georgia, United
States.

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Joseph Scipioni has served as our President and Chief
Executive Officer since February 5, 2008 and as a member of our board of
directors since February 19, 2008. He also serves on our safety, health and
environmental committee. Mr. Scipioni served as our Chief Operating Officer
since March 2007 and as General Manager of our Minnesota operations since July
2006. Prior to June 2006, Mr. Scipioni's career spanned more than 30 years with
United States Steel Corporation where he worked in a number of progressively
senior positions in operations. His last position was Plant Manager at the
Keewatin Taconite plant in Minnesota. Mr. Scipioni is an active advisor to the
University of Minnesota Natural Resources Research Institute based in Duluth,
Minnesota, is an officer of the Minnesota Section of the Society of Mining,
Metallurgy and Exploration (SME), and serves as an executive officer of Mining
Minnesota. Mr. Scipioni currently resides in Minnesota, United States.

Douglas J. Newby has served as our Chief Financial
Officer since November 2005. Mr. Newby has nearly 30 years of experience in the
evaluation and financing of mining companies and projects around the world.
Before coming to PolyMet, Mr. Newby served variously as a Director, Executive
Vice President, interim Chairman, President and Chief Executive Officer of
Western Goldfields, Inc. (now New Gold, Inc.) a US-based gold mining company.
Mr. Newby has also been President of Proteus Capital Corp., a corporate advisory
firm that specializes in the natural resource industries, since July 2001. Mr.
Newby served as Managing Director of Proteus Consultants Ltd. from January 1991
to July 2001 and Managing Partner of Moyes Newby & Co., Inc. from April 1994
to December 1998, both of which provided corporate advisory services primarily
to the international energy and mining industries. Since June 2011 Mr. Newby has
served as a director of Coronet Metals, Inc., a Canadian company developing a
gold mine in Peru. From January 2004 to March 2006, Mr. Newby served as
Vice-President of Cadence Resources Corporation, an oil and gas exploration and
development company. Prior to January 1991, Mr. Newby held senior positions with
the investment banking firms of S.G. Warburg & Co., Inc., Morgan Grenfell
& Co., and James Capel & Co. Mr. Newby currently resides in New York,
United States.

Bradley C. Moore has served as our Executive Vice
President, Environmental & Government Affairs since January 24, 2011. Mr.
Moore has nearly 30 years experience in government and regulatory positions. He
served as Commissioner of the Minnesota Pollution Control Agency from 2006 to
2008, and as Assistant Commissioner for Operations of the Minnesota Department
of Natural Resources (MDNR) from January 1999 to August 2006. Prior to that, he
worked in leadership and policy analyst positions with the MDNR and the
Minnesota Department of Public Service (now the Department of Commerce). In
December 2008, Mr. Moore joined Barr Engineering as Senior Advisor, Public and
Governmental Affairs where he advised several companies, including PolyMet, on
environmental strategy. Mr. Moore currently resides in Minnesota, United States.

Niall Moore has served as our Corporate Secretary since December 2006 and as our Group Controller since September 2006.  Mr. Moore has over 25 years of experience with public companies in the resource sector. From November 2002 to May 2006, he was Director, Corporate Reporting for Placer Dome Inc. (“Placer”) and from May 2006 until December 2006 he worked as a consultant to Barrick Gold, Inc. following that company’s acquisition of Placer. Prior to November 2002, Mr. Moore was an audit partner at Ernst & Young LLP. Mr. Moore has extensive experience in financial reporting, compliance and valuation work. Mr. Moore currently resides in British Columbia, Canada.

Dr. David Dreisinger has served as a member of our board
  of directors since October 2003. Dr. Dreisinger also served on our audit committee
  prior to June 2006. Currently, Dr. Dreisinger is the chair of our safety, health
  and environmental committee. Since 1988, Dr. Dreisinger has been a member of
  the faculty at the University of British Columbia in the Department of Materials
  Engineering and is currently Professor and Chairholder of the Industrial Research
  and Chair in Hydrometallurgy. He has published over 200 papers and has been
  extensively involved as a process consultant in industrial research programs
  with metallurgical companies. Dr. Dreisinger has participated in 14 U.S. patents
  for work in areas such as pressure leaching, ion exchange removal of impurities
  from process solutions, use of thiosulfate as an alternative to cyanide in gold
  leaching, and leach-electrolysis treatment of copper recovery from sulfide ores,
  and the Sepon Copper Process for copper recovery from sulfidic-clayey ores. Dr. Dreisinger serves as a director of Search Minerals, Inc.
and as Vice President  Metallurgy/Process for each of Baja Mining Corp and
South American Silver Corp. Dr. Dreisinger currently resides in British
Columbia, Canada.

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Alan R. Hodnikhas served as a member of our board of directors since March 9, 2011.  He also serves on our compensation committee and our corporate governance and nominating committee.  Mr. Hodnik was named President of ALLETE, Inc. in May 2009, CEO in May 2010, and Chairman of that company in May 2011.  Since joining ALLETE in 1982, Mr. Hodnik has served as Vice President-Generation Operations, Senior Vice President of Minnesota Power Operations, and Chief Operating Officer.  As Chief Operating Officer, he led transmission, distribution, generation, and engineering for all aspects of the Company.  Mr. Hodnik was the elected mayor of the City of Aurora, Minnesota from 1988 to 1998.  He is a member of the board of Essentia Health - East Region and of the Area Partnership for Economic Expansion (APEX). Mr. Hodnik currently resides in Minnesota, United States.

William Murray served as our Executive Chairman from
February 5, 2008 to December 31, 2010 and has served as a member of our board of
directors since March 2003. He previously served as our President and Chief
Executive Officer from March 2003 until February 2008. Mr. Murray is an engineer
in the mining industry with more than 35 years of experience in construction
management and project evaluation in North America and Africa. From April 1993
to 2003, Mr. Murray provided consulting services to the mining industry as a
principal of Optimum Project Services Ltd. Prior to that, Mr. Murray was
employed by Fluor Daniel, a large U.S. Engineering & Construction
contractor, as the Director of New Business from October 1989 to April 1993.
From September 1981 to May 1986, Mr. Murray was a Director of Project Services
at Denison Mines where he was part of the core team than built the $1.2 billion
Quintette Coal project. From September 1970 to August 1981, Mr. Murray held a
number of positions at Anglo American Corp in South Africa, principally in the
Gold Division. Mr. Murray is also a director of South American Silver Corp.,
Aura Minerals, Inc., and Prospero Silver Corp. Mr. Murray currently resides in
British Columbia, Canada.

Stephen Rowlandhas served as a member of our board of
  directors since October 30, 2008. He also serves on our audit and compensation
  committees. Mr. Rowland has been an executive with Glencore, a privately held
  diversified natural resources company, since 1988. Mr. Rowland has held various
  positions with responsibility for international trading in metals and minerals
  in London, Switzerland, and the United States. Prior to joining Glencore, Mr.
  Rowland started his career in 1985 with Cargill, Inc. in Minneapolis. Mr. Rowland
  currently resides in Connecticut, United States.

Michael M. Sill has served as a member of our board of directors since March 9, 2011. He also serves on our audit committee and our safety, health and environmental committee.  Mr. Sill has served as President and CEO of Road Machinery & Supplies Co. since 1994, having joined the company in 1988.  Road Machinery is a distributor of construction, mining and forestry equipment.  Educated at Dartmouth College and J.L. Kellogg Graduate School of Management, Mr. Sill started his career as a financial analyst and commercial lending officer with The Northern Trust Company.  He has served on the boards of the Associated Equipment Distributors, Associated General Contractors of Minnesota, and the Twin Cities Regional Board of US Bank.  Mr. Sill currently resides in Minnesota, United States.

- 42 -

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B.           Statement
of Executive Compensation

The following table sets forth the compensation paid to our
Named Executive Officers for the fiscal year ended January 31, 2012:

Pension,
    Bonus SharesSalaries
    Options /
    RetirementCommissions
    Restricted
    and Similar
    
    Totaland Bonuses
    Stock Units
    Benefits(1)
    
    CompensationJoseph Scipioni, - President and Chief
      Executive Officer
    $275,100
    $61,200
    $14,696
    $nil
    $350,996Douglas Newby - Chief Financial Officer
    $247,535
    $91,800
    $7,425
    $nil
    $346,760Niall Moore, Corporate Secretary
    $177,670
    $36,720
    $nil
    $nil
    $214,390


(1) Balances represent Company
contributions under 401k pension plans.

During the fiscal year ended January 31, 2012, we had three
Named Executive Officers (NEOs) (for the purposes of applicable securities
legislation), namely:

| | (a) | Joseph Scipioni, President and Chief Executive Officer;
| | --- | -------------------------------------------------------
| |     |                                                        
| | (b) | Douglas Newby, Chief Financial Officer, and            
| |     |                                                        
| | (c) | Niall Moore, Corporate Secretary.                      

Other than the arrangements noted in the table below, during
the fiscal year ended January 31, 2012, no compensation was paid or is payable
by us to the directors of the Company, other than the NEOs (the Other
Directors), or our subsidiaries, if any, for their services in their capacity
as directors, including any amounts payable for committee participation or
special assignments;

Name of Director
    Directors Fees
    Options/Restricted Stock
      Units
    Total CompensationDavid Dreisinger W. Ian L. Forrest Alan R. Hodnik
      William Murray Stephen Rowland Michael M. Sill Frank Sims
    40,000 50,000 30,000 40,000 -
      35,000 50,000
    - - 167,626 71,400 -
      167,626 167,626
    40,000 50,000 197,626 111,400
      - 202,626 217,626


During the quarter ended January 31, 2012, we sold a used drill
for $3.68 million. A company controlled by one of our Directors, Michael M.
Sill, received a commission of $200,000 related to this sale.

The Company has no pension plan or other arrangement for
non-cash compensation to the Other Directors.

C.           Board
Practices

All of our directors hold office until the next annual meeting
of shareholders and until their successors have been elected and qualified. Our
officers are elected by the Board of Directors at the first Board of Directors meeting after each annual meeting of shareholders and
hold office until death, resignation, or upon removal from office.

- 43 -

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None of our directors have service contracts with us providing
for benefits upon termination of their employment.

Our Audit Committee consists of W. Ian L. Forrest (Chair),
Stephen Rowland, Michael M. Sill, and Frank L. Sims, all of whom are independent
directors. All four members of the Audit Committee meet the criteria of an
Audit Committee Financial Expert under the applicable rules and regulations of
the SEC and such designation has been ratified by the Board of Directors. The
Audit Committee oversees our auditing procedures, receives and accepts the
reports of our independent certified public accountants, oversees our internal
systems of accounting and management controls, and makes recommendations to the
Board of Directors as to the selection and appointment of our auditors. The
Audit Committee is governed by the terms of the Charter of the Audit Committee
of the Board of Directors which has previously been filed as Exhibit 16.1.

Our Compensation Committee consists of W. Ian L. Forrest
(Chair), Alan R. Hodnik, Stephen Rowland, and Frank L. Sims. The function of the
Compensation Committee is to administer the 2007 PolyMet Omnibus Share
Compensation Plan and to have authority over the salaries, bonuses, and other
compensation arrangements of our executive officers.

Our Nominating and Corporate Governance Committee consists of Frank L. Sims (Chair), W. Ian L. Forrest, and Alan R. Hodnik.  The committee (1) identifies individuals qualified to become members of the Board, (2) selects, or recommends to the Board, the director nominees for the next annual shareholders meeting, (3) selects candidates to fill any vacancies on the Board, and (4) develops and recommends to the Board a set of corporate governance principles applicable to PolyMet.

D. Employees

As of January 31, 2012 we had 18 full-time employees, with 2
located in our Vancouver office and 16 located in our Hoyt Lakes office.
None of our employees are covered by a collective bargaining agreement. We
believe that our relations with our employees are good.

During the fiscal year ended January 31, 2012, we employed an
average of 4 consultants working out of our Vancouver and Minnesota offices.

E. Share Ownership

For the shareholdings of our directors and executive officers
see Item 7(A).

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ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

A.           Officers,
Directors and Major Shareholders

The following table sets forth, as of April 24, 2012, certain
  information regarding the ownership of our voting securities by each shareholder
  known to our management to be (i) the beneficial owner of more than 5% of our
  outstanding common shares, (ii) our directors, (iii) our current executive officers
  identified under Item 6(A), and (iv) all executive officers and directors as
  a group. We believe that, except as otherwise indicated, the beneficial owners
  of the common shares listed below, based on information furnished by such owners,
  have sole investment and voting power with respect to such shares.

|                                                                          |  | Amount and Nature of      |  |              
|------------------------------------------------------------------------- |  | ------------------------- |  | -------------
|                                                                          |  | Beneficial Ownership      |  |              
|                                                                          |  | (includes shares, vested  |  |              
|                                                                          |  | options and warrants, and |  |              
|                                                                          |  | restricted shares for     |  | Percent of   
|Name and Address of                                                       |  | which the holder has      |  | Outstanding  
|Beneficial
      Owner(1)                                                 |  | voting rights)            |  | Common Shares
|                                                                          |  |                           |  |              
|W. Ian L. Forrest (2)                                                     |  | 2,453,000                 |  | 1.38%        
|                                                                          |  |                           |  |              
|Frank Sims (3)                                                            |  | 1,196,124                 |  | 0.67%        
|                                                                          |  |                           |  |              
|Joseph Scipioni (4)                                                       |  | 780,000                   |  | 0.44%        
|                                                                          |  |                           |  |              
|Douglas J. Newby (5)                                                      |  | 1,260,000                 |  | 0.71%        
|                                                                          |  |                           |  |              
|Bradley C. Moore (6)                                                      |  | 200,000                   |  | 0.11%        
|                                                                          |  |                           |  |              
|Niall Moore (7)                                                           |  | 525,000                   |  | 0.29%        
|                                                                          |  |                           |  |              
|David Dreisinger (8)                                                      |  | 1,426,300                 |  | 0.80%        
|                                                                          |  |                           |  |              
|Alan R. Hodnik (9)                                                        |  | 450,000                   |  | 0.25%        
|                                                                          |  |                           |  |              
|William Murray (10)                                                       |  | 3,146,976                 |  | 1.76%        
|                                                                          |  |                           |  |              
|Stephen Rowland (11)                                                      |  | 250,000                   |  | 0.14%        
|                                                                          |  |                           |  |              
|Michael M. Sill (12)                                                      |  | 450,000                   |  | 0.25%        
|                                                                          |  |                           |  |              
|Total executive officers and directors as a
      group (11 persons) (13) |  | 12,137,400                |  | 6.59%        
|                                                                          |  |                           |  |              
|5% or more shareholders:                                                  |  |                           |  |              
|                                                                          |  |                           |  |              
|Glencore (14) Baarermattstrasse 3
      CH-6341 Baar Switzerland          |  | 72,078,038                |  | 34.71%       

|1. | The address of each person, unless otherwise noted, is
      c/o PolyMet Mining Corp., Suite 390- 3600 Lysander Lane, Richmond, British
      Columbia V7B 1C3.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|2. | Includes 1,528,000 common shares owned in the name of
      Micor Trading SA of which Mr. Forrest is a director and has voting and
      dispositive control, 375,000 common shares owned in the name of Panares
      Resources Inc. of which he is a director and has voting and dispositive
      control, 150,000 common shares issuable upon exercise of options
      at an exercise price of CDN$1.36 per share set to expire on September 19,
      2012, 250,000 common shares issuable upon exercise of options at an
      exercise price of CDN$2.76 per share set to expire on March 20, 2013, and
      150,000 common shares issuable upon exercise of options at an exercise
  price of $0.82 per share set to expire on February 17, 2016.

- 45 -

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|3. | Includes 346,124 common shares directly owned by Mr.
      Sims, 200,000 common shares issuable upon exercise of options at an
      exercise price of $2.72 per share set to expire on February 15, 2015,
      200,000 common shares issuable upon exercise of options at an exercise
      price of $0.82 per share set to expire on February 17, 2016, 250,000
      common shares issuable upon exercise of options at an exercise price of
      $2.04 per share set to expire on March 10, 2018, and 200,000 common shares
      issuable upon exercise of options at an exercise price of $1.19 per share
      set to expire on March 8, 2019. In addition, Mr. Sims holds currently
      un-exercisable options to acquire 200,000 common shares at an exercise
      price of $2.72 per share set to expire on February 15, 2015,                                                                                                                                                                                                                                                  
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|4. | Includes 50,000 common shares directly owned by Mr.
      Scipioni and 30,000 restricted common shares for which he has voting power
      but does not currently have dispositive control, 200,000 common shares
      issuable upon exercise of options at an exercise price of CDN$2.97 per
      share set to expire on June 19, 2013, 300,000 common shares issuable upon
      exercise of options at an exercise price of CDN$3.30 per share set to
      expire on January 5, 2014, and 200,000 common shares issuable upon
      exercise of options at an exercise price of $0.82 per share set to expire
      on February 17, 2016. In addition, Mr. Scipioni holds currently
      un-exercisable options to acquire 250,000 common shares at an exercise
      price of $2.92 per share set to expire on March 12, 2014 and 100,000
      common shares at an exercise price of $2.72 per share set to expire on
      February 15, 2015,                                                                                                                                        
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|5. | Includes 165,000 common shares held in the name of
      Proteus Capital Corp. of which Mr. Newby is the President and controlling
      shareholder, 45,000 restricted common shares for which he has voting power
      but does not currently have dispositive control, 100,000 common shares
      issuable upon exercise of options at an exercise price of CDN$1.15 per
      share set to expire on December 5, 2012, 500,000 common shares issuable
      upon exercise of options at an exercise price of CDN$2.76 per share set to
      expire on March 20, 2013, 200,000 common shares issuable upon exercise of
      options at an exercise price of $1.19 per share set to expire on March 8,
      2019 in Mr. Newbys name; and 40,000 common shares issuable upon exercise
      of options at an exercise price of CDN$0.94 per share set to expire on
      June 15, 2012, and 210,000 common shares issuable upon exercise of options
      at an exercise price of CDN$1.36 per share set to expire on September 19,
      2012 held in the name of Proteus Capital Corp.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|6. | includes 100,000 common shares issuable upon exercise of options at an exercise price of $2.17 per share set to expire on January 25, 2018 and 100,000 common shares issuable upon exercise of options at an exercise price of $1.19 per share set to expire on March 8, 2019.  In addition, Mr. Moore holds currently un-exercisable options to acquire 200,000 common shares at an exercise price of $2.17 per share set to expire on January 25, 2018.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|7. | Includes 275,000 common shares issuable upon exercise of
      options at an exercise price of CDN$3.82 per share set to expire on
      September 1, 2013, 175,000 common shares issuable upon exercise of options
      at an exercise price of CDN$3.30 per share set to expire on January 5,
      2014, and 75,000 common shares issuable upon exercise of options at an
      exercise price of $0.82 per share set to expire on January 30, 2016. In
      addition, Mr. Moore has the right, upon certain milestones, to receive
      18,000 common shares issuable under Restricted Stock Units for which he
      currently has neither voting nor dispositive rights.                                                                                                                                                                                                                                                                                                                                                                                                              
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|8. | Includes 876,300 common shares directly owned by Dr.
      Dreisinger, 150,000 common shares issuable upon exercise of options at an
      exercise price of CDN$1.36 per share set to expire on September 19, 2012,
      250,000 common shares issuable upon exercise of options at an exercise
      price of CDN$2.76 per share set to expire on March 20, 2013, and 150,000
      common shares issuable upon exercise of options at an exercise price of
      $0.82 per share set to expire on February 17,
2016.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

- 46 -

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|9.  | Includes 250,000 common shares issuable upon exercise of
      options at an exercise price of USD $2.04 per share set to expire on March
      10, 2018, and 200,000 common shares issuable upon exercise of options at
      an exercise price of $1.19 per share set to expire on March 8,
  2019.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|10. | Includes 1,209,800 common shares directly owned by Mr.
      Murray and 987,176 common shares held in the name of Group 4 Ventures of
      which he is the sole shareholder, 300,000 common shares issuable upon
      exercise of options at an exercise price of CDN$1.36 per share set to
      expire on September 19, 2012, 450,000 common shares issuable upon exercise
      of options at an exercise price of CDN$2.76 per share set to expire on
      March 20, 2013, and 200,000 common shares issuable upon exercise of
      options at an exercise price of $0.82 per share set to expire on February
      17, 2016. In addition, Mr. Murray has the right, upon certain milestones,
      to receive 35,000 common shares issuable under Restricted Stock Units for
      which he currently has neither voting nor dispositive rights.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|11. | Includes 250,000 common shares issuable upon exercise of
      options at an exercise price of $1.19 per share set to expire on March 8,
      2019.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|12. | Includes 250,000 common shares issuable upon exercise of
      options at an exercise price of USD $2.04 per share set to expire on March
      10, 2018 and 200,000 common shares issuable upon exercise of options at an
      exercise price of $1.19 per share set to expire on March 8,
2019.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|13. | Includes 5,612,400 common shares owned, 6,525,000 common
      shares issuable upon exercise of options, and 75,000 restricted common
      shares for which the holder has voting power but does not currently have
      dispositive control. Does not include 53,000 common shares issuable under
      Restricted Stock Units for which the holder currently has neither voting
      nor dispositive rights nor currently un-exercisable options to acquire
      750,000 common shares.                                                                                                                                                                                                                                                                                                                                                            
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|14. | This shareholder acquired 9,433,962 of our common shares
      from us during our fiscal 2010 fourth quarter, 5,000,000 of our common
      shares from us during our fiscal 2011 fourth quarter, 5,000,000 of our
      common shares from us during our fiscal 2012 second quarter, and
      13,333,333 of our common shares from us during our fiscal 2012 fourth
      quarter. This shareholder acquired 9,200,547 of our common shares from
      Cliffs on July 15, 2011 and also holds $25 million initial principal
      debentures exchangeable into 19,510,196 of our common shares (including
      interest capitalized at March 31, 2012) and warrants to acquire 5,600,000
      of our common shares at $1.50 per share.                                                                                                               

Our shareholder who beneficially owns more than 5% of our
common shares outstanding does not have voting rights different from any other
shareholders of common shares.

As of April 24, 2012, there were 346 holders of record of our
common shares of which 266 were U.S. residents owning 20.46% of our outstanding
common shares.

- 47 -

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B.  Related Party Transactions

We have conducted transactions with officers, directors and
persons or companies related to directors and paid or accrued amounts as
follows:

| |                                                                         |   | 2012              |   |   | 2011              |   |   | 2010              |  
| | ----------------------------------------------------------------------- | - | ----------------- | - | - | ----------------- | - | - | ----------------- | -
| |                                                                         |   | (in
      $'000's | ) |   | (in
      $'000's | ) |   | (in
      $'000's | )
| |                                                                         |   |                   |   |   |                   |   |   |                   |  
| | Consulting fees paid to Dr.
      Dreisinger, a Director of the Company | $ | nil               |   | $ | 59                |   | $ | 59                |  
| |                                                                         | $ | nil               |   | $ | 59                |   | $ | 59                |  

The amounts charged to us for the services provided have been
determined by negotiation among the parties. These transactions were in the
normal course of operations and were measured at the exchange value, which is
the amount of consideration established and agreed to by the related party.

During the year ended January 31, 2012, we paid $nil (2011 -
$59,000 and 2010 - $59,000) to Dr. Dreisinger for consulting fees primarily in
connection with activities related to the processing / technical side of the
NorthMet Project and related expenses (the latter were supported by invoices and
receipts). The consulting fees were based on a monthly fee of Canadian $5,500
plus general sales tax. Throughout the term of his engagement, Dr. Dreisinger
has conducted in-person and telephonic meetings with Mr. William Murray, the
Companys then Executive Chairman and formerly its President and Chief Executive
Officer, and other members of management at which he provided both verbal and
written updates on the status of test work and made recommendations for future
activities. These meetings occurred approximately every two to three weeks for
the past six years.

The agreement with Dr. Dreisinger was entered into at a time when our current business plans were being formulated and were month to month and oral in nature.  The agreement was approved by Mr. William Murray.  It was discussed with our board of directors who did not consider that formal approval and a written contract was necessary at that time.  We believe that the contract was negotiated on terms at least as good as could be obtained from third parties.

During the quarter ended January 31, 2012, we sold a used drill
rig for $3.680 million. A company controlled by one of our Directors, Michael M.
Sill, received a commission of $200,000 related to this sale.

C. Interests of experts and counsel.

Not applicable.

ITEM 8. FINANCIAL INFORMATION

A.           Consolidated
Statements and Other Financial Information

See Item 18.

Legal Proceedings

Neither we, nor our subsidiaries, is a party to, nor is our
property or the property of our subsidiaries the subject of, any pending legal
or arbitration proceeding that is material.

Dividend Policy

Since our incorporation, we have not declared or paid, and have no present intention to declare or to pay in the foreseeable future, any cash dividends with respect to our common shares.  Earnings will be retained to finance further growth and development of our business. However, if our board of directors declares dividends, all common shares will participate equally, and, in the event of liquidation, in our net assets.

- 48 -

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B.           Significant
Changes

On February 1, 2012 we reported on the status of the NorthMet
environmental review. ERM, the Lead Agencies' environmental consultant, has
completed a significant amount of work on the SDEIS, which will comprise nine
chapters. The first four chapters, comprising over 400 pages and including more
than 100 figures, have been drafted and are being reviewed by the Lead Agencies.

Other important milestones already achieved include:

- Approval of air emission estimates.
- Approval of cumulative visibility, acid deposition, and fiber impact
  evaluation reports.
- Completion of geotechnical stability modeling with results now under
  review.
- Completion of direct wetland impact evaluation and wetland mitigation
  plans, which are now under review.
- Completion of hazardous materials assessment; threatened, endangered and
  sensitive species analysis; assessments of wildlife and heritage resources;
  and wetland/floodplain analysis reports for the lands involved in the land
  exchange, which have been delivered to the USFS for review.
- Delivery by us of updated project documents including the detailed project
  description, mine plan, reclamation and waste disposal plans, and extensive
  data packages.

As SDEIS preparation moves into the final stages, the Lead
Agencies have completed a detailed assessment of tasks outstanding and the
timeline. The key task is completion of detailed environmental modeling,
including quality assurance plans as well as generation, verification, review,
and documentation of modeling data.

The Lead Agencies expect that all aspects of modeling will be
completed in the spring of 2012, with the preliminary SDEIS available for review
by the Cooperating Agencies during the summer, and public review and comment in
the fall of 2012.

On March 9, 2012 PolyMet acquired control of land that it plans to restore to wetlands through an agreement with AG for Waterfowl, LLP ("AG").  PolyMet paid AG $2.0 million cash and issued 2,788,902 of its common shares and a warrant to purchase 1,083,333 of its common shares at $1.50 per share at any time until December 31, 2015 as consideration for the purchase of a $5.9 million face value five year zero interest rate mortgage over land currently in agricultural use that AG will restore to wetlands in order to create wetland credits.  The mortgage will be partially released as part of the lands are fully restored to approved wetland status, at which time PolyMet will receive formal wetland credits.  Any lands that PolyMet has not requested be restored to wetland, will revert to AG and the remaining mortgage, if any, will be released on February 28, 2017.  PolyMet is committed to pay AG an additional $680,000 over seven years and will release part of the mortgage.

- 49 -

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ITEM 9. THE OFFER AND LISTING

A.           The
Offer and Listing Details

The following table outlines the annual high and low market
prices for the five most recent fiscal years:



The following table outlines the high and low market prices for
each fiscal financial quarter for the two most recent fiscal periods:



The following table outlines the high and low market prices for
each of the most recent six months and April 2012 to-date:



B.          
Plan of Distribution

Not applicable.

- 50 -

---

C.           Markets

In April 1984, our common shares commenced trading on what is now the TSX Venture Exchange in British Columbia, Canada under the symbol "POM.”  On February 1, 2007, our common shares graduated to trading on the Toronto Stock Exchange in British Columbia under the symbol “POM”. In August 2000, our common shares began trading on the OTCBB under the symbol “POMGF.”  On June 26, 2006, our common shares commenced trading on what is now the NYSE Amex under the symbol “PLM.”

D.          
Selling Shareholders

Not applicable.

E.          
Dilution

Not applicable.

F.          
Expenses of the Issue

Not applicable.

ITEM 10. ADDITIONAL INFORMATION

A.          
Share Capital

Not Applicable.

B.           Memorandum
and Articles of Association

Incorporation

We were incorporated under the name Fleck Resources Ltd. pursuant to the Companies Act (British Columbia) and continued under the Business Corporations Act (British Columbia) by registration of our memorandum in British Columbia, Canada, under Certificate of Incorporation #BC0228310 on March 4, 1981. We changed our name to PolyMet Mining Corp. on June 10, 1998.  We do not have any stated “objects” or “purposes” as such that are not required by the corporate laws of the Province of British Columbia. Rather, we are, by such corporate laws, entitled to carry on any activities whatsoever that are not specifically precluded by other statutory provisions of the Province of British Columbia.

Powers and Functions of the Directors

The powers and functions of the directors are set forth in our
Articles, the current version of which were adopted on October 6, 2004, and in
theBusiness Corporations Act (British Columbia). They provide that:

|(a) | a director who holds office or possesses any property,
      right, or interest that could result, directly or indirectly, in the
      creation of a duty of interest that materially conflicts with his duty or
      interest as a director must disclose the nature and extent of the conflict
      and abstain from voting on the approval of the proposed contract or
      transaction, unless all the directors have a disclosable interest, in
      which case the director may vote on such resolution, and moreover, may be
      liable to account to us for any profit that accrued under such an interest
      contract or transaction;
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|(b) | a director is not deemed to be interested in a proposed
      contract or transaction merely because it relates to the remuneration of a
      director in that capacity. The directors may, in the absence of an
      independent quorum, vote compensation to themselves;                                                                                                                                                                                                                                                                                                                                                                            
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|(c) | there are no specific limitations on the exercise by the
      directors of our borrowing powers;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

- 51 -

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|(d) | there are no provisions for the retirement or
      non-retirement of directors under an age limit, and
|--- | -------------------------------------------------------------------------------------------------------
|    |                                                                                                        
|(e) | there is no requirement for a director to hold any shares
      in us.                                 

Rights and Restrictions Attached to the Shares

As all of our authorized and issued shares are of one class of
common shares, there are no special rights or restrictions of any nature or kind
attached to any of the shares, including any dividend rights. All authorized and
issued shares rank equally in respect to the declaration and receipt of
dividends and rights to share in any profits or surplus upon our liquidation,
dissolution or winding-up. Each share has attached to it one non-cumulative
vote. Shareholders are not liable to further capital calls made by us. There is
no specific sinking fund provision or any provision discriminating against any
existing or prospective holder of shares as a result of such shareholder owning
a substantial number of shares.

Alteration of Share Rights

The rights of holders of our issued common shares may be
altered by special resolution, which requires the approval of the holders of
two-thirds or more of the votes cast at a meeting of our shareholders called and
held in accordance with applicable law.

Annual General Meetings

Annual General Meetings are called and scheduled upon decision
by the Board of Directors. Pursuant to the Business Corporations Act(British Columbia), we are required to hold an annual meeting in each year,
not more than 15 months after the date of the most recent annual meeting. The
directors may call a meeting of the shareholders whenever they see fit. All
meetings of the shareholders may be attended by registered shareholders or
persons who hold powers of attorney or proxies given to them by registered
shareholders.

Foreign Ownership Limitations

Our Articles and other charter documents do not contain limitations prohibiting non-residents, foreigners or any other group from holding or voting shares.

Change of Control

There are no provisions in our Articles or charter documents
that currently have the effect of delaying, deferring or preventing a change in
the control in us, or that would operate with respect to any proposed merger,
acquisition or corporate restructuring involving us or any of our subsidiaries.

Share Ownership Reporting Obligations

There are no provisions in our Articles requiring share
ownership to be disclosed.

Securities legislation in Canada requires that shareholder ownership must be disclosed once a person owns beneficially or has control or direction, directly or indirectly, over greater than 10% of the issued voting shares of a corporation, such as us.  This threshold is higher than the 5% threshold under U.S. securities legislation at which shareholders must report their share ownership.

- 52 -

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C.          
Material Contracts

The following is a summary of each material contract, other
than contracts entered into in the ordinary course of business, to which we or
any member of the group is a party, for the two years preceding the date of this
document.

Asset Purchase Agreements

For a complete description of the acquisition of the mine site
lease, see Item 4(D)(c)(i).

For a complete description of the acquisition of the Erie Plant
and associated infrastructure acquired in the Asset Purchase Agreements I and
II, see Item 4(D)(c)(ii).

Share Purchase Agreement

For a complete description of the stock purchase agreement
entered into with Glencore AG, see Item 5(B).

D.          
Exchange Controls

There are no governmental laws, decrees or regulations in
Canada relating to restrictions on the export or import of capital, or affecting
remittance of interest, dividends or other payments to non-resident holders of
our common shares. Any remittances of dividends to United States residents are,
however, subject to a 15% withholding tax (5% if the shareholder is a company
owning at least 10% of the outstanding common shares) pursuant to the reciprocal
tax treaty between Canada and the United States. See the section of this Form
20-F entitled Taxation.

Except as provided in the Investment Canada Act (the ICA),
which has provisions which govern the acquisition of a control block of voting
shares by a person who is not a Canadian resident (a non-Canadian) of a
company carrying on a Canadian business, there are no limitations specific to
the rights of non-Canadians to hold or vote the common shares under the laws of
Canada or the Province of British Columbia or in our charter documents.

E.          
Taxation

The following summary of the material Canadian federal income
tax considerations generally applicable to our common shares reflects our
opinion. The tax consequences to any particular holder of common shares will
vary according to the status of that holder as an individual, trust,
corporation, or member of a partnership, the jurisdiction in which that holder
is subject to taxation, the place where that holder is resident and, generally,
according to that holders particular circumstances. This summary is applicable
only to holders who are residents of the United States, have never been a
resident of Canada, deal at arms length with us, hold their common shares as
capital property, and who will not use or hold the common shares in carrying on
business in Canada. Special rules, which are not discussed in this summary, may
apply to a United States holder that is an issuer that carries on business in
Canada and elsewhere.

This summary is based upon the provisions of the Income Tax Act
of Canada and the regulations thereunder (collectively, the Tax Act, or ITA)
and the Canada-United States Tax Convention as amended by the Protocols thereto
(the Tax Convention) as of the date of the Annual Report and the current
administrative practices of Revenue Canada, Customs, Excise and Taxation. This
summary does not take into account Canadian provincial income tax consequences.

This summary is not exhaustive of all possible income tax
consequences. It is not intended as legal or tax advice to any particular holder
of our common shares and should not be so construed. Each holder should consult
his own tax advisor with respect to the income tax consequences applicable to
him in his own particular circumstances.

- 53 -

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North American Free Trade Agreement (Canada). The
Investment Act was amended with the North American Free Trade Agreement (NAFTA)
to provide for special review thresholds for Americans (including
American-controlled entities as defined in the Investment Act). Under the
Investment Act, as amended, an investment in our common shares by an American
would be reviewable only if it was an investment to acquire control of us and
the value of our assets was equal to or greater than a specified amount (the
Review Threshold), which increases in stages. The Review Threshold is
currently $150 million.

Disposition of Common Shares. If a non-resident of
Canada were to dispose of our common shares to a Canadian corporation which
deals or is deemed to deal on a non-arms length basis with the non-resident and
that, and immediately after the disposition is connected with us (i.e. holds
shares representing more than 10% of the voting power and more than 10% of the
market value of all of our shares issued and outstanding), the amount by which
the fair market value of any consideration (other than any shares of the
purchaser corporation) exceeds the paid-up capital of the common shares sold
will be deemed to be taxable as a dividend paid by the purchasing corporation,
either immediately or eventually by means of a deduction in computing the
paid-up capital of the purchasing corporation, and subject to withholding taxes
as described below.

Under the Tax Act, a gain from the sale of common shares by a
non-resident will not be subject to Canadian tax, provided the shareholder
(and/or persons who do not deal at arms length with the shareholder) has not
held a substantial interest in us (25% or more of any class of our shares) at
any time in the five years preceding the disposition. Generally, the Tax
Convention will exempt from Canadian taxation any capital gain realized by a
resident of the United States, provided that the value of the common shares is
not derived principally from real property situated in Canada.

Dividend. In the case of any dividends paid to
non-residents, we withhold the Canadian tax and remit only the net amount to the
shareholder. By virtue of Article X of the Tax Convention, the rate of tax on
dividends paid to residents of the United States is generally limited to 15% of
the gross dividend (or 5% in the case of certain corporate shareholders owning
at least 10% of our voting shares upon ratification of the Protocol amending the
treaty. In the absence of the Tax Convention provisions, the rate of Canadian
withholding tax imposed on non-residents is 25% of the gross dividend. Share
dividends received by non-residents from us are taxable by Canada as ordinary
dividends and therefore the withholding tax rates will be applicable.

Where a holder disposes of common shares to us (unless we
acquired the common shares in the open market in the manner in which shares
would normally be purchased by any member of the public), this will result in a
deemed dividend to the U.S. holder equal to the amount by which the
consideration we paid exceeds the paid-up capital of such shares. The amount of
such dividend will be subject to withholding tax as described above.

Capital Gains. A non-resident of Canada is not subject
to tax under the ITA in respect of a capital gain realized upon the disposition
of a share of a class that is listed on a prescribed stock exchange unless the
share represents taxable Canadian property to the holder thereof. Our common
shares will be taxable Canadian property to a non-resident holder if, at any
time during the period of five years immediately preceding the disposition, the
non-resident holder, persons with whom the non-resident holder did not deal at
arms length, or the non-resident holder and persons with whom he/she did not
deal at arms length owned 25% or more of our issued shares of any class or
series. In the case of a nonresident holder to whom our shares represent taxable
Canadian property and who is resident of the United States, no Canadian tax will
be payable on a capital gain realized on such shares by reason of the Tax
Convention unless the value of such shares is derived principally from real
property situated in Canada or the non-resident holder previously held the
shares while resident in Canada. We believe that the value of our common shares
is not derived from real property situated inside Canada.

Certain United States Federal Income Tax Consequences.
The following discussion is a summary of certain U.S. federal income tax
consequences that may be relevant with respect to the ownership and disposition
of our common shares by a U.S. Holder (as hereinafter defined). This discussion
is based upon the provisions of the U.S. Internal Revenue Code of 1986,
as amended (the Code), Treasury regulations promulgated thereunder,
administrative rulings and judicial decisions, in each case as of the date
hereof. These authorities are subject to differing interpretations and may be
changed, perhaps retroactively, resulting in U.S. federal income tax
consequences different from those discussed below. We have not sought any ruling
from the U.S. Internal Revenue Service (IRS) with respect to the statements
made and the conclusions reached in this discussion, and there can be no
assurance that the IRS will agree with such statements and conclusions. This
discussion applies only to U.S. Holders who hold our common shares as capital
assets within the meaning of Section 1221 of the Code. In addition, this summary
does not address all U.S. federal income tax considerations that may be
applicable to a U.S. Holders particular circumstances or to U.S. Holders who
may be subject to special tax rules, including, without limitation: tax-exempt
organizations, qualified retirement plans, individual retirement accounts and
other tax-deferred accounts, financial institutions, insurance companies,
partnerships or other entities treated as partnerships for U.S. federal income
tax purposes, real estate investment trusts, regulated investment companies,
broker-dealers, non-resident alien individuals, U.S. Holders whose functional
currency is not the U.S. dollar, persons subject to the alternative minimum
tax, persons who hold our common shares as part of a straddle, hedging or
conversion transaction, and persons who own, actually or constructively, 10% or
more of our common shares.

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For purposes of this discussion, a U.S. Holder means a holder
of our common shares who is (i) a citizen or an individual resident of the U.S.,
(ii) a corporation, or other entity treated as a corporation for U.S. federal
income tax purposes, created or organized in or under the laws of the U.S., any
state thereof or the District of Columbia, (iii) an estate the income of which
is subject to.US. federal income taxation regardless of its source, or (iv) a
trust if it is subject to the primary supervision of a court within the U.S. and
one or more U.S. persons, as defined in the Code, have the authority to
control all substantial decisions of the trust or (2) has a valid election in
effect under applicable Treasury regulations to be treated as a U.S. person.

If a partnership (or any other entity treated as a partnership
for U.S. federal income tax purposes) holds our common shares, the tax treatment
of a partner in such partnership will generally depend on the status of the
partner and the activities of the partnership. Such a partner should consult its
own tax advisors as to the U.S. federal income tax consequences of being a
partner in a partnership that holds or disposes of our common shares.

This discussion addresses only certain aspects of U.S. federal
income taxation to U.S. Holders. U.S. Holders should consult their own tax
advisors regarding the U.S. federal, state, local, non-U.S. and other tax
consequences of the ownership and disposition of our common shares.

Distributions on Our Common Shares. Subject to the
discussion below under Passive Foreign Investment Company, U.S. Holders
receiving dividend distributions (including constructive dividends) with respect
to our common shares generally are required to include in gross income for U.S.
federal income tax purposes the gross amount of such distributions (without
reduction for any Canadian income or other tax withheld from such
distributions), equal to the U.S. dollar value of such distributions on the date
of receipt (based on the exchange rate on such date), to the extent that we have
current or accumulated earnings and profits(as determined for
U.S. federal income tax purposes). To the extent that the amount of the
distribution exceeds our current and accumulated earnings and profits, it will
be treated as a return of capital to the extent of a U.S. Holders adjusted tax
basis in our common shares and thereafter as capital gain from the sale or
exchange of such common shares. We do not intend to calculate our earnings and
profits under U.S. federal income tax principles. Therefore, a U.S. Holder
should expect that the full amount of a distribution with respect to the common
shares will be treated, and reported by us, as a dividend.

For taxable years beginning before January 1, 2011, dividends
received by U.S. Holders that are individuals, estates or trusts from a
qualified foreign corporation, as defined in Section 1(h)(11) of the Code,
generally are taxed at the same preferential tax rates applicable to long-term
capital gains. A corporation that is a PFIC, as defined below under Passive
Foreign Investment Company, for its taxable year during which it pays a
dividend, or for its immediately preceding taxable year, however, is not a
qualified foreign corporation. We believe we will meet the definition of a
PFIC and dividends received by U.S. Holders that are individuals, estates or
trusts generally will be subject to U.S. federal income tax at ordinary income
tax rates (and not at the preferential tax rates applicable to long-term capital
gains). Dividends paid on our common shares will not be eligible for the
dividends received deduction provided to corporations receiving dividends from
certain U.S. corporations.

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In the case of foreign currency received as a dividend that is
not converted by the recipient into U.S. dollars on the date of receipt, a U.S.
Holder will have a tax basis in the foreign currency equal to its U.S. dollar
value on the date of receipt. Generally any gain or loss recognized upon a
subsequent sale or other disposition of the foreign currency, including the
exchange for U.S. dollars, will be ordinary income or loss.

Disposition of Our Common Shares. Subject to the
discussion below under Passive Foreign Investment Company, U.S. Holders will
recognize gain or loss upon the sale of our common shares equal to the
difference, if any, between (i) the amount of cash plus the fair market value of
any property received, and (ii) the U.S. Holders tax basis in our common
shares. A U.S. Holders tax basis in the shares generally will be equal to the
amount such U.S. Holder paid for the shares, subject to adjustments. Any gain or
loss on disposition of our common shares generally will be U.S. source gain or
loss and will be capital gain or loss. If, at the time of the disposition, a
U.S. holder is treated as holding the common shares for more than one year, such
gain or loss will be a long-term capital gain or loss. Long-term capital gain
recognized by a non-corporate U.S. holder is currently subject to taxation at a
reduced rate. The deductibility of capital losses is subject to limitations.

Passive Foreign Investment Company.We believe
that we will meet the definition of passive foreign investment company
(PFIC) within the meaning of Sections 1291 through 1298 of the Code. A U.S.
Holder who holds shares in a non-U.S. corporation during any year in which such
corporation is a PFIC is subject to numerous special U.S. federal income tax
rules. A non-U.S. corporation is considered to be a PFIC for any taxable year if
either:

- at least 75% of its gross income is passive income (the income test), or
- at least 50% of the value of its assets (based on an average of the
  quarterly values of the assets during a taxable year) is attributable to
  assets that produce or are held for the production of passive income (the
  asset test).

For purposes of the income test and the asset test,
respectively, we will be treated as earning our proportionate share of the
income and owning our proportionate share of the assets of any other corporation
in which we own, directly or indirectly, 25% or more (by value) of the shares.
In addition, for purposes of the income test, passive income does not include
any interest, dividends, rents, or royalties received or accrued by us from a
related person (as defined in Section 954(d)(3) of the Code), to the extent
such items are properly allocable to income of such related person that is not
passive.

We must make a separate determination each year as to whether
we are a PFIC. As a result, our PFIC status may change. In particular, because
the total value of our assets for purposes of the asset test will be calculated
using the market price of our common shares (assuming that we continue to be a
publicly traded corporation for purposes of the PFIC rules), our PFIC status
will depend in large part on the market price of our common shares. Accordingly,
fluctuations in the market price of our common shares may result in our being a
PFIC for any year. If we are a PFIC for any year during which a U.S. Holder
holds our common shares, we generally will continue to be treated as a PFIC for
all succeeding years during which such U.S. Holder holds the common shares,
absent a special election. For instance, if we cease to be a PFIC, a U.S. Holder
may avoid some of the adverse effects of the PFIC regime by making a deemed sale
election with respect to our common shares pursuant to which such U.S. Holder
recognizes gain (which will be taxed under the default PFIC tax rules discussed
below) as if such common shares had been sold on the last day of the last
taxable year for which we were a PFIC. If we are a PFIC for any taxable year and
any of our non-U.S. subsidiaries is also a PFIC, a U.S. Holder would be treated
as owning a proportionate amount (by value) of the shares of the lower-tier PFIC
for purposes of the application of these rules. U.S. Holders are urged to
consult their tax advisors about the application of the PFIC rules to any of our
subsidiaries.

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If we are a PFIC for any taxable year during which a U.S.
Holder holds our common shares, such U.S. Holder will be subject to special tax
rules with respect to any excess distribution that it receives and any gain it
realizes from a sale or other disposition (including a pledge) of the common
shares, unless the U.S. Holder makes a mark-to-market election, as discussed
below. Distributions received by a U.S. Holder in a taxable year that are
greater than 125% of the average annual distributions such U.S. Holder received
during the shorter of the three preceding taxable years and its holding period
for the common shares will be treated as an excess distribution. Under these
special tax rules:

- the excess distribution or gain will be allocated ratably over the U.S.
  Holders holding period for the common shares;
- the amount allocated to the current taxable year and any taxable year prior
  to the first taxable year in which we became a PFIC will be treated as
  ordinary income, and
- the amount allocated to each other taxable year will be subject to the
  highest tax rate in effect for that year and the interest charge generally
  applicable to underpayments of tax will be imposed on the resulting tax
  attributable to each such year.

The tax liability for amounts allocated to taxable years prior
to the year of disposition or excess distribution cannot be offset by any net
operating losses for such years, and gains (but not losses) realized on the
disposition of the common shares cannot be treated as capital, even if the U.S .
Holder holds the common shares as capital assets.

Alternatively, a U.S. Holder of marketable stock (as defined
below) in a PFIC may make a mark-to-market election with respect to shares of a
PFIC to elect out of the tax treatment discussed above. If a U.S. Holder makes a
valid mark-to-market election for the common shares, the U.S. Holder will
include in income each year an amount equal to the excess, if any, of the fair
market value of the common shares as of the close of its taxable year over its
adjusted basis in such common shares. The U.S. Holder is allowed a deduction for
the excess, if any, of the adjusted basis of the common shares over their fair
market value as of the close of the taxable year. However, deductions are
allowable only to the extent of any net mark-to-market gains on the common
shares included in the U.S. Holders income for prior taxable years. Amounts
included in a U.S. Holders income under a mark-to-market election, as well as
gain on the actual sale or other disposition of the common shares, are treated
as ordinary income. Ordinary loss treatment also applies to the deductible
portion of any mark-to-market loss on the common shares, as well as to any loss
realized on the actual sale or disposition of the common shares, to the extent
that the amount of such loss does not exceed the net mark-to-market gains
previously included for such common shares. A U.S. Holders basis in the common
shares will be adjusted to reflect any such income or loss amounts. If a U.S.
Holder makes such an election, the tax rules that ordinarily apply to
distributions by corporations that are not PFICs would apply to distributions by
us, except that the preferential tax rates applicable to long-term capital gains
on dividends received from a qualified foreign corporation discussed above
under Distributions on the Common Shares would not apply.

Although a U.S. Holder may be eligible to make a mark-to-market
election with respect to our common shares, no such election may be made with
respect to the stock of any of our non-U.S. subsidiaries that is also a PFIC and
that a U.S. Holder is treated as owning, because such stock is not marketable.
Hence, the mark-to-market election will not be effective to eliminate the
interest charge described above with respect to deemed dispositions of
subsidiary PFIC stock or distributions from a subsidiary PFIC.

The mark-to-market election is available only for marketable
stock, which is stock that is traded in other than de minimis quantities on at
least 15 days during each calendar quarter on a qualified exchange, including
the Toronto Stock Exchange and the NYSE Amex, or other market, as defined in
applicable U.S. Treasury regulations. We expect that our common shares will
continue to be listed on each of the Toronto Stock Exchange and the NYSE Amex on
at least 15 days during each calendar quarter and traded in other than de
minimis quantities, and, consequently, the mark-to-market election would be
available to U.S. Holders of common shares if we were to be a PFIC.

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If a non-U.S. corporation is a PFIC, a holder of shares in that
corporation can avoid taxation under the rules described above by making a
qualified electing fund election to include the holders share of the
corporations income on a current basis in gross income. However, a U.S. Holder
can make a qualified electing fund election with respect to its common shares
only if we furnish the U.S. Holder annually with certain tax information, and we
do not intend to prepare or provide such information.

Congress recently enacted the Hiring Incentives to Restore
Employment Act (HIRE). Under HIRE, U.S. Holders of a PFIC are required to file
an annual report containing any information that may be required by the
Treasury. While these information requirements have not yet been specified by
the Treasury, a U.S. Holder that holds common shares in any year in which we are
a PFIC generally will be required to file IRS Form 8621 regarding distributions
received on the common shares and any gain realized on the disposition of the
common shares.

U.S. Holders are urged to consult their tax advisors regarding
the application of the PFIC rules to their investment in our common shares.

Foreign Tax Credits. Subject to certain conditions and
limitations, including potential limitations under the United States-Canada
treaty, Canadian taxes paid on or withheld from distributions from us and not
refundable to a U.S. Holder may be, at the election of such U.S. Holder, either
credited against such U.S. Holders U.S. federal income tax liability or
deducted from such U.S. Holders taxable income. Generally, a credit will reduce
a U.S. Holders U.S. federal income tax liability on a dollar-for-dollar basis,
whereas a deduction will reduce a U.S. Holder s income subject to U.S. federal
income tax. This election is made on a year-by-year basis and applies to all
foreign taxes paid by or withheld from a U.S. Holder that year.

Complex limitations apply to the foreign tax credit, including
the general limitation that the credit cannot exceed the proportionate share of
a U.S. Holders U.S. federal income tax liability that such U.S. Holders
foreign source taxable income bears to such U.S. Holders worldwide taxable
income. In applying this limitation, a U.S. Holders various items of income and
deduction must be classified, under complex rules, as either foreign source or
U.S. source. In addition, this limitation is calculated separately with
respect to specific categories of income. Dividends paid by us generally will
constitute foreign source income and generally will be categorized as passive
category income.

Because the rules governing foreign tax credits are complex,
U.S. Holders should consult their own tax advisors regarding the availability of
foreign tax credits in their particular circumstances.

Information Reporting; Backup Withholding.In general,
payments made in the U.S. or through certain U.S. related financial
intermediaries with respect to the ownership and disposition of our common
shares will be required to be reported to the IRS unless the U.S. Holder is a
corporation or other exempt recipient and, when required, demonstrates this
fact. In addition, a U.S. Holder may be subject to a backup withholding tax
(currently at a rate of 28%) on such payments unless the U.S. Holder (i) is a
corporation or other exempt recipient and when required, demonstrates this fact
or (ii) provides a taxpayer identification number and otherwise timely complies
with applicable certification requirements. U.S. Holders should consult their
tax advisors regarding their qualification for an exemption from backup
withholding and the procedures for obtaining such an exemption, if applicable.
Backup withholding is not an additional tax. Amounts withheld as backup
withholding may be credited against a U.S. Holders U.S. federal income tax
liability and such U.S. Holder may obtain a refund of any excess amounts
withheld by filing the appropriate claim for refund with the IRS and furnishing
any required information in a timely manner.

THE UNITED STATES FEDERAL INCOME TAX DISCUSSION SET FORTH
ABOVE IS FOR GENERAL INFORMATION PURPOSES ONLY, DOES NOT PURPORT TO BE A
COMPLETE DESCRIPTION OF THE POTENTIAL TAX CONSIDERATIONS RELATING TO OUR COMMON
SHARES AND IS NOT TAX ADVICE. U.S. HOLDERS ARE URGED TO CONSULT THEIR TAX
ADVISORS REGARDING THE SPECIFIC TAX CONSEQUENCES TO THEM OF THE OWNERSHIP AND
DISPOSITION OF OUR COMMON SHARES.

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F.           Dividends
and Paying Agents

Not Applicable.

G.          
Statement by Experts

Not Applicable.

H.           Documents
on Display

All documents referred to in this Form 20-F are available for
inspection at our registered and records office, listed below, during normal
office hours.

Farris LLP c/o Farris, Vaughan,
Wills & Murphy LLP 2500 - 700 W Georgia St Vancouver BC 
  Canada V7Y 1B3

We are subject to the informational requirements of the Exchange Act.  In accordance with these requirements, we file reports and other information with the SEC.  These materials, including this Annual Report on Form 20-F and its exhibits, may be inspected and copied at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549 and at the SEC’s regional office at 500 West Madison Street, Suite 1400, Chicago, Illinois 60661.   Copies of the materials may be obtained from the Public Reference Room of the Commission at 100 F. Street, N.E., Washington, D.C. 20549 at prescribed rates. The public may obtain information on the operation of the Commission’s Public Reference Room by calling the Commission in the United States at 1-800-SEC-0330.

Our reports, registration statements and other information can
also be inspected on EDGAR available on the SECs website at
www.sec.gov.

In Canada, additional information, including directors and
officers remuneration and indebtedness, principal holders of our securities and
securities authorized for issuance under equity compensation plans, is contained
in our Management Information Circular for our most recent annual meeting of
securityholders that involves the election of directors.

Additional financial information is provided in our financial
statements and MD&A, copies of which can be obtained by contacting our
Corporate Secretary in writing at 390  3600 Lysander Lane, Richmond, British
Columbia V7B 1C3 or by e-mail at info@polymetmining.com. Copies of such documents will
be provided to shareholders free of charge.

Additional information relating to PolyMet may be found on the
System for Electronic Document Analysis and Retrieval (SEDAR) at www.sedar.com.

I. Subsidiary Information

Not Applicable

ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT
  MARKET RISK

We may be subject to foreign currency exchange rate risk,
because we hold funds and financial instruments in Canadian dollars but report
our financial information using the U.S. dollar. If we hold onto funds obtained
from financings, currently our only means to obtain funds, in Canadian dollar
accounts and the Canadian dollar depreciates in comparison to the U.S. the fair
value of our funds will decrease and will be reported on our financial
statements at this depressed conversion rate. If the Canadian dollar appreciates
as compared to the U.S. dollar, however, fair value of any financial instruments
or funds held will increase and be reported on our financial statements based
on this favorable conversion rate. Our current exposure, however, is not
sufficient to have a material effect on our results of operations and financial
condition.

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Moreover, we periodically access the capital markets with the issuance of new common shares to fund operating expenses, and we do not maintain significant cash reserves over periods of time that could be materially affected by fluctuations in interest rates or foreign exchange rates.

ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

Not Applicable.

PART II

ITEM 13. DEFAULT, DIVIDEND ARREARAGES AND
DELINQUENCIES

None.

ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHT OF SECURITY
HOLDERS AND USE OFPROCEEDS

Shareholder Rights Plan

Effective May 25, 2007, we adopted an updated Shareholder
Rights Plan (Rights Plan), which was approved by our shareholders on June 27,
2007, modified by our shareholders on June 17, 2008, and reapproved by our
shareholders on July 13, 2011. Under the Rights Plan, we have issued one right
(a "Right") for no consideration in respect of each outstanding common share of
the Company to all holders of record of common shares on December 4, 2003. All
common shares subsequently issued by the Company during the term of the Rights
Plan have one right represented for each common share held by the shareholder of
the Company. The term of the Rights Plan is 10 years, unless the rights are
earlier redeemed or exchanged. The Rights issued under the Rights Plan become
exercisable only if a party acquires 20% or more of our common shares without
complying with the Rights Plan or without the approval of our Board of
Directors.

Each Right entitles the registered holder thereof to purchase
from the Company on the occurrence of certain events, one common share of the
Company at the price of CDN$50 per share, subject to adjustment (the Exercise
Price). However, if a Flip-in Event (as defined in the Rights Plan) occurs,
each Right would then entitle the registered holder to receive, upon payment of
the Exercise Price, that number of common shares that have a market value at the
date of that occurrence equal to twice the Exercise Price. The Rights are not
exercisable until the Separation Time as defined in the Rights Plan.

The Shareholder Rights Plan has previously been filed as
Exhibit 14.1.

ITEM 15. CONTROLS AND PROCEDURES

A. Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this Annual Report, an
evaluation was performed under the supervision and with the participation of our
management, including the chief executive officer and chief financial officer, of the effectiveness of the design and
operation of our disclosure controls and procedures (as defined in Rule 13a-15
of the Exchange Act). Based on that evaluation, our management, including the
chief executive officer and chief financial officer, concluded that at January
31, 2012 the Companys disclosure controls and procedures were effective in
providing reasonable assurance that material information required to be
disclosed by us in the reports that we file or submit under the Exchange Act, is
recorded, processed, summarized and reported within the time periods specified
in the SECs rules and forms. In reaching this conclusion, the Company
recognizes two factors that must be and are present:

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| | a) | the Company is dependent upon its advisors and consultants (primarily legal counsel) to assist in recognizing, interpreting and understanding and complying with disclosure requirements of the various securities regulators, and
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | b) | an active board of directors and management with open
      lines of communication.                                                                                                                                               

B. Management's Annual Report on Internal Control over
Financial Reporting

Our management is responsible for establishing and maintaining
adequate internal control over financial reporting. Internal control over
financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of the
Consolidated Financial Statements for external reporting purposes in accordance
with IFRS.

Internal control over financial reporting, no matter how well
designed, has inherent limitations. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.

Management has assessed the effectiveness of our internal control over financial reporting as at January 31, 2012.  In making its assessment, management has used the criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) to evaluate our internal control over financial reporting.

Based on its assessment, management believes that, as of
January 31, 2012, our internal control over financial reporting is
effective.

C. Attestation Report of the Registered Public Accounting
Firm

The attestation report of PricewaterhouseCoopers, LLP with respect
to the Companys internal control over financial reporting is filed with Item 18
of this Annual Report.

D. Changes in Internal Controls

The Companys management is responsible for establishing and
maintaining adequate internal controls over financial reporting. Any system of
internal control over financial reporting, no matter how well designed, has
inherent limitations. Therefore, even those systems determined to be effective
can provide only reasonable assurance with respect to financial statement
preparation and presentation.

During the quarter ended October 31, 2010 the Company
experienced difficulties moving to a new accounting and financial reporting
system. These difficulties were primarily in the input and review of
transactions and in particular concerned the accurate recording of foreign
exchange and intercompany transactions. Termination of an outsource accounting
service provider and use of non-accounting personnel to undertake accounting
duties exacerbated the problems.

Management undertook a rigorous process to ensure that all
transactions were recorded completely and accurately in the accounting records.
As a result of these difficulties and this review process, the Company was unable to meet its filing deadline to provide
consolidated financial statements, managements discussion and analysis and CEO
and CFO certifications for its quarter ended October 31, 2010.

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Management recognized the need to implement changes to the Company’s internal control over financial reporting relating to the input and review of all transactions, including foreign exchange and intercompany transactions.  Since filing the third quarter interim financials, Management has been implementing changes to the Company’s internal control over financial reporting including strengthening the segregation of duties, reallocating responsibilities, strengthening the financial reporting team, and is in the final stage of engaging independent advice in connection with complex accounting issues and tax.

Implementation of the changes was not sufficiently complete
during preparation of year-end financial statements and, as a consequence, the
Company was unable to meet its filing deadline to provide consolidated financial
statements, managements discussion and analysis and CEO and CFO certifications
for its year ended January 31, 2011.

Management believes that the full implementation of the changes described above ensures timely provision of future financial information to the Company's shareholders, in accordance with the filing deadlines established by regulators.

Aside from the completion of the implementation of the changes
noted above and the retention of a consultant to assist with the transition from
CGAAP to IFRS, there have been no other changes in the Companys internal
control over financial reporting during the year ended January 31, 2012 that
have materially affected, or are reasonably likely to material affect, its
internal control over financial reporting.

ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT

As of January 31, 2012, the audit committee consisted of four
directors. All four members of the Audit Committee, W. Ian L. Forrest, Stephen
Rowland, Frank L. Sims, and Michael M. Sill meet the criteria of an Audit
Committee Financial Expert under the applicable rules and regulations of the
SEC, and each of their designation as an Audit Committee Financial Expert has
been ratified by the Board. All four members of the Audit Committee are
independent, as that term is defined in the New York Stock Exchange Amexlisting standards.

ITEM 16B. CODE OF ETHICS

We have adopted a Code of Ethics, effective April 5, 2006, which applies to all our employees, including our directors and executive officers, including our principal executive, financial and accounting officers, and persons performing similar functions.  The Code of Ethics covers areas of professional and business conduct, and is intended to promote honest and ethical behavior, including fair dealing and the ethical handling of conflicts of interest, support full, fair, accurate, and timely disclosure in reports and documents we file with, or submit to, the SEC and other governmental authorities, and in its other public communications; deter wrongdoing; encourage compliance with applicable laws, rules, and regulations; and to ensure the protection of our legitimate business interests.  We also encourage our directors, officers, employees and consultants to promptly report any violations of the Code of Ethics.

The Code has previously been filed as Exhibit 11.1.

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ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The following outlines the expenditures for accounting fees
  billed and paid for the last two fiscal periods ended:

Financial Year Ending
      Audit Fees
      Audit Related Fees1
      Tax Fees2
      All Other FeesJanuary 31, 2012
    CDN $340,000
    CDN $93,000
    CDN $19,900
    CDN $NilJanuary 31, 2011
    CDN $225,000
    CDN $111,000
    CDN $14,400
    CDN $Nil


| | 1 | Audit Related Fees are the aggregate fees billed for
      assurance and related services that are reasonably related to the
      performance of the audit and are not reported under Audit Fees.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 2 | Tax fees consist of fees to prepare the Companys annual
      tax filings.                                                                                                                       

Pre-Approval Policies and Procedures

All of the fees paid to our auditors, PricewaterhouseCoopers
LLP, were pre-approved by our Audit Committee. This pre-approval involved a
submission by our auditors to our Audit Committee of a scope of work to complete
the audit and prepare tax returns, an estimate of the time involved, and a
proposal for the fees to be charged for the audit. The Audit Committee reviewed
this proposal with our management and after discussion with our auditors,
pre-approved the scope of work and fees.

ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT
  COMMITTEES

Not applicable.

ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER
  AND AFFILIATEDPURCHASERS

Not applicable.

ITEM 16F. CHANGES IN REGISTRANTS CERTIFYING
ACCOUNTANT

Not applicable.

ITEM 16G. CORPORATE GOVERNANCE

Our corporate governance practices do not differ in any
significant way from those followed by U.S. domestic companies listed on the
NYSE Amex.

ITEM 16H. MINE SAFETY DISCLOSURE

There were no incidents reportable under Section 1503(a) of the
Dodd-Frank Wall Street Reform and Consumer Protection Act related to section 104
of the Federal Mine Safety and Health Act of 1977.

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PART III

ITEM 17. FINANCIAL STATEMENTS

Not applicable.

ITEM 18. FINANCIAL STATEMENTS

Our financial statements are stated in United States Dollars
($) and are prepared in accordance with International Financial Reporting
Standards (IFRS) as issued by the International Accounting Standards Board
(IASB), effective with the Companys transition to IFRS on February 1, 2011.
Previously, the Companys consolidated financial statements were prepared in
accordance with CGAAP. Material measurement differences between CGAAP and
accounting principles in the United States, applicable to the Company, were
described in the Companys previous consolidated financial statements.

Index to Financial Statements

Description
    PageManagements
      Responsibility for the Financial Statements
    F-1Independent Auditor's Report
    F-3Consolidated
      Balance Sheet
    F-5Consolidated Statements of Loss and Comprehensive Loss
    F-6Consolidated
      Statements of Changes in Shareholders Equity
    F-7Consolidated
      Statements of Cash Flows
    F-8Notes
      to Consolidated Financial Statements
    F-9


- 64 -

---







POLYMET MINING CORP.



CONSOLIDATED FINANCIAL STATEMENTS

January 31, 2012, January 31, 2011 and February 1, 2010

U.S. Funds





Suite 390  3600 Lysander Place, Richmond, British Columbia,
Canada, V7B 1C3

E-MAIL:info@polymetmining.comOR VISIT OUR WEBSITE AT:
www.polymetmining.com

---

Management Report

Managements Responsibility for Consolidated Financial
Statements

The accompanying Consolidated Financial Statements of PolyMet
Mining Corp. (the Company) are the responsibility of management. The
Consolidated Financial Statements have been prepared by management in accordance
with International Financial Reporting Standards (IFRS) and include certain
estimates that reflect managements best judgments.

The Companys Board of Directors has approved the information
contained in the Consolidated Financial Statements. The Board of Directors
fulfills its responsibilities regarding the Consolidated Financial Statements
mainly through its Audit Committee, which has a written mandate that complies
with current requirements of Canadian securities legislation and the United
States Sarbanes-Oxley Act of 2002. The Audit Committee meets at least on a
quarterly basis.

Managements Annual Report on Internal Control over
Financial Reporting

Management is also responsible for establishing and maintaining
adequate internal control over financial reporting. Internal control over
financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of the
Consolidated Financial Statements for external reporting purposes in accordance
with IFRS.

Internal control over financial reporting, no matter how well
designed, has inherent limitations. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.

Management has assessed the effectiveness of the Companys
internal control over financial reporting as at January 31, 2012. In making its
assessment, management has used the criteria established in Internal Control
- Integrated Frameworkissued by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO) to evaluate the Companys internal control
over financial reporting. Based on this assessment, management has concluded
that the Companys internal control over financial reporting was effective as at
that date.

The effectiveness of the Companys internal control over
financial reporting as at January 31, 2012 has been audited by
PricewaterhouseCoopers LLP, our independent auditors, as stated in their report
which appears herein.



|Joseph
      Scipioni(signed)       |  | Douglas Newby(signed)
|------------------------------------- |  | -----------------------
|                                      |  |                        
|Joseph Scipioni                       |  | Douglas Newby          
|President and Chief Executive Officer |  | Chief Financial Officer

F-1

---

Independent Auditors Report

To the Shareholders of PolyMet Mining Corp.

We have completed an integrated audit of PolyMet Mining Corp.s
(the Company) 2012 consolidated financial statements and its internal control
over financial reporting as at January 31, 2012 and an audit of its January 31,
2011 consolidated financial statements. Our opinions, based on our audits, are
presented below.

Report on the consolidated financial statements

We have audited the accompanying consolidated financial
statements of the Company, which comprise the consolidated balance sheets as at
January 31, 2012, January 31, 2011 and February 1, 2010 and the consolidated
statements of loss and comprehensive loss, changes in shareholders equity, and
cash flows for the years ended January 31, 2012 and January 31, 2011, and the
related notes, which comprise a summary of significant accounting policies and
other explanatory information.

Managements responsibility for the consolidated financial
statementsManagement is responsible for the preparation and fair
presentation of these consolidated financial statements in accordance with
International Financial Reporting Standards as issued by the International
Accounting Standards Board and for such internal control as management
determines is necessary to enable the preparation of consolidated financial
statements that are free from material misstatement, whether due to fraud or
error.

Auditors responsibilityOur responsibility is to
express an opinion on these consolidated financial statements based on our
audits. We conducted our audits in accordance with Canadian generally accepted
auditing standards (CAS) and the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and
perform an audit to obtain reasonable assurance about whether the consolidated
financial statements are free from material misstatement. CAS require that we
comply with ethical requirements.

An audit involves performing procedures to obtain audit
evidence, on a test basis, about the amounts and disclosures in the consolidated
financial statements. The procedures selected depend on the auditors judgment,
including the assessment of the risks of material misstatement of the
consolidated financial statements, whether due to fraud or error. In making
those risk assessments, the auditor considers internal control relevant to the
Companys preparation and fair presentation of the consolidated financial
statements in order to design audit procedures that are appropriate in the
circumstances. An audit also includes evaluating the appropriateness of
accounting principles and policies used and the reasonableness of accounting
estimates made by management, as well as evaluating the overall presentation of
the consolidated financial statements.

|                                                                                                                                                                                                                                     
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|PricewaterhouseCoopers LLP, Chartered Accountants                                                                                                                                                                                    
|PricewaterhouseCoopers Place, Suite 700, 250 Howe
      Street, Vancouver, British Columbia, Canada V6C 3S7                                                                                                                          
|T: +1 604 806 7000, F: +1 604 806 7806,
      www.pwc.com/ca                                                                                                                                                                         
|                                                                                                                                                                                                                                     
|PwC refers to PricewaterhouseCoopers LLP, an Ontario
      limited liability partnership, which is a member firm of
      PricewaterhouseCoopers International Limited, each member firm of which is
      a separate legal entity.
|

F-2

---

We believe that the audit evidence we have obtained in our
audits is sufficient and appropriate to provide a basis for our audit opinion on
the consolidated financial statements.

OpinionIn our opinion, the consolidated financial
statements present fairly, in all material respects, the financial position of
PolyMet Mining Corp. as at January 31, 2012, January 31, 2011 and February 1,
2010 and its financial performance and its cash flows for the years ended
January 31, 2012 and January 31, 2011 in accordance with International Financial
Reporting Standards as issued by the International Accounting Standards
Board.

Report on internal control over financial reporting

We have also audited PolyMet Mining Corp.s internal control
over financial reporting as at January 31, 2012, based on criteria established
in Internal Control - Integrated Framework, issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO).

Managements responsibility for internal control over
financial reportingManagement is responsible for maintaining effective
internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting included in the
accompanying Managements Annual Report on Internal Control over Financial
Reporting

Auditors responsibilityOur responsibility is to
express an opinion on the companys internal control over financial reporting
based on our audit. We conducted our audit of internal control over financial
reporting in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects.

An audit of internal control over financial reporting includes
obtaining an understanding of internal control over financial reporting,
assessing the risk that a material weakness exists, testing and evaluating the
design and operating effectiveness of internal control, based on the assessed
risk, and performing such other procedures as we consider necessary in the
circumstances.

We believe that our audit provides a reasonable basis for our
audit opinion on the Companys internal control over financial reporting.

Definition of internal control over financial
reportingA companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles. A
companys internal control over financial reporting includes those policies and
procedures that: (i) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of the
assets of the company; (ii) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (iii) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the companys assets that could have a
material effect on the financial statements.

F-3

---

Inherent limitationsBecause of its inherent
limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of
changes in conditions or that the degree of compliance with the policies or
procedures may deteriorate.

OpinionIn our opinion, PolyMet Mining Corp.
maintained, in all material respects, effective internal control over financial
reporting as at January 31, 2012, based on criteria established in Internal
Control - Integrated Framework issued by COSO.

Chartered Accountants

Vancouver, British Columbia 
April 30, 2012

F-4

---

PolyMet Mining Corp.(a development stage
company)Consolidated Balance SheetsAll figures in Thousands of U.S. Dollars

|                                                                         |   | January  |   |   | January 31, |   |   | February 1, |  
|------------------------------------------------------------------------ | - | -------- | - | - | ----------- | - | - | ----------- | -
|                                                                         |   | 31, 2012 |   |   | 2011        |   |   | 2010        |  
|ASSETS                                                                   |   |          |   |   |             |   |   |             |  
|Current                                                                  |   |          |   |   |             |   |   |             |  
|Cash and equivalents                                                     | $ | 17,478   |   | $ | 10,361      |   | $ | 21,282      |  
|Trade and other receivables                                              |   | 440      |   |   | 318         |   |   | 88          |  
|Investment (Note 17)                                                     |   | 30       |   |   | 66          |   |   | 140         |  
|Prepaid expenses                                                         |   | 934      |   |   | 636         |   |   | 512         |  
|Assets held for sale
      (Notes 6 and 16c))                            |   | -        |   |   | 3,420       |   |   | -           |  
|                                                                         |   |          |   |   |             |   |   |             |  
|                                                                         |   | 18,882   |   |   | 14,801      |   |   | 22,022      |  
|Deferred Financing Costs                                                 |   | -        |   |   | -           |   |   | 1,794       |  
|Mineral Property, Plant and Equipment(Notes 5 and 6)                     |   | 170,689  |   |   | 141,935     |   |   | 125,876     |  
|                                                                         | $ | 189,571  |   | $ | 156,736     |   | $ | 149,692     |  
|                                                                         |   |          |   |   |             |   |   |             |  
|LIABILITIES                                                              |   |          |   |   |             |   |   |             |  
|Current                                                                  |   |          |   |   |             |   |   |             |  
|Trade payables and accrued liabilities                                   | $ | 1,679    |   | $ | 2,444       |   | $ | 2,953       |  
|Current portion of long
      term debt (Note 7)                         |   | -        |   |   | 6,750       |   |   | 2,000       |  
|Current portion of environmental
      rehabilitation provision (Note 8) |   | 828      |   |   | 1,408       |   |   | 756         |  
|                                                                         |   | 2,507    |   |   | 10,602      |   |   | 5,709       |  
|Long term                                                                |   |          |   |   |             |   |   |             |  
|Long term debt (Note
      7)                                            |   | 3,672    |   |   | 1,775       |   |   | 8,529       |  
|Convertible debt (Note 9)                                                |   | 29,018   |   |   | 27,631      |   |   | 24,866      |  
|Environmental
      rehabilitation provision (Note 8)                    |   | 22,008   |   |   | 14,311      |   |   | 12,943      |  
|Total Liabilities                                                        |   | 57,205   |   |   | 54,319      |   |   | 52,047      |  
|                                                                         |   |          |   |   |             |   |   |             |  
|SHAREHOLDERS EQUITY                                                     |   |          |   |   |             |   |   |             |  
|Share Capital-(Note 10)                                                  |   | 168,434  |   |   | 142,373     |   |   | 132,066     |  
|Share Premium- (Note 10)                                                 |   | 2,132    |   |   | 875         |   |   | -           |  
|Equity Reserves                                                          |   | 43,590   |   |   | 37,914      |   |   | 37,662      |  
|Deficit                                                                  |   | (81,790  | ) |   | (78,745     | ) |   | (72,083     | )
|                                                                         |   | 132,366  |   |   | 102,417     |   |   | 97,645      |  
|Total
      Liabilities and Shareholders Equity                         | $ | 189,571  |   | $ | 156,736     |   | $ | 149,692     |  
|General Information(Note 1)                                              |   |          |   |   |             |   |   |             |  
|Commitments and Contingencies(Notes 6, 8, 10, 16
      and 19)           |   |          |   |   |             |   |   |             |  
|Subsequent events(Note 10b) and
      19)                                |   |          |   |   |             |   |   |             |  

ON BEHALF OF THE BOARD:

|William Murray   | , Director
|------------------ | ----------
|                   |           
|David Dreisinger | , Director

- See Accompanying Notes 

F-5

---

PolyMet Mining Corp.(a development stage
company)Consolidated Statements of Loss and Comprehensive LossFor the years ended January
31All figures in Thousands of U.S. Dollars, except per share amounts

|                                                       |   | January     |   |   | January 31, |  
|------------------------------------------------------ | - | ----------- | - | - | ----------- | -
|                                                       |   | 31, 2012    |   |   | 2011        |  
|General and Administrative                             |   |             |   |   |             |  
|Amortization                                           | $ | 31          |   | $ | 31          |  
|Consulting fees                                        |   | 31          |   |   | 36          |  
|Directors fees and expenses                           |   | 248         |   |   | -           |  
|Exploration                                            |   | -           |   |   | 193         |  
|Investor relations                                     |   | 17          |   |   | 118         |  
|Office and corporate wages                             |   | 984         |   |   | 1,196       |  
|Professional fees                                      |   | 740         |   |   | 365         |  
|Shareholders information                              |   | 368         |   |   | 330         |  
|Share-based compensation (Notes 10b) and
      c))     |   | 625         |   |   | (119        | )
|Transfer agent and filing fees                         |   | 99          |   |   | 99          |  
|Travel                                                 |   | 226         |   |   | 267         |  
|                                                       |   | 3,369       |   |   | 2,516       |  
|                                                       |   |             |   |   |             |  
|Other Expenses (Income)                                |   |             |   |   |             |  
|Financing costs write-off                              |   | -           |   |   | 1,830       |  
|Finance income and costs
      (Note 11)               |   | 351         |   |   | 499         |  
|Loss (gain) on foreign exchange                        |   | 104         |   |   | (46         | )
|Loss (gain) on asset held for
      sale               |   | (72         | ) |   | 520         |  
|Loss on refinancing of convertible debt
      (Note 9) |   | -           |   |   | 2,931       |  
|Rental income                                          |   | (50         | ) |   | (198        | )
|                                                       |   | 333         |   |   | 5,536       |  
|                                                       |   |             |   |   |             |  
|Loss for the year before tax                           |   | 3,702       |   |   | 8,052       |  
|Deferred income tax recovery
      (Note 10e))         |   | (657        | ) |   | (1,390      | )
|Loss for the year                                      |   | 3,045       |   |   | 6,662       |  
|                                                       |   |             |   |   |             |  
|Other Comprehensive Loss                               |   |             |   |   |             |  
|Unrealized gain (loss) on
      investment             |   | (36         | ) |   | (77         | )
|Total
      Comprehensive Loss for the year            |   | 3,081       |   |   | 6,739       |  
|                                                       |   |             |   |   |             |  
|                                                       |   |             |   |   |             |  
|Basic and Diluted Loss per Share                       | $ | (0.02       | ) | $ | (0.04       | )
|                                                       |   |             |   |   |             |  
|                                                       |   |             |   |   |             |  
|                                                       |   |             |   |   |             |  
|Weighted Average Number of Shares                      |   | 160,358,498 |   |   | 149,444,955 |  

- See Accompanying Notes -

F-6

---

PolyMetMiningCorp.(adevelopmentstagecompany)Consolidated Statements of Changes in Shareholder EquityFor the years endedJanuary31All figures inThousandsof U.S. Dollars, except for
Shares

|                                                          |  | Share Capital (Notes 9 & 10) |  |  | Equity Reserves |  |   |         |  |   |         |  
|--------------------------------------------------------- |  | ---------------------------- |  |  | --------------- |  | - | ------- |  | - | ------- | -
|                                                          |  |                              |  |  |                 |  |   |         |  |   |         |  
|                                                          |  |                              |  |  |                 |  |   | Paid-in |  |   |         |  
|                                                          |  | Authorized                   |  |  | Issued          |  |   | Share   |  |   | Share   |  
|                                                          |  | Shares                       |  |  | Shares          |  |   | Capital |  |   | Premium |  
|Balance at January 31, 2011                               |  | Unlimited                    |  |  | 154,825,791     |  | $ | 142,373 |  | $ | 875     |  
|Loss and comprehensive loss for
      the year            |  | -                            |  |  | -               |  |   | -       |  |   | -       |  
|Shares and
      warrants issued:                         |  |                              |  |  |                 |  |   |         |  |   |         |  
|Equity
      offering and issuance costs (Notes 9 and 10a |  | -                            |  |  | 13,333,333      |  |   | 15,162  |  |   | 4,667   |  
|Equity offering and issuance costs (Notes 9 and 10a       |  | -                            |  |  | 5,000,000       |  |   | 9,103   |  |   | 875     |  
|Exercise of
      options                                 |  | -                            |  |  | 1,185,000       |  |   | 902     |  |   | -       |  
|Fair value of share options exercised                     |  | -                            |  |  | -               |  |   | 663     |  |   | -       |  
|Restricted
      share units in trust (Note 10c))         |  | -                            |  |  | 259,000         |  |   | -       |  |   | -       |  
|For options on land purchases                             |  | -                            |  |  | 135,000         |  |   | 231     |  |   | -       |  
|Refinancing of convertible debt
      (Note 9)            |  | -                            |  |  | -               |  |   | -       |  |   | (4,285  | )
|Long-term debt -
      warrants (Note 7)                  |  | -                            |  |  | -               |  |   | -       |  |   | -       |  
|Milestone 4 Bonus Share cost
      amortization (Note 16) |  | -                            |  |  | -               |  |   | -       |  |   | -       |  
|Deferred income
      tax recovery (Note 10e))            |  | -                            |  |  | -               |  |   | -       |  |   | -       |  
|Share-based compensation (Note 10c))                      |  | -                            |  |  | -               |  |   | -       |  |   | -       |  
|Balance - January 31, 2012                                |  | Unlimited                    |  |  | 174,738,124     |  | $ | 168,434 |  | $ | 2,132   |  

|                                                          |  | Share Capital (Notes 9 & 10) |  |  | Equity Reserves |  |   |         |  |   |         | 
|--------------------------------------------------------- |  | ---------------------------- |  |  | --------------- |  | - | ------- |  | - | ------- | 
|                                                          |  |                              |  |  |                 |  |   |         |  |   |         | 
|                                                          |  |                              |  |  |                 |  |   | Paid-in |  |   |         | 
|                                                          |  | Authorized                   |  |  | Issued          |  |   | Share   |  |   | Share   | 
|                                                          |  | Shares                       |  |  | Shares          |  |   | Capital |  |   | Premium | 
|Balance at January 31, 2010                               |  | Unlimited                    |  |  | 148,980,791     |  | $ | 132,066 |  | $ | -       | 
|Loss and comprehensive loss for
      the year            |  | -                            |  |  | -               |  |   | -       |  |   | -       | 
|Shares and
      warrants issued:                         |  |                              |  |  |                 |  |   |         |  |   |         | 
|Equity
      offering and issuance costs (Notes 9 and 10a |  | -                            |  |  | 5,000,000       |  |   | 9,019   |  |   | 875     | 
|Exercise of options                                       |  | -                            |  |  | 845,000         |  |   | 808     |  |   | -       | 
|Fair value
      of share options exercised               |  | -                            |  |  | -               |  |   | 480     |  |   | -       | 
|Refinancing of
      convertible debt (Note 9)            |  | -                            |  |  | -               |  |   | -       |  |   | -       | 
|Milestone 4 Bonus Share cost
      amortization (Note 16) |  | -                            |  |  | -               |  |   | -       |  |   | -       | 
|Deferred income
      tax recovery (Note 10e))            |  | -                            |  |  | -               |  |   | -       |  |   | -       | 
|Share-based compensation (Note 10c))                      |  | -                            |  |  | -               |  |   | -       |  |   | -       | 
|Balance - January 31, 2011                                |  | Unlimited                    |  |  | 154,825,791     |  | $ | 142,373 |  | $ | 875     | 

- See Accompanying Notes -

F-7

---

PolyMet Mining Corp.(a development stage
company)Consolidated Statements of Cash FlowsFor the years ended January 31All figures in
Thousands of U.S. Dollars

|                                                           |   | 2012    |   |   | 2011    |  
|---------------------------------------------------------- | - | ------- | - | - | ------- | -
|Operating Activities                                       |   |         |   |   |         |  
|Loss for the year                                          | $ | (3,045  | ) | $ | (6,662  | )
|Items not involving cash                                   |   |         |   |   |         |  
|Amortization                                               |   | 31      |   |   | 31      |  
|Finance
      costs (Note 11)                              |   | 350     |   |   | 480     |  
|Financing costs write-off                                  |   | -       |   |   | 1,830   |  
|Deferred
      income tax recovery (Note 10e))             |   | (657    | ) |   | (1,390  | )
|Loss (gain) on asset held
      for sale                   |   | (72     | ) |   | 520     |  
|Loss on
      refinancing of convertible debt (Note 9)     |   | -       |   |   | 2,931   |  
|Share-based compensation                                   |   | 625     |   |   | (119    | )
|Changes in non-cash working
      capital items            |   |         |   |   |         |  
|Trade and other
      receivables                          |   | (122    | ) |   | (230    | )
|Prepaid
      expenses                                     |   | (298    | ) |   | (124    | )
|Trade payables and
      accrued liabilities               |   | 233     |   |   | (335    | )
|Net cash used in operating activities                      |   | (2,955  | ) |   | (3,068  | )
|                                                           |   |         |   |   |         |  
|Financing Activities                                       |   |         |   |   |         |  
|Share capital - for cash (Note 10a))                       |   | 30,709  |   |   | 10,702  |  
|Deferred financing costs                                   |   | -       |   |   | (36     | )
|Long-term debt funding (Note 7)                            |   | 4,000   |   |   | -       |  
|Long-term debt repayment
      (Note 7)                    |   | (8,500  | ) |   | (2,000  | )
|Net cash provided by financing activities                  |   | 26,209  |   |   | 8,666   |  
|                                                           |   |         |   |   |         |  
|Investing Activities                                       |   |         |   |   |         |  
|Purchase of mineral property,
      plant and equipment    |   | (19,629 | ) |   | (16,519 | )
|Sale of asset held for sale                                |   | 3,942   |   |   | -       |  
|Net cash used in investing activities                      |   | (16,137 | ) |   | (16,519 | )
|                                                           |   |         |   |   |         |  
|Net Increase (decrease) in Cash and Cash
      Equivalents |   | 7,117   |   |   | (10,921 | )
|Cash and Cash Equivalents - Beginning of year              |   | 10,361  |   |   | 21,282  |  
|Cash and Cash Equivalents - End of year                    | $ | 17,478  |   | $ | 10,361  |  

Supplemental Disclosure with Respect to Statement of Cash Flows
 Note 12

- See Accompanying Notes -

F-8

---

|PolyMet Mining Corp.                                                                             
|-------------------------------------------------------------------------------------------------
|(a development stage company)                                                                    
|Notes to Consolidated Financial Statements                                                       
|For the years ended January 31, 2012 and 2011                                                    
|Tabular amounts in thousands of U.S. Dollars except for
      price per share, shares and options
|                                                                                                 

|1. | General Information                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   | PolyMet Mining Corp. (the Company) was incorporated in
      British Columbia, Canada on March 4, 1981 under the name Fleck Resources
      Ltd. The Company changed its name from Fleck Resources to PolyMet Mining
      Corp. on June 10, 1998. The Company is engaged in the exploration and
      development, when warranted, of natural resource properties. The Companys
      primary mineral property is the NorthMet Project, a polymetallic project
      in northeastern Minnesota, USA. The realization of the Companys
      investment in the NorthMet Project and other assets is dependent upon
      various factors, including the existence of economically recoverable
      mineral reserves, the ability to obtain the necessary financing to
      complete the exploration and development of the NorthMet Project, future
      profitable operations, or alternatively upon disposal of the investment on
      an advantageous basis.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   | On September 25, 2006, the Company received the results
      of a Definitive Feasibility Study prepared by Bateman Engineering (Pty)
      Ltd. (Bateman) that confirmed the economic and technical viability of
      the NorthMet Project (the "Project") and, as such, the Project moved from
      the exploration stage to the development stage.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   | The head office of the Company is located at 6500 County
      Road 666, Hoyt Lakes, Minnesota, United States of America, 55750, The
      principal address and records office of the Company are located at Suite
      390  3600 Lysander Place, Richmond, British Columbia, Canada, V7B 1C3 and
      700 West Georgia, 25thFloor, Vancouver, B.C., Canada, V7Y 1B3,
      respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|2. | Basis of Preparation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   | Statement of Compliance                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   | The consolidated financial statements of PolyMet Mining
      Corp. have been prepared in accordance with International Financial
      Reporting Standards (IFRS) as issued by the International Accounting
      Standards Board (IASB). These are the Companys first consolidated
      financial statements prepared in accordance with IFRS and IFRS 1
      First-time Adoption of International Financial Reporting Standardshave been applied.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   | The Companys consolidated financial statements were
      previously prepared in accordance with Canadian generally accepted
      accounting principles (GAAP). An explanation of how the transition to
      IFRS has affected the reported financial position, financial performance
      and cash flows of the Company is provided in Note 18. Comparative figures
      have been restated to reflect these adjustments.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   | The policies applied in these consolidated financial
      statements use the IFRS standards and interpretations effective as of
      January 31, 2012. The financial statements were approved by the Board of
      Directors on April 30, 2012.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   | Basis of Consolidation and Presentation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   | The consolidated financial statements have been prepared
      under the historical cost convention, as modified by the revaluation of
      available-for-sale and fair value through profit or loss financial assets.
      All dollar amounts presented are in United States (U.S.) dollar unless
      otherwise specified.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   | The consolidated financial statements include the
      accounts of the Company and its wholly-owned subsidiary, Poly Met Mining,
      Inc. (PolyMet US). Control is achieved where the Company has the power
      to govern the financial and operating policies of an entity so as to
      obtain benefits from its activities. Inter-company balances and
      transactions have been eliminated on
consolidation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

F-9

---

|PolyMet Mining Corp.                                                                             
|-------------------------------------------------------------------------------------------------
|(a development stage company)                                                                    
|Notes to Consolidated Financial Statements                                                       
|For the years ended January 31, 2012 and 2011                                                    
|Tabular amounts in thousands of U.S. Dollars except for
      price per share, shares and options
|                                                                                                 

|3. | Summary of Significant Accounting
  Policies                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   | Foreign Currency Translation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   | The U.S. dollar is the functional currency of the Company
      and its controlled entities. Amounts in these consolidated financial
      statements are expressed in United States (U.S.) dollars unless
      otherwise stated. Transactions in foreign currencies are translated into
      the functional currency at the exchange rates at the date of the
      transactions. Monetary assets and liabilities of the Companys operations
      denominated in a currency other than the U.S. dollar are translated using
      exchange rates prevailing at the balance sheet date. Non-monetary items
      that are measured in terms of historical cost in a foreign currency are
      translated using the exchange rates on the dates of the initial
      transactions. Revenue and expense items are translated at the exchange
      rates in effect at the date of the underlying transaction, except for
      amortization related to non-monetary assets, which are translated at
      historical exchange rates. Exchange differences are recognized in net loss
      in the year in which they arise.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   | Borrowing costs                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   | Borrowing costs directly attributable to the acquisition,
      construction or production of a qualifying asset are capitalized as part
      of the cost of that asset until such time as the asset is substantially
      complete and ready for its intended use or sale. Where funds have been
      borrowed specifically to finance an asset, the amount capitalized is the
      actual borrowing costs incurred. Where the funds used to finance an asset
      form part of general borrowings, the amount capitalized is calculated
      using a weighted average of rates applicable to relevant general
      borrowings of the Company during the period. Other borrowing costs not
      directly attributable to a qualifying asset are expensed in the year
      incurred.                                                                                                                                                                                                                                                                                                                                   
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   | Significant Accounting Estimates and
    Judgements                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   | The preparation of the consolidated financial statements
      in conformity with IFRS requires the use of certain critical accounting
      estimates. These critical accounting estimates require management to make
      assumptions and estimates that affect the reported amounts of assets and
      liabilities and disclosures of contingent assets and liabilities as at the
      date of the financial statements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   | Significant estimates used in the preparation of these
      consolidated financial statements include, amongst other things, expected
      economic lives of plant and equipment, anticipated costs of environmental
      rehabilitations including the reclamation of mine site, valuation of
      options, convertible debt and share purchase warrants, and the assessment
      of impairment in value of long lived assets. Actual results could differ
      from these estimates. The following discusses some of the most significant
      accounting estimates and judgements that the Company has made in the
      preparation of these consolidated financial statements:                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   | (i) Determination of mineral reserves                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   | Reserves are estimates of the amount of product that can
      be economically and legally extracted from the Companys property. In
      order to estimate reserves, estimates are required about a range of
      geological, technical and economic factors, including quantities,
      production techniques, production costs, capital costs, transport costs,
      demand, prices and exchange rates. Estimating the quantity of reserves
      requires the size, shape and depth of deposits to be determined by
      analyzing geological data. This process may require complex and difficult
      geological judgments to interpret the data. As a result, management will
      form a view of forecast sales prices, based on current and long-term
      historical average price trends. Changes in the proven and probable
      reserves estimates may impact the carrying value of property, plant and
      equipment, restoration provisions, recognition of deferred tax amounts and
      depreciation, depletion and amortization.                                                                  

F-10

---

|PolyMet Mining Corp.                                                                             
|-------------------------------------------------------------------------------------------------
|(a development stage company)                                                                    
|Notes to Consolidated Financial Statements                                                       
|For the years ended January 31, 2012 and 2011                                                    
|Tabular amounts in thousands of U.S. Dollars except for
      price per share, shares and options
|                                                                                                 

|3. | Summary of Significant Accounting Policies-
      Continued
|-- | -----------------------------------------------------------

(ii) Asset values and impairment
charges

If the recoverable amount of an asset
or cash-generating unit is estimated to be less than its carrying amount, the
carrying amount of the asset or cash-generating unit is reduced to its
recoverable amount. An impairment loss is recognized immediately in the
statement of loss and comprehensive loss. Managements determination of
recoverable amounts include estimates of sales volumes and prices, costs to
sell, recoverable reserves, operating costs and capital costs, which are subject
to certain risks and uncertainties that may affect the recoverability of an
assets costs. Although management has made its best estimate of these factors,
it is possible that changes could occur that could adversely affect managements
estimate of the net cash flow to be generated from its assets or cash-generating
unit.

For its mining property interest the
Company considers both external and internal sources of information in assessing
whether there are any indications of impairment. External sources of information
the Company considers include changes in the market, economic and legal
environment in which the Company operates that are not within its control and
affect the recoverable amount of mining property interests. Internal sources of
information the Company considers include indications of economic performance of
the asset. In determining the recoverable amounts of the Companys mining
property interest, the Companys management makes estimates of the discounted
future after-tax cash flows expected to be derived from the Companys property,
costs to sell the mining property and the appropriate discount rate. Reductions
in price forecasts, increases in estimated future costs of production, increases
in estimated future non-expansionary capital expenditures, reductions in the
amount of recoverable reserves and resources, and/or adverse current economics
can result in a write-down of the carrying amounts of the Companys mining
interest.

(iii) Estimated Reclamation and Closure
Costs

The Companys provision for reclamation
and closure cost obligations represents managements best estimate of the
present value of the future cash outflows required to settle the liability which
reflects estimates of future costs, inflation, and assumptions of risks
associated with the future cash outflows, and the applicable risk-free interest
rates for discounting the future cash outflows. Changes in the above factors can
result in a change to the provision recognized by the Company. Changes to
reclamation and closure cost obligations are recorded with a corresponding
change to the carrying amounts of the related mining property. Adjustments to
the carrying amounts of the related mining property can result in a change to
future depletion expense.

Cash and Cash Equivalents

The Company considers cash and cash
equivalents to include amounts held in banks and highly liquid debt investments
with remaining maturities at point of purchase of three months or less.

Mineral Property, Plant and
Equipment

Mineral Property

Mineral property costs, aside from
mineral property acquisition costs, incurred prior to determination of the
Definitive Feasibility Study (DFS) are expensed as incurred and expenditures
incurred subsequent to the DFS and mineral property acquisition costs are
capitalized until the property is placed into production, sold, allowed to lapse
or abandoned. Acquisition costs include cash, debt and fair market value of
common shares.

F-11

---

|PolyMet Mining Corp.                                                                             
|-------------------------------------------------------------------------------------------------
|(a development stage company)                                                                    
|Notes to Consolidated Financial Statements                                                       
|For the years ended January 31, 2012 and 2011                                                    
|Tabular amounts in thousands of U.S. Dollars except for
      price per share, shares and options
|                                                                                                 

|3. | Summary of Significant Accounting Policies-
      Continued                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   | Upon commencement of production, mineral properties and
      acquisition costs relating to mines are amortized on a unit of production
      basis over the estimated proven and probable mineral reserves not to exceed
      the assets useful lives.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   | As a result of the DFS on the NorthMet Project, the
      Project entered the development stage effective October 1, 2006. The
      Company has capitalized mineral property development expenditures related
      to the NorthMet Project from that date.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   | Ownership in mineral interests involves certain inherent
      risks due to the difficulties of determining the validity of certain
      claims as well as the potential for problems arising from the frequently
      ambiguous conveyance history characteristic of many mineral interests. The
      Company has investigated ownership of its mineral interests and, to the
      best of its knowledge, ownership of its interests are in good
    standing.                                                                                                                                                                                                                                                                                                                                                       
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   | Plant and Equipment                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   | Plant and equipment are recorded at historical cost less
      accumulated depreciation and if applicable, accumulated impairment losses.
      Subsequent costs are included in the assets carrying amount or recognized
      as a separate asset, as appropriate, if it is probable that the future
      economic benefits embodied within the part will flow to the Company and
      its cost can be measured reliably. The carrying amount of a replaced part
      is derecognized. All other repairs and maintenance are charged to the
      statement of loss and comprehensive loss during the year in which they are
      incurred. Plant and equipment is depreciated over the estimated life of
      the related assets calculated on a unit of production or straight-line
      basis, as appropriate.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   | Depreciation of plant and equipment is calculated using
      the cost of the asset, less its residual value, on a straight-line basis
      over the estimated useful life of the asset. Estimated useful lives are as
      follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

| | Leasehold improvements  | Straight-line over the term of the lease
| | ----------------------- | ----------------------------------------
| | Furniture and equipment | Straight-line over 10 years             
| | Computers               | Straight-line over 5 years              
| | Computer software       | Straight-line over 1 year               

Assets Held for Sale

Assets are classified as held for sale
in the period in which certain criteria are met. Assets held for sale are
measured at the lower of carrying amount or fair value less cost to sell and are
not depreciated as long as they remain classified as held for sale.

Loss Per Share

Loss per share is computed by dividing
the loss for the period by the weighted average number of common shares
outstanding during the period. Basic and diluted losses per share are the same
for the periods reported, as the effect of potential issuances of shares under
warrant or share option agreements would, in total, be anti-dilutive.

F-12

---

|PolyMet Mining Corp.                                                                             
|-------------------------------------------------------------------------------------------------
|(a development stage company)                                                                    
|Notes to Consolidated Financial Statements                                                       
|For the years ended January 31, 2012 and 2011                                                    
|Tabular amounts in thousands of U.S. Dollars except for
      price per share, shares and options
|                                                                                                 

|3. | Summary of Significant Accounting Policies-
      Continued                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   | Share-Based Payments and Share Purchase
      Warrants                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   | All share-based payment awards made to directors,
      employees and non-employees are measured and recognized using a fair value
      based method. For directors and employees, or those providing services
      similar to employees, the fair value of the award is measured at the date
      of the grant and recognized over the tranches vesting period in earnings
      or capitalized as appropriate based on the number of options expected to
      vest. Share options issued to non-employees are recognized based on the
      fair value of the goods or services received.                                                                                       
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   | For directors, employees and non-employees, the fair
      value of the award is accrued and charged either to operations or mineral
      property plant and equipment, with the offsetting credit to warrants and
      share-based payment reserve, on a graded method over the vesting period.
      If and when share options are ultimately exercised or performance share
      units and restricted share units vest, the applicable amounts from the
      warrants and share-based payment reserve are transferred to share
      capital.                                                                                                                                   
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   | The Company issues share purchase warrants in connection
      with certain equity transactions. The fair value of the warrants, as
      determined using the Black-Scholes option pricing model, is credited to
      the warrants and share-based payment reserve. The recorded value of share
      purchase warrants is transferred to share capital upon exercise.                                                                                                                                                                                                                                                                                                               
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   | The Company issues restricted stock units to employees.
      The fair value of the restricted stock units is calculated using the
      intrinsic value of the shares at issuance, and is amortised straight-line
      over the vesting period. Certain restricted stock units vest upon
      achievement of a specified performance condition. On a quarterly basis,
      management, using the best available information, the
      probability of achieving those performance conditions, estimates the
      appropriate vesting period. The recorded value of the restricted stock
      units is transferred to share capital upon vesting.                                 
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   | When the Company amends the terms of either share options
      or share purchase warrants, the incremental change in the fair value of
      the options or warrants due to the amendment is booked to warrant or
      option amendment expense and the warrants and share-based payment
      reserve.                                                                                                                                                                                                                                                                                                                                                                              
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   | Provisions                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   | Provisions for environmental rehabilitation associated
      with mineral property, plant and equipment, are recognized when the
      Company has a present legal or constructive obligation that can be
      estimated reliably, and it is probable that an outflow of economic
      benefits will be required to settle the obligation. Provisions are
      determined by discounting the expected future cash flows at a pre-tax rate
      that reflects current market assessments of the time value of money and
      the risks specific to the liability. The increase in the provision due to
      the passage of time is recorded as finance income and costs
  expense.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   | Upon initial recognition of provisions for environmental
      rehabilitation, a corresponding increase to the carrying amount of the
      related asset is recorded and amortized over the life of the asset. The
      estimates are based principally on legal and regulatory requirements.
      Following initial recognition of the environmental rehabilitation
      provision, the carrying amount of the liability is increased for the
      passage of time and adjusted for changes to the current market-based
      discount rate, or changes in the amount and timing of the underlying cash
      flows needed to settle the obligation.                             

F-13

---

|PolyMet Mining Corp.                                                                             
|-------------------------------------------------------------------------------------------------
|(a development stage company)                                                                    
|Notes to Consolidated Financial Statements                                                       
|For the years ended January 31, 2012 and 2011                                                    
|Tabular amounts in thousands of U.S. Dollars except for
      price per share, shares and options
|                                                                                                 

|3. | Summary of Significant Accounting Policies-
      Continued                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   | It is possible that the Companys estimates of its
      ultimate reclamation and closure liabilities could change as a result of
      changes in regulations, changes in the extent of environmental remediation
      required, changes in the means of reclamation or changes in cost
      estimates. The operations of the Company may in the future be affected
      from time to time in varying degrees by changes in environmental
      regulations, including those for future removal and site restoration
      costs. Both the likelihood of new regulations and their overall effect
      upon the Company may vary greatly and are not predictable.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   | Impairment of Non-Financial Assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   | The carrying amounts of the Companys non-financial
      assets, including mineral property, plant and equipment, are reviewed at
      each reporting date to determine whether there is any indication of
      impairment. If any such indication exists, then the assets recoverable
      amount is estimated. The recoverable amount of an asset is the greater of
      its value in use and its fair value less costs to sell. In assessing value
      in use, the estimated future cash flows are discounted to their present
      value using a pre-tax discount rate that reflects current market
      assessments of the time value of money and the risks specific to the
      asset. An impairment loss is recognized if the carrying amount of an asset
      exceeds its estimated recoverable amount. An impairment loss previously
      recorded is reversed if there has been a change in the estimates used to
      determine the recoverable amount.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   | Financial Assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   | All financial assets are initially recorded at fair value
      and designated upon inception as one of the following four categories:
      held to maturity, available for sale, loans and receivables or at fair
      value through profit or loss (FVTPL). Financial assets classified as
      FVTPL are measured at fair value with unrealized gains and losses
      recognized through profit and loss. Financial assets classified as loans
      and receivables and held to maturity are measured at amortized cost using
      the effective interest method less any allowance for impairment. The
      effective interest method is a method of calculating the amortized cost of
      a financial asset and of allocating interest income over the relevant
      period. The effective interest rate is the rate that exactly discounts
      estimated future cash receipts (including all fees paid or received that
      form an integral part of the effective interest rate, transaction costs
      and other premiums or discounts) through the expected life of the
      financial asset, or, where appropriate, a shorter period. Financial assets
      classified as available for sale are measured at fair value with
      unrealized gains and losses recognized in other comprehensive loss except
      when there is objective evidence that the asset is impaired, the
      cumulative loss that had been recognized in other comprehensive loss shall
      be reclassified from equity to profit or loss as a reclassification
      adjustment. Transactions costs associated with FVTPL financial assets are
      expensed as incurred, while transaction costs associated with all other
      financial assets are included in the initial carrying amount of the
      asset.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   | Financial Liabilities and Equity
  Instruments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   | Financial liabilities are recognized when the Company
      becomes a party to the contractual provisions of the instrument. Financial
      liabilities at amortized cost include trade payables and long term debt.
      Trade payables are initially recognized at the amount required to be paid,
      less, when material, a discount to reduce the payables to fair value.
      Subsequently, trade payables are measured at amortized cost using the
      effective interest method. Long term debt is recognized initially at fair
      value, net of any transaction costs incurred, and subsequently at
      amortized cost using the effective interest method. Financial liabilities
      are classified as current liabilities if payment is due within twelve
      months. Otherwise, they are presented as non-current
  liabilities.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

F-14

---

|PolyMet Mining Corp.                                                                             
|-------------------------------------------------------------------------------------------------
|(a development stage company)                                                                    
|Notes to Consolidated Financial Statements                                                       
|For the years ended January 31, 2012 and 2011                                                    
|Tabular amounts in thousands of U.S. Dollars except for
      price per share, shares and options
|                                                                                                 

|3. | Summary of Significant Accounting Policies-
      Continued                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   | All financial liabilities are initially recorded at fair
      value and designated upon inception as FVTPL or other financial
      liabilities. Financial liabilities classified as other financial
      liabilities are initially recognized at fair value less directly
      attributable transaction costs. After initial recognition, other financial
      liabilities are subsequently measured at amortized cost using the
      effective interest method. The effective interest method is a method of
      calculating the amortized cost of a financial liability and of allocating
      interest expense over the relevant period. The effective interest rate is
      the rate that exactly discounts estimated future cash payments through the
      expected life of the financial liability. Financial liabilities classified
      as FVTPL include financial liabilities held for trading and financial
      liabilities designated upon initial recognition as FVTPL. Derivatives,
      including separated embedded derivatives, are also classified as held for
      trading unless they are designated as effective hedging instruments.
      Transaction costs on financial liabilities classified as FVTPL are
      expensed as incurred. At the end of each reporting period subsequent to
      initial recognition, financial liabilities at FVTPL are measured at fair
      value, with changes in fair value recognized directly in profit or loss in
      the period in which they arise. The net gain or loss recognized in profit
      or loss excludes any interest paid on the financial liabilities.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|4. | Recent Accounting Pronouncements                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   | The IASB issued the following standards which have not
      yet been adopted by the Company: IFRS 9, Financial instruments -
      Classification and Measurement, IFRS 10, Consolidated Financial
      Statements, IFRS 11, Joint ArrangementsIFRS 12, Disclosure
      of Interests in Other Entities, IAS 27, Separate Financial
      Statements, IFRS 13, Fair Value Measurementand amended IAS 28,
      Investments in Associates and Joint Ventures. Each of the new
      standards is effective for annual periods beginning on or after January 1,
      2013, except for IFRS 9 which is effective for annual periods beginning on
      or after January 1, 2015, with early adoption permitted. The Company has
      not yet begun the process of assessing the impact that the new and amended
      standards will have on its consolidated financial statements or whether to
      early adopt any of the new requirements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   | The following is a brief summary of these new
      standards:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   | IFRS 9  Financial instruments - classification and
      measurement                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   | This is the first part of a new standard on
      classification and measurement of financial assets that will replace IAS
      39, Financial Instruments: Recognition and Measurement. IFRS 9 has
      two measurement categories: amortized cost and fair value. All equity
      instruments are measured at fair value. A debt instrument is at amortized
      cost only if the entity is holding it to collect contractual cash flows
      and the cash flows represent principal and interest. Otherwise it is at
      fair value through profit or loss. Requirements for financial liabilities
      were added to IFRS 9 in October 2010. Most of the requirements for
      financial liabilities were carried forward unchanged from IAS 39. However,
      some changes were made to the fair value option for financial liabilities
      to address the issue of own credit risk.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

F-15

---

|PolyMet Mining Corp.                                                                             
|-------------------------------------------------------------------------------------------------
|(a development stage company)                                                                    
|Notes to Consolidated Financial Statements                                                       
|For the years ended January 31, 2012 and 2011                                                    
|Tabular amounts in thousands of U.S. Dollars except for
      price per share, shares and options
|                                                                                                 

|4. | Recent Accounting Pronouncements-
      Continued                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   | IFRS 10  Consolidation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   | IFRS 10 requires an entity to consolidate an investee
      when it is exposed, or has rights, to variable returns from its
      involvement with the investee and has the ability to affect those returns
      through its power over the investee. Under existing IFRS, consolidation is
      required when an entity has the power to govern the financial and
      operating policies of an entity so as to obtain benefits from its
      activities. IFRS 10 replaces SIC-12 ConsolidationSpecial Purpose
      Entitiesand parts of IAS 27Consolidated and Separate Financial
    Statements.                                                                                                
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   | IFRS 11 - Joint Arrangements                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   | IFRS 11 requires a venturer to classify its interest in a
      joint arrangement as a joint venture or joint operation. Joint ventures
      will be accounted for using the equity method of accounting whereas for a
      joint operation the venturer will recognize its share of the assets,
      liabilities, revenue and expenses of the joint operation. Under existing
      IFRS, entities have the choice to proportionately consolidate or equity
      account for interests in joint ventures. IFRS 11 supersedes IAS 31,
      Interests in Joint Ventures, and SIC-13, Jointly Controlled
      EntitiesNon-monetary Contributions by Venturers.                                      
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   | IFRS 12  Disclosure of Interests in Other
      Entities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   | IFRS 12 establishes disclosure requirements for interests
      in other entities, such as joint arrangements, associates, special purpose
      vehicles and off balance sheet vehicles. The standard carries forward
      existing disclosures and also introduces significant additional disclosure
      requirements that address the nature of, and risks associated with, an
      entitys interests in other entities.                                                                                                                                                                                                                                                                         
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   | IFRS 13 - Fair Value Measurement                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   | IFRS 13 is a comprehensive standard for fair value
      measurement and disclosure requirements for use across all IFRS standards.
      The new standard clarifies that fair value is the price that would be
      received to sell an asset, or paid to transfer a liability in an orderly
      transaction between market participants, at the measurement date. It also
      establishes disclosures about fair value measurement. Under existing IFRS,
      guidance on measuring and disclosing fair value is dispersed among the
      specific standards requiring fair value measurements and in many cases
      does not reflect a clear measurement basis or consistent
    disclosures.

F-16

---

|PolyMet Mining Corp.                                                                             
|-------------------------------------------------------------------------------------------------
|(a development stage company)                                                                    
|Notes to Consolidated Financial Statements                                                       
|For the years ended January 31, 2012 and 2011                                                    
|Tabular amounts in thousands of U.S. Dollars except for
      price per share, shares and options
|                                                                                                 

|5. | Resource Property Agreements                                                                                                                                                                                                                                                                                                                                                                                                                                            
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   | NorthMet, Minnesota, U.S.A. - Lease                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   | Pursuant to an agreement dated January 4, 1989,
      subsequently amended and assigned, the Company leases certain lands in St.
      Louis County, Minnesota from RGGS Land & Minerals Ltd., L.P. The
      original term of the renewable lease was 20 years and called for total
      lease payments of $1,475,000. The Company can and has renewed the lease by
      making annual payments of $150,000 on or before each anniversary through
      January 2012.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   | The Company can, at its option, terminate the lease at
      any time by giving written notice to the lessor not less than 90 days
      prior to the effective termination date or can indefinitely extend the
      20-year term by continuing to make $150,000 annual lease payments on each
      successive anniversary date.                                                                                                                                      
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   | The lease payments are considered advance royalty
      payments and shall be deducted from future production royalties payable to
      the lessor, which range from 3% to 5% based on the net smelter return
      received by the Company. The Companys recovery of the advance royalty
      payments is subject to the lessor receiving an amount not less than the
      amount of the annual lease payment due for that year.                                   
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   | Pursuant to the leases, PolyMet holds mineral rights and
      the right to mine. PolyMet intends to acquire surface rights through a
      land exchange with the United States Forest Service, which costs have been
      included in the capital cost estimate of the
Project.                                                                                                                                                                                      

F-17

---

|PolyMet Mining Corp.                                                                             
|-------------------------------------------------------------------------------------------------
|(a development stage company)                                                                    
|Notes to Consolidated Financial Statements                                                       
|For the years ended January 31, 2012 and 2011                                                    
|Tabular amounts in thousands of U.S. Dollars except for
      price per share, shares and options
|                                                                                                 

|6. | Mineral Property, Plant and Equipment
|-- | -------------------------------------
|   |                                      
|   | Details are as follows:              

| |                                                  |   | NorthMet |   |   | Other fixed |   |   |         |  
| | ------------------------------------------------ | - | -------- | - | - | ----------- | - | - | ------- | -
| | Net Book
      Value                             |   | Project  |   |   | assets      |   |   | Total   |  
| |                                                  |   |          |   |   |             |   |   |         |  
| | Balance at February 1, 2010                      | $ | 125,664  |   | $ | 212         |   | $ | 125,876 |  
| | Additions                                        |   | 17,488   |   |   | 192         |   |   | 17,680  |  
| | Disposals                                        |   | -        |   |   | -           |   |   | -       |  
| | Changes to environmental rehabilitation (Note 8) |   | 1,997    |   |   | -           |   |   | 1,997   |  
| | Transfer to assets held for sale                 |   | (3,420   | ) |   | -           |   |   | (3,420  | )
| | Amortization                                     |   | -        |   |   | (198        | ) |   | (198    | )
| | Balance at January 31, 2011                      |   | 141,729  |   |   | 206         |   |   | 141,935 |  
| | Additions                                        |   | 20,807   |   |   | 412         |   |   | 21,219  |  
| | Disposals                                        |   | -        |   |   | -           |   |   | -       |  
| | Changes to environmental rehabilitation (Note 8) |   | 7,894    |   |   | -           |   |   | 7,894   |  
| | Amortization                                     |   | -        |   |   | (359        | ) |   | (359    | )
| | Balance at
      January 31, 2012                | $ | 170,430  |   | $ | 259         |   | $ | 170,689 |  

| |                                                       |   | January  |  |   | January 31, |  |   | February 1, | 
| | ----------------------------------------------------- | - | -------- |  | - | ----------- |  | - | ----------- | 
| | NorthMet
      Project                                |   | 31, 2012 |  |   | 2011        |  |   | 2010        | 
| | Mineral property acquisition and interest
      costs | $ | 42,895   |  | $ | 41,220      |  | $ | 38,838      | 
| | Mine plan and development                             |   | 34,941   |  |   | 29,305      |  |   | 25,470      | 
| | Environmental                                         |   | 33,843   |  |   | 25,994      |  |   | 19,537      | 
| | Consulting and wages                                  |   | 25,921   |  |   | 21,756      |  |   | 18,788      | 
| | Environmental rehabilitation                          |   | 20,925   |  |   | 13,143      |  |   | 11,600      | 
| | Site activities                                       |   | 10,956   |  |   | 9,362       |  |   | 7,641       | 
| | Mine equipment                                        |   | 949      |  |   | 949         |  |   | 3,790       | 
| | Net book value                                        | $ | 170,430  |  | $ | 141,729     |  | $ | 125,664     | 

Erie Plant, Minnesota, U.S.A.

In October 2003, the Company entered
into an option with Cliffs Natural Resources Inc. to purchase 100% ownership of
large parts of the former LTV Steel Mining Company ore processing plant in north
eastern Minnesota. The Company paid $500,000 in cash and issued 1,000,000 common
shares (at fair value of $229,320) for this option, which it exercised on
November 15, 2005 under the Asset Purchase Agreement with Cliffs Natural
Resources Inc. Consideration for the purchase was $1 million in cash, $2.4
million in notes payable (paid in full in June 2008) and the issuance of
6,200,547 common shares (at fair market value of $7,564,000) in the capital
shares of the Company.

On December 20, 2006, the Company
closed a transaction (the Asset Purchase Agreement II) in which it acquired,
from Cliffs, property and associated rights sufficient to provide it with a
railroad connection linking the mine development site and the Erie Plant. The
transaction also included a 120-railcar fleet, locomotive fuelling and
maintenance facilities, water rights and pipelines, large administrative offices
on site and an additional 6,000 acres to the east and west of and contiguous to
its existing tailing facilities.

F-18

---

|PolyMet Mining Corp.                                                                             
|-------------------------------------------------------------------------------------------------
|(a development stage company)                                                                    
|Notes to Consolidated Financial Statements                                                       
|For the years ended January 31, 2012 and 2011                                                    
|Tabular amounts in thousands of U.S. Dollars except for
      price per share, shares and options
|                                                                                                 

|6. | Mineral Property, Plant and Equipment-
      Continued                                                             
|-- | -------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                    
|   | The purchase price totalling 2 million shares and $15
      million in cash and debt (Note 7) was in four
tranches:

| |  | 2 million shares of PolyMet with a fair value of $6.160
      million, paid at closing;                                                                                                                                                                                                                                                                                                                                                                                     
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |  | $1 million in cash, paid at closing;                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |  | $7 million in cash, payable in quarterly instalments of
      $250,000 commencing December 31, 2006 with the balance payable upon
      receipt of production financing (remaining balance paid in full in
      December 2011). Interest was payable quarterly at the Wall Street
      JournalPrime Rate, and                                                                                                                                                             
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |  | $7 million in cash, payable in quarterly instalments of
      $250,000 commencing on December 31, 2009 with a balloon payment of any
      unpaid balance due on December 31, 2011 (balance paid in full in December
      2011). No interest was payable until December 31, 2009 after which it was
      payable quarterly at the Wall Street JournalPrime Rate,
      accordingly the debt was fair valued, for balance sheet purposes, by
      discounting it at 8.25%.

The Company has assumed certain ongoing
site-related environmental and reclamation obligations as a result of the above
purchases. These environmental and reclamation obligations are presently
contracted under the terms of the purchase agreements with Cliffs. Once the
Company obtains its permit to mine and Cliffs is released from its obligations
by the State agencies, the environmental and reclamation obligations will be
direct with the governing bodies. The present value of the environmental
rehabilitation provision in the amount of $22,836,000 (Note 8) net of accretion
and amounts spent has been recorded as an increase in the carrying amount of the
NorthMet Project assets and will be amortized over the life of the asset.

Interest and loan accretion on the
long-term (Note 7) and convertible debt (Note 9) to January 31, 2012 in the
amount of $9,213,000 (January 31, 2011 - $7,196,000, February 1, 2010 -
$4,833,000) have been capitalized as part of the cost of the NorthMet Project
assets.

As the above assets are not in use, no
amortization of these assets has been recorded to January 31, 2012.

At April 30, 2010, certain equipment
was classified as assets held for sale. During the year-ended January 31, 2011,
these assets were written down to fair value less estimated cost to sell,
resulting in a loss of $520,000. During the quarter ended January 31, 2012 the
assets were sold for a gain of $72,000.

F-19

---

|PolyMet Mining Corp.                                                                             
|-------------------------------------------------------------------------------------------------
|(a development stage company)                                                                    
|Notes to Consolidated Financial Statements                                                       
|For the years ended January 31, 2012 and 2011                                                    
|Tabular amounts in thousands of U.S. Dollars except for
      price per share, shares and options
|                                                                                                 

|7. | Long Term Debt                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   | Pursuant to Asset Purchase Agreement II (Note 6) the
      Companys wholly owned subsidiary PolyMet US signed two notes payable to
      Cliffs in the amounts of $7,000,000 and $7,000,000,
respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   | The first note was interest bearing at the Wall Street
      Journal Prime Rate and was being paid in quarterly instalments equal to
      $250,000 with the first payment on December 31, 2006, with the balance
      repayable upon receipt of commercial financing, for total repayment of
      $7,000,000.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   | The second note was interest bearing at the Wall Street
      Journal Prime Rate and was being paid in quarterly instalments equal to
      $250,000 commencing on December 31, 2009 for total repayment of $7,000,000
      with final payment due on December 31, 2011. No interest was payable on
      the second note until December 31, 2009. Accordingly it was fair valued,
      for balance sheet purposes, by discounting it at 8.25%, the rate of
      interest on the first note when it was entered.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   | If PolyMet were to default on individual elements of the
      transactions with Cliffs, the assets associated with the default could
      revert to Cliffs control.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   | Both of these notes were repaid in full in December
      2011.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   | On June 30, 2011 PolyMet closed a $4,000,000 loan from
      Iron Range Resources & Rehabilitation Board ("IRRRB"), a development
      agency created by the State of Minnesota to stabilize and enhance the
      economy of northeastern Minnesota. At the same time, the Company exercised
      its options to acquire two tracts of land as part of a proposed land
      exchange with the U.S. Forest Service (USFS). The loan is secured by the
      land acquired, carries a fixed interest rate of 5% per annum, compounded
      annually, and is repayable on the earlier of June 30, 2016 or the date
      which the related land is exchanged with the USFS. PolyMet has issued
      warrants giving the IRRRB the right to purchase 400,000 shares of its
      common shares at $2.50 per share at any time until the earlier of June 30,
      2016 the date the land is exchanged with the USFS and an alternate date as
      determined between the parties as the due date of the loan.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   | The Company has accounted for the IRRRB loan and the
      400,000 common share warrants by allocating the $4,000,000 between the
      debt and the warrants by fair valuing the debt using a discount rate of 8%
      and allocating the residual of $550,124 to the warrants.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   | As at January 31, 2012, the outstanding long term debt
      was as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

| |                                |   | January  |  |   | January 31, |   |   | February 1, |  
| | ------------------------------ | - | -------- |  | - | ----------- | - | - | ----------- | -
| |                                |   | 31, 2012 |  |   | 2011        |   |   | 2010        |  
| | Note payable                   | $ | 3,450    |  | $ | 8,500       |   | $ | 10,499      |  
| | Accrued interest and accretion |   | 222      |  |   | 25          |   |   | 30          |  
| | Total Debt                     |   | 3,672    |  |   | 8,525       |   |   | 10,529      |  
| | Less current portion           |   | -        |  |   | (6,750      | ) |   | (2,000      | )
| |                                |   |          |  |   |             |   |   |             |  
| | Long term debt                 | $ | 3,672    |  | $ | 1,775       |   | $ | 8,529       |  

F-20

---

|PolyMet Mining Corp.                                                                             
|-------------------------------------------------------------------------------------------------
|(a development stage company)                                                                    
|Notes to Consolidated Financial Statements                                                       
|For the years ended January 31, 2012 and 2011                                                    
|Tabular amounts in thousands of U.S. Dollars except for
      price per share, shares and options
|                                                                                                 

|8. | Environmental Rehabilitation Provision                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   | As part of the consideration for the Cliffs Purchase
      Agreements (Note 6), the Company indemnified Cliffs for the liability for
      final reclamation and closure of the acquired property.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   | Federal, state and local laws and regulations concerning
      environmental protection affect the Companys operations. Under current
      regulations, the Company is contracted to indemnify Cliffs requirement to
      meet performance standards to minimize environmental impact from
      operations and to perform site restoration and other closure activities.
      The Companys provisions for future site closure and reclamation costs are
      based on known requirements. It is not currently possible to estimate the
      impact on operating results, if any, of future legislative or regulatory
      developments. The Companys estimate of the present value of the
      obligation to reclaim the NorthMet Project is based upon existing
      reclamation standards at January 31, 2012 and under IFRS. Once the Company
      obtains its permit to mine the environmental and reclamation obligations
      will be direct with the governing bodies.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   | The Companys best estimate of the environmental
      rehabilitation provision at January 31, 2012 was $22,836,000 (January 31,
      2011 - $15,719,000, February 1, 2010 - $13,699,000). This best estimate
      was based upon an January 31, 2012 undiscounted future cost of $23.9
      million (January 31, 2011 - $24.4 million, February 1, 2010 - $21.6
      million) for the first Cliffs transaction and $2.0 million (January 31,
      2011 - $2.1 million, February 1, 2010 - $2.0 million) for Cliffs II, an
      annual inflation rate of 2.00%, risk-free interest rate of 2.55%, a mine
      life of 20 years and a reclamation period of 9 years. The revision in
      estimated cash flow balance during the period of $7,894,000 is mostly due
      to the decrease in the risk-free interest rate from 4.33% to 2.55% during
      the period.                                                                                                                
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   | In April 2010, Cliffs entered into a consent decree with
      the Minnesota Pollution Control Agency (MPCA) relating to alleged
      violations on the Cliffs Erie Property. This consent decree required
      submission of Field Study Plan Outlines and Short Term Mitigation Plans,
      which have been approved by the MPCA. In April 2012, long-term mitigation
      plans were submitted to the MPCA for its review and approval, such
      approval remains outstanding to date. As part of its prior transactions
      with Cliffs (Note 6), PolyMet has agreed to indemnify Cliffs for certain
      on-going site environmental liabilities.                                                                                                                                                                                                                                                                                                                           
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   | There is substantial uncertainty related to the cost of
      implementation of the Long Term Mitigation Plan related to uncertainty
      about applicable water quality standards, the engineering scope and cost
      of mitigation required to meet those standards, and responsibility for the
      financial liability. As such, the Company is unable to estimate the liability for the Long Term Mitigation Plan at January 31, 2012. Outcomes
      that are unfavorable to us could result in material additional liability.
      The Company has included its best estimate of the liabilities related to
      this consent decree in its environmental rehabilitation provision for the
    year ended January 31, 2012.                                                                                                                                                                                                                                                    

F-21

---

|PolyMet Mining Corp.                                                                             
|-------------------------------------------------------------------------------------------------
|(a development stage company)                                                                    
|Notes to Consolidated Financial Statements                                                       
|For the years ended January 31, 2012 and 2011                                                    
|Tabular amounts in thousands of U.S. Dollars except for
      price per share, shares and options
|                                                                                                 

|   |                                                  
|-- | -------------------------------------------------
|8. | Environmental Rehabilitation Provision -Continued

Adjustments to the provision were as
follows:

| |                                              |   | Year ended  |   |   | Year ended  |  
| | -------------------------------------------- | - | ----------- | - | - | ----------- | -
| |                                              |   | January 31, |   |   | January 31, |  
| |                                              |   | 2012        |   |   | 2011        |  
| | Balance  beginning of year                  | $ | 15,719      |   | $ | 13,699      |  
| | Liabilities incurred                         |   | -           |   |   | -           |  
| | Liabilities discharged                       |   | (1,127      | ) |   | (457        | )
| | Accretion expense                            |   | 350         |   |   | 480         |  
| | Revisions in estimated cash
      flows      |   | 7,894       |   |   | 1,997       |  
| | Total environmental rehabilitation provision |   | 22,836      |   |   | 15,719      |  
| | Less current portion                         |   | (828        | ) |   | (1,408      | )
| |                                              |   |             |   |   |             |  
| | Balance  end of year                        | $ | 22,008      |   | $ | 14,311      |  

F-22

---

|PolyMet Mining Corp.                                                                             
|-------------------------------------------------------------------------------------------------
|(a development stage company)                                                                    
|Notes to Consolidated Financial Statements                                                       
|For the years ended January 31, 2012 and 2011                                                    
|Tabular amounts in thousands of U.S. Dollars except for
      price per share, shares and options
|                                                                                                 

|9. | Glencore Financing                                                                              
|-- | ------------------------------------------------------------------------------------------------
|   |                                                                                                 
|   | Details of fair value of the Glencore convertible
      debentures, as amended, were as follows:

| |                                      |   | Year ended  |  |   | Year ended  | 
| | ------------------------------------ | - | ----------- |  | - | ----------- | 
| |                                      |   | January 31, |  |   | January 31, | 
| |                                      |   | 2012        |  |   | 2011        | 
| | Balance  beginning of year          | $ | 27,631      |  | $ | 24,866      | 
| | Fair value adjustment on refinancing |   | -           |  |   | 706         | 
| | Accretion and accrued interest       |   | 1,387       |  |   | 2,059       | 
| |                                      |   |             |  |   |             | 
| | Balance  end of year                | $ | 29,018      |  | $ | 27,631      | 

Since October 31, 2008 the Company and
Glencore have entered into a series of financing agreements and a marketing
agreement whereby Glencore committed to purchase all of our production of
concentrates, metal, or intermediate products on market terms at the time of
delivery, for at least the first five years of production. PolyMet agreed to
propose to shareholders the election of Stephen Rowland, a senior executive of
Glencore, as a director and also appointed a senior member of Glencore's
technical team to PolyMet's Technical Steering Committee. As a result of the
series of financing transactions and the purchase by Glencore of PolyMet common
shares previously owned by Cliffs, Glencore's current ownership of PolyMet
comprises:

| |  | 41,967,842 shares representing 23.6% of PolyMet's issued
      shares                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |  | $25 million initial principal floating rate secured
      debentures due September 30, 2014. Including capitalized interest as of
      March 31, 2012, these debentures are exchangeable at $1.50 per share into
      19,510,196 common shares of PolyMet upon PolyMet giving Glencore notice
      that it has received permits necessary to start construction of the
      NorthMet project and availability of senior construction finance in a form
      reasonably acceptable to Glencore.                                                       
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |  | Glencore has subscribed to 5 million common shares at
      $2.00 per share no later than October 15, 2012.                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |  | Glencore holds warrants to purchase 5.6 million common
      shares at $1.50 per share at any time until December 31, 2015, subject to
      mandatory exercise if the 20-day Value Weighted Average Price (VWAP) of
      PolyMet common shares is equal to or greater than 150% the exercise price
      and PolyMet provides notice to Glencore that it has received permits
      necessary to start construction of the North Met Project and availability
      of senior construction finance, in a form reasonably acceptable to
      Glencore.

If Glencore were to exercise all of its
rights and obligations under these agreements, it would own 72,078,038 common
shares of PolyMet, representing 34.7% on a partially diluted basis.

2008 Agreement

On October 31, 2008, the Company
entered into a financing with Glencore for an aggregate of $50 million floating
rate secured debentures which were due on September 30, 2011 (the "Debentures")
to be issued by PolyMet US, and guaranteed by the Company. The Debentures bear
interest at 12-month US dollar LIBOR plus 4%, compounded quarterly. Interest is
payable in cash or by increasing the principal amount of the Debentures, at
PolyMets option, for payments on or before September 30, 2009, and at
Glencores option thereafter. At January 31, 2012, $4,018,000 of interest had
been added to the principal amount of the debt since inception. The Company has
provided security on the Debentures covering all of the assets
of PolyMet and PolyMet US, including a pledge of PolyMets 100% shareholding in
PolyMet US. The due date of the Debentures was extended under the 2010 and 2011
Agreements.

F-23

---

|PolyMet Mining Corp.                                                                             
|-------------------------------------------------------------------------------------------------
|(a development stage company)                                                                    
|Notes to Consolidated Financial Statements                                                       
|For the years ended January 31, 2012 and 2011                                                    
|Tabular amounts in thousands of U.S. Dollars except for
      price per share, shares and options
|                                                                                                 

The Debentures were exchangeable into
common shares of PolyMet, at Glencores option, at $4.00 per share. The Issuer
could, at its option, prepay the Debentures if PolyMets shares trade at a
20-day volume weighted average price (VWAP) equal to or exceeding $6.00, at
which time, and at Glencores option, Glencore could exchange the Debentures for
common shares of PolyMet within 30 days in lieu of payment. Repayment between
October 1, 2009 and September 30, 2010 would have been at 105% of the then
outstanding principal of the Debentures, repayment between October 1, 2010 and
September 30, 2011 would have been at 102.5% of the outstanding principal. The
terms of exchange were amended under the 2011 Agreement.

$7.5 million of the Debentures were
issued on October 31, 2008, an additional $7.5 million on December 22, 2008, $5
million on June 18, 2009 and $5 million on August 31, 2009.

Glencores commitment to purchase, and
the Companys commitment to issue, the final $25 million of Debentures was
cancelled under the 2010 Agreement described below.

F-24

---

|PolyMet Mining Corp.                                                                             
|-------------------------------------------------------------------------------------------------
|(a development stage company)                                                                    
|Notes to Consolidated Financial Statements                                                       
|For the years ended January 31, 2012 and 2011                                                    
|Tabular amounts in thousands of U.S. Dollars except for
      price per share, shares and options
|                                                                                                 

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | On October 31, 2008, PolyMet issued to Glencore warrants
      (Glencore Warrants) to purchase 6.25 million common shares of PolyMet at
      $5.00 if exercised before the NorthMet Project entered into commercial
      production, or $6.00 thereafter. The Glencore Warrants were amended under
      the 2009 Agreement and cancelled under the 2010 Agreement described
      below.                                                                                                                                                                                                                 
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | The Company accounted for the initial $7.5 million of the
      Debentures and the Glencore Warrants by allocating the $7.5 million to the
      warrants and debt based on their fair values, with the residual attributed
      to the exchangeable feature of the debt. The debt was fair valued using
      the difference between 9% and the 12 month LIBOR rate at October 31, 2008
      plus 4% (7.2075%). Costs related to the financing of $652,000 were
      recorded against the convertible debt.                                                                                               
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | The Company accounted for the second, third and fourth
      advances of $7.5 million, $5 million and $5 million, respectively, of the
      Debentures by allocating the principal amounts to the debt based on its
      fair value and the residual to the exchangeable feature of the debt. The
      debt was fair valued using the difference between 9% and the 12 month
      LIBOR rate at October 31, 2008 plus 4% (7.2075%). Costs related to the
      financings of $43,000, $16,000 and $12,000, respectively, were recorded
      against the convertible debt.                                
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | 2009 Agreement                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | On November 17, 2009, the Company agreed to modify
      certain terms of the above transaction. Under the new terms the Glencore
      Warrants entitled Glencore to purchase 6.25 million common shares of
      PolyMet at $3.00 at any time on or before September 30, 2011. The
      incremental $158,000 increase in the fair value of the warrants due to the
      warrant exchange was debited to warrant amendment expense and credited to
      the warrants and share-based payment reserve. These warrants were
      cancelled as part of the November 2010 agreements described
  below.      
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | On November 17, 2009, PolyMet agreed to modify the terms
      of the final $25 million Tranche E of the $50 million Debenture with
      Glencore such that Tranche E, if drawn, could be exchanged at $2.65 per
      share. The first four tranches totalling $25 million (excluding
      capitalized interest) that had already been drawn would continue to be
      exchangeable at $4.00 per share.                                                                                                                                                                                                   
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | On November 17, 2009 PolyMet agreed to sell 9,433,962
      common shares of the Company to Glencore at $2.65 per share for gross
      proceeds of $25 million. Closing and funding occurred in two transactions.
      On November 24, 2009, the Company closed the first tranche of 3,773,585
      common shares at $2.65 per share for gross proceeds of $10 million. On
      January 26, 2010, the Company closed the second tranche of 5,660,377
      common shares at $2.65 per common share for gross proceeds of $15 million.
      Transactions costs for these two financings totalled $499,000.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | 2010 Agreement                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | On November 12, 2010, the Company renegotiated its
      debenture financing from Glencore. The agreed amendments to the debenture
      financing were as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                           

| |  | The maturity date of the $25 million in outstanding
      debentures, plus interest, was extended from September 30, 2011 to
      September 30, 2012. The Issued Debentures continued to be exchangeable
      into common shares of PolyMet at $4.00 per share, as agreed to in 2008.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-25

---

|PolyMet Mining Corp.                                                                             
|-------------------------------------------------------------------------------------------------
|(a development stage company)                                                                    
|Notes to Consolidated Financial Statements                                                       
|For the years ended January 31, 2012 and 2011                                                    
|Tabular amounts in thousands of U.S. Dollars except for
      price per share, shares and options
|                                                                                                 

|9. | Glencore Financing-
  Continued
|-- | -------------------------------

| |  | Cancellation of Glencores commitment to purchase, and
      the Companys commitment to issue, $25 million of Tranche E Debentures
      which were to be issued upon publication of the Final Environmental Impact
      Statement, receipt of a term sheet for construction financing, and other
      customary conditions.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                                
| |  | Cancellation of warrants to purchase 6.25 million common
      shares of PolyMet at $3.00 per share at any time until September 30, 2011
      issued to Glencore in connection with the Debentures, and                                                                                                                       
| |   |                                                                                                                                                                                                                                                                                                                                
| |  | Issuance of warrants (the "2010 Warrants") to purchase 3
      million common shares of PolyMet at $2.00 per share at any time until
      December 31, 2015, issued to Glencore in consideration of the amendments
      listed above. The terms of these warrants were amended under the 2011
      Agreement.               

On November 12, 2010, the Company
entered into a definitive agreement with Glencore to sell to Glencore in a
private placement 15 million common shares at $2.00 per share for gross proceeds
of $30 million, before deducting estimated offering expenses. Completion of the
sale of these shares and funding occurred or are expected to occur in the
following three tranches subject, in each case, to certain closing conditions:

| |  | Tranche 1 of $10 million (closed on January 17, 2011);                                                                                                                                                                                                                                                                                                                                                          
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                 
| |  | Tranche 2 of $10 million (closed on July 15, 2011), and                                                                                                                                                                                                                                                                                                                                                         
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                 
| |  | Tranche 3 of $10 million will close on the earlier of (i)
      the date of the Companys funding requirement as set forth in a budget
      agreed between PolyMet and Glencore, ii) within ten business days
      following receipt by PolyMet of key permits, in a form reasonably
      acceptable to Glencore, that will enable the start of construction of the
      Project, and iii) October 15, 2012.

Glencore was also granted a right of
first refusal to provide all material financings, subject to regulatory approval
as long as it owns 10% or more of the issued and outstanding shares of PolyMet.
As long as Glencore owns more than 5% of the issued and outstanding shares of
PolyMet, it has the right to participate in any equity-related financing to
maintain its partially diluted ownership interest (currently 23.6% of issued and
34.7% on a partially diluted basis).

In accordance with IFRS, the November
12, 2010 transaction has been accounted for as an extinguishment of the existing
convertible debt at that date with a book value of $26.546 million and
reissuance of new convertible debt. Therefore all of the costs associated with
the transaction have been recorded as a non-cash expense in the statement of
loss and comprehensive loss of $2.931 million, comprising:

| |  | The change in fair value of the conversion feature
      resulting from its term being extended from September 30, 2011 to
      September 30, 2012 of $1.633 million;                                                                                                                           
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                  
| |  | The difference in fair value between the warrants to
      purchase 6.25 million common shares at $3.00 per share exercisable until
      September 30, 2011 and the warrants to purchase 3 million common shares at
      $2.00 per share exercisable until December 31, 2015 of $3.217 million;
| |   |                                                                                                                                                                                                                                                                                                  
| |  | The amounts of discount and deferred costs remaining to
      be accreted and amortized over the life of the debt of $706,000, less                                                                                                                                                              

F-26

---

|PolyMet Mining Corp.                                                                             
|-------------------------------------------------------------------------------------------------
|(a development stage company)                                                                    
|Notes to Consolidated Financial Statements                                                       
|For the years ended January 31, 2012 and 2011                                                    
|Tabular amounts in thousands of U.S. Dollars except for
      price per share, shares and options
|                                                                                                 

|9. | Glencore Financing-
  Continued
|-- | -------------------------------

| |  | The premium of $2.625 million resulting from the price of
      the common shares sold or to be sold to Glencore compared with the market
      price at the time of the arrangement.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The $875,000 of premium attributable to
the first tranche of the financing was debited to share capital and credited to
equity reserves  share premium in fiscal 2011 and the  $875,000 of premium attributable to the second tranche of the financing was debited
to share capital and credited to equity reserves share premium in fiscal 2012.

2011 Agreement

On November 30, 2011, PolyMet and
Glencore entered into a definitive agreement to:

| |  | Sell in a private placement to Glencore, 13,333,333
      common shares at $1.50 per share for gross proceeds of $20 million (before
      deducting offering expenses) and issue to Glencore warrants (the 2011
      Warrants) to purchase 2,600,000 common shares of PolyMet at $1.50 per
      share at any time until December 31, 2015, subject to mandatory exercise
      if the 20-day Value Weighted Average Price (VWAP) of PolyMet shares is
      equal to or greater than 150% the exercise price and PolyMet provides
      notice to Glencore that it has received permits necessary to start
      construction of the North Met Project and availability of senior
      construction finance, in a form reasonably acceptable to Glencore.
      Following satisfaction of the conditions for mandatory exercise, if
      Glencore does not elect to exercise the 2011 Warrants, the 2011 Warrants
      will expire. Approximately $7.0 million of the proceeds from the sale of
      these shares were used to repay outstanding notes (including interest) to
      Cliffs Natural Resources Inc. (Note 7);
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |  | Extend the term of the $25 million initial principal
      debentures from September 30, 2012 to the earlier of i) PolyMet giving
      Glencore ten days notice that PolyMet has received permits necessary to
      start construction of the NorthMet project and availability of senior
      construction finance, in a form reasonably acceptable to Glencore (the
      "Early Maturity Event"), and ii) September 30, 2014, on which date all
      principal and interest accrued to such date will be due and payable.
      Glencore has the right to exchange some or all of the debentures at any
      time. Upon occurrence of the Early Maturity Event, the initial principal
      and capitalized interest will be exchanged into common shares of PolyMet
      at $1.50 per share, and                                                                                                                                                                                                                                                                                                                           
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |  | Amend the terms of the warrants issued to Glencore in
      2010 (the "2010 Warrants) to conform to the 2011 Warrants, giving
      Glencore the right to acquire 3,000,000 common shares of PolyMet at $1.50
      per share at any time until December 31, 2015, subject to mandatory
      exercise if the 20-day VWAP of PolyMet shares is equal to or greater than
      150% the exercise price and PolyMet provides notice to Glencore that it
      has received permits necessary to start construction of the North Met
      Project and availability of senior construction finance, in a form
      reasonably acceptable to Glencore. Following satisfaction of the
      conditions for mandatory exercise, if Glencore does not elect to exercise
      the 2010 Warrants, the 2010 Warrants will expire.                                                                                                                                                                                                                                                                                                           

The transactions closed on December 6,
2011.

The December
6, 2011 transaction has been accounted for as a modification of the existing
convertible debt at that date with a book value of $28.779 million. Therefore
all of the costs associated with the transaction have been recorded within Share
Capital, comprising:

| |  | The change in fair value of the conversion feature
      resulting from its term being extended from September 30, 2012 to
      September 30, 2014 of $2.400 million;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-27

---

|PolyMet Mining Corp.                                                                             
|-------------------------------------------------------------------------------------------------
|(a development stage company)                                                                    
|Notes to Consolidated Financial Statements                                                       
|For the years ended January 31, 2012 and 2011                                                    
|Tabular amounts in thousands of U.S. Dollars except for
      price per share, shares and options
|                                                                                                 

|9. | Glencore Financing-
  Continued
|-- | -------------------------------

| |  | The difference in fair value between the warrants to
      purchase 3 million common shares at $2.00 per share exercisable until
      December 31, 2015 and the warrants to purchase 3 million common shares at
      $1.50 per share exercisable until December 31, 2015 of $177,000;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                        
| |  | The fair value of the warrants to purchase 2.6 million
      common shares at $1.50 per exercisable until December 31, 2015 of $1.708
      million, less                                                                                                                              
| |   |                                                                                                                                                                                                                                                                                        
| |  | The premium of $4.667 million results from the agreed
      upon price of the common shares of $1.50 per share, compared with the
      market price at the time of the arrangement.                                                                                                   

F-28

---

|PolyMet Mining Corp.                                                                             
|-------------------------------------------------------------------------------------------------
|(a development stage company)                                                                    
|Notes to Consolidated Financial Statements                                                       
|For the years ended January 31, 2012 and 2011                                                    
|Tabular amounts in thousands of U.S. Dollars except for
      price per share, shares and options
|                                                                                                 

|10. | Share Capital
|--- | -------------
|    |              
|    | a)           
|    |              
|    |              
|    |              
|    |              
|    |              
|    |              
|    |              
|    | b)           
|    |              
|    |              
|    |              
|    |              

| |                                   |  | January 31, 2012 |   |  | January 31, |  
| | --------------------------------- |  | ---------------- | - |  | ----------- | -
| |                                   |  |                  |   |  | 2011        |  
| | Outstanding - Beginning of period |  | 11,630,000       |   |  | 13,075,000  |  
| | Granted                           |  | 750,000          |   |  | 300,000     |  
| | Forfeited                         |  | -                |   |  | (900,000    | )
| | Exercised                         |  | (1,185,000       | ) |  | (845,000    | )
| |                                   |  |                  |   |  |             |  
| | Outstanding - End
      of period |  | 11,195,000       |   |  | 11,630,000  |  

The weighted average share price on
the dates the above options were exercised was $1.78 in the current year (prior
year - $1.74) .

F-29

---

|PolyMet Mining Corp.                                                                             
|-------------------------------------------------------------------------------------------------
|(a development stage company)                                                                    
|Notes to Consolidated Financial Statements                                                       
|For the years ended January 31, 2012 and 2011                                                    
|Tabular amounts in thousands of U.S. Dollars except for
      price per share, shares and options
|                                                                                                 

|10. | Share Capital- Continued
|--- | ------------------------
|    |                         
|    | b)                      
|    |                         
|    |                         

| |                                                                               |  |                |  |  |                |  |  | Number
      of | 
| | ----------------------------------------------------------------------------- |  | -------------- |  |  | -------------- |  |  | --------------- | 
| |                                                                               |  | Exercise Price |  |  | Exercise Price |  |  | options         | 
| | Expiry Date                                                                   |  | (US$)          |  |  | (CDN$)         |  |  | outstanding     | 
| | March 30, 2012                                                                |  | 0.65*          |  |  | 0.65           |  |  | 50,000          | 
| | May 1, 2012                                                                   |  | 0.85*          |  |  | 0.85           |  |  | 135,000         | 
| | June 15, 2012                                                                 |  | 0.94*          |  |  | 0.94           |  |  | 40,000          | 
| | September 19, 2012                                                            |  | 1.35*          |  |  | 1.36           |  |  | 1,240,000       | 
| | October 24, 2012                                                              |  | 1.20*          |  |  | 1.20           |  |  | 200,000         | 
| | December 5, 2012                                                              |  | 1.15*          |  |  | 1.15           |  |  | 125,000         | 
| | March 20, 2013                                                                |  | 2.75*          |  |  | 2.76           |  |  | 2,400,000       | 
| | June 19, 2013                                                                 |  | 2.96*          |  |  | 2.97           |  |  | 325,000         | 
| | September 1, 2013                                                             |  | 3.81*          |  |  | 3.82           |  |  | 300,000         | 
| | September 22, 2013                                                            |  | 3.50*          |  |  | 3.51           |  |  | 75,000          | 
| | January 5, 2014                                                               |  | 3.29*          |  |  | 3.30           |  |  | 525,000         | 
| | February 13, 2014                                                             |  | 2.99           |  |  |                |  |  | 1,250,000       | 
| | March 12, 2014                                                                |  | 2.92           |  |  |                |  |  | 250,000         | 
| | March 23, 2014                                                                |  | 2.89           |  |  |                |  |  | 50,000          | 
| | September 4, 2014                                                             |  | 3.00           |  |  |                |  |  | 360,000         | 
| | December 12, 2014                                                             |  | 3.05           |  |  |                |  |  | 205,000         | 
| | January 11, 2015                                                              |  | 3.03           |  |  |                |  |  | 70,000          | 
| | January 31, 2015                                                              |  | 2.87           |  |  |                |  |  | 100,000         | 
| | February 15, 2015                                                             |  | 2.72           |  |  |                |  |  | 500,000         | 
| | June 2, 2015                                                                  |  | 3.92           |  |  |                |  |  | 100,000         | 
| | July 30, 2015                                                                 |  | 3.22           |  |  |                |  |  | 175,000         | 
| | January 30, 2016                                                              |  | 0.82           |  |  |                |  |  | 585,000         | 
| | February 17, 2016                                                             |  | 0.82           |  |  |                |  |  | 910,000         | 
| | October 15, 2016                                                              |  | 2.67           |  |  |                |  |  | 115,000         | 
| | January 8, 2017                                                               |  | 3.54           |  |  |                |  |  | 60,000          | 
| | January 25, 2018                                                              |  | 2.17           |  |  |                |  |  | 300,000         | 
| | March 10, 2018                                                                |  | 2.04           |  |  |                |  |  | 750,000         | 
| | Weighted average
      exercise price and total number of options outstanding |  | 2.32           |  |  |                |  |  | 11,195,000      | 

* For information purposes, those
options issued in Canadian dollars have been translated to the Companys
reporting currency using the exchange rate as at January 31, 2012.

As at January 31, 2012 all options had
vested and were exercisable, with the exception of 1,812,500, which vest upon
completion of specific targets.

Subsequent to year end, on March 8,
2012, the Company granted 1,150,000 options to certain independent directors and
management with an average exercise price of USD$1.19 per option.

F-30

---

|PolyMet Mining Corp.                                                                             
|-------------------------------------------------------------------------------------------------
|(a development stage company)                                                                    
|Notes to Consolidated Financial Statements                                                       
|For the years ended January 31, 2012 and 2011                                                    
|Tabular amounts in thousands of U.S. Dollars except for
      price per share, shares and options
|                                                                                                 

|10. | Share Capital- Continued
|--- | ------------------------
|    |                         
|    | c)                      
|    |                         
|    |                         

| | Risk-free interest rate         | 1.71% 
| | ------------------------------- | ------
| | Expected dividend yield         | Nil   
| | Expected forfeiture rate        | Nil   
| | Expected share price volatility | 75.18%
| | Expected option life in years   | 1.40  

The expected forfeiture rate reflects
the Company's expectations that its key staff and directors who have received
incentive options will continue to work for the Company. The Company has no
current plans to reduced staffing levels and anticipates that the likelihood of
resignations will diminish as the permitting process proceeds.

The weighted fair value of options
granted during the period was $0.68. Option pricing models require the input of
highly subjective assumptions including the estimate of the share price
volatility. Changes in the subjective input assumptions can materially affect
the fair value estimate, and therefore, the existing models do not necessarily
provide a reliable single measure of the fair value of the Companys share
options.

During the year ended January 31,
2012, the Company recorded $962,000 for share-based compensation in its accounts
as an expense of $625,000 and as a debit to mineral property, plant and
equipment of $337,000, with the offsetting entries to warrants and share-based
payment reserve.

During the year ended January 31,
2012, the Company granted bonuses comprising 327,500 restricted shares for U.S.
employees and consultants and restricted share units for Canadian employees and
consultants. 50% of each award to be issued upon receipt of permits and the
balance to be issued upon the start of production. The restricted shares had a
fair value of $668,000 which is being amortized over the vesting periods. During
the current year, the Company recorded $274,000 for share-based compensation
relating to these units in its accounts as an expense of $95,000 and as a debit
to mineral property, plant and equipment of $179,000, with the offsetting
entries to warrants and share-based payment reserve. These amounts are included
in the totals in the preceding paragraph. 259,000 shares of the restricted
shares were issued in trust to a third party.

F-31

---

|PolyMet Mining Corp.                                                                             
|-------------------------------------------------------------------------------------------------
|(a development stage company)                                                                    
|Notes to Consolidated Financial Statements                                                       
|For the years ended January 31, 2012 and 2011                                                    
|Tabular amounts in thousands of U.S. Dollars except for
      price per share, shares and options
|                                                                                                 

|10. | Share Capital- Continued
|--- | ------------------------
|    |                         
|    | c)                      
|    |                         
|    |                         

| | Risk-free interest rate             | 1.68% 
| | ----------------------------------- | ------
| | Expected dividend yield             | Nil   
| | Expected share price volatility     | 64.79%
| | Expected option
      life in years | 1.50  

The weighted fair value of options
granted during the period was $0.73. Option pricing models require the input of
highly subjective assumptions including the estimate of the share price
volatility. Changes in the subjective input assumptions can materially affect
the fair value estimate, and therefore, the existing models do not necessarily
provide a reliable single measure of the fair value of the Companys share
options.

During the year ended 31 January 2011,
the Company recorded $275,000 for share based compensation in its accounts as an
expense of $93,000 and a debit to mineral property, plant and equipment of
$182,000, with the offsetting entries going to contributed surplus. During the
year ended 31 January 2011, the Company also recorded a debit to contributed
surplus and a credit to share based compensation expense of $212,000 to reverse
prior accounting for share options which had yet to vest and were forfeited in
the period.

During the year ended 31 January 2010,
the Company granted 1,585,000 options to directors, officers, consultants and
employees with an average exercise price of USD$1.14 per option. The fair value
of these options was estimated at the date of grant using the Black-Scholes
Option Pricing Model with the following weighted average assumptions:

| | Risk-free interest rate             | 1.30% to 1.69%   
| | ----------------------------------- | -----------------
| | Expected dividend yield             | Nil              
| | Expected share price volatility     | 81.97% to 107.32%
| | Expected option
      life in years | 2.33             

The weighted fair value of options
granted during the period was $0.56. Option pricing models require the input of
highly subjective assumptions including the estimate of the share price
volatility. Changes in the subjective input assumptions can materially affect
the fair value estimate, and therefore, the existing models do not necessarily
provide a reliable single measure of the fair value of the Companys share
options.

During the year ended 31 January 2010,
the Company recorded $1,240,000 for share based compensation in its accounts as
an expense of $915,000 and a debit to mineral property, plant and equipment of
$325,000, with the offsetting entries going to contributed surplus. The total
for the year included the amortization of the fair value cost of existing share
options and the impact of the two year extension of the term of all options
outstanding at 24 June 2009 ($339,000).

F-32

---

|PolyMet Mining Corp.                                                                             
|-------------------------------------------------------------------------------------------------
|(a development stage company)                                                                    
|Notes to Consolidated Financial Statements                                                       
|For the years ended January 31, 2012 and 2011                                                    
|Tabular amounts in thousands of U.S. Dollars except for
      price per share, shares and options
|                                                                                                 

|10. | Share Capital- Continued
|--- | ------------------------
|    |                         
|    | d)                      
|    |                         
|    |                         
|    |                         
|    |                         

| |                                                                   |   | Year ended  |   |   | Year ended  |  
| | ----------------------------------------------------------------- | - | ----------- | - | - | ----------- | -
| |                                                                   |   | January 31, |   |   | January 31, |  
| |                                                                   |   | 2012        |   |   | 2011        |  
| | Balance  Beginning of year                                       | $ | 37,920      |   | $ | 37,591      |  
| | Fair value of share-based compensation                            |   | 962         |   |   | 63          |  
| | Refinancing of convertible
      debt (Note 9)                    |   | 4,285       |   |   | 2,225       |  
| |                                                                   |   |             |   |   |             |  
| | Bonus Shares for Milestones 4
      cost amortization (Note 16a)) |   | 1,235       |   |   | 1,593       |  
| | Forfeiture of Bonus Shares for Milestone 4
      (Note 16a))      |   | -           |   |   | (1,682      | )
| | Deferred income tax charge
      (Note 10e)                       |   | (657        | ) |   | (1,390      | )
| | Long-term debt  warrants to IRRRB (Note
      10e))              |   | 550         |   |   | -           |  
| | Fair value of share options and warrants exercised                |   | (663        | ) |   | (480        | )
| | Balance  End of
      year                                       | $ | 43,632      |   | $ | 37,920      |  

| | e) | Share Purchase Warrants                                          
| | -- | -----------------------------------------------------------------
| |    |                                                                  
| |    | Details of share purchase warrant activity were as
      follows:

| |                                          |  | January 31, 2012 |   |  | January 31, 2011 | 
| | ---------------------------------------- |  | ---------------- | - |  | ---------------- | 
| |                                          |  |                  |   |  | Weighted         | 
| |                                          |  |                  |   |  | Average          | 
| |                                          |  |                  |   |  | Exercise         | 
| |                                          |  | Warrants         |   |  | Price            | 
| |                                          |  |                  |   |  |                  | 
| | Warrants outstanding - beginning of year |  | 7,010,000        |   |  | 4.00             | 
| | Expired (Note 10e))                      |  | (4,010,000       | ) |  | 5.00             | 
| | Cancelled (Note 9)                       |  | -                |   |  | -                | 
| | Amended (Note 9)                         |  | (3,000,000       | ) |  | 2.00             | 
| | Amended (Note 9)                         |  | 3,000,000        |   |  | 1.50             | 
| | Issued
      (Notes7 and 9)              |  | 3,000,000        |   |  | 1.63             | 
| | Warrants outstanding  end of year       |  | 6,000,000        |   |  | 1.57             | 

F-33

---

|PolyMet Mining Corp.                                                                             
|-------------------------------------------------------------------------------------------------
|(a development stage company)                                                                    
|Notes to Consolidated Financial Statements                                                       
|For the years ended January 31, 2012 and 2011                                                    
|Tabular amounts in thousands of U.S. Dollars except for
      price per share, shares and options
|                                                                                                 

|10. | Share Capital -continued
|--- | ------------------------
|    |                         
|    | e)                      
|    |                         
|    |                         
|    |                         
|    |                         

| |  | 4,010,000 warrants, each warrant entitling the holder to
      purchase one share of PolyMet common shares at $3.00 per share at any time
      until October 13, 2009, and                                                                                
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                            
| |  | 4,010,000 warrants, each warrant entitling the holder to
      purchase one share of PolyMet common shares at $5.00 if exercised before
      the NorthMet Project commenced commercial production, or $6.00 thereafter
      and prior to August 31, 2011.

The incremental $544,000 increase in
the fair value of the warrants due to the warrant exchange was debited to
warrant amendment expense and credited to the warrants and share-based payment
reserve in the year ended January 31, 2009.

In October and November 2009, the
Company received the consent from holders of more than two-thirds of the above
warrants to, in two steps, exchange the 4,010,000 warrants due to expire on
October 13, 2009 for 4,010,000 warrants, each warrant entitling the holder to
purchase one share of PolyMet common shares at $3.00 per share at any time until
December 31, 2010, with certain provisions for acceleration. The incremental
$4,762,000 increase in the fair value of the warrants due to the warrant
exchange was debited to warrant amendment expense and credited to the warrants
and share-based payment reserve.

Warrants to purchase 167,954 common
shares of PolyMet were exercised in the year ended January 31, 2010. On December
31, 2010, the unexercised warrants, to purchase 3,842,046 common shares of
PolyMet at $3.00 per share, expired. The Company recorded a deferred income tax
charge as the expiration of the warrants triggered a capital gain for tax
purposes which was offset by the application of tax losses carried forward
resulting in a credit of $1,219,000.

On August 31, 2011, the unexercised
warrants, to purchase 4,010,000 common shares of PolyMet at $5.00 per share if
exercised before the NorthMet Project has produced a cumulative total of 20,000
metric tonnes of concentrate, or $6.00 thereafter, expired. The Company recorded
a deferred income tax charge as the expiration of the warrants triggered a
capital gain for tax purposes which was offset by the application of tax losses
carried forward resulting in a credit of $657,000.

F-34

---

|PolyMet Mining Corp.                                                                             
|-------------------------------------------------------------------------------------------------
|(a development stage company)                                                                    
|Notes to Consolidated Financial Statements                                                       
|For the years ended January 31, 2012 and 2011                                                    
|Tabular amounts in thousands of U.S. Dollars except for
      price per share, shares and options
|                                                                                                 

|10. | Share Capital -continued
|--- | ------------------------
|    |                         
|    | e)                      
|    |                         
|    |                         
|    |                         
|    |                         
|    |                         
|    |                         
|    |                         
|    |                         
|    |                         
|    |                         

F-35

---

|PolyMet Mining Corp.                                                                             
|-------------------------------------------------------------------------------------------------
|(a development stage company)                                                                    
|Notes to Consolidated Financial Statements                                                       
|For the years ended January 31, 2012 and 2011                                                    
|Tabular amounts in thousands of U.S. Dollars except for
      price per share, shares and options
|                                                                                                 

|10. | Share Capital -continued                                                                       
|--- | -----------------------------------------------------------------------------------------------
|    |                                                                                                
|    | e)                                                                                             
|    |                                                                                                
|    |                                                                                                
|    |                                                                                                
|11. | Finance Income and Costs                                                                       
|    |                                                                                                
|    | Finance income and costs for the years ended January 31,
      2012 and 2011 were comprised of:

| |                                                     |   | 2012 |  |   | 2011 | 
| | --------------------------------------------------- | - | ---- |  | - | ---- | 
| | Interest (income) expense                           | $ | 1    |  | $ | 19   | 
| | Accretion of environmental rehabilitation provision |   | 350  |  |   | 480  | 
| | Finance income and costs                            | $ | 351  |  | $ | 499  | 

12.        Supplemental
Disclosure With Respect to Statements of Cash Flows

During the years ended January 31, 2012
and 2011 the Company entered into the following non-cash investing and financing
activities:

| |                                                                                         |   | 2012  |   |   | 2011   |  
| | --------------------------------------------------------------------------------------- | - | ----- | - | - | ------ | -
| | Changes in trade payables and accrued liabilities related to
      investing activities | $ | 998   |   | $ | 176    |  
| | Accretion and accrued interest                                                          |   | 1,387 |   |   | 2,059  |  
| | Deferred income tax recovery                                                            |   | (657  | ) |   | (1,390 | )
| | Share-based compensation                                                                |   | 962   |   |   | 63     |  
| | Milestone 4 bonus share cost
    amortization                                           |   | 1,235 |   |   | (98    | )

F-36

---

|PolyMet Mining Corp.                                                                             
|-------------------------------------------------------------------------------------------------
|(a development stage company)                                                                    
|Notes to Consolidated Financial Statements                                                       
|For the years ended January 31, 2012 and 2011                                                    
|Tabular amounts in thousands of U.S. Dollars except for
      price per share, shares and options
|                                                                                                 

13.        Related Party
Transactions

The Company conducted transactions with
key management personnel, comprising of certain members of senior management,
officers, directors and persons or companies related to these individuals, and
paid or accrued amounts during the years ended January 31, 2012 and 2011, as
follows:

| |                                     |   | 2012  |  |   | 2011 | 
| | ----------------------------------- | - | ----- |  | - | ---- | 
| | Wages and other short-term benefits | $ | 950   |  | $ | 825  | 
| | Termination benefits                |   | -     |  |   | -    | 
| | Other long-term benefits            |   | 32    |  |   | 21   | 
| | Commission on sale of used drill    |   | 200   |  |   |      | 
| | Share-based compensation            |   | 738   |  |   | -    | 
| |                                     |   |       |  |   |      | 
| | Total                               | $ | 1,920 |  | $ | 846  | 

The amounts charged to the Company for
the services provided have been determined by negotiation among the parties.

Included in key management compensation
were consulting fees of $nil paid during the year ended January 31, 2012
(January 31, 2011 - $59,000) to Dr. Dreisinger, a director of the Company,
primarily in connection with activities related to the processing / technical
side of the NorthMet project and related expenses (the latter were supported by
invoices and receipts). The consulting fees were based on a monthly fee of
Canadian $5,500 plus general sales tax. Throughout the term of his engagement,
Dr. Dreisinger conducted in-person and telephonic meetings with Mr. William
Murray, then the Companys Executive Chairman, and other members of management
at which he provided both verbal and written updates on the status of test work
and made recommendations for future activities. These meetings occurred
approximately every two to three weeks for the past six years.

The agreement with Dr. Dreisinger was
entered into at a time when the Companys current business plans were being
formulated and were month to month and oral in nature. The agreement was
approved by Mr. William Murray. It was discussed with the Companys board of
directors who did not consider that a formal approval and written contract was
necessary at that time. The Company believes that the contract was at terms at
least as good as could be obtained from third parties. The agreement with Dr.
Dreisinger was terminated effective January 31, 2011.

During the quarter ended January 31,
2012, PolyMet sold a used drill for $3.69 million. A company controlled by a
Director of PolyMet received a commission of $200,000 related to this sale.

As a result of Glencores ownership of
23.6% of the Company it is also a related party. Transactions with Glencore are
described in notes 9 and 16d.

F-37

---

|PolyMet Mining Corp.                                                                             
|-------------------------------------------------------------------------------------------------
|(a development stage company)                                                                    
|Notes to Consolidated Financial Statements                                                       
|For the years ended January 31, 2012 and 2011                                                    
|Tabular amounts in thousands of U.S. Dollars except for
      price per share, shares and options
|                                                                                                 

|14. | Income Taxes
|--- | ------------
|    |             
|    | a)          
|    |             
|    |             

| |                                                            |   | 2012   |   |   | 2011   |  
| | ---------------------------------------------------------- | - | ------ | - | - | ------ | -
| | Net loss                                                   | $ | (3,045 | ) | $ | (6,692 | )
| | Statutory tax rate                                         |   | 26.5%  |   |   | 28.5%  |  
| | Recovery of income taxes computed at
      statutory rates |   | (807   | ) |   | (1,907 | )
| | Difference in foreign tax rates                            |   | (118   | ) |   | (320   | )
| | Non-deductible loss on refinancing with
      Glencore     |   |        |   |   | 835    |  
| | Other non-deductible items and other                       |   | 268    |   |   | 2      |  
| | Deferred income tax recovery                               | $ | (657   | ) | $ | (1,390 | )

| | b) | Deferred tax assets have not been recognized in
      respect of the following items:
| | -- | -------------------------------------------------------------------------------------

| |                                                             |   | 2012   |   |   | 2011   |  
| | ----------------------------------------------------------- | - | ------ | - | - | ------ | -
| | Non-capital losses and other future tax
      deductions    | $ | 20,307 |   | $ | 16,278 |  
| | Mineral properties, deferred development and capital assets |   | (3,263 | ) |   | (3,556 | )
| | Other assets                                                |   | 157    |   |   | 112    |  
| | Unrecognized
      deferred income assets                   | $ | 17,201 |   | $ | 12,834 |  

As at January 31, 2012, the Company
had deductible temporary differences for which deferred tax assets have not been
recognized because it is not probable that future profit will be available
against which the Company can utilize the benefits.

F-38

---

|PolyMet Mining Corp.                                                                             
|-------------------------------------------------------------------------------------------------
|(a development stage company)                                                                    
|Notes to Consolidated Financial Statements                                                       
|For the years ended January 31, 2012 and 2011                                                    
|Tabular amounts in thousands of U.S. Dollars except for
      price per share, shares and options
|                                                                                                 

|14. | Income Taxes- Continued                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|    | As of January 31, 2012, the Company has Canadian loss
      carry forwards of approximately $7.7 million (2011 - $10.3 million) and US
      loss carry forwards of approximately $48.4 million (2011 - $39.9 million)
      available to reduce future years income for tax purposes. The Company
      recognizes the benefit of tax losses only to the extent of anticipated
      future taxable income in relevant jurisdictions. The tax loss carry
      forwards expire as follows:

| | Expiry of Tax
      Losses |   | Amount | 
| | -------------------------- | - | ------ | 
| | January 31, 2019           | $ | 835    | 
| | January 31, 2020           |   | 693    | 
| | January 31, 2021           |   | 827    | 
| | January 31, 2022           |   | 937    | 
| | January 31, 2023           |   | 859    | 
| | January 31, 2024           |   | 655    | 
| | January 31, 2025           |   | 945    | 
| | January 31, 2026           |   | 3,277  | 
| | January 31, 2027           |   | 7,606  | 
| | January 31, 2028           |   | 6,445  | 
| | January 31, 2029           |   | 6,180  | 
| | January 31, 2030           |   | 8,195  | 
| | January 31, 2031           |   | 10,170 | 
| | January 31, 2032           |   | 8,446  | 
| |                            | $ | 56,070 | 

F-39

---

|PolyMet Mining Corp.                                                                             
|-------------------------------------------------------------------------------------------------
|(a development stage company)                                                                    
|Notes to Consolidated Financial Statements                                                       
|For the years ended January 31, 2012 and 2011                                                    
|Tabular amounts in thousands of U.S. Dollars except for
      price per share, shares and options
|                                                                                                 

15.       Segmented
Information

The Company is in the permitting stage
of developing its mineral properties in the U.S. and provides for its financing
and administrative functions at the head office located in Canada. Segmented
information on a geographic basis was as follows:

| | January 31, 2012                                    |   | Canada |   |   | U.S.    |  |   | Consolidated |  
| | --------------------------------------------------- | - | ------ | - | - | ------- |  | - | ------------ | -
| | Cash and equivalents                                | $ | 15,850 |   | $ | 1,628   |  | $ | 17,478       |  
| | **Mineral Property, Plant and**
      **Equipment** | $ | 19     |   | $ | 170,670 |  | $ | 170,689      |  
| | Identifiable assets                                 | $ | 16,235 |   | $ | 173,336 |  | $ | 189,571      |  
| | Total Liabilities                                   | $ | 29,333 |   | $ | 27,872  |  | $ | 57,205       |  
| | Deferred income tax
      recovery                  | $ | (657   | ) | $ | -       |  | $ | (657         | )
| | Segment operating loss                              | $ | 2,020  |   | $ | 1,025   |  | $ | 3,045        |  

| | January 31, 2011                            |   | Canada |   |   | U.S.    |  |   | Consolidated |  
| | ------------------------------------------- | - | ------ | - | - | ------- |  | - | ------------ | -
| | Cash and equivalents                        | $ | 10,023 |   | $ | 338     |  | $ | 10,361       |  
| | Asset held for sale                         | $ | -      |   | $ | 3,420   |  | $ | 3,420        |  
| | Mineral Property, Plant and
      Equipment | $ | 39     |   | $ | 141,896 |  | $ | 141,935      |  
| | Identifiable assets                         | $ | 9,010  |   | $ | 147,726 |  | $ | 156,736      |  
| | Total liabilities                           | $ | 27,905 |   | $ | 26,414  |  | $ | 54,319       |  
| | Financing cost write-off                    | $ | 1,830  |   | $ | -       |  | $ | 1,830        |  
| | Loss (gain) on asset held for
      sale    | $ | -      |   | $ | 520     |  | $ | 520          |  
| | Deferred income tax recovery                | $ | (1,390 | ) | $ | -       |  | $ | (1,390       | )
| | Segment operating loss                      | $ | 5,031  |   | $ | 1,631   |  | $ | 6,662        |  

F-40

---

|PolyMet Mining Corp.                                                                             
|-------------------------------------------------------------------------------------------------
|(a development stage company)                                                                    
|Notes to Consolidated Financial Statements                                                       
|For the years ended January 31, 2012 and 2011                                                    
|Tabular amounts in thousands of U.S. Dollars except for
      price per share, shares and options
|                                                                                                 

|16. | Commitments and Contingencies
|--- | -----------------------------
|    |                              
|    | a)                           
|    |                              
|    |                              

| |             | Bonus
      Shares |                   
| | ----------- | ------------------ | ------------------
| | Milestone 1 | 1,590,000          | issued            
| | Milestone 2 | 1,300,000          | issued            
| | Milestone 3 | 2,350,000          | issued            
| | Milestone 4 | 3,640,000          | (i)
      and (ii)

| | (i)  | Milestone 4  Commencement of commercial production at
      the NorthMet Project at a time when the Company has not less than 50%
      ownership interest.                                                                                                                                                                                                                                                                                                                                                                                                                          
| | ---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | (ii) | At the Annual General Meeting of shareholders of the
      Company, held on June 17, 2008, the disinterested shareholders approved
      the bonus shares for Milestone 4. The bonus shares allocated to Milestone
      4 are valued at $3.80, the Companys closing trading price on June 17,
      2008.                                                                                                                                                                                                                                                                           
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |      | During the year ended January 31, 2012, the Company
      recorded $1,235,000 related to Milestone 4 (January 31, 2011  $(89,000),
      these amounts were capitalized to Mineral Property, Plant and Equipment.
      The fair value of these unissued bonus shares is being amortized, over its
      expected life, until the estimated date of issuance. The prior year period
      reversal includes $1,682,000 representing the forfeiture of entitlement to
      bonus shares by individuals upon resignation or not continuing to stand as
      Directors of the Company.

F-41

---

|PolyMet Mining Corp.                                                                             
|-------------------------------------------------------------------------------------------------
|(a development stage company)                                                                    
|Notes to Consolidated Financial Statements                                                       
|For the years ended January 31, 2012 and 2011                                                    
|Tabular amounts in thousands of U.S. Dollars except for
      price per share, shares and options
|                                                                                                 

|16. | Commitments and Contingencies-
      Continued
|--- | ----------------------------------------------
|    |                                               
|    | b)                                            
|    |                                               
|    | c)                                            
|    |                                               
|    | d)                                            
|    |                                               
|    | e)                                            
|    |                                               
|    | f)                                            

F-42

---

|PolyMet Mining Corp.                                                                             
|-------------------------------------------------------------------------------------------------
|(a development stage company)                                                                    
|Notes to Consolidated Financial Statements                                                       
|For the years ended January 31, 2012 and 2011                                                    
|Tabular amounts in thousands of U.S. Dollars except for
      price per share, shares and options
|                                                                                                 

|16. | Commitments and Contingencies-
      Continued
|--- | ----------------------------------------------

| | g) | The following table lists the known accounts payable and
      debt at January 31, 2012:
| | -- | ----------------------------------------------------------------------------------------

Payments due by period (US$000s)Total
      
      
      Less than 1
      
      
      1  3 years
      
      
      3  5 years
      
      
      More than 5Contractual Obligations
      
      
      
      
      year
      
      
      
      
      
      
      
      
      yearsTrade payables and accrued liabilities
      $
      1,679
      
      $
      1,679
      
      $
      -
      
      $
      -
      
      $
      -Long-term debt obligations
      
      38,146
      
      
      -
      
      
      33,132
      
      
      5,014
      
      
      -Environmental rehabilitation provision
      
      25,828
      
      
      828
      
      
      582
      
      
      538
      
      
      23,880Firm Commitments
      
      2,200
      
      
      2,145
      
      
      55
      
      
      -
      
      
      -Total
      $
      67,853
      
      $
      4,652
      
      $
      33,769
      
      $
      5,552
      
      $
      23,880


F-43

---

|PolyMet Mining Corp.                                                                             
|-------------------------------------------------------------------------------------------------
|(a development stage company)                                                                    
|Notes to Consolidated Financial Statements                                                       
|For the years ended January 31, 2012 and 2011                                                    
|Tabular amounts in thousands of U.S. Dollars except for
      price per share, shares and options
|                                                                                                 

|17. | Financial Instruments and Risk
Management                                                                     
|--- | --------------------------------------------------------------------------------------------------------------
|    |                                                                                                               
|    | The carrying values of the Companys financial
      instruments are classified into the following
categories:

| |                                       |   | January 31, |  |   | January 31, | 
| | ------------------------------------- | - | ----------- |  | - | ----------- | 
| |                                       |   | 2012        |  |   | 2011        | 
| |                                       |   |             |  |   |             | 
| | Loans and Receivables (1)             | $ | 17,478      |  | $ | 10,361      | 
| | Available-for-sale                    |   | 30          |  |   | 66          | 
| | Other loans and receivables           |   | 440         |  |   | 318         | 
| | Other financial
      liabilities (2) |   | 34,369      |  |   | 38,600      | 

| | (1) | Includes cash and equivalents.                                                             
| | --- | -------------------------------------------------------------------------------------------
| | (2) | Includes trade payables and accrued liabilities,
      convertible debt and long term debt.

The Company has determined the
estimated fair values of its financial instruments based on appropriate
valuation methodologies.

Risks Arising from Financial
Instruments and Risk Management

The Companys activities expose it to a
variety of financial risks: market risk (including currency), credit risk,
liquidity risk, interest rate risk and investment risk. Reflecting the current
stage of development of the Companys NorthMet Project, PolyMets overall risk
management program focuses on facilitating the Companys ability to continue as
a going concern and seeks to minimize potential adverse effects on PolyMets
ability to execute its business plan.

Risk management is the responsibility
of executive management. Material risks are identified and monitored and are
discussed with the audit committee and the board of directors.

Currency Risk

The Company incurs expenditures in
Canada and in the United States. The functional and reporting currency of the
Company and its subsidiary is the United States dollar. Foreign exchange risk
arises because the amount of Canadian dollar cash and equivalents, trade and
other receivables, investment or trade payables and accrued liabilities will
vary in United States dollar terms due to changes in exchange rates.

As the majority of the Companys
expenditures are in United States dollars, the Company has kept a significant
portion of its cash and equivalents in United States dollars. The Company has
not hedged its exposure to currency fluctuations.

F-44

---

|PolyMet Mining Corp.                                                                             
|-------------------------------------------------------------------------------------------------
|(a development stage company)                                                                    
|Notes to Consolidated Financial Statements                                                       
|For the years ended January 31, 2012 and 2011                                                    
|Tabular amounts in thousands of U.S. Dollars except for
      price per share, shares and options
|                                                                                                 

|17. | Financial Instruments and Risk Management-
      Continued                                                                                                
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                           
|    | As at January 31, 2012, the Company was exposed to
      currency risk through the following assets and liabilities denominated in
      Canadian dollars:

| |                                 |   | January 31, |   |   | January 31, |  
| | ------------------------------- | - | ----------- | - | - | ----------- | -
| |                                 |   | 2012        |   |   | 2011        |  
| |                                 |   |             |   |   |             |  
| | Loans and Receivables (1)       | $ | 305         |   | $ | 554         |  
| | Available-for-sale              |   | 30          |   |   | 66          |  
| | Other loans and receivables     |   | 95          |   |   | 102         |  
| | Other financial liabilities (2) |   | (239        | ) |   | (192        | )
| |                                 | $ | 191         |   | $ | 530         |  

| | (1) | Includes cash and equivalents.                    
| | --- | --------------------------------------------------
| | (2) | Includes trade payables and accrued
  liabilities.

Based on the above net exposures, as at
January 31, 2012, a 10% change in the Canadian / United States exchange rate
would have impacted the Companys loss by $19,000.

Credit Risk

Credit risk arises on cash and
equivalents held with banks and financial institutions, as well as credit
exposure on outstanding trade and other receivables. The maximum exposure to
credit risk is equal to the carrying value of the financial assets of
$17,918,000.

The Companys cash and equivalents are
held through a large Canadian financial institution.

Liquidity Risk

Liquidity risk arises through the
excess of financial obligations over available financial assets due at any point
in time. The Companys objective in managing liquidity risk is to maintain
sufficient readily available reserves in order to meet its liquidity
requirements at any point in time. The Company achieves this by maintaining
sufficient cash and equivalents.

Interest Rate Risk

Interest rate risk arises on cash and
equivalents and long term debt and fluctuations in the related interest rates.
The Company has not hedged any of its interest rate risk.

As at January 31, 2012, the Company was
exposed to interest rate risk through the following assets and liabilities:

| |                                       |   | January 31, |  |   | January 31, | 
| | ------------------------------------- | - | ----------- |  | - | ----------- | 
| |                                       |   | 2012        |  |   | 2011        | 
| | Loans and receivables (1)             | $ | 17,478      |  | $ | 10,361      | 
| | Other financial
      liabilities (2) |   | 32,690      |  |   | 36,156      | 

| | (1) | Includes cash and equivalents.                                         
| | --- | -----------------------------------------------------------------------
| | (2) | Represents long term debt (Note 7) and convertible debt
      (Note 9).

F-45

---

|PolyMet Mining Corp.                                                                             
|-------------------------------------------------------------------------------------------------
|(a development stage company)                                                                    
|Notes to Consolidated Financial Statements                                                       
|For the years ended January 31, 2012 and 2011                                                    
|Tabular amounts in thousands of U.S. Dollars except for
      price per share, shares and options
|                                                                                                 

|17. | Financial Instruments and Risk Management-
      Continued                                                                                                                                                                   
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                              
|    | Investment Risk                                                                                                                                                                                                              
|    |                                                                                                                                                                                                                              
|    | The Companys investment in the common shares of a
      publicly traded Canadian mining company bears investment risk. The maximum
      exposure to investment risk is equal to the carrying value of the
      investment.
|    |                                                                                                                                                                                                                              
|    | The Company's investment in the NorthMet Project (Note 6)
      is also at risk since the NorthMet Project is pledged in part as security
      to Cliffs and otherwise is pledged wholly as security to
  Glencore.         
|    |                                                                                                                                                                                                                              
|    | As at January 31, 2012, the Company was exposed to
      investment risk through the following assets:                                                                                                                       

| |                        |   | 31 January |  |   | 31 January | 
| | ---------------------- | - | ---------- |  | - | ---------- | 
| |                        |   | 2012       |  |   | 2011       | 
| |                        |   |            |  |   |            | 
| | Available-for-sale (1) | $ | 30         |  | $ | 66         | 

(1)    Includes
investment.

Fair Value Measurements

PolyMets financial assets and
liabilities are measured or disclosed at fair value on a recurring basis and
classified in their entirety based on the lowest level of input that is
significant to the fair value measurement. There are three levels of fair value
hierarchy that prioritize the inputs to valuation techniques used to measure
fair value, with level 1 inputs having the highest priority. The levels and the
valuation techniques used to value the Companys financial assets and
liabilities are described below:

| | Level 1  | Unadjusted quoted prices in active markets that are
      accessible at the measurement date for identical, unrestricted assets or
      liabilities. Investments in marketable securities are valued using quoted
      market prices in active markets, obtained from securities exchanges.
      Accordingly, these items are included in Level 1 of the fair value
      hierarchy.
| | --------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |           |                                                                                                                                                                                                                                                                                                                                                                                        
| | Level 2  | Quoted prices in markets that are not active, quoted
      prices for similar assets or liabilities in active markets, or inputs that
      are observable, either directly or indirectly, for substantially the full
      term of the asset or liability.                                                                                                                            
| |           |                                                                                                                                                                                                                                                                                                                                                                                        
| | Level 3  | Unobservable (supported by little or no market activity)
      prices.                                                                                                                                                                                                                                                                                                                 

Loans and receivables are recorded at
face value. Trade and other receivables are short-term in nature and represent
the initial price of the good or service. Long term and convertible debt have
been fair valued using assumptions with respect to interest rates relevant to
similar debt taking into account the collateral involved.

The fair values of the Company's
financial assets, loans and receivables and trade and other receivables
approximate their carrying amounts. The Companys investment is valued using
quoted market prices in active markets, obtained from securities exchanges and
accordingly is Level 1 in the fair value hierarchy.

The fair value of the Company's trade
payables and accrued liabilities, long term debt and convertible debt
approximate their carrying amounts.

F-46

---

|PolyMet Mining Corp.                                                                             
|-------------------------------------------------------------------------------------------------
|(a development stage company)                                                                    
|Notes to Consolidated Financial Statements                                                       
|For the years ended January 31, 2012 and 2011                                                    
|Tabular amounts in thousands of U.S. Dollars except for
      price per share, shares and options
|                                                                                                 

|17. | Financial Instruments and Risk Management-
      Continued                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|    | Capital Management                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|    | Similar to other companies in the development stage, the
      Company is in discussions with certain parties to provide funding which
      will enable the Company to execute its business plan. With the completion
      of the DFS and taking into account the current permitting process the
      Company is in, PolyMet will require additional funds through Project
      construction. Funding for the Project could come from a number of sources
      and include internal cash flows (for the second stage of the
      construction), bank project financing and capital market financing. During
      the upcoming fiscal year, the Companys objective is to identify the
      source or sources from which it will obtain the capital required to
      complete the Project.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|    | The Company has no externally imposed capital
      requirements. In the management of capital, the Company includes the
      components of shareholders equity, convertible debt and long-term debt.
      The Company manages the capital structure and makes adjustments to it
      depending on economic conditions and the rate of anticipated expenditures.
      To maintain or adjust the capital structure, the Company may attempt to
      issue new shares, issue new debt, acquire or dispose of assets.                                                                                                                                                                                                                                                                          
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|    | In order to assist in management of its capital
      requirements, the Company prepares expenditure budgets that are updated as
      necessary depending on various factors. The budgets are approved by the
      Companys Board of Directors.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|    | Although the Company plans to have the resources to carry
      out its plans and operations through January 31, 2013, it does not
      currently have sufficient capital to meet its estimated project capital
      expenditure requirements and is currently in discussions to arrange
      sufficient capital to meet these requirements.                                                                                                                                                                                                                                                                                                                                                                                                                                                   

F-47

---

|PolyMet Mining Corp.                                                                             
|-------------------------------------------------------------------------------------------------
|(a development stage company)                                                                    
|Notes to Consolidated Financial Statements                                                       
|For the years ended January 31, 2012 and 2011                                                    
|Tabular amounts in thousands of U.S. Dollars except for
      price per share, shares and options
|                                                                                                 

|18. | Transition to IFRS                                                                                                                                                                                                                                                                                                                                                                         
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                            
|    | These are the Companys first consolidated financial
      statements prepared in accordance with IFRS.                                                                                                                                                                                                                                                                                    
|    |                                                                                                                                                                                                                                                                                                                                                                                            
|    | The accounting policies set out in Note 3 have been
      applied in preparing the financial statements for the year ended January
      31, 2012, the comparative information presented in these financial
      statements for the year ended January 31, 2011 and in the preparation of
      an opening IFRS balance sheet at February 1, 2010, the Companys date of
      transition.
|    |                                                                                                                                                                                                                                                                                                                                                                                            
|    | For its opening IFRS balance sheet, the Company has
      adjusted amounts previously reported in financial statements prepared
      using Canadian GAAP. An explanation of how the transition from Canadian
      GAAP to IFRS has affected the Companys financial position, financial
      performance and cash flows is provided in the following footnotes and
      tables.        
|    |                                                                                                                                                                                                                                                                                                                                                                                            
|    | a)                                                                                                                                                                                                                                                                                                                                                                                         
|    |                                                                                                                                                                                                                                                                                                                                                                                            
|    |                                                                                                                                                                                                                                                                                                                                                                                            
|    |                                                                                                                                                                                                                                                                                                                                                                                            
|    |                                                                                                                                                                                                                                                                                                                                                                                            
|    |                                                                                                                                                                                                                                                                                                                                                                                            
|    |                                                                                                                                                                                                                                                                                                                                                                                            
|    |                                                                                                                                                                                                                                                                                                                                                                                            
|    |                                                                                                                                                                                                                                                                                                                                                                                            
|    |                                                                                                                                                                                                                                                                                                                                                                                            
|    |                                                                                                                                                                                                                                                                                                                                                                                            
|    |                                                                                                                                                                                                                                                                                                                                                                                            
|    |                                                                                                                                                                                                                                                                                                                                                                                            
|    |                                                                                                                                                                                                                                                                                                                                                                                            
|    |                                                                                                                                                                                                                                                                                                                                                                                            
|    |                                                                                                                                                                                                                                                                                                                                                                                            
|    |                                                                                                                                                                                                                                                                                                                                                                                            

F-48

---

|PolyMet Mining Corp.                                                                             
|-------------------------------------------------------------------------------------------------
|(a development stage company)                                                                    
|Notes to Consolidated Financial Statements                                                       
|For the years ended January 31, 2012 and 2011                                                    
|Tabular amounts in thousands of U.S. Dollars except for
      price per share, shares and options
|                                                                                                 

|18. | Transition to IFRS-
  Continued
|--- | -------------------------------

| |    | IFRS Mandatory Exceptions                                                                                                                                                                                                                                                          
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                    
| |    | In accordance with the mandatory exception in IFRS 1 for
      estimates, the estimates used as at February 1, 2010 are consistent with
      the estimates as at the same date made in conformity with Canadian
      GAAP.                                                       
| |    |                                                                                                                                                                                                                                                                                    
| |    | The other compulsory exceptions of IFRS 1 have not been
      applied as they are not relevant to the Company.                                                                                                                                                                     
| |    |                                                                                                                                                                                                                                                                                    
| | b) | Reconciliations of Canadian GAAP to IFRS                                                                                                                                                                                                                                           
| |    |                                                                                                                                                                                                                                                                                    
| |    | IFRS 1 requires an entity to reconcile equity,
      comprehensive income and cash flows for prior periods. The following
      tables represent the reconciliations from Canadian GAAP to IFRS for the
      respective periods noted for equity and total comprehensive
  income.

Reconciliation of equity between
Canadian GAAP and IFRS as at February 1, 2010:

Share
    
    
    Contributed
    
    
    
    
    
    
    
    
    TotalNote
    
    Capital
    
    
    Surplus1
    
    
    AOCL2
    
    
    Deficit
    
    
    EquityAs reported under Canadian GAAP
    
    $
    132,066
    
    $
    36,979
    
    $
    71
    
    $
    (71,549
    )
    $
    97,567Change to initial fair value of
      convertible    debt conversion factor and warrants
    (i)
    
    -
    
    
    612
    
    
    -
    
    
    -
    
    
    612Adjustment to fair value of environmental
         rehabilitation provision
    (ii)
    
    -
    
    
    -
    
    
    -
    
    
    (534
    )
    
    (534
    )As reported under IFRS
    
    $
    132,066
    
    $
    37,591
    
    $
    71
    
    $
    (72,083
    )
    $
    97,645


| | 1 | Contributed surplus was reclassified to warrants and
      share-based payment equity reserve under IFRS                        
| | - | --------------------------------------------------------------------------------------------------------------------------------
| | 2 | Accumulated other comprehensive loss (AOCL) was
      reclassified to available for sale revaluation equity reserve under IFRS

F-49

---

|PolyMet Mining Corp.                                                                             
|-------------------------------------------------------------------------------------------------
|(a development stage company)                                                                    
|Notes to Consolidated Financial Statements                                                       
|For the years ended January 31, 2012 and 2011                                                    
|Tabular amounts in thousands of U.S. Dollars except for
      price per share, shares and options
|                                                                                                 

|18. | Transition to IFRS-
  Continued
|--- | -------------------------------

Reconciliation of equity between
Canadian GAAP and IFRS as at January 31, 2011:

Share
    
    
    Share
    
    
    Contributed
    
    
    
    
    
    
    
    
    TotalNote
    
    Capital
    
    
    Premium
    
    
    Surplus1
    
    
    AOCL2
    
    
    Deficit
    
    
    EquityAs reported under Canadian
      GAAP
    
    $
    142,373
    
    $
    
    
    $
    39,083
    
    $
    (6
    )
    $
    (78,832
    )
    $
    102,618Change to
      initial fair value of convertible    debt conversion
      factor and warrants
    (i)
    
    -
    
    
    -
    
    
    612
    
    
    -
    
    
    -
    
    
    612Reclassify share premium
    (iii)
    
    -
    
    
    875
    
    
    (875
    )
    
    -
    
    
    -
    
    
    -Adjustment to
      fair value of environmental    rehabilitation provision
    (ii)
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    (534
    )
    
    (534
    )Change in loss on refinancing of
      convertible    debt
    (i)
    
    -
    
    
    -
    
    
    (900
    )
    
    -
    
    
    716
    
    
    (184
    )Change in accretion of environmental
         rehabilitation provision
    (ii)
    
    
    
    
    -
    
    
    
    
    
    -
    
    
    (95
    )
    
    (95
    )As reported under IFRS
    
    $
    142,373
    
    $
    875
    
    $
    37,920
    
    $
    (6
    )
    $
    (78,745
    )
    $
    102,417


| | 1 | Contributed surplus was reclassified to warrants and
      share-based payment equity reserve under IFRS                              
| | - | --------------------------------------------------------------------------------------------------------------------------------------
| | 2 | Accumulated other comprehensive loss (AOCL) was
      reclassified to available for sale revaluation equity reserve under
      IFRS

Reconciliation of total comprehensive
loss between Canadian GAAP and IFRS the year ended January 31, 2011:

| |                                                                     |      |   | Year ended  |  
| | ------------------------------------------------------------------- | ---- | - | ----------- | -
| |                                                                     |      |   | January 31, |  
| |                                                                     | Note |   | 2011        |  
| | Total comprehensive loss - under Canadian GAAP                      |      | $ | 7,360       |  
| | Change in loss on refinancing of convertible
      debt             | (i)  |   | (716        | )
| | Change in accretion of environmental
      rehabilitation provision | (ii) |   | 95          |  
| |                                                                     |      |   |             |  
| | Total comprehensive loss  as reported under IFRS                   |      | $ | 6,739       |  

| | c) | Explanations of Reconciliations of Canadian GAAP to
      IFRS                                                                                                                                                                                                                                                                                                                                                                
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                               
| |    | The transition from Canadian GAAP to IFRS has had no
      effect on the net cash flows reported by the Company. The changes made to
      the statements of consolidated earnings and consolidated balance sheets
      have resulted in reclassification of various amounts on the statements of
      cash flows, however as there have been no changes to the net cash flows,
      no reconciliations have been prepared.

| | i) | Convertible Debt  Glencore Financing                                                                                                                                                                                                                                                                                                                                                                  
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                        
| |    | Under IFRS, the value attributable to the conversion
      factor of convertible debt is the residual of the overall instruments
      fair value, after the fair value of the debt is determined. As was
      permitted under Canadian GAAP for the Glencore financing, the Company had
      allocated values to the debt, the conversion factor and warrants on a fair
      value pro-rata basis.

F-50

---

|PolyMet Mining Corp.                                                                             
|-------------------------------------------------------------------------------------------------
|(a development stage company)                                                                    
|Notes to Consolidated Financial Statements                                                       
|For the years ended January 31, 2012 and 2011                                                    
|Tabular amounts in thousands of U.S. Dollars except for
      price per share, shares and options
|                                                                                                 

|18. | Transition to IFRS-
  Continued
|--- | -------------------------------

| |      | The transition to IFRS resulted in a decrease in the
      initial fair value of debt of $612,000, resulting in a fair value of
      $23,380,170 and an increase in the fair value of the conversion factor and
      fair value of warrants of $612,000.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | ---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |      | Interest and accretion associated with the debt is
      capitalized to mineral property, plant and equipment. The change in the
      initial fair value of the debt resulted in an increase capitalized
      interest and accretion costs of $225,000 at February 1, 2010 and $426,000
      at January 31, 2011.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |      | The convertible debt was renegotiated in November 2010,
      resulting in a loss on extinguishment of the existing debt. Under IFRS,
      the loss on refinancing of convertible debt was $2,931,000, a decrease of
      $716,000 as calculated under Canadian GAAP. The components of the loss on
      refinancing of convertible debt are disclosed in Note 9.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | ii)  | Environmental Rehabilitation Provision                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |      | The Company elected to apply the IFRS 1 optional
      exemption for its decommissioning liabilities. The fair value of the
      environmental rehabilitation provision was calculated as at February 1,
      2010 and then discounted to the date the obligation first arose using a
      historical discount rate and added to the cost of the related asset in
      mineral property, plant and equipment.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |      | The transition from Canadian GAAP to IFRS resulted in an
      environmental rehabilitation provision of $13,699,000 as at February 1,
      2010, an increase of $10,353,000, and a provision of $15,719,000 as at
      January 31, 2011, an increase of $11,907,000. The change in accretion of
      the environmental rehabilitation provision resulted in a $534,000 increase
      to deficit as at the transition date, February 1, 2010. Accretion for the
      provision under IFRS was $480,000 for the year ended January 31, 2011, an
      increase of $95,000. The transition from Canadian GAAP to IFRS resulted in
      an asset as part of mineral property, plant and equipment associated with
      environmental rehabilitation of $11,600,000 as at February 1, 2010, an
      increase of $9,819,000, and an asset of $13,143,000 as at January 31,
      2011, an increase of $11,278,000. As the associated assets are not in use,
      amortization of these assets has not been recorded to January 31,
    2012.
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |      | The most significant factor in the measurement difference
      of the environmental rehabilitation provision under IFRS and asset
      retirement obligation under Canadian GAAP was the applied discount rate.
      Under IFRS, a liability specific risk-free rate was used to discount
      future cash flows, whereas Canadian GAAP required a credit-adjusted
      risk-free rate. IFRS also requires changes in the liability to be recorded
      each period based on changes in discount rates, in addition to changes in
      estimated timing or amount of future cash flows.                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | iii) | Assets Held for Sale                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |      | As a result of the transition to IFRS, non-current assets
      held for sale have been reclassified to current assets from their
      classification as non-current assets under Canadian
GAAP.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

F-41

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|PolyMet Mining Corp.                                                                             
|-------------------------------------------------------------------------------------------------
|(a development stage company)                                                                    
|Notes to Consolidated Financial Statements                                                       
|For the years ended January 31, 2012 and 2011                                                    
|Tabular amounts in thousands of U.S. Dollars except for
      price per share, shares and options
|                                                                                                 

|19. | Subsequent Event
|--- | ----------------

On March 9, 2012 PolyMet acquired
control of land that it plans to restore to wetlands through an agreement with
AG for Waterfowl, LLP ("AG"). PolyMet paid AG $2.0 million cash and issued
2,788,902 of its common shares and a warrant to purchase 1,083,333 of its common
shares at US$1.50 per share at any time until December 31, 2015 as consideration
for purchase of a $5.9 million face value five year zero interest rate mortgage
over land currently in agricultural use that AG will restore to wetlands in
order to create wetland credits. The mortgage will be partially released as part
of the lands are fully restored to approved wetland status, at which time
PolyMet will receive formal wetland credits. Any lands that PolyMet has not
requested be restored to wetland will revert to AG and the remaining mortgage,
if any, will be released on February 28, 2017. PolyMet is committed to pay AG an
additional $680,000 over seven years as compensation for the work AG is
continuing to undertake.

F-52

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ITEM 19. EXHIBITS

|Exhibit |                                                                                                      | Footnote
|------- | ---------------------------------------------------------------------------------------------------- | --------
|No.     | Description                                                                                          | Ref.    
|        |                                                                                                      |         
|1.1     | Certificate of
      Incorporation.                                                                  | (2)     
|        |                                                                                                      |         
|1.2     | Certificate of Change of Name.                                                                       | (2)     
|        |                                                                                                      |         
|1.3     | Articles of Incorporation of PolyMet Mining Corp.                                                    | (2)     
|        |                                                                                                      |         
|4.1     | Shareholder Rights Plan Agreement.                                                                   | (2)     
|        |                                                                                                      |         
|4.2     | Contract for Deed between us and Cleveland Cliffs, Ohio,
      dated November 15, 2005.              | (2)     
|        |                                                                                                      |         
|4.3     | Contract for Deed between us and Cleveland Cliffs, Ohio,
      dated December 20, 2006               | (1)     
|        |                                                                                                      |         
|4.4     | Purchase Agreement between us and Glencore, dated October
      31, 2008                             | (8)     
|        |                                                                                                      |         
|4.5     | Floating Rate Secured Debenture between us and Glencore,
      dated October 31, 2008                | (8)     
|        |                                                                                                      |         
|4.6     | Guarantee between PolyMet Mining Corp. and Glencore,
      dated October 31, 2008                    | (8)     
|        |                                                                                                      |         
|4.7     | Security Agreement between PolyMet Mining Corp. and
      Glencore, dated October 31, 2008           | (8)     
|        |                                                                                                      |         
|4.8     | Security Agreement between Poly Met Mining, Inc. and
      Glencore, dated October 31, 2008          | (8)     
|        |                                                                                                      |         
|4.9     | Pledge Agreement between us and Glencore, dated October
      31, 2008                               | (8)     
|        |                                                                                                      |         
|4.10    | Exchange Warrant of PolyMet Mining Corp., dated October
      31, 2008                               | (8)     
|        |                                                                                                      |         
|4.11    | Purchase Warrant of PolyMet Mining Corp., dated October
      31, 2008                               | (8)     
|        |                                                                                                      |         
|4.12    | Amendment Letter number 11 to Purchase Agreement between
      us and Glencore                       | (9)     
|        |                                                                                                      |         
|4.13    | Amendment and Waiver between the Company, the Issuer and
      the Purchaser dated November 12, 2010 | (10)    
|        |                                                                                                      |         
|4.14    | Form of Warrant dated November 12, 2010                                                              | (10)    
|        |                                                                                                      |         
|4.15    | Subscription Agreement dated November 12, 2010                                                       | (10)    
|        |                                                                                                      |         
|4.16    | Registration Rights Agreement dated November 12, 2010                                                | (10)    
|        |                                                                                                      |         
|4.17    | Subscription Agreement dated November 30, 2011                                                       | (11)    
|        |                                                                                                      |         
|4.18    | 2011 Warrant                                                                                         | (11)    
|        |                                                                                                      |         
|4.19    | Amendment and Waiver dated November 30, 2011                                                         | (11)    
|        |                                                                                                      |         
|4.20    | Amended and Restated Exchange Warrant                                                                | (11)    
|        |                                                                                                      |         
|4.21    | Registration Rights Agreement and Amendment to Existing
      Registration Rights Agreement          | (11)    

- 65 -

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|6.1   | 2007 PolyMet Omnibus Share Compensation
      Plan                                                                                               | (7)
|----- | ------------------------------------------------------------------------------------------------------------------------------------------------ | ---
|      |                                                                                                                                                  |    
|8.1   | List of Subsidiaries.                                                                                                                            | (2)
|      |                                                                                                                                                  |    
|11.1  | Code of Ethics.                                                                                                                                  | (3)
|      |                                                                                                                                                  |    
|11.2  | Statement of Corporate Governance
      Practices, including Audit Mandate and Charter.                                                          | (4)
|      |                                                                                                                                                  |    
|12.1  | Certification
      of Principal Executive Officer pursuant to 17 C.F.R. 240.13a-14(a).                                                          | *  
|      |                                                                                                                                                  |    
|12.2  | Certification
      of Principal Financial Officer pursuant to 17 C.F.R. 240.13a-14(a).                                                          | *  
|      |                                                                                                                                                  |    
|13.1  | Certification
      of Principal Executive Officer and Principal Financial Officer pursuant
      to 17 C.F.R. 240.13a-14(b) and 18 U.S.C. 1350. | *  
|      |                                                                                                                                                  |    
|14.1  | Amended and Restated Shareholder
      Rights Plan                                                                                               | (7)
|      |                                                                                                                                                  |    
|15.1  | Technical Report on NorthMet Project
      by P. Downey and Associates, dated July 2004                                                          | (5)
|      |                                                                                                                                                  |    
|15.2  | Subscription Agreement dated as
      of July 19, 2004, between us and certain investor(s).                                                      | (2)
|      |                                                                                                                                                  |    
|15.3  | Subscription Agreement dated as
      of February 11, 2005, between us and certain investor(s).                                                  | (2)
|      |                                                                                                                                                  |    
|15.4  | Subscription Agreement closing
      on August 29, 2005, between us and certain investor(s).                                                     | (2)
|      |                                                                                                                                                  |    
|15.5  | Subscription Agreement dated as
      of September 21, 2005, between us and certain investor(s).                                                 | (2)
|      |                                                                                                                                                  |    
|15.6  | Form of Canadian Subscription
      Agreement between us and certain investor (s).                                                               | (1)
|      |                                                                                                                                                  |    
|15.7  | Form of U.S. Subscription Agreement
      between us and certain investor(s).                                                                    | (1)
|      |                                                                                                                                                  |    
|15.8  | Lease Agreement between us and
      U.S. Steel Corporation, dated January 4, 1989.                                                              | (2)
|      |                                                                                                                                                  |    
|15.9  | Notice of Assignment of the Lease
      Agreement from U.S. Steel Corporation to RGGS Land and Minerals, Ltd. L.P.                               | (2)
|      |                                                                                                                                                  |    
|15.10 | Nominating and Corporate Governance
      Committee Charter                                                                                      | (7)
|      |                                                                                                                                                  |    
|15.11 | Technical Report on NorthMet Project
      by P.J. Hunter C. Eng. CP dated October 2006                                                          | (6)
|      |                                                                                                                                                  |    
|15.12 | Consent
      of Independent Registered Public Accounting Firm                                                                                   | *  
|      |                                                                                                                                                  |    
|16.1  | Audit Committee Charter                                                                                                                          | (7)
|      |                                                                                                                                                  |    
|17.1  | Executive employment agreement
      with Mr. William Murray dated July 1, 2007 and amended January 25, 2008                                     | (7)
|      |                                                                                                                                                  |    
|17.2  | Executive employment agreement
      with Mr. Douglas Newby dated July 1, 2007                                                                   | (7)
|      |                                                                                                                                                  |    
|17.3  | Executive employment agreement
      with Mr. Joseph Scipioni dated July 1, 2007                                                                 | (7)
|      |                                                                                                                                                  |    
|17.4  | Employment agreement with Mr.
      Niall Moore dated May 6, 2007 and amended January 25, 2008                                                   | (7)

- 66 -

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|Footnote |                                                                                                                                                
|-------- | -----------------------------------------------------------------------------------------------------------------------------------------------
|Ref.     | Description                                                                                                                                    
|         |                                                                                                                                                
|*        | Filed herewith.                                                                                                                                
|         |                                                                                                                                                
|(1)      | Incorporated by reference to our Annual Report on Form
      20-F/A for the fiscal year ended January 31, 2007, filed on May 31 2007.          
|         |                                                                                                                                                
|(2)      | Incorporated by reference to our Annual Report on Form
      20-F/A for the fiscal year ended January 31, 2006, filed on July 31 2006.         
|         |                                                                                                                                                
|(3)      | Incorporated by reference to our Annual Report on Form
      20-F/A for the fiscal year ended January 31, 2004, filed on July 7, 2005.         
|         |                                                                                                                                                
|(4)      | Incorporated by reference to our Annual Report on Form
      20-F for the fiscal year ended January 31, 2005, filed on July 25, 2005.          
|         |                                                                                                                                                
|(5)      | Incorporated by reference to our Annual Report on Form
      20-F for the fiscal year ended January 31, 2004, filed on June 30, 2004.          
|         |                                                                                                                                                
|(6)      | Incorporated by reference to our Report on Form 6-K,
      filed on November 13, 2006.                                                         
|         |                                                                                                                                                
|(7)      | Incorporated by reference to our Annual Report on
      Form-20-F/A for the fiscal year ended January 31, 2008, filed on August
      27, 2008.
|         |                                                                                                                                                
|(8)      | Incorporated by reference to our Form 13-D relating to
      our Purchase Agreement filed on November 10, 2008.                                
|         |                                                                                                                                                
|(9)      | Incorporated by reference to our Report on Form 6-K filed
      on November 23, 2009.                                                          
|         |                                                                                                                                                
|(10)     | Incorporated by reference to our Report on Form 6-K filed
      on November 18, 2010.                                                          
|         |                                                                                                                                                
|(11)     | Incorporated by reference to our Report on Form 6-K filed
      on December 7, 2011                                                            

- 67 -

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SIGNATURES

The Registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and has duly caused and authorized the undersigned to sign this Annual Report on its behalf.

Dated: April 30, 2012

POLYMET MINING CORP.

/s/ Joseph
ScipioniName:   Joseph Scipioni Title:    
Chief Executive Officer

- 68 -

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