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UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549


Form 20-F

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OFTHE
SECURITIES EXCHANGE ACT OF 1934For the
fiscal year ended December 31, 2012

Commission file number 001-04192



(Exact name of Registrant as
specified in its charter)

British Columbia,
Canada(Jurisdiction of incorporation
or organization)

Suite 1620 - 400 Burrard Street,
Vancouver, British Columbia, CanadaV6C 3A6(Address of principal offices)

Michael J.
      Smith
    with a copy
      to:Suite 1620 - 400 Burrard
      Street
    H.S.
      Sangra,Sangra Moller LLPVancouver, British
      Columbia, Canada V6C 3A6
    1000 Cathedral Place,
      925 West Georgia StreetTelephone: +1
      604-683-8286
    Vancouver, British
      Columbia,Canada V6C 3L2Facsimile: +1
      604-683-3205
    Facsimile: +1
      604-669-8803


(Name, Telephone, E-mail and/or
Facsimile number and Address of CompanyContact Person)

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

Title of each class
    Name of each exchange on which
      registeredCommon
    Shares
    New York 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.

There were 62,552,126 common shares,
without par value, issued and outstandingas of December 31, 2012.

Indicate by check mark if the
registrant is a well-known seasoned issuer, as defined in Rule 405 of the
Securities Act. o 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 or 15(d) of the Exchange Act. o YES      x NO

Note  Checking the box above will not
relieve any registrant required to file reports pursuant to Section 13 or 15(d)
of the Exchange Act from their obligations under those Sections.

Indicate by check mark whether the
registrant (1) has filed all reports required to be filed by Section 13 or 15(d)
of the Exchange Act 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 90 days. x YES      o NO

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.

Large accelerated filer  o
    Accelerated filer  x
    Non-accelerated filer  o


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

|U.S. GAAP o |  | International Financial Reporting
      Standards as issued by the International Accounting Standards Board x |  | Other o
|----------- |  | ------------------------------------------------------------------------------------------------------------- |  | -------

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. o Item 17      o 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) o
YES      x NO

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DEAR FELLOW
SHAREHOLDERS

We are pleased to present the
results of MFC Industrial Ltd. (MFC) for the year ended December 31, 2012 and
to provide you with an update on our recent corporate developments.(All references to dollar amounts are in
United States dollars unless otherwise stated).

2012 was a time of challenges and
opportunities. We saw commodities prices experience a weaker than expected year,
which opened the doors to two significant opportunities for us. These
opportunities have allowed us to enlarge our commodities footprint, enter new
markets and expand our supply chain platform,thus offering growth and the
potential for significant contributions to the economics of our company in a
recovering economy. We still have a long way to go to reach our goals. However,
we are fortunate to have a good business platform and a sound financial
foundation.

HIGHLIGHTSFOR THE YEAR ENDED DECEMBER 31,
      2012►
    
    Exited the Indian iron-ore market
      and recognized a one-time non-cash impairment charge and inventory
      write-down (net of an income tax recovery) of $48.2 million.►
    
    Increased our book value per
      share to $12.11, from $8.74 at the end of 2011. Total assets are now $1.38
      billion.►
    
    Increased our annual cash
      dividend by 9% for 2013, representing a 2.81% yield, based on the closing
      price of our shares in 2012.►
    
    Expanded our commodities platform
      into natural gas and midstream facilities with the completion of the
      acquisition of Compton Petroleum Corporation (CPC).►
    
    Grew our commodity supply chain
      business with the acquisition of Possehl Mexico S.A. de C.V. (Possehl)
      and ACC Resources Co., L.P. (ACCR), which also gave us new products and
      new markets.►
    
    Acquired Kasese Cobalt Company
      Limited (KCCL), which owns a cobalt refinery and a hydroelectric power
      station.►
    
    Our net income for the year ended
      December 31, 2012, increased to $30.6 million, or $0.49 per share on a
      diluted basis, excluding a non-cash accounting gain of $247.0 million, a
      one-time non-cash impairment charge and inventory write-down (net of an
      income tax recovery) of $48.2 million and certain one-time transaction
      expenses of $2.6 million. See page (III) for a
      reconciliation to net income.


On the negative side, we saw a
major shift in the mining landscape in India during the year. In September 2012,
the Indian government halted all mining activity in the State of Goa following the tabling in
Parliament of the Shah Commission report on illegal mining. Subsequently, in
October 2012, the Supreme Court further banned all mining activities in the
State. We believe these orders will take many years to resolve and, as a
result, made the decision to exit the market and recognized an impairment charge
and write-down, net of income tax recovery of $48.2 million.

We completed the takeover of CPC,
a company active in the production of natural gas and natural gas liquids. This
transaction reflected our strategy to increase our captive commodities sources
and meets our stated investment objectives.

In 2012, we were also pleased to
announce that we acquired Park Ridge, NJ-based, ACCR and its affiliated company,
Mexico City-based, Possehl. ACCR and Possehl were privately owned, fully
integrated commodity supply chain companies, specializing in industrial raw
materials, chemicals and various other products. These companies will expand our
existing global supply chain network, reaching further into the North and Latin
American markets.

During 2012, we also acquired
KCCL, which owns a cobalt refinery plant and a hydroelectric power station. The refinery should deplete its pyrite tailings supply by the end of
2013 and we are now in the planning stages of shutting down the refinery.
Discussions are in progress to sell the equipment to third parties upon
completion of the dismantling of the refinery itself. KCCL will retain ownership
of the hydroelectric power station, which will sell electricity directly to the
grid.

IILETTER TO SHAREHOLDERS

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We must now integrate all of our
newly acquired businesses, which we view as both a challenge and a good
opportunity. MFC will continue to focus on increasing its efforts in acquiring
undervalued captive commodities assets and operating businesses, as well as
streamlining its existing operations. Our financial foundation has allowed us to
expand and diversify our commodities business in an expedient manner.

RESULTS FOR THE
YEAR ENDED DECEMBER 31, 2012

Total revenuesfor the year ended December 31, 2012
decreased to $485.7 million compared to $520.7 million in 2011. Our income for
2012, including a non-cash bargain purchase accounting gain of $247.0 million,
primarily from the CPC acquisition, and a one-time non-cash impairment and
write-down charge (net of income tax recovery) of $48.2 million for our former
subsidiary, increased to $226.8 million, or $3.62 per share on a diluted basis,
from $12.2 million, or $0.19 per share on a diluted basis from the same period
last year.

Excluding a non-cash bargain
purchase accounting gain of $247.0 million (which was primarily a net gain on
the purchase of CPC excluding our cost), one-time non-cash impairment charge and
inventory write-down (net of an income tax recovery) of $48.2 million (on our
former subsidiary) and certain one-time transaction expenses of $2.6 million,
our income for the year ended December 31, 2012 increased to $30.6 million, or
$0.49 per share on a diluted basis, from $12.2 million, or $0.19 per share on a
diluted basis from the same period last year.

Revenues were down for 2012
because of several factors, including the fact that the Euro depreciated against
the United States dollar by 7.6%. We also had lower volumes and price
reductions on some commodities during the first half of the year. However, we
did offset some of the revenue reduction through the introduction of new
products. Our revenue numbers were disappointing, but we believe the new
acquisitions will be integrated and will be major contributors in 2013.

Revenues for our commodities
and resources businesswere $455.9
million for the year ended December 31, 2012, compared to $481.7 million for the
same period in 2011. Included are the gross revenues generated by our royalty
interest, which for the year ended December 31, 2012 were approximately $29.1
million, compared to $30.8 million in 2011. A total of 3,189,443 tons of iron
ore pellets and concentrate were shipped during the year ended December 31,
2012, compared to 3,472,643 tons shipped in the same period in 2011.

Revenues for our merchant
banking businesswere $11.8 million
for the year ended December 31, 2012, compared to $22.5 million for the same
period in 2011.

Other
revenues, which encompass our
corporate and other investments, were $18.0 million for the year ended December
31, 2012, compared to $16.5 million for the same period in 2011.

Costs of
salesdecreased to $407.6 million
during the year ended December 31, 2012 from $435.4 million for the same period
in 2011.Selling, general and
administrative expensesincreased to
$47.7 million for the year ended December 31, 2012 from $40.4 million for the
same period in 2011.

OVERVIEW OF
OUR RESULTS FOR THE YEAR ENDED DECEMBER 31, 2012

The table below shows our revenues
by operating segments for each of the years ended December 31, 2012 and
2011:

REVENUESAll amounts
      in thousandsDecember 31, 2012
    
    
    December 31, 2011twelve months
    
    
    twelve monthsCommodities and
      resources
    
    $
    455,898
    
    
    $
    481,677Merchant banking
    
    
    11,751
    
    
    
    22,487Other
    
    
    18,010
    
    
    
    16,545Total
      revenues
    
    $
    485,659
    
    
    $
    520,709


IIILETTER TO SHAREHOLDERS

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Our income from operations for
each of the years ended December 31, 2012 and 2011 are broken out in the table
below:

INCOME FROM
      OPERATIONSAll amounts
      in thousands, except per share amountsDecember 31, 2012
    
    
    December 31, 2011twelve months
    
    
    twelve monthsCommodities and
    resources
    
    $
    (25,661
    )(1)
    
    $
    23,157Merchant banking
    
    
    259,957
    (2)
    
    
    8,858Other
    
    
    (9,301
    )
    
    
    (14,834
    )Income before income
      taxes
    
    
    224,995
    
    
    
    17,181Income tax recovery
           (expenses)
    
    
    8,528
    
    
    
    (1,336
    )Resource property revenue
           tax expenses
    
    
    (5,902
    )
    
    
    (4,647
    )Net (income) loss attributable
           to non-controlling interests
    
    
    (867
    )
    
    
    995Net income attributable to
           shareholders
    
    $
    226,756
    (3)
    
    $
    12,193Earning per share
    
    $
    3.62
    (3)
    
    $
    0.35
    (4)


Notes: (1)
    
    Included a
      one-time non-cash impairment and write-down of $62.1 million (before
      income tax recovery of $13.8 million).(2)
    
    Includes a
      non-cash bargain purchase accounting gain of $247.0 million.(3)
    
    Including a
      non-cash bargain purchase gain of $247.0 million and a non-cash impairment
      and write-down of $48.2 million (net of income tax recovery).(4)
    
    The first half of 2011 included a one-time expense of $0.14 per
      share.


REVENUE
BREAKDOWN BY REGION

The following pie chart shows our
revenue by region for the year ended December 31, 2012.

REVENUE BY
  REGION




IVLETTER TO SHAREHOLDERS

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FINANCIAL

The following table highlights
certain selected key financial numbers and ratios as of December 31,
2012.

FINANCIAL
      HIGHLIGHTSAll amounts
      in thousands, except per share amount and ratiosDecember 31, 2012Cash
      and cash equivalents
    
    $
    273,790Trade receivables
    
    
    72,820Current assets
    
    
    684,278Total assets
    
    
    1,381,489Current liabilities
    
    
    338,930Working capital
    
    
    345,348Current ratio*
    
    
    2.02Acid
      test ratio*
    
    
    1.20Total liabilities
    
    
    618,104Shareholders equity
    
    
    757,197Equity per common share
    
    
    12.11


*Note*: *
    
    The current
      ratio is calculated as current assets divided by current liabilities. The
      acid test ratio is calculated as cash and cash equivalents plus short-term
      cash deposits, short-term securities and receivables divided by total
      current liabilities and excluding restricted cash inventories, prepaid and assets held for
      resale and related liabilities.


VLETTER TO SHAREHOLDERS

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LIQUIDITY

Liquidity is of great importance
to companies in our business. As at December 31, 2012, we had cash, short-term
deposits and securities of $280.6 million. Our objectives when managing capital
are: to safeguard our ability to do business so that we can continue to provide
returns to shareholders; and to provide an adequate return by pricing products
and services commensurately with the level of risk. We also maintain a flexible
capital structure which optimizes the cost of capital at acceptable risk and we
set the amount of capital allocated proportionate to risk. We manage our capital
structure and make adjustments to it in light of changes in economic conditions
and the risk characteristics of the underlying assets.

LIQUIDITYAll amounts in
      thousandsDecember 31, 2012
    
    
    December 31, 2011Total debt
    
    $
    162,993
    
    
    $
    47,127Less: cash and cash
      equivalents
    
    
    (273,790
    )
    
    
    (387,052
    )Net
      debt (net cash & cash
    equivalents)
    
    
    (110,797
    )
    
    
    (339,925
    )Shareholders' equity
    
    
    757,197
    
    
    
    546,623


LONG-TERM
DEBT

The following table highlights
certain selected key numbers and ratio as of December 31, 2012.

LONG-TERM DEBTAll amounts in thousands, except
      ratioDecember 31, 2012
    
    
    December 31, 2011Long-term debt, less current
      portion
    
    $
    118,824
    
    
    $
    20,150Shareholders' equity
    
    
    757,197
    
    
    
    546,623Long-term debt-to-equity ratio (1)
    
    
    0.16
    
    
    
    0.04


*Note* (1)
    
    The long-term
      debt-to-equity ratio is calculated as long-term debt divided by
      shareholders' equity.


As at December 31, 2012, the
majority of our long-term debt, less current portion in the amount of $105.5
million, consists of borrowing from banks. All-in costs for this unsecured
loan, which is due November 2020, are 2.54% annually.

CREDIT
FACILITIES

We maintain various types of
credit lines and facilities with various banks, and most of these are
short-term. These facilities are used for day-to-day business, structured
solutions and various other activities in both the commodities and finance
areas.

As at December 31, 2012, we had
credit facilities aggregating $439.7 million as follows: (i) revolving credit
facilities aggregating $119.2 million from banks; (ii) revolving credit
facilities aggregating $63.8 million from banks for structured solutions. The
margin is negotiable when the facility is used; (iii) a structured factoring
arrangement with a bank for up to $122.6 million for our commodities activities.
Generally, we can factor our commodity receivables upon invoicing at the
inter-bank rate plus a margin; and (iv) a foreign exchange credit facility of
$58.1 million with a bank. All of these bank lines and facilities are renewable
on a yearly basis.

VILETTER TO SHAREHOLDERS

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COMMODITY
LINES

As a result of our recent
acquisitions combined with our other integrated commodities and mineral
interests operations, we can now supply a wide range of commodities including
metals, ceramics, minerals, natural gas, chemicals, plastics, additives for food
and beverages, and wood products. These are supported by our captive commodities
arrangements through strategic direct and indirect investments and other sources
secured by us from third parties. The following charts show some of the
commodities we now supply:



VIlLETTER TO SHAREHOLDERS

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UPDATE ON
OUR SOURCES OF FERROUS METALS IN INDIA

In September 2012, the Indian
government halted all mining activity in the State of Goa following the tabling
in Parliament of the Shah Commission report on illegal mining. Subsequently, in
October 2012, the Supreme Court, acting on a filed petition, stayed all mining
operations, including transport of mined minerals (iron ore and manganese), in
the State until further orders.

We believe the orders will take
many years to resolve for the existing mines and that there is a very strong
possibility that no new mining will ever occur. As a result, it was our decision
to move on and recognize a loss on our investment. We have sold our position for nominal consideration, consisting of an interest in any future cash flow if
mining actually resumes.

With this former subsidiary being
sold in 2013, MFC recognized an impairment charge of $42.6 million on these
interests and a $19.4 million write-down on inventories. The total impairment
and write-down was $48.2 million, net of an income tax recovery of $13.8
million. MFC has no further cash flow obligations associated with these
operations.

EXPANDED
OUR COMMODITIES PLATFORM INTO NATURAL GAS & MIDSTREAM FACILITIES

The
acquisition of CPC in 2012 expanded our commodities platform into natural gas
and midstream facilities. Wedetermined to
pursue and complete the acquisition of CPC for, among other things, the
following key reasons:

| | 
| | 

- to significantly expand our global
  commodities platform into the energy sector;
- the price paid under our takeover of CPC was
  attractive and considerably below CPC's net asset value, which resulted in our
  recognition of a bargain purchase gain of $244.6 million for the year ended
  December 31, 2012 in connection with the acquisition of CPC;
- CPC's operations include significant
  midstream facilities, which present an opportunity for growth through
  value-added projects and the consolidation of regional gas production;
- in addition to its producing properties, CPC
  hasa significant undeveloped land package, which, as
  at December 31, 2012, included 309,782 net undeveloped acres which can be
  further developed; and
- at the time we completed the takeover, our acquisition
  cost per mcf equivalent for CPC's proved and probable natural gas, NGL and oil
  reserves was approximately CDN$0.10  based on CPC's most recent
  reserves estimates prior to completion of the acquisition, which were as of
  June 30, 2012. Please note that these reserves estimates are historic in
  nature, do not represent our reserves as at December 31, 2012 and were
  prepared by CPC based upon Canadian securities requirements and are not
  comparable to the updated reserves figures that we have prepared in accordance
  with SEC requirements, which are in our Annual Report on Form
20-F.

LETTER TO SHAREHOLDERSVIII

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The following are selected
highlights of this acquisition.

HIGHLIGHTS OF
      THE TRANSACTIONAcquired CPC, a producer and
      processor of natural gas and other hydrocarbons in Western Canada, for
      approximately CDN$33.1 million on September 6, 2012.Expanded our global commodities
      platform to include energy.Majority of operations located in
      Deep Basin fairway of Western Canada.Significant undeveloped land
      bank.Future tax
benefits.Recognized a $244.6 million
      bargain purchase gain in connection with the acquisition.


In reviewing these assets, we will
use our financial strength to arrange credit facilities. We have reduced CPCs
selling, general and administrative expenses and we also refinanced their bank
debt. As a consequence, we can now look to rationalize these assets and better
manage their supply, distribution risk and capital requirements. The following
is an overview of our current plans and intentions for CPCs assets in 2013.

Developing midstream operations

Our plan for our Mazeppa Gas
Processing Facility(sweet and sour gas facility),is to develop
midstream facilities which will help to reduce our exposure to the volatility of
natural gas prices and have the potential to create long-term stable processing
income as well as an value-added component to our natural gas. Sour
gasisgas containing significant amounts of hydrogen sulfide,
whereas sweet gas is a natural gas low in concentration of sulphur
compounds. The Mazeppa facility was originally built by Canadian Occidental
Petroleum and we are advised that the replacement cost of this facility today
would be in excess of $100 million.

Using the Mazeppa facility as the
foundation, our strategy involves pursuing bolt-on or value-added projects, which
may involve aggregate investments of over $300 million, including the following
potential projects:

DEVELOPING
      MIDSTREAM OPERATIONS (ADD-ON OPTIONS)Co-generation plant (10 to 25 MW)
      providing electricity for our own use and with the surplus for sale to the
      Alberta electrical grid.Consolidate regional sour gas
      production by investing in sour gas gathering infrastructure to complement
      our facility and connecting stranded sour gas suppliers.Design and build a deep-cut
      straddle plant at our facility for the recovery of ethane, propane and
      butane.A 10,000 barrel per day natural
      gas liquid fractionation facility and rail terminal.


IXLETTER TO SHAREHOLDERS

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We have been approached by several
interested parties who wish to be our partner in our midstream operations. These
projects are in the initial planning, design and contracting phases and the
current timing for execution is expected to be approximately 24 to 36 months.

Wells and other processing
facilities

NATURAL GAS
      WELLS (COSTS AND PRODUCTION)All amounts
      in Canadian dollars, except production numbersFor the period
      between September 7 and December 31, 2012Operating cost (lifting cost) per mcf of natural gas
    
    CDN$
    (1.32
    )Royalties expenses per mcf of natural gas
    
    
    (0.47
    )Transportation costs per mcf of natural gas
    
    
    (0.13
    )Average selling price per mcf of natural gas
    
    
    3.12Natural gas production per day, mcf
    
    
    55,849Natural gas, liquids and oil production per day, BOE
    
    
    10,812


It is our intention to sell
certain assets as well as some of our smaller low volume wells in due
course.

Significant undeveloped land
bank

We have approximately 309,782 net
undeveloped acres on which, due to the current pricing environment in natural
gas, we do not intend to do any drilling at this time.

EXPANDED
OUR COMMODITIES SUPPLY CHAIN MANAGEMENT PLATFORM AND ENTERED NEW MARKETS

MFC acquired, Park Ridge,
NJ-based, ACCR and its affiliated company, Mexico City-based, Possehl in November
of 2012.

XLETTER TO SHAREHOLDERS

---



HIGHLIGHTS OF
      THE TRANSACTIONMFC acquired 60% of the shares of
      Possehl and 70% of the shares of ACCR for $20.9 million in cash, with the
      balance of the shares owned by the existing management.The MFC group gained experienced
      operating management.The acquisition resulted in our
      expansion into new markets and new products.


History

ACCR, established in 1957, has a
head office in New Jersey and a network of offices in Latin America, including
Argentina and Brazil, as well as a sourcing office in China. Possehl, which was
established in 1986, has a network of offices, warehousing and agencies in
Mexico. They source internationally and sell primarily in Mexico and Central and
South America.

Purchase price

The acquisition price for 60% of
Possehl and 70% of ACCR was equal to the Net Tangible Asset Value (NTAV),
which equals approximately $20.9 million, subject to adjustments. An additional
$2.3 million is payable by us in November 2013, at which time we will acquire an
additional 10% interest in ACCR. In addition we have created a series of options
for additional ACCR shares to retain key individuals with the same NTAV price
formula. MFCs notable financial strength and its already substantial global
reach will be resources that will enable growth and agility for the combined
companies.

It is ACCR, Possehl and MFCs
belief that China will be an excellent sourcing market for us. As the Chinese
slowdown continues, their commodities prices should start to come down and they
will appreciate relationships with reliable counterparties from international
supply chain organizations with ready financing.

UPDATE ON
THE ROYALTY INTEREST AT THE WABUSH MINE

On March 11, 2013, Cliffs Natural
Resources Inc. (Cliffs) announced that due to high production costs and lower
pellet premium pricing, which is expected to persist in certain markets during
the year, it would be taking measures to adjust iron ore pellet production at
its Wabush operation, while continuing to meet its customer commitments. Cliffs's
current product mix in its Eastern Canadian iron ore business segment is
comprised of iron ore pellets and concentrate.

Cliffs expects to idle production
at its Pointe Noire iron ore pellet plant within the city of Sept-Iles, Quebec
and transition to producing an iron ore concentrate from its Wabush Scully Mine
in the Province of Newfoundland and Labrador by the end of the second quarter in
2013.

We do not expect that this will
affect the royalty payment that we receive from Cliffs. Our royalties are paid
on all iron ore products (i.e. pellets, concentrate and chips) shipped from the
Wabush Mine.

Cliffs also disclosed that, for
2013, it is maintaining its full-year sales and production volume expectations
of 9 to 10 million tons out of its Eastern Canada business segment. This is
comprised of approximately 3 million tons of both iron ore pellets and/or
concentrate products from its Wabush operation. We believe it is a positive
development that Cliffs maintained its 2013 guidance for the same 3 million ton
production levels as in 2012. On another Cliffs issue, we are again in arbitration
over the underpayment of royalties and the method to calculate the royalty
prices going forward. We expect the related hearings to be held in the fall of
2013.

UPDATE ON
OUR CAPTIVE SOURCES OF FERROUS METALS AT PEA RIDGE

MFC currently holds an indirect
50% interest in the Pea Ridge Iron Ore project (Project), a past-producing
iron ore mine located in Sullivan, Missouri. The Project is a 50/50 joint
venture between MFC and Alberici Group Inc., who joined forces with the goal to
re-open and further develop the former Pea Ridge Iron Ore Mine.

XILETTER TO SHAREHOLDERS

---






To date our activities at the
Project have included, among other things:

- a total investment of approximately $16.7 million in
  the Project; and
- completing a Canadian National Instrument
  43-101 compliant technical report dated August 13, 2012 by Behre Dolbear and
  Company (USA), Inc. and titled "Technical Report on the PRR Mining Pea Ridge
  Property" (the "Technical Report"), to update previously disclosed historic
  resources estimate to current resource estimates. The Technical Report
  estimated the following resources at a cut-off grade of 40% magnetic iron:
- measured and indicated resources of 248.7
    million short tons at 57.82% total iron and 52.87% magnetic iron; and
- inferred resources of 15.8 million short
    tons at 57.64% total iron and 53.67% magnetic iron.

Please refer to the Technical
Report, a copy of which is available under our profile on www.sedar.com, for
further information regarding the Project and the above estimates.

In addition to completion of the Technical Report, as part of the work necessary to evaluate the Pea
Ridge Mine for re-opening, we engaged the consulting firm Geotechnology, Inc. to
investigate the depth and shape of the top and bottom of the subsidence cave
zone which is present above the Pea Ridge Mine deposit. This work included
direct measurements of the size and extent of the cave zone within existing
vertical drill holes above a portion of the Pea Ridge Mine deposit. Having
received the results of such investigation, we are, together with our
consultants, considering additional steps in the evaluation of the cave zone,
including re-drilling several existing holes above the mineralized zone, and
conducting a three-dimensional detailed seismic survey over the Pea Ridge Mine
site. We believe that the results of this work will be useful in determining the
best way to develop and mine the iron deposit. Additionally, in 2012 we
commenced confirmatory exploration and development work in connection with the
large tonnage of tailings materials of the Pea Ridge Mine site.

Together with our consultants, we
are conducting additional analysis and investigation regarding the re-opening of
the mine, including commencing confirmatory work in connection with the large
tonnage of tailings materials present at the Project site. If we determine to
move forward with the Project, significant additional investment would be
required. We currently expect that development activities would take place in
two main phases:

XIILETTER TO SHAREHOLDERS

---



- The first phase focusing on the tailings
  materials. This would likely require construction of a beneficiation plant to
  process the tailing at the project.
- The second phase would center on re-opening
  of the underground mine. This will involve dewatering the mine, substantial
  new development work, installing new equipment and, in part, will require
  construction of additional beneficiating facilities.

The Project is currently at a
preliminary stage and any decision on proceeding with the Project, including
development activities, is dependent on the completion of further analysis,
including feasibility studies. Activities at the Project are proceeding in an
orderly fashion. It is currently anticipated that substantial additional
expenditures will be incurred in order to determine the feasibility of the
Project.

DEFERRED
INCOME TAX ASSETS AND LIABILITIES

DEFERRED INCOME TAX ASSETS AND
      LIABILITIESAll amounts in
      thousandsDecember 31, 2012
    
    
    December 31, 2011Deferred income tax assets
    
    $
    18,510
    
    
    $
    7,524Deferred income tax
      liabilities
    
    
    (3,391
    )
    
    
    (61,045
    )Net
    
    $
    15,119
    
    
    $
    (53,521
    )


It is important to understand what
has happened with these different tax assets and liabilities. In 2011 we had a
liability of approximately $61.0 million primarily related to the increase in
value of the royalty at Wabush that was recognized upon adoption of IFRS.
Following the CPC transaction and reorganization of its tax pools, we had enough
new benefit in essence to off-set the $50 million and have a net asset of $18.6
million for future use.

CORPORATE
TAXATION

We are a company that strives to
be fiscally responsible. The corporate income tax paid in cash was approximately
$4.9 million for the year ended December 31, 2012.

ANNUAL CASH
DIVIDEND

On January 14, 2013, our Board of
Directors declared an annual cash dividend for 2013 of US$0.24 per common share.
The dividend is 9% higher than the dividend paid in 2012 and, based on the
closing price of $8.55 for the Company's common shares on December 31, 2012,
represents a yield of approximately 2.81% compared to an annual dividend yield
of approximately 2.5% for the NYSE Composite Index in 2012.

- The 2013 cash dividend will be paid in equal
  quarterly instalments of $0.06 per common share.
- The first payment of $0.06 per common share
  was paid on February 8, 2013 to shareholders of record on January 25,
  2013.
- The second payment of $0.06 per common share
  will be paid on April 22, 2013 to shareholders of record on April 12,
  2013.
- The remaining quarterly dividend payments of
  $0.06 per common share in 2013 are expected to be made to shareholders of
  record in June and September.

|Respectfully
  Submitted,
|-------------------------
|                         
|Michael J. Smith         
|Chairman of the Board    

XIIILETTER TO SHAREHOLDERS

---



|                                | CORPORATE
      INFORMATION                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            | 
|------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
|                                | BOARD OF DIRECTORS
      Michael J.
      SmithDirector
      since 1987
      Dr. Shuming
      Zhao*Director since 2004
      Robert Ian
      Rigg*Director since
      2010
      Indrajit
      Chatterjee*Director since 2005
      Ravindra
      PrakashDirector
      since 2011
      * Member of
      the Audit Committee
      AUDITORS
      Deloitte LLP
      PO Box 492792800 - 1055 Dunsmuir Street Vancouver, BC V7X 1P4 Canada
      Telephone: 1 (604) 669 4466 www.deloitte.ca
      STOCK
      LISTING
      New York Stock
      Exchange 11 Wall Street New York, NY 10005 Telephone: 1 (212)
      656 3000 Email: nyselistings@nyse.com Trading Symbol:MIL
      WEBSITE
      www.mfcindustrial.com |  | OFFICES AND SUBSIDIARIES
      AUSTRIA
      Millennium
      Tower, 21st FloorHandelskai 94-96 1200 Vienna, Austria Telephone: (43) 1
      24025 0 Email: office@mfc-commodities.com
      HONG
      KONG
      8th Floor,
      Dina HouseRuttonjee
      Centre, 11 Duddell StreetHong Kong SAR, China Telephone: (852)
      2840 1230 Email: mfc@mfinancialcorp.hk
      CANADA
      1620 - 400
      Burrard Street Vancouver, BC Canada V6C 3A6 Telephone: 1 (604) 683
      8286 Email: rrandall@bmgmt.com
      AMERICA
      One Maynard
      DrivePark Ridge, NJ
      07656 USA Telephone: 1 (201) 307 1500 Email:
      info@accr.com
      CHINA
      Room 2409,
      Shanghai Mart Tower 2299 Yan An Road West Changning District
      Shanghai, P.R. China 200336 Telephone: (86) 21 6115 6996
      Email: office@mfc-china.com
      CHINA
      Room 1807, The
      Exchange Beijing No. 118, Jianguo Road (Y1) Chaoyang District
      Beijing, P.R. China 100022 Telephone: (86) 10 6567 8200 Email:
      info@accr.com |  | ARGENTINA
      Avenida Alicia
      Moreau Justo 1750Segundo Piso
      D C1107AAV Buenos Aires, ArgentinaTelephone: (54) 11 5238 7788 Email: info@accr.com
      MEXICO
      Bosques de
      Alisos No. 47B Officina A1 - 01Bosques de las Lomas, Cuajimalpa Mexico D.F. C.P.
      05120, Mexico Telephone: (52) 55 9177 7440 Email:
      inquires@possehl.com.mix
      CORPORATE
      CONTACT
      R.
      RandallMFC
      Industrial Ltd.Telephone: 1 (604) 683 8286 ex 224 Email:
      rrandall@bmgmt.com
      INVESTOR RELATIONS
      Cameron Associates Inc. 535 Fifth
      Ave, 24th Floor New York, NY 10017, USA Telephone: 1
      (212) 245 4577 Email: kevin@cameronassoc.com
      TRANSFER
      AGENT
      Computershare480 Washington Blvd,
      27th Floor Newport Office Center VII Jersey City, NJ 07310, USA
      Telephone: 1 (888) 478 2338 www.computershare.com | 
|XIVLETTER TO
      SHAREHOLDERS

---





Form 20-F

TABLE OF CONTENTS

|PART I |                                                                     | 1                                                                  
|------ | ------------------------------------------------------------------- | -------------------------------------------------------------------
|       | FORWARD-LOOKING STATEMENTS                                          |                                                                    
|       | CAUTIONARY NOTE ON RESOURCE
    ESTIMATES                           |                                                                    
|       | NOTE ON NATURAL GAS AND OIL DISCLOSURE AND DEFINITIONS              |                                                                    
|       | CURRENCY                                                            |                                                                    
|       | NOTE ON FINANCIAL INFORMATION                                       |                                                                    
|       | ITEM 1: IDENTITY OF DIRECTORS, SENIOR
      MANAGEMENT AND ADVISERS |                                                                    
|       | ITEM 2: OFFER STATISTICS AND EXPECTED TIMETABLE                     |                                                                    
|       | ITEM 3: KEY INFORMATION                                             |                                                                    
|       |                                                                     | A.
      Selected Financial Data                                   
|       |                                                                     | B. Capitalization and Indebtedness                                 
|       |                                                                     | C.
      Reasons for the Offer and Use of Proceeds                 
|       |                                                                     | D. Risk Factors                                                    
|       | ITEM 4:INFORMATION ON
      THE COMPANY                             |                                                                    
|       |                                                                     | A. History and Development of the
      Company                    
|       |                                                                     | B.
      Business Overview                                         
|       |                                                                     | C. Organizational Structure                                        
|       |                                                                     | D.
      Property, Plants and Equipment                            
|       | ITEM 4A: UNRESOLVED STAFF COMMENTS                                  |                                                                    
|       | ITEM 5:OPERATING AND
      FINANCIAL REVIEW AND PROSPECTS           |                                                                    
|       |                                                                     | General                                                            
|       |                                                                     | Business Environment                                               
|       |                                                                     | Presentation of Financial
      Information/Accounting Treatment   
|       |                                                                     | Results of Operation                                               
|       |                                                                     | Liquidity and Capital Resources                                    
|       |                                                                     | Application of Critical Accounting Policies                        
|       |                                                                     | New Standards and Interpretations Adopted
      and Not Yet Adopted
|       |                                                                     | Trend Information                                                  
|       |                                                                     | Off-Balance Sheet Arrangements                                     
|       |                                                                     | Safe
      Harbour                                                 
|       | ITEM 6:DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES                   |                                                                    
|       |                                                                     | A.
      Directors and Senior Management                           
|       |                                                                     | B. Compensation                                                    
|       |                                                                     | C.
      Board Practices                                           
|       |                                                                     | D. Employees                                                       
|       |                                                                     | E.
      Share Ownership                                           
|       | ITEM 7:MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS            |                                                                    
|       |                                                                     | A.
      Major Shareholders                                        
|       |                                                                     | B. Related Party Transactions                                      
|       |                                                                     | C.
      Interests of Experts and Counsel                          
|       | ITEM 8:FINANCIAL INFORMATION                                        |                                                                    
|       |                                                                     | A.
      Consolidated Statements and Other Financial Information   
|       |                                                                     | B. Significant Changes                                             
|       | ITEM 9:THE OFFER AND
      LISTING                                  |                                                                    
|       |                                                                     | A. Offer and Listing Details                                       
|       |                                                                     | B.
      Plan of Distribution                                      
|       |                                                                     | C. Markets                                                         
|       |                                                                     | D.
      Selling Shareholders                                      
|       |                                                                     | E. Dilution                                                        
|       |                                                                     | F.
      Expenses of the Issue                                     

(i)

---



|              | ITEM 10: ADDITIONAL
      INFORMATION                                                   |                                                 | 54 
|------------- | --------------------------------------------------------------------------------------- | ----------------------------------------------- | ---
|              |                                                                                         | A. Share Capital                                |    
|              |                                                                                         | B. Memorandum and Articles of
      Association |    
|              |                                                                                         | C. Material Contracts                           |    
|              |                                                                                         | D. Exchange Controls                            |    
|              |                                                                                         | E. Taxation                                     |    
|              |                                                                                         | F. Dividends and Paying Agents                  |    
|              |                                                                                         | G. Statement by Experts                         |    
|              |                                                                                         | H. Documents on Display                         |    
|              |                                                                                         | I. Subsidiary Information                       |    
|              | ITEM 11: QUANTITATIVE AND
      QUALITATIVE DISCLOSURES ABOUT MARKET RISK               |                                                 | 60 
|              | ITEM 12: DESCRIPTION OF SECURITIES OTHER
      THAN EQUITY SECURITIES                   |                                                 | 60 
|PART
      II |                                                                                         | 60                                             
|              | ITEM 13: DEFAULTS, DIVIDEND ARREARAGES AND
      DELINQUENCIES                          |                                                 | 60 
|              | ITEM 14: MATERIAL
      MODIFICATIONS TO RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS |                                                 | 60 
|              | ITEM 15: CONTROLS AND PROCEDURES                                                        |                                                 | 61 
|              | ITEM 16:
    [RESERVED]                                                                 |                                                 | 62 
|              | ITEM 16A: AUDIT COMMITTEE FINANCIAL
      EXPERT                                        |                                                 | 62 
|              | ITEM 16B: CODE OF
      ETHICS                                                          |                                                 | 62 
|              | ITEM 16C: PRINCIPAL ACCOUNTANT FEES AND
      SERVICES                                  |                                                 | 63 
|              | ITEM 16D: EXEMPTIONS FROM
      THE LISTING STANDARDS FOR AUDIT COMMITTEES              |                                                 | 63 
|              | ITEM 16E: PURCHASES OF EQUITY SECURITIES BY
      THE ISSUER AND AFFILIATED PURCHASERS  |                                                 | 63 
|              | ITEM 16F: CHANGE IN
      REGISTRANT'S CERTIFYING ACCOUNTANT                            |                                                 | 63 
|              | ITEM 16G: CORPORATE GOVERNANCE                                                          |                                                 | 64 
|              | ITEM 16H: MINE SAFETY
      DISCLOSURE                                                  |                                                 | 64 
|              | ITEM 17: FINANCIAL STATEMENTS                                                           |                                                 | 64 
|              | ITEM 18: FINANCIAL
      STATEMENTS                                                     |                                                 | 65 
|              | ITEM 19: EXHIBITS                                                                       |                                                 | 141

(ii)

---



PART I

FORWARD-LOOKING STATEMENTS

This document contains certain
forward-looking information and statements, including statements relating to
matters that are not historical facts and statements of our beliefs, intentions
and expectations about developments, results and events which will or may occur
in the future, which constitute "forward-looking information" within the meaning
of applicable Canadian securities legislation and "forward-looking statements"
within the meaning of the "safe harbour" provisions of theUnited States Private Securities Litigation Reform Act of
1995, collectively referred to as
"forward-looking statements". Forward-looking statements are typically
identified by words such as "anticipate", "could", "should", "expect", "seek",
"may", "intend", "likely", "will", "plan", "estimate", "believe" and similar
expressions suggesting future outcomes or statements regarding an outlook.

Forward-looking statements are included throughout this document and
include, but are not limited to, statements with respect to: our projected
revenues; markets; production, demand and prices for products and services,
including iron ore and other minerals; trends; economic conditions; performance;
business prospects; results of operations; capital expenditures; foreign
exchange rates; derivatives; our ability to expand our business; and other such
matters. All such forward-looking statements are based on certain assumptions
and analyses made by us in light of our experience and perception of historical
trends, current conditions and expected future developments, as well as other
factors we believe are appropriate in the circumstances. These statements are,
however, subject to known and unknown risks and uncertainties and other factors.
As a result, actual results, performance or achievements could differ materially
from those expressed in, or implied by, these forward-looking statements and,
accordingly, no assurance can be given that any of the events anticipated by the
forward-looking statements will transpire or occur, or if any of them do so,
what benefits will be derived therefrom. These risks, uncertainties and other
factors include, among others:

- our financial results may fluctuate substantially
  from period to period;
- our earnings and, therefore, our profitability may
  be affected by commodities price volatility;
- a weak global economy can adversely affect our
  business and financial results and have a material adverse effect on our
  liquidity and capital resources;
- the global commodity supply chain and merchant
  banking businesses are highly competitive;
- the operation of the iron ore mine underlying our
  royalty interest is generally determined by a third party operator and we have
  no decision making power as to how the property is operated. In addition, we
  have no or very limited access to technical or geological data respecting the
  mine, including as to reserves.The owner's
  failure to perform or other operating decisions made by the owner, including
  scaling back or ceasing operations, could have a material adverse effect on
  our revenue, results of operations and financial condition;
- the profitability of our global commodity supply
  chain operations depends, in part, on the availability of adequate sources of
  supply;
- we may face a lack of suitable acquisition or
  merger or other proprietary investment candidates, which may limit our future
  growth;
- strategic investments or acquisitions and joint
  ventures, or our entry into new business areas, may result in additional risks
  and uncertainties in our business;
- the industries in which we operate may be affected
  by disruptions beyond our control;
- our commodities activities are subject to
  counterparty risks associated with performance of obligations by our
  counterparties and suppliers;
- larger and more frequent capital commitments in
  our merchant banking business increase the potential for significant
  losses;
- we are subject to transaction risks that may have
  a material adverse effect on our business, results of operations, financial
  condition and cash flow;
- our risk management strategies leave us exposed to
  unidentified or unanticipated risks that could impact our risk management
  strategies in the future and could negatively affect our results of operations
  and financial condition;

1

---



- derivative transactions may expose us to
  unexpected risks and potential losses;
- fluctuations in interest rates and foreign
  currency exchange rates may affect our results of operations and financial
  condition;
- our operations and infrastructure may malfunction
  or fail;
- the exploration and development of mining and
  resource properties is inherently dangerous and subject to risks beyond our
  control;
- our natural gas and related operations are subject
  to inherent risks and hazards;
- mineral resource calculations are only
  estimates;
- estimates of natural gas and oil reserves involve
  uncertainty;
- if we are unsuccessful in acquiring or finding
  additional reserves, our future natural gas, NGL and oil production will
  decline;
- our global commodity supply chain operations are
  subject to environmental laws and regulations that may increase the costs of
  doing business and may restrict such operations;
- future environmental and reclamation obligations
  respecting our resource properties and interests may be
  material;
- we or the operators of our current and any future
  resource interests may not be able to secure required permits and
  licenses;
- there can be no assurance that we will be able to
  obtain adequate financing in the future or that the terms of such financing
  will be favourable, and, as a result, we may have to raise additional capital
  through the issuance of additional equity, which will result in dilution to
  our shareholders;
- limitations on our access to capital could impair
  our liquidity and our ability to conduct our business;
- we may substantially increase our debt in the
  future;
- as a result of our global operations, we are
  exposed to political, economic, legal, operational and other risks that could
  negatively affect our business, our results of operations, financial condition
  and cash flow;
- we are exposed to litigation risks in our business
  that are often difficult to assess or quantify. We anticipate that we will
  incur significant legal expenses every year in defending against
  litigation;
- we rely significantly on the skills and experience
  of our executives, and the loss of any of these individuals may harm our
  business;
- we may experience difficulty attracting and
  retaining qualified management and technical personnel to efficiently operate
  our business, and the failure to operate our business effectively could have a
  material and adverse effect on our profitability, financial condition and
  results of operations;
- certain of our directors and officers may, from
  time to time, serve in similar positions with other public companies, which
  may put them in a conflict position from time to time;
- we conduct business in countries with a history of
  corruption and transactions with foreign governments, and doing so increases
  the risks associated with our international activities;
- employee misconduct could harm us and is difficult
  to detect and deter;
- we may incur losses as a result of unforeseen or
  catastrophic events, including the emergence of a pandemic, terrorist attacks
  or natural disasters;
- investors' interests may be diluted and investors
  may suffer dilution in their net book value per share if we issue additional
  shares or raise funds through the sale of equity securities;
  and
- certain factors may inhibit, delay or prevent a
  takeover of our company, which may adversely affect the price of our common
  shares.

2

---



Although we believe that the
expectations reflected in such forward-looking information and statements are
reasonable, we can give no assurance that such expectations will prove to be
accurate. Accordingly, readers should not place undue reliance upon any of the
forward-looking information and statements set out in this document. All of the
forward-looking information and statements contained in this document are
expressly qualified, in their entirety, by this cautionary statement. The
various risks to which we are exposed are described in additional detail in this
document under the section entitled "Item 3:
Key Information  D. Risk Factors". The
forward-looking information and statements are made as of the date of this
document, and we assume no obligation to update or revise them except as
required pursuant to applicable securities laws.

As used in this annual report, the
terms "we", "us" and "our" mean MFC Industrial Ltd. and our subsidiaries, unless
otherwise indicated.

CAUTIONARY NOTE ON RESOURCE ESTIMATES

As a reporting issuer in Canada, we are
required by Canadian law to provide disclosure respecting our mineral interests
in accordance with Canadian National Instrument 43-101 -Standards of Disclosure for Mineral Projects, referred to as "NI 43-101". Accordingly, you are cautioned
that the information contained in this annual report on Form 20-F may not be
comparable to similar information made public by U.S. companies under the United
States federal securities laws and the rules and regulations thereunder. In
particular, the terms "measured resource", "indicated resource" and "inferred
resource" as may be used herein are not defined in Securities and Exchange
Commission, referred to as the "SEC", Industry Guide 7 and are normally not
permitted to be used in reports and registration statements filed with the SEC.
Investors are cautioned not to assume that any part or all of mineral deposits
in these categories will ever be converted into mineral reserves with
demonstrated economic viability. In addition, the estimation of inferred
resources involves far greater uncertainty as to their existence and economic
viability than the estimation of other categories of resources. Under Canadian
rules, estimates of inferred mineral resources may not form the basis of
feasibility or pre-feasibility studies, except in rare cases. U.S. investors are
cautioned not to assume that part or all of an inferred resource exists, or is
economically or legally minable.

NOTE ON NATURAL GAS AND OIL
DISCLOSURE AND DEFINITIONS

On March 15, 2013, we were granted an
exemption order by applicable Canadian securities regulators from the
requirements of Canadian National Instrument 51-101 -Standards of Disclosure for Oil and Gas Activities, referred to as "NI 51-101", applicable to our natural gas
and oil disclosure. The exemption permits us to prepare such disclosure in
accordance with the rules of the SEC in place of much of the disclosure required
by NI 51-101. In accordance with the exemption, proved and probable natural gas
and oil reserves data and certain other disclosures with respect to our natural
gas and related activities in this document have been prepared in accordance
with SEC requirements and definitions and, accordingly, may differ from
corresponding information otherwise required by NI 51-101. Accordingly, such
disclosures may not be comparable to those prepared by other Canadian reporting
issuers.

NI 51-101 prescribes a relatively
comprehensive set of disclosures in respect of oil and gas reserves and other
disclosures about oil and gas activities. The SEC also prescribes an extensive
set of disclosures but instructs reporting companies to remain flexible in their
disclosure, where appropriate, in order to provide meaningful disclosure in the
circumstances. Among other differences, NI 51-101 specifies that proved,
probable and possible reserves be determined in accordance with the Canadian Oil
and Gas Evaluation Handbook definitions and the SEC requirements provide for the
use of pricing based on a historic 12-month average for reserves estimation and
disclosure, whereas NI 51-101 requires the evaluation of oil and gas reserves to
be based on a forecast of economic conditions.

Where applicable, barrels of oil
equivalent, referred to as "boe", amounts have been calculated using a
conversion ratio of six thousand cubic feet of natural gas to one barrel of oil
which is based on an energy equivalency conversion method primarily applicable
at the burner tip and does not represent a value equivalency at the wellhead.
BOEs may be misleading, particularly if used in isolation. In addition, the
following oil and gas industry specific terms are utilized in this annual report
on Form 20-F:

AECO Daily Index The daily price as quoted in Canadian Enerdata's Canadian
Gas Price Reporter in the table entitled "Daily Spot Gas Price at AECO C &
NOVA Inventory Transfer" in the column "Price ($/GJ)", Sub column "Avg", for
each individual day.

bbl Barrels.

bbl/d Barrels per day.

boe/d Barrels of oil equivalent per day.

Developed reserves Reserves that can
be expected to be recovered through existing wells with existing equipment and operating methods or in which the cost
of the required equipment is relatively minor compared to the cost of a new
well.

3

---



mbbl Thousand barrels.

mboe Thousand barrels of oil equivalent.

mcf Thousand cubic feet.

mcf/d Thousand cubic feet per day.

mmcf Million cubic feet.

mmcf/d Million cubic feet per day.

Natural gasorgas The lighter hydrocarbons and associated non-hydrocarbon
substances occurring naturally in an underground reservoir, which under
atmospheric conditions are essentially gases, but which may contain natural gas
liquids. Natural gas can exist in a reservoir either dissolved in crude oil
(solution gas) or in a gaseous phase (associated gas or non-associated gas).
Non-hydrocarbon substances may include hydrogen sulphide, carbon dioxide, and
nitrogen.

Net acresorNet wells The sum of the fractional working interests
owned by us in gross acres or gross wells.

Net reservesRemaining reserves, after deduction of estimated royalties and
including royalty interests.

NGLorNGLs Natural gas liquid or natural gas liquids, which are naturally
occurring substances found in natural gas, including ethane, butane, isobutane,
propane and natural gasoline, that can be collectively removed from produced
natural gas, separated into these substances and sold.

Probable reserves Those additional reserves that are less certain to be
recovered than proved reserves. It is equally likely that the actual remaining
quantities recovered will be greater or less than the sum of the estimated
proved plus probable reserves.

Producing well A well that is not a dry well. Productive wells include
producing wells and wells that are mechanically capable of production.

Proved reserves Proved natural gas, NGL and oil reserves are those
quantities of natural gas, NGL and oil, which, by analysis of geoscience and
engineering data, can be estimated with reasonable certainty to be economically
producible.

Undeveloped reserves Proved reserves that are expected to be
recovered from new wells on undrilled acreage, or from existing wells where a
relatively major expenditure is required for recompletion.

Working interest The interest in a property which gives the owner that share
of production from the property. A working interest owner bears that share of
the costs of exploration, development and production in return for a share of
production. Working interests are typically burdened by overriding royalty
interest or other interests.

CURRENCY

Unless otherwise indicated, all
references in this document to "$" and "dollars" are to United States dollars,
all references to "C$", "CDN$" and "Canadian dollars" are to Canadian dollars
and all references to "Euro" or "€" are to the European Union Euro. On March 22,
2013, the noon buying rate in New York City for cable transfers as certified by
the Federal Reserve Bank of New York for the conversion of Canadian dollars and
Euros to United States dollars was C$1.00 = $0.9781 and €1.00 = $1.2996,
respectively.

NOTE ON FINANCIAL INFORMATION

Unless otherwise stated, all financial
information presented herein has been prepared in accordance with the English
language version of International Financial Reporting Standards as issued by the
International Accounting Standards Board, referred to as "IFRS", which may not
be comparable to financial data prepared by many U.S. companies.

4

---



Due to rounding, numbers presented
throughout this document may not add up precisely to the totals we provide and
percentages may not precisely reflect the absolute figures.

ITEM 1: IDENTITY OF DIRECTORS,
SENIOR MANAGEMENT AND ADVISERS

Not
applicable.

ITEM 2: OFFER STATISTICS AND
EXPECTED TIMETABLE

Not applicable.

ITEM 3: KEY INFORMATION

A. Selected Financial Data

The following table summarizes selected
consolidated financial data prepared in accordance with IFRS, for each of the
fiscal years ended December 31, 2012, 2011, 2010 and 2009. The information in
the table was extracted from the detailed consolidated financial statements and
related notes included elsewhere in this annual report or previously filed on
Form 20-F and should be read in conjunction with such financial statements and
with the information appearing under the heading "Item 5: Operating and Financial Review and Prospects".

Selected Financial
Data(Stated in United States dollars
in accordance with IFRS)(in thousands,
other than per share amounts)

|                                                               |  | 2012(1) |           | 2011   |  | 2010(2)(3) |         | 2009(3)
|-------------------------------------------------------------- |  | ------- | --------- | ------ |  | ---------- | ------- | -------
|Net sales                                                      |  | $       | 479,507   |        |  | $          | 514,797 |        
|Net income (loss) from continuing
      operations(4)          |  |         | 226,754   | (5)(6) |  |            | 12,193  |        
|Net income (loss) income
      from discontinued operations(4) |  |         | -         |        |  |            | -       |        
|Basic earnings (loss) per share:                               |  |         |           |        |  |            |         |        
|Continuing
      operations                                    |  |         | 3.62      | (5)(6) |  |            | 0.19    |        
|Discontinued operations                                        |  |         | -         |        |  |            | -       |        
|Diluted earnings (loss)
      per share:                       |  |         |           |        |  |            |         |        
|Continuing operations                                          |  |         | 3.62      | (5)(6) |  |            | 0.19    |        
|Discontinued
      operations                                  |  |         | -         |        |  |            | -       |        
|Net income(4)                                                  |  |         | 226,754   | (5)(6) |  |            | 12,193  |        
|Net income per
    share:                                      |  |         |           |        |  |            |         |        
|Basic                                                          |  |         | 3.62      | (5)(6) |  |            | 0.19    |        
|Diluted                                                        |  |         | 3.62      | (5)(6) |  |            | 0.19    |        
|Total assets                                                   |  |         | 1,381,489 |        |  |            | 858,957 |        
|Net assets                                                     |  |         | 763,385   |        |  |            | 549,147 |        
|Long-term debt, less current
    portion                       |  |         | 118,824   |        |  |            | 20,150  |        
|Shareholders'
    equity                                       |  |         | 757,197   |        |  |            | 546,623 |        
|Capital stock, net of treasury
    stock                       |  |         | 314,136   |        |  |            | 314,172 |        
|Weighted average number of
      common stock outstanding,     |  |         |           |        |  |            |         |        
|diluted                                                        |  |         | 62,555    |        |  |            | 62,561  |        
|Cash dividends paid to
shareholders                            |  |         | 13,762    |        |  |            | 12,512  |        

|Notes:
|------
|(1)   
|(2)   
|(3)   
|(4)   
|(5)   
|(6)   

B. Capitalization and Indebtedness

Not applicable.

5

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C. Reasons for the Offer and Use of
Proceeds

Not applicable.

D. Risk Factors

Certain statements in this annual
report on Form 20-F are forward-looking statements, which reflect our
management's expectations regarding our future growth, results of operations,
performance and business prospects and opportunities. Forward-looking statements
consist of statements that are not purely historical, including any statements
regarding beliefs, plans, expectations, projections or intentions regarding the
future. While these forward-looking statements, and any assumptions upon which
they are based, are made in good faith and reflect our current judgment
regarding the direction of our business, actual results will almost always vary,
sometimes materially, from any estimates, predictions, projections, assumptions
or other future performance suggested herein.

Such estimates, projections or other
forward-looking statements involve various risks and uncertainties as outlined
below. We caution the reader that important factors in some cases have affected
and, in the future, could materially affect actual results and cause actual
results to differ materially from the results expressed in any such estimates,
projections or other forward-looking statements.

An investment in our common shares
involves a number of risks. You should carefully consider the following risks
and uncertainties in addition to other information in this annual report on Form
20-F in evaluating our company and our business before purchasing our common
shares. Our business, operations and financial condition could be materially and
adversely affected by one or more of the following risks.

Risk Factors Relating to Our
Business

Our financial results may fluctuate
substantially from period to period.

We expect our business to experience
significant periodic variations in its revenues and results of operations in the
future. These variations may be attributed in part to the fact that our merchant
banking revenues are often earned upon the successful completion of a
transaction, the timing of which is uncertain and beyond our control. In many
cases, we may receive little or no payment for engagements that do not result in
the successful completion of a transaction. Additionally, through our merchant
banking business, we seek to acquire undervalued assets where we can use our
experience and management to realize upon the value. Often, we will hold or
build upon these assets over time, and we cannot predict the timing of when
these assets' values may be realized. As a result, we are unlikely to achieve
steady and predictable earnings, which could in turn adversely affect our
financial condition and results of operations.

Our earnings and, therefore, our
profitability may be affected by commodities price volatility.

The majority of our revenue from our
global commodity supply chain business is derived from the sale of commodities,
including metals, hydrocarbons, plastics and other materials. As a result, our
earnings are directly related to the prices of these commodities. In addition,
our revenues from our iron ore and natural gas interests are directly connected
to the prices of such commodities. There are many factors influencing the price
of metals, hydrocarbons, plastics and other commodities, including: expectations
for inflation; global and regional demand and production; political and economic
conditions; and production costs in major producing regions. These factors are
beyond our control and are impossible for us to predict. Changes in the prices
of iron ore, hydrocarbons, plastics, metals and other commodities may adversely
affect our operating results.

A weak global economy can adversely
affect our business and financial results and have a material adverse effect on
our liquidity and capital resources.

Our business, by its nature, does not
produce predictable earnings, and it may be materially affected by conditions in
the global financial markets and economic conditions generally.

Global prices for our commodities are
influenced strongly by international demand and global economic conditions.
Uncertainties or weaknesses in global economic conditions, including the ongoing
sovereign debt crisis in Europe, could adversely affect our business and
negatively impact our financial results. In addition, the current level of
international demand for certain of our commodities, including iron ore, used in
steel production is driven largely by industrial growth in China. If the
economic growth rate in China slows for an extended period of time, or if
another global economic downturn were to occur, we would likely see decreased
demand for such products and decreased prices, resulting in lower revenue
levels and decreasing margins. We
are not able to predict whether the global economic conditions will continue or
worsen and the impact it may have on our operations and the industry in general
going forward.

6

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Market deterioration and weakness can
result in a material decline in the number and size of the transactions that we
execute for our own account and for our clients and to a corresponding decline
in our revenues. Any market weakness can further result in losses to the extent
that we own assets in such market.

The global commodity supply chain
and merchant banking businesses are highly competitive.

All aspects of the global commodity
supply chain and merchant banking businesses are highly competitive, and we
expect them to remain so.

Our competitors include merchant and
investment banks, brokerage firms, commercial banks, private equity firms, hedge
funds, financial advisory firms and natural resource and mineral royalty
companies. Many of our competitors have substantially greater capital and
resources, including access to commodities supply, than we do. We believe that
the principal factors affecting competition in our business include transaction
execution, our products and services, client relationships, reputation,
innovations, credit worthiness and price. We have experienced price competition
in some of our trading business.

The scale of our competitors has
increased in recent years as a result of substantial consolidation. These firms
have the ability to offer a wider range of products than we do, which may
enhance their competitive position. They also have the ability to support their
business with other financial services such as commercial lending in an effort
to gain market share, which has resulted, and could further result, in pricing
pressure in our businesses.

If we are unable to compete effectively
with our competitors, our business and results of operations will be adversely
affected.

The operation of the iron ore mine
underlying our royalty interest is generally determined by a third party
operator, and we have no decision making power as to how the property is
operated. In addition, we have no or very limited access to technical or
geological data respecting the mine, including as to reserves. The operator's
failure to perform or other operating decisions made by the operator, including
scaling back or ceasing operations, could have a material adverse effect on our
revenue, results of operations and financial condition.

The commodities and resources segment
of our business includes our indirect royalty interest in the iron ore mine. The
revenue derived from the interest is based on production generated by the mine's
third party operator. The operator generally has the power to determine the
manner in which the iron ore is exploited, including decisions to expand,
continue or reduce production from the mine, and decisions about the marketing
of products extracted from the mine. The interests of the third party operator
and our interests may not always be aligned. As an example, it will, in almost
all cases, be in our interest to advance production as rapidly as possible in
order to maximize near-term cash flow, while the third party operator may, in
many cases, take a more cautious approach to development, as it is at risk with
respect to the cost of development and operations. Our inability to control the
operations of the mine can adversely affect our profitability, results of
operations and financial condition. Similar adverse effects may result from any
other interests we may acquire that are primarily operated by a third party
operator.

To the extent that we retain our
current indirect royalty interest, we will be dependent to a large extent upon
the financial viability and operational effectiveness of owners and operators of
our interests. Payments from production generally flow through the operator and
there is a risk of delay and additional expense in receiving such revenues.
Payments may be delayed by restrictions imposed by lenders, delays in the sale
or delivery of products, accidents, the recovery by operators of expenses
incurred in the operation of any royalty properties, the establishment by
operators of reserves for such expenses or the insolvency of an operator. Our
rights to payment under the royalties will likely have to be enforced by
contract. This may inhibit our ability to collect outstanding royalties upon a
default. Failure to receive any payments from the owners and operators of mines
in which we have or may acquire a royalty interest may result in a material and
adverse effect on our profitability, results of operations and financial
condition.

To the extent grantors of royalties and
other interests do not abide by their contractual obligations, we may be forced
to take legal action to enforce our contractual rights. Such litigation may be
time consuming and costly, and, as with all litigation, there is no guarantee of
success. Should any such decision be determined adversely to us, such decision
may have a material and adverse effect on our profitability, results of
operations and financial condition.

7

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In addition, we have no or very limited
access to technical, geological data relating to the mine, including data as to
reserves, nor have we received a NI 43-101 compliant technical report in respect
of the mine. As such, we cannot independently determine reserve amounts or the
estimated life of the mine and are instead wholly dependent on the determination
of the reserves by the operator of the mine. We can provide no assurances as to
the level of reserves at the mine. If the operator of the mine determines there
are insufficient reserves to economically operate the mine, it may scale back or
cease operations, which could have a material adverse effect on our
profitability, results of operations and financial condition.

The profitability of our global
commodity supply chain operations depends, in part, on the availability of
adequate sources of supply.

Our global commodity supply chain
business relies on, among other things, numerous outside sources of supply for
our operations. These suppliers generally are not bound by long-term contracts
and will have no obligation to provide commodities to us in the future. In
periods of low industry prices, suppliers may elect to hold commodities to wait
for higher prices or intentionally slow their activities. If a substantial
number of suppliers cease selling commodities to us, we will be unable to source
and/or execute commodities transactions at desired levels and our results of
operations and financial condition could be materially adversely
affected.

We may face a lack of suitable
acquisition or merger or other proprietary investment candidates, which may
limit our growth.

In order to grow our business, we may
seek to acquire, merge with or invest in new companies or opportunities. Our
failure to make acquisitions or investments may limit our growth. In pursuing
acquisition and investment opportunities, we face competition from other
companies having similar growth and investment strategies, many of which may
have substantially greater resources than us. Competition for these acquisitions
or investment targets could result in increased acquisition or investment
prices, higher risks and a diminished pool of businesses, services or products
available for acquisition or investment.

Strategic investments or
acquisitions and joint ventures, or our entry into new business areas, may
result in additional risks and uncertainties in our business.

We have grown and intend to continue to
grow our business both through internal expansion and through strategic
investments, acquisitions or joint ventures. When we make strategic investments
or acquisitions or enter into joint ventures, we expect to face numerous risks
and uncertainties in combining or integrating the relevant businesses and
systems, including the need to combine accounting and data processing systems
and management controls and to integrate relationships with customers and
business partners.

Acquisitions also frequently result in
recording of goodwill and other intangible assets, which are subject to
potential impairments in the future that could have a material adverse effect on
our operating results. Furthermore, the costs of integrating acquired businesses
(including restructuring charges associated with the acquisitions, as well as
other acquisition costs, such as accounting fees, legal fees and investment
banking fees) could significantly impact our operating results.

Although we perform due diligence on
the businesses we purchase, in light of the circumstances of each transaction,
an unavoidable level of risk remains regarding the actual condition of these
businesses. We may not be able to ascertain the value or understand the
potential liabilities of the acquired businesses and their operations until we
assume operating control of the assets and operations of these businesses.

Furthermore, any acquisitions of
businesses or facilities, including our recent acquisition of Compton, could
entail a number of risks, including:

- problems with
  the effective integration of operations;
- inability to maintain key pre-acquisition business
  relationships;
- increased operating costs;
- exposure to substantial unanticipated
  liabilities;
- difficulties in realizing projected efficiencies,
  synergies and cost savings;
- the risks of entering markets in which we have
  limited or no prior experience; and
- the
  possibility that we may be unable to recruit additional managers with the
  necessary skills to supplement the management of the acquired businesses.

8

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In addition, geographic and other
expansions, acquisitions or joint ventures may require significant managerial
attention, which may be diverted from our other operations. If we are
unsuccessful in overcoming these risks, our business, financial condition or
results of operations could be materially and adversely affected.

The industries in which we operate
may be affected by disruptions beyond our control.

Our global commodity supply chain
operations include direct or indirect investments in assets, such as smelting,
refining, mining, processing and hydrocarbon operations. Transport disruption,
weather and natural disasters such as hurricanes and flooding, unexpected
maintenance problems, collapse or damage to mines or wells, unexpected
geological variations, labour disruptions and changes in laws and regulations
relating to occupational safety, health and environmental matters are some of
the factors that may adversely affect our financial condition and results of
operations. These factors can affect costs at particular assets for varying
periods. In addition, smelting, refining, mining, processing and hydrocarbon
operations also rely on key inputs, such as labour, spare parts, fuel and
electricity. Disruption to the supply of key inputs, or changes in their
pricing, may have a significant adverse impact on our future results.

Our commodities activities are
subject to counterparty risks associated with performance of obligations by our
counterparties and suppliers.

Our business is subject to commercial
risks, which include counterparty risk, such as failure of performance by
commodities suppliers and failure of payment by our trading customers. We seek
to reduce the risk of supplier non-performance by requiring credit support from
creditworthy financial institutions where appropriate. We attempt to reduce the
risk of non-payment by purchasers of commodities by imposing limits on open
accounts extended to creditworthy customers and imposing credit support
requirements for other customers. Nevertheless, we are exposed to the risk that
parties owing us or our clients and other financial intermediaries may default
on their obligations to us due to bankruptcy, lack of liquidity, operational
failure or other reasons. These counterparty obligations may arise, for example,
from placing deposits, the extension of credit in trading and investment
activities and participation in payment, securities and commodity trading
transactions on our behalf and as an agent on behalf of our clients. If any of
these parties default on their obligations, our business, results of operations,
financial condition and cash flow could be adversely affected.

Larger and more frequent capital
commitments in our global commodity supply chain business increase the potential
for significant losses.

We may enter into large transactions in
which we commit our own capital as part of our global commodity supply chain
business to facilitate client trading activities. The number and size of these
large transactions may materially affect our results of operations in a given
period. Market fluctuations may also cause us to incur significant losses from
our trading activities. To the extent that we own assets (i.e., have long
positions), a downturn in the value of those assets or in the markets in which
those assets are traded could result in losses. Conversely, to the extent that
we have sold assets we do not own (i.e., have short positions) in any of those
markets, an upturn in those markets could expose us to potentially large losses
as we attempt to cover our short positions by acquiring assets in a rising
market.

We are subject to transaction risks
that may have a material adverse effect on our business, results of operations,
financial condition and cash flow.

We manage transaction risks through
allocating and monitoring our capital investments in circumstances where the
risk to our capital is minimal, carefully screening clients and transactions,
and engaging qualified personnel to manage transactions. Nevertheless,
transaction risks can arise from, among other things, our trading and merchant
banking activities. These risks include market and credit risks associated with
our merchant banking operations. We intend to make investments in highly
unstructured situations and in companies undergoing severe financial distress.
Such investments often involve severe time constraints. These investments may
expose us to significant transaction risks. An unsuccessful investment may
result in the total loss of such an investment and may have a material adverse
effect on our business, results of operations, financial condition and cash
flow.

Our risk management strategies leave
us exposed to unidentified or unanticipated risks that could impact our risk
management strategies in the future and could negatively affect our results of
operations and financial condition.

We use a variety of instruments and
strategies to manage exposure to various types of risks. For example, we use
derivative foreign exchange contracts to manage our exposure and our clients'
exposure to foreign currency exchange rate risks. If anyof
the variety of instruments and strategies we utilize to manage our exposure to
various types of risk are not effective, we may incur losses. Many of our
strategies are based on historical trading patterns and correlations. However,
these strategies may not be fully effective in mitigating our risk exposure in
all market environments or against all types of risk. Unexpected market
developments may affect our risk management strategies during this time, and
unanticipated developments could impact our risk management strategies in the
future.

9

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Derivative transactions may expose
us to unexpected risk and potential losses.

We, from time to time, enter into
derivative transactions that require us to deliver to the counterparty the
underlying security, loan or other obligation in order to receive payment. In a
number of cases, we may not hold the underlying security, loan or other
obligation and may have difficulty obtaining, or be unable to obtain, the
underlying security, loan or other obligation through the physical settlement of
other transactions. As a result, we are subject to the risk that we may not be
able to obtain the security, loan or other obligation within the required
contractual time frame for delivery. This could cause us to forfeit the payments
due to us under these contracts or result in settlement delays with the
attendant credit and operational risk as well as increased costs to us.

Fluctuations in interest rates and
foreign currency exchange rates may affect our results of operations and
financial condition.

Fluctuation in interest rates may
affect the fair value of our financial instruments sensitive to interest rates.
An increase or decrease in market interest rates may result in changes to the
fair value of our fixed interest rate financial instrument liabilities, thereby
resulting in a reduction in the fair value of our equity. Similarly,
fluctuations in foreign currency exchange rates may affect the fair value of our
financial instruments sensitive to foreign currency exchange rates.

Our operations and infrastructure
may malfunction or fail.

Our business is highly dependent on our
ability to process, on a daily basis, a number of transactions across diverse
markets, and the transactions we process have become increasingly complex. The
inability of our systems to accommodate an increasing volume of transactions
could also constrain our ability to expand our businesses. If any of these
systems do not operate properly or are disabled, or if there are other
shortcomings or failures in our internal processes, people or systems, we could
suffer impairments, financial loss, a disruption of our businesses, liability to
clients, regulatory intervention or reputational damage.

The exploration and development of
mining and resource properties is inherently dangerous and subject to risks
beyond our control.

Companies engaged in resource
activities are subject to all of the hazards and risks inherent in exploring for
and developing natural resource projects. These risks and uncertainties include,
but are not limited to, environmental hazards, industrial accidents, labour
disputes, increases in the cost of labour, social unrest, fires, changes in the
regulatory environment, impact of non-compliance with laws and regulations,
explosions, encountering unusual or unexpected geological formations or other
geological or grade problems, unanticipated metallurgical characteristics or
less than expected mineral recovery, encountering unanticipated ground or water
conditions, cave-ins, pit wall failures, flooding, rock bursts, periodic
interruptions due to inclement or hazardous weather conditions, earthquakes,
seismic activity, other natural disasters or unfavourable operating conditions
and losses. Should any of these risks or hazards affect a company's exploration
or development activities, it may: (i) cause the cost of development or
production to increase to a point where it would no longer be economic to
produce the metal or other resource from the company's resources or expected
reserves; (ii) result in a write down or write-off of the carrying value of one
or more projects; (iii) cause delays or stoppage of mining or processing; (iv)
result in the destruction of properties, processing facilities or third party
facilities necessary for operations; (v) cause personal injury or death and
related legal liability; or (vi) result in the loss of insurance coverage. The
occurrence of any of above mentioned risks or hazards could result in an
interruption or suspension of operation of the properties in which we hold an
interest or any other properties we acquire in the future and have a material
and adverse effect on our results of operations and financial condition.

Our natural gas and related
operations are subject to inherent risks and hazards.

There are many operating risks and
hazards inherent in exploring for, producing, processing, and transporting
natural gas and oil. Drilling operations may encounter unexpected formations or
pressures that could cause damage to equipment or personal injury and fires,
explosions, blowouts, spills, or other accidents may occur. Additionally, we
could experience interruptions to, or the termination of, drilling, production,
processing, and transportation activities due to bad weather, natural disasters,
delays in obtaining governmental approvals or consents, insufficient storage or
transportation capacity, orother geological and mechanical
conditions. Any of these events that result in a shutdown or slowdown of
operations will adversely affect our business. While close well supervision and
effective maintenance operations can contribute to maximizing production rates
over time, production delays and declines from normal field operating conditions
cannot be eliminated and can be expected to adversely affect revenue and cash
flow levels to varying degrees.

10

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Drilling activities, including
completions, are subject to the risk that no commercially productive reservoirs
will be encountered and we will not recover all or any portion of our
investment. The cost of drilling, completing, and operating wells is often
uncertain due to drilling in unknown formations, the costs associated with
encountering various drilling conditions, such as over pressured zones, and
changes in drilling plans and locations as a result of prior exploratory wells
or additional seismic data and interpretations thereof.

Mineral resource calculations are
only estimates.

Any figures presented for mineral
resources in this document are only estimates. There are numerous uncertainties
inherent in estimating mineral resources. Such estimates are subjective, and the
accuracy of mineral resource estimation is a function of the quantity and
quality of available data and of the assumptions made and judgments used in
engineering and geological interpretation. These amounts are estimates only, and
the actual level of recovery of minerals from such deposits may be different.
Differences between our assumptions, including economic assumptions such as
mineral prices, market conditions and actual events, could have a material
adverse effect on our mineral reserve and mineral resource estimates, financial
position and results of operation. No assurance can be given that any mineral
resource estimates will be ultimately reclassified as reserves.

Estimates of natural gas and oil
reserves involve uncertainty.

Estimates of natural gas and oil
reserves involve a great deal of uncertainty because they depend upon the
reliability of available geologic and engineering data, which is inherently
imprecise. Geologic and engineering data are used to determine the probability
that an oil and gas reservoir exists at a particular location and whether
hydrocarbons are recoverable from the reservoir. The probability of the
existence and recoverability of reserves is less than 100% and actual recoveries
may be materially different from estimates.

Such estimates require numerous
assumptions relating to operating conditions and economic factors, including the
prices of such commodities, availability of investment capital, recovery costs,
the availability of enhanced recovery techniques, the ability to market
production, and governmental and other regulatory factors, such as taxes,
royalty rates, and environmental laws. A change in one or more of these factors
could result in known quantities of natural gas and oil previously estimated
becoming unrecoverable. Each of these factors also impacts recovery costs and
production rates. In addition, estimates of reserves that are prepared by
different independent engineers, or by the same engineers at different times,
may vary substantially.

If we are unsuccessful in acquiring
or finding additional reserves, our future natural gas, NGL and oil production
would decline, thereby reducing our cash flows and results of operations and
impairing our financial condition.

The rate of production from our natural
gas and oil properties generally declines as reserves are depleted. Except to
the extent we acquire interests in additional properties containing proved
reserves, conduct successful exploration and development activities or, through
engineering studies, optimize production performance or identify additional
reserves, our proved reserves will decline materially as natural gas, NGLs and
oil are produced. Accordingly, to the extent we are not successful in replacing
such production, our future revenues may decline.

Creating and maintaining an inventory
of prospects for future production depends on many factors,
including:

- obtaining
  rights to explore for, develop and produce hydrocarbons in promising
  areas;
- drilling success;
- the ability to complete long lead-time,
  capital-intensive projects timely and on budget;
- the ability to find or acquire additional proved
  reserves at acceptable costs; and
- the ability to fund such activity.

11

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Our global commodity supply chain
operations are subject to environmental laws and regulations that may increase
the costs of doing business and may restrict such operations.

All phases of a resource business
present environmental risks and hazards and are subject to environmental
regulation pursuant to a variety of government laws and regulations. These
regulations mandate, among other things, the maintenance of air and water
quality standards and land reclamation. They also set forth limitations on the
generation, transportation, storage and disposal of solid and hazardous waste.
Compliance with such laws and regulations can require significant expenditures,
and a breach may result in the imposition of fines and penalties, which may be
material. Environmental legislation is evolving in a manner expected to result
in stricter standards and enforcement, larger fines and liability and
potentially increased capital expenditures and operating costs. Any breach of
environmental legislation by the operator of properties underlying our interests
or by us, as an owner or operator of a property, could have a material impact on
the viability of the relevant property and impair the revenue derived from the
owned property or applicable royalty or other interest, which could have a
material adverse effect on our results of operations and financial condition.
Further, environmental hazards may exist on the properties on which we hold
interests, which are unknown to us at present and have been caused by previous
or existing owners or operators of the properties.

Failure to comply with applicable laws,
regulations and permitting requirements may result in enforcement actions
thereunder, including orders issued by regulatory or judicial authorities
causing operations to cease or be curtailed and may include corrective measures
requiring capital expenditures, installation of additional equipment or remedial
actions. Parties engaged in resource operations or in the exploration or
development of resource properties may also be required to compensate those
suffering loss or damage by reason of the mining activities and may have civil
or criminal fines or penalties imposed for violations of applicable laws or
regulations.

We are not fully insured against
certain environmental risks, either because such insurance is not available or
because of high premium costs. In particular, insurance against risks from
environmental pollution occurring over time, as opposed to sudden and
catastrophic damages, is not available on economically reasonable terms.
Accordingly, our properties may be subject to liability due to hazards that
cannot be insured against or that have not been insured against due to
prohibitive premium costs or for other reasons.

Future environmental and reclamation
obligations respecting our resource properties and interests may be material.

We have not established a separate
reclamation fund for the purpose of funding estimated future environmental and
reclamation obligations. Any site reclamation or abandonment costs incurred in
the ordinary course in a specific period will be funded out of cash flow from
operations. It is not possible for us to predict our ability to fully fund the
cost of all of our future environmental, abandonment and reclamation
obligations. We expect to incur site restoration costs over a prolonged period
as wells reach the end of their economic life. There are significant
uncertainties related to decommissioning obligations, and the impact on the
financial statements could be material. The eventual timing of and costs for
these asset retirement obligations could differ from current estimates. The main
factors that can cause expected cash flows to change are:

- changes to
  laws and legislation;
- construction of new facilities;
- change in the reserve estimate and the resulting
  amendment to the life of the reserves for our hydrocarbon operations;
  and
- changes in technology.

We or the operators of our current
and any future resource interests may not be able to secure required permits and
licenses.

Operations underlying our resource
interests may require licenses and permits from various governmental
authorities. There can be no assurance that we or the operator of any given
project will be able to obtain all necessary licenses and permits that may be
required to carry out exploration, development or other resource
operations.

12

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There can be no assurance that we
will be able to obtain adequate financing in the future or that the terms of
such financing will be favourable, and, as a result, we may have to raise
additional capital through the issuance of additional equity, which will result
in dilution to our shareholders.

There can be no assurance that we will
be able to obtain adequate financing in the future or that the terms of such
financing will be favourable. Failure to obtain such additional financing could
result in delay or indefinite postponement of further business activities. We
may require new capital to grow our business, and there are no assurances that
capital will be available when needed, if at all. It is likely such additional
capital will be raised through the issuance of additional equity, which would
result in dilution to our shareholders.

Limitations on our access to capital
could impair our liquidity and our ability to conduct our
businesses.

Liquidity, or ready access to funds, is
essential to companies engaged in commodities trading and financing and merchant
banking. Failures of financial firms have often been attributable in large part
to insufficient liquidity. Liquidity is of particular importance to our
commodities and resources business, and perceived liquidity issues may affect
our clients' and counterparties' willingness to engage in transactions with us.
Our liquidity could be impaired due to circumstances that we may be unable to
control, such as a general market disruption or an operational problem that
affects our clients, counterparties, our lenders or us. Further, our ability to
sell assets may be impaired if other market participants are seeking to sell
similar assets at the same time.

We may substantially increase our
debt in the future.

We expect that it may be necessary for
us to obtain financing with a bank or financial institution to provide funds for
working capital, capital purchases, potential acquisitions and business
development. However, because of our cash flow position, we do not expect that
we will have any immediate need to obtain additional financing. Interest costs
associated with any debt financing may adversely affect our profitability.
Further, the terms on which amounts may be borrowed  including standard
financial covenants regarding the maintenance of financial ratios, the
prohibition against engaging in major corporate transactions or reorganizations
and the payment of dividends  may impose additional constraints on our business
operations and our financial strength.

As a result of our global
operations, we are exposed to political, economic, legal, operational and other
risks that could adversely affect our business, our results of operations,
financial condition and cash flow.

In conducting our business in major
markets around the world, we are subject to political, economic, legal,
operational and other risks that are inherent in operating in other countries.
These risks range from difficulties in settling transactions in emerging markets
to possible nationalization, expropriation, price controls and other restrictive
governmental actions, and terrorism. We also face the risk that exchange
controls or similar restrictions imposed by foreign governmental authorities may
restrict our ability to convert local currency received or held by us in their
countries into Swiss francs, Canadian dollars, Euros or other hard currencies,
or to take those other currencies out of those countries. If any of these risks
become a reality, our business, results of operations, financial condition and
cash flow could be negatively impacted.

We are exposed to litigation risks
in our business that are often difficult to assess or quantify. We anticipate
that we will incur significant legal expenses every year in defending against
litigation.

We are exposed to legal risks in our
business, and the volume and amount of damages claimed in litigation against
financial intermediaries are increasing. These risks include potential liability
under securities or other laws for materially false or misleading statements
made in connection with securities and other transactions, potential liability
for advice we provide to participants in corporate transactions and disputes
over the terms and conditions of complex trading arrangements. We also face the
possibility that counterparties in complex or risky trading transactions will
claim that we improperly failed to tell them of the risks involved or that they
were not authorized or permitted to enter into such transactions with us and
that their obligations to us are not enforceable. During a prolonged market
downturn, we expect these types of claims to increase. We are also exposed to
legal risks in our merchant banking activities.

We seek to invest in undervalued
businesses or assets often as a result of financial, legal, regulatory or other
distress affecting them. Investing in distressed businesses and assets can
involve us in complex legal issues relating to priorities, claims and other
rights of stakeholders. These risks are often difficult to assess or quantify,
and their existence and magnitude often remains unknown for substantial periods
of time. We may incur significant legal and other expenses in defending against
litigation involved with any of these risks and may be required to pay
substantial damages forsettlements and/or
adverse judgments. Substantial legal liability or significant regulatory action
against us could have a material adverse effect on our financial condition and
results of operations.

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We rely significantly on the skills
and experience of our executives, and the loss of any of these individuals may
harm our business.

Our future success depends to a
significant degree on the skills, experience and efforts of our executives, and
the loss of their services may compromise our ability to effectively conduct our
business. We do not maintain "key person" insurance in relation to any of our
employees.

We may experience difficulty
attracting and retaining qualified management and technical personnel to
efficiently operate our business, and the failure to operate our business
effectively could have a material and adverse effect on our profitability,
financial condition and results of operations.

We are dependent upon the continued
availability and commitment of our management, whose contributions to immediate
and future operations are of significant importance. The loss of any such
management could negatively affect our business operations. From time to time,
we will also need to identify and retain additional skilled management and
specialized technical personnel to efficiently operate our business. The number
of persons skilled in the acquisition, exploration and development of royalties
and interests in natural resource properties is limited, and competition for
such persons is intense. Recruiting and retaining qualified personnel is
critical to our success, and there can be no assurance of our ability to attract
and retain such personnel. If we are not successful in attracting and retaining
qualified personnel, our ability to execute our business model and growth
strategy could be affected, which could have a material and adverse impact on
our profitability, results of operations and financial condition.

Certain of our directors and
officers may, from time to time, serve in similar positions with other public
companies, which may put them in a conflict position with us from time to time.

Certain of our directors and officers
may, from time to time, serve as directors or officers of other companies
involved in similar businesses to us, and, to the extent that such other
companies may participate in the same ventures in which we may seek to
participate, such directors and officers may have a conflict of interest in
negotiating and concluding terms respecting the extent of such participation. In
all cases where our directors and officers have an interest in other companies,
such other companies may also compete with us in commodities trading, financing
and merchant banking and for the acquisition of royalties, similar interests or
resources properties or projects. Such conflicts of our directors and officers
may result in a material and adverse effect on our results of operations and
financial condition.

We conduct business in countries
with a history of corruption and transactions with foreign governments, and
doing so increases the risks associated with our international
activities.

As we operate internationally, we are
subject to the United StatesForeign Corrupt
Practices Act, and other laws that prohibit
improper payments or offers of payments to foreign governments and their
officials and political parties by United States and other business entities
that have securities registered in the United States for the purpose of
obtaining or retaining business. We have operations and agreements with third
parties in countries known to experience corruption. Further international
expansion may involve more exposure to such practices. Our activities in these
countries create the risk of unauthorized payments or offers of payments by one
of our employees or consultants that could be in violation of various laws
including theForeign Corrupt Practices
Act, even though these parties are not always
subject to our control. It is our policy to implement safeguards to discourage
these practices by employees. However, our existing safeguards and any future
improvements may prove to be less than effective, and our employees or
consultants may engage in conduct for which we might be held responsible.
Violations of theForeign Corrupt Practices
Actmay result in criminal or civil
sanctions, and we may be subject to other liabilities, which could negatively
affect our business, operating results and financial condition.

Employee misconduct could harm us
and is difficult to detect and deter.

It is not always possible to detect and
deter employee misconduct. The precautions we take to detect and prevent
employee misconduct may not be effective in all cases, and we could suffer
significant reputational and economic harm for any misconduct by our employees.
The potential harm to our reputation and to our business caused by such
misconduct is impossible to quantify.

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We may incur losses as a result of
unforeseen or catastrophic events, including the emergence of a pandemic,
terrorist attacks or natural disasters.

The occurrence of unforeseen or
catastrophic events, including the emergence of a pandemic or other widespread
health emergency (or concerns over the possibility of such an emergency),
terrorist attacks or natural disasters, could create economic and financial
disruptions, could lead to operational difficulties (including travel
limitations) that could impair our ability to manage our business and could
expose our insurance subsidiaries to significant losses.

General Risks Faced by Us

Investors' interests may be diluted
and investors may suffer dilution in their net book value per share if we issue
additional shares or raise funds through the sale of equity securities.

Our constating documents authorize the
issuance of our common shares, Class A common shares and Class A Preference
Shares, issuable in series. In the event that we are required to issue any
additional shares or enter into private placements to raise financing through
the sale of equity securities, investors' interests in us will be diluted, and
investors may suffer dilution in their net book value per share depending on the
price at which such securities are sold. If we issue any such additional shares,
such issuances will also cause a reduction in the proportionate ownership of all
other shareholders. Further, any such issuance may result in a change of control
of our company.

Certain factors may inhibit, delay
or prevent a takeover of our company, which may adversely affect the price of
our common shares.

Certain provisions of our charter
documents and the corporate legislation which govern us may discourage, delay or
prevent a change of control or changes in our management that shareholders may
consider favourable. Such provisions include authorizing the issuance by our
board of directors of preferred stock in series, providing for a classified
board of directors with staggered, three-year terms and limiting the persons who
may call special meetings of shareholders. In addition, theInvestment Canada Actimposes certain limitations on the rights of non-Canadians to acquire our
common shares, although it is highly unlikely that this will apply. If a change
of control or change in management is delayed or prevented, the market price of
our common shares could decline.

ITEM 4: INFORMATION ON THE COMPANY

A. History and Development of the
Company

Corporate Information

We are a corporation organized under
the laws of the Province of British Columbia, Canada. We were originally
incorporated in June 1951 by letters patent issued pursuant to theCompanies Act of 1934(Canada). We were continued under theCanadaBusiness Corporations Actin March 1980, under theBusiness
Corporations Act(Yukon) in August 1996 and
under theBusiness Corporations Act(British Columbia) in November 2004. Our name
was changed from "Terra Nova Royalty Corporation" to "MFC Industrial Ltd." on
September 30, 2011 to better reflect our focus on the global commodities supply
chain business.

Our principal office is located at
Suite 1620 - 400 Burrard Street, Vancouver, British Columbia, Canada V6C 3A6 and
the telephone number is (604) 683-8286. Our registered office is located at
Suite 1000 - 925 West Georgia Street, Vancouver, British Columbia, Canada, V6C
3L2.

General

We are a global commodities supply
chain company, which sources and delivers commodities and materials to clients,
with an expertise on the financing and risk management aspects of their
businesses.

Until the first quarter of 2010, we
were also active in the Industrial Business through our interest in KHD Humboldt
Wedag International (Deutschland) AG, referred to as "KID". Our former
Industrial Business supplied plant systems as well as machinery and equipment
worldwide for the manufacture of cement, whether for new plants, redevelopments
of existing plants or capacity increases for existing plants. It also designed
and provided equipment that produced clinker and cement and offered basic
engineering, detail engineering, plant and equipment for complete plants and
plant sections. During the course of 2010, we
distributed our shares of KID to our shareholders. Upon the distribution to our
shareholders of our Industrial Business, we operated primarily in the royalty
and resources business.

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In connection with our long-term
strategic plans, involving internal growth initiatives, acquisitions or business
combinations, we seek out and evaluate strategic acquisition candidates. After
the distribution of our Industrial Business to our shareholders, in the fourth
quarter of 2010, we acquired all of the outstanding shares of Mass, which was
engaged in the commodities, merchant banking and proprietary investment
businesses, and consolidated its operations from November 16, 2010. In December
2011, we acquired, together with our partner in the project, Alberici Group,
Inc., referred to as "Alberici", the Pea Ridge Iron Ore Mine project, located
near Sullivan, Missouri, U.S.A.

In 2012, in order to further our
long-term strategy to expand our global commodities business, we completed the
following acquisitions, which increased our geographic range and added new
products to our commodities platform:

- in September 2012, we completed the take-over bid
  of Compton, which expanded our commodities business to include the energy
  sector;
- in November 2012, we acquired a controlling
  interest in each of ACC Resources Co., L.P., referred to as "ACCR" and Possehl
  Mexico S.A. de C.V., referred to as "Possehl", which are global commodities
  supply chain businesses with a presence in the North American and Latin
  American markets and a focus on refractory and ceramic materials and other
  products that are new to our commodities platform; and
- in March 2012, we acquired a mineral refinery
  plant and power plant.

Recent Developments

The following is a summary of selected
key recent developments in our business.

Impairment of Indian Iron Ore
Activities

In the year ended December 31, 2012, we
recognized an impairment and write-down, net of income tax recovery, of $48.2
million in relation to our iron ore activities in India. In October 2012, the
Supreme Court of India banned all mining activities in the State of Goa, India.
As we believe the situation will take many years to resolve, we determined to
exit the market and recognized the aforementioned impairment and write-down.
These interests were sold in 2013.

Acquisition of Compton Petroleum
Corporation

On September 6, 2012, we completed our
previously announced take-over bid, referred to as the "Offer", for all of the
issued and outstanding common shares of Compton, referred to as the "Compton
Shares". The Offer was made pursuant to a support agreement, referred to as the
"Support Agreement", between Compton and us dated July 6, 2012. Pursuant to the
Offer, on September 6, 2012, our indirect wholly-owned subsidiary acquired
approximately 93.8% of the outstanding Compton Shares. On September 11, 2012, we
completed a compulsory acquisition under the AlbertaBusiness Corporations Act, whereby our
indirect wholly-owned subsidiary acquired all the remaining outstanding Compton
Shares not already owned by us or our affiliates. As a result of such compulsory
acquisition, our indirect wholly-owned subsidiary acquired 100% ownership of
Compton. Total cash consideration paid to holders of Compton Shares under the
Offer and compulsory acquisition was C$32.9 million.

In connection with the Support
Agreement, on July 16, 2012, our indirect wholly-owned subsidiary acquired
6,548,498 special warrants, referred to as the "Warrants", in the capital of
Compton, at a price of C$1.25 per Warrant. On September6, 2012, as a result of the conversion of the Warrants, our indirect
wholly-owned subsidiary, acquired an additional 6,548,498 Compton Shares. No
additional consideration was paid in connection with the conversion of the
Warrants.

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The following diagram describes the
ownership of Compton:

MFC
      Industrial Ltd.(British Columbia)100%Compton
      Petroleum(Austria) GmbH(Austria)100%MFC
      Acquisition Inc.(British Columbia)100%Compton
      PetroleumCorporation(Alberta)


As a result of the completion of the
Offer and related transactions, we have consolidated Compton's operations since
September 7, 2012.

Acquisition Rationale We determined to pursue and complete the
acquisition of Compton for, among other things, the following key reasons:

- to significantly expand our global commodities
  platform into the energy sector;
- the price paid under the Offer was attractive and
  below Compton's net asset value, which resulted in our recognition of a
  bargain purchase of $244.6 million for the year ended December 31, 2012 in
  connection with the acquisition of Compton;
- Compton's operations include significant midstream
  facilities, which present an opportunity for growth through value-added
  projects and the consolidation of regional gas production to such
  facilities;
- in addition to its producing properties, Compton
  has a significant undeveloped land package, which, as at December 31, 2012,
  included 309,782 net undeveloped acres which can be further developed; and
- at the time we completed the Offer, our
  acquisition cost per mcf equivalent for Compton's proved and probable natural
  gas, NGL and oil reserves was approximately $0.10 based on Compton's most
  recent reserves estimates prior to completion of the Offer, which were as of
  June 30, 2012. Please note that these reserves estimates are historic in
  nature, do not represent our reserves as at December 31, 2012 and were
  prepared by Compton based upon Canadian securities requirements under NI
  51-101 and are not comparable to the updated reserves figures
  that we have prepared in accordance with SEC requirements, which are disclosed
  elsewhere in this annual report on Form 20-F.

Acquisition of ACCR and
Possehl

In November 2012, we acquired a
controlling interest in each of ACCR and Possehl, which are based in New Jersey,
U.S.A. and Mexico City, Mexico, respectively. ACCR and Possehl are fully
integrated commodity supply chain companies, specializing in industrial raw
materials, chemicals and various other products. The aggregate purchase price
for a 80% interest in ACCR and a 60% interest in Possehl was approximately $23.2
million. We paid $14.7 million of the purchase price in 2012 and $6.2 million in
January 2013 for a 70% interest in ACCR and 60% interest in Possehl. An
additional $2.3 million is payable by us in November 2013 at which time we will
acquire an additional 10% interest in ACCR. The purchase price is subject to
adjustment based on pending valuations of real property and occurrence of
certain adjustment events. In addition, the underlying agreements provide for,
among other things, the future acquisition of additional interests in ACCR and
Possehl in certain circumstances.

The acquisition of ACCR and Possehl
expanded our existing global supply chain network, reaching further into North
and Latin American markets. Additionally, as ACCR's and Possehl's product base
included various products that were not previously in our commodities platform,
the acquisition has resulted in an expansion of our commodities operations into
new products, including refractory and ceramic materials, such as bauxite, flint
clay, magnesium oxide, alumina cements and chrome ore, talcs and plastics,
industrial chemicals and other products.

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Acquisition Rationale We entered into the transaction to acquire
controlling interests in ACCR and Possehl for, among other things, the following
key reasons:

- the transaction price was based on the net
  tangible asset value of the assets, which is consistent with our acquisition
  strategy;
- there are significant synergies between our global
  commodity supply chain business and the businesses of ACCR and
  Possehl;
- the acquisition presented an attractive
  opportunity to expand the geographic reach of our global commodity supply
  chain business further into the North American and Latin American markets and
  increase our customer base with new customers and industries;
- ACCR's and Possehl's existing management team and
  personnel complement and enhance our existing team; and
- it allowed us to diversify the scope of our global
  commodity supply chain business into new and unique commodities.

Acquisition of Kasese Cobalt Company
Limited

Pursuant to an asset purchase agreement
with a vendor, in March 2012, we acquired a shareholder loan held by the vendor
and a 75% controlling interest in Kasese Cobalt Company Limited, referred to as
"KCCL", for cash consideration of $28.0 million. As a result of the acquisition,
we hold a mineral refinery plant and power plant in Uganda. KCCL's operations
comprised the recovery of cobalt metal from pyrite tailings located near its
refinery. Supply from the tailings pile for the refinery is expected to be
depleted by the end of 2013. A bargain purchase of $2.4 million was recognized
in connection with the acquisition.

Acquisition Rationale We completed the KCCL acquisition for, among
other things, the following key reasons:

- the acquisition of KCCL presented an opportunity
  for us to leverage our experience to complete the closure of KCCL's mining
  operations and rationalize its assets;
- the acquisition allowed us to acquire the related
  power plant, which presented a potential upside opportunity in connection with
  the sale of energy production; and
- the opportunity to realize upon the benefits of
  reducing the general and administrative costs of KCCL.

Dividend Payments

In 2012, pursuant to our previously
announced annual dividend policy, we declared and paid a cash dividend of $0.22
per common share, which was paid in four quarterly installments throughout the
year. On January 14, 2013, we announced that our board of directors had declared
an annual cash dividend for 2013 of $0.24 per common share, payable in four
quarterly installments. The 2013 dividend is approximately 9% higher than the
dividend paid in 2012, and, based on the closing price on December 31, 2012 of
$8.55 on the New York Stock Exchange, referred to as the "NYSE", represents a
dividend yield of approximately 2.81%, compared to an annual dividend yield of
approximately 2.5% for the NYSE Composite Index in 2012. The first 2013 dividend
payment of $0.06 per share was made on February 8, 2013 to shareholders of
record on January 25, 2013. On April 1, 2013 we announced that the second
dividend payment for 2013, of $0.06 per share, would be made on April 22, 2013
to shareholders of record on April 12, 2013.

B. Business Overview

We are a global commodities supply
chain company, which sources and delivers commodities and materials to clients,
with a special expertise on the financing and risk management aspects of the
business.

Business Segments

Our business is divided into three
reportable segments: (i) commodities and resources, which includes our
commodities activities and mineral and energy resources; (ii) merchant banking,
which includes structured solutions, financial services and proprietary investing activities; and (iii) other, which encompasses
our corporate and other investments and business interests, including our
medical supplies and servicing business and corporate.

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Commodities and
Resources

Our commodity supply chain business is
globally focused and includes our integrated commodities operations and our
mineral interests. We conduct such operations primarily through our subsidiaries
based in Vienna, Austria and our recently acquired subsidiaries in the United
States, Latin America and Canada, and supply various commodities, including
minerals and metals, chemicals, plastics, refractory and ceramic materials and
wood products to our customers. As a result of our acquisition of Compton in the
third quarter of 2012, we are now active in the energy sector of the commodities
business through our natural gas and other hydrocarbon production and processing
activities in Alberta, Canada. Our commodities originate either from our
directly or indirectly held interests in resource projects or are secured by us
from third parties. We also derive production royalty revenue from a mining
sub-lease.

Through our global commodity supply
chain business, we also provide logistics, supply chain management and other
services to producers and consumers of commodities. These activities are
supported by strategic direct or indirect investments in natural resource assets
operating in our core commodities, including plastics, non-ferrous metals and
minerals.

Our commodities operations include
sourcing and supplying commodities. To a lesser extent, we also act as an agent
for our clients. Our commodities operations often utilize innovative trading
strategies and structures. We currently engage in purchases and sales with
commodity and other producers who are unable to effectively realize sales due to
their specific circumstances.

We often purchase or produce the
underlying commodity and sell it to an end buyer or transfer it for another
commodity, which will subsequently be sold. Further, commodity producers and end
customers often work with us to better manage their internal supply chain,
distribution risk and currency and capital requirements. In such commodities
operations, we try to capture various commodities, financing and currency
spreads. Through our operations, we have been able to develop ongoing
relationships with commodity producers, end customers and financiers and
integrate them into our financial activities.

We generally source commodities from
Asia, Africa, Europe, North America and the Middle East. Our commodities are
sold in global markets.

Our commodities operations are
supported by our logistics and finance activities in order to provide cost
effective and efficient transportation, as well as the granting of payment terms
for working capital requirements for our customers and partners.

Our commodities and resources business
employs personnel worldwide. Our main marketing office is located in Vienna,
Austria. In addition, we establish relationships with and seek to further market
our products through agents located worldwide. Our marketing and investment
activities in the commodities and resource sector are supported by a global
network of agents and relationships. This network provides us with worldwide
sourcing and distribution capabilities.

We had indirectly entered into
agreements with third party leaseholders of iron ore mines in India pursuant to
which our subsidiary was the sole contractor, and the third parties agreed to
sell iron ore to our subsidiary at a fixed price per ton based on the extraction
costs plus a royalty payment to the owner dependent upon the iron content.
During the year ended December 31, 2012, we recognized an inventory write-down
of $19.4 million as well as an impairment loss of $42.6 million on such
interests after the Supreme Court of India banned all mining activities in the
area. In aggregate, the total loss on the write-down and impairment was $48.2
million, net of an income tax recovery of $13.8 million. We sold these interests
in 2013 for nominal consideration and an interest in future cash flow if mineral
extraction actually resumes.

We indirectly derive production royalty
revenue from a mining sub-lease of the lands upon which the Wabush iron ore mine
is situated in Newfoundland and Labrador, Canada. This sub-lease commenced in
1956 and expires in 2055. The lessor is Knoll Lake Minerals Ltd., referred to as
"Knoll Lake Minerals", which holds a direct mining lease from the Province. The
mine is owned by Cliffs Natural Resources Inc., referred to as "Cliffs". In
August 2011, we reorganized our royalty asset to hold an indirect 99.44%
economic interest therein.

In 2012, 2011 and 2010, 3.1 million,
3.3 million and 3.8 million tons of iron pellets, respectively, were shipped
from Pointe Noire, Québec, Canada. Subsequent to the year ended December 31,
2012, Cliffs announced that it expects to idle the Wabush Pointe Noire pellet plant by the end of the second quarter 2013
and transition to producing an iron ore concentrate only product from the mine
due to high production costs and lower pellet premium pricing.

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Iron ore shipments from the Wabush iron
ore mine are subject to seasonal and cyclical fluctuations. The royalty is paid
quarterly and is based on the tonnage of iron ore products shipped. One of the
major components in the calculation of the royalty rate payable is based on the
most recently published price of a particular iron ore pellet. Pursuant to the
terms of the mining sub-lease, the royalty payment is not to be less than C$3.25
million per annum until its expiry. In 1988, the royalty rate was amended to
require a base royalty rate of C$1.685 per ton with escalations as defined in
the sub-lease. We are obligated to make royalty payments of C$0.22 per ton on
shipments of iron ore products to Knoll Lake Minerals, which holds the direct
lease over the mine property. Cliffs applies a portion of the royalty payments
under the sub-lease to make such royalty payments to Knoll Lake
Minerals.

Historically, iron ore benchmark prices
were determined in the first quarter of the calendar year through negotiations
between the major producers and their most significant customers. These prices
were then generally adopted by the other suppliers when published.

A shift in the marketplace has, among
other things, made obsolete certain of the world iron ore pellet pricing
methodology for calculating the royalty rate due to us contained in our
sub-lease for the Wabush iron mine. As a result of these market changes, and as
the sub-lease permits us to renegotiate an increase in the royalty rates when
the mine achieves certain profitability thresholds, which we believe have been
obtained, we served the mine operator with notice of arbitration respecting our
entitlement to a new base rate for the royalty. We have also provided the mine
operator with a notice of arbitration seeking recovery for royalty underpayments
in 2010 and a determination for the calculation of future royalty pricing. The
outcome of such proceedings cannot be determined at this time.

Iron ore is typically sold either as a
concentrate, whereby the iron ore is in granular form, or as a pellet, whereby
iron ore concentrate has been mixed with a binding agent, formed into a pellet
and then fired in a furnace. Iron ore pellets can be charged directly into blast
furnaces without further processing and are primarily used to produce pig iron
which is subsequently transformed into steel. The ore resources at the Wabush
mine contain manganese in quantities that make the resulting iron ore
concentrates unattractive to some steel plant customers. The operator of the
mine has announced that it is addressing this by installing mill components that
reduce manganese content, with the final plant reconfiguration requiring four to
six independent manganese reduction circuits, two of which were installed in
2011. The operator of the mine has indicated that this manganese reduction
program would extend the mine life by six years.

The following table sets forth
historical total iron ore shipments (which include pellets, chips and
concentrates) and royalty payments to us based upon the amounts reported to us
by the Wabush mine operator:

|     |  |                                             |     |       |    |       |       | Gross  
|---- |  | ------------------------------------------- | --- | ----- | -- | ----- | ----- | -------
|     |  |                                             |     |       |    |       |       | Average
|     |  | **Tonnage Shipped**                         |     | Total |    | Gross |       | Royalty
|     |  |                                             |     |       |    |       |       |        
|Year |  |                                             | Q1  |       | Q2 |       | Q3    |        
|     |  | (In thousands, other than the Royalty Rate)
|     |  | (All monetary amounts in Canadian dollars) 
|2006 |  |                                             | 751 |       |    |       | 1,296 |        
|2007 |  |                                             | 472 |       |    |       | 1,607 |        
|2008 |  |                                             | 694 |       |    |       | 1,437 |        
|2009 |  |                                             | 402 |       |    |       | 386   |        
|2010 |  |                                             | 874 |       |    |       | 941   |        
|2011 |  |                                             | 719 |       |    |       | 796   |        
|2012 |  |                                             | 482 |       |    |       | 911   |        

|Notes:
|------
|(1)   
|(2)   

In the fourth quarter of 2011, along
with Alberici, we acquired the Pea Ridge Iron Ore Mine, located near Sullivan,
Missouri, U.S.A. We previously acquired various secured debt and interests
respecting the properties underlying the Pea Ridge Mine, with our investment
being approximately $12.1 million in 2011 to acquire our indirect 50% interest
in the Pea Ridge Mine. Pursuant to the transaction, the previous owners retained
a 2.6% net smelter returns royalty on ferrous minerals produced at the mine.
Additionally, the previous owners hold 70% of another entity which has a mineral
license respecting non-ferrous minerals at the mine, with the remaining 30% of
such entity indirectly held jointly by us and Alberici.

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The Pea Ridge Mine is located
approximately 70 miles southwest of St. Louis, Missouri and was operated as an
underground mine between 1963 and 2001, producing approximately 58.5 million
short tons during such period. The mine was originally developed as a
partnership between Bethlehem Steel Corporation and St. Joe Minerals Corp.,
operating as the Meramec Mining Company. From 1981 to 1987 the mine was operated
by Fluor Corporation and was subsequently acquired by Woodridge Resources
Corporation, which operated the mine until its closure in 2001. From 2001 until
we acquired our interest in the Pea Ridge Mine, operations at the mine had been
limited to reclamation of resource settlement ponds located below the historical
production facilities.

The Pea Ridge Mine project includes the
historic mine deposit along with a large tonnage of tailings material. Prior
infrastructure remains in place, including access to underground workings, two
vertical mine shafts with hoists and headframes, a plant building and tailings
and settling ponds. The Pea Ridge Mine's location is served by highways
connecting to the U.S. interstate highway system and has a presently unused rail
spur line connecting to the Union Pacific railway system.

During 2012, we and our partner,
Alberici, continued to study the re-opening of the Pea Ridge Mine. During the
second quarter of 2012, we completed an updated independent NI 43-101 compliant
technical report, referred to as the "Pea Ridge Technical Report", upgrading
previously disclosed historic resources estimates to current resource estimates.
Behre Dolbear and Company (USA), Inc., referred to as "Behre Dolbear", our
independent technical consultants, authored the Pea Ridge Technical Report. The
estimates include anin situ(originally present) measured and indicated resource of 248.7
million short tons at 52.87% magnetic iron and 57.82% total iron and an inferred
resource of 15.8 million short tons at 53.67% magnetic iron and 57.64% total
iron based on a cut-off grade of 40% magnetic iron.

In completing the Pea Ridge Technical
Report, Behre Dolbear conducted, among other things, an audit of historic drill
hole data and a confirmatory re-sampling and analysis program on the extensive
library of drill core maintained at the Pea Ridge Mine site.

Readers should refer to the full text
of the Pea Ridge Technical Report, titled "Technical Report on the PRR Mining
Pea Ridge Property" dated August 13, 2012, for further information regarding the
Pea Ridge Mine, a copy of which is available under our profile at www.sedar.com.

In addition to completion of the Pea
Ridge Technical Report, as part of the work necessary to evaluate the Pea Ridge
Mine for re-opening, we engaged the consulting firm Geotechnology, Inc. to
investigate the depth and shape of the top and bottom of the subsidence cave
zone which is present above the Pea Ridge Mine deposit. This work included
direct measurements of the size and extent of the cave zone within existing
vertical drill holes above a portion of the Pea Ridge Mine deposit. Having
received the results of such investigation, we are, together with our
consultants, considering additional steps in the evaluation of the cave zone,
including re-drilling several existing holes above the mineralized zone, and
conducting a three-dimensional detailed seismic survey over the Pea Ridge Mine
site. We believe that the results of this work will be useful in determining the
best way to develop and mine the iron deposit. Additionally, in 2012 we
commenced confirmatory exploration and development work in connection with the
large tonnage of tailings materials of the Pea Ridge Mine site.

A necessary step in completing further
analysis, including feasibility studies, and re-opening the Pea Ridge Mine is
dewatering the existing underground mine workings. De-watering activities have
been delayed while we complete further preliminary analysis and investigations
regarding the re-opening of the mine. In the year ended December 31, 2012, we
invested an additional $5.0 million of capital to progress the project.

As a result of our acquisition of
Compton, our commodities activities have expanded to the energy sector through
the development, production and processing of natural gas, NGLs and, to a far
lesser degree, crude oil in western Canada. The majority of such operations are
located in the central fairway of the Western Canada Sedimentary Basin,
primarily situated in the Province of Alberta. As at December 31, 2012, these
interests included 945producing natural gas wells, 17non-producing natural gas wells,
116producing oil wells, 7 non-producing oil wells and a land position that
includes 309,782net undeveloped acres. Our assets are situated in the following areas of
the Western Canada Sedimentary Basin: (i) the Rock Creek sands and other
Cretaceous sands in the Niton area of central Alberta; (ii) the Cretaceous and
Tertiary sands in Okotoks and Southern Alberta; (iii) the Mannville sands in the
High River area of southern Alberta; and (iv) the deeper, Belly River sands in
the Callum area of southern Alberta. For further information regarding our
natural gas and oil facilities, please see "Item 4: Information on the Company  D. Property, Plants and Equipment 
Natural Gas Interests".

21

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Merchant Banking

Our merchant banking operations include
merchant banking and financial services, third-party financing and other
services, proprietary investing and our real property. We seek to invest in many
industries, emphasizing those business opportunities where the perceived
intrinsic value is not properly recognized.

We use our financial and management
expertise to add or unlock value within a relatively short time period. Our
merchant banking activity is generally not passive, and we seek investments
where our financial expertise and management can add or unlock value.
Proprietary investments are generated and made as part of our overall merchant
banking activities and are realized upon over time, sometimes taking more than
one year. In addition, we often seek to acquire interests or establish
relationships with commodity producers to realize upon potential synergies. Such
interests can be acquired through purchases of, or investments in, commodity
producers, or through contractual arrangements with them, including off-take
agreements. The investments we make in commodity producers are part of our
merchant banking strategy. To a degree, our merchant banking and commodities and
resources businesses supplement each other, which results in synergies in our
overall business activities.

Our activities include making
proprietary investments through investing our own capital and utilizing our
expertise to capture investment opportunities. We seek to invest in businesses
or assets whose intrinsic value is not properly reflected in their share or
other price. Often such investments are in companies or assets that are under
financial, legal or regulatory distress and our services include resolving such
distress. Our investing takes many forms and can include acquiring entire
businesses or portions thereof, investing in equity, investing in the existing
indebtedness (secured and unsecured) of a business or in new equity or debt
issues. Our investing is generally not passive, and we invest where we believe
our expertise in financial restructuring and management and complementary
trading and corporate finance capabilities can add or unlock value. Our
investing in distressed businesses and/or assets can result in complex and
intricate legal issues relating to priorities, claims and other rights of
stakeholders. Such issues can result in our being involved in legal and other
claims as a result of our overall proprietary investment strategy. Our
proprietary investments are often made as a part of, or complementary to, our
commodities and resources activities.

We consider investment opportunities
where: (i) our existing participation in the marketing and production of
commodities provides expert insight; (ii) we can obtain a satisfactory return of
future capital investment; and (iii) such investment integrates with our
business. Our philosophy is to utilize our financial strength to realize the
commercial potential of assets in markets where we have a comprehensive
understanding of the drivers of value.

Our merchant banking operations provide
innovative finance services for corporate and trade finance transactions. We
focus on meeting the financial needs of small to mid-sized companies and other
business enterprises primarily in Europe and Asia. We believe that many of these
clients are underserviced by the large global investment banks and financial
service providers. We specialize in advising and structuring business
enterprises involved in unstructured and novel situations where a strong
financial partner is needed and traditional, off-the-shelf solutions are not
workable.

In addition, we utilize our established
relationships with international financial institutions, credit insurance and
factoring companies to provide flexible, customized financial tools, extensive
credit and risk management and structured solutions for our customers. Working
closely with our customers, our professional staff arrange support of hedging
and trading of materials, financing and risk management solutions.

Our merchant banking activities also
include leveraging our trading and financial experience and relationships to
provide trading services and trade finance services to our customers.

Our merchant banking business generates
revenues in the form of corporate and trade finance service fees and interest
income. We also realize gains from time to time on our proprietary investments,
upon their sale, the execution of an equity or debt restructuring, or the
completion of other forms of divestment.

Other

Our other segment includes our
corporate and other operating segments and investments, which include financing
joint ventures through our Shanghai, China-based subsidiary which provides
medical services, equipment and supplies.

22

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Company Strategy

Our primary and overriding business
objective is to enhance value and create wealth for our shareholders. The key
elements of our strategy include the following:

- Investing in Undervalued Opportunities.We seek to invest in businesses or assets
  whose intrinsic value is not properly reflected in their share price or where
  we perceive that our commodities and financial expertise and management can
  add or unlock value. These include investments in highly unstructured
  situations and in companies undergoing financial or operational stress. Such
  investments often involve severe time constraints, and, given our liquid
  resources, we are well positioned to capitalize on such opportunities. Unlike
  traditional companies in the financial services sector, our investing is
  generally not passive.
- Geographic Scope of Operations.We operate globally, so we supply a
  diversified range of commodities to our customers, develop new relationships
  with producers and consumers of commodities and selectively target new
  business and investment opportunities worldwide.
- Strategic Investments.Strategic investments in resource assets are an important
  component of our commodities trading activities and value added services. We
  pursue selective strategic acquisitions and alliances to support and
  strengthen our commodities operations as and when opportunities arise. We will
  continue to apply our investment criteria to our acquisitions, pursuing
  investments in assets that are of strategic importance to our core businesses.
  At the same time, we continue to evaluate dispositions of investments or
  assets, in particular when they are no longer deemed to support our core
  business or when attractive selling opportunities arise.
- Create Shareholder Value.The nature of our business is cyclical and affected by
  several factors that do not lend themselves to regular evaluation. Therefore,
  we do not evaluate our performance and do not believe we should be scrutinized
  in terms of our price-to-earnings multiple. We seek to grow our asset base and
  net worth and believe these are the best valuation measures for our
  business.
- Financial Profile.We seek to maintain
  our fiscal profile, so we can access necessary financing on competitive terms.
  In addition, we believe our fiscal approach helps us to manage acquisition
  risks and maintain a high level of liquidity.
- Risk Approach.We have adopted policies intended to mitigate and manage commodity
  price and counterparty risks associated with our commodities trading
  activities. For example, a substantial portion of our inventory of commodities
  is at any time under contract for sale at a pre-determined price. We also
  reduce the risk of non-payment by customers by imposing limits on open
  accounts extended to creditworthy customers and imposing credit support
  requirements for other customers.

Competitive Strengths

We believe that our competitive
strengths include the following:

- International Capabilities.Unlike other similarly sized companies, we have sought to
  develop a broad geographic scope rather than focusing on any one particular
  market. While many of our larger competitors have greater presences in more
  international markets, including merchant and investment banks, trading firms,
  brokerage firms, commercial banks and hedge funds, we believe our smaller size
  and collegiality allow us to work as a team on cross-border transactions
  better than many of our competitors.
- Liquidity.Liquidity is of critical importance to companies in the merchant
  banking industry and global commodity supply chain business and is key to
  strategic acquisitions to further expand and support our global commodity
  supply chain business. We therefore maintain liquidity in order to be able to
  capitalize on business opportunities in time sensitive transactions, fund our
  core businesses to continue to generate revenues, and fund a broad range of
  potential cash outflows in stressed environments, including financing
  obligations. Our approach to liquidity allows us to meet immediate obligations
  without needing to sell other assets or depend on additional funding from
  credit-sensitive markets, and affords us significant flexibility in
  structuring our affairs and managing through difficult funding environments.
  Historically, we have funded our businesses with cash generated from our
  operations.
- Independence.We are an independent company managed by our directors and officers,
  rather than part of a larger, diversified financial services institution. Such
  financial services companies can develop conflicts with their clients due to
  the large number of customers they service, their own investment and trading
  position and the broad range of products and services they offer. We believe
  that awareness of these potential conflicts has heightened and that such awareness has resulted
  in increased opportunities for independent firms like us in respect of merger,
  acquisition, restructuring and similar transactions.

23

---



- Management.We believe that our
  management has expertise in the global commodity supply chain business,
  including critical expertise with respect to our specialized financial
  services and corporate finance services internationally, including on
  corporate restructurings and mergers and acquisitions.
- Integrated Service Approach.We believe our logistics and financing
  activities allow us to provide a full-service solution to our commodities
  trading customers and suppliers. We are able to provide our customers and
  suppliers assistance with transportation and logistics as well as trading,
  hedging, financing and risk management services.
- Operating Structure Allows Prompt
  Response to Investment Opportunities.We
  have a lean operating structure and are therefore able to quickly assess
  whether a business venture represents an appropriate investment for us,
  responding promptly to all desirable business opportunities. We carefully
  select the business opportunities we investigate and do not move forward
  unless we have a high level of confidence that the opportunities fit within
  our objectives and core competencies.

Competitive Conditions

All segments of our business are
intensely competitive, and we expect them to remain so.

Our operations are relatively small
compared to our competitors. Many of our competitors have far greater financial
resources, a broader range of products and services, larger customer bases,
greater name recognition and marketing resources, a larger number of senior
professionals to serve their clients' needs, greater global reach and more
established relationships with clients than we do. These competitors may be
better able to respond to changes in business conditions, to compete for skilled
professionals, to finance acquisitions, to fund internal growth and to compete
for market share generally. Further many companies are engaged in the
acquisition of resource interests. We may also be at a competitive disadvantage
in acquiring such properties and interests as many competitors may have greater
financial resources and technical staff. Accordingly, there can be no assurance
that we will be able to compete successfully against other companies in
acquiring additional interests and resource properties.

The scale of our competitors in the
merchant banking business has increased in recent years as a result of
substantial consolidation among companies, especially in the banking and
financial industries. These firms have the ability to offer a wider range of
products than we do which may enhance their competitive position. They also have
the ability to support their businesses with other services such as commercial
lending in an effort to gain market share, which has resulted, and could further
result, in pricing pressure in our businesses.

We believe that our experience and
operating structure permit us to respond more rapidly to our clients' needs than
many of our larger competitors. These traits are important to small and
mid-sized business enterprises, many of which do not have large internal
corporate finance departments to handle their capital requirements. We develop a
partnership approach to assist clients. This often permits us to develop
multiple revenue sources from the same client. For example, we may purchase and
sell a client's products, or commit our own capital to make a proprietary
investment in its business or capital structure.

24

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C. Organizational Structure

The following table describes our
direct and indirect significant subsidiaries as at the date hereof, their
respective jurisdictions of organization and our beneficial interest in respect
of each subsidiary. The table excludes subsidiaries which only hold
inter-company assets and liabilities and do not have active businesses or whose
results and net assets did not materially impact our consolidated results and
net assets.

Country of
      Incorporation
    
    Beneficial
      Interest(1)MFC Commodities
    GmbH
    
    Austria
    
    
    100
    %MFC Trade & Financial Service
    GmbH
    
    Austria
    
    
    100
    %IC Managementservices
      GmbH
    
    Austria
    
    
    100
    %Compton Petroleum Austria GmbH
    
    Austria
    
    
    100
    %International Trade
      Services GmbH
    
    Austria
    
    
    100
    %MFC Metal Trading GmbH
    
    Austria
    
    
    100
    %Compton Petroleum
      Corporation
    
    Canada
    
    
    100
    %Kasese Cobalt Company Limited
    
    Uganda
    
    
    100
    %ACC Resources Co.,
      LP
    
    United States
    
    
    80
    %(2)ACC Resources S.R.L.
    
    Argentina
    
    
    80
    %(2)Possehl Mexico S.A. de
      C.V.
    
    Mexico
    
    
    60
    %AFM Aluminiumfolie Merseburg GmbH
    
    Germany
    
    
    55
    %MAW Mansfelder
      Aluminiumwerk GmbH
    
    Germany
    
    
    55
    %MFC (A) Ltd
    
    Marshall Islands
    
    
    100
    %MFC (D) Ltd
    
    Marshall Islands
    
    
    100
    %Brock Metals s.r.o.
    
    Slovakia
    
    
    100
    %M Financial
Corp.
    
    Barbados
    
    
    100
    %Mednet (Shanghai) Medical Technical
      Developing Co., Ltd
    
    China
    
    
    90
    %Hangzhou Zhe-er Optical
      Co. Ltd
    
    China
    
    
    46
    %MFC Corporate Services AG
    
    Switzerland
    
    
    100
    %


|Notes:
|------
|(1)   
|(2)   

D. Property, Plants and Equipment

Office Space

Our principal office is located at
Suite 1620  400 Burrard Street, Vancouver, British Columbia, Canada V6C 3A6. We
also maintain offices in Vienna, Austria, Hong Kong, Beijing and Shanghai,
China, New Jersey, U.S.A., Mexico City, Mexico, Buenos Aires, Argentina and
Calgary, Alberta, Canada.

We believe that our existing facilities
are adequate for our needs through the end of the year ending December 31, 2013.
Should we require additional space at that time, or prior thereto, we believe
that such space can be secured on commercially reasonable terms.

Royalty
Interest

We participate in a royalty interest
which consists of a mining sub-lease of the lands upon which the Wabush iron ore
mine is situated. For a discussion of the royalty interest, please see
"Item 4: Information on the Company  B.
Business Overview  Business Segments  Commodities and
Resources".

Pea Ridge
Mine

We hold a 50% interest in the Pea Ridge
Iron Ore Mine located in Sullivan, Missouri U.S.A. For a discussion of the Pea
Ridge Iron Ore Mine, please see "Item 4:
Information on the Company  B. Business Overview  Business Segments
Commodities and Resources".

25

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Natural Gas Interests

As a result of our acquisition of
Compton on September 6, 2012, our commodities activities have expanded to the
energy sector through the development, production and processing of natural gas
and NGLs in western Canada. The majority ofsuch
operations are located in the central fairway of the Western Canada Sedimentary
Basin, primarily situated in the Province of Alberta. As at December 31, 2012,
Compton had an interest in 945producing natural gas wells,
17non-producing natural gas wells, 116producing oil wells, 7 non-producing oil
wells and a land position that includes 309,782net working interest undeveloped
acres. Our assets are situated in the following areas of the Western Canada
Sedimentary Basin: (i) the Rock Creek sands and other Cretaceous sands in the
Niton area of central Alberta; (ii) the Cretaceous and Tertiary sands in Okotoks
and Southern Alberta; (iii) the Mannville sands in the High River area of
southern Alberta; and (iv) the deeper, Belly River sands in the Callum area of
southern Alberta.

The Niton area includes multi-zone,
liquids-rich, tight gas plays with production to date primarily coming from Rock
Creek and Ellerslie sandstones. We have a large number of mineral agreements
that cover specific zonal rights in this area. We have an average 71% working
interest in 93,000 gross acres of land to the base of the Rock Creek Member of
the Fernie Group. The Niton area has other productive zones that provide
opportunities to expand our development base by moving into other geological
horizons. These zones lie above the Rock Creek and include the Wilrich and
Notikewin sandstones of the Upper Mannville and Spirit River Group.

The Southern Plains is comprised
primarily of multi Belly River sands along with upper Edmonton Group coal bed
methane formations. As well, in select areas of Southern Alberta there are
productive Mannville sands. With control of 426,600 gross acres of land at an
average 88% working interest, this land base provides a significant multi-year,
low risk natural gas drilling inventory. Infrastructure is in place in the area
for future production increases.

Our High River asset is primarily a low
to medium permeability Basal Quartz channel sandstone pool, which is the
southern Alberta extension of the Lower Cretaceous Deep Basin gas
trend.

We also have interests in substantial
established infrastructure, which allows flexibility to effectively manage area
development and adjust operations accordingly. Overall, we operate over 50,000
horsepower of compression totaling 200 mmcf/d, of available field compression
capacity, having over 85 mmcf/d of operated processing capacity and over 2,000
km of pipeline infrastructure in place. Key facilities are as follows:

- Mazeppa Gas Processing Plant
  Through Compton, we provide the management team and corporate guidance for the
  Mazeppa Processing Partnership, referred to as "MPP", which has 100% ownership
  of the Mazeppa gas processing plant and the Mazeppa gas gathering system. The
  Mazeppa sour gas processing plant is located in the High River area and
  currently has production capacity of 90 mmcf/d (licensed plant capacity) of
  sour natural gas and 45 mmcf/d of sweet natural gas.
- High River In the High River area there is 9,150 horsepower
  installed with a gas compression capacity of 42.5 mmcf/d and 270 km of
  pipeline infrastructure in place. Volumes are all produced through the Mazeppa
  gas gathering system and sour gas processing plant.
- Southern Alberta
  Foothills The Callum and Cowley Gas
  Processing Plants with 100% plant ownership are currently capable of
  compressing 19 mmcf/d and ultimately processing 50 mmcf/d through the two
  existing facilities with the addition of field and/or plant compression. There
  is currently over 60 km of pipeline infrastructure in the operating area with
  minimal third party infrastructure in place.
- Edson, Niton, and
  McLeod This foothills area property has
  compression capacity of 23 mmcf/d utilizing over 6,400 horsepower, including
  the Compton McLeod River Gas Processing Plant with 23 mmcf/d of capacity with
  100% plant ownership. Additionally, there is over 185 km of pipeline
  infrastructure in the area.
- Shallow Gas
  Properties Our shallow gas infrastructure
  consists of over 110 mmcf/d of compression capacity utilizing 30,000
  horsepower with over 1,200 km of pipeline infrastructure in place. Final
  processing gas volumes are linked into the Nova/TransCanada pipeline systems
  at multiple sales locations.

Gas Reserves

We retained GLJ Petroleum Consultants,
referred to as "GLJ", to evaluate and prepare report on our natural gas
properties. All of our reserves are located in Alberta, Canada. Please refer to
Exhibit 15.3 of this Annual Report on Form 20-F for GLJ's report on their
evaluation and methodology.

26

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The following table sets forth our
company gross (working interest reserves, before royalty) and company net
(working interest reserves, including royalty) as at December 31, 2012.

|                                 |  | Reserves as
      of December 31, 2012
|-------------------------------- |  | --------------------------------------
|Category                         |  | Natural Gas                           
|                                 |  | Company                               
|                                 |  | Gross                                 
|                                 |  | (mmcf)                                
|Proved                           |  |                                       
|Developed Producing              |  | 131,960                               
|Developed
      Non-Producing    |  | 2,742                                 
|Undeveloped                      |  | 15,599                                
|Total Proved                     |  | 150,301                               
|Probable                         |  | 81,669                                
|Total Proved plus
      Probable |  | 231,970                               

Estimated reserves shown for the
producing properties have been projected on the basis of the extrapolation of
performance data where there was sufficient data to suggest a performance trend.
A significant percentage of the completions have extensive production histories
and provide substantial data with respect to performance trends. In some cases
the information suggests that recent well intervention work has been performed.
In such cases we have considered prior historical performance in estimating
future reserves. Projections for recently drilled wells have been prepared on
the basis of early performance data and/or well tests with consideration for the
performance trends observed in those wells with long production histories.
Probable reserves are higher risk than proved reserves and are generally
believed to be less likely to be accurately estimated or recovered than proved
reserves.

Estimates of total net proved reserves
are not filed with any U.S. federal authority or agency other than the SEC.

Our policies and practices regarding
internal controls over the recording of reserves are structured to objectively
and accurately estimate our gas and oil reserves quantities and present values
in compliance with the SEC's regulations and financial reporting standards. Our
controls over reserve estimates included retaining GLJ as our independent
petroleum and geological engineering firm. We provided information about our gas
and oil properties, including production profiles, prices and costs, to GLJ, and
they prepared their own estimates of the reserves attributable to our
properties, as of December 31, 2012. All of the information regarding reserves
in this annual report on Form 20-F is derived from the report prepared by GLJ.
The principal engineer at GLJ is Myron Hladyshevsky, P. Eng., who was
responsible for preparing our reserve estimates, has over 30 years of experience
in the oil and gas industry and is a professional engineer registered in the
Province of Alberta, Canada. He is also a member of the Society of Professional
Engineers in the Province of Alberta. GLJ's reserves estimates are reviewed by
our technical personnel and management, and our board of directors meets with
such personnel to discuss matters and policies related to our
reserves.

There are numerous uncertainties
inherent in estimating quantities of proved reserves, including many factors
beyond our control or the control of the reserve engineers. Reserve engineering
is a subjective process of estimating underground accumulations of gas and oil
that cannot be measured in an exact manner. The accuracy of any reserve or cash
flow estimate is a function of the quality of available data and of engineering
and geological interpretation and judgment. Estimates by different engineers
often vary, sometimes significantly. In addition, physical factors, such as the
results of drilling, testing and production subsequent to the date of an
estimate, as well as economic factors, such as an increase or decrease in
product prices that renders production of such reserves more or less economic,
may justify revision of such estimates. A significant reduction in our proved
reserves may result in a full cost ceiling limitation and/or an accelerated
depletion rate. Accordingly, reserve estimates could be different from the
quantities of gas and oil that are ultimately recovered. Please refer to
"Item 3: Key Information - D. Risk
Factors" for further information respecting
these risks.

Production, Prices and
Costs

The following table sets forth gas and
oil production, average prices and costs for the period from September 7, 2012,
being the date we consolidated Compton, until December 31, 2012.

27

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For the period between September 7 and
December 31, 2012, we produced 6,479 mmcf of natural gas, 123 mboe of natural
gas liquids (including sulphur) and 52 mbbl of crude oil, for total production
of natural gas, natural gas liquids and crude oil of 1,254 mboe. The following
table sets forth our average daily production by field for the period between
September 7 and December 31, 2012:

Natural Gas
    
    NGLs
    
    Crude Oil
    
    TotalArea
    
    
    (mcf/d)
    
    (bbl/d)(1)
    
    (bbl/d)
    
    (boe/d)High River
    
    
    14,853
    
    
    
    281
    
    
    
    12
    
    
    
    2,769Okotoks
    
    
    5,386
    
    
    
    198
    
    
    
    -
    
    
    
    1,096Callum
    
    
    3,671
    
    
    
    26
    
    
    
    -
    
    
    
    638Niton
    
    
    12,910
    
    
    
    532
    
    
    
    105
    
    
    
    2,788Others
    
    
    19,030
    
    
    
    19
    
    
    
    331
    
    
    
    3,521Total
    
    
    55,849
    
    
    
    1,056
    
    
    
    448
    
    
    
    10,812


|Note:
|-----
|(1)  

The following table sets our average
sales prices, operating costs, royalty amounts and transportation costs for the
period between September 7 and December 31, 2012:

Natural Gas
    
    NGLs
    
    Crude Oil
    
    Total(C$/mcf)
    
    (C$/bbl)(1)
    
    (C$/bbl)
    
    (C$/boe)Price(2)
    
    
    C$
    3.12
    
    
    C$
    75.34
    
    C$
    78.90
    
    C$
    28.02Royalties
    
    
    
    0.47
    
    
    
    24.17
    
    
    17.73
    
    
    5.54Operating costs(3)
    
    
    
    1.32
    
    
    
    8.02
    
    
    9.95
    
    
    8.02Transportation
      costs
    
    
    
    0.13
    
    
    
    4.64
    
    
    4.64
    
    
    1.29


|Notes:
|------
|(1)   
|(2)   
|(3)   

Present Activities and Productive
Wells

During the period from September 7,
2012, being the date we consolidated Compton, until December 31, 2012, we did
not drill any wells.

The following table summarizes the
location of our interests as at December 31, 2012 in natural gas and crude oil
wells that are producing or that are mechanically capable of production.

|                  |  | Producing |                         | Non-producing |                            | Producing |                       | Non-producing |                          |       |                   |     |  |      
|----------------- |  | --------- | ----------------------- | ------------- | -------------------------- | --------- | --------------------- | ------------- | ------------------------ | ----- | ----------------- | --- |  | -----
|Area              |  |           | Natural Gas
      Wells |               | Natural Gas
      Wells(1) |           | Crude Oil
      Wells |               | Crude Oil
      Wells(1) |       | Total
      Wells
|                  |  | Gross     |                         | Net           |                            | Gross     |                       | Net           |                          | Gross |                   | Net |  | Gross
|Niton             |  | 122       |                         | 91            |                            | -         |                       | -             |                          | 12    |                   | 9   |  | -    
|High River        |  | 150       |                         | 124           |                            | 1         |                       | 1             |                          | 2     |                   | 2   |  | -    
|Okotoks, Southern |  |           |                         |               |                            |           |                       |               |                          |       |                   |     |  |      
|Plains            |  | 25        |                         | 24            |                            | -         |                       | -             |                          | -     |                   | -   |  | -    
|Callum Foothills  |  | 26        |                         | 25            |                            | -         |                       | -             |                          | -     |                   | -   |  | -    
|Other             |  | 622       |                         | 377           |                            | 16        |                       | 14            |                          | 102   |                   | 20  |  | 7    
|Total wells       |  | 945       |                         | 649           |                            | 17        |                       | 15            |                          | 116   |                   | 31  |  | 7    

|Note:
|-----
|(1)  

28

---



The following table sets forth the
acreage of our gross and net developed and undeveloped gas and oil properties,
all of which were located in Alberta, Canada, as at December 31, 2012.

|Type        |  |         | Gross Acres |         | Net Acres
|----------- |  | ------- | ----------- | ------- | ---------
|Developed   |  | 811,987 |             | 679,769
|Undeveloped |  | 358,455 |             | 309,782

Delivery Commitments

Compton's natural gas production is
sold to creditworthy counterparties under contracts at AECO Daily Index price
sales with transactions at TransCanada Pipeline Nova Inventory Transfer. Natural
gas is transported through regulated pipelines in the Province of Alberta at
tariffs which require either Provincial or Federal regulatory approval.

NGLs are re-priced on an annual basis
with respect to product premiums with the base price for each component
reflecting posted prices. Compton's crude oil sales are priced at market using
Edmonton postings as a benchmark and are typically 30-day evergreen contracts.
NGLs and crude oil are transported to the point of sale to creditworthy
counterparties using a combination of pipelines and trucking
services.

From time to time, Compton may enter
into hedging arrangements to mitigate commodity price risk and take advantage of
opportunistic pricing. Compton's risk management policy provides comprehensive
guidance that allows management to enter into hedging transactions that mitigate
risk from commodity prices, interest rates, foreign exchange rates and
electricity prices. The policy specifically prohibits speculative hedging and
sets limits on the volume and length of hedging contracts. The hedging policy
provides for hedging of up to 50% of gross budgeted volumes for any particular
quarter for a period up to 24 months from the day they are entered into.

ITEM 4A: UNRESOLVED STAFF COMMENTS

None.

ITEM 5: OPERATING AND FINANCIAL
REVIEW AND PROSPECTS

The following discussion and
analysis of our financial condition and results of operations for the
fiscalyears ended December 31, 2012, 2011 and 2010 should be read in
conjunction with our audited consolidated financial statements and related notes
included in this annual report on Form 20-F. Our financial statements included
in this annual report on Form 20-F were prepared in accordance with IFRS. We
adopted IFRS as of January 1, 2010.

General

We are a global commodities supply
chain company which sources and delivers commodities and materials to clients,
with a special expertise on the financing and risk management aspects of the
business. We also commit our own capital to promising enterprises and invest and
otherwise capture investment opportunities for our own account. We seek to
invest in businesses or assets whose intrinsic value is not properly reflected
in their share price or value. Our investing is generally not passive. We
actively seek investments where our financial expertise and management can add
or unlock value.

Our results of operations have been and
may continue to be affected by many factors of a global nature, including
economic and market conditions, the availability of capital, the level and
volatility of equity prices and interest rates, currency values, commodity
prices and other market indices, technological changes, the availability of
credit, inflation and legislative and regulatory developments. Our results of
operations may also be materially affected by competitive factors. Our
competitors include firms traditionally engaged in merchant banking and
financial services such as merchant and investment banks, along with other
capital sources such as hedge funds, private equity firms and insurance
companies, and other trade companies engaged in commodities activities in
Europe, Asia and globally.

Our results of operations for any
particular period may also be materially affected by our realization on
proprietary investments. These investments are made to maximize total return
through long-term appreciation and recognized gains on divestment. We realize on
our proprietary investments through a variety of methods including sales,
capital restructuring or other forms of divestment.

A majority of our revenues is derived
from our global commodity supply chain operations. The remaining portions are
generally derived from financial services, sales of properties and net gains on
securities.

29

---



We view our net book value per share as
a key indicator of our overall financial performance. Our net book value as at
December 31, 2012, 2011 and 2010 is set forth below:

|                         |  | December
      31,                                                   |         | December
      31, |   | December
      31,
|------------------------ |  | -------------------------------------------------------------------- | ------- | ------------------ | - | ------------------
|                         |  | 2012(1)                                                              |         | 2011               |   | 2010(2)           
|                         |  | (United
      States dollars in thousands, except per share amounts)
|Net book value           |  | $                                                                    | 757,197 |                    | $ | 546,623           
|Net book value per share |  |                                                                      | 12.11   |                    |   | 8.74              

|Notes:
|------
|(1)   
|(2)   

Business Environment

Our financial performance is, and our
consolidated results in any period can be, materially affected by global
economic conditions and financial markets generally.

Our favourable business environment is
characterized by many factors, including a stable geopolitical climate,
transparent financial markets, low inflation, low interest rates, availability
of credit, low unemployment, strong business profitability and high business and
investor confidence. Unfavourable or uncertain economic and market conditions
can be caused by declines in economic growth, business activity or investor or
business confidence, limitations on the availability or increase in the cost of
credit and capital, increases in inflation, interest rates, exchange rate
volatility, outbreaks of hostilities or other geopolitical instability,
corporate, political or other scandals that reduce investor confidence in the
capital markets, or a combination of these or other factors.

Commencing in mid-2008 and continuing
through most of 2009, the macro business environment for many of our activities
was extremely challenging. During such period, capital and securities markets
generally were materially and adversely affected by significant declines in the
values of nearly all investment classes and by a serious lack of liquidity. The
global markets were characterized by substantially increased volatility and an
overall loss of investor confidence, initially in financial institutions, but
later in companies in a number of other industries and in the broader markets.
The decline in asset values has caused increases in margin calls for investors,
requirements that derivatives counterparties post additional collateral and
redemptions by mutual and hedge fund investors, all of which have increased the
downward pressure on asset values and outflows of funds across the financial
services industry. In addition, increased redemptions and unavailability of
credit caused hedge funds and other investors to rapidly reduce leverage, which
has increased volatility and further contributed to the decline in asset
values.

Ongoing global economic conditions,
including fears of sovereign debt default and a European banking crisis
continued to impact the liquidity in financial and capital markets, restricting
access to financing and causing significant volatility in commodity prices in
2012. There can be no assurance as to the stabilization and recovery of economic
conditions in the near term.

Presentation of Financial
Information/Accounting Treatment

We completed our acquisition of Compton
in September 2012, and, as a result, we commenced consolidating Compton's
operation from September 7, 2012.

We completed our acquisition of Mass in
November 2010 and caused the amalgamation of Mass and our wholly-owned
subsidiary in December 2010. As a result of the successful acquisition, we
commenced consolidating Mass's operations, including its commodities and
merchant banking activities from November 16, 2010.

Until March 30, 2010, we also operated
in the Industrial Business through KID. As at March 30, 2010, we completed a
plan of arrangement pursuant to which, among other things, we distributed
approximately 26% of the outstanding shares of our Industrial Business (at such
time) to our shareholders and ceased to consolidate it as at March 31, 2010. We
distributed the Industrial Business to our shareholders over the course of
2010.

The disposition of our former
Industrial Business in 2010 resulted in it being accounted for as discontinued
operations.

30

---



Results of Operation

Summary of Quarterly
Results

The following tables
provide selected financial information for the most recent eight quarters
presented in accordance with IFRS:

December 31,
    
    
    September 30,
    
    June 30,
    
    March 31,2012
    
    2012(1)
    
    2012
    
    2012(United States dollars in thousands, except
      per share amounts)Net sales
    
    
    $
    110,416
    
    
    
    
    $
    118,597
    
    
    
    $
    104,445
    
    $
    146,049Equity income
    
    
    
    1,347
    
    
    
    
    
    1,515
    
    
    
    
    1,706
    
    
    1,584Total revenues
    
    
    
    111,763
    
    
    
    
    
    120,112
    
    
    
    
    106,151
    
    
    147,633Net
      income (loss) from continuing operations(2)
    
    
    
    (47,011
    )(3)
    
    
    
    
    245,760
    (4)
    
    
    
    11,061
    
    
    16,944Basic income (loss) from continuing
      operations, per share
    
    
    
    (0.75
    )(3)
    
    
    
    
    3.93
    (4)
    
    
    
    0.18
    
    
    0.27Diluted income (loss) from continuing operations, per
    share
    
    
    
    (0.75
    )(3)
    
    
    
    
    3.93
    (4)
    
    
    
    0.18
    
    
    0.27Net income (loss)(2)
    
    
    
    (47,011
    )(3)
    
    
    
    
    245,760
    (4)
    
    
    
    11,061
    
    
    16,944Basic earnings (loss), per share
    
    
    
    (0.75
    )(3)
    
    
    
    
    3.93
    (4)
    
    
    
    0.18
    
    
    0.27Diluted earnings (loss), per share
    
    
    
    (0.75
    )(3)
    
    
    
    
    3.93
    (4)
    
    
    
    0.18
    
    
    0.27


|Notes:
|------
|(1)   
|(2)   
|(3)   
|(4)   

December 31,
    
    September 30,
    
    June 30,
    
    March 31,2011
    
    2011
    
    2011
    
    2011(United States dollars in thousands, except
      per share amounts)Net sales
    
    
    $
    128,076
    
    
    
    
    $
    112,107
    
    
    $
    142,032
    
    $
    132,582Equity income
    
    
    
    1,383
    
    
    
    
    
    1,621
    
    
    
    1,653
    
    
    1,255Total revenues
    
    
    
    129,459
    
    
    
    
    
    113,728
    
    
    
    143,685
    
    
    133,837Net
      income (loss) from continuing operations(1)
    
    
    
    (9,410
    )
    
    
    
    
    6,686
    
    
    
    11,997
    
    
    2,920Basic income (loss) from continuing
      operations, per share
    
    
    
    (0.15
    )
    
    
    
    
    0.11
    
    
    
    0.19
    
    
    0.05Diluted income (loss) from continuing operations, per
    share
    
    
    
    (0.15
    )
    
    
    
    
    0.11
    
    
    
    0.19
    
    
    0.05Net income (loss)(1)
    
    
    
    (9,410
    )
    
    
    
    
    6,686
    
    
    
    11,997
    
    
    2,920Basic earnings (loss), per share
    
    
    
    (0.15
    )
    
    
    
    
    0.11
    
    
    
    0.19
    
    
    0.05Diluted earnings (loss), per share
    
    
    
    (0.15
    )
    
    
    
    
    0.11
    
    
    
    0.19
    
    
    0.05


|Note:
|-----
|(1)  

31

---



Year Ended December 31, 2012
Compared to the Year Ended December 31, 2011

The following table sets forth, for the
periods indicated, certain key operating results and other financial
information:

December 31,2012(1)
    
    2011(United
      States dollars in thousands,except per
      share amounts)Net sales
    $
    479,507
    
    $
    514,797Gross revenues
    
    485,659
    
    
    520,709Costs and
    expenses
    
    514,699
    
    
    502,595Costs of sales
    
    407,626
    
    
    435,392Impairment of
      available-for-sale securities
    
    4,265
    
    
    12,408Impairment of interests in resource
      properties
    
    42,631
    
    
    -Selling, general and
      administrative expense
    
    47,737
    
    
    40,378Share-based compensation expense
    
    9
    
    
    7,219Bargain
      purchase(2)
    
    247,004
    
    
    -Finance costs
    
    12,431
    
    
    7,198Income (loss) from
      operations
    
    (29,040
    )
    
    18,114Net income(3)
    
    226,754
    
    
    12,193Earnings per
    share:Basic
    
    3.62
    
    
    0.19Diluted
    
    3.62
    
    
    0.19


|Notes:
|------
|(1)   
|(2)   
|(3)   

The following is a breakdown of our
gross revenues by segment for each of the years ended December 31, 2012 and
2011:

December
      31,2012
    
    2011(United States dollars in
      thousands)Gross Revenues:Commodities and resources
    
    $
    455,898
    
    $
    481,677Merchant banking
    
    
    11,751
    
    
    22,487All
      other
    
    
    18,010
    
    
    16,545$
    485,659
    
    $
    520,709


The following charts illustrate our
revenues by business segment and geographic distribution in fiscal year ended
December 31, 2012:

|Revenues by Business Segment | Revenues by Region
|---------------------------- | ------------------
|                             |                   
|                            
|                            

Based upon the
yearly average exchange rates for the year ended December 31, 2012, the United
States dollar increased by approximately 8.3% and 1.1% in value against the Euro
and the Canadian dollar, respectively, compared to the average exchange rates in
2011. As at December 31, 2012, the United States dollar had decreased by
approximately 1.6% against the Euro and 2.2% against the Canadian dollar since
December 31, 2011.

32

---



Gross revenues for the year ended
December 31, 2012 decreased to $485.7 million (consisting of net sales of $479.5
million and equity income from medical joint ventures of $6.2 million) from
$520.7 million (consisting of net sales of $514.8 million and equity income from
medical joint ventures of $5.9 million) in the same period of 2011, primarily as
a result of decreased sales of commodities due to reductions in both volumes and
prices on some commodities in 2012, partially offset by new products and the
consolidation of Compton since September 7, 2012. A weaker Euro also had an
adverse impact on our revenues when Euro-denominated revenues were translated to
U.S. dollars.

Gross revenues for our commodities and
resources business were $455.9 million for the year ended December 31, 2012,
compared to $481.7 million for the same period in 2011, primarily as a result of
decreased sales of commodities due to reductions in both volumes and prices of
some commodities in 2012, partially offset by new products and the consolidation
of Compton since September 7, 2012.

During the fiscal year ended December
31, 2012, gross revenues generated by our royalty marginally decreased to
approximately $29.1 million from approximately $30.8 million in the same period
in 2011. This decrease in gross royalty revenues was mainly attributable to
lower shipments in 2012. A total of 3.2 million tons and 3.5 million tons of
iron ore products were shipped during the fiscal years ended December 31, 2012
and 2011, respectively.

Gross revenues for our merchant banking
business were $11.8 million for the year ended December 31, 2012, compared to
$22.5 million for the same period in 2011, primarily as a result of lower
activities.

Gross revenues for our other segment
were $18.0 million for the year ended December 31, 2012, compared to $16.5
million for the same period in 2011.

Costs of sales decreased to $407.6
million during the fiscal year ended December 31, 2012 from $435.4 million for
the same period in 2011, primarily as a result of a decrease in commodities and
resource activities, partially off-set by a write-down of inventories of $15.7
million (of which $19.4 million related to our former Indian iron ore
activities, which we recognized after the Supreme Court of India banned all
mining activities in the area). The following is a breakdown of our costs of
sales for each of the years ended December 31, 2012 and 2011:

December
      31,2012
    
    2011(United States dollars in
      thousands)Commodities and resources
    $
    382,232
    
    
    $
    414,745Expiry of exploration and evaluation assets
    
    931
    
    
    
    -Loss on securities, net
    
    -
    
    
    
    4,314Credit recovery on loans and receivables
    
    (521
    )
    
    
    (530
    )Change in fair value of investment
      property
    
    (14
    )
    
    
    56Market value decrease on commodities
    
    1,509
    
    
    
    4,422Loss on derivative contracts, net
    
    57
    
    
    
    -Write-off (recovery) of inventories
    
    15,659
    
    
    
    (29
    )Other
    
    7,773
    
    
    
    12,414Total cost of
    sales
    $
    407,626
    
    
    $
    435,392


Selling, general and administrative
expenses, excluding share-based compensation, increased to $47.7 million for the
year ended December 31, 2012 from $40.4 million for the same period of 2011. The
increase is primarily linked to expenses incurred in connection with the
acquisition of Compton during the period and its consolidation since September
7, 2012, partially offset by savings associated with streamlining our
activities.

We recognized an impairment of interests
in resource properties of $42.6 million (before income tax recovery of $13.8
million) for the year ended December 31, 2012 in connection with a subsidiary
that had engaged in iron ore activities in India. We recognized the impairment
after the Supreme Court of India banned all mining activities in the area. The
total impairment and write-down, net of income tax recovery, was $48.2 million
for the year ended December 31, 2012 in relation to these interests. These
interests were sold in 2013.

Impairment of available-for-sale
securities was $4.3 million in 2012, compared to $12.4 million in 2011. It
represents an other-than-temporary impairment charge on our investment
portfolio.

During the year ended December 31,
2012, non-cash and discretionary share-based compensation expense decreased to
$9,000 from $7.2 million for the same period in 2011 as a result of granting
2,635,000 options to our directors and employees in January 2011.

During the year ended December 31,
2012, we incurred finance costs of $12.4 million, primarily related to our
commodities business, compared to $7.2 million for the year ended December 31,
2011. Such finance costs increased as a result of increased interest payments on
our long term debt and credit facilities.

33

---



For the year ended December 31, 2012,
we incurred a net foreign currency transaction gain of $7.1 million, compared to
a loss of $0.9 million for the same period in 2011, in the statement of operations.

We recognized a bargain purchase of
$247.0 million, or $3.95 per share, during the year ended December 31, 2012,
primarily in connection with the acquisition of Compton. The bargain purchase
arose as the consideration under the transaction was less than the fair market
value of the net identifiable assets acquired.

We recognized an income tax recovery
(other than resource property revenue taxes) of $8.5 million during the year
ended December 31, 2012, compared to a provision for income taxes of $1.3
million during the year ended December 31, 2011. Our statutory tax rate was 25%
during the year ended December 31, 2012 compared to 26.5% for the same period in
2011, and our effective tax rates are lower than our statutory tax rates in the
current period. The income tax paid in cash during the year ended December 31,
2012 was $4.9 million compared to $1.0 million for the same period in 2011.

We also recognized resource property
revenue taxes of $5.9 million during the year ended December 31, 2012 compared
to $4.6 million during the same period of 2011. The resource property revenues
tax rate was 20% on the gross royalty revenue, deducted at source, which is
reduced by 20% of deductible expenses. The increase in taxes was primarily a
result of a claim in the year ended December 31, 2012.

Overall, we recognized an income tax
recovery of $2.6 million (recovery of income taxes of $8.5 million and resource
property revenue taxes of $5.9 million) during the year ended December 31, 2012,
compared to an expense of $6.0 million (income taxes of $1.3 million and
resource property revenue taxes of $4.6 million) during the same period of
2011.

For the year ended December 31, 2012,
our income from continuing operations attributable to shareholders was $226.8
million, or $3.62 per share on a basic and diluted basis, compared to $12.2
million, or $0.19 per share on a basic and diluted basis, for the same period in
2011.

Year Ended December 31, 2011
Compared to the Year Ended December 31, 2010

The following table sets forth, for the
periods indicated, certain key operating results and other financial
information:

December 31,2011
    
    2010(1)(2)(United
      States dollars in thousands,except per
      share amounts)Net sales
    $
    514,797
    
    $
    84,476Gross revenues
    
    520,709
    
    
    85,430Costs and
    expenses
    
    502,595
    
    
    70,724Costs of sales
    
    435,392
    
    
    51,362Impairment of
      available-for-sale securities
    
    12,408
    
    
    -Selling, general and administrative
      expense
    
    40,378
    
    
    18,316Share-based compensation
      expense
    
    7,219
    
    
    72Finance costs
    
    7,198
    
    
    974Net income from continuing
      operations(3)
    
    12,193
    
    
    45,839Net loss from discontinued
      operations(3)
    
    -
    
    
    (15,523
    )Net
      income(3)
    
    12,193
    
    
    30,316Basic earnings (loss) per share:Continuing
      operations
    
    0.19
    
    
    1.28Discontinued
      operations
    
    -
    
    
    (0.43
    )Diluted earnings (loss)
      per share:Continuing
      operations
    
    0.19
    
    
    1.28Discontinued
      operations
    
    -
    
    
    (0.43
    )


Notes:


|(1) |  | We consolidated the operations of
      Mass from November 16, 2010.                                                                                            
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) |  | In 2010, we deconsolidated our
      Industrial Business, which resulted in it being accounted for as
      discontinued operations in our financial statements.
|(3) |  | Net income attributable to our
      shareholders.                                                                                                              

34

---



The following is a breakdown of our
gross revenues by segment for each of the years ended December 31, 2011 and
2010:

December 31,2011
    
    2010(United
      States dollars in thousands)Gross Revenues:Commodities and resources
    $
    481,677
    
    $
    76,478Merchant banking
    
    22,487
    
    
    4,821All other
    
    16,545
    
    
    4,131$
    520,709
    
    $
    85,430


The following charts illustrate our
revenues by business segment and geographic distribution in fiscal year ended
December 31, 2011:

|Revenues by Business
      Segment | Revenues by Region
|---------------------------------- | ------------------
|                                   |                   
|                                   |                   
|                                   |                   
|                                  

Based upon the yearly average exchange rates for the
year ended December 31, 2011, the United States dollar decreased by
approximately 4.7% and 4.0% in value against the Euro and the Canadian dollar,
respectively, compared to the average exchange rates in 2010. As at December 31,
2011, the United States dollar had increased by approximately 3.2% against the
Euro and 2.3% against the Canadian dollar since December 31, 2010.

Gross revenues for the year ended
December 31, 2011 increased to $520.7 million (consisting of net sales of $514.8
million and equity income from medical joint ventures of $5.9 million) from
$85.4 million (consisting of net sales of $84.5 million and equity income from
medical joint ventures of $1.0 million) in the same period of 2010, primarily as
a result of the inclusion of the results of the operations of Mass since
November 16, 2010.

Gross revenues for our commodities and
resources business were $481.7 million for the year ended December 31, 2011,
compared to $76.5 million for the same period in 2010, primarily as a result of
the inclusion of the results of operations of Mass since November 16, 2010.

During the fiscal year ended December
31, 2011, gross revenues generated by our royalty marginally decreased to
approximately $30.8 million from approximately $31.7 million (including royalty
payments respecting prior years of $11.2 million) in the same period in 2010.
This decrease in gross royalty revenues was mainly attributable to lower
shipments in 2011 and the inclusion of $11.2 million of royalty payments
respecting prior years including 2010. A total of 3.5 million tons and
3.8 million
tons of iron ore products were shipped during the fiscal years ended December
31, 2011 and 2010, respectively.

Gross revenues for our merchant banking
business were $22.5 million for the year ended December 31, 2011, compared to
$4.8 million for the same period in 2010, primarily as a result of the inclusion
of Mass since November 16, 2010.

Gross revenues for our other segment
were $16.5 million for the year ended December 31, 2011, compared to $4.1
million for the same period in 2010, primarily as a result of the inclusion of
Mass since November 16, 2010.

35

---



Costs of sales increased to $435.4
million during the fiscal year ended December 31, 2011 from $51.4 million for
the same period in 2010, primarily as a result of the consolidation of Mass's
operations from November 16, 2010. The following is a breakdown of our costs of
sales for each of the years ended December 31, 2011 and 2010:

December 31,2011
    
    2010(United
      States dollars in thousands)Commodities and
      resources
    $
    414,745
    
    
    $
    45,994Loss on securities, net
    
    4,314
    
    
    
    834Credit losses (recovery)
      on loans and receivables
    
    (530
    )
    
    
    795Change in fair value of investment
      property
    
    56
    
    
    
    294Write-down on real estate
      held for sale
    
    -
    
    
    
    241Market value decrease on
    commodities
    
    4,422
    
    
    
    -Loss on derivative
      contracts, net
    
    (29
    )
    
    
    2,010Other
    
    12,414
    
    
    
    1,194Total cost of
      sales
    $
    435,392
    
    
    $
    51,362


Impairment of available-for-sale
securities was $12.4 million in 2011, compared to $nil in 2010. It represents an
other-than-temporary impairment charge on our long-term investment portfolio.

Selling, general and administrative
expenses, excluding share-based compensation, increased to $40.4 million for the
year ended December 31, 2011 from $18.3 million for the same period of 2010. The
increase is primarily linked to the inclusion of Mass's operations since
November 16, 2010 and, in particular, employee compensation expenses.

During the year ended December 31,
2011, non-cash and discretionary share-based compensation expense increased to
$7.2 million from $0.1 million for the same period in 2010 as a result of
granting 2,635,000 options to our directors and employees in January 2011. The
options vested immediately, resulting in all share-based compensation expense
being fully recognized in the first quarter of 2011. The Company did not grant
additional options in 2011 and, accordingly, did not incur or report share-based
compensation expense over the remaining life of these options.

During the year ended December 31,
2011, we incurred finance costs of $7.2 million, compared to $1.0 million for
the year ended December 31, 2010. Such finance costs increased as a result of
increased interest payments on our long term debt and credit facilities and
factoring charges as a result of the inclusion of Mass since November 16,
2010.

For the year ended December 31, 2011,
we incurred a net foreign currency transaction loss of $0.9 million, compared to
$3.6 million for the same period in 2010, in the statement of operations.

We recognized a bargain purchase gain
of $41.1 million during fiscal year ended December 31, 2010 in connection with
the acquisition of Mass. The bargain purchase gain was included in our
statements of operations for the year ended December 31, 2010 and arose as the
market price of our common shares on the acquisition dates was less than the
fair value of the net identifiable assets acquired from Mass.

We recognized a provision for income
taxes (other than resource property revenue taxes) of $1.3 million and $0.2
million during the years ended December 31, 2011 and 2010. Our statutory tax
rate was 26.5% during the year ended December 31, 2011 compared to 28.5% for the
same period in 2010, and our effective tax rates are lower than our statutory
tax rates in the current period. The income tax paid in cash during the year
ended December 31, 2011 was $1.0 million compared to $3.0 million for the same
period in 2010.

We also recognized resource property
revenue taxes of $4.6 million during the year ended December 31, 2011, compared
to $6.7 million during the same period of 2010. The resource property revenues
tax rate was 20% on the gross royalty revenue, deducted at source, which is
reduced by 20% of deductible expenses. The lower taxes in 2011 are primarily a
result of a tax refund claim.

Overall, we recognized an income tax
expense of $6.0 million (income taxes of $1.3 million and resource property
revenue taxes of $4.6 million) during the year ended December 31, 2011, compared
to $7.0 million (income taxes of $0.2 million and resource property revenue
taxes of $6.7 million) during the same period of 2010.

For the year ended December 31, 2011,
our income from continuing operations attributable to shareholders was $12.2
million, or $0.19 per share on a basic and diluted basis, compared to $45.8
million, or $1.28 per share on a basic and diluted basis, for the same period in
2010.

36

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Liquidity and Capital Resources

General

Liquidity is of importance to companies
in our businesses. Insufficient liquidity often results in
underperformance.

Our objectives when managing capital
are: (i) to safeguard our ability to continue as a going concern so that we can
continue to provide returns for shareholders and benefits for other
stakeholders, (ii) to provide an adequate return to our shareholders by pricing
products and services commensurately with the level of risk, and (iii) to
maintain a flexible capital structure which optimizes the cost of capital at
acceptable risk. We set the amount of capital in proportion to risk. We manage
our capital structure and make adjustments to it in the light of changes in
economic conditions and the risk characteristics of the underlying assets. In
order to maintain or adjust this capital structure, we may adjust the amount of
dividends paid to shareholders, return capital to shareholders, issue new shares
or sell assets to reduce debt.

Consistent with others in our industry,
we monitor capital on the basis of our debt-to-adjusted capital ratio and
long-term debt-to-equity ratio. The debt-to-adjusted capital ratio is calculated
as net debt divided by adjusted capital. Net debt is calculated as total debt
less cash and cash equivalents. Adjusted capital comprises all components of
equity and some forms of subordinated debt, if any. The long-term debt-to-equity
ratio is calculated as long-term debt divided by shareholders' equity. The
computations are based on continuing operations. The following table sets forth
the calculation of our debt-to-adjusted capital ratio as at each of the periods
indicated:

|                                               |  | 2012(1)                                    |          | 2011           |  | 2010          
|---------------------------------------------- |  | ------------------------------------------ | -------- | -------------- |  | --------------
|                                               |  | (United
      States dollars in thousands)
|Total debt                                     |  | $                                          | 162,993  |                |  | $             
|Less: cash and cash equivalents                |  |                                            | (273,790 | )              |  |               
|Net debt (net cash and
      cash equivalents) |  |                                            | (110,797 | )              |  |               
|Shareholders' equity                           |  |                                            | 757,197  |                |  |               
|Debt-to-adjusted capital
      ratio           |  | Not
      applicable                       |          | Not applicable |  | Not
applicable

Note:


|(1) |  | This table does not include the
      MPP term financing as it involves a purchase option and future processing
      fees. See "MPP Term Financing".
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------

There were no amounts in accumulated
other comprehensive income relating to cash flow hedges nor were there any
subordinated debt instruments as at December 31, 2012, 2011 and 2010. The
debt-to-adjusted capital ratio in 2012, 2011 and 2010 was not applicable as we
had a net cash and cash equivalents balance.

The following table sets forth the
calculation of our long-term debt-to-equity ratio as at each of the periods
indicated:

|                                     |  | 2012(1)                                    |         | 2011 |   | 2010   
|------------------------------------ |  | ------------------------------------------ | ------- | ---- | - | -------
|                                     |  | (United
      States dollars in thousands)
|Long-term debt                       |  | $                                          | 118,824 |      | $ | 20,150 
|Shareholders' equity                 |  |                                            | 757,197 |      |   | 546,623
|Long-term debt-to-equity
      ratio |  |                                            | 0.16    |      |   | 0.04   

Note:


|(1) |  | This table does not include the
      MPP term financing as it involves a purchase option and future processing
      fees. See "MPP Term Financing".
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------

During 2012, our strategy, which was
unchanged from 2011 and 2010, was to maintain the debt-to-adjusted capital ratio
and the long-term debt-to-equity ratio at a low level. We had a net cash and
cash equivalent balance after deduction of the total debt. Our long-term
debt-to-equity ratio was 0.16, 0.04 and 0.09 as at December 31, 2012, 2011 and
2010, respectively.

37

---



Financial
Position

The following table sets out our
selected financial information as at the dates indicated:

|                                        |  | December 31,                              
|--------------------------------------- |  | ------------------------------------------
|                                        |  | 2012                                      
|                                        |  | (United States Dollars in
      thousands)
|Cash and cash equivalents               |  | $                                         
|Short-term securities                   |  |                                           
|Trade receivables                       |  |                                           
|Other receivables                       |  |                                           
|Inventories                             |  |                                           
|Assets held for sale                    |  |                                           
|Total assets                            |  |                                           
|Working capital                         |  |                                           
|Short-term bank borrowings              |  |                                           
|Long-term debt, less current portion(1) |  |                                           
|Shareholders' equity                    |  |                                           

Note :


|(1) |  | This amount does not include the
      MPP term financing as it involves a purchase option and future processing
      fees. See "MPP Term Financing".
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------

We maintain an adequate level of
liquidity, with a portion of our assets held in cash and cash equivalents and
securities. The liquid nature of these assets provides us with flexibility in
managing and financing our business and the ability to realize upon investment
or business opportunities as they arise. We also use this liquidity in
client-related services by acting as a financial intermediary for third parties
(e.g. by acquiring a position or assets and reselling such position or assets)
and for our own proprietary trading and investing activities.

As at December 31, 2012, cash and cash
equivalents were $273.8 million, compared to $387.1 million and $397.7 million
as at December 31, 2011 and 2010, respectively. The decrease in cash was
primarily a result of cash utilized to fund the acquisition of Compton and
related transactions and cash flows used in operating activities. We had assets
held for sale of $128.7 million as at December 31, 2012, compared to $nil as at
each of December 31, 2011 and 2010. As at December 31, 2012, short-term
securities decreased to $6.7 million from $13.1 million and $27.9 million as at
December 31, 2011 and 2010, respectively. The decrease in short-term securities
in 2011 was a result of dispositions. Trade receivables and other receivables
were $72.8 million and $18.3 million, respectively as at December 31, 2012,
compared to $21.2 million and $9.1 million at December 31, 2011 and $13.1 and
$12.1 million at December 31, 2010. The increase in trade receivables was
primarily a result of the consolidation of new subsidiaries. As at December 31,
2012, we had a loan receivable of $nil, compared to $19.9 million as at December
31, 2011 and $5.8 million as at December 31, 2010. The decrease in loan
receivable was a result of the collection of a credit facility. As at December
31, 2012, we had bills of exchange of $nil, compared to $10.5 million in 2011
and $nil in 2010. The decrease in bills of exchange in 2012 was a result of
collections in cash. The value of our inventories increased to $142.9 million as
at December 31, 2012, from $81.2 million and $67.1 million as at December 31,
2011 and 2010, respectively. The increased inventories were partially due to the
acquisition of new subsidiaries in 2012. The value of real estate held for sale
was $12.2 million as at December 31, 2012, compared to $12.0 million and $12.5
million as at December 31, 2011 and 2010, respectively. The value of deposits,
prepaid and other assets was $27.8 million as at December 31, 2012, compared to
$9.3 million and $20.8 million as at December 31, 2011 and 2010, respectively.
The increase in the value of deposits, prepaid and other assets was primarily a
result of prepayments and deposits for inventories and the consolidation of new
subsidiaries in 2012. As described herein and in the notes to our audited
financial statements for the year ended December 31, 2012, the acquisitions of
new subsidiaries had a material impact on our current assets.

Short-Term Bank Loans and
Facilities

As part of our operations, we
establish, utilize and maintain various kinds of credit lines and facilities
with banks and insurers. Most of these facilities are short-term. These
facilities are used for day-to-day business and structured solutions activities
in commodities. The amounts drawn under such facilities fluctuate with the kind
and level of transactions being undertaken.

As at December 31, 2012, we had credit
facilities aggregating $439.7 million as follows: (i) we had unsecured revolving
credit facilities aggregating $195.2 million from banks; (ii) we had revolving
credit facilities aggregating $63.8 million from banks for structured solutions,
a special trade financing. The margin is negotiable when the facility is used;
(iii) we had a non-recourse specially structured factoring arrangement with a
bank for up to a credit limit of $122.6 million for our commodities activities. We may factor
our commodity receivable accounts upon invoicing at the inter-bank rate plus a
margin; and (iv) we had a foreign exchange credit facility of $58.1 million with
a bank. All of these facilities are renewable on a yearly basis.

38

---



Long-Term Debt

Other than lines of credit drawn and as
may be outstanding for trade financing and commodities and structured solutions
activities, as of December 31, 2012, the maturities of long-term debt were as
follows:

|Maturity   |   | Principal |  | Interest |        | Total
|---------- | - | --------- |  | -------- | ------ | -----
|2013       | $ | 44,169    |  | $        | 4,239  |      
|2014       |   | 25,001    |  |          | 3,055  |      
|2015       |   | 21,833    |  |          | 2,391  |      
|2016       |   | 21,833    |  |          | 1,843  |      
|2017       |   | 21,833    |  |          | 1,275  |      
|Thereafter |   | 28,324    |  |          | 1,474  |      
|           | $ | 162,993   |  | $        | 14,277 |      

During the year ended December 31,
2012, we paid off $28.3 million of debt. We incurred additional long term debt
of $133.5 million consisting of €80.0 million in connection with our acquisition
of Compton and $28.0 million in connection with KCCL.

We expect our maturing debt to be
satisfied primarily through the settlement of underlying commodities
transactions, trade financing transactions, including structured solutions
transactions, cash on hand and cash flow from operations. Much of our maturing
debt may either subsequently be made re-available to us by the applicable
financial institution or we may replace such facilities with new facilities
depending upon particular capital requirements.

MPP Term Financing

As at December 31, 2012, we had
liabilities under the MPP term financing totaling $18.7 million as a result of
our consolidation of Compton in the third quarter of 2012, comprised of the
present value of monthly base processing fees, the outstanding purchase option
and unamortized financing fees. MPP is a limited partnership organized under the
laws of the Province of Alberta and owns certain midstream facilities, including
natural gas plants and pipelines in southern Alberta, through which Compton
processes a significant portion of its production from the surrounding area. The
arrangements with MPP are governed by agreements which provide for:

| | a. |  | Compton's management of the
      midstream facility;                                                                         
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------
| |   
| | b. |  | the payment to MPP of a base
      processing fee and the reimbursement of MPP's net out-of-pocket
      costs;               
| |   
| | c. |  | the dedication through April 30,
      2024 of production and reserves from the defined area through the
      facilities; and
| |   
| | d. |  | an option to purchase the MPP
      partnership at a predetermined amount on April 30,
  2014.                                

Notice of exercise of the above
purchase option has been provided to the respective counterparties.

Cash Flows

Due to the type of businesses we engage
in, our cash flows are not necessarily reflective of net earnings and net assets
for any reporting period. As a result, instead of using a traditional cash flow
analysis solely based on cash flows statements, our management believes it is
more useful and meaningful to analyze our cash flows by the overall liquidity
and credit availability. Please see the discussion on our financial position,
short-term bank loans, facilities and long term debt earlier in this section.

The global commodity supply chain
business can be cyclical and our cash flows vary accordingly. Our principal
operating cash expenditures are for financing trading of securities, commodities
financing and general and administrative expenses.

Working capital levels fluctuate
throughout the year and are affected by the level of our commodities operations,
the markets and prices for commodities and the timing of receivables and the
payment of payables and expenses. Changes in the volume of commodities
transactions can affect the level of receivables and influence overall working
capital levels. We have a sufficient level of cash on hand
and credit facility amounts. We believe that we have sufficient cash flows from
operations, cash on hand and credit availability to meet our working capital and
other requirements and to meet unexpected cash demands.

39

---



Cash Flows from Operating
Activities

Operating activities used cash of
$144.4 million in 2012, compared to providing cash of $44.7 million and $43.9
million in 2011 and 2010, respectively. In 2012, a decrease in short-term bank
borrowings for day-to-day business requirements used cash of $115.5 million,
compared to an increase in same providing cash of $49.8 million and a decrease
in same using cash of $4.9 million in 2011 and 2010, respectively. An increase
of inventories used cash of $36.5 million in 2012, compared to $22.8 million and
$4.4 million in 2011 and 2010, respectively. A decrease in bills of exchange, as
a result of collections in cash, provided cash of $10.5 million in 2012,
compared to an increase in bills of exchange using cash of $10.5 million and
$nil in 2011 and 2010, respectively. An increase in receivables used cash of
$12.9 million in 2012, compared to using cash of $8.3 million and providing $4.4
million in 2011 and 2010, respectively. An increase in deposits, prepaid and
other used cash of $8.9 million in 2012, compared to a decrease providing cash
of $10.8
million and $7.3 million in 2011 and 2010, respectively. A decrease in accounts
payable and accrued expenses used cash of $8.3 million in 2012, compared to $1.4
million and providing $1.0 million in 2011 and 2010, respectively. A decrease in
income tax liabilities used cash of $2.3 million in 2012, compared to an
increase in income tax liabilities providing cash of $0.8 million in 2011 and
$0.3 million in 2010. A decrease in deferred sale liabilities used cash of $15.1
million in the year ended December 31, 2012, compared to a decrease using cash
of $22.9 million in 2011 and an increase providing cash of $22.7 million in
2010. Changes in short-term securities provided cash of $7.2 million during
2012, compared to providing cash of $5.3 million and using cash of $0.4 million
in 2011 and 2010, respectively. An increase in assets held for sale in
connection with the committed sale program of our former subsidiary used cash of
$3.1 million in the year ended December 31, 2012, compared to $nil in each of
2011 and 2010. An increase in restricted cash used $0.3 million for 2012,
compared to decreases in restricted cash providing $2.9 million and $0.7 million in the
same periods of 2011 and 2010, respectively. An increase in short-term cash
deposits used cash of $16,000 during 2012, compared to using cash
of $4.1
million and $nil for 2011 and 2010, respectively. Other items provided cash of
$2.0 million in 2012, compared to using $0.4 million in 2011 and providing $1.7
million in 2010.

Cash Flows from Investing
Activities

Investing activities used cash of $55.7
million in 2012, compared to using cash of $36.5 million in 2011 and providing
cash of $224.2 million in 2010. Purchases of long-term securities used cash of
$5.1 million in 2012, compared to $37.5 million and $1.3 million in 2011 and
2010, respectively. Proceeds from sales of long-term investments provided cash
of $2.6 million in 2012, compared to $7.4 million and $13.5 million in 2011 and
2010, respectively. During 2012, a net decrease in a loan receivable provided
cash of $19.9 million, compared to a net increase using cash of $14.1 million and $1.7
million in 2011 and 2010, respectively. Purchases of property, plant and
equipment, net of sales, used cash of $2.1 million in 2012, compared to $1.2
million and $1.1 million in 2011 and 2010, respectively. Distributions from
joint ventures provided net cash of $7.6 million in 2012, compared to $5.1
million in 2011 and $0.9 million in 2010. The acquisitions of subsidiaries net
of cash acquired used cash of $78.5 million in 2012, compared to the acquisition
of a subsidiary net of cash acquired using cash of $95,000 in 2011 and the
acquisition of Mass net of cash acquired providing cash of $213.9 million in
2010. Other items used cash of $48,000 in 2012, compared to providing cash
of $3.8
million (primarily consisting of sales of investment property) and $0.1 million
in 2011 and 2010, respectively.

Cash Flows from Financing
Activities

Net cash provided by financing
activities was $83.4 million 2012, compared to using cash of $17.4 million in
2011 and providing cash of $46.2 million in 2010. A net increase in debt
borrowing provided cash of $105.2 million in 2012, compared to a decrease in
debt borrowing using cash of $4.3 million and $0.8 million in 2011 and 2010,
respectively. Cash used by financing activities during 2012 consisted of
dividends paid to our shareholders, dividends paid to non-controlling interests,
a reduction in facility term financing and the repurchase of shares pursuant to
our odd-lot repurchase program, used cash of $13.8 million, $0.7 million, $7.4
million and $44,000, respectively.

40

---



Our odd-lot share repurchase program
was completed on July 2, 2012. Pursuant to the program, we offered to buy back
common shares from registered and beneficial shareholders who owned 99 or fewer
common shares. Pursuant to the program, we repurchased and cancelled a total of
6,028 of our common shares from 455 registered and beneficial shareholders,
representing a 48.6% participation rate amongst registered eligible
shareholders. Shareholders who elected to participate in the repurchase program
received an amount equal to the weighted average of the closing prices of our
common shares on the NYSE during each of the initial six-week period of the
program and the six-week extension thereto for each common share
tendered.

Future
Liquidity

We had no material commitments to
acquire assets or operating businesses as at December 31, 2012. We expect that
there will be acquisitions of businesses or commitments to projects in the
future. To achieve the long-term goals of expanding our assets and earnings,
including through acquisitions, capital resources will be required. Depending on
the size of a transaction, the capital resources that will be required can be
substantial. The necessary resources will be generated from cash flows from
operations, cash on hand, borrowings against our assets, sales of proprietary
investments or the issuance of securities.

Foreign
Currency

Substantially all of our operations are
conducted in international markets and our consolidated financial results are
subject to foreign currency exchange rate fluctuations.

Our reporting currency is the United
States dollar. We translate subsidiaries' assets and liabilities, into United
States dollars at the rate of exchange on the balance sheet date. Revenues and
expenses are translated at exchange rates approximating those at the date of the
transactions. As a substantial amount of revenues are received in Euros, Chinese
yuans and Canadian dollars, the financial position for any given period, when
reported in United States dollars, can be significantly affected by the exchange
rates for Euros, Chinese yuans and Canadian dollars prevailing during that
period.

In the year ended December 31, 2012, we
reported approximately a net $7.9 million currency translation adjustment loss
under other comprehensive income within equity, compared to losses of $1.4
million and $3.9 million in 2011 and 2010, respectively.

Contractual
Obligations

The following table sets out our
contractual obligations and commitments as at December 31, 2012 in connection
with our long-term liabilities.

|                                    |  | Payments Due by Period(1)                 
|----------------------------------- |  | ------------------------------------------
|                                    |  | (United
      States dollars in thousands)
|                                    |  | Less
      than                           
|Contractual
      Obligations(2)(3) |  |                                           
|Long-term debt obligations          |  | $                                         
|Operating lease
      obligations   |  |                                           
|Purchase obligations                |  |                                           
|Puttable
    Instruments            |  |                                           
|Total                               |  | $                                         

Notes:


|(1) |  | Undiscounted.                                                                                                                                                                  
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) |  | The table does not include
      non-financial instrument liabilities and guarantees.                                                                                          
|(3) |  | The table does not include
      provisions for warranty and decommissioning obligations as such
      obligations may involve performance of physical activities and
    work.

Risk
Management

Risk is an inherent part of our
business and operating activities. The extent to which we properly and
effectively identify, assess, monitor and manage each of the various types of
risk involved in our activities is critical to our financial soundness and
profitability. We seek to identify, assess, monitor and manage the following
principal risks involved in our business activities: market, credit, liquidity,
operational, legal and compliance, new business, reputational and other. Risk
management is a multi-faceted process that requires communication, judgment and
knowledge of financial products and markets. Our management takes an active role
in the risk management process and requires specific administrative
and business functions to assist in the
identification, assessment and control of various risks. Our risk management
policies, procedures and methodologies are fluid in nature and are subject to
ongoing review and modification.

41

---



Inflation

We do not believe that inflation has
had a material impact on our revenues or income over the past two fiscal years.
However, increases in inflation could result in increases in our expenses, which
may not be readily recoverable in the price of services provided to our clients.
To the extent that inflation results in rising interest rates and has other
adverse effects on capital markets, it could adversely affect our financial
position and profitability.

Application of Critical Accounting
Policies

The preparation of financial statements
in conformity with IFRS requires our management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods.

Our management routinely makes
judgments and estimates about the effects of matters that are inherently
uncertain. As the number of variables and assumptions affecting the probable
future resolution of the uncertainties increase, these judgments become even
more subjective and complex. We have identified certain accounting policies that
are the most important to the portrayal of our current financial condition and
results of operations. Please refer to Note 1 to our audited consolidated
financial statements included in this annual report on Form 20-F for a
discussion of the significant accounting policies.

The following accounting policies are
the most important to our ongoing financial condition and results of
operations:

Inventories

Our inventories consist of raw
materials, work-in-progress and finished goods.

In general, inventories are recorded at
the lower of cost or estimated net realizable value. Commodities acquired in
commodity broker-trader activities with the purpose of selling them in the near
future and generating a profit from fluctuations in price or margin are measured
at fair value less costs to sell. Accordingly, our management must make
estimates about their pricing when establishing the appropriate provisions for
inventories. For the finished goods and commodity inventories, the estimated net
selling price is the most important determining factor. However, our management
also considers whether there are any alternatives to enhance the value of the
finished goods by various marketing strategies and channels. Actual selling
price could differ from the estimated selling price, and such differences could
be material.

Receivables

Receivables are financial instruments
that are not classified as held for trading or available for sale. They are net
of an allowance for credit losses, if any. We perform ongoing credit evaluations
of customers and adjust our allowance accounts for specific customer risks and
credit factors. Receivables are considered past due on an individual basis based
on the terms of the contracts. Our allowance for credit losses is maintained at
an amount considered adequate to absorb estimated credit-related losses. Such
allowance reflects our management's best estimate of the losses in our
receivables and judgments about economic conditions. As at December 31, 2012, we
had recognized receivables (including trade and other receivables) aggregating
$91.1 million.

Valuation of
Securities

Securities held for trading are carried
at current market value. Any unrealized gains or losses on securities held for
trading are included in our results of operations.

Available-for-sale securities are also
carried at current market value when current market value is available. Any
unrealized gains or losses are included in other comprehensive income. When
there is any objective evidence that an available-for-sale security is other
than a temporary decline, the security will be written down to recognize the
loss in the determination of income. In determining whether the decline in value
is other than temporary, quoted market price is not the only deciding factor,
particularly for thinly traded securities, large block holdings and restricted
shares. We consider, but such consideration is not limited to, the following
factors: (i) the trend of the quoted market price and trading volume; (ii) the
investee's financial position and results for a period of years; (iii) any
liquidity or going concern problems of the investee; (iv) changes in or
reorganization of the investee and/or its future business plan; (v) the outlook
of the investee's industry; (vi) the current fair value of the
investment (based upon an appraisal thereof) relative to its carrying value;
(vii) our business plan and strategy to divest the security or to restructure
the investee; and (viii) the extent and/or duration of the decline in market
value.

42

---



Recent market volatility has made it
extremely difficult to value certain securities. Subsequent valuations, in light
of factors prevailing at such time, may result in significant changes in the
values of these securities in future periods. Any of these factors could require
us to recognize further impairments in the value of our securities portfolio,
which may have an adverse effect on our results of operations in future periods.

Impairment of Non-Financial
Assets

We assess at the end of each reporting
period whether there is any indication that an asset may be impaired. If any
such indication exists, we shall estimate the recoverable amount of the asset.
In assessing whether there is any indication that an asset may be impaired, we
consider, as a minimum, the following indications:

External sources of
information

|(a) |  | during the period, an asset's
      market value has declined significantly more than would be expected as a
      result of the passage of time or normal use;                                                                                                                                      
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(b) |  | significant changes with an
      adverse effect on the entity have taken place during the period, or will
      take place in the near future, in the technological, market, economic or
      legal environment in which the entity operates or in the market to which
      an asset is dedicated;
|   
|(c) |  | market interest rates or other
      market rates of return on investments have increased during the period,
      and those increases are likely to affect the discount rate used in
      calculating an asset's value in use and decrease the asset's recoverable
      amount materially;        
|   
|(d) |  | the carrying amount of the net
      assets of the entity is more than its market
  capitalization;                                                                                                                                                                                                  

Internal sources of
information

|(e) |  | evidence is available of
      obsolescence or physical damage of an asset;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(f) |  | significant changes with an
      adverse effect on the entity have taken place during the period, or are
      expected to take place in the near future, in the extent to which, or
      manner in which, an asset is used or is expected to be used. These changes
      include the asset becoming idle, plans to discontinue or restructure the
      operation to which an asset belongs, plans to dispose of an asset before
      the previously expected date, and reassessing the useful life of an asset
      as finite rather than indefinite; and
|   
|(g) |  | evidence is available from
      internal reporting that indicates that the economic performance of an
      asset is, or will be, worse than expected.                                                                                                                                                                                                                                                                                                                                                                                                         

Provisions for Decommissioning
Obligations

Our provisions for decommissioning
obligations represent 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, movements in foreign exchange rates 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 us.

Changes in decommissioning obligations
are recorded with a corresponding change to the carrying amounts of related
properties. Adjustments to the carrying amounts of related properties can result
in a change to future depletion expense.

Income Taxes

Management believes that it has
adequately provided for income taxes based on all of the information that is
currently available. The calculation of income taxes in many cases, however,
requires significant judgment in interpreting tax rules and regulations, which
are constantly changing.

43

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Our tax filings are also subject to
audits, which could materially change the amount of current and future income
tax assets and liabilities. Any change would be recorded as a charge or a credit
to income tax expense. Any cash payment or receipt would be included in cash
from operating activities.

We currently have deferred tax assets
which are comprised primarily of tax loss carry-forwards and deductible
temporary differences, both of which will reduce taxable income in the future.
The amounts recorded for deferred tax are based upon various judgments,
assumptions and estimates. We assess the realization of these deferred tax
assets on a periodic basis to determine to what extent that it is probable that
taxable profit will be available against which the deductible temporary
differences and the carry-forward of unused tax credits and unused tax losses
can be utilized. We determine whether it is probable that all or a portion of
the deferred tax assets will be realized, based on currently available
information, including, but not limited to, the following:

- the history of the tax loss carry-forwards and
  their expiry dates;
- future reversals of temporary
  differences;
- our projected earnings; and
- tax planning opportunities.

On the reporting date, we also reassess
unrecognized deferred tax assets. We recognize a previously unrecognized
deferred tax asset to the extent that it has become probable that future taxable
profit will allow the deferred tax asset to be recovered.

We provide for future liabilities in
respect of uncertain tax positions where additional tax may become payable in
future periods and such provisions are based on our management's assessment of
exposures. We did not recognize the full deferred tax liability on taxable
temporary differences associated with investments in subsidiaries, joint
ventures and associates where we are able to control the timing of the reversal
of the temporary differences and it is probable that the temporary differences
will not reverse in the foreseeable future. We may change our investment
decision in the normal course of our business, thus resulting in additional tax
liability.

New Standards and Interpretations
Adopted and Not Yet Adopted

In June 2011, the IASB issued an
amended version of International Accounting Standard, referred to as "IAS" 19,Employee Benefits, which brings in various changes relating to the recognition and
measurement of termination benefits and postemployment defined benefit expense,
and to the disclosures for all employee benefits. The amended IAS 19 is
effective for annual periods beginning on or after January 1, 2013. The Group
early adopted this new standard with effect in the current year ending December
31, 2012, in connection with the acquisition of Compton. The Group did not have
a defined benefit plan in 2011 or 2010.

The following amendments were issued by
the IASB and are mandatory for our accounting year 2012 and do not have
significant effects on the Group's financial statements:

Amendments, set out inDeferred Tax: Recovery of Underlying Assets, were issued to amend IAS 12,Income Taxes.IAS 12 requires an
entity to measure the deferred tax relating to an asset depending on whether the
entity expects to recover the carrying amount of the asset through use or sale.
It can be difficult and subjective to assess whether recovery will be through
use or through sale when the asset is measured using the fair value model in IAS
40,Investment Property. The amendments provide a practical solution to the problem
by introducing a presumption that recovery of the carrying amount will,
normally, be through sale.

Amendments, set out inDisclosures  Transfers of Financial Assets, were issued to amend IFRS 7,Financial Instruments,so as to
enhance the disclosure requirements for transfers of financial assets that
result in derecognition. These amendments respond, in part, to the recent
financial crisis. Entities will be required to provide more extensive
quantitative and qualitative disclosures about: (i) risk exposures relating to
transfers of financial assets that are: (a) not derecognized in their entirety;
or (b) derecognized in their entirety, but with which the entity continues to
have some continuing involvement; and (ii) the effect of those risks on an
entity's financial position.

44

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The following new accounting standards
and amendments are expected to have significant effects on the Group's
accounting policies, financial position and/or financial statement presentation
for periods after 2012:

IFRS 9,Financial Instruments, replaces IAS,
39,Financial Instruments: Recognition and
Measurement.IFRS 9 uses a single approach to
determine whether a financial asset is measured at amortized cost or fair value.
The approach in IFRS 9 is based on how an entity manages its financial
instruments (its business model) and the contractual cash flow characteristics
of the financial assets. The new standard also requires a single impairment
method to be used, replacing the many different impairment methods in IAS 39.
Pursuant to IFRS 9, an entity choosing to measure a liability at fair value will
present the portion of the change in its fair value due to changes in the
entity's own credit risk in other comprehensive income, rather than in the
profit or loss. New requirements for the derecognition of financial instruments,
impairment and hedge accounting are expected to be added to IFRS 9. In December
2011, the IASB issued amendments to IFRS 9 that defer the mandatory effective
date from January 1, 2013 to January 1, 2015. The deferral will make it possible
for all phases of the project to have the same mandatory effective date. The
amendments also provide relief from the requirement to restate comparative
financial statements for the effect of applying IFRS 9. Additional transition
disclosures will be required to help investors understand the effect that the
initial application of IFRS 9 has on the classification and measurement of
financial instruments. Early application of IFRS 9 is still permitted. We are
currently evaluating the impacts that IFRS 9 will have on our consolidated
financial statements.

IFRS 10,Consolidated Financial Statements,establishes principles for the presentation and preparation of
consolidated financial statements when an entity controls one or more other
entities. IFRS 10 supersedes IAS 27 (Revised),Consolidated and Separate Financial Statements,and Standard Interpretations Committee, referred to as "SIC",
12,and is
effective for annual periods beginning on January 1, 2013.

IFRS 11,Joint Arrangementsestablishes
principles for financial reporting by entities that have an interest in
arrangements that are controlled jointly (i.e. joint arrangements). IFRS 11
supersedes IAS 31,Interests in Joint
Ventures,and SIC-13,Jointly Controlled Entities - Non-Monetary Contributions by
Venturers,and is effective for annual
periods beginning on January 1, 2013.

IFRS 12,Disclosure of Interests in Other Entities,applies to entities that have an interest in a subsidiary, a joint
arrangement, an associate or an unconsolidated structured entity. The objective
of this IFRS is to require an entity to disclose information that enables users
of its financial statements to evaluate: (a) the nature of, and risks associated
with, its interests in other entities; and (b) the effects of those interests on
its financial position, financial performance and cash flows. IFRS 12 is
effective for annual periods beginning on January 1, 2013.

IAS 27,Separate Financial Statements,has
been amended for the issuance of IFRS 10 but retains the current guidance for
separate financial statements. IAS 28,Investments in Associates and Joint Ventures,has been amended for conforming changes based on the issuance of IFRS 10
and IFRS 11. The amendments to the IAS 27 and IAS 28 are effective for annual
periods beginning on January 1, 2013.

We do not expect that the our
consolidated entities, associates and joint ventures will be significantly
affected when IFRS 10, 11, 12 and amendments to IFRS 27 and 28 become effective,
though the new standards and amendments will have impact on our financial
statement presentation.

IFRS 13,Fair Value Measurement,(a) defines
fair value; (b) sets out in a single IFRS a framework for measuring fair value;
and (c) requires disclosures about fair value measurements. IFRS 13 is to be
applied for annual periods beginning on January 1, 2013. The new standard will
have impact on our financial statement presentation.

Amendments, set out inPresentation of Items of Other Comprehensive
Income ̧were issued to amend IAS 1,Presentation of Financial Statements.The amendments require the grouping of items
of other comprehensive income into items that might be reclassified to profit or
loss in subsequent periods and items that will not be reclassified to profit or
loss in subsequent periods. The amendments are effective for annual periods
beginning on January 1, 2013 with full retrospective application. The amendments
will have impact on our financial statement presentation.

Trend Information

For a discussion of trends relating to
revenues derived from our royalty interest, please see "Item 4: Information on the Company  B. Business Overview 
Business Segments  Commodities and Resources".

Off-Balance Sheet Arrangements

We do not have any off-balance sheet
arrangements that have or are reasonably likely to have a current or future
effect on our financial condition, changes in financial condition, revenues or
expenses, results of operations, liquidity, capital expenditures or capital
resources that are material to investors.

45

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We have outstanding issued guarantees
held by our trading and financial partners in connection with our commodities
and resources activities. As of December 31, 2012, we had issued guarantees of
up to a maximum of $13.0 million, of which $5.2 million were outstanding and
have not been recorded as liabilities in the consolidated statement of financial
position. There has been no claim against the guarantees.

Safe Harbour

Not applicable.

ITEM 6: DIRECTORS, SENIOR MANAGEMENT
AND EMPLOYEES

A. Directors and Senior Management

We have no arrangement or understanding
with major shareholders, customers, suppliers or others pursuant to which any of
our directors or officers was selected as a director or officer. The following
table sets forth the names of each of our directors and officers, as at the date
hereof:

|                                        |  |                                                                                     |                        | Date of      |                  |                   
|--------------------------------------- |  | ----------------------------------------------------------------------------------- | ---------------------- | ------------ | ---------------- | ------------------
|                                        |  |                                                                                     |                        | Commencement |                  | Expiration
    of 
|                                        |  |                                                                                     |                        | of Office    |                  | Term of
    Office
|Name
      (Age)                        |  |                                                                                     | Present
      Position |              | with our Company |                   
|Michael J. Smith (64)                   |  | Chairman, Chief Executive
      Officer, Chief Financial Officer and
      Director |                        | 1986         |                  | 2014              
|Dr. Shuming Zhao
      (60)(1)(2)(3)    |  | Director                                                                            |                        | 2004         |                  | 2013              
|Robert Ian Rigg (69)(1)(2)(3)           |  | Director                                                                            |                        | 2010         |                  | 2014              
|Indrajit Chatterjee
      (67)(1)(2)(3) |  | Director                                                                            |                        | 2005         |                  | 2015              
|Ravin Prakash (68)                      |  | Director                                                                            |                        | 2011         |                  | 2013              

|Notes:
|------
|(1)   
|(2)   
|(3)   

Michael J. SmithChairman, Chief Executive
Officer, Chief Financial Officer and Director

Mr. Smith has been our Chairman since
2003 and a director of our company since 1986. Mr. Smith was appointed our Chief
Executive Officer in March 2010 and is our Chief Financial Officer. He was our
Secretary until March 1, 2008. Mr. Smith was also our Chief Executive Officer
between 1996 and 2006. Mr. Smith was also previously the President, Chief
Executive Officer, Secretary and a director of Mass and served as a director and
officer of various public companies. Mr. Smith has experience in corporate
finance and restructuring.

Dr. Shuming Zhao 
Director

Dr. Zhao has been a director of our
company since 2004. Dr. Zhao is Chair Professor and Honorary Dean of the School
of Business, Nanjing University, the People's Republic of China. He serves as
President of the International Association of Chinese Management Research
(IACMR, Third Term), Vice President of Chinese Society of Management
Modernization, President for Jiangsu Provincial Association of Human Resource
Management, and Vice President of Jiangsu Provincial Association of Business
Management and Entrepreneurs. Since 1994, Dr. Zhao has acted as management
consultant for several Chinese and international firms. Dr. Zhao is also a
director of Little Swan Company, Ltd. (China) and Daqo New Energy Corp. (China).
Dr. Zhao has successfully organized and held seven international symposia on
multinational business management in 1992, 1996, 1999, 2002, 2005, 2008 and
2011. Since 1997, Dr. Zhao has been a visiting professor at Marshall School of
Business, University of Southern California and the College of Business,
University of Missouri-St. Louis. Dr. Zhao has lectured in countries including
the United States, Canada, Japan, Singapore, South Korea, the United Kingdom,
Germany, the Netherlands, Portugal, and Australia.

Robert Ian Rigg 
Director

Mr. Rigg has been a director of our
company since 2010. Mr. Rigg is a retired accountant and holds a commerce degree
in economics and accounting from the University of Melbourne and was a member of
the Institute of Chartered Accountants in Canada. Mr. Rigg has experience as
both a director and chief financial officer of several public
companies.

46

---



Indrajit Chatterjee 
Director

Mr. Chatterjee has been a director of
our company since 2005. Mr. Chatterjee is a retired businessman who was formerly
responsible for marketing with the Transportation Systems Division of General
Electric for India. Mr. Chatterjee is experienced in dealing with Indian
governmental issues.

Ravin Prakash 
Director

Mr. Prakash has been a director of our
company since 2011. Until February 2013, Mr. Prakash was the Executive Chairman
of one of our former subsidiaries. He has over 36 years of corporate banking and
financial management experience in industry, specialized in recovery and
restructuring of doubtful assets, the raising of project and trade finance and
risk assessment.

Family
Relationships

There are no family relationships
between any of our director and executive officers.

B. Compensation

During fiscal year ended December 31,
2012, we paid an aggregate of approximately $1.3 million in cash compensation to
our directors and officers, excluding directors' fees. No other funds were set
aside or accrued by our company during the fiscal year ended December 31, 2012
to provide pension, retirement or similar benefits for our directors or officers
pursuant to any existing plan provided or contributed to by us.

Executive
Officers

The following table provides a summary
of compensation paid by us during the fiscal year ended December 31, 2012 to our
Chief Executive Officer, Chief Financial Officer and each of our three most
highly compensated executive officers (or persons acting in a similar capacity)
whose total compensation for the fiscal year exceeded $150,000:

|                                                                                                  |  |         |  |        |  |         |  | Non-equity
    incentive |  |           |  |         |  |             
|------------------------------------------------------------------------------------------------- |  | ------- |  | ------ |  | ------- |  | ------------------------ |  | --------- |  | ------- |  | ------------
|                                                                                                  |  |         |  |        |  |         |  | compensation plan        |  |           |  |         |  |             
|                                                                                                  |  |         |  |        |  |         |  | compensation             |  |           |  |         |  |             
|                                                                                                  |  |         |  |        |  |         |  | ($)                      |  |           |  |         |  |             
|                                                                                                  |  |         |  | Share- |  | Option- |  |                          |  | Long-     |  |         |  |             
|                                                                                                  |  |         |  | based  |  | based   |  | Annual                   |  | term      |  | Pension |  | All Other   
|Name and
      Principal                                                                          |  | Salary  |  | awards |  | awards  |  | incentive                |  | incentive |  | value   |  | Compensation
|Position                                                                                          |  | ($)     |  | ($)    |  | ($)     |  | plans                    |  | plans     |  | ($)     |  | ($)         
|****Michael J. Smith****Chairman,****Chief Executive
      Officer****and Chief Financial Officer |  | 300,117 |  | -      |  | -       |  | 93,800                   |  | -         |  | -       |  | 185,315(1)  
|****Ravin Prakash****Director(2)                                                                  |  | 65,603  |  | -      |  | -       |  | 149,428                  |  | -         |  | -       |  | -           
|****Prashant Sahu****Former Executive Director****of Magnum
      Minerals****Private Limited     |  | 140,827 |  | -      |  | -       |  | 149,428                  |  | -         |  | -       |  | -           
|****Roland Schulien****Senior Vice
      President****Finance, Europe                             |  | 174,828 |  | -      |  | -       |  | 10,284                   |  | -         |  | -       |  | 27,258(3)   

|Notes:
|------
|(1)   
|(2)   
|(3)   

47

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Directors'
Compensation

The following table provides a summary
of compensation paid by us during the fiscal year ended December 31, 2012 to the
directors of our company.

|DIRECTOR COMPENSATION TABLE
|---------------------------
|                           
|                           
|                           
|Name                       
|****Michael J. Smith(1)    
|****Dr. Shuming Zhao       
|****Ian Rigg               
|****Indrajit Chatterjee    
|****Ravin Prakash(2)       

|Notes:
|------
|(1)   
|(2)   

A total of $0.3 million was paid to our
directors for services rendered as directors, or for committee participation or
assignments, during our most recently completed financial year. Our directors
are each paid an annual fee of $30,000 and $750for each director's meeting attended
as well as additional fees, as applicable, for their respective participation on
our Audit and Compensation Committees. We also reimburse our directors and
officers for expenses incurred in connection with their services as directors
and officers.

Termination and Change of Control
Benefits

Effective March 1, 2008, we entered
into an independent consulting agreement with Michael Smith, our Chairman, Chief
Executive Officer and Chief Financial Officer, pursuant to which he provides
consulting services to us. In the event that the agreement is terminated by us
or in the event of a change of control, Mr. Smith is entitled to receive a
termination payment equal to the sum of three times the aggregate consulting fee
paid to Mr. Smith in the previous twelve months plus the higher of his current
bonus or the highest bonus received by him in the previous five years prior to
such termination. In addition, all unvested rights in any stock options or other
equity awards made to Mr. Smith will vest in full in the event of a change of
control. Mr. Smith will also be entitled, for a period of 365 days following the
earlier of the date of the termination of the agreement and the date of the
change of control, to require us to purchase all or any part of our common
shares held by Mr. Smith on the date of termination or date of change of
control, at a price equal to the average closing market price of our common
shares on the NYSE for the ten preceding trading days. Assuming a discontinuance
of Mr. Smith's services as a result of termination or a change of control
effective December 31, 2012, we would have been required to make a maximum
payment to Mr. Smith in the aggregate amount of $3,552,080 pursuant to the terms
of his consulting arrangement.

Pension Plan Benefits

As of December 31, 2012, we did not
have any defined benefit, defined contribution or deferred compensation plans
for any of our senior officers or directors.

C. Board Practices

Our Articles provide for three classes
of directors with staggered terms. Each director holds office until the expiry
of his or her term or until his or her successor is elected or appointed, unless
such office is earlier vacated in accordance with our Articles or with the
provisions of the British ColumbiaBusinessCorporations Act. At each annual
meeting of our company, a class of directors is elected to hold office for a
three-year term. Successors to the class of directors whose terms expire are
identified as being of the same class as the directors they succeed and are
elected to hold office for a term expiring at the third succeeding annual
meeting of shareholders. A director appointed or elected to fill a vacancy on
the board of directors holds office for the unexpired term of his predecessor.
The following table sets forth the date of expiration of the current term of
office of each of our directors, as well as the period during which that person
has served as a director:

Expiration
    ofName of Director
    
    
    Director Since
    
    Current TermMichael J. Smith
    
    1986
    
    2014Ian Rigg
    
    2010
    
    2014Indrajit Chatterjee
    
    2005
    
    2015Dr. Shuming Zhao
    
    2004
    
    2013Ravin Prakash
    
    2011
    
    2013


48

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Other than as discussed elsewhere
herein, there are no service contracts between our company and any of our
directors providing for benefits upon termination of employment.

Our board of directors has established
an Audit Committee. Our Audit Committee currently consists of Dr. Shuming Zhao,
Ian Rigg and Indrajit Chatterjee. The Audit Committee operates pursuant to a
charter adopted by the board of directors. A copy of our Audit Committee charter
is attached as Exhibit 99.1 to our annual report filed with the SEC on April 3,
2006. The Audit Committee is appointed by and generally acts on behalf of the
board of directors. The Audit Committee is responsible primarily for monitoring:
(i) the integrity of our financial statements; (ii) compliance with legal and
regulatory requirements; and (iii) the independence and performance of our
internal and external auditors. The Audit Committee also oversees our company's
financial reporting process and internal controls and consults with management
and our independent auditors on matters related to our annual audit and internal
controls, published financial statements, accounting principles and auditing
procedures being applied.

Our board of directors has established
a Compensation Committee. Our Compensation Committee currently consists of Dr.
Shuming Zhao, Ian Rigg and Indrajit Chatterjee. The Compensation Committee
operates pursuant to a Compensation Committee charter adopted by the board of
directors. A copy of our Compensation Committee charter is attached as exhibit
99.2 to our annual report filed with the SEC on April 3, 2007. The Compensation
Committee is appointed and generally acts on behalf of the board of directors.
The Compensation Committee is responsible for reviewing and approving annual
salaries, bonuses and other forms and items of compensation for the senior
officers and employees of our company. Except for plans that are, in accordance
with their terms or as required by law, administered by our board of directors
or another particularly designated group, the Compensation Committee also
administers and implements all of our stock option and other stock-based and
equity-based benefit plans (including performance-based plans), recommends
changes or additions to those plans and reports to our board of directors on
compensation matters. Our Chief Executive Officer does not vote upon or
participate in the deliberations regarding his compensation.

Effective July 15, 2005, we formed a
Nominating and Corporate Governance Committee. The Nominating and Corporate
Governance Committee currently consists of Ian Rigg, Dr. Shuming Zhao and
Indrajit Chatterjee. The Nominating and Corporate Governance Committee operates
pursuant to a charter adopted by our board of directors. A copy of our
nominating and corporate governance charter is attached as Exhibit 99.3 to our
annual report filed with the SEC on April 3, 2007. The primary function of the
Nominating and Corporate Governance Committee is to assist our board of
directors in developing our approach to corporate governance issues and
monitoring performance against the defined approach. The Nominating and
Corporate Governance Committee is also responsible for the nomination of
directors by identifying and reporting on candidates to be nominated to our
board of directors.

D. Employees

At December 31, 2012, 2011 and 2010, we
employed approximately 955, 616 and 678 people, respectively.

49

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E. Share Ownership

There were 62,552,126 common shares,
2,635,000 stock options and no share purchase warrants issued and outstanding as
of March 28, 2013. Of the shares issued and outstanding on that date, our
directors and senior officers, who served in such positions at any time during
the fiscal year ended December 31, 2012, owned the following common shares:

Common Shares
    
    Percentage of Total
      Common
    
    Stock Options(1)Beneficially Owned
    
    Shares
      Outstanding
    
    HeldName and Principal Position
    
    (#)
    
    (%)
    
    (#)****Michael J. Smith****Chairman, Chief
      Executive Officer, Chief****Financial Officer and
      Director
    
    
    272,727
    
    
    0.04
    
    
    390,000****Dr. Shuming Zhao****Director
    
    
    -
    
    
    -
    
    
    55,000****Ian Rigg****Director
    
    
    7,230
    
    
    0.01
    
    
    55,000****Indrajit Chatterjee****Director
    
    
    -
    
    
    -
    
    
    55,000****Ravin Prakash****Director
    
    
    -
    
    
    -
    
    
    55,000


|Notes:                                                                                                             
|-------------------------------------------------------------------------------------------------------------------
|(1)     The
      options are exercisable at a price of $7.81 per common share and expire on
      January 1, 2016.

Stock Option
Plan

We have an incentive stock option plan
that provides for the grant of incentive stock options to purchase our common
shares to our directors, officers and key employees and other persons providing
ongoing services to us. Our stock option plan is administered by our board of
directors. The maximum number of our common shares which may be reserved and set
aside for issuance under our stock option plan is 5,524,000. Each option upon
its exercise entitles the grantee to purchase one common share. The exercise
price of an option may not be less than the closing market price of our common
shares on the NYSE, on the day prior to the date of grant of the option. In the
event our common shares are not traded on such day, the exercise price may not
be less than the average of the closing bid and ask prices of our common shares
on the NYSE, for the ten trading days immediately prior to the date the option
is granted. Options may be granted under our stock option plan for an exercise
period of up to ten years from the date of grant of the option. No options were
granted during the year ended December 31, 2012. There were 1,720,000 options
outstanding as at December 31, 2012. There were 12,344 options available for
grant under the stock option plan as at December 31, 2012.

Incentive
Plan

At our annual and special meeting of
our shareholders held in September 2008, our shareholders passed a resolution
approving an equity incentive plan, referred to as the "Incentive Plan", to
further align the interests of employees and directors with those of our
shareholders by providing incentive compensation opportunities tied to the
performance of our common shares and by promoting increased ownership of our
common stock by such individuals.

Pursuant to the terms of the Incentive
Plan, our board of directors, our Compensation Committee or such other committee
as is appointed by our board of directors to administer the Incentive Plan, may
grant Awards (as hereinafter defined) under the Incentive Plan, establish the
terms and conditions for those Awards, construe and interpret the Incentive Plan
and establish the rules for the Incentive Plan's administration. Such committee
may grant nonqualified stock options, incentive stock options, stock
appreciation rights, restricted stock awards, stock unit awards, stock awards,
performance stock awards and tax bonus awards, each referred to as an "Award",
under the Incentive Plan. Awards may be granted to employees, directors,
officers or consultants of ours or any affiliate or any person to whom an offer
of employment with us or any affiliate is extended. Such committee has the
authority to determine which employees, directors, officers, consultants and
prospective employees should receive Awards. Non-employee directors and
consultants may not receive incentive stock options.

The maximum number of our common shares
that may be issuable pursuant to all Awards granted under the Incentive Plan is
1,500,000 common shares. Forfeited, cancelled, returned and lapsed Awards are
not counted against the 1,500,000 common shares. Any Awards, or portions
thereof, that are settled in cash and not by issuance of our common shares are
not counted against the 1,500,000 common shares. As of
the date of this annual report on Form 20-F, 915,000 Awards have been issued
pursuant to the Incentive Plan and 585,000 Awards are available for
issuance.

50

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ITEM 7: MAJOR SHAREHOLDERS AND
RELATED PARTY TRANSACTIONS

A. Major Shareholders

There were 62,552,126 common shares
issued and outstanding as of March 28, 2013. The following table sets forth, as
of March 28, 2013, persons known to us to be the beneficial owner of more than
five percent (5%) of our common shares:

|Name          |               | Amount
      Owned |       | Percent of
      Class(1)
|------------- | ------------- | ------------------ | ----- | -------------------------
|Peter Kellogg | 19,346,159(2) |                    | 30.9%

|Notes:
|------
|(1)   
|(2)   

The voting rights of our major
shareholders do not differ from the voting rights of holders of our shares who
are not major shareholders.

As of February 28, 2013, there were
62,552,126 common shares issued and outstanding held by 526 registered
shareholders. Of those common shares issued and outstanding, 62,526,441 common
shares were registered in the United States (489 registered shareholders).

To the best of our knowledge, we are
not directly or indirectly owned or controlled by another corporation, by any
foreign government or by any other natural or legal person.

There are no arrangements known to us,
the operation of which may at a subsequent date result in a change in the
control of our company.

B. Related Party Transactions

Other than as disclosed herein, to the
best of our knowledge, since January 1, 2012, there have been no material
transactions or loans between our company and: (a) enterprises that directly or
indirectly through one or more intermediaries control or are controlled by, or
are under common control with, our company; (b) associates; (c) individuals
owning, directly or indirectly, an interest in the voting power of our company
that gives them significant influence over our company, and close members of any
such individual's family; (d) key management personnel of our company, including
directors and senior management of our company and close members of such
individuals' families; and (e) enterprises in which a substantial interest in
the voting power is owned, directly or indirectly, by any person described in
(c) or (d) or over which such a person is able to exercise significant
influence.

In the normal course of operations, we
enter into transactions with related parties which include, among others,
affiliates whereby we have a significant equity interest (10% or more) in the
affiliates or have the ability to influence the affiliates' or our operating and
financing policies through significant shareholding, representation on the board
of directors, corporate charter and/or bylaws. The affiliates also include
certain of our directors, our President, Chief Executive Officer, Chief
Financial Officer, Chief Operating Officer and their close family members. These
related party transactions are made in arm's length transactions at normal
market prices and on normal commercial terms. In addition to transactions
disclosed elsewhere in our financial statements for the year ended December 31,
2012 and in this annual report on Form 20-F, we had the following transactions
with affiliates during the year ended December 31, 2012:

|                                                                                 | 2012                        
|-------------------------------------------------------------------------------- | ----------------------------
|                                                                                 | (United
      States dollars
|                                                                                 | in
      thousands)         
|                                                                                
|Royalty expense paid and
      payable*                                          | $                           
|Sales of goods                                                                   |                             
|Director's salary from a
      subsidiary to a close family member of a director |                             

|* |  | included in income from an
      interest in resource property
|- |  | --------------------------------------------------------------

In 2012, we entered into an agreement with a director of two of our subsidiaries, whereby the director agreed to purchase 100% of the shares of our subsidiary for a nominal amount. Such subsidiary did not have significant assets or business at the time of disposition. Subsequent to the year ended December 31, 2012, such director acquired another subsidiary from us. Please refer to Notes 18 and 36 to our audited consolidated financial statements included in this annual report on Form 20-F for further information.

51

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C. Interests of Experts and Counsel

Not applicable.

ITEM 8: FINANCIAL INFORMATION

A. Consolidated Statements and Other
Financial Information

Effective January 1, 2010, we adopted
IFRS following approval from the Canadian Securities Administrators under
National Instrument 52-107,Acceptable
Accounting Principles, Auditing Standards and Reporting Currency. The consolidated financial statements have been prepared in
compliance with IFRS. See "Item 18: Financial
Statements".

Legal
Proceedings

We are subject to routine litigation incidental to our business and
are named from time to time as a defendant in various legal actions arising in connection with our activities, certain of
which may include large claims for punitive damages. Further, due to the size, complexity and nature of our operations,
various legal and tax matters are outstanding from time to time, including a currently ongoing audit by the Canadian
taxation authority of our domestic and international transactions covering the 2006 to 2010 taxation years.
Currently, based upon information available to us, we do not believe any such matters would have a material adverse effect
upon our financial condition or results of operations. However, due to the inherent uncertainty of litigation, we cannot
provide certainty as to their outcome. If our current assessments are materially incorrect or if we are unable to resolve any
of these matters favorably, there may be a material adverse impact on our financial performance, cash flows or results
of operations.

Dividend
Distributions

On January 10, 2011, we announced that
our board of directors had adopted an annual dividend policy, providing for an
annual dividend based on the annual dividend yield of the NYSE Composite Index
for the preceding year plus 25 basis points. On the same date, we announced an
annual cash dividend for 2011 of $0.20 per common share, payable in four
quarterly installments. The dividend payments of $0.05 per share were made: (i)
on January 31, 2011 to shareholders of record on January 20, 2011; (ii) on April
11, 2011 to shareholders of record on March 31, 2011; (iii) on July 11, 2011 to
shareholders of record on June 30, 2011; and (iv) on October 11, 2011 to
shareholders of record on September 30, 2011.

On January 17, 2012, we announced that
our board of directors had declared an annual cash dividend for 2012 of $0.22
per common share, payable in four quarterly instalments. The 2012 dividend was
10% higher than the dividend paid in 2011, and, based on the closing price of
$7.01 for our common shares on December 31, 2011, and represented a dividend
yield of approximately 3.13%, compared to an annual dividend yield of
approximately 2.51% for the NYSE Composite Index in 2012. We made dividend
payments of $0.05 per share: (i) on February 10, 2012 to shareholders of record
on January 27, 2012; (ii) on April 10, 2012 to shareholders of record on March
30, 2012; (iii) on July 13, 2012 to shareholders of record on July 2, 2012; and
(iv) on October 26, 2012 to shareholders of record on October 15,
2012.

On January 14, 2013, we announced that
our board of directors had declared an annual cash dividend for 2013 of $0.24
per common share, payable in four quarterly instalments. The 2013 dividend is
approximately 9% higher than the dividend paid in 2012, and, based on the
closing price of $8.55 for our common shares on December 31, 2012, represents a
dividend yield of approximately 2.81%, compared to an annual dividend yield of
approximately 2.5% for the NYSE Composite Index in 2012. The first 2013 dividend
payment of $0.06 per share was made on February 8, 2013 to shareholders of
record on January 25, 2013. On April 1, 2013 we announced that the second
dividend payment for 2013, of $0.06 per share, would be made on April 22, 2013
to shareholders of record on April 12, 2013.

The actual timing, payment and amount
of dividends paid on our common shares is determined by our board of directors,
based upon things such as our cash flow, results of operations and financial
condition, the need for funds to finance ongoing operations and such other
business consideration as our board of directors considers relevant.

B. Significant Changes

Please refer to "Item 4: Information on the Company  A. History and
Development of the Company  Recent Developments" and Note 41 of our annual financial statements included herewith for a
discussion of significant events that have occurred after December 31, 2012.

52

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ITEM 9: THE OFFER AND LISTING

A. Offer and Listing Details

Since June 18, 2007, our common shares
have been quoted on the NYSE, currently under the symbol "MIL". Previously, our
common shares were traded on the NASDAQ Global Select Market under the symbol
"KHDH". We voluntarily terminated our listing on the NASDAQ
Global Select Market, and the last day of trading of our common shares on the
Nasdaq Global Select Market was June 15, 2007. The following table sets forth
the high and low sales of prices of our common shares on the NYSE for the
periods indicated.

ExchangeHigh ($)
    
    Low ($)Annual Highs and Lows2008
    
    
    35.79
    
    
    
    6.502009
    
    
    14.20
    
    
    
    6.652010
    
    
    16.10
    
    
    
    6.602011
    
    
    9.00
    
    
    
    6.172012
    
    
    8.80
    
    
    
    6.65Quarterly Highs and Lows2011First Quarter
    
    
    9.00
    
    
    
    7.15Second Quarter
    
    
    8.59
    
    
    
    7.41Third Quarter
    
    
    7.88
    
    
    
    6.66Fourth Quarter
    
    
    7.36
    
    
    
    6.172012First Quarter
    
    
    8.77
    
    
    
    7.03Second Quarter
    
    
    8.80
    
    
    
    6.65Third Quarter
    
    
    7.69
    
    
    
    6.66Fourth Quarter
    
    
    8.16
    
    
    
    7.92Monthly Highs and LowsSeptember 2012
    
    
    8.80
    
    
    
    8.27October 2012
    
    
    8.38
    
    
    
    8.00November 2012
    
    
    8.72
    
    
    
    7.92December 2012
    
    
    8.77
    
    
    
    8.30January 2013
    
    
    10.24
    
    
    
    8.59February 2013
    
    
    10.39
    
    
    
    9.60March 2013
    
    
    10.11
    
    
    
    9.00


The transfer of our common shares is
managed by our transfer agent, Computershare, 480 Washington Boulevard, Jersey
City, NJ 07310 (Tel: 201-680-5258; Fax: 201-680-4604).

B. Plan of Distribution

Not applicable.

C. Markets

Our common shares are quoted on the
NYSE under the symbol "MIL".

D. Selling Shareholders

Not applicable.

E. Dilution

Not applicable.

F. Expenses of the Issue

Not applicable.

53

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ITEM 10: ADDITIONAL INFORMATION

A. Share Capital

Not applicable.

B. Memorandum and Articles of
Association

We are organized under the laws of the
Province of British Columbia, Canada and have been assigned the number
BC0778539.

Our Articles do not contain a
description of our objects and purposes.

Our Articles do not restrict a
director's power to vote on a proposal, arrangement or contract in which the
director is materially interested, vote compensation to themselves or any other
members of their body in the absence of an independent quorum or exercise
borrowing powers. There is no mandatory retirement age for our directors, and
our directors are not required to own securities of our company in order to
serve as directors.

Our authorized capital consists of an
unlimited number of common shares without par value, an unlimited number of
class A common shares without par value and an unlimited number of Class A
preferred shares without par value. Our Class A preferred shares may be issued
in one or more series and our directors may fix the number of shares which is to
comprise each series and designate the rights, privileges, restrictions and
conditions attaching to each series.

Holders of our common shares may
receive dividends when, as and if declared by the board, subject to the
preferential dividend rights of any other classes or series of preferred shares
issued and outstanding. In no event may a dividend be declared or paid on the
common shares, if payment of the dividend would cause the realizable value of
the assets of our company to be less than the aggregate of its liabilities.
Holders of our common shares are entitled to one vote per share at any meeting
of shareholders of any class of common shares, and, in general and subject to
applicable law, all matters will be determined by a majority of votes cast other
than fundamental changes with respect to our company. The common shareholders
are entitled, in the event of a distribution of assets of our company on the
liquidation, dissolution or winding-up of our company, referred to as a
"Liquidation Distribution", to receive, before any Liquidation Distribution is
made to the holders of the class A common shares or any other shares of our
company ranking junior to the common shares, but after any prior rights of any
of our preferred shares, the stated capital with respect to each common share
held by them, together with all declared and unpaid dividends (if any and if
preferential) thereon, up to the date of such Liquidation Distribution, and
thereafter the common shares shall rankpari
passuwith all other classes of our common
shares in connection with the Liquidation Distribution.

The rights and restrictions attaching
to our class A common shares are the same as those attaching to our common
shares, except that in the event of a Liquidation Distribution, the holders of
the class A common shares are entitled to receive such Liquidation Distribution
only after any prior rights of the preferred shares and common shares or any
other share ranking prior in right to the class A common shares.

Our Class A preferred shares of each
series rank on a parity with our Class A preferred shares of any other series
and are entitled to a preference over our common shares with respect to the
payment of dividends and the distribution of assets or return of capital in the
event of liquidation, dissolution or winding-up of our company.

The provisions in our Articles
attaching to our common shares and Class A preferred shares may be altered,
amended, repealed, suspended or changed by the affirmative vote of the holders
of not less than two-thirds of the common shares and two-thirds of the Class A
preferred shares, respectively, present in person or by proxy at any such
meeting of holders.

Our Articles provide for three classes
of directors with staggered terms. Each director holds office until the expiry
of his term or until his successor is elected or appointed, unless his office is
earlier vacated in accordance with our Articles or with the provisions of the
British ColumbiaBusiness Corporations
Act. At each annual meeting of our company, a
class of directors is elected to hold office for a three-year term. Successors
to the class of directors whose terms expire are identified as being of the same
class as the directors they succeed and are elected to hold office for a term
expiring at the third succeeding annual meeting of shareholders. A director
appointed or elected to fill a vacancy on the board of directors holds office
for the unexpired term of his predecessor.

An annual meeting of shareholders must
be held at such time in each year that is not later than fifteen months after
the last preceding annual meeting and at such place as our board of directors,
or failing it, our Chairman, Managing Director or President, may from time to
time determine. The holders of not less than five percent of our issued shares
that carry the right to vote at a meeting may requisition our directors to call
a meeting of shareholders for the purposes stated in the requisition. The quorum
for the transaction of business at any meeting of shareholders is two persons
who are entitled to vote at the meeting in person or by proxy. Only persons
entitled to vote, our directors and auditors and others who, although not
entitled to vote, are otherwise entitled or required to be present, are entitled
to be present at a meeting of shareholders.

54

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Except as provided in theInvestment Canada Act, there are no limitations specific to the rights of
non-Canadians to hold or vote our common shares under the laws of Canada or
British Columbia, or in our charter documents. See the section of this annual
report on Form 20-F entitled "Exchange
Controls" below for a discussion of the
principal features of theInvestment Canada
Actfor non-Canadian residents proposing to
acquire our common shares.

As set forth above, our Articles
contain certain provisions that would have an effect of delaying, deferring or
preventing a change in control of our company, including authorizing the
issuance by our board of directors of preferred stock in series, providing for a
classified board of directors with staggered, three-year terms and limiting the
persons who may call special meetings of shareholders. Our Articles do not
contain any provisions that would operate only with respect to a merger,
acquisition or corporate restructuring of our company.

Our Articles do not contain any
provisions governing the ownership threshold above which shareholder ownership
must be disclosed.

Our Articles are not significantly
different from the requirements of theBusiness Corporations Act(British
Columbia), and the conditions imposed by our Articles governing changes in
capital are not more stringent than what is required by theBusiness Corporations Act(British Columbia).

C. Material Contracts

The following summary of certain
material provisions of the agreements referenced below is not complete and these
provisions are qualified in their entirety by reference to the full text of such
agreements.

In July 2012, we entered into the
Support Agreement with Compton, pursuant to which we made the Offer for all of
the issued and outstanding Compton Shares. Pursuant to the Offer, on September
6, 2012, our indirect wholly-owned subsidiary acquired approximately 93.8% of
the outstanding Compton Shares. On September 11, 2012, we completed a compulsory
acquisition under the AlbertaBusiness
Corporations Act, whereby our indirect
wholly-owned subsidiary acquired all the remaining outstanding Compton Shares
not already owned by us or our affiliates. For further information, please see
the section of this annual report on Form 20-F entitled "Item 4:Information on the Company  A. History and Development of the
Company".

D. Exchange Controls

There are presently no governmental
laws, decrees or regulations in Canada which restrict the export or import of
capital, or which impose foreign exchange controls or affect the remittance of
interest, dividends or other payments to non-resident holders of our common
shares. However, any remittances of dividends to shareholders not resident in
Canada are subject to withholding tax in Canada. See "Item 10: Additional Information  E. Taxation".

Except as provided in theInvestment Canada Act, there are no limitations specific to the rights of
non-Canadians to hold or vote our common shares under the laws of Canada or
British Columbia or in our charter documents. The following summarizes the
principal features of theInvestment Canada
Actfor non-Canadian residents proposing to
acquire our common shares.

This summary is of a general nature
only and is not intended to be, and should not beconstrued to be, legal advice to any
holder or prospective holder of our commonshares, and no opinion or representation to
any holder or prospective holder of ourcommon shares is hereby made. Accordingly,
holders and prospective holders of ourcommon shares should consult with their own
legal advisors with respect to theconsequences of purchasing and owning our
common shares.

TheInvestment Canada Actgoverns the
direct or indirect acquisition of control of an existing Canadian business by
non-Canadians. Under theInvestment Canada
Act, non-Canadian persons or entities
acquiring "control" (as defined in theInvestment Canada Act) of a
corporation carrying on business in Canada are required to either notify, or
file an application for review with, Industry Canada, unless a specific
exemption, as set out in theInvestment Canada
Act, applies. Industry Canada may review any
transaction which results in the direct or indirect acquisition of control of a
Canadian business, where the gross value of corporate assets exceeds certain
threshold levels (which are higher for investors from members of the World Trade
Organization, including United States residents, or World Trade Organization
member-controlled companies) or where the activity of the business is related to
Canada's cultural heritage or national identity. No change of voting control
will be deemed to have occurred, for purposes of theInvestment Canada Act, if less than
one-third of the voting control of a Canadian
corporation is acquired by an investor. In addition, theInvestment Canada Actpermits the Canadian government to review any investment where the
responsible Minister has reasonable grounds to believe that an investment by a
non-Canadian could be injurious to national security. No financial threshold
applies to a national security review. The Minister may deny the investment, ask
for undertakings, provide terms or conditions for the investment or, where the
investment has already been made, require divestment. Review can occur before or
after closing and may apply to corporate re-organizations where there is no
change in ultimate control.

55

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If an investment is reviewable under
theInvestment Canada Act, an application for review in the form prescribed is normally
required to be filed with Industry Canada prior to the investment taking place,
and the investment may not be implemented until the review has been completed
and the Minister responsible for theInvestment CanadaActis satisfied that the
investment is likely to be of net benefit to Canada. If the Minister is not
satisfied that the investment is likely to be of net benefit to Canada, the
non-Canadian applicant must not implement the investment, or if the investment
has been implemented, may be required to divest itself of control of the
Canadian business that is the subject of the investment. The Minister is
required to provide reasons for a decision that an investment is not of net
benefit to Canada.

Certain transactions relating to our
common shares will generally be exempt from theInvestment Canada Act, subject to the
Minister's prerogative to conduct a national security review, including:

| | (a) |  | the acquisition of our
      common shares by a person in the ordinary course of that person's business
      as a trader or dealer in securities;                                                                                                                                          
| | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    
| | (b) |  | the acquisition of
      control of our company in connection with the realization of security
      granted for a loan or other financial assistance and not for a purpose
      related to the provisions of theInvestment Canada Act;
    and                                            
| |    
| | (c) |  | the acquisition of
      control of our company by reason of an amalgamation, merger, consolidation
      or corporate reorganization following which the ultimate direct or
      indirect control in fact of our company, through ownership of our common
      shares, remains unchanged.

E. Taxation

Material Canadian Federal Income
Tax Consequences

We consider that the following general
summary fairly describes the principal Canadian Federal income tax consequences
applicable to a beneficial holder of our common shares who is a resident of the
United States for purposes of theIncome Tax
Act(Canada) and the Canada-United States Tax
Convention (1980), as amended, referred to as the "Treaty", who is not, will not
be and will not be deemed to be, a resident of Canada for purposes of theIncome Tax Act(Canada) and the treaty and who does not use or hold, and is not deemed
to use or hold, his common shares in the capital of our company in connection
with carrying on a business in Canada, referred to as a "non-resident holder".

This summary is based upon the current
provisions of theIncome Tax
Act, the regulations thereunder, referred to
as the "Regulations", the current publicly announced administrative and
assessing policies of the Canada Revenue Agency and the Treaty. This summary
also takes into account the amendments to theIncome Tax Actand the Regulations
publicly announced by the Minister of Finance (Canada) prior to the date hereof,
referred to as the "Tax Proposals", and assumes that all such Tax Proposals will
be enacted in their present form. However, no assurances can be given that the
Tax Proposals will be enacted in the form proposed, or at all. This summary is
not exhaustive of all possible Canadian Federal income tax consequences
applicable to a holder of our common shares and, except for the foregoing, this
summary does not take into account or anticipate any changes in law, whether by
legislative, administrative or judicial decision or action, nor does it take
into account provincial, territorial or foreign income tax legislation or
considerations, which may differ from the Canadian Federal income tax
consequences described herein.

This summary is of a general nature
only and is not intended to be, and should not beconstrued to be, legal, business or
tax advice to any particular holder orprospective holder of our common shares, and
no opinion or representation withrespect to the tax consequences to any holder
or prospective holder of our commonshares is made. Accordingly, holders and
prospective holders of our common sharesshould consult their own tax advisors with
respect to the income tax consequences ofpurchasing, owning and disposing of our common
shares in their particularcircumstances.

56

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Dividends

Dividends paid on our common shares to
a non-resident holder will be subject under theIncome Tax Actto withholding tax
which tax is deducted at source by our company. The withholding tax rate for
dividends prescribed by theIncome Tax Actis 25% but this rate may be reduced under the
provisions of an applicable tax treaty. Under the Treaty, the withholding tax
rate is reduced to 15% on dividends paid by our company to a resident of the
United States who is the beneficial owner of the dividend, is entitled to all of
the benefits of the Treaty and who holds less than 10% of the voting shares of
our Company. The 25% rate may be further reduced to 5% where the beneficial
owner of the dividends is a corporation resident in the United States who is the
beneficial owner of the dividend, is entitled to all of the benefits of the
Treaty and who owns at least 10% of the voting shares of our company.

Capital Gains

A non-resident holder will not be
subject to tax under theIncome Tax Acton any capital gain realized on a disposition
of our common shares unless the common shares constitute "taxable Canadian
property" as defined in theIncome Tax Actto the holder at the time of the disposition
and such gain is not otherwise exempt from tax under theIncome Tax Actpursuant to
the provisions of an applicable income tax convention.

Generally, a common share will not be
taxable Canadian property to a non-resident holder at a particular time provided
that such share is listed on a "designated stock exchange" (which currently
includes the NYSE) as defined in theIncome
Tax Actunless at any time during the
60-month period immediately preceding the disposition (i) the non-resident
holder, persons with whom the non-resident holder did not deal at arms length,
or the non-resident holder together with all such persons, owned 25% or more of
the issued shares of any class or series of shares of our capital stock, and
(ii) more than 50% of the fair market value of the particular share was derived
directly or indirectly from one or any combination of real or immovable property
situated in Canada, "Canadian resource property" as defined in theIncome Tax Act, "timber resource property" as defined in theIncome Tax Act, and options in respect
of, or interests in, or for civil law rights in, any such properties (whether or
not such property exists). Notwithstanding the foregoing, in certain
circumstances set out in theIncome Tax
Act, our common shares could be deemed to be
taxable Canadian property to a non-resident holder.

Material United States Federal
Income Tax Consequences

The following is a discussion of
certain United States Federal income tax matters under current law, generally
applicable to a U.S. Holder (as defined below) of our common shares who holds
such shares as capital assets. This discussion does not address all aspects of
United States Federal income tax matters and does not address consequences
particular to persons subject to certain special provisions of United States
Federal income tax law such as those described below. In addition, this
discussion does not cover any state, local or foreign tax consequences. See
"Material Canadian Federal Income Tax
Consequences" above.

The following discussion is based upon
theInternal Revenue Code of
1986, as amended, referred to as the "Code",
Treasury Regulations, published by the Internal Revenue Service, referred to as
"IRS", rulings, published administrative positions of the IRS and court
decisions that are currently applicable, any or all of which could be materially
and adversely changed, possibly on a retroactive basis, at any time. In
addition, this discussion does not consider the potential effects, both adverse
and beneficial, of any recently proposed legislation which, if enacted, could be
applied, possibly on a retroactive basis, at any time. No assurance can be given
that the IRS will agree with the statements and conclusions herein, or will not
take, or a court will not adopt, a position contrary to any position taken
herein.

The following discussion is for
general information only and is not intended to be,nor should it be construed to be,
legal, business or tax advice to any holder orprospective holder of our common
shares, and no opinion or representation withrespect to the United States Federal income
tax consequences to any such holder orprospective holder is made. Accordingly,
holders and prospective holders of commonshares are urged to consult their own tax
advisors with respect to United States Federal, state,local and foreign tax
consequences of purchasing, owning and disposing of our commonshares.

U.S. Holders

As used herein, a "U.S. Holder"
includes: (i) a holder of our common shares who is a citizen or resident of the
United States, (ii) a corporation created or organized in or under the laws of
the United States or of any political subdivision thereof, or any entity which
is taxable as a United States corporation for United States tax purposes, (iii)
an estate, the income of which is subject to United States Federal income tax
without regard to its source, or (iv) a trust if (1) a court within the United
States is able to exercise primary supervision over the administration of the
trust, and one or more U.S. persons have the authority to control all
substantial decisions of the trust, or (2) the trust has a valid election in
effect under applicable Treasury regulations to be treated as a U.S.
person.

57

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This summary does not purport to
address all material United States Federal income tax consequences that may be
relevant to a U.S. Holder, and does not take into account the specific
circumstances of any particular investors, some of which (such as tax-exempt
entities, banks or other financial institutions, insurance companies,
broker-dealers, traders in securities that elect to use a mark-to-market method
of accounting for their securities holdings, regulated investment companies,
real estate investment trusts, U.S. expatriates, investors liable for the
alternative minimum tax, partnerships and other pass-through entities, investors
that own or are treated as owning 10% or more of our common shares, investors
that hold the common shares as part of a straddle, hedge, conversion or
constructive sale transaction or other integrated transaction, and U.S. holders
whose functional currency is not the U.S. dollar) may be subject to special tax
rules. This summary does not address shareholders who acquired their shares
through the exercise of employee stock options or otherwise as compensation.

Distributions

The gross amount of a distribution paid
to a U.S. Holder (including amounts withheld in respect of Canadian taxes) in
respect of the common shares will be subject to United States Federal income
taxation as ordinary income to the extent paid out of our current or accumulated
earnings and profits, as determined under United States Federal income tax
principles. Such dividends will not be eligible for the dividends received
deduction allowed to corporations. Distributions which are taxable dividends and
which meet certain requirements will be "qualified dividend income" and will
generally be taxed to U.S. Holders who are individuals at a maximum United
States Federal income tax rate of 20% (subject to the "Passive Foreign
Investment Company" rules discussed below). Distributions in excess of our
current and accumulated earnings and profits will be treated first as a tax-free
return of capital to the extent the U.S. Holder's tax basis in the common shares
and, to the extent in excess of such tax basis, will be treated as a gain from a
sale or exchange of such shares.

Capital Gains

In general, upon a sale, exchange or
other disposition of common shares, a U.S. Holder will generally recognize a
capital gain or loss for United States Federal income tax purposes in an amount
equal to the difference between the amount realized on the sale or other
distribution and the U.S. Holder's adjusted tax basis in such shares. Such gain
or loss will be a United States source gain or loss and will be treated as a
long-term capital gain or loss if the U.S. Holder's holding period of the shares
exceeds one year. If the U.S. Holder is an individual, any capital gain will
generally be subject to United States Federal income tax at preferential rates
if specified minimum holding periods are met. The deductibility of capital
losses is subject to significant limitations.

Foreign Tax Credit

Dividends paid by us generally will
constitute income from non-U.S. sources and will be subject to various
classification rules and other limitations for U.S. foreign tax credit purposes.
Subject to generally applicable limitations under United States Federal income
tax law, Canadian withholding tax imposed on such dividends, if any, will be
treated as a foreign income tax eligible for credit against a U.S. holders
United States Federal income tax liability (or at a U.S. holders election if it
does not elect to claim a foreign tax credit for any foreign taxes paid during
the taxable year, all foreign income taxes paid may instead be deducted in
computing such U.S. holders taxable income). Generally, it will be more
advantageous to claim a credit because a credit reduces United States Federal
income taxes on a dollar-for-dollar basis, while a deduction merely reduces the
taxpayer's income subject to tax. There are significant and complex limitations
which apply to the tax credit, among which is an ownership period requirement
and the general limitation that the credit cannot exceed the proportionate share
of the U.S. Holder's United States Federal income tax liability that the U.S.
Holder's foreign source income bears to his or its worldwide taxable income. In
determining the application of this limitation, the various items of income and
deduction must be classified into foreign and United States sources. Complex
rules govern this classification process. In general, special rules will apply
to the calculation of foreign tax credits in respect of dividend income that is
subject to preferential rates of United States Federal income tax. The
availability of the foreign tax credit and the application of these complex
limitations on the tax credit are fact specific and holders and prospective
holders of our common shares should consult their own tax advisors regarding
their individual circumstances.

Passive Foreign Investment
Corporation

We do not believe that we are currently
a passive foreign investment corporation, referred to as a "PFIC". However,
since PFIC status depends upon the composition of a corporation's income and
assets and the market value of its assets and shares from time to time, there is
no assurance that we will not be considered a PFIC for any taxable year. If we
were treated as a PFIC for any taxable year during which a U.S. Holder held
shares, certain adverse United States Federal income tax consequences could
apply to the U.S. Holder.

58

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If we are treated as a PFIC for any
taxable year, gains recognized by a U.S. Holder on a sale or other disposition
of shares would be allocated ratably over the U.S. Holder's holding period for
the shares. The amount allocated to the taxable year of the sale or other
exchange and to any year before we became a PFIC would be taxed as ordinary
income. The amount allocated to each other taxable year would be subject to tax
at the highest rate in effect for individuals or corporations, as applicable,
and an interest charge would be imposed on the amount allocated to such taxable
year. Further, any distribution in respect of shares in excess of 125% of the
average of the annual distributions on shares received by the U.S. Holder during
the preceding three years or the U.S. Holder's holding period, whichever is
shorter, would be subject to United States federal income taxation as described
above. Certain elections might be available to U.S. Holders that may mitigate
some of the adverse consequences resulting from PFIC status. However, regardless
of whether such elections are made, dividends paid by a PFIC will not be
"qualified dividend income" and will generally be taxed at the higher rates
applicable to other items of ordinary income.

U.S. Holders and prospective holders
should consult their own tax advisorsregarding the potential application of the
PFIC rules to their ownership of ourcommon shares.

Medicare Tax

A U.S. Holder that is an individual or
estate, or a trust that does not fall into a special class of trusts that is
exempt from such tax, will be subject to a 3.8% tax on the lesser of (1) the
U.S. Holders "net investment income" (or undistributed "net investment income"
in the case of estates and trusts) for the relevant taxable year and (2) the
excess of the U.S. Holders modified adjusted gross income for the taxable year
over a certain threshold (which in the case of individuals will be between
$125,000 and $250,000, depending on the individuals circumstances). A holders
net investment income will generally include its interest income and its net
gains from the disposition of securities, unless such interest income or net
gains are derived in the ordinary course of the conduct of a trade or business
(other than a trade or business that consists of certain passive or trading
activities). If you are a U.S. Holder that is an individual, estate or trust,
you are urged to consult your own tax advisor regarding the applicability of
this Medicare tax.

Information Reporting and Backup
Withholding

Under United States Federal income tax
law and the Treasury Regulations, certain categories of U.S. Holders must file
information returns with respect to their investment in, or involvement in, a
foreign corporation. For example, certain United States Federal income tax
return disclosure obligations (and related penalties) are generally imposed on
U.S. Holders that hold certain specified foreign financial assets in excess of
$50,000. The definition of specified foreign financial assets includes not only
financial accounts maintained in foreign financial institutions, but also,
unless held in accounts maintained by a financial institution, any stock or
security issued by a non-U.S. person, any financial instrument or contract held
for investment that has an issuer or counterparty other than a U.S. person and
any interest in a foreign entity. U. S. Holders may be subject to these
reporting requirements unless their common shares are held in an account at a
domestic financial institution. Penalties for failure to file certain of these
information returns are substantial. U.S. Holders should consult with their own
tax advisers regarding the requirements of filing information returns, and, if
applicable, filing obligations relating to the PFIC rules.

Dividends paid on, and proceeds from
the sale or other taxable disposition of, our common shares to a U.S. Holder
generally may be subject to United States Federal information reporting
requirements and may be subject to backup withholding (currently at the rate of
28%) unless the U.S. Holder provides an accurate taxpayer identification number
or otherwise demonstrates that it is exempt. The amount of any backup
withholding collected from a payment to a U.S. Holder will generally be allowed
as a credit against the U.S. Holders United States Federal income tax liability
and may entitle the U.S. Holder to a refund, provided that certain required
information is timely submitted to the IRS. A non-U.S. holder generally will be
exempt from these information reporting requirements and backup withholding tax
but may be required to comply with certain certification and identification
procedures in order to establish its eligibility for exemption.

F. Dividends and Paying Agents

Not applicable.

59

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G. Statement by Experts

Not applicable.

H. Documents on Display

Documents and agreements concerning our
company may be inspected at the offices of Sangra Moller LLP, 1000 Cathedral
Place, 925 West Georgia Street, Vancouver, British Columbia, Canada.

I. Subsidiary Information

For a list of our significant
wholly-owned direct and indirect subsidiaries and significant non-wholly-owned
subsidiaries, see "Item 4: Information on the
Company  C. Organizational Structure".

ITEM 11: QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to various market risks
from changes in interest rates, foreign currency exchange rates and equity
prices which may affect our results of operations and financial condition and,
consequently, our fair value. Generally, our management believes that our
current financial assets and financial liabilities, due to their short-term
nature, do not pose significant financial risks. We use various financial
instruments to manage our exposure to various financial risks. The policies for
controlling the risks associated with financial instruments include, but are not
limited to, standardized company procedures and policies on matters such as
hedging of risk exposures, avoidance of undue concentration of risk and
requirements for collateral (including letters of credit) to mitigate credit
risk. We have risk managers to perform audits and checking functions to ensure
that company procedures and policies are complied with.

We use derivative instruments to manage
certain exposures to currency exchange rate risks. The use of derivative
instruments depends on our management's perception of future economic events and
developments. These types of derivative instruments are generally highly
speculative in nature. They are also very volatile as they are highly leveraged
given that margin requirements are relatively low in proportion to notional
amounts.

Many of our strategies, including the
use of derivative instruments and the types of derivative instruments selected
by us, are based on historical trading patterns and correlations and our
management's expectations of future events. However, these strategies may not be
fully effective in all market environments or against all types of risks.
Unexpected market developments may affect our risk management strategies during
this time, and unanticipated developments could impact our risk management
strategies in the future. If any of the variety of instruments and strategies we
utilize is not effective, we may incur losses.

Please refer to Note 39 of our annual
consolidated financial statements for the years ended December 31, 2012, 2011
and 2010 for a qualitative and quantitative discussion of our exposure to market
risks and the sensitivity analysis of interest rate, currency and other price
risks at December 31, 2012.

ITEM 12: DESCRIPTION OF SECURITIES
OTHER THAN EQUITY SECURITIES

Not applicable.

PART II

ITEM 13: DEFAULTS, DIVIDEND
ARREARAGES AND DELINQUENCIES

None.

ITEM 14: MATERIAL MODIFICATIONS TO
RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS

None.

60

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ITEM 15: CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls
and Procedures

Disclosure controls and procedures are
controls and other procedures that are designed to ensure that information
required to be disclosed in our company's reports filed or submitted under theSecurities Exchange Act of
1934is recorded, processed, summarized and
reported, within the time periods specified in the SEC's rules and forms.
Disclosure controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be disclosed in our
company's reports filed under theSecurities
Exchange Act of 1934is accumulated and
communicated to management, including our company's Chief Executive Officer and
Chief Financial Officer as appropriate, to allow timely decisions regarding
required disclosure.

As required by Rule 13a-15 under theSecurities Exchange Act of
1934, we have carried out an evaluation of
the effectiveness of the design and operation of our company's disclosure
controls and procedures as of the end of the period covered by this annual
report on Form 20-F, being December 31, 2012. This evaluation was carried out by
our Chief Executive Officer (being our principal executive officer) and Chief
Financial Officer (being our principal financial officer). Based upon that
evaluation, our Chief Executive Officer and Chief Financial Officer concluded
that our company's disclosure controls and procedures are effective.

Report of Management on Internal
Control over Financial Reporting

Management is responsible for
establishing and maintaining adequate internal control over financial reporting
as defined in Rule 13a-15(f) or 13d-15(f) under theSecurities Exchange Act of 1934, as
amended. Our internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of consolidated financial statements for external purposes
in accordance with IFRS. Our internal control over financial reporting includes
those policies and procedures that:

| | 1. |  | pertain to the
      maintenance of records that, in reasonable detail, accurately and fairly
      reflect the transactions and dispositions of our assets and our
      consolidated entities;                                                                                                                                           
| | -- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   
| | 2. |  | provide reasonable
      assurance that transactions are recorded as necessary to permit
      preparation of the consolidated financial statements in accordance with
      IFRS, and that receipts and expenditures of our company are being made
      only in accordance with authorizations of management and our directors;
      and
| |   
| | 3. |  | provide reasonable
      assurance regarding prevention or timely detection of unauthorized
      acquisition, use, or disposition of our assets that could have a material
      effect on the consolidated financial
statements.                                                                                                         

As described in this annual report on
Form 20-F, in 2012, we acquired 100% of Compton and controlling interests in
each of ACCR, Possehl and KCCL. The businesses acquired pursuant to such
acquisitions have been excluded from management's report on internal control
over financial reporting as there was not sufficient time to complete an
assessment of the internal controls of such businesses between the date of the
acquisition and the date of management's assessment of internal controls. The combined financial statements of these entities represent 50% of our total assets, 42% of our net assets, 11% of our net revenues and 3% of our net income as of and for the year ended December 31, 2012.

Management, including our Chief
Executive Officer and Chief Financial Officer, conducted an evaluation of the
effectiveness of our internal control over financial reporting as of December
31, 2012. In conducting this evaluation, management used the criteria set forth
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO)
inInternal Control  Integrated
Framework.

Based on this evaluation, management
concluded that, as of December 31, 2012, our company's internal control over
financial reporting was effective.

The effectiveness of our company's
internal control over financial reporting as of December 31, 2012 has been
audited by our independent registered chartered accountants, Deloitte LLP, who
also audited our consolidated financial statements for the year ended December
31, 2012. Deloitte LLP have expressed an unqualified opinion on the
effectiveness of our internal control over financial reporting as of December
31, 2012. Their report is included in this annual report on Form 20-F.

61

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Changes in Internal Control over
Financial Reporting

We maintain internal controls over
financial reporting which have been designed to provide reasonable assurance of
the reliability of external financial reporting in accordance with IFRS as
required by National Instrument 52-109.

Other than as disclosed above in
connection with the 2012 acquisitions, there were no changes in our internal
control over financial reporting that occurred during the year ended December
31, 2012 that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.

Inherent Limitations on
Effectiveness of Controls

Internal control over financial
reporting has inherent limitations. Internal control over financial reporting is
a process that involves human diligence and compliance and is subject to lapses
in judgment and breakdowns resulting from human failures. Internal control over
financial reporting also can be circumvented by collusion or improper management
override. Because of such limitations, there is a risk that material
misstatements will not be prevented or detected on a timely basis by internal
control over financial reporting. However, these inherent limitations are known
features of the financial reporting process. Therefore, it is possible to design
into the process safeguards to reduce, though not eliminate, this risk.

ITEM 16: [RESERVED]

ITEM 16A: AUDIT COMMITTEE FINANCIAL
EXPERT

Our board of directors has determined
that Robert Ian Rigg, a member of our Audit Committee, qualifies as an "audit
committee financial expert" and is "independent" as such terms are used in
Section 303A.02 of the NYSE Listed Company Manual.

Mr. Rigg is a retired accountant and
holds a commerce degree in economics and accounting from the University of
Melbourne and was a member of the Institute of Chartered Accountants in Canada.
In addition, his past experience includes acting as both a chief financial
officer and director of public companies.

ITEM 16B: CODE OF ETHICS

Code of Ethics and Code of
Conduct

Our board of directors encourages and
promotes a culture of ethical business conduct through the adoption and
monitoring of our codes of ethics and conduct, the insider trading policy and
such other policies as may be adopted from time to time.

Our Audit Committee adopted a Code of
Ethics for the Senior Executive Officers and Senior Financial Officers on
November 9, 2006. Since that date, our board of directors has conducted an
assessment of its performance, including the extent to which the board and each
director comply with the Code of Ethics. It is intended that such assessment
will be conducted annually. The Code of Ethics applies to our Chief Executive
Officer, President, Chief Financial Officer, Principal Executive Officer,
Principal Financial Officer, Principal Accounting Officer, Controller, persons
performing similar functions, and other officers or employees of our company
with prominent positions with respect to the filing of reports with securities
regulators.

The purpose of the Code of Ethics is to
promote: honest and ethical conduct, including the ethical handling of actual or
apparent conflicts of interest between personal and professional relationships;
full, fair, accurate and timely disclosure in all reports and documents filed
with securities regulators; compliance with applicable governmental laws, rules
and regulations; the prompt internal reporting of violations of the Code of
Ethics; and accountability for adherence to the Code of Ethics.

There has been no conduct of any
director or officer that would constitute a departure from the Code of Ethics,
and therefore, no material change reports have been filed in this regard.

62

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In addition, our Audit Committee has
adopted a written Code of Conduct, which sets out the standards of ethical
behaviour required for all employees and officers of our company and our
subsidiaries. Our board of directors conducts regular reviews with management
for compliance with such policies. The basic principles of the Code of Conduct
include: providing customers with the best
quality products and services at competitive prices; providing employees with a
fair, polite and respectful work environment; keeping company information
confidential; keeping client and business partner information confidential;
being fair and honest to all parties having business relationships with our
company; not doing business with any third parties who are likely to harm our
company's reputation; refraining from any form of discrimination or harassment;
and being mindful of the interest of the public and the environment. The Code of
Conduct emphasizes that all employees of our company, regardless of their
position or status, are accountable for complying with all applicable legal
requirements, the general provisions stipulated by the Code of Conduct, and our
other business policies.

We will provide a copy of the Code of
Ethics or the Code of Conduct to any person without charge, upon request.
Requests can be sent by mail to: MFC Industrial Ltd., Suite 1620 - 400 Burrard
Street, Vancouver, British Columbia, Canada V6C 3A6.

ITEM 16C: PRINCIPAL ACCOUNTANT FEES
AND SERVICES

Audit Fees

The aggregate fees for audit services
rendered for the audit of our annual financial statements for the fiscal years
ended December 31, 2012 and 2011 by Deloitte LLP were C$1,682,000 and
C$1,055,000.

Audit Related
Fees

For the fiscal years ended December 31,
2012, Deloitte LLP performed assurance or related services relating to the
performance of the audit or review of our financial statements which are not
reported under the caption "Audit Fees" above, with aggregate fees for such
audit related services totalling C$330,000 and C$nil in 2012 and 2011,
respectively.

Tax Fees

For each of the fiscal years ended
December 31, 2012 and 2011, the aggregate fees billed for tax compliance, tax
advice and tax planning by Deloitte LLP were C$nil.

All Other
Fees

For the fiscal years ended December 31,
2012 and 2011, the aggregate fees billed by Deloitte LLP for all other non-audit
professional services was C$470,000 and C$nil, respectively, in connection with
valuation and other services in connection with our acquisition of
Compton.

Audit Committee Pre-approval
Policies and Procedures

The Audit Committee pre-approves all
services provided by our independent auditors. All of the services and fees
described under the categories of "Audit Fees", "Audit Related Fees", "Tax Fees"
and "All Other Fees" were reviewed and approved by the Audit Committee before
the respective services were rendered and none of such services were approved by
the Audit Committee pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of
Regulation S-X.

The Audit Committee has considered the
nature and amount of the fees billed for the fiscal year ended December 31, 2012
and 2011 by Deloitte LLP and believes that the provision of the services for
activities unrelated to the audit is compatible with maintaining the
independence of Deloitte LLP.

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

Not applicable.

ITEM 16E: PURCHASES OF EQUITY
SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS

We announced an odd-lot share
repurchase program on March 30, 2012, which commenced on April 9, 2012 and
expired on July 2, 2012. Pursuant to the program, we offered to buy back common
shares from registered and beneficial shareholders who owned 99 or fewer common
shares. Pursuant to the program, we repurchased and cancelled a total of 6,028
of our common shares.Shareholders who elected to participate in the repurchase
program received an amount equal to the weighted average of the closing prices
of our common shares on the NYSE during each of the initial six-week period of
the program and the six-week extension thereto for each common share tendered.
The following table sets out information respecting purchases made under the
program:

Total Number of
      Common
    
    Average Price
      PaidPeriod
    
    Shares Purchased
    
    per Common ShareApril 9, 2012 toMay 21, 2012
    
    4,645
    
    
    $
    7.31May 22, 2012 toJuly 2, 2012
    
    1,383
    
    
    $
    6.87Total
    
    6,028


Other than pursuant to our odd-lot
share repurchase program, during the year ended December 31, 2012, neither we
nor any affiliated purchaser (as defined in theSecurities Exchange Act of 1934)
purchased any of our common shares.

ITEM 16F: CHANGE IN REGISTRANT'S
CERTIFYING ACCOUNTANT

Not applicable.

63

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ITEM 16G: CORPORATE
GOVERNANCE

Shares of our common stock
are listed on the NYSE. Summarized below are the significant differences between
our corporate governance rules and the corporate governance rules applicable to
U.S. domestic issuers under the listing standards of the NYSE:

- Section 303A.03 of the
  NYSE's Listed Company Manual requires the non-management directors of a listed
  company to meet at regularly scheduled executive sessions without management.

While our independent directors (all of whom are non-management
directors) meet regularly for committee meetings at which they are all present
without non-independent directors or management in attendance, they do not
generally hold other regularly scheduled meetings at which non-independent
directors and members of management are not in attendance.

- Section 303A.08 of the NYSE's Listed
  Company Manual requires shareholder approval of all equity compensation plans
  and material revisions to such plans.

Our current stock option and Incentive Plan have been approved by our
shareholders. However, while our Incentive Plan provides that amendments may be
submitted for shareholder approval by our board of directors to the extent that
it deems it necessary or advisable, our plans do not specifically require
shareholder approval of material revisions.

ITEM 16H: MINE SAFETY
DISCLOSURE

The information concerning
mine safety violations and other regulatory matters required by Section 1503(a)
of theDodd-Frank Wall Street
Reform and Consumer Protection Actis included in Exhibit 16.1 to this annual report on Form 20-F.

ITEM 17: FINANCIAL
STATEMENTS

Not applicable. See
"Item 18: Financial
Statements".

64

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ITEM 18: FINANCIAL STATEMENTS

The following attached financial
statements are incorporated herein:

|1. |  | Report of Independent Registered Chartered Accountants,
      Deloitte LLP, dated April 1, 2013 on the consolidated financial statements
      of our company for the years ended December 31, 2012 and
2011                                                                                                           |  | 66
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --
|2. |  | Report of Independent Registered Chartered Accountants,
      Deloitte LLP, on the effectiveness of internal controls over financial
      reporting as at December 31, 2012                                                                                                                                           |  | 68
|3. |  | Report of Independent Registered Public Accounting Firm,
      a member of NEXIA International, Davidson & Company LLP, dated March
      31, 2011 on the consolidated statement of operations, comprehensive
      income, changes in equity and cash flows of our company for the year ended
      December 31, 2010 |  | 70
|4. |  | Consolidated statements of financial
      position as of December 31, 2012 and 2011                                                                                                                                                                                                                                   |  | 71
|5. |  | Consolidated statements of
      operations for the years ended December 31, 2012, 2011 and 2010                                                                                                                                                                                                                       |  | 72
|6. |  | Consolidated statements of comprehensive
      income for the years ended December 31, 2012, 2011 and 2010                                                                                                                                                                                                             |  | 73
|7. |  | Consolidated statements of
      changes in equity for the years ended December 31, 2012, 2011 and
      2010                                                                                                                                                                                                          |  | 74
|8. |  | Consolidated statements of cash flows for
      the years ended December 31, 2012, 2011 and 2010                                                                                                                                                                                                                       |  | 75
|9. |  | Notes to consolidated
      financial statements as of December 31, 2012                                                                                                                                                                                                                                               |  | 76

65

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| | Deloitte
      LLP2800 - 1055 Dunsmuir
      Street4 Bentall CentreP.O. Box 49279Vancouver BC
      V7X 1P4Canada
      Tel: 604-669-4466Fax: 604-685-0395www.deloitte.ca | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

Report of Independent Registered
Chartered Accountants

To the Board of Directors and
Shareholders ofMFC Industrial Ltd.

We have audited the accompanying
consolidated financial statements of MFC Industrial Ltd. and subsidiaries
(collectively the "Company"), which comprise the consolidated statements of
financial position as at December 31, 2012 and 2011, and the consolidated
statements of operations, comprehensive income, changes in equity, and cash
flows for the years then ended, and 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 and the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we comply with ethical
requirements and plan and perform the audit to obtain reasonable assurance about
whether the consolidated financial statements are free from material
misstatement.

An audit involves performing procedures
to obtain audit evidence 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
entity'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 policies used and the reasonableness of accounting estimates made by
management, as well as evaluating the overall presentation of the consolidated
financial statements.

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

OpinionIn our opinion, the consolidated financial statements present
fairly, in all material respects, the financial position of MFC Industrial Ltd.
and subsidiaries as at December 31, 2012 and 2011, and their financial
performance and cash flows for the years then ended in accordance with
International Financial Reporting Standards as issued by the International
Accounting Standards Board.

Other MattersWe have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the Company's
internal control over financial reporting as of December 31, 2012, based on the
criteria established inInternal
ControlIntegrated Frameworkissued by the
Committee of Sponsoring Organizations of the Treadway Commission and our report
dated April 1, 2013,expressed an unqualified opinion on the Company's internal
control over financial reporting.

66

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The consolidated statements of
operations, comprehensive income, changes in equity, and cash flows for the year
ended December 31, 2010, were audited by another auditor who issued an
unmodified opinion on March 31, 2011.

/s/ Deloitte LLP

Independent Registered Chartered
Accountants

April 1, 2013

67

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| | Deloitte
      LLP2800 - 1055 Dunsmuir
      Street4 Bentall CentreP.O. Box 49279Vancouver BC
      V7X 1P4Canada
      Tel: 604-669-4466Fax: 604-685-0395www.deloitte.ca | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

Report of Independent Registered
Chartered Accountants

To the Board of Directors and
Shareholders ofMFC Industrial Ltd.

We have audited the internal control
over financial reporting of MFC Industrial Ltd. and subsidiaries (collectively
the "Company")as of December 31, 2012, based on the criteria established inInternal ControlIntegrated
Frameworkissued by the Committee of
Sponsoring Organizations of the Treadway Commission. As described in Report of
Management on Internal Control over Financial Reporting, management excluded
from its assessment the internal control over financial reporting at Compton
Petroleum Corporation, ACC Resources Co., L.P., Possehl Mexico S.A. de C.V. and
Kasese Cobalt Company Limited, which were acquired on September 6, 2012,
November 30, 2012, November 30, 2012 and March 16, 2012, respectively, and whose
combined financial statements constitute 50% of total assets, 42% of net assets, 11% of net revenues and 3% of net income of the consolidated
financial statement amounts as of and for the year ended December 31, 2012.
Accordingly, our audit did not include the internal control over financial
reporting at Compton Petroleum Corporation, ACC Resources Co., L.P., Possehl
Mexico S.A. de C.V. and Kasese Cobalt Company Limited. The Company's management
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 Report of Management on
Internal Control over Financial Reporting. Our responsibility is to express an
opinion on the Company's internal control over financial reporting based on our
audit.

We conducted our audit 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. Our audit included 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 considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our
opinion.

A company's internal control over
financial reporting is a process designed by, or under the supervision of, the
company's principal executive and principal financial officers, or persons
performing similar functions, and effected by the company's board of directors,
management, and other personnel 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 (1) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) 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 (3) 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.

Because of the inherent limitations of
internal control over financial reporting, including the possibility of
collusion or improper management override of controls, material misstatements
due to error or fraud may not be prevented or detected on a timely basis. Also,
projections of any evaluation of the effectiveness of the internal control over
financial reporting to future periods are subject to the risk that the controls
may become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.

In our opinion, the Company maintained,
in all material respects, effective internal control over financial reporting as
of December 31, 2012, based on the criteria established in Internal Control  Integrated Frameworkissued by the Committee of
Sponsoring Organizations of the Treadway Commission.

68

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We have also audited, in accordance
with Canadian generally accepted auditing standards and the standards of the
Public Company Accounting Oversight Board (United States), the consolidated
financial statements as of and for the years ended December 31, 2012 and 2011, of the
Company and our report dated April 1, 2013 expressed an unqualified opinion on
those consolidated financial statements.

/s/ Deloitte LLP

Independent Registered Chartered
Accountants

April 1, 2013

69

---



REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM

To the Board of Directors and Shareholders
ofMFC Industrial Ltd.

We have audited the accompanying
consolidated statement of operations of MFC Industrial Ltd. (the Company) and
the related statements of comprehensive income and changes in equity, and cash
flows for the year ended December 31, 2010. The Companys management is
responsible for these financial statements. Our responsibility is to express an
opinion on these financial statements based on our audit.

We conducted our audit in accordance
with 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 whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated
financial statements present fairly, in all material respects, the results of
operations of the Company and its cash flows for the year ended December 31,
2010 in accordance with International Financial Reporting Standards as issued by
the International Accounting Standards Board.

DAVIDSON & COMPANY LLP

Chartered Accountants

Vancouver, Canada

March 31, 2011



1200 - 609 Granville Street, P.O. Box
10372, Pacific Centre, Vancouver, B.C., Canada V7Y 1G6Telephone (604)
687-0947 Fax (604) 687-6172

70

---



MFC INDUSTRIAL LTD.

CONSOLIDATED STATEMENTS OF FINANCIAL
POSITION(United States Dollars in
Thousands)

|                                                   |  |       |  | December 31, |           | December 31,
|-------------------------------------------------- |  | ----- |  | ------------ | --------- | ------------
|ASSETS                                             |  | Notes |  | 2012         |           | 2011        
|Current Assets                                     |  |       |  |              |           |             
|Cash and cash
      equivalents                    |  |       |  | $            | 273,790   |             
|Short-term cash
      deposits                     |  |       |  |              | 182       |             
|Securities                                         |  | 6     |  |              | 6,658     |             
|Restricted
      cash                              |  | 7     |  |              | 889       |             
|Loan
      receivable                              |  | 8     |  |              | -         |             
|Bills of
      exchange                            |  | 9     |  |              | -         |             
|Trade
      receivables                            |  | 9     |  |              | 72,820    |             
|Other
      receivables                            |  | 10    |  |              | 18,314    |             
|Inventories                                        |  | 11    |  |              | 142,925   |             
|Real estate held
      for sale                    |  |       |  |              | 12,210    |             
|Deposits, prepaid
      and other                  |  | 12    |  |              | 27,833    |             
|Assets held for
      sale                         |  | 13    |  |              | 128,657   |             
|Total
      current assets                         |  |       |  |              | 684,278   |             
|Non-current Assets                                 |  |       |  |              |           |             
|Securities                                         |  | 14    |  |              | 9,637     |             
|Equity method
      investments                    |  | 15    |  |              | 22,382    |             
|Investment
      property                          |  | 16    |  |              | 34,152    |             
|Property, plant and
      equipment                |  | 17    |  |              | 80,139    |             
|Interests in
      resource properties             |  | 18    |  |              | 383,745   |             
|Hydrocarbon
      probable reserves                |  | 19    |  |              | 99,142    |             
|Hydrocarbon
      undeveloped lands                |  | 19    |  |              | 48,728    |             
|Deferred income tax
      assets                   |  | 20    |  |              | 18,510    |             
|Other                                              |  |       |  |              | 776       |             
|Total
      non-current assets                     |  |       |  |              | 697,211   |             
|                                                   |  |       |  | $            | 1,381,489 |             
|LIABILITIES AND
      EQUITY                       |  |       |  |              |           |             
|Current Liabilities                                |  |       |  |              |           |             
|Short-term bank
      borrowings                   |  | 21    |  | $            | 150,396   |             
|Debt, current
      portion                        |  | 22    |  |              | 44,169    |             
|Accounts payables
      and accrued expenses       |  | 23    |  |              | 77,586    |             
|Facility term
      financing                      |  | 24    |  |              | 7,390     |             
|Provisions                                         |  | 25    |  |              | 80        |             
|Income tax
      liabilities                       |  |       |  |              | 2,866     |             
|Deferred sale
      liabilities                    |  | 26    |  |              | 26,637    |             
|Liabilities
      relating to assets held for sale |  | 13    |  |              | 29,806    |             
|Total
      current liabilities                    |  |       |  |              | 338,930   |             
|Long-term Liabilities                              |  |       |  |              |           |             
|Debt, less current
      portion                   |  | 22    |  |              | 118,824   |             
|Facility term
      financing                      |  | 24    |  |              | 11,328    |             
|Deferred income tax
      liabilities              |  | 20    |  |              | 3,391     |             
|Decommissioning
      obligations                  |  | 27    |  |              | 136,642   |             
|Accrued pension
      obligations, net             |  | 28    |  |              | 1,228     |             
|Puttable instrument
      financial liabilities    |  | 29    |  |              | 7,761     |             
|Deferred sale
      liabilities                    |  | 26    |  |              | -         |             
|Total
      long-term liabilities                  |  |       |  |              | 279,174   |             
|Total
      liabilities                            |  |       |  |              | 618,104   |             
|Equity                                             |  |       |  |              |           |             
|Capital
    stock                                  |  | 30    |  |              | 382,746   |             
|Treasury
      stock                               |  | 30    |  |              | (68,610   | )           
|Contributed
      surplus                          |  |       |  |              | 13,037    |             
|Retained
      earnings                            |  |       |  |              | 426,184   |             
|Accumulated other
      comprehensive income       |  |       |  |              | 3,840     |             
|Total
      shareholders' equity                   |  |       |  |              | 757,197   |             
|Non-controlling
      interests                    |  |       |  |              | 6,188     |             
|Total
      equity                                 |  |       |  |              | 763,385   |             
|                                                   |  |       |  | $            | 1,381,489 |             

The accompanying notes are an integral
part of these consolidated financial statements.

71

---



MFC INDUSTRIAL LTD.

CONSOLIDATED STATEMENTS OF
OPERATIONSFor the Years Ended December
31, 2012, 2011 and 2010(United States
Dollars in Thousands, Except per Share Amounts)

|                                                                        |                               | Notes |  | 2012 |            | 2011    |  | 2010
|----------------------------------------------------------------------- | ----------------------------- | ----- |  | ---- | ---------- | ------- |  | ----
|Net sales                                                               |                               | 5&32  |  | $    | 479,507    |         |  | $   
|Equity income                                                           |                               | 5&32  |  |      | 6,152      |         |  |     
|Gross revenues                                                          |                               |       |  |      | 485,659    |         |  |     
|                                                                       
|Costs and Expenses:                                                     |                               |       |  |      |            |         |  |     
|Costs of sales                                                          |                               | 32    |  |      | 407,626    |         |  |     
|Impairment of
      available-for-sale securities                       |                               |       |  |      | 4,265      |         |  |     
|Impairment of interests
      in resource properties                    |                               |       |  |      | 42,631     |         |  |     
|Selling, general and
      administrative                               |                               |       |  |      | 47,737     |         |  |     
|Share-based compensation
       selling, general and administrative    |                               | 31    |  |      | 9          |         |  |     
|Finance costs                                                           |                               |       |  |      | 12,431     |         |  |     
|                                                                       
|                                                                        |                               |       |  |      | 514,699    |         |  |     
|                                                                       
|(Loss) income from operations                                           |                               |       |  |      | (29,040    | )       |  |     
|                                                                       
|Other items:                                                            |                               |       |  |      |            |         |  |     
|Exchange differences on
      foreign currency transactions             |                               |       |  |      | 7,108      |         |  |     
|Change in fair value of
      puttable instrument financial liabilities |                               |       |  |      | (77        | )       |  |     
|Bargain
purchase                                                        |                               | 3     |  |      | 247,004    |         |  |     
|                                                                       
|Income before income taxes                                              |                               |       |  |      | 224,995    |         |  |     
|Income tax (expense) recovery:                                          |                               |       |  |      |            |         |  |     
|Income taxes                                                            |                               | 33    |  |      | 8,528      |         |  |     
|Resource property revenue
      taxes                                   |                               | 33    |  |      | (5,902     | )       |  |     
|                                                                        |                               |       |  |      | 2,626      |         |  |     
|Income from continuing operations                                       |                               |       |  |      | 227,621    |         |  |     
|Loss from discontinued operations                                       |                               |       |  |      | -          |         |  |     
|Net income for the year                                                 |                               |       |  |      | 227,621    |         |  |     
|Less: Net (income) loss
      attributable to non-controlling interests |                               |       |  |      | (867       | )       |  |     
|Net income attributable to owners of the parent company                 |                               |       |  | $    | 226,754    |         |  | $   
|                                                                       
|Consisting of:                                                          | Continuing operations         |       |  |      | $          | 226,754 |  |     
|                                                                        | Discontinued
      operations |       |  |      |            | -       |  |     
|                                                                        |                               |       |  | $    | 226,754    |         |  | $   
|                                                                       
|Basic earnings (loss) per share:                                        | Continuing
      operations   |       |  |      | $          | 3.62    |  |     
|                                                                        | Discontinued
      operations |       |  |      |            | -       |  |     
|                                                                        |                               |       |  | $    | 3.62       |         |  | $   
|                                                                       
|Diluted earnings (loss) per share:                                      | Continuing
      operations   |       |  |      | $          | 3.62    |  |     
|                                                                        | Discontinued
      operations |       |  |      | $          | -       |  |     
|                                                                        |                               |       |  | $    | 3.62       |         |  | $   
|Weighted average number of common shares outstanding                    |                               |       |  |      |            |         |  |     
|
      basic                                                           |                               | 34    |  |      | 62,555,438 |         |  |     
| diluted                                                               |                               | 34    |  |      | 62,555,438 |         |  |     

The accompanying notes are an integral
part of these consolidated financial statements.

72

---



MFC INDUSTRIAL LTD.

CONSOLIDATED STATEMENTS OF
COMPREHENSIVE INCOMEFor the Years
Ended December 31, 2012, 2011 and 2010(United States Dollars in
Thousands)

|                                                                            |                                                                   | 2012 |         | 2011    |   | 2010
|--------------------------------------------------------------------------- | ----------------------------------------------------------------- | ---- | ------- | ------- | - | ----
|Net income for the year                                                     |                                                                   | $    | 227,621 |         |   | $   
|Other comprehensive income (loss), net of tax                               |                                                                   |      |         |         |   |     
|Exchange differences arising from translating financial
    statements      |                                                                   |      |         |         |   |     
|of
      foreign operations and U.S. dollar reporting                       |                                                                   |      | (7,262  | )       |   |     
|Reclassification adjustment
      for exchange differences to               |                                                                   |      |         |         |   |     
|statements of operations for
      subsidiaries deconsolidated              |                                                                   |      | (609    | )       |   |     
|                                                                            | Net exchange differences                                          |      |         | (7,871  | ) |     
|Fair value gain (loss) on
      available-for-sale securities               |                                                                   |      | 319     |         |   |     
|Reclassification of fair value loss (gain) on available-for-sale            |                                                                   |      |         |         |   |     
|securities to statements of operations for securities disposed
of           |                                                                   |      | 4,321   |         |   |     
|                                                                            | Net fair
      value gain (loss) on available-for-sale securities |      |         | 4,640   |   |     
|Remeasurement of the net defined benefit liabilities                        |                                                                   |      | 961     |         |   |     
|Other comprehensive loss                                                    |                                                                   |      | (2,270  | )       |   |     
|Total comprehensive income for the
      year                               |                                                                   |      | 225,351 |         |   |     
|Comprehensive (income) loss attributable to non-controlling
      interests |                                                                   |      | (980    | )       |   |     
|Comprehensive income attributable to owners
      of the parent company     |                                                                   | $    | 224,371 |         |   | $   
|Consisting of:                                                              | Continuing operations                                             |      | $       | 224,371 |   |     
|                                                                            | Discontinued operations                                           |      |         | -       |   |     
|                                                                            |                                                                   | $    | 224,371 |         |   | $   

The accompanying notes are an integral
part of these consolidated financial statements.

73

---



MFC INDUSTRIAL LTD.

CONSOLIDATED STATEMENTS OF CHANGES IN
EQUITYFor the Years Ended December 31, 2012, 2011 and
2010(United States Dollars in
Thousands)

|                                       |  |                     |   |                      |   |                 |   |        |            |                  |  |              |         |             |  |                            |   |            |   |         |  |             |          |               |  | Accumulated Other |        |       |  |   |     |      |   |        |   |  |   |         
|-------------------------------------- |  | ------------------- | - | -------------------- | - | --------------- | - | ------ | ---------- | ---------------- |  | ------------ | ------- | ----------- |  | -------------------------- | - | ---------- | - | ------- |  | ----------- | -------- | ------------- |  | ----------------- | ------ | ----- |  | - | --- | ---- | - | ------ | - |  | - | --------
|                                       |  | Capital
      Stock |   | Treasury
      Stock |   |                 |   |        |            |                  |  |              |         |             |  | Comprehensive
      Income |   |            |   |         |  |             |          |               |  |                   |        |      
|                                       |  |                     |   |                      |   |                 |   |        |            |                  |  |              |         |             |  | Contributed                |   |            |   |         |  |             |          |               |  |                   |        |       |  |   |     |      |   |        |   |  |   |         
|                                       |  |                     |   |                      |   |                 |   |        |            |                  |  |              |         |             |  | Surplus,                   |   |            |   |         |  | Available-  |          | Defined       |  | Currency          |        |       |  |   |     | Non- |   |        |   | 
|                                       |  | Number              |   |                      |   |                 |   | Number |            |                  |  |              |         | Share-based |  | Retained                   |   | for-sale   |   | Benefit |  | Translation |          | Shareholders' |  | **controlling**   |        | Total
|                                       |  | of
      Shares     |   | Amount               |   | of
      Shares |   | Amount |            | **Compensation** |  | **Earnings** |         | Securities  |  | Obligations                |   | Adjustment |   | Equity  |  | Interests   |          | Equity       
|Balance at December 31, 2009           |  | 35,577,155          |   |                      | $ | 141,604         |   |        | (5,317,244 | )                |  | $            | (83,334 | )           |  |                            | $ | 7,232      |   |         |  | $           | 354,334  |               |  | $                 | -      |       |  | $ | -   |      | $ | 15,853 |   |  | $ | 435,689 
|                                      
|Net
      income                       |  | -                   |   |                      |   | -               |   |        | -          |                  |  |              | -       |             |  |                            |   | -          |   |         |  |             | 30,316   |               |  |                   | -      |       |  |   | -   |      |   | -      |   |  |   | 30,316  
|Dividends
    paid                     |  | -                   |   |                      |   | -               |   |        | -          |                  |  |              | -       |             |  |                            |   | -          |   |         |  |             | -        |               |  |                   | -      |       |  |   | -   |      |   | -      |   |  |   | -       
|Cancellation of treasury stock         |  | (2,174,988          | ) |                      |   | (8,676          | ) |        | 2,174,988  |                  |  |              | 18,459  |             |  |                            |   | -          |   |         |  |             | (9,783   | )             |  |                   | -      |       |  |   | -   |      |   | -      |   |  |   | -       
|Purchase of shares in
      a company  |  | 41,400              |   |                      |   | 303             |   |        | -          |                  |  |              | -       |             |  |                            |   | -          |   |         |  |             | -        |               |  |                   | -      |       |  |   | -   |      |   | -      |   |  |   | 303     
|Purchase of shares in a                |  |                     |   |                      |   |                 |   |        |            |                  |  |              |         |             |  |                            |   |            |   |         |  |             |          |               |  |                   |        |       |  |   |     |      |   |        |   |  |   |         
|subsidiary                             |  | -                   |   |                      |   | -               |   |        | -          |                  |  |              | -       |             |  |                            |   | -          |   |         |  |             | -        |               |  |                   | -      |       |  |   | -   |      |   | -      |   |  |   | -       
|Distribution of
      shares in a      |  |                     |   |                      |   |                 |   |        |            |                  |  |              |         |             |  |                            |   |            |   |         |  |             |          |               |  |                   |        |       |  |   |     |      |   |        |   |  |   |         
|former subsidiary                      |  | -                   |   |                      |   | -               |   |        | -          |                  |  |              | -       |             |  |                            |   | -          |   |         |  |             | (161,348 | )             |  |                   | -      |       |  |   | -   |      |   | -      |   |  |   | (161,348
|Rights offering                        |  | 7,571,227           |   |                      |   | 49,549          |   |        | -          |                  |  |              | -       |             |  |                            |   | -          |   |         |  |             | -        |               |  |                   | -      |       |  |   | -   |      |   | -      |   |  |   | 49,549  
|Acquisition of Mass
      Financial    |  |                     |   |                      |   |                 |   |        |            |                  |  |              |         |             |  |                            |   |            |   |         |  |             |          |               |  |                   |        |       |  |   |     |      |   |        |   |  |   |         
|Corp.                                  |  | 24,992,122          |   |                      |   | 198,487         |   |        | (328,239   | )                |  |              | (2,626  | )           |  |                            |   | -          |   |         |  |             | -        |               |  |                   | -      |       |  |   | -   |      |   | -      |   |  |   | 195,861 
|Exercise of stock options              |  | 25,000              |   |                      |   | 406             |   |        | -          |                  |  |              | -       |             |  |                            |   | (80        | ) |         |  |             | -        |               |  |                   | -      |       |  |   | -   |      |   | -      |   |  |   | 326     
|Share-based
      compensation         |  | -                   |   |                      |   | -               |   |        | -          |                  |  |              | -       |             |  |                            |   | (1,377     | ) |         |  |             | -        |               |  |                   | -      |       |  |   | -   |      |   | -      |   |  |   | (1,377  
|Net
      change in available-for-sale |  |                     |   |                      |   |                 |   |        |            |                  |  |              |         |             |  |                            |   |            |   |         |  |             |          |               |  |                   |        |       |  |   |     |      |   |        |   |  |   |         
|securities                             |  | -                   |   |                      |   | -               |   |        | -          |                  |  |              | -       |             |  |                            |   | -          |   |         |  |             | -        |               |  |                   | 1,991  |       |  |   | -   |      |   | -      |   |  |   | 1,991   
|Translation
      adjustment           |  | -                   |   |                      |   | -               |   |        | -          |                  |  |              | -       |             |  |                            |   | -          |   |         |  |             | -        |               |  |                   | -      |       |  |   | -   |      |   | (3,554 | ) |  |   | (3,554  
|Balance at December 31, 2010           |  | 66,031,916          |   |                      |   | 381,673         |   |        | (3,470,495 | )                |  |              | (67,501 | )           |  |                            |   | 5,775      |   |         |  |             | 213,519  |               |  |                   | 1,991  |       |  |   | -   |      |   | 12,299 |   |  |   | 547,756 
|                                      
|Net
      income                       |  | -                   |   |                      |   | -               |   |        | -          |                  |  |              | -       |             |  |                            |   | -          |   |         |  |             | 12,193   |               |  |                   | -      |       |  |   | -   |      |   | -      |   |  |   | 12,193  
|Dividends
    paid                     |  | -                   |   |                      |   | -               |   |        | -          |                  |  |              | -       |             |  |                            |   | -          |   |         |  |             | (12,512  | )             |  |                   | -      |       |  |   | -   |      |   | -      |   |  |   | (12,512 
|Transfer of an interest in             |  |                     |   |                      |   |                 |   |        |            |                  |  |              |         |             |  |                            |   |            |   |         |  |             |          |               |  |                   |        |       |  |   |     |      |   |        |   |  |   |         
|resource property                      |  | -                   |   |                      |   | -               |   |        | -          |                  |  |              | -       |             |  |                            |   | -          |   |         |  |             | -        |               |  |                   | -      |       |  |   | -   |      |   | -      |   |  |   | -       
|Derecognition of a
      subsidiary    |  | -                   |   |                      |   | -               |   |        | -          |                  |  |              | -       |             |  |                            |   | -          |   |         |  |             | -        |               |  |                   | -      |       |  |   | -   |      |   | -      |   |  |   | -       
|Issuance of preferred shares           |  | 616,380             |   |                      |   | 616             |   |        | (616,380   | )                |  |              | (616    | )           |  |                            |   | -          |   |         |  |             | -        |               |  |                   | -      |       |  |   | -   |      |   | -      |   |  |   | -       
|Share-based
      compensation         |  | -                   |   |                      |   | -               |   |        | -          |                  |  |              | -       |             |  |                            |   | 7,253      |   |         |  |             | -        |               |  |                   | -      |       |  |   | -   |      |   | -      |   |  |   | 7,253   
|Net
      change in available-for-sale |  |                     |   |                      |   |                 |   |        |            |                  |  |              |         |             |  |                            |   |            |   |         |  |             |          |               |  |                   |        |       |  |   |     |      |   |        |   |  |   |         
|securities                             |  | -                   |   |                      |   | -               |   |        | -          |                  |  |              | -       |             |  |                            |   | -          |   |         |  |             | -        |               |  |                   | (6,750 | )     |  |   | -   |      |   | -      |   |  |   | (6,750  
|Translation
      adjustment           |  | -                   |   |                      |   | -               |   |        | -          |                  |  |              | -       |             |  |                            |   | -          |   |         |  |             | -        |               |  |                   | -      |       |  |   | -   |      |   | (1,317 | ) |  |   | (1,317  
|Balance at December 31, 2011           |  | 66,648,296          |   |                      |   | 382,289         |   |        | (4,086,875 | )                |  |              | (68,117 | )           |  |                            |   | 13,028     |   |         |  |             | 213,200  |               |  |                   | (4,759 | )     |  |   | -   |      |   | 10,982 |   |  |   | 546,623 
|                                       |  |                     |   |                      |   |                 |   |        |            |                  |  |              |         |             |  |                            |   |            |   |         |  |             |          |               |  |                   |        |       |  |   |     |      |   |        |   |  |   |         
|Net
      income                       |  | -                   |   |                      |   | -               |   |        | -          |                  |  |              | -       |             |  |                            |   | -          |   |         |  |             | 226,754  |               |  |                   | -      |       |  |   | -   |      |   | -      |   |  |   | 226,754 
|Cancellation of fractional shares      |  | (3,267              | ) |                      |   | -               |   |        | -          |                  |  |              | -       |             |  |                            |   | -          |   |         |  |             | -        |               |  |                   | -      |       |  |   | -   |      |   | -      |   |  |   | -       
|Purchase of subsidiaries               |  | -                   |   |                      |   | -               |   |        | -          |                  |  |              | -       |             |  |                            |   | -          |   |         |  |             | -        |               |  |                   | -      |       |  |   | -   |      |   | -      |   |  |   | -       
|By-back of odd-lot shares              |  | (6,028              | ) |                      |   | (36             | ) |        | -          |                  |  |              | -       |             |  |                            |   | -          |   |         |  |             | (8       | )             |  |                   | -      |       |  |   | -   |      |   | -      |   |  |   | (44     
|Dividends paid and payable             |  | -                   |   |                      |   | -               |   |        | -          |                  |  |              | -       |             |  |                            |   | -          |   |         |  |             | (13,762  | )             |  |                   | -      |       |  |   | -   |      |   | -      |   |  |   | (13,762 
|Share-based compensation               |  | -                   |   |                      |   | -               |   |        | -          |                  |  |              | -       |             |  |                            |   | 9          |   |         |  |             | -        |               |  |                   | -      |       |  |   | -   |      |   | -      |   |  |   | 9       
|Issuance of preferred shares           |  | 493,105             |   |                      |   | 493             |   |        | (493,105   | )                |  |              | (493    | )           |  |                            |   | -          |   |         |  |             | -        |               |  |                   | -      |       |  |   | -   |      |   | -      |   |  |   | -       
|Net
      fair value gain              |  | -                   |   |                      |   | -               |   |        | -          |                  |  |              | -       |             |  |                            |   | -          |   |         |  |             | -        |               |  |                   | 4,640  |       |  |   | -   |      |   | -      |   |  |   | 4,640   
|Net
      gain on remeasurements       |  | -                   |   |                      |   | -               |   |        | -          |                  |  |              | -       |             |  |                            |   | -          |   |         |  |             | -        |               |  |                   | -      |       |  |   | 961 |      |   | -      |   |  |   | 961     
|Net
      exchange differences         |  | -                   |   |                      |   | -               |   |        | -          |                  |  |              | -       |             |  |                            |   | -          |   |         |  |             | -        |               |  |                   | -      |       |  |   | -   |      |   | (7,984 | ) |  |   | (7,984  
|Balance at December 31, 2012           |  | 67,132,106          |   |                      | $ | 382,746         |   |        | (4,579,980 | )                |  | $            | (68,610 | )           |  |                            | $ | 13,037     |   |         |  | $           | 426,184  |               |  | $                 | (119   | )     |  | $ | 961 |      | $ | 2,998  |   |  | $ | 757,197 

|                           |  |               |  | Non-        |   |      
|-------------------------- |  | ------------- |  | ----------- | - | -----
|Total
      Comprehensive  |  | Shareholders' |  | Controlling |   |      
|Income (Loss) for the
Year |  | Equity        |  | Interests   |   | Total
|2010                       |  | 28,753        |  | (912        | ) |      
|2011                       |  | 4,126         |  | (1,042      | ) |      
|2012                       |  | 224,371       |  | 980         |   |      

|                                    |  | Common Shares       |   | Class A Common
      Shares* |   | Preferred Shares* |   | Total Capital Stock
|----------------------------------- |  | ------------------- | - | ---------------------------- | - | ----------------- | - | -------------------
|                                    |  | Number              |   |                              |   |                   |   | Number             
|Components of Capital Stock         |  | **of
      Shares** |   | Amount                       |   | of Shares         |   | Amount             
|Balance at December 31,
      2009  |  | 35,577,155          |   |                              | $ | 141,604           |   |                    
|                                   
|Cancellation and
      re-issuance  |  | (5,317,244          | ) |                              |   | (21,210           | ) |                    
|Cancellation of treasury stock      |  | -                   |   |                              |   | -                 |   |                    
|Purchase of shares
      in         |  |                     |   |                              |   |                   |   |                    
|subsidiaries                        |  | 41,400              |   |                              |   | 303               |   |                    
|Rights offering                     |  | 7,571,227           |   |                              |   | 49,549            |   |                    
|Acquisition of Mass
      Financial |  |                     |   |                              |   |                   |   |                    
|Corp.                               |  | 24,992,122          |   |                              |   | 198,487           |   |                    
|Exercise of stock options           |  | 25,000              |   |                              |   | 406               |   |                    
|Balance at December 31,
      2010  |  | 62,889,660          |   |                              | $ | 369,139           |   |                    
|Issuance of preferred shares        |  | -                   |   |                              |   | -                 |   |                    
|Balance at December 31,
      2011  |  | 62,889,660          |   |                              | $ | 369,139           |   |                    
|Cancellation of fractional shares   |  | (3,267              | ) |                              |   | -                 |   |                    
|Buy-back of odd-lot
      shares    |  | (6,028              | ) |                              |   | (36               | ) |                    
|Issuance of preferred shares        |  | -                   |   |                              |   | -                 |   |                    
|Balance at December 31,
      2012  |  | 62,880,365          |   |                              | $ | 369,103           |   |                    

*All the Class A Common Shares and
Preferred Shares were and are held by the Group as Treasury Stock.

The accompanying notes are an integral
part of these consolidated financial statements.

74

---



MFC INDUSTRIAL LTD.

CONSOLIDATED STATEMENTS OF CASH FLOWSFor the
Year Ended December 31, 2012, 2011 and 2010(United States Dollars in Thousands)

|                                                                                                   |  | 2012 |          | 2011 |  | 2010
|-------------------------------------------------------------------------------------------------- |  | ---- | -------- | ---- |  | ----
|Cash flows from continuing
      operating activities:                                             |  |      |          |      |  |     
|Income
      from continuing operations                                                            |  | $    | 227,621  |      |  | $   
|Adjustments
      for:                                                                             |  |      |          |      |  |     
|Amortization, depreciation and depletion                                                           |  |      | 20,312   |      |  |     
|Exchange differences on foreign currency transactions                                              |  |      | (7,108   | )    |  |     
|(Gain) loss on short-term securities                                                               |  |      | (1,162   | )    |  |     
|(Loss) gain on available-for-sale securities                                                       |  |      | 94       |      |  |     
|Impairment of available-for-sale securities                                                        |  |      | 4,265    |      |  |     
|Impairment of interests in resource properties                                                     |  |      | 42,631   |      |  |     
|Write-down of inventories                                                                          |  |      | 15,659   |      |  |     
|Stock-based compensation (recovery)                                                                |  |      | 9        |      |  |     
|Deferred income taxes                                                                              |  |      | (12,105  | )    |  |     
|Equity income                                                                                      |  |      | (6,152   | )    |  |     
|Market value decrease (increment) on commodity inventories                                         |  |      | 1,509    |      |  |     
|Change in fair value of puttable instrument financial
liabilities                                  |  |      | 77       |      |  |     
|Bargain purchase                                                                                   |  |      | (247,004 | )    |  |     
|Changes in operating assets and liabilities, net of effects of
      acquisitions and dispositions |  |      |          |      |  |     
|Short-term cash deposits                                                                           |  |      | (16      | )    |  |     
|Short-term securities                                                                              |  |      | 7,241    |      |  |     
|Restricted cash                                                                                    |  |      | (269     | )    |  |     
|Bills of exchange                                                                                  |  |      | 10,545   |      |  |     
|Receivables                                                                                        |  |      | (12,899  | )    |  |     
|Inventories                                                                                        |  |      | (36,479  | )    |  |     
|Deposits, prepaid and other                                                                        |  |      | (8,936   | )    |  |     
|Assets held for sale                                                                               |  |      | (3,103   | )    |  |     
|Short-term bank borrowings                                                                         |  |      | (115,505 | )    |  |     
|Accounts payable and accrued expenses                                                              |  |      | (8,267   | )    |  |     
|Deferred sale liabilities                                                                          |  |      | (15,080  | )    |  |     
|Income tax liabilities                                                                             |  |      | (2,280   | )    |  |     
|Provisions                                                                                         |  |      | (36      | )    |  |     
|Decommissioning obligations                                                                        |  |      | 44       |      |  |     
|Accrued pension obligations                                                                        |  |      | (19      | )    |  |     
|Other                                                                                              |  |      | 2,041    |      |  |     
|Cash flows (used in) provided by continuing
      operating activities                             |  |      | (144,372 | )    |  |     
|Cash flows from continuing
      investing activities:                                             |  |      |          |      |  |     
|Purchases of property, plant and equipment, net                                                    |  |      | (2,108   | )    |  |     
|Purchases of
      long-term investments                                                           |  |      | (5,100   | )    |  |     
|Proceeds from sales of long-term securities                                                        |  |      | 2,616    |      |  |     
|Increase in loan
      receivables                                                                 |  |      | (81      | )    |  |     
|Decrease in loan receivables                                                                       |  |      | 19,950   |      |  |     
|Distributions from
      joint ventures, net                                                       |  |      | 7,641    |      |  |     
|Acquisition of a subsidiary (net of cash acquired)                                                 |  |      | (78,546  | )    |  |     
|Other                                                                                              |  |      | (48      | )    |  |     
|Cash flows (used in) provided by continuing
      investing activities                             |  |      | (55,676  | )    |  |     
|Cash flows from continuing
      financing activities:                                             |  |      |          |      |  |     
|Debt
      repayment                                                                               |  |      | (28,259  | )    |  |     
|Debt
    borrowing                                                                                 |  |      | 133,485  |      |  |     
|Reduction in facility term financing                                                               |  |      | (7,388   | )    |  |     
|Issuance of
      shares                                                                           |  |      | -        |      |  |     
|Repurchase of shares                                                                               |  |      | (44      | )    |  |     
|Dividends paid to
      shareholders                                                               |  |      | (13,762  | )    |  |     
|Dividends paid to non-controlling interests                                                        |  |      | (666     | )    |  |     
|Cash flows provided by
      (used in) continuing financing activities                             |  |      | 83,366   |      |  |     
|Cash flows used in discontinued operating
      activities                                         |  |      | -        |      |  |     
|Cash flows used in
      discontinued investing activities                                         |  |      | -        |      |  |     
|Cash flows used in discontinued financing
      activities                                         |  |      | -        |      |  |     
|Exchange rate effect on
      cash and cash equivalents                                            |  |      | 3,420    |      |  |     
|Decrease in cash and cash
    equivalents                                                          |  |      | (113,262 | )    |  |     
|Cash and cash equivalents,
      beginning of year                                                 |  |      | 387,052  |      |  |     
|Cash and cash equivalents, end of
    year                                                         |  | $    | 273,790  |      |  | $   
|Cash and cash equivalents
      at end of year consisted of:                                       |  |      |          |      |  |     
|Cash                                                                                               |  | $    | 208,860  |      |  | $   
|Money market and
      highly liquid funds                                                         |  |      | 64,930   |      |  |     
|                                                                                                   |  | $    | 273,790  |      |  | $   
|                                                                                                  
|Supplemental cash flows
      disclosure (see Note 37)                                             |  |      |          |      |  |     
|Interest received                                                                                  |  | $    | 7,201    |      |  | $   
|Dividends
      received                                                                           |  |      | 353      |      |  |     
|Interest paid                                                                                      |  |      | (8,120   | )    |  |     
|Income taxes paid
      (including resource property revenue taxes)                                |  |      | (10,266  | )    |  |     

The accompanying notes are an integral part of
these consolidated financial statements.

75

---



MFC INDUSTRIAL LTD.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS DECEMBER 31, 2012

Note 1. Nature of Business and
Summary of Significant Accounting Policies

MFC Industrial Ltd. (MFC Industrial
or the Company) is incorporated under the laws of British Columbia, Canada.
MFC Industrial is a global commodities supply chain company.

In November and December 2010, MFC
Industrial, through a share exchange, acquired all of the issued and outstanding
shares of Mass Financial Corp. ("Mass"). Mass and its subsidiaries
(collectively, "Mass Group") are primarily in the commodities and resources
business, and merchant banking. The Group consolidated the results of the
operations of Mass Group since November 16, 2010.

In September 2012, MFC Industrial,
through its Austrian subsidiary, acquired all of the issued and outstanding
shares of Compton Petroleum Corporation (CPC). CPC and its joint ventures and
special-purpose entity (collectively CPC Group) are primarily in the
hydrocarbon business. The Group consolidated the results of the operations of
CPC Group since September 7, 2012.

Until the end of March 2010, MFC
Industrial also operated in the industrial plant technology, equipment and
service business for the cement and mining industries through its former
subsidiary KHD Humboldt Wedag International AG in Germany and its subsidiaries
and affiliates (collectively "KID"). MFC Industrial ceased to consolidate KID
from March 31, 2010 and completed the spin-off of KID by December 31, 2010 (see
Note 4). As a result, the results of operations of KID had been reclassified and
presented as discontinued operations.

A. Basis of
Presentation

Basis of
Accounting

These consolidated financial statements
have been prepared in accordance with the English language version of
International Financial Reporting Standards (IFRS) which include International
Accounting Standards (IAS) and Interpretations (IFRIC and SIC) as issued
by the International Accounting Standards Board (the "IASB").

These consolidated financial statements
were prepared using going concern, accrual (except for cash flow information)
and historical cost (except for investment property and certain financial assets
and financial liabilities which are measured at fair value) bases.

The presentation currency of these
consolidated financial statements is the United States of America (the "U.S.")
dollar ($), as rounded to the nearest thousand (except per share amounts and
amounts indicated in specific monetary units).

Principles of
Consolidation

These consolidated financial statements
include the accounts of MFC Industrial and entities it controls (collectively,
the "Group"). Control comprises the power to govern the financial and operating
policies of the investee so as to obtain benefit from its activities and is
achieved through direct and indirect ownership of voting rights; currently
exercisable or convertible potential voting rights; or by way of contractual
agreement. Subsidiaries are consolidated from the date of their acquisition,
being the date on which the Group obtains control, and continue to be
consolidated until the date that such control ceases. All intercompany balances
and transactions, including unrealized profits arising from intragroup
transactions, have been eliminated in full. Unrealized losses are eliminated
unless the transaction provides evidence of an impairment of the asset
transferred. On the acquisition date, non-controlling interest is measured at
either its fair value or its proportionate share in the recognized amounts of
the subsidiarys identifiable net assets, on a transaction-by-transaction basis.
Subsequently, non-controlling interest increases or decreases for its share of
changes in equity since the acquisition date.

Interests in special purpose
entities -A special purpose entity (SPE)
is usually created to accomplish a narrow and well-defined objective. The Group
consolidates SPEs because the substance of the relationship between the SPEs and
the Group indicates that the SPEs are controlled by the Group pursuant to
SIC-12,Consolidation  Special Purpose
Entities(SIC-12).

76

---



MFC INDUSTRIAL LTD.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS DECEMBER 31, 2012

Note 1. Nature of Business and
Summary of Significant Accounting Policies (continued)

Interests in joint ventures -A joint venture is a contractual arrangement
whereby two or more parties (venturers) undertake an economic activity that is
subject to joint control. Joint control exists only when the strategic financial
and operating decisions relating to the activity require the unanimous consent
of the venturers.

A jointly controlled entity is a joint
venture that involves the establishment of a company, partnership or other
entity to engage in economic activity that the group jointly controls with its
fellow venturers.

The results, assets and liabilities of
a jointly controlled entity are incorporated in these financial statements using
the equity method of accounting. Under the equity method, the Groups investment
in a jointly controlled entity is carried in the statement of financial position
at cost, plus post-acquisition changes in the Group's share of net assets of the
jointly controlled entity, less distributions received and less any impairment
in value of the investment. Loans advanced to jointly controlled entities are
also included in the investment balance on the consolidated statement of
financial position. The consolidated statement of operations reflects the
Group's share of the results after tax of the jointly controlled
entities.

Unrealized gains on transactions
between the Group and its jointly controlled entities are eliminated to the
extent of the Group's interest in the jointly controlled entities. Unrealized
losses are also eliminated unless the transaction provides evidence of an
impairment of the asset transferred.

The Group ceases to use the equity
method of accounting from the date on which it no longer has joint control or
significant influence over the joint venture, or when the interest becomes held
for sale.

Interests in jointly controlled assets
are included in these consolidated financial statements using the proportionate
consolidation method and included in the accounts is the Groups proportionate
share of revenues, expenses, assets and liabilities.

Interests in associates- An associate is an entity over which the
Group is in a position to exercise significant influence through participation
in the financial and operating policy decisions of the investee, but which is
not a subsidiary or a joint venture. The results, assets and liabilities of an
associate are incorporated in these financial statements using the equity method
of accounting as described above for jointly controlled entities.

The financial statements of MFC
Industrial and its subsidiaries, SPEs, joint ventures and associates used in the
preparation of the consolidated financial statements are prepared as of the same
date, using uniform accounting policies for like transactions and other events
in similar circumstances.

Foreign Currency
Translation

The presentation currency of the
Group's consolidated financial statements is the U.S. dollar. The Group chose to
use the U.S. dollar as its presentation currency because the majority of MFC
Industrials shareholders are from the U.S.

MFC Industrial conducts its business
throughout the world through its foreign operations. Foreign operations are
entities that are subsidiaries, associates, joint ventures or branches, the
activities of which are based or conducted in countries or currencies other than
those of MFC Industrial. Functional currency is the currency of the primary
economic environment in which an entity operates and is normally the currency in
which the entity primarily generates and expends cash. Foreign currency is a
currency other than the functional currency of the entity.

Reporting foreign currency
transactions in the functional currency

A foreign currency transaction is
recorded, on initial recognition in the functional currency, by applying to the
foreign currency amount the spot exchange rate between the functional currency
and the foreign currency at the date of the transaction. At the end of each
reporting period: (a) foreign currency monetary items are translated using the
closing rate; (b) non-monetary items that are measured in terms of historical
cost in a foreign currency are translated using the exchange rate at the date of
the transaction; and (c) non-monetary items that are measured at fair value in a
foreign currency are translated using the exchange rates at the date when the
fair value was determined.

77

---



MFC INDUSTRIAL LTD.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS DECEMBER 31, 2012

Note 1. Nature of Business and
Summary of Significant Accounting Policies (continued)

Exchange differences arising on the
settlement of monetary items or on translating monetary items at rates different
from those at which they were translated on initial recognition during the
period or in previous financial statements are recognized in profit or loss in
the period in which they arise, except for exchange differences arising on a
monetary item that forms part of a reporting entity's net investment in a
foreign operation which are initially in other comprehensive income in the
consolidated financial statements and reclassified from equity to profit or loss
on disposal of the net investment.

When a gain or loss on a non-monetary
item is recognized in other comprehensive income, any exchange component of that
gain or loss is recognized in other comprehensive income. Conversely, when a
gain or loss on a non-monetary item is recognized in profit or loss, any
exchange component of that gain or loss is recognized in profit or loss.

Use of a presentation currency other
than the functional currency

The results and financial position of
an entity whose functional currency is not the currency of a hyperinflationary
economy are translated into a different presentation currency using the
following procedures: (a) assets and liabilities for each statement of financial
position presented are translated at the closing rate at the date of that
statement of financial position; (b) income and expenses for each statement of
comprehensive income or separate income statement presented are translated at
the average exchange rates for the periods (which approximate the exchange rates
at the dates of the transactions); and (c) all resulting exchange differences
are recognized in other comprehensive income.

The Group does not have any entities in
a hyperinflationary economy.

The following table sets out exchange
rates for the translation of Canadian dollars (CDN$ or C$), Euros (EUR or €) and
Chinese yuans (Renminbi or RMB), which represented the major trading currencies
of the Group, into U.S. dollars:

CDN$
    
    EUR
    
    RMBClosing rate at December 31, 2012
    
    1.0051
    
    1.3186
    
    0.1605Average rate for the year 2012
    
    1.0004
    
    1.2855
    
    0.1585Closing rate at December 31, 2011
    
    0.9833
    
    1.2972
    
    0.1589Average rate for the year 2011
    
    1.0110
    
    1.3918
    
    0.1548Closing rate at December 31, 2010
    
    1.0054
    
    1.3390
    
    0.1517Average rate for the year 2010
    
    0.9710
    
    1.3264
    
    0.1477


Use of Estimates and
Assumptions and Measurement Uncertainty

The timely preparation of the
consolidated financial statements in conformity with IFRS requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Management's best estimates are based on the facts
and circumstances available at the time estimates are made, historical
experience, general economic conditions and trends, and management's assessment
of probable future outcomes of these matters. Actual results could differ from
these estimates, and such differences could be material. For critical judgments
in applying accounting policies and major sources of estimation uncertainty, see
Notes 1C and 1D.

B. Significant Accounting Policies

(i) Financial
Instruments

All financial assets and financial
liabilities are classified by characteristic and/or management intent. Except
for certain financial instruments which are excluded from the scope, all
financial assets are classified into one of four categories: at fair value
through profit or loss, held-to-maturity, loans and receivables, and
available-for-sale; and all financial liabilities are classified into one of two
categories: at fair value through profit or loss and at amortized
cost.

78

---



MFC INDUSTRIAL LTD.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTSDECEMBER 31, 2012

Note 1. Nature of Business and
Summary of Significant Accounting Policies (continued)

Generally, a financial asset or
financial liability at fair value through profit or loss is a financial asset or
financial liability that meets either of the following conditions: (a) it is
classified as held for trading if it is (i) acquired or incurred principally for
the purpose of selling or repurchasing it in the near term; (ii) part of a
portfolio of identified financial instruments that are managed together and for
which there is evidence of a recent actual pattern of short-term profit taking;
or (iii) a derivative, except for a derivative that is a designated and
effective hedging instrument; or (b) it is designated by the Group upon initial
recognition as at fair value through profit or loss when certain conditions are
met. Generally, a financial instrument cannot be reclassified into or out of the
fair value through profit or loss category while it is held or issued. Only if a
financial asset is no longer held for the purpose of selling it in the near term
or in the rare circumstances that a reliable measure of fair value is no longer
available, the Group reclassifies the financial asset at its fair value on the
date of reclassification.

Available-for-sale financial assets are
those non-derivative financial assets that are designated as available for sale,
or that are not classified as loans and receivables, held-to-maturity
investments, or fair value through profit or loss.

Non-derivative financial liabilities,
other than puttable instruments, are classified as financial liabilities
measured at amortized cost.

When a financial asset or financial
liability is recognized initially, the Group measures it at its fair value plus,
in the case of a financial asset or financial liability not at fair value
through profit or loss, transaction costs that are directly attributable to the
acquisition or issue of the financial asset or financial liability. Transaction
costs related to the acquisition of a financial asset or financial liability at
fair value through profit or loss are expensed as incurred. The subsequent
measurement of a financial instrument and the recognition of associated gains
and losses is determined by the financial instrument classification.

After initial recognition, the Group
measures financial assets, including derivatives that are assets, at their fair
values, without any deduction for transaction costs it may incur on sale or
other disposal, except for the following financial assets: (a) held-to-maturity
investments which are measured at amortized cost using the effective interest
method; (b) loans and receivables which are measured at amortized cost using the
effective interest method; (c) investments in equity instruments that do not
have a quoted market price in an active market and whose fair value cannot be
reliably measured and derivatives that are linked to and must be settled by
delivery of such unquoted equity instruments are measured at cost. All financial
assets except those measured at fair value through profit or loss are subject to
review for impairment.

After initial recognition, the Group
measures all financial liabilities at amortized cost using the effective
interest method, except for financial liabilities that are classified as at fair
value through profit or loss (including derivatives that are liabilities) which
are measured at their fair values (except for derivative liabilities that are
linked to and must be settled by delivery of an unquoted equity instrument whose
fair value cannot be reliably measured, which should be measured at cost).

A gain or loss on a financial asset or
financial liability classified as at fair value through profit or loss is
recognized in the consolidated statement of operations for the period in which
it arises. A gain or loss on an available-for-sale financial asset is recognized
directly in other comprehensive income, except for impairment losses, until the
financial asset is derecognized, at which time the cumulative gain or loss
previously recognized in accumulated other comprehensive income is recognized in
profit or loss for the period. For financial assets and financial liabilities
carried at amortized cost, a gain or loss is recognized in the consolidated
statement of operations when the financial asset or financial liability is
derecognized or impaired, and through the amortization process.

Whenever quoted market prices are
available, bid prices are used for the measurement of fair value of financial
assets while ask prices are used for financial liabilities. When the market for
a financial instrument is not active, the Group establishes fair value by using
a valuation technique. Valuation techniques include using recent arm's length
market transactions between knowledgeable, willing parties, if available;
reference to the current fair value of another instrument that is substantially
the same; discounted cash flow analysis; option pricing models and other
valuation techniques commonly used by market participants to price the
instrument.

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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS DECEMBER 31, 2012

Note 1. Nature of Business and
Summary of Significant Accounting Policies (continued)

An entity classifies fair value
measurements using a fair value hierarchy that reflects the significance of the
inputs used in making the measurements. The fair value hierarchy has the
following levels:

| | (a) |  | quoted prices
      (unadjusted) in active markets for identical assets or liabilities (Level
      1);                                                                                                       
| | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    
| | (b) |  | inputs other than
      quoted prices included in Level 1 that are observable for the asset or
      liability, either directly (i.e. as prices) or indirectly (i.e. derived
      from prices) (Level 2); and
| |    
| | (c) |  | inputs for the asset
      or liability that are not based on observable market data (unobservable
      inputs) (Level 3).                                                                                   

Assessing the significance of a
particular input to the fair value measurement in its entirety requires
judgment, considering factors specific to the asset or liability.

(ii) Cash and Cash
Equivalents

Cash and cash equivalents are measured
at fair value through profit or loss and include cash on hand, cash at banks and
highly liquid investments (e.g. money market funds) readily convertible to a
known amount of cash and subject to an insignificant risk of change in value.
They have original maturities of three months or less and are generally
interest-bearing.

(iii) Restricted
Cash

Restricted cash, whose use is
restricted pursuant to the terms of a contract or an agreement, is measured at
fair value through profit or loss.

(iv)
Securities

Securities are classified as at fair
value through profit or loss (i.e. held for trading), or short-term or long-term
available-for-sale securities.

Publicly-traded securities (debt and
equity) which are acquired principally for the purpose of selling in the near
term are classified as held for trading. Securities held for trading are marked
to their bid prices on the reporting date and unrealized gains and losses are
included in the consolidated statement of operations.

Available-for-sale securities consist
of publicly-traded securities and unlisted equity securities which are not held
for trading and not held to maturity. Long-term available-for-sale securities
are purchased with the intention to hold until market conditions render
alternative investments more attractive. The available-for-sale securities are
stated at bid price whenever quoted market prices are available. When the market
for the available-for-sale security is not active, the Group establishes fair
value by using a valuation technique. Unrealized gains and losses are recorded
in other comprehensive income, net of income taxes.

When a decline in the fair value of an
available-for-sale security has been recognized in other comprehensive income
and there is objective evidence that the asset is impaired, the cumulative loss
that had been recognized in other comprehensive income is reclassified from
equity to profit or loss as a reclassification adjustment even though the
security has not been derecognized.

Impairment losses recognized in profit
or loss for an investment in an equity instrument classified as available for
sale shall not be reversed through profit or loss.

If, in a subsequent period, the fair
value of a debt instrument classified as available for sale increases and the
increase can be objectively related to an event occurring after the impairment
loss was recognized in profit or loss, the impairment loss shall be reversed,
with the amount of the reversal recognized in profit or loss.

Gains and losses on sales of securities
are recognized on the average cost basis.

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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS DECEMBER 31, 2012

Note 1. Nature of Business and
Summary of Significant Accounting Policies (continued)

(v)
Receivables

Receivables are financial instruments
which are not classified as at fair value through profit or loss or
available-for-sale. They are classified as loans and receivables and are
measured at amortized cost.

Receivables are net of an allowance for
credit losses, if any. The Group performs ongoing credit evaluation of customers
and adjusts the allowance accounts for specific customer risks and credit
factors. Receivables are considered past due on an individual basis based on the
terms of the contracts.

(vi) Allowance for Credit
Losses

The Group applies credit risk
assessment and valuation methods to its loan, trade and other receivables. The
Group's allowance for credit losses is maintained at an amount considered
adequate to absorb estimated credit-related losses. Such allowance reflects
management's best estimate of the losses in the Group's receivables and
judgments about economic conditions. Estimates and judgments could change in the
near-term, and could result in a significant change to a recognized allowance.
Credit losses arise primarily from receivables but may also relate to other
credit instruments issued by or on behalf of the Group, such as guarantees and
letters of credit. An allowance for credit losses may be increased by provisions
which are charged to income and reduced by write-offs net of any recoveries.

Specific provisions are established on
an individual basis. A country risk provision may be made based on exposures in
less developed countries and on management's overall assessment of the
underlying economic conditions in those countries. Write-offs are generally
recorded after all reasonable restructuring or collection activities have taken
place and there is no realistic prospect of recovery.

(vii) Derivative Financial
Instruments

A derivative is a financial instrument
or other contract with all three of the following characteristics: (a) its value
changes in response to the change in a specified interest rate, financial
instrument price, commodity price, foreign exchange rate, index of prices or
rates, credit rating or credit index, or other variable; (b) it requires no
initial net investment or an initial net investment that is smaller than would
be required for other types of contracts that would be expected to have a
similar response to changes in market factors; and (c) it is settled at a future
date. A derivative financial instrument is either exchange-traded or negotiated.
A derivative is included in the consolidated statement of financial position and
is measured at fair value. The recognition and measurement of a derivative
financial instrument is covered by IAS 39,Financial Instruments: Recognition and Measurement(IAS 39),which does not apply to contract
that is entered into and continues to be held for the purpose of the receipt or
delivery of a non-financial item in accordance with the entity's expected
purchase, sale or usage requirements.

The Group uses derivative financial
instruments to manage interest rate risk and to hedge exposures to fluctuations
in foreign currencies and commodity prices in accordance with its risk
management policy. The Group does not use derivative financial instruments for
speculative purposes. A description of the Group's objectives, policies and
strategies with regard to derivatives and other financial instruments is set out
in Note 39.

Derivatives embedded in other financial
instruments or other host contracts are treated as separate derivatives and
recorded in the statement of financial position at fair value when their risks
and characteristics are not closely related to those of the host contract.
Changes in the fair value of those embedded derivatives recognized in the
statement of financial position are recognized in the consolidated statement of
operations as they arise.

Where the Group has both the legal
right and intent to settle derivative assets and liabilities simultaneously with
a counterparty, the net fair value of the derivative financial instruments is
reported as an asset or liability, as appropriate.

Changes in the fair value of derivative
financial instruments that do not qualify for hedge accounting are recognized in
the consolidated statement of operations as they arise.

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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS DECEMBER 31, 2012

Note 1. Nature of Business and
Summary of Significant Accounting Policies (continued)

(viii) Hedge
Accounting

Hedge accounting is allowed when there
is a high degree of correlation between price movements in the derivative
instruments and the items designated as being hedged. The Group formally
documents all hedges and the risk management objectives at the inception of the
hedge. Derivative instruments that have been designated and qualify for hedge
accounting are classified as either cash flow or fair value hedges.

Changes in the fair values of
derivatives that are designated and qualify as fair value hedges are recognized
in the consolidated statement of operations together with any changes in the
fair values of the hedged items that are attributable to the hedged risk.

Changes in the fair value of the
effective portion of derivatives that are designated and qualify as cash flow
hedges are recognized in equity through other comprehensive income, while
changes in the fair value of the ineffective portion of cash flow hedges are
recognized in the consolidated statement of operations. Amounts accumulated in
equity are reclassified to the consolidated statement of operations when the
underlying transaction occurs or, if the transaction results in a non-financial
asset or liability, are included in the initial cost of that asset or liability.

For hedges of net investments, gains
and losses resulting from foreign exchange translation of the Group's net
investments in foreign operations and the effective portion of the hedging
instrument is recorded in other comprehensive income. Amounts included in
cumulative translation adjustment are reclassified to net income when realized.

Hedge accounting is discontinued when
the hedging instrument expires or is sold, terminated, or exercised, or no
longer qualifies for hedge accounting. At that time, any cumulative gain or loss
on the hedging instrument recognized in equity is retained in equity until the
forecasted transaction occurs. If a hedged transaction is no longer expected to
occur, the net cumulative gain or loss recognized in equity is reclassified to
the consolidated statement of operations.

(ix)
Inventories

Inventories consist of raw materials,
work-in-progress, and finished goods. Inventories are recorded at the lower of
cost and estimated net realizable value. Cost, where appropriate, includes an
allocation of manufacturing overheads incurred in bringing inventories to their
present location and condition. Net realizable value represents the estimated
selling price less all estimated costs of completion and cost to be incurred in
marketing, selling and distribution. The amount of any write-down of inventories
to net realizable value and all losses of inventories are recognized as an
expense in the period the write-down or loss occurs. The amount of a reversal of
a write-down of inventories arising from an increase in net realizable value is
recognized as a reduction in the amount of inventories recognized as an expense
in the period in which the reversal occurs.

Commodities acquired in commodity
broker-trader activities with the purpose of selling in the near future and
generating a profit from fluctuations in price or broker-traders' margin are
measured at fair value less costs to sell.

(x) Real Estate Held for
Sale

Real estate held for sale is real
estate intended for sale in the ordinary course of business or in the process of
construction or development for such sale.

Real estate held for sale is accounted
for as inventories at the lower of cost (on a specific item basis) and net
realizable value. Net realizable value is estimated by reference to sale
proceeds of properties sold in the ordinary course of business less all
estimated selling expenses around the reporting date, or by management estimates
based on prevailing market conditions. The amount of any write-down of
properties to net realizable value is recognized as an expense in the period the
write-down occurs. The amount of a reversal of a write-down arising from an
increase in net realizable value is recognized in the period in which the
reversal occurs.

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MFC INDUSTRIAL LTD.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTSDECEMBER 31, 2012

Note 1. Nature of Business and
Summary of Significant Accounting Policies (continued)

(xi) Investment
Property

Investment property is property that is
held for generating rental income or for capital appreciation or both, rather
than for: (a) use in the production or supply of goods or services or for
administrative purposes; or (b) sale in the ordinary course of business. The
Group's investment property comprises freehold land and buildings. Investment
property is initially recognized at cost including related transaction costs.
After initial recognition, investment property is measured at fair value, with
changes in fair value recognized in the Group's profit or loss for the period in
which it arises.

The fair value of investment property
is the price at which the property could be exchanged between knowledgeable,
willing parties in an arm's length transaction. Fair value specifically excludes
an estimated price inflated or deflated by special terms or circumstances,
special considerations or concessions granted by anyone associated with the
sale. The Group determines fair value without any deduction for transaction
costs it may incur on sale or other disposal. Fair value on the Group's
investment property is based on valuations prepared annually by external
evaluators in accordance with guidance issued by the International Valuation
Standard Committee and reviewed by the Group in accordance with guidance on fair
value in IAS 40,Investment
Property.

(xii) Property, Plant and
Equipment

Property, plant and equipment are
carried at cost, net of accumulated depreciation and, if any, accumulated
impairment losses. The initial cost of an item of property, plant and equipment
comprises its purchase price or construction cost, any costs directly
attributable to bringing the asset into operation, the initial estimate of any
decommissioning obligation, if any, and, for qualifying assets, borrowing costs.
The purchase price or construction cost is the aggregate amount paid and the
fair value of any other consideration given to acquire the asset. Where an item
of property, plant and equipment or part of the item that was separately
depreciated is replaced and it is probable that future economic benefits
associated with the replacement item will flow to the Group, the cost of the
replacement item is capitalized and the carrying amount of the replaced asset is
derecognized. All other replacement expenditures are recognized in the
consolidated statement of operations when incurred.

The depreciable amounts of the Groups
property, plant, and equipment are depreciated according to the following
estimated lives and methods:

|                                                   | Lives          |  | Method       
|-------------------------------------------------- | -------------- |  | -------------
|Buildings (including
      leasehold improvements) | up to 20 years |  | straight-line
|Processing plant and equipment                     | 5 to 20 years  |  | straight-line
|Refineries and power
      plant                   | Up to 30 years |  | straight-line
|Office equipment and other                         | 3 to 10 years  |  | straight-line

Inspection costs associated with major
maintenance programs are capitalized and amortized over the period to the next
inspection. The costs of maintenance turnarounds of facilities are capitalized
and amortized over the period to the next scheduled turnaround; generally three
years. All other maintenance costs are expensed as incurred.

Depreciation expense is included in
either costs of sales or selling, general and administrative expense, whichever
is appropriate.

The residual value and the useful life
of an asset are reviewed at least at each financial year-end and, if
expectations differ from previous estimates, the changes, if any, are accounted
for as a change in an accounting estimate in accordance with IAS 8,Accounting Policies, Changes in Accounting
Estimates and Errors. The depreciation method
applied to an asset is reviewed at least at each financial year-end and, if
there has been a significant change in the expected pattern of consumption of
the future economic benefits embodied in the asset, the method is changed to
reflect the changed pattern. The carrying value of property, plant and equipment
is reviewed for impairment whenever events or changes in circumstances indicate
the carrying value may not be recoverable.

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MFC INDUSTRIAL LTD.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTSDECEMBER 31, 2012

Note 1. Nature of Business and
Summary of Significant Accounting Policies (continued)

The carrying amount of an item of
property, plant and equipment is derecognized upon disposal or when no future
economic benefits are expected to arise from the continued use of the asset. Any
gain or loss arising on derecognition of the asset (calculated as the difference
between the net disposal proceeds and the carrying amount of the item) is
included in the consolidated statement of operations in the period in which the
item is derecognized.

(xiii) Exploration and
Evaluation Assets

Pre-license costs are recognized in the
consolidated statement of operations as incurred.

Exploration and evaluation costs,
including the costs of acquiring undeveloped lands and drilling costs are
initially capitalized until the drilling of the well is complete and the results
have been evaluated. The costs are accumulated in cost centers pending
determination of technical feasibility and commercial viability. The technical
feasibility and commercial viability is considered to be determinable when
proved and/or probable reserves are determined to exist. If proved and/or
probable reserves are found, the drilling costs and the costs of associated
hydrocarbon undeveloped lands are reclassified to interests in resource
properties, or from hydrocarbon undeveloped lands to hydrocarbon probable
reserves. The cost of hydrocarbon undeveloped lands that expires or any
impairment recognized during a period is charged to the consolidated statement
of operations.

Exploration and evaluation assets are
assessed for impairment if (i) sufficient data exists to determine technical
feasibility and commercial viability, and (ii) facts and circumstances suggest
that the carrying amount exceeds the recoverable amount. For purposes of
impairment testing, exploration and evaluation assets are allocated to
cash-generating units (CGUs).

(xiv) Interests in Resource
Properties

The Groups interests in resource
properties include iron ore mine and extracting facilities and hydrocarbons
development and production assets.

(a) Recognition and
measurement

Interests in resource properties are
initially measured at cost and subsequently carried at cost less accumulated
depletion and, if any, accumulated impairment losses.

The cost of an interest in resource
property includes the initial purchase price and directly attributable
expenditures to find, develop, construct and complete the asset. This includes
reclassifications from exploration and evaluation assets, installation or
completion of infrastructure facilities such as platforms, pipelines and the
drilling of development wells, including unsuccessful development or delineation
wells. Any costs directly attributable to bringing the asset to the location and
condition necessary to operate as intended by management and result in an
identifiable future benefit are also capitalized. This includes the estimate of
any decommissioning obligations and, for qualifying assets, capitalized
borrowing costs.

(b) Subsequent costs

Costs incurred subsequent to the
determination of technical feasibility and commercial viability and the costs of
replacing parts of property are capitalized only when they increase the future
economic benefits embodied in the specific asset to which they relate. Such
capitalized costs generally represent costs incurred in developing proved and/or
probable reserves and bringing in or enhancing production from such reserves,
and are accumulated on a field or geotechnical area basis. All other
expenditures are recognized in the consolidated statement of operations as
incurred. The costs of periodic servicing of the properties are recognized in
operating expenses as incurred.

The carrying amount of any replaced or
sold component is derecognized.

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MFC INDUSTRIAL LTD.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTSDECEMBER 31, 2012

Note 1. Nature of Business and
Summary of Significant Accounting Policies (continued)

(c) Depletion and
depreciation

The net carrying value of an interest
in a resource property is depleted using the unit of production method by
reference to the ratio of production in the period to the related reserves.

For interests in hydrocarbon
properties, depletion is computed based on proved producing reserves, taking
into account estimated future development costs necessary to bring those
reserves into production and the estimated salvage value of the asset at the end
of its useful life. Future development costs are estimated taking into account
the level of development required to continue to produce the reserves. Reserves
for hydrocarbon properties are estimated annually by independent qualified
reserve evaluators, and represent the estimated quantities of natural gas,
natural gas liquids and crude oil which geological, geophysical and engineering
data demonstrate with a specified degree of certainty to be recoverable in
future years from known reservoirs and which are considered commercially
producible. For depletion purposes, relative volumes of petroleum and natural
gas production and reserves are converted at the energy equivalent conversion
rate of six thousand cubic feet of natural gas to one barrel of crude oil.

For interests in iron ore and
extracting facilities, depletion is computed based on proved and probable
reserves. The estimate of the reserves of the iron ore is reviewed whenever
significant new information about the reserve is available, or at least at each
financial year-end.

(xv) Intangible
Assets

Intangible assets are carried at cost,
net of accumulated depreciation and, if any, accumulated impairment losses. An
intangible asset acquired as part of a business combination is measured at fair
value at the date of acquisition and is recognized separately from goodwill if
the asset is separable or arises from contractual or other legal rights.
Intangible assets with a finite life are amortized on a straight-line basis over
their expected useful lives. The expected useful lives of assets are reviewed on
an annual basis and, if necessary, changes in useful lives are accounted for
prospectively.

(xvi) Farm-out
Arrangements

The Corporation does not adjust the
recognized cost of exploratory property interests, excluding cash consideration
received, for which farm-out agreements have been made. No exploration costs
incurred by the farmee are recorded.

(xvii) Impairment of
Non-financial Assets

The Group reviews the carrying values
of its non-financial assets, other than exploration and evaluation assets, 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.
Exploration and evaluation assets are assessed for impairment when they are
reclassified to interests in resource properties and also if facts and
circumstances suggest that the carrying value exceeds the recoverable amount.

The recoverable amount is the higher of
an assets fair value less any costs to sell or value-in-use. Where an
individual asset does not generate separately identifiable cash flows, an
impairment test is performed at the CGU level which is the smallest grouping of
assets that generate independent, identifiable cash inflows. Where the carrying
amount of an asset or CGU exceeds its recoverable amount, the asset is
considered impaired and written down to its recoverable amount. In assessing
value-in-use, the estimated future cash flows are discounted to their present
value using a discount rate that reflects current market assessments of the time
value of money and the risks specific to the asset. In determining fair value
less costs to sell, an appropriate valuation model is used. These calculations
are corroborated by external valuation metrics or other available fair value
indicators wherever possible.

In assessing the carrying values of the
Groups unproved properties, management takes into account future plans for
those properties, the remaining terms of the leases and any other factors that
may be indicators of potential impairment.

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MFC INDUSTRIAL LTD.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTSDECEMBER 31, 2012

Note 1. Nature of Business and
Summary of Significant Accounting Policies (continued)

For assets other than goodwill, an
assessment is made each reporting date as to whether there is an indication that
previously recognized impairment losses no longer exist or have decreased. If
such indication exists, an estimate of the assets recoverable amount is
reviewed. A previously recognized impairment loss is reversed to the extent that
the events or circumstances that triggered the original impairment have changed.
The reversal is limited so that the carrying amount of the asset does not exceed
its recoverable amount, nor exceed the carrying amount that would have been
determined, net of depreciation, depletion and amortization had no impairment
loss been recognized for the asset in prior periods.

A reversal of an impairment loss for a
CGU is allocated to the assets of the CGU, except goodwill, pro-rata with the
carrying amounts of those assets. An impairment loss recognized for goodwill is
not reversed in a subsequent period.

(xviii) Assets Held for
Sale

Non-current assets or disposal groups
are classified as held for sale when their carrying amount will principally be
recovered through a sales transaction rather than through continued use and a
sales transaction is highly probable.

Assets held for sale are recorded at
the lower of carrying value and fair value less cost to sell and classified as
current assets.

(xix)
Leases

A lease is classified as an operating
lease if it does not transfer substantially all the risks and rewards incidental
to ownership. Operating lease payments are expensed in net earnings on a
straight line-basis over the term of the lease.

(xx) Sale and Repurchase
Arrangements

The Group enters into sale and
repurchase agreements with other commodity broker-traders pursuant to which the
Group sells an agreed quantity of commodities at agreed prices and undertakes to
buy back the same quantity of the same commodities at the same agreed prices in
future periods. These sale and repurchase transactions are accounted for as
financing arrangements. The sale and repurchase agreements are
non-interest-bearing. Cash received is discounted at the market-interest rate
and presented as deferred sale liabilities in the consolidated statement of
financial position. Deferred sale liabilities are accreted with the accretion
included in the consolidated statement of operation. When the transaction is
unwound in the normal course of business, cash is paid back to the counterparty,
with a debit to the deferred sale liabilities.

(xxi) Defined Benefit Pension
Plan

The Group recognizes a net defined
benefit liability, which represents the deficit of a defined benefit pension
plan and is calculated by deducting the fair value of plan assets from the
present value of the defined benefit obligations, in the consolidated statement
of financial position. When the Group has a surplus in a defined benefit plan,
it measures the net defined benefit asset at the lower of (a) the surplus in the
defined benefit plan; and (b) the asset ceiling. The Group accounts not only for
its legal obligation under the formal terms of a defined benefit plan, but also
for any constructive obligation that arises from the Groups informal
practices.

The Group uses the projected unit
credit method to determine the present value of its defined benefit obligations
and the related current service cost and, where applicable, past service cost.
Actuarial assumptions are unbiased and mutually compatible and comprise
demographic and financial assumptions.

Past service cost, which is the change
in the present value of the defined benefit obligation resulting from a plan
amendment or curtailment, is recognized as an expense at the earlier of when the
amendment/curtailment occurs or when the Group recognizes related restructuring
or termination costs. The gain or loss on a settlement, which is the difference
between the present value of the defined benefit obligation being settled and
the settlement price, is recognized when the settlement occurs.

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MFC INDUSTRIAL LTD.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTSDECEMBER 31, 2012

Note 1. Nature of Business and
Summary of Significant Accounting Policies (continued)

Current service cost and net interest
on the net defined benefit liability (asset) are recognized in the consolidated
statement of operations.

Remeasurements of the net defined
benefit liability (asset), which comprise actuarial gains and losses, the return
on plan assets (excluding amounts included in net interest on the net defined
benefit liability (asset)) and any change in the effect of the asset ceiling
(excluding amounts included in net interest on the net defined benefit liability
(asset)), are recognized in other comprehensive income and are not be
reclassified to profit or loss in a subsequent period.

(xxii) Provisions and
Contingencies

Provisions are recognized when the
Group has a present obligation as a result of a past event, it is probable that
an outflow of resources embodying economic benefits will be required to settle
the obligation and a reliable estimate can be made of the amount of the
obligation. Provisions are measured at management's best estimate of the
expenditure required to settle the obligation at the reporting date. Where
appropriate, the future cash flow estimates are adjusted to reflect risks
specific to the liability. If the effect of the time value of money is material,
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. Where discounting is used, the increase
in the provision due to the passage of time is recognized as interest expense.

Contingent liabilities are possible
obligations whose existence will only be confirmed by future events not wholly
within the control of the Group. Contingent liabilities, other than those
assumed in connection with business combinations which are measured at fair
value at the acquisition date, are not recognized in the consolidated financial
statements but are disclosed unless the possibility of an outflow of economic
resources is considered remote. Legal costs in connection with a loss
contingency are recognized when incurred.

(xxiii) Decommissioning
Obligations

The Group provides for decommissioning,
restoration and similar liabilities (collectively, decommissioning obligations,
or asset retirement obligations) on its resource properties, facilities,
production platforms, pipelines and other facilities based on estimates
established by current legislation and industry practices. The decommissioning
obligation is initially measured at fair value and capitalized to interest in
resource property or property, plant and equipment as an asset retirement cost.
The liability is estimated by discounting expected future cash flows required to
settle the liability using a pre-tax rate that reflects current market
assessments of the time value of money and the risks specific to the liability.
The estimated future asset retirement costs may be adjusted for risks such as
project, physical, regulatory and timing. The estimates are reviewed
periodically. Changes in the provision as a result of changes in the estimated
future costs or discount rates are added to or deducted from the asset
retirement cost in the period of the change. The liability accretes for the
effect of time value of money until it is settled. The asset retirement cost is
amortized through depreciation, depletion and amortization over the life of the
related asset. Actual asset retirement expenditures are recorded against the
obligation when incurred. Any difference between the accrued liability and the
actual expenditures incurred is recorded as a gain or loss in the settlement
period.

(xxiv) Puttable Instrument
Financial Liabilities

A puttable instrument financial
liability represents a contractual obligation for the issuer to repurchase or
redeem that instrument for cash or another financial asset on exercise of the
put. Puttable instrument held by non-controlling parties in a subsidiary is
classified as financial liability, which is recognized at an amount equal to the
present value of the amount that could be required to be paid to the
counterparties. Changes in the measurement of the gross obligation due to the
unwinding of the discount or changes in the amount that the acquirer could be
required to pay are recognized in the consolidated statement of operations.

The financial liability is reclassified
to equity when all the features of and conditions for equity are met. At such
time, equity is measured at the carrying value of the financial liability at the
date of reclassification.

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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTSDECEMBER 31, 2012

Note 1. Nature of Business and
Summary of Significant Accounting Policies (continued)

(xxv) Own Equity
Instruments

The Group's holdings of its own equity
instruments, including common stock and preferred stock, are classified as
"treasury stock", and are deducted from shareholders' equity at cost and in the
determination of the number of equity shares outstanding. No gain or loss is
recognized in the consolidated statement of operations on the purchase, sale,
re-issue or cancellation of the Groups own equity instruments.

(xxvi) Revenue
Recognition

Revenues include proceeds from sales of
commodities and resources, real estate properties, medical instruments and
supplies, fees from provisions of financial and other services, rental income
from and fair value gains on investment property, royalty income and net gains
on securities.

Revenue from the sale of goods is
recognized when: (a) the Group has transferred to the buyer the significant
risks and rewards of ownership of the goods (which generally coincides with the
time when the goods are delivered to customers and title has passed); (b) the
Group retains neither continuing managerial involvement to the degree usually
associated with ownership nor effective control over the goods sold; (c) the
amount of revenue can be measured reliably; (d) it is probable that the economic
benefits associated with the transaction will flow to the Group; and (e) the
costs incurred or to be incurred in respect of the transaction can be measured
reliably. For sales of hydrocarbon products, revenue is generally recognized at
the time hydrocarbon products enter the trading hub or are at the plant gate,
depending on the contractual arrangements.

Revenue from rendering of services is
recognized when: (a) the amount of revenue can be measured reliably; (b) it is
probable that the economic benefits associated with the transaction will flow to
the Group; (c) the stage of completion of the transaction at the reporting date
can be measured reliably; and (d) the costs incurred for the transaction and the
costs to complete the transaction can be measured reliably.

Revenue is measured at the fair value
of the consideration received or receivable and represents amounts receivable
for goods provided in the normal course of business, net of discounts, customs
duties, sales taxes and royalty obligations to governments and other mineral
interest owners. When the Group charges shipping and handling fees to customers,
such fees are included in sales revenue. Where the Group acts as an agent on
behalf of a third party to procure or market goods, any associated fee income is
recognized but no purchase or sale is recorded.

For interest, royalty and dividend
income, recognition is warranted when it is probable that economic benefits will
flow to the Group and the amount of income can be measured reliably. Interest
income is recognized on a time proportion basis, taking into account the
effective yield on the underlying asset. Royalty income is recognized on an
accrual basis, in accordance with the terms of the underlying agreement and is
reported net of royalties paid and government levies. Dividend income is
recognized when the Group's right as a shareholder to receive payment has been
established.

(xxvii) Costs of
Sales

Costs of sales include the cost of
goods (commodities and resources, real estate properties, medical instruments
and supplies) sold. The cost of goods sold includes both the direct cost of
materials and indirect costs, freight charges, purchasing and receiving costs,
inspection costs, distribution costs, overriding and other royalties, freehold
mineral taxesas
well as provision for warranty when applicable.

Costs of sales also include the
write-downs of inventories and available-for-sale securities, credit losses on
loans and receivables, fair value gain and loss on investment property and net
losses on securities.

The reversal of write-downs of
inventories and allowance for credit losses reduce the costs of
sales.

88

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MFC INDUSTRIAL LTD.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTSDECEMBER 31, 2012

Note 1. Nature of Business and
Summary of Significant Accounting Policies (continued)

(xxviii) Employee
Benefits

Wages, salaries, bonuses, social
security contributions, paid annual leave and sick leave are accrued in the
period in which the associated services are rendered by employees of the Group.
The employee benefits are included in either costs of sales or selling, general
and administrative expense, as applicable.

(xxix) Share-Based
Compensation

The cost of equity-settled transactions
with employees is measured by reference to the fair value at the date at which
equity instruments are granted and is recognized as an expense over the vesting
period, which ends on the date on which the relevant employees become fully
entitled to the award. Fair value is determined by using an appropriate
valuation model. No expense is recognized for awards that do not ultimately
vest. At each reporting date before vesting, the cumulative expense is
calculated, representing the extent to which the vesting period has expired and
management's best estimate of the achievement or otherwise of non-market
conditions and the number of equity instruments that will ultimately vest. The
movement in cumulative expense since the previous reporting date is recognized
in the consolidated statement of operations, with a corresponding amount in
equity.

When the terms of an equity-settled
award are modified or a new award is designated as replacing a cancelled or
settled award, the cost based on the original award terms continues to be
recognized over the original vesting period. In addition, an expense is
recognized over the remainder of the new vesting period for the incremental fair
value of any modification, based on the difference between the fair value of the
original award and the fair value of the modified award, both as measured on the
date of the modification. No reduction is recognized if this difference is
negative. When an equity-settled award is cancelled other than by forfeiture
when the vesting conditions are not satisfied, it is treated as if it had vested
on the date of cancellation and any cost not yet recognized in the consolidated
statement of operations for the award is expensed immediately.

Share-based compensation expenses are
classified as selling, general and administrative expenses. When stock options
are exercised, the exercise price proceeds together with the amount initially
recorded in the contributed surplus account are credited to capital stock.

(xxx) Finance
Costs

Finance costs comprise interest expense
on borrowings, accretion of the discount on provisions and liabilities and
charges and fees relating to factoring transactions.

Finance costs directly attributable to
the acquisition, construction or production of qualifying assets, which are
assets that necessarily take a substantial period of time to get ready for their
intended use, are added to the cost of those assets, until such time as the
assets are substantially ready for their intended use. All other finance costs
are recognized in the consolidated statement of operations in the period in
which they are incurred.

Share capital and debt are recorded at
the proceeds received, net of direct issue costs. Finance charges, including
premiums payable on settlement or redemption and direct issue costs for debt,
are charged to income on an accrual basis using the effective interest method
and are added to the carrying amount of the instrument to the extent that they
are not settled in the period in which they arise.

89

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MFC INDUSTRIAL LTD.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTSDECEMBER 31, 2012

Note 1. Nature of Business and
Summary of Significant Accounting Policies (continued)

(xxxi) Income
Taxes

Tax expense (tax recovery) comprises
current tax expense (current tax recovery) and deferred tax expense (deferred
tax recovery) and includes all domestic and foreign taxes which are based on
taxable profits. The tax currently payable is based on the taxable profits for
the period. Taxable profit differs from net income before income taxes as
reported in the consolidated statement of operations because it excludes items
of income or expense that are taxable or deductible in other periods and it
further excludes items that are never taxable or deductible. The Group's
liability for current tax is calculated using tax rates that have been enacted
or substantively enacted by the reporting date. Deferred tax is provided, using
the liability method, on all temporary differences at the reporting date between
the tax bases of assets and liabilities and their carrying amounts for financial
reporting purposes.

Deferred income tax liabilities are
recognized for all taxable temporary differences:

| | - |  | except where the deferred income tax
      liability arises on goodwill that is not tax deductible or the initial
      recognition of an asset or liability in a transaction that is not a
      business combination and, at the time of the transaction, affects neither
      the accounting profit nor taxable profit or loss.              
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |  |                                                                                                                                                                                                                                                                                                                                                  
| | - |  | in respect of taxable temporary
      differences associated with investments in subsidiaries, joint ventures
      and associates, except where the Group is able to control the timing of
      the reversal of the temporary differences and it is probable that the
      temporary differences will not reverse in the foreseeable
  future.

Deferred income tax assets are
recognized for all deductible temporary differences, carry-forward of unused tax
credits and unused tax losses, to the extent that it is probable that taxable
profit will be available against which the deductible temporary differences and
the carry-forward of unused tax credits and unused tax losses can be
utilized:

| | - |  | except where the deferred income tax
      asset relating to the deductible temporary difference arises from the
      initial recognition of an asset or liability in a transaction that is not
      a business combination and, at the time of the transaction, affects
      neither the accounting profit nor taxable profit or loss.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |  |                                                                                                                                                                                                                                                                                                                                           
| | - |  | in respect of deductible temporary
      differences associated with investments in subsidiaries, joint ventures
      and associates, deferred tax assets are recognized only to the extent that
      it is probable that the temporary differences will reverse in the
      foreseeable future.                                       

On the reporting date, management
reviews the Group's deferred income tax assets to determine whether it is
probable that the benefits associated with these assets will be realized. The
Group also reassesses unrecognized deferred income tax assets. This review and
assessment involve evaluating both positive and negative evidence. The Group
recognizes a previously unrecognized deferred tax asset to the extent that it
has become probable that future taxable profit will allow the deferred income
tax asset to be recovered.

Deferred income tax assets and
liabilities are measured at the tax rates that are expected to apply to the year
when the asset is realized or the liability is settled, based on tax rates and
tax laws that have been enacted or substantively enacted at the reporting date.
Tax relating to items recognized directly in other comprehensive income or
equity is recognized in other comprehensive income or equity and not in the
consolidated statement of operations.

Deferred income tax assets and
liabilities are offset when there is a legally enforceable right to set off
current income tax assets against current income tax liabilities, and when they
relate to income tax levied by the same taxation authority and the Group intends
to settle its current tax assets and liabilities on a net basis.

Resource property revenue taxes and
withholding taxes (which include withholding taxes payable by a subsidiary,
associate or joint venture on distributions to the Group) are treated as income
taxes when they have the characteristics of an income tax. This is considered to
be the case when they are imposed under government authority and the amount
payable is calculated by reference to revenue derived.

90

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MFC INDUSTRIAL LTD.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTSDECEMBER 31, 2012

Note 1. Nature of Business and
Summary of Significant Accounting Policies (continued)

The Group includes interest charges and
penalties on current tax liabilities as a component of interest expense.

(xxxii) Earnings Per
Share

Basic earnings per share is determined
by dividing net income attributable to common shares of the parent company by
the weighted average number of common shares outstanding during the period, net
of treasury stock.

Diluted earnings per share is
determined using the same method as basic earnings per share except that the
weighted average number of common shares outstanding includes the potential
dilutive effect of stock options. For the purpose of calculating diluted
earnings per share, the Group assumes the exercise of its dilutive options with
the assumed proceeds from these instruments regarded as having been received
from the issue of common shares at the average market price of common shares
during the period. The difference between the number of common shares issued and
the number of common shares that would have been issued at the average market
price of common shares during the period is treated as an issue of common shares
for no consideration and added to the weighted average number of common shares
outstanding. The amount of the dilution is the average market price of common
shares during the period minus the issue price and the issue price includes the
fair value of services to be supplied to the Group in the future under the
share-based payment arrangement.

When share-based payments are granted
during the period, the shares issuable are weighted to reflect the portion of
the period during which the payments are outstanding. The shares issuable are
also weighted to reflect forfeitures occurring during the period. When stock
options are exercised during the period, shares issuable are weighted to reflect
the portion of the period prior to the exercise date and actual shares issued
are included in the weighted average number of shares outstanding from the
exercise date.

(xxxiii) Business
Combinations

The Group adopted IFRS 3,Business Combinations,and accounts for each business combination by applying the
acquisition method. Pursuant to the acquisition method, the Group, when a
business combination occurs, identifies the acquirer (which obtains control of
the acquiree), determines the acquisition date (on which the acquirer legally
transfers the consideration, acquires the assets and assumes the liabilities of
the acquiree), recognize and measures the identifiable assets acquired, the
liabilities assumed and any non-controlling interest in the acquiree, and
recognize and measure goodwill or a gain from a bargain purchase (i.e. negative
goodwill). The identifiable assets acquired and the liabilities assumed are
measured at their acquisition-date fair values. Non-controlling interest is
measured at either its fair value or its proportionate share in the recognized
amounts of the subsidiarys identifiable net assets, on a
transaction-by-transaction basis.

The consideration transferred in a
business combination is measured at fair value, which is calculated as the sum
of the acquisition-date fair values of the assets transferred by the acquirer,
the liabilities incurred by the Group to former owners of the acquiree and the
equity interests issued by the Group.

In a business combination achieved in
stages, the Group remeasures its previously held equity interest in the acquiree
at its acquisition-date fair value and recognizes the resulting gain or loss, if
any, in profit or loss.

If the initial accounting for a
business combination is incomplete by the end of the reporting period in which
the combination occurs, the Group reports in its financial statements
provisional amounts for the items for which the accounting is incomplete. During
the measurement period, the Group retrospectively adjusts the provisional
amounts recognized at the acquisition date to reflect new information obtained
about facts and circumstances that existed as of the acquisition date and, if
known, would have affected the measurement of the amounts recognized as of that
date. During the measurement period, the Group also recognizes additional assets
or liabilities if new information is obtained about facts and circumstances that
existed as of the acquisition date and, if known, would have resulted in the
recognition of those assets and liabilities as of that date. The measurement
period ends as soon as the Group receives the information it was seeking about
facts and circumstances that existed as of the acquisition date or learns that
more information is not obtainable. However, the measurement period does not
exceed one year from the acquisition date.

91

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MFC INDUSTRIAL LTD.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTSDECEMBER 31, 2012

Note 1. Nature of Business and
Summary of Significant Accounting Policies (continued)

Acquisition-related costs are costs the
acquirer incurs to effect a business combination. Those costs include finder's
fees; advisory, legal, accounting, valuation and other professional or
consulting fees; general administrative costs, including the costs of
maintaining an internal acquisitions department; and costs of registering and
issuing debt and equity securities. The Group accounts for acquisition-related
costs as expenses in the periods in which the costs are incurred and the
services are received, except for the costs to issue debt or equity securities
(see Significant Accounting Policy Item(xxx)above).

C. Critical Judgments in Applying
Accounting Polices

In the process of applying the Group's
accounting policies, management makes various judgments, apart from those
involving estimations under Note 1(D) below, that can significantly affect the
amounts it recognizes in the consolidated financial statements. The following
are the critical judgments that management has made in the process of applying
the Groups accounting policies and that have the most significant effects on
the amounts recognized in the consolidated financial statements:

(i) Reserve
Estimates

Estimation of reported recoverable
quantities of proved and probable reserves include judgmental assumptions
regarding production profile, commodity prices, exchange rates, remediation
costs, timing and amount of future development costs, and production,
transportation and marketing costs for future cash flows. It also requires
interpretation of geological and geophysical models in anticipated recoveries.
The economical, geological and technical factors used to estimate reserves may
change from period to period. Changes in reported reserves can impact the
carrying values of the Groups interest in resource properties and/or property,
plant and equipment, the calculation of depletion and depreciation, the
provision for decommissioning obligations, and the recognition of deferred tax
assets or liabilities due to changes in expected future cash flows. The
recoverable quantities of reserves and estimated cash flows from the Groups
hydrocarbon interests are independently evaluated by reserve engineers at least
annually.

The Groups hydrocarbon reserves
represent the estimated quantities of petroleum, natural gas and natural gas
liquids which geological, geophysical and engineering data demonstrate with a
specified degree of certainty to be economically recoverable in future years
from known reservoirs and which are considered commercially producible. Such
reserves may be considered commercially producible if management has the
intention of developing and producing them and such intention is based upon (a)
a reasonable assessment of the future economics of such production; (b) a
reasonable expectation that there is a market for all or substantially all the
expected hydrocarbon production; and (c) evidence that the necessary production,
transmission and transportation facilities are available or can be made
available. Reserves may only be considered proven and probable if producibility
is supported by either production or conclusive formation tests.

(ii) Identification of
Cash-generating Units

The Groups assets are aggregated into
CGUs, for the purpose of calculating impairment, based on their ability to
generate largely independent cash flows. The determination of CGUs requires
judgment in defining the smallest identifiable group of assets that generate
cash inflows that are largely independent of the cash inflows from other assets
or groups of assets. CGUs have been determined based on similar geological
structure, shared infrastructure, geographical proximity, commodity type and
similar exposures to market risks. By their nature, these estimates and
assumptions are subject to measurement uncertainty, which may impact the
carrying values of the Groups assets in future periods.

92

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MFC INDUSTRIAL LTD.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTSDECEMBER 31, 2012

Note 1. Nature of Business and
Summary of Significant Accounting Policies (continued)

(iii) Special-purpose
Entities

The Group consolidates an SPE when the
substance of the relationship between the Group and the SPE indicates that the
SPE is controlled by the Group, even in cases where the Group owns one half or
less of the voting power of the SPE. In assessing whether the investee entity
meets the definition of an SPE pursuant to SIC-12, the Group reviews and
examines all relevant circumstances, including activities of, decision-making
powers over, benefits of and residual or ownership risks relating to the SPE.

(iv) Investment
Property

Investment property is property (land
or a building - or part of a building - or both) held to earn rental income or
for capital appreciation or both, rather than for: (a) use in the production or
supply of goods or services or for administrative purposes; or (b) sale in the
ordinary course of business. Judgment is needed to determine whether a property
qualifies as investment property although the Group has developed criteria so
that it can exercise that judgment consistently in accordance with the
definition of investment property pursuant to IAS 40.

(v) Deferred Sale
Liabilities

The Group entered into sale and
repurchase agreements with other commodity broker-traders pursuant to which the
Group sold an agreed quantity of commodities at agreed prices and undertakes to
buy back the same quantity of the same commodities at the same agreed prices in
future periods. Judgment is made as to whether, in substance, they are financing
arrangements and therefore do not give rise to revenue.

(vi) Purchase Price
Allocations

Purchase prices related to business
combinations and asset acquisitions are allocated to the underlying acquired
assets and liabilities based on their estimated fair value at the time of
acquisition. The determination of fair value requires the Group to make
assumptions, estimates and judgments regarding future events. The allocation
process is inherently subjective and impacts the amounts assigned to individual
identifiable assets and liabilities, including the fair value of long-lived
assets and the amount of goodwill or bargain purchase calculated. As a result,
the purchase price allocation impacts the Groups reported assets and
liabilities and future net earnings due to the impact on future depreciation,
depletion and amortization expense and impairment tests.

D. Major Sources of Estimation
Uncertainty

The timely preparation of the
consolidated financial statements requires management to make judgments,
estimates and assumptions that affect the application of accounting policies and
the reported amount of assets, liabilities, income and expenses.

The major assumptions about the future
and other major sources of estimation uncertainty at the end of the reporting
period that have a significant risk of resulting in a material adjustment to the
carrying amounts of assets and liabilities within the next financial year are
discussed below. These items require management's most difficult, subjective or
complex judgments. Actual results may differ materially from these
estimates.

93

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MFC INDUSTRIAL LTD.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTSDECEMBER 31, 2012

Note 1. Nature of Business and
Summary of Significant Accounting Policies (continued)

(i) Recoverable Value of
Receivables

The Group had recognized receivables
(including trade and other receivables) aggregating $91,134 at December 31,
2012. The recoverability of receivables is regularly reviewed and specific
provisions are recognized for balances considered to be irrecoverable. The
irrecoverable amounts are estimated based on reviewing the macro-economic
environment and available micro-economic information specific to each
receivable.

(ii) Provision for
Inventories

The Group had recorded inventories of
$142,925 at December 31, 2012. The provision for inventories is regularly
reviewed and general and specific provisions are recognized for balances
considered to be irrecoverable. The irrecoverable amounts are estimated based on
reviews of the macro-economic environment and available micro-economic
information specific to the product categories.

(iii) Impairment of Equity
Method Investments

The Group had investments in joint
ventures accounted for by the equity method aggregating $22,382 at December 31,
2012. Investments in joint ventures are reviewed for impairment at the reporting
date. Determining whether an investment balance is impaired requires an
estimation of the value in use of the joint venture. The value in use
calculation requires an estimate to be made of the timing and amount of future
cash flows expected to arise from the joint venture and the application of a
suitable discount rate in order to calculate the present value.

(iv) Impairment of Exploration
and Evaluation Assets

The Group had recorded exploration and
evaluation assets of $147,870 at December 31, 2012. Exploration and evaluation
assets are assessed for impairment by comparing their carrying amounts to their
recoverable amounts. The estimation of the recoverable amount involves a number
of assumptions, including the timing, likelihood and amount of commercial
production, further resource assessment plans and future revenue and costs
expected from the asset, if any.

(v) Impairment of Other
Non-financial Assets

The Group had property, plant and
equipment and interests in resource properties aggregating $498,036 at December
31, 2012. Impairment of the Groups non-financial assets is evaluated at the
cash-generating unit (CGU) level. In testing for impairment, the recoverable
amounts of the Companys CGUs are determined based on the greater of the
value-in-use and fair value less costs to sell. In the absence of quoted market
prices, the recoverable amount is based on estimates of reserves, production
rates, future oil and natural gas prices, future costs, discount rates and other
relevant assumptions.

(vi)
Taxation

The Group is subject to tax in a number
of jurisdictions and judgment is required in determining the worldwide provision
for income taxes. Deferred income taxes are recognized for temporary differences
using the liability method, with deferred tax liabilities generally being
provided for in full (except for taxable temporary differences associated with
investments in subsidiaries, joint ventures and associates where the Group is
able to control the timing of the reversal of the temporary differences and it
is probable that the temporary differences will not reverse in the foreseeable
future) and deferred tax assets being recognized to the extent that it is
probable that future taxable profits will be available against which the
temporary differences can be utilized.

The operations and organization
structures of the Group are complex, and related tax interpretations,
regulations and legislation are continually changing. As a result, there are
usually some tax matters in question that result in uncertain tax positions. The
Group only recognizes the income tax benefit of an uncertain tax position when
it is probable that the ultimate determination of the tax treatment of the
position will result in that benefit being realized.

94

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MFC INDUSTRIAL LTD.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTSDECEMBER 31, 2012

Note 1. Nature of Business and
Summary of Significant Accounting Policies (continued)

The Group companies income tax filings
are subject to audit by taxation authorities in numerous jurisdictions. There
are audits in progress and items under review, some of which may increase the
Groups tax liability. In addition, the companies have filed appeals and have
disputed certain issues. While the results of these items cannot be ascertained
at this time, the Group believes that the Group has an adequate provision for
income taxes based on available information.

The Group recognized deferred income
tax assets of $18,510 at December 31, 2012. In assessing the realizability of
deferred tax assets, management considers whether it is probable that some
portion or all of the deferred tax assets will be realized. The ultimate
realization of deferred tax assets is dependent upon the generation of future
taxable income during the periods in which those temporary differences become
deductible or before the tax loss carry-forwards expire. Management considers
the future reversals of existing taxable temporary differences, projected future
taxable income, taxable income in prior years and tax planning strategies in
making this assessment. Unrecognized deferred income tax assets are reassessed
at the end of each reporting period.

The Group provides for future
liabilities in respect of uncertain tax positions where additional tax may
become payable in future periods and such provisions are based on management's
assessment of exposures. The Group did not recognize the full deferred tax
liability on taxable temporary differences associated with investments in
subsidiaries, joint ventures and associates where the Group is able to control
the timing of the reversal of the temporary differences and it is probable that
the temporary differences will not reverse in the foreseeable future. The Group
may change its investment decision in its normal course of business, thus
resulting in additional tax liability.

(vii) Decommissioning
Obligations

The Group had recorded long-term
decommissioning obligations of $136,642 at December 31, 2012. The Group
estimates the decommissioning obligations for its resource properties and
facilities. In most instances, dismantling of assets and remediation occurs many
years into the future. The value of the ultimate decommissioning obligation can
fluctuate in response to many factors including changes to relevant legal
requirements, the emergence of new restoration techniques, experience at other
production sites, and changes to the risk-free discount rate.

The expected timing and amount of
expenditure can also change, for example, in response to changes in reserves or
changes in laws and regulations or their interpretation.

(viii) Puttable
Instrument

The Group recorded puttable instrument
financial liabilities of $7,761 at December 31, 2012. The Group estimates the
puttable instrument financial liabilities using discounted cash flows model
("DCF"), taking into consideration discount rates, profit forecast for the
future periods and expected times of the exercise of the options. One of the put
agreements become exercisable upon occurrence of one of the triggering events
which include death, permanent disability, retirement or termination without
cause of the holder or a corporate event (as defined) affecting the acquired
entity. The ultimate value of the puttable instrument financial liabilities will
fluctuate.

(vix)
Contingencies

Pursuant to IAS 37,Provisions, Contingent Liabilities and Contingent Assets,the Group does not recognize a contingent
liability. By their nature, contingencies will only be resolved when one or more
future events occur or fail to occur. The assessment of contingencies inherently
involves the exercise of significant judgment and estimates of the outcome of
future events. If it becomes probable that an outflow of future economic
benefits will be required for an item previously dealt with as a contingent
liability, an accrual or a provision is recognized in the financial statements
of the period in which the change in probability occurs.

E. Recent Accounting Standards and
Amendments not yet Adopted

In June 2011, the IASB issued an
amended version of IAS 19,Employee
Benefits, which brings in various changes
relating to the recognition and measurement of termination benefits and
postemployment defined benefit expense, and to the disclosures for all employee
benefits. The amended IAS 19 is effective for annual periods beginning on or
after January 1, 2013. The Group early adopted this new standard with effect in
the current year ending December 31, 2012, in connection with the acquisition of
CPC. The Group did not have a defined benefit plan in 2011 or 2010.

95

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MFC INDUSTRIAL LTD.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTSDECEMBER 31, 2012

Note 1. Nature of Business and
Summary of Significant Accounting Policies (continued)

The following amendments were issued by
the IASB and are mandatory for the Group's accounting year 2012 and do not have
significant effects on the Group's financial statements:

Amendments, set out inDeferred Tax: Recovery of Underlying Assets,were issued to amend IAS 12,Income Taxes(IAS 12).IAS 12 requires an entity
to measure the deferred tax relating to an asset depending on whether the entity
expects to recover the carrying amount of the asset through use or sale. It can
be difficult and subjective to assess whether recovery will be through use or
through sale when the asset is measured using the fair value model in IAS 40,Investment Property.

The amendments provide a practical
solution to the problem by introducing a presumption that recovery of the
carrying amount will, normally, be through sale.

Amendments, set out inDisclosures  Transfers of Financial Assets,were issued to amend IFRS 7,Financial Instruments,so as to
enhance the disclosure requirements for transfers of financial assets that
result in derecognition. These amendments respond, in part, to the recent
financial crisis. Entities will be required to provide more extensive
quantitative and qualitative disclosures about: (i) risk exposures relating to
transfers of financial assets that are: (a) not derecognized in their entirety;
or (b) derecognized in their entirety, but with which the entity continues to
have some continuing involvement; and (ii) the effect of those risks on an
entity's financial position.

The following new accounting standards
and amendments are expected to have significant effects on the Group's
accounting policies, financial position and/or financial statement presentation
for periods after 2012:

IFRS 9,Financial Instruments(IFRS 9),
replaces IAS 39. IFRS 9 uses a single approach to determine whether a financial asset is
measured at amortized cost or fair value. The approach in IFRS 9 is based on how
an entity manages its financial instruments (its business model) and the
contractual cash flow characteristics of the financial assets. The new standard
also requires a single impairment method to be used, replacing the many
different impairment methods in IAS 39. Pursuant to IFRS 9, an entity choosing
to measure a liability at fair value will present the portion of the change in
its fair value due to changes in the entity's own credit risk in other
comprehensive income, rather than in the profit or loss. New requirements for
the derecognition of financial instruments, impairment and hedge accounting are
expected to be added to IFRS 9. In December 2011, the IASB issued amendments to
IFRS 9 that defer the mandatory effective date from January 1, 2013 to January
1, 2015. The deferral will make it possible for all phases of the project to
have the same mandatory effective date. The amendments also provide relief from
the requirement to restate comparative financial statements for the effect of
applying IFRS 9. Additional transition disclosures will be required to help
investors understand the effect that the initial application of IFRS 9 has on
the classification and measurement of financial instruments. Early application
of IFRS 9 is still permitted. We are currently evaluating the impacts that IFRS
9 will have on the Group's consolidated financial statements.

IFRS 10,Consolidated Financial Statements(IFRS 10), establishes principles for the presentation and preparation of
consolidated financial statements when an entity controls one or more other
entities. IFRS 10 supersedes IAS 27 (Revised),Consolidated and Separate Financial Statements,and SIC-12, and is effective for annual periods beginning on January 1,
2013.

IFRS 11,Joint Arrangements(IFRS
11),establishes principles for financial reporting by entities that have an
interest in arrangements that are controlled jointly (i.e. joint arrangements).
IFRS 11 supersedes IAS 31,Interests in Joint
Ventures,and SIC-13,Jointly Controlled Entities - Non-Monetary Contributions by
Venturers,and is effective for annual
periods beginning on January 1, 2013.

IFRS 12,Disclosure of Interests in Other Entities(IFRS 12), applies to entities that have an interest in a subsidiary, a
joint arrangement, an associate or an unconsolidated structured entity. The
objective of this IFRS is to require an entity to disclose information that
enables users of its financial statements to evaluate: (a) the nature of, and
risks associated with, its interests in other entities; and (b) the effects of
those interests on its financial position, financial performance and cash flows.
IFRS 12 is effective for annual periods beginning on January 1, 2013.

96

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MFC INDUSTRIAL LTD.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTSDECEMBER 31, 2012

Note 1. Nature of Business and
Summary of Significant Accounting Policies (continued)

IAS 27,Separate Financial Statements(IAS
27),has
been amended for the issuance of IFRS 10 but retains the current guidance for
separate financial statements. IAS 28,Investments in Associates and Joint Ventures(IAS 28), has been amended for conforming changes based on the issuance of IFRS 10
and IFRS 11. The amendments to the IAS 27 and IAS 28 are effective for annual
periods beginning on January 1, 2013.

Management does not expect that the
Group's consolidated entities, associates and joint ventures will be
significantly affected when IFRS 10, 11, 12 and amendments to IAS 27 and 28
become effective, though the new standards and amendments will have impact on
the Group's financial statement presentation.

IFRS 13,Fair Value Measurement(IFRS
13), (a)
defines fair value; (b) sets out in a single IFRS a framework for measuring fair
value; and (c) requires disclosures about fair value measurements. IFRS 13 is to
be applied for annual periods beginning on January 1, 2013. The new standard
will have impact on the Group's financial statement presentation.

Amendments, set out inPresentation of Items of Other Comprehensive
Income ̧were issued to amend IAS 1,Presentation of Financial Statements.The amendments require the grouping of items
of other comprehensive income into items that might be reclassified to profit or
loss in subsequent periods and items that will not be reclassified to profit or
loss in subsequent periods. The amendments are effective for annual periods
beginning on January 1, 2013 with full retrospective application. The amendments
will have impact on the Group's financial statement presentation.

Note 2. Capital Disclosure on the
Group's Objectives, Policies and Processes for Managing Its Capital
Structure

The Group's objectives when managing
capital are: (i) to safeguard the entity's ability to continue as a going
concern so that it can continue to provide returns for shareholders and benefits
for other stakeholders, (ii) to provide an adequate return to shareholders by
pricing products and services commensurately with the level of risk, and (iii)
to maintain a flexible capital structure which optimizes the cost of capital at
acceptable risk.

The Group sets the amount of capital in
proportion to risk. The Group manages the capital structure and makes
adjustments to it in the light of changes in economic conditions and the risk
characteristics of the underlying assets. In order to maintain or adjust the
capital structure, the Group may adjust the amount of dividends paid to
shareholders, return capital to shareholders, issue new shares, or sell assets
to reduce debt.

Consistently with others in the
industry, the Group monitors capital on the basis of the debt-to-adjusted
capital ratio and long-term debt-to-equity ratio. The debt-to-adjusted capital
ratio is calculated as net debt divided by adjusted capital. Net debt is
calculated as total debt less cash and cash equivalents. Adjusted capital
comprises all components of shareholders equity and some forms of subordinated
debt, if any. The long-term debt-to-equity ratio is calculated as long-term debt
divided by shareholders' equity. The computations are based on continuing
operations.

|                                                | 2012                 |          | 2011                
|----------------------------------------------- | -------------------- | -------- | --------------------
|Total debt (excluding MPP
      term financing) | $                    | 162,993  |                     
|Less: cash and cash equivalents                 |                      | (273,790 | )                   
|Net debt (net cash and
      cash equivalents)  | $                    | (110,797 | )                   
|Shareholders' equity                            | $                    | 757,197  |                     
|Debt-to-adjusted capital
      ratio            | Not
      applicable |          | Not
      applicable

There were no amounts in accumulated
other comprehensive income relating to cash flow hedges nor were there any
subordinated debt instruments as at December 31, 2012 and 2011. The
debt-to-adjusted capital ratio in 2012 and 2011 were not applicable since the
Group had a net cash and cash equivalents balance.

|                                                    | 2012 |         | 2011
|--------------------------------------------------- | ---- | ------- | ----
|Long-term debt (excluding
      MPP term financing) | $    | 118,824 |     
|Shareholders' equity                                | $    | 757,197 |     
|Long-term debt-to-equity
      ratio                |      | 0.16    |     

97

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MFC INDUSTRIAL LTD.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTSDECEMBER 31, 2012

|Note
    2. | Capital Disclosure on
      the Group's Objectives, Policies and Processes for Managing Its Capital
      Structure (continued)
|----------- | -------------------------------------------------------------------------------------------------------------------------------

During 2012, the Group's strategy,
which was unchanged from 2011, was to maintain the debt-to-adjusted capital
ratio and the long-term debt-to-equity ratio at a low level. The Group had a net
cash and cash equivalent balance after deduction of the total debt. The Group's
long-term debt-to-equity ratio was 0.16 and 0.04 as at December 31, 2012 and
2011, respectively. The increase in the debt-to-equity ratio in 2012 reflects
the Groups objectives of long-term business growth and development.

Note 3. Acquisitions of Consolidated
Entities

Year
2012

CPC

On September 6, 2012, the Company
completed the take-over bid (the "Offer") for all of the issued and outstanding
common shares of CPC (the "CPC Shares") for cash consideration of C$1.25 per CPC
Share. The Offer was made pursuant to a support agreement between CPC and the
Company dated July 6, 2012. Pursuant to the Offer, on September 6, 2012, the
Company, through its indirect wholly-owned subsidiary, acquired approximately
93.8% of the outstanding CPC Shares. On September 11, 2012, the Company
completed a compulsory acquisition under the Alberta Business Corporations Act,
whereby its indirect wholly-owned subsidiary acquired all the remaining
outstanding CPC Shares not already owned by the Group. As a result of such
compulsory acquisition, the indirect wholly-owned subsidiary acquired 100%
ownership of CPC.

In connection with the Support
Agreement, on July 16, 2012, the indirect wholly-owned subsidiary acquired
6,548,498 special warrants (the "Warrants") in the capital of CPC, at a price of
C$1.25 per Warrant. On September 6, 2012, as a result of the conversion of the
Warrants, the indirect wholly-owned subsidiary, acquired an additional 6,548,498
CPC Shares. No additional consideration was paid in connection with the
conversion of the Warrants.

The consideration paid by the Group for
the CPC Shares under the Offer and compulsory acquisition was approximately
$33,535 (C$32,948) in cash.

CPC is actively engaged in the
exploration, development and production of hydrocarbons in western Canada. The
acquisition is to enhance the investment and strategic growth objectives of the
Groups global commodity supply chain business. As a result, CPCs financial
position and results are included in the Groups commodities and resources
segment. The acquisition was accounted for as a business combination pursuant to
IFRS 3. The aggregated cost of the acquisition totaled $41,866, comprising
$33,535 paid in cash to the former holders of CPC Shares and $8,331 (C$8,185)
paid for the Warrants.

98

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MFC INDUSTRIAL LTD.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTSDECEMBER 31, 2012

Note 3. Acquisitions of Consolidated
Entities (continued)

The fair values of the identifiable
assets acquired and the liabilities assumed at their acquisition-date are listed
below.

|                                                           |   | $        |  
|---------------------------------------------------------- | - | -------- | -
|Receivables                                                |   | 16,035   |  
|Hydrocarbon probable resources and
      undeveloped lands |   | 150,564  |  
|Property, plant and
      equipment                        |   | 49,552   |  
|Interests in resource properties                           |   | 223,057  |  
|Assets held for
    sale                                   |   | 117,062  |  
|Deferred tax assets                                        |   | 57,137   |  
|Other assets                                               |   | 5,089    |  
|                                                           |   | 618,496  |  
|Short-term bank
      borrowings                           |   | (115,061 | )
|MPP term financing                                         |   | (26,383  | )
|Accounts payables and
      accrued expenses               |   | (30,583  | )
|Decommissioning obligations                                |   | (138,369 | )
|Deferred income tax
      liabilities                      |   | (3,772   | )
|Accrued pension obligations, net                           |   | (2,227   | )
|Liabilities relating to
      assets held for sale         |   | (15,590  | )
|Net assets
      acquired                                  |   | 286,511  |  
|Total consideration
      paid                             |   | 41,866   |  
|Bargain
      purchase                                     | $ | 244,645  |  

CPC was a publicly traded company prior
to the Groups acquisition. As a result of the price of natural gas and high
operating expenses, the market capitalization of CPC had been much smaller than
its net assets at the time of acquisition. The Group acquired the CPC Shares at
their market price. As a result, the Group recognized $244,645 in bargain
purchase gain in the consolidated statement of operations which is non-taxable.

The Group measured 100,000 CPC Shares
held by the Group prior to the acquisition at fair value of $125 at the time of
acquisition, thus recognizing a loss of $358 which was included in the net
losses on available-for-sale securities under gross revenue in the consolidated
statement of operations.

There were neither intangible assets
other than goodwill acquired nor contingent consideration
arrangements.

With respect to acquired receivables,
the fair value of the receivables, the gross contractual amounts receivables and
the best estimate of the contractual cash flows not expected to be collected on
the acquisition date were $16,035, $16,547 and $512, respectively.

The amount of acquisition-related costs
was $1,497 which was included in selling, general and administrative expenses in
the consolidated statement of operations.

As a result of the completion of the
Offer and related transactions, the Group consolidated CPC's operations since
September 7, 2012. The amount of revenue and net income of CPC since the
acquisition date included in the consolidated statement of operations for the
reporting period of 2012 were $30,402 and $1,916, respectively.

The amount of revenue and net loss of
the Group for the current reporting period as though the acquisition date for
the combination of CPC had been as of the beginning of the 2012 annual reporting
period of 2012 would be $552,278 and $51,669, respectively. These amounts were
computed based on the historical unaudited accounting records of CPC and were
not adjusted for the non-conformity of the accounting policies of the two
entities (if any), non-recurring transactions incurred by CPC during the period
prior to the acquisition and post-combination arrangements initiated by the
Group to streamline CPCs operations and administration, except that the pro forma net loss did not include any impairment loss on CPCs non-financial assets as different assumptions would and could have been made. These amounts are not
indicative of the results that actually would have occurred if the acquisition
had been completed as of the beginning of 2012. The bargain purchase amount was
excluded from the pro forma net loss.

99

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MFC INDUSTRIAL LTD.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTSDECEMBER 31, 2012

Note 3. Acquisitions of Consolidated
Entities (continued)

Immaterial business
combinations

On March 16, 2012, a subsidiary of MFC
Industrial (the "Purchaser") purchased a 75% equity interest and a shareholder
loan interest in a corporation, for a total purchase price of $28,000 which was
paid on March 19, 2012. The corporation has a mineral refinery plant and power
plant. The acquisition of the 75% equity and the shareholder loan interests
together effectively transferred a 100% economic interest in the corporation to
the Purchaser.

This acquisition was not considered as
a material business combination. There were no identifiable intangible assets or
goodwill acquired. Bargain purchase gain of $2,359 was recognized.
Non-controlling interest in the corporation was measured at its fair value on
the acquisition date, which was $nil. The amount of acquisition-related costs
was nominal.

In November 2012, MFC Industrial,
through its Austrian subsidiary, acquired a controlling interest in Park Ridge,
NJ-based ACC Resources Co., L.P. (ACCR) and Mexico City-based Possehl Mexico
S.A. de C.V. (Possehl). Both Possehl and ACCR are fully integrated commodity
supply chain companies, specializing in industrial raw materials, chemicals and
various other products. The acquisition of these companies expands the Groups
existing global supply chain network, reaching further into the North and Latin
American markets, as well as the Chinese activities. The Group consolidated the
results of the operations of ACCR group and Possehl group since December 1,
2012.

The combined acquisition price for 80%
of ACCR and 60% of Possehl was $23,232 in cash which was determined based on the
net tangible asset value of the entities as of July 31, 2012, of which $14,718
was paid in 2012, $6,201 was paid in January 2013 and the remainder of $2,313 is
payable in November 2013. The purchase price is subject to adjustment based on
pending valuations of real property and occurrence of certain adjustment events
(as defined). At the time of the approval of these consolidated financial
statements, the fair value of certain real property is provisional as no final
binding appraisal value has been accepted by the parties. In addition, there are
call and put options which allow the Group to acquire up to all of the remaining
shares of ACCR, its affiliate and Possehl, based on the same the net tangible
asset value price formula. The vendors undertake to compensate for any loss or
reduction in value of the purchased interest.

This acquisition was not considered as
a material business combination. Non-controlling interests in the entities were
$3,350 at the time of acquisition. As the non-controlling interests are subject
to put options, they are classified as puttable instrument financial liabilities
(see Note 29). The fair value of the puttable instrument financial liabilities
is provisional pending upon the approval and acceptance of the final valuation
of real property. The amount of acquisition-related costs was $752. Intangible
assets totaling $1,073 relating to order backlog were identified and were
included in deposits, prepaid and other under current assets due to their
short-term nature.

Year
2011

In August 2011, MFC Industrial
reorganized its indirect royalty interest by transferring it to 0915988 B.C.
Ltd. (091 BC) in exchange for voting interest of 40.1% (including 9.9%
purchased in June 2011 for $128 in cash) and non-voting interest of 100%, or an
aggregate economic interest of 99.44%, in 091 BC. This exchange transaction was
accounted for as a purchase other than business combination and 091 BC has been
consolidated into the Group since August 2011 pursuant to SIC-12. Immediately prior to the
initial consolidation into MFC Industrial, 091 BC had total assets of $95 and
total liabilities of $430; and did not recognize a deferred tax asset with
respect to its non-capital tax loss carryforwards. Non-controlling interest of
$1,172 was initially recognized upon consolidation of 091 BC.

100

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MFC INDUSTRIAL LTD.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTSDECEMBER 31, 2012

Note 3. Acquisitions of Consolidated
Entities (continued)

Year
2010

On September 27, 2010, MFC Industrial
announced that it entered into an agreement with Mass for MFC Industrial to
acquire all of the issued and outstanding common shares of Mass by way of a
take-over bid (the "Offer"). The Offer was one common share of MFC Industrial
for each common share of Mass. The Offer was based upon the adjusted book value
of each company on a diluted basis and valued MFC Industrial's common shares at
$8.91 per share.

Mass's business encompasses a broad
spectrum of activities related to the integrated combination of commodities and
resources and merchant banking, which include trading, commercial trade,
proprietary investing and financial services. The board of directors of MFC
Industrial considered a number of factors, including, among other things,
strategic growth through acquisition, adjusted book value valuation, increased
scope, complementary businesses, management team, fairness opinion, meaningful
cost savings and other synergies and facilitated the Mass acquisition. MFC
Industrial received authorization from the New York Stock Exchange in October
2010 to list the shares to be issued pursuant to the Offer and over 99% of its
shareholders voting at its special meeting on October 29, 2010 approved the
same.

The Offer was completed and closed on
November 15, 2010 and 23,317,912 common shares of Mass were submitted for
exchange. As a result, 23,317,912 MFC Industrial common shares were issued. In
December 2010, MFC Industrial acquired the common shares held by the
non-controlling interests of Mass by mandatory acquisition by issuing 1,674,210
MFC Industrial common shares. The aggregate fair value of shares issued was
$200,139, before deducting the costs of issuing shares totaling $1,652.

Prior to the acquisition date, the
Group held approximately a 4.6% equity interest in Mass with a fair value of
$9,388 on the acquisition date. The Group recognized a loss of $1,806 which was
included in net gains on securities in the consolidated statement of operations.

The Offer was a part of a multi-step
transaction, which included the subsequent merger of Mass and a subsidiary of
MFC Industrial, designed to effect a combination.

The acquisition was accounted for as a
business combination. The aggregated cost of the acquisition totaled $209,527.
The preliminary fair values of the assets acquired and liabilities assumed at the acquisition
date were allocated as follows:

|Cash                                       | $ | 213,850  |  
|------------------------------------------ | - | -------- | -
|Receivables, net                           |   | 23,040   |  
|Other current assets                       |   | 131,371  |  
|Property, plant and equipment              |   | 3,840    |  
|Interests in resource properties           |   | 51,000   |  
|Treasury stock                             |   | 2,626    |  
|Other non-current assets                   |   | 67,362   |  
|Current liabilities                        |   | (128,444 | )
|Non-current liabilities                    |   | (108,747 | )
|Non-controlling interests                  |   | (5,313   | )
|Total identifiable net assets
    acquired | $ | 250,585  |  
|Total consideration transferred            | $ | 209,527  |  
|Bargain purchase                           |   | 41,058   |  
|                                           | $ | 250,585  |  

The bargain purchase arose as the share
market prices of MFC Industrial on the acquisition dates were less than the fair
values of the net identifiable assets acquired from Mass. Non-controlling
interests were measured at their proportionate share in the recognized amounts
of Masss identifiable net assets.

101

---



MFC INDUSTRIAL LTD.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTSDECEMBER 31, 2012

Note 3. Acquisitions of Consolidated
Entities (continued)

At the acquisition date, the gross
contractual amounts of receivables acquired was $23,591 and the best estimate of
the contractual cash flows not expected to be collected was $551, resulting in a
fair value of $23,040.

The amounts of revenue and net income
of Mass since the acquisition date (i.e. from November 16 to December 31, 2010)
included in the consolidated statement of operations for 2010 was $53,276 and
$5,652, respectively.

Note 4. Discontinued Operations

In the normal course of the business,
the Group derecognizes its subsidiaries from time to time by way of sale,
liquidation or spin-off. The Group reclassifies the subsidiary which either has
been disposed of or is classified as held for sale as a discontinued operation
when the subsidiary (or a component thereof) (a) represents a separate major
line of business or geographical area of operations, (b) is part of a single
co-ordinated plan to dispose of a separate major line of business or
geographical area of operations or (c) is a subsidiary acquired exclusively with
a view to resale. During 2012 and 2011, none of the dispositions of consolidated
entities met the aforesaid conditions.

Year 2010 
KID

Until the end of March 2010, the Group,
through its former subsidiary KID, focused on the industrial plant technology,
equipment and service business for the cement and mining industries and on
maintaining leadership in supplying technologies, equipment and engineering
services for the cement and mining sectors, as well as designing and building
plants that produce clinker and cement and process coal and other minerals, such
as copper, gold and diamonds.

On January 6, 2010, MFC Industrial
announced that it intended to restructure its assets and operations by dividing
into two independent publicly traded companies; one company to focus on the
industrial engineering business and the other company on MFC Industrial's
resource-focused business. To effect this division, MFC Industrial, among other
things, effected a reorganization whereby substantially all of its subsidiaries
engaged in the industrial engineering business were transferred to
KID.

MFC Industrial entered into an
Arrangement Agreement with KID on February 26, 2010 to effect an arrangement
(the "Arrangement") under Section 288 of the British Columbia Business
Corporations Act, which was approved by MFC Industrials shareholders on March
29, 2010 and was subsequently approved by the British Columbia Supreme
Court.

Pursuant to the Arrangement, among
other things, approximately 26% of the issued and outstanding common shares of
KID were distributed, on a pro rata basis, one common share of KID for every
three and one-half of MFC Industrial common shares held, to the non-subsidiary
shareholders of MFC Industrial as a return of capital. The carrying amount of
these common shares of KID was within the fair value range obtained from a
valuation. For financial statement presentation purposes, the distribution of
common shares of KID was accounted for as a dividend in kind and the carrying
amount was charged against retained earnings. This was a non-cash transaction.

102

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MFC INDUSTRIAL LTD.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTSDECEMBER 31, 2012

Note 4. Discontinued Operations
(continued)

As a result of the Arrangement and
related amendment to MFC Industrial's articles, two publicly traded companies
were created. As well in connection with the Arrangement, MFC Industrial entered
into a shareholders agreement (the "Shareholders Agreement") with another
corporate shareholder of KID (the "Custodian") whereby MFC Industrial engaged
the Custodian to direct the voting of the common shares of KID that MFC
Industrial continued to hold after consummation of the Arrangement. As a result
of the execution of the Shareholders Agreement, MFC Industrial ceased to hold
its continuing power to determine the strategic operating, investing and
financing policies of KID. There have been no common directors and officers
between the two entities. Accordingly, MFC Industrial no longer considered KID
as its subsidiary since March 31, 2010. Pursuant to SIC-12,management of the Group
analyzed its continuing interests in KID and concluded that KID was not a SPE of
the Group because the substance of the relationship between the Group and KID
did not indicate that KID was controlled by the Group. Management of the Group
believed that KID's total equity investment at risk was sufficient to permit the
entity to finance its activities without additional subordinated financial
support provided by any parties, including the Group, and the facts that the
guarantees then provided by the Group would expire in the ordinary course
pursuant to their terms and KID would get credit facilities on its own.
(Pursuant to a subsequent amendment to the bonding agreement, all guarantees
previously provided by the Group expired on December 31, 2010.) Accordingly, the
Group ceased to consolidate KID from March 31, 2010. At March 31, 2010, the
carrying amount of the Group's investment in KID common shares approximated its
fair value and there was no gain or loss recognized in connection with the
cessation of the consolidation of KID. Effective March 31, 2010, the Group
classified its investment in these common shares of KID as available for sale.
The shares are measured at their fair value, net of income tax, with changes in
fair value recorded in other comprehensive income until they are disposed
of.

As at March 31, 2010, assets and
liabilities of the industrial engineering business ceased to be consolidated
were as follows:

|Cash                          | $ | 285,739  |  
|----------------------------- | - | -------- | -
|Other assets                  |   | 237,561  |  
|Liabilities                   |   | (356,720 | )
|Non-controlling interests     |   | (3,930   | )
|Net identifiable
      assets | $ | 162,650  |  

In June 2010, MFC Industrial declared a
special dividend whereby it distributed approximately 23% of the total issued
and outstanding common shares of KID to MFC Industrial's shareholders of record
on July 1, 2010, on a pro rata basis, one common share of KID for every four of
MFC Industrial common shares held. The special dividend was recorded at its
carrying amount (which approximated its fair value) in the consolidated
financial statements for the quarter ended June 30, 2010.

In September 2010, MFC Industrial
distributed, as a return of capital, approximately 29% of the total issued and
outstanding common shares of KID to MFC Industrial's shareholders of record on
September 23, 2010, on a pro rata basis, one common share of KID for every four
of MFC Industrial common shares held. The carrying amount of these common shares
of KID was within the fair value range obtained from a valuation. For financial
statement presentation purposes, the distribution of common shares of KID was
accounted for as a dividend in kind and the carrying amount was charged against
retained earnings. This was a non-cash transaction.

In December 2010, MFC Industrial
distributed, as a return of capital, approximately 19% of the total issued and
outstanding common shares of KID to MFC Industrial's shareholders of record on
December 31, 2010, on a pro rata basis, one common share of KID for every 10 of
MFC Industrial common shares held. The carrying amount of these common shares of
KID was within the fair value range obtained from a valuation. This was the
fourth and final distribution of KID shares. For financial statement
presentation purposes, the distribution of common shares of KID was accounted
for as a dividend in kind and the carrying amount was charged against retained
earnings. This was a non-cash transaction.

103

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MFC INDUSTRIAL LTD.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTSDECEMBER 31, 2012

Note 4. Discontinued Operations
(continued)

Management is of the opinion that the
KID common shares were not quoted in an active market until December 31, 2010
when the fourth distribution of KID commons shares was made and, accordingly,
the KID common shares had been measured using Level 3 of the fair value
hierarchy. The valuation was based on the earnings forecast of the operations of
industrial plant technology, equipment and service business, as well as the
expected earning multiple and discount rate. Upon the final distribution of KID
common shares on December 31, 2010, the Group held approximately 2.9% of the
then outstanding KID shares and reclassified its investment at its carrying
amount from Level 3 to Level 1 of the fair value hierarchy. The investment in
KID common shares is the only item in Level 3 of the fair value hierarchy during
2010 and no gain or loss was recognized while it remained in Level 3. The reason
for the reclassification of the investment in KID common shares from Level 3 to
Level 1 was that, after four distributions of KID common shares by December 31,
2010, an active market for KID common shares had been created.

Income taxes included capital gain
taxes of $5,974 on the disposition and the outside basis difference of the KID
common shares and a withholding tax of $2,514 deducted at source on the cash
dividend paid by KID to the Group. The capital gain taxes were offset by MFC
Industrial's non-capital loss carry-forwards and, accordingly, did not involve
cash payments.

For reporting purposes, the results of
operations of KID have been presented as a discontinued operation. Following is
the summary of operating results for the discontinued operations.

|                                                   |  | 2010
|-------------------------------------------------- |  | ----
|Net sales                                          |  | $   
|Other revenues                                     |  |     
|Expenses                                           |  |     
|Income before income taxes                         |  |     
|Less: Income
    taxes                             |  |     
|Net loss                                           |  |     
|Non-controlling
      interests                    |  |     
|Net loss attributable to equity
      shareholders |  | $   

Note 5. Business Segment
Information

The Group is primarily in the global
commodities supply chain business.

In reporting to management, the Group's
operating results are categorized into the following operating segments:
commodities and resources, merchant banking and all other segments.

Basis of
Presentation

In reporting segments, certain of the
Group's business lines have been aggregated where they have similar economic
characteristics and are similar in each of the following areas: (i) the nature
of the products and services; (ii) the methods of distribution, and (iii) the
types or classes of customers/clients for the products and services.

Commodities and resources segment
includes trading of commodities and resources, as well as the related producing,
processing and extracting activities. It also includes royalty income from the
Group's interests in resource properties.

Merchant banking segment includes
structured solutions, proprietary investing and provision of financial services.
The Group seeks investments in many industries, emphasizing those business
opportunities where the perceived intrinsic value is not properly recognized.
The Group uses its financial and management expertise to add or unlock value
within a relative short time period. The merchant banking business also provides
supply chain structured solutions.

All other segment includes the Group's
corporate and operating segments whose quantitative amounts do not exceed 10% of
any of the Group's (a) reported revenue, (b) net income or (c) total assets. The
Groups other operating segments primarily include business activities in
medical equipment, instruments, supplies and services.

104

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MFC INDUSTRIAL LTD.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTSDECEMBER 31, 2012

Note 5. Business Segment Information
(continued)

The accounting policies of the
operating segments are the same as those described in the summary of significant
accounting policies. The chief operating decision maker evaluates performance on
the basis of income or loss from operations before income taxes and does not
consider acquisition accounting adjustments in assessing the performance of
reporting units. The segment information presented in this Note 5 is prepared
according to the following methodologies: (a) revenues and expenses directly
associated with each segment are included in determining pre-tax earnings; (b)
intersegment sales and transfers are accounted for as if the sales or transfers
were to third parties at current market prices; (c) certain general and
administrative expenses paid by corporate, particularly incentive compensation
and share-based compensation, are not re-allocated to reporting units; (d) all
intercompany investments, receivables and payables are eliminated in the
determination of the segment's assets and liabilities; and (e) deferred tax
assets and liabilities are not reallocated further.

Products and
Services

The Group's total revenues comprised
the following for the years ended December 31, 2012, 2011 and 2010,
respectively:

|                                                                         |  | 2012 |         | 2011 |   | 2010   
|------------------------------------------------------------------------ |  | ---- | ------- | ---- | - | -------
|Commodities and
      resources                                          |  | $    | 443,055 |      | $ | 470,242
|Fees                                                                     |  |      | 8,389   |      |   | 6,670  
|Gains on
    securities                                                  |  |      | 1,150   |      |   | -      
|Interest                                                                 |  |      | 10,489  |      |   | 10,701 
|Dividend                                                                 |  |      | 360     |      |   | 338    
|Derivative instrument gains, net                                         |  |      | -       |      |   | 6,805  
|Equity income                                                            |  |      | 6,152   |      |   | 5,912  
|Other (primarily from medical business and
      real estate properties) |  |      | 16,064  |      |   | 20,041 
|Total revenues                                                           |  | $    | 485,659 |      | $ | 520,709

The Group's revenues for 2012
consolidated the revenues of CPC Group from September 7, 2012. The Group's
revenues for 2010 consolidated the revenues of Mass Group from November 16,
2010.

Segment Operating
Results

|                                                                   |  | Year ended December 31, 2012
|------------------------------------------------------------------ |  | ----------------------------
|                                                                   |  | Commodities                 
|                                                                   |  | and resources               
|Revenues from external
      customers                             |  | $                           
|Intersegment sale                                                  |  |                             
|Interest expense                                                   |  |                             
|Income (loss) from continuing operations
      before income taxes |  |                             

|*  | including impairment of interests
      in resource properties of $42,631 and inventory write-off of $19,434 in a
      subsidiary (which was sold in 2013) (see Note 32).
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|** | including bargain purchase of
      $247,004.                                                                                                                             

105

---



MFC INDUSTRIAL LTD.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTSDECEMBER 31, 2012

Note 5. Business Segment Information
(continued)

|                                                                   |  | Year ended
      December 31, 2011
|------------------------------------------------------------------ |  | ----------------------------------
|                                                                   |  | Commodities                       
|                                                                   |  | and
      resources               
|Revenues from external customers                                   |  |                                   
|Intersegment
      sale                                            |  |                                   
|Interest expense                                                   |  |                                   
|Income (loss) from
      continuing operations before income taxes |  |                                   
|                                                                  
|                                                                   |  | Year ended
      December 31, 2010
|                                                                   |  | Commodities                       
|                                                                   |  | and
      resources               
|Revenues from external customers                                   |  |                                   
|Intersegment
      sale                                            |  |                                   
|Interest expense                                                   |  |                                   
|Income (loss) from
      continuing operations before income taxes |  |                                   
|                                                                  
|                                                                   |  | As at December
      31, 2012     
|                                                                   |  | Commodities                       
|                                                                   |  | and
      resources               
|Segment assets                                                     |  |                                   
|Equity method
      investments (included in segment assets)       |  |                                   
|                                                                  
|                                                                   |  | As at December
      31, 2011     
|                                                                   |  | Commodities                       
|                                                                   |  | and
      resources               
|Segment assets                                                     |  |                                   
|Equity method
      investments (included in segment assets)       |  |                                   
|                                                                  
|                                                                   |  | As at December
      31, 2012     
|                                                                   |  | Commodities                       
|                                                                   |  | and
      resources               
|Segment liabilities                                                |  |                                   
|                                                                  
|                                                                   |  | As at December
      31, 2011     
|                                                                   |  | Commodities                       
|                                                                   |  | and
      resources               
|Segment liabilities                                                |  |                                   

Geographic
Information

Due to the highly integrated nature of
international commodities, resources and merchant banking activities and
markets, and a significant portion of the Group's activities require
cross-border coordination in order to serve the Group's customers and clients,
the methodology for allocating the Group's profitability to geographic regions
is dependent on estimates and management judgment.

106

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MFC INDUSTRIAL LTD.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTSDECEMBER 31, 2012

Note 5. Business Segment Information
(continued)

Geographic results are generally
allocated as follows:

|Segment                         |                                                                                     | Basis for attributing revenues | 
|------------------------------- | ----------------------------------------------------------------------------------- | ------------------------------ | 
|Commodities and
      resources | Locations of external
      customers                                              
|Merchant banking                | Locations of clients,
      assets or the reporting units, whichever is appropriate
|All other
    segments          | Locations of the reporting
      units                                             

Due to the nature of cross-border
business, the Group presents its geographic information by geographic regions,
instead of by countries. The following table presents revenues from external
customers attributed to MFC Industrial's country of domicile (i.e. Canada) and
all foreign geographic regions from which the Group derives revenues:

|Year
      ended December 31: |  |   | 2012    |  | 2011 |         | 2010
|----------------------------- |  | - | ------- |  | ---- | ------- | ----
|Canada                        |  | $ | 61,864  |  | $    | 37,410  |     
|Africa                        |  |   | 2,103   |  |      | 7,914   |     
|Americas                      |  |   | 25,954  |  |      | 49,887  |     
|Asia                          |  |   | 55,598  |  |      | 87,208  |     
|Europe                        |  |   | 340,140 |  |      | 338,290 |     
|                              |  | $ | 485,659 |  | $    | 520,709 |     

Income from an interest in resource
property is earned from a third party entity operating in Canada and amounted to
$29,065, $30,782 and $31,715, respectively, in the years ended December 31,
2012, 2011 and 2010.

Except for the geographic
concentrations as indicated in the above table and one trading customer
representing approximately 11% of the Groups total revenues in 2012, there were
no revenue concentrations in 2012, 2011 and 2010.

The following table presents
non-current assets from continuing operations other than financial instruments
and deferred tax assets by geographic area based upon the location of the
assets.

|As at December 31: |  |   | 2012    |  | 2011
|------------------ |  | - | ------- |  | ----
|Canada             |  | $ | 579,887 |  | $   
|Africa             |  |   | 26,136  |  |     
|Americas           |  |   | 3,201   |  |     
|Asia               |  |   | 434     |  |     
|Europe             |  |   | 36,248  |  |     
|                   |  | $ | 645,906 |  | $   

The non-current assets located in
Canada comprised primarily the Group's interests in resource properties and
hydrocarbon properties (see Notes 18 and 19).

Note 6. Securities

Short-term
securities

|As at
      December 31:           |  |   | 2012  |  | 2011
|---------------------------------- |  | - | ----- |  | ----
|Trading securities:                |  |   |       |  |     
|Common
      shares, at fair value |  | $ | 6,658 |  | $   
|Available-for-sale securities:     |  |   |       |  |     
|Common shares, at
      fair value |  |   | -     |  |     
|                                   |  | $ | 6,658 |  | $   

At December 31, 2012, investments in
publicly-listed common shares trading securities comprised six companies (of
which three companies represented 95%).

At December 31, 2011, investments in
publicly-listed common shares trading securities comprised 11 companies (of
which four companies represented 75%).

107

---



MFC INDUSTRIAL LTD.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTSDECEMBER 31, 2012

Note 7. Restricted
Cash

|As at December 31:                                                    |  |   | 2012 |  | 2011
|--------------------------------------------------------------------- |  | - | ---- |  | ----
|Cash pledged with a bank in connection with sales of
      securities |  | $ | 359  |  | $   
|Bank accounts temporarily
      restricted (released in 2013)         |  |   | 460  |  |     
|Other                                                                 |  |   | 70   |  |     
|                                                                      |  | $ | 889  |  | $   

Cash pledged with a bank in connection
with sales of publicly-traded equity securities will be released whenever the
securities are bought back.

Note 8. Loan
Receivable

|As at December
      31:                                         |  |   | 2012 |  | 2011
|---------------------------------------------------------------- |  | - | ---- |  | ----
|Loans to a corporation under a credit
      facility of $20,000, |  |   |      |  |     
|interest at
      London Inter-Bank Offered Rate ("LIBOR")       |  |   |      |  |     
|plus
      4.06% per annum. The credit facility expired          |  |   |      |  |     
|in May 2012 and the full amount was collected                    |  | $ | -    |  | $   
|Total - current                                                  |  | $ | -    |  | $   

Note 9. Bills of Exchange and Trade
Receivables

Bills of
Exchange

|As at December 31: |  |   | 2012 |  | 2011
|------------------ |  | - | ---- |  | ----
|Bills of exchange  |  | $ | -    |  | $   

A bill of exchange (which is also known
as a draft) is a negotiable instrument which is a document guaranteeing the
payment of a specific amount of money, either on demand, or at a set time; and
is frequently used in international trade. In its normal course of commodity
supply chain business, the Group may request customers to draw bills of exchange
(with underlying trade receivables guaranteed by a top-rated Austrian bank or
credit-insured) as a means of payment and the Group usually discounts the bills
of exchange with banks so as to improve its liquidity.

The Group discounted $10,545 in the
bills of exchange with a bank at December 31, 2011 and the proceeds were
received in January 2012.

Trade
Receivables

|As at December 31:                      |  |   | 2012   |   | 2011
|--------------------------------------- |  | - | ------ | - | ----
|Trade receivables, gross amount         |  | $ | 74,066 |   |     
|Less: Allowance for credit
      losses |  |   | (1,246 | ) |     
|Trade receivables, net amount           |  | $ | 72,820 |   |     

Trade receivables primarily arise from
commodity activities. The terms with affiliates in the normal course of the
Group's activities are no different from third party customers.

The Group has a specially structured
factoring arrangement with a bank for the Group's trade receivables (see Note
21). As at December 31, 2012, trade receivables amounting to $12,025 were used
as securities against bank debt (see Note 22).

108

---



MFC INDUSTRIAL LTD.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTSDECEMBER 31, 2012

Note 9. Bills of Exchange and Trade
Receivables (continued)

As at December 31, 2012, trade
receivables of $17,006 (2011: $1,817) were past due but not impaired. The aging
analyses of these trade receivables as at December 31, 2012 and 2011 are as
follows:

|Past-due                |  |   | 2012   |  | 2011
|----------------------- |  | - | ------ |  | ----
|Below 30 days           |  | $ | 9,517  |  | $   
|Between 31 and 60 days  |  |   | 1,229  |  |     
|Between 61 and 90 days  |  |   | 514    |  |     
|Between 91 and 365 days |  |   | 5,746  |  |     
|Over 365 days           |  |   | -      |  |     
|                        |  | $ | 17,006 |  | $   

As at December 31, 2012, trade
receivables of $4,998 (2011: $1,030) were impaired and an allowance for credit
losses of $1,246 (2011: $719) has been provided. Not all past-due account
balances are uncollectible as some of the accounts are covered by credit
insurance or other collection procedures. Credit risk from trade account
receivables is mitigated since they are credit insured, covered by letters of
credit, bank guarantees and/or other credit enhancements (see Note 39). The
aging analyses of these trade receivables as at December 31, 2012 and 2011 are
as follows:

|Past-due                      |  |   | 2012  |  | 2011
|----------------------------- |  | - | ----- |  | ----
|Below 30 days                 |  | $ | 789   |  | $   
|Between 31 and 60
      days  |  |   | -     |  |     
|Between 61 and 90 days        |  |   | 1     |  |     
|Between 91 and 365
      days |  |   | 814   |  |     
|Over 365 days                 |  |   | 3,394 |  |     
|                              |  | $ | 4,998 |  | $   

The movements in the allowance for
credit losses during the current period under review are as follows:

|                                        |  | 2012 |       | 2011
|--------------------------------------- |  | ---- | ----- | ----
|Balance, beginning of the
      year    |  | $    | 719   |     
|Additions                               |  |      | 593   |     
|Reversals                               |  |      | (12   | )   
|Write-offs                              |  |      | -     |     
|Cumulative translation
      adjustment |  |      | (54   | )   
|Balance, end of the year                |  | $    | 1,246 |     

As at December 31, 2012 and 2011, there
was no trade receivable which would otherwise be past due or impaired if the
terms had not been renegotiated.

Note 10. Other
Receivables

|As at December
      31:                                                    |  |   | 2012   |  | 2011
|--------------------------------------------------------------------------- |  | - | ------ |  | ----
|Investment income                                                           |  | $ | 219    |  | $   
|Government taxes (primarily value-added and goods-and-services
      taxes) |  |   | 6,181  |  |     
|Royalty income from an interest in resource
      property                  |  |   | 7,528  |  |     
|Employees travel advances                                                   |  |   | 38     |  |     
|Derivative assets                                                           |  |   | 633    |  |     
|Sale of securities                                                          |  |   | 1,683  |  |     
|Supplies with debit balance                                                 |  |   | 649    |  |     
|Other                                                                       |  |   | 1,383  |  |     
|                                                                            |  | $ | 18,314 |  | $   

Other receivables primarily arise in
the normal course of business and are expected to be collected within one year
from the reporting date.

As at December 31, 2012 and 2011, there
were no receivables which would otherwise be past due or impaired if the terms
had not been renegotiated.

109

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MFC INDUSTRIAL LTD.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTSDECEMBER 31, 2012

Note 11. Inventories

|As at December
      31:                                        |  |   | 2012    |  | 2011
|--------------------------------------------------------------- |  | - | ------- |  | ----
|Raw materials                                                   |  | $ | 10,137  |  | $   
|Work-in-progress                                                |  |   | 4,546   |  |     
|Finished goods                                                  |  |   | 49,111  |  |     
|Commodity inventories (including goods-in-transit of
    $2,366 |  |   |         |  |     
|and $42,130 at December 31, 2012 and 2011, respectively)        |  |   | 78,168  |  |     
|Other                                                           |  |   | 963     |  |     
|                                                                |  | $ | 142,925 |  | $   

As at December 31, 2012 and 2011, there
was no inventory pledged as security for liabilities.

Note 12. Deposits, Prepaid and
Other

|As at December 31:                                                     |  |   | 2012    |   | 2011
|---------------------------------------------------------------------- |  | - | ------- | - | ----
|Prepayments and deposits for inventories                               |  | $ | 23,154  |   |     
|Prepaid non-income
      taxes                                         |  |   | 287     |   |     
|Intangible assets relating to order backlog on acquisition
      dates |  |   | 885     |   |     
|Prepaid, deposits and
      other                                      |  |   | 3,507   |   |     
|                                                                       |  | $ | 27,833  |   |     
|                                                                      
|Note 13.
      Assets Held for Sale                                    |  |   |         |   |     
|                                                                      
|As at December 31:                                                     |  |   | 2012    |   | 2011
|Assets held for sale                                                   |  | $ | 128,657 |   |     
|Liabilities relating to
      assets held for sale                     |  |   | (29,806 | ) |     
|Net assets held for
      sale                                         |  | $ | 98,851  |   |     
|Represented
by:                                                        |  |   |         |   |     
|Hydrocarbon properties                                                 |  | $ | 99,140  |   |     
|Extracting facilities                                                  |  |   | (289    | ) |     
|Net assets held for
      sale                                         |  | $ | 98,851  |   |     

In connection with the acquisition of
CPC, management has committed to a plan to sell certain hydrocarbon properties
and an active program to locate a buyer and complete the plan has been
initiated. The assets are actively marketed for sale at a price that is
reasonable in relation to their current fair values. The sale is expected to
qualify for recognition as a completed sale within one year from September 2012
and actions required to complete the plan indicate that it is unlikely that
significant changes to the plan will be made or that the plan will be withdrawn.
As at December 31, 2012, the assets held for sale (represented by interests in
resource properties) and the related liabilities (represented by decommissioning
obligations) were $115,603 and $16,463, respectively.

In December 2012, management was
committed to a plan to sell the extracting facilities and the sale was completed
in 2013. As at December 31, 2012, the assets reclassified as held for sale were
$13,054 (consisting of $3,103 in cash, $9,030 in other current assets and $921
in non-current assets) and the related current liabilities were $13,343. The
extracting facilities did not represent as a separate major line of business or
geographical area of operations.

The assets held for sale are included
in the Groups commodities and resources segment.

Note 14. Long-term
securities

|As at December 31:             |  |   | 2012  |  | 2011
|------------------------------ |  | - | ----- |  | ----
|Available-for-sale securities: |  |   |       |  |     
|Publicly-traded                |  | $ | 9,637 |  | $   

At December 31, 2012,
available-for-sale securities comprised six publicly-traded equity securities
and investment funds (of which the largest company represented 61%). At December
31, 2011, available-for-sale securities comprised 12 publicly-traded equity
securities and investment funds (of which the largest company represented
47%).

110

---



MFC INDUSTRIAL LTD.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTSDECEMBER 31, 2012

Note 15. Equity method investments

|As at December 31:          |  |   | 2012   |  | 2011
|--------------------------- |  | - | ------ |  | ----
|Joint ventures  China      |  | $ | 5,219  |  | $   
|Joint ventures 
      U.S. |  |   | 17,163 |  |     
|                            |  | $ | 22,382 |  | $   

All of the Group's joint venture
interests in China were acquired in 2010 through the business combination of
Mass and provide eye care business. In December 2011, the Group, through joint
venture entities, acquired a 50% interest in an exploration and development
stage iron ore mine in the U.S. The Group will jointly develop the iron ore
mine, including working towards completing a feasibility study on the project,
with the mandate to re-open the mine, including exploiting the existing tailings
accumulation and other areas for ferrous mineral production.

The following table shows the Groups
joint ventures as at December 31, 2012:

|                                                             |  | Proportion of
|------------------------------------------------------------ |  | -------------
|                                                             |  | Ownership    
|                                                             |  | Interest     
|Zhejiang University No. 2 Hospital Hangzhou
      Eye Center |  | 55%          
|Chongqing Lasernet Guangji Eye Hospital
      (incorporated) |  | 58%          
|Chongqing Fuling Lasernet Eye
    Center                     |  | 65%          
|Sichuan Suining Lasernet Eye Center                          |  | 40%          
|Thayer Land Development Company,
    LLC                     |  | 50%          
|TTT Mining, LLC                                              |  | 50%          
|PRR Mining Inc.                                              |  | 50%          
|PRR Processing Inc.                                          |  | 50%          

Joint ventures 
China

The following table presents the book
values of the assets and liabilities related to the Group's interests in the
joint ventures as at December 31, 2012 and 2011:

|                    |  | 2012 |        | 2011
|------------------- |  | ---- | ------ | ----
|Current assets      |  | $    | 2,819  |     
|Long-term assets    |  |      | 5,150  |     
|                    |  |      | 7,969  |     
|Current liabilities |  |      | (2,750 | )   
|Net                 |  | $    | 5,219  |     

The assets held by the joint ventures
primarily consist of medical equipment and are financed from their own working
capital and equity.

As at December 31, 2012, the Group has
not incurred any contingent liabilities or capital commitments in relation to
its interests in the joint ventures, by the Group itself, or through the joint
venturers or the joint ventures.

The following table presents the
aggregated amounts of income and expenses (including income taxes) related to
the Group's interest in the joint ventures for the years ended December 31,
2012, 2011 and 2010:

|         |  | 2012 |         | 2011 |  | 2010
|-------- |  | ---- | ------- | ---- |  | ----
|Income   |  | $    | 19,261  |      |  | $   
|Expenses |  |      | (13,109 | )    |  |     
|Net      |  | $    | 6,152   |      |  | $   

The Group did not receive any fees to
manage the joint ventures during the years ended December 31, 2012, 2011 and
2010.

111

---



MFC INDUSTRIAL LTD.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTSDECEMBER 31, 2012

Note 15. Equity method investments
(continued)

Joint ventures 
U.S.

The following table presents the assets
and liabilities related to the Group's interest in the joint ventures as of
December 31, 2012 and 2011:

|                    |  | 2012 |        | 2011
|------------------- |  | ---- | ------ | ----
|Current assets      |  | $    | 116    |     
|Long-term assets    |  |      | 19,299 |     
|                    |  |      | 19,415 |     
|Current liabilities |  |      | (2,252 | )   
|Net                 |  | $    | 17,163 |     

The assets held by the joint ventures
primarily consist of an interest in an exploration and development stage iron
ore mine. The Group did not record income and expenses related to these joint
ventures since their acquisitions in December 2011 as the resource property is
being developed and all the costs and expenses have been
capitalized.

As at December 31, 2012, the Group has
not incurred any contingent liabilities or capital commitments in relation to
its interests in the joint ventures, by the Group itself, or through the joint
venturers or the joint venture.

Note 16. Investment property

|                                         |  | 2012 |        | 2011
|---------------------------------------- |  | ---- | ------ | ----
|Balance, beginning of
      year         |  | $    | 33,585 |     
|Additions                                |  |      | 1      |     
|Disposals                                |  |      | (2     | )   
|Change in fair value during the
    year |  |      | 14     |     
|Cumulative translation
      adjustment  |  |      | 554    |     
|Balance, end of year                     |  | $    | 34,152 |     

The change in fair value of the
investment property is included in the costs of sales in the consolidated
statement of operations.

The amounts recognized in the
consolidated statement of operations in relation to the investment property
during 2012 and 2011 are as follows:

|                                                                                             |  | 2012 |       | 2011
|-------------------------------------------------------------------------------------------- |  | ---- | ----- | ----
|Rental income                                                                                |  | $    | 1,477 |     
|Direct operating expenses (including
      repairs and maintenance) from investment property |  |      |       |     
|that generated rental income during the year                                                 |  |      | 345   |     

There were no restrictions on the
realizability of investment property or the remittance of income and proceeds or
disposal.

As at December 31, 2012, contractual
obligations to purchase, construct or develop the investment property or for
repairs, maintenance or enhancements were $nil.

112

---



MFC INDUSTRIAL LTD.

NOTES TO CONSOLIDATED
FINANCIAL STATEMENTSDECEMBER 31, 2012

Note 17. Property, Plant
and Equipment

The following changes in
property, plant and equipment were recorded in 2012:

|                               |  |         |         |  |           |       |           |   |             |   |                |   |             |  | Reclassified |        |            |  |   |      |   | 
|------------------------------ |  | ------- | ------- |  | --------- | ----- | --------- | - | ----------- | - | -------------- | - | ----------- |  | ------------ | ------ | ---------- |  | - | ---- | - | 
|                               |  |         |         |  |           |       |           |   |             |   |                |   |             |  | to assets    |        | Cumulative |  |   |     
|                               |  | Opening |         |  |           |       |           |   |             |   | Business       |   | held        |  | translation  |        | Ending    
|Historical
      costs         |  |         | balance |  | Additions |       | Disposals |   | combination |   | for
      sale |   | adjustments |  | balance     
|Land and building              |  | $       | 482     |  | $         | 293   |           | $ | -           |   |                | $ | 2,858       |  | $            | (737   | )          |  | $ | (74  | ) | 
|Refineries and power plant     |  |         | -       |  |           | -     |           |   | -           |   |                |   | 75,454      |  |              | -      |            |  |   | (511 | ) | 
|Processing plant and equipment |  |         | 2,885   |  |           | 418   |           |   | -           |   |                |   | 1,927       |  |              | -      |            |  |   | 205  |   | 
|Office equipment               |  |         | 2,547   |  |           | 378   |           |   | (5          | ) |                |   | 1,199       |  |              | (595   | )          |  |   | 47   |   | 
|                               |  | $       | 5,914   |  | $         | 1,089 |           | $ | (5          | ) |                | $ | 81,438      |  | $            | (1,332 | )          |  | $ | (333 | ) | 

|                               |  |         |       |           |   |           |  |                |   |             | Reclassified |             |            |        |   |      |   | 
|------------------------------ |  | ------- | ----- | --------- | - | --------- |  | -------------- | - | ----------- | ------------ | ----------- | ---------- | ------ | - | ---- | - | 
|                               |  |         |       |           |   |           |  |                |   |             | to assets    |             | Cumulative |        |   |     
|                               |  | Opening |       |           |   |           |  |                |   | held        |              | translation |            | Ending
|Accumulated depreciation       |  | balance |       | Additions |   | Disposals |  | for
      sale |   | adjustments |              | Balance    
|Land and building              |  | $       | 207   |           | $ | 93        |  | $              | - |             | $            | (249        | )          |        | $ | (6   | ) | 
|Refineries and power plant     |  |         | -     |           |   | 3,174     |  |                | - |             |              | -           |            |        |   | (109 | ) | 
|Processing plant and equipment |  |         | 719   |           |   | 1,129     |  |                | - |             |              | -           |            |        |   | 63   |   | 
|Office equipment               |  |         | 1,245 |           |   | 695       |  |                | - |             |              | (369        | )          |        |   | 40   |   | 
|                               |  | $       | 2,171 |           | $ | 5,091     |  | $              | - |             | $            | (618        | )          |        | $ | (12  | ) | 
|Carrying amount                |  | $       | 3,743 |           |   |           |  |                |   |             |              |             |            |        |   |      |   | 

The following changes in
property, plant and equipment were recorded in 2011:

|                               |  |         |       |         |   |           |  |           |     |             |             | Cumulative |        |   | 
|------------------------------ |  | ------- | ----- | ------- | - | --------- |  | --------- | --- | ----------- | ----------- | ---------- | ------ | - | 
|                               |  | Opening |       |         |   |           |  |           |     |             | translation |            | Ending
|Historical
      costs         |  |         |       | balance |   | Additions |  | Disposals |     | adjustments |             | balance   
|Land and building              |  | $       | 440   |         | $ | 153       |  | $         | (5  | )           |             | $          | (106   | ) | 
|Processing plant and equipment |  |         | 2,555 |         |   | 509       |  |           | (1  | )           |             |            | (178   | ) | 
|Office equipment               |  |         | 2,194 |         |   | 531       |  |           | (34 | )           |             |            | (144   | ) | 
|                               |  | $       | 5,189 |         | $ | 1,193     |  | $         | (40 | )           |             | $          | (428   | ) | 

|                               |  |         |         |  |           |       |           |   |             |   |             | Cumulative |        |   | 
|------------------------------ |  | ------- | ------- |  | --------- | ----- | --------- | - | ----------- | - | ----------- | ---------- | ------ | - | 
|                               |  | Opening |         |  |           |       |           |   |             |   | translation |            | Ending
|Accumulated
      depreciation |  |         | balance |  | Additions |       | Disposals |   | adjustments |   | balance    
|Land and building              |  | $       | 19      |  | $         | 232   |           | $ | -           |   |             | $          | (44    | ) | 
|Processing plant and equipment |  |         | 79      |  |           | 768   |           |   | (1          | ) |             |            | (127   | ) | 
|Office equipment               |  |         | 889     |  |           | 480   |           |   | (14         | ) |             |            | (110   | ) | 
|                               |  | $       | 987     |  | $         | 1,480 |           | $ | (15         | ) |             | $          | (281   | ) | 
|Carrying amount                |  | $       | 4,202   |  |           |       |           |   |             |   |             |            |        |   | 

As at December 31, 2012,
land and building with carrying amount of $2,146 were used as securities against
the bank debt (see Note 22).

Note 18. Interests in
Resource Properties

The Group's interests in
resource properties comprised the following:

|As at December 31                             | : |   | 2012    |  | 2011
|--------------------------------------------- | - | - | ------- |  | ----
|Interest in an iron ore mine                  |   | $ | 168,071 |  | $   
|Interest in an iron ore extracting facilities |   |   | -       |  |     
|Interests in hydrocarbon
properties           |   |   | 215,646 |  |     
|Other                                         |   |   | 28      |  |     
|Total                                         |   | $ | 383,745 |  | $   

113

---



MFC INDUSTRIAL LTD.

NOTES TO CONSOLIDATED
FINANCIAL STATEMENTSDECEMBER 31, 2012

Note 18. Interests in
Resource Properties (continued)

Iron ore
mine

The lease of the Canadian
iron ore mine is to expire in 2055. The iron ore deposit is currently sub-leased
to a third party entity under certain lease agreements which will also expire in
2055. The Group collects royalty payments directly from the third party entity
based on a pre-determined formula, with a minimum payment not to be less than
C$3,250 per year.

Iron ore extracting
facilities

An Indian subsidiary (which
was subsequently sold in 2013) entered into contracts with leaseholders (the
LH) for extraction of iron ore from certain mines on behalf of the LH for
which the subsidiary receives an extraction fee per ton and gives the subsidiary
the right to extract, crush, screen and store the iron ore at the LHs site on
its behalf.Interests in the extractingfacilities were impaired and written off In December 2012 (see Note 32).
The subsidiary was sold in 2013.

Hydrocarbon
properties

The Group owns development
and production assets in hydrocarbon properties in western Canada. The majority
of such operations are located in the Deep Basin fairway of the Western Canada
Sedimentary Basin. These interests include producing natural gas wells,
non-producing natural gas wells, producing oil wells and non-producing oil
wells, but do not include a land position that includes net working interests in
undeveloped acres and properties containing probable reserves only which are
included in exploration and evaluation assets (see Note 19). The Group had no
hydrocarbon properties in years 2011 and 2010.

The following changes in
interests in resource properties were recorded in 2012:

Decom-
    
    CumulativeOpening
    
    Business
    
    
    
    
    
    
    
    
    
    missioning
    
    translation
    
    Endingbalance
    
    combination
    
    Additions
    
    Impairment
    
    obligations
    
    adjustments
    
    balanceHistorical costs
    
    $
    251,195
    
    
    $
    223,057
    
    $
    1,073
    
    
    $
    (50,865
    )
    
    $
    588
    
    $
    (2,747
    )
    
    $
    422,301Accumulated depletion
    
    
    (31,613
    )
    
    
    -
    
    
    (15,221
    )
    
    
    8,234
    
    
    
    -
    
    
    44
    
    
    
    (38,556
    )Carrying amount
    
    $
    219,582
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    383,745


The following changes in
interests in resource properties were recorded in 2011:

CumulativeOpening
    
    
    
    
    
    translation
    
    Endingbalance
    
    Additions
    
    adjustments
    
    balanceHistorical costs
    
    $
    251,330
    
    
    $
    27
    
    
    $
    (162
    )
    
    $
    251,195Accumulated depletion
    
    
    (20,033
    )
    
    
    (11,724
    )
    
    
    144
    
    
    
    (31,613
    )Carrying amount
    
    $
    231,297
    
    
    
    
    
    
    
    
    
    
    $
    219,582


The Group did not
capitalize any general and administrative costs in respect of hydrocarbon
development and production activities during the years 2012, 2011 and 2010.
There were no borrowing costs capitalized in the current or prior years, as the
Company did not have any qualifying assets.

During 2012, the Group
recognized an impairment of $42,631 on its extracting facilities. For the years
2011 and 2010, there were no impairment identified and, accordingly, an
impairment test was not required and there were no impairment losses recognized
in those prior years.

114

---



MFC INDUSTRIAL LTD.

NOTES TO CONSOLIDATED
FINANCIAL STATEMENTSDECEMBER 31, 2012

Note 19. Hydrocarbon
Probable Reserves and Undeveloped Lands

Exploration and evaluation
assets, which comprise hydrocarbon probable reserves and undeveloped lands, were
acquired by the Group as a result of the business combination in September 2012.
The movements in exploration and evaluation assets during 2012 were as follows.
The Group did not have any exploration and evaluation assets during 2011 and
2010.

|                                       |  | Probable |         | Undeveloped
|-------------------------------------- |  | -------- | ------- | -----------
|                                       |  | reserves |         | lands      
|Balance, beginning of 2012             |  | $        | -       |            
|Purchased through business combination |  |          | 100,393 |            
|Additions                              |  |          | -       |            
|Land expiries                          |  |          | -       |            
|Cumulative translation adjustment      |  |          | (1,251  | )          
|Balance, end of 2012                   |  | $        | 99,142  |            

During 2012, a total of
$930 of undeveloped lands expired and were charged to exploration and evaluation
expense. In 2012, no impairment was recorded on exploration and evaluation
assets based on the estimated recoverable amount of undeveloped lands and
probable reserves, as determined by a third party valuation.

Note 20. Deferred Income
Tax Assets and Liabilities

The tax effect of temporary
differences and tax loss carry-forwards that give rise to significant components
of deferred income tax assets and liabilities are as follows:

|As at December
31                   | : |   | 2012   |   | 2011
|----------------------------------- | - | - | ------ | - | ----
|Non-capital tax loss
carry-forwards |   | $ | 3,745  |   |     
|Interests in resource properties    |   |   | 10,766 |   |     
|Other assets                        |   |   | 3,416  |   |     
|Other liabilities                   |   |   | (2,808 | ) |     
|                                    |   | $ | 15,119 |   |     

Deferred income tax assets
and liabilities are included in the consolidated statement of financial position
as follows:

|Deferred income tax assets      |  | $ | 18,510 |   |  | $ | 7,524   |  
|------------------------------- |  | - | ------ | - |  | - | ------- | -
|Deferred income tax liabilities |  |   | (3,391 | ) |  |   | (61,045 | )
|Net                             |  | $ | 15,119 |   |  | $ | (53,521 | )

At December 31, 2012, the
Group had estimated accumulated non-capital losses which expire in the following
countries as follows. Management is of the opinion that not all of these
non-capital losses are probable to be utilized in the future.

|            |  |   |                    |  | Amount for which     |        |                       
|----------- |  | - | ------------------ |  | -------------------- | ------ | ----------------------
|            |  |   |                    |  | no deferred asset is |        |                       
|Country     |  |   | Gross
      amount |  | recognized           |        | Expiration
      dates
|Canada      |  | $ | 91,485             |  | $                    | 85,380 |                       
|Germany     |  |   | 4,982              |  |                      | 4,982  |                       
|Switzerland |  |   | 3,767              |  |                      | 3,767  |                       
|U.S.        |  |   | 20,883             |  |                      | 20,883 |                       
|Austria     |  |   | 8,872              |  |                      | -      |                       
|Slovakia    |  |   | 2,206              |  |                      | 2,206  |                       

115

---



MFC INDUSTRIAL LTD.

NOTES TO CONSOLIDATED
FINANCIAL STATEMENTSDECEMBER 31, 2012

Note 20. Deferred Income
Tax Assets and Liabilities (continued)

At December 31, 2012, MFC
Industrial had an aggregate amount of $476,677 of temporary differences
associated with its investments in subsidiaries, associates and interests in
joint ventures, for which deferred income tax liabilities have not been
recognized because the Group is in a position to control the timing of the
reversal of such temporary differences and it is probable that such differences
will not reverse in the foreseeable future.

During 2012, the Company, through its Austrian subsidiary, acquired all of the issued and outstanding shares of a Canadian corporation in a business combination. At the time of the acquisition, management was aware that deferred assets were available to be utilized through applying existing taxable profits of the Group. As such, the deferred tax assets of the acquiree in the amount of $57,137 were recognized at the time of the acquisition. Before the date of acquisition, the Company had a viable tax planning strategy to restructure its Canadian entities to access the deferred tax assets to offset future increases in taxable income of the Canadian entities. Before the acquisition, the acquiree had suffered a loss in the current and prior period in the tax jurisdictions to which the deferred tax assets relate.

Due to the size, complexity and nature of the Company’s operations, various legal and tax matters are outstanding from time to time, including an audit by the Canada tax authority of the Company’s domestic and international transactions covering the 2006 to 2010 taxation years, which is currently ongoing. By their nature, contingencies will only be resolved when one or more future events occur or fail to occur. The assessment of contingencies inherently involves the exercise of significant judgment and estimates of the outcome of future events. Based on information available to management to date, the outstanding legal and tax matters are not expected to have a material adverse effect on the Company’s financial position. However, if the Company is unable to resolve any of these matters favorably, there may be a material adverse impact on the Company’s financial performance, cash flows or results of operations.

The Group companies’ income tax filings are also subject to audit by taxation authorities in numerous jurisdictions. There are audits in progress and items under review, some of which may increase the Group’s tax liability. In the event that management’s estimate of the future resolution of these matters changes, the Group will recognize the effects of the changes in its consolidated financial statements in the appropriate period relative to when such changes occur.

Note 21. Short-term Bank
Borrowings

Short-term bank borrowings
are repayable within a year from the reporting date. They are used to finance
the Groups day-to-day commodities and resources business.

|As at December 31            | : |   | 2012    |  | 2011
|---------------------------- | - | - | ------- |  | ----
|Credit facilities from banks |   | $ | 150,396 |  | $   

As at December 31, 2012,
the Group had credit facilities aggregating $439,718 as follows: (i) the Group
had unsecured revolving credit facilities aggregating $195,184 from banks. The
banks generally charge an interest rate at inter-bank rate plus an interest
margin; (ii) the Group also had revolving credit facilities aggregating $63,834
from banks for structured solutions, a special trade financing. The margin is
negotiable when the facility is used; (iii) the Group had a specially structured
factoring arrangement with a bank up to a credit limit of $122,620 for the
Group's commodities activities. Generally, the Group factors its trade
receivable accounts upon invoicing, at inter-bank rate plus a margin; and (iv)
the Group also had a foreign exchange credit facility of $58,080 with a bank.
All these facilities are renewable on a yearly basis.

116

---



MFC INDUSTRIAL LTD.

NOTES TO CONSOLIDATED
FINANCIAL STATEMENTSDECEMBER 31, 2012

Note 22. Debt

|As at December 31:                                                                                                 |  | 2012 |         | 2011
|------------------------------------------------------------------------------------------------------------------ |  | ---- | ------- | ----
|Due to a bank, €nil and €14,350 at December
      31, 2012 and 2011, respectively, interest fixed at an            |  |      |         |     
|Austria
      government credit agency (the "Austrian Credit Agency") financing rate and
      backup              |  |      |         |     
|guarantee fee
      of 3.9% per annum and payable quarterly and due in 2012                                        |  | $    | -       |     
|Due
      to a bank, Swiss francs nil and Swiss francs 1,423 at December 31, 2012
      and 2011, respectively,    |  |      |         |     
|interest at 2.35% per annum at
      December 31, 2011 and payable quarterly, secured by a charge on
    land      |  |      |         |     
|and due in quarterly payments with a
      balloon final payment in 2012                                           |  |      | -       |     
|Due to a bank, €nil and €2,210 at December
      31, 2012 and 2011, respectively, interest at interbank rate       |  |      |         |     
|plus an
      interest margin and payable quarterly and due in 2012                                                |  |      | -       |     
|Due
      to a bank, €nil and €3,000 at both December 31, 2012 and 2011,
      respectively, interest at interbank |  |      |         |     
|rate plus an interest margin and
      payable monthly and due in 2012                                             |  |      | -       |     
|Due to a bank, €2,400 and €3,600 at December
      2012 and 2011, respectively, interest at the Austrian           |  |      |         |     
|Credit Agency
      financing rate plus an interest margin and backup guarantee fee (2.19% per
      annum at      |  |      |         |     
|December 31, 2012) and payable quarterly and due in 2012 to 2014 in equal installments                             |  |      | 3,165   |     
|Due
      to a bank, $3,000 and $nil at December 31, 2012 and 2011, respectively,
      interest at LIBOR plus an  |  |      |         |     
|interest margin (3.81% at December
      2012) and payable monthly, secured by trade receivables and due           |  |      |         |     
|in negotiated periodic repayment
      with final payment in October 2014                                          |  |      | 3,000   |     
|Due to a bank, $7,519 and $nil at December
      31, 2012 and 2011, respectively, interest at LIBOR plus an        |  |      |         |     
|interest
      margin (3.71% at December 2012) and payable monthly, secured by real
      estate and trade         |  |      |         |     
|receivables
      and due in negotiated periodic repayment with final payment in April
      2014                  |  |      | 7,519   |     
|Due
      to banks, €80,000 and €nil at December 31, 2012 and 2011, respectively,
      interest and backup        |  |      |         |     
|guarantee fee on €59,300 fixed at
      2.61% per annum and the remainder at EURIBOR plus an interest              |  |      |         |     
|margin and backup guarantee fee
      (approx. 1.94% per annum at December 2012) and payable monthly               |  |      |         |     
|due in semi-annual repayment with
      final payment in November 2020; final payment on the €20,700               |  |      |         |     
|portion with variable interest is in
      December 2014                                                           |  |      | 105,485 |     
|Due to a bank, $28,000 and nil at December
      31, 2012 and 2011, respectively, interest at LIBOR plus an        |  |      |         |     
|interest
      margin and backup guarantee fee (3.90% per annum at December 31, 2012) and
      payable            |  |      |         |     
|monthly and
      due in equal yearly repayment with final repayment in August
2020                                |  |      | 28,000  |     
|Due
      to a bank, €12,000 at both December 31, 2012 and 2011, respectively,
      interest fixed the Austrian   |  |      |         |     
|Credit Agencys financing rates and
      backup guarantee fees between 4.80% and 5.05% per annum and              |  |      |         |     
|payable quarterly, due in
    2013                                                                                 |  |      | 15,824  |     
|                                                                                                                   |  | $    | 162,993 |     
|Current portion                                                                                                    |  | $    | 44,169  |     
|Long-term
      portion                                                                                            |  |      | 118,824 |     
|                                                                                                                   |  | $    | 162,993 |     

As of December 31, 2012,
the maturities of debt are as follows:

|Maturity   |  |   | Principal |  | Interest |        | Total
|---------- |  | - | --------- |  | -------- | ------ | -----
|2013       |  | $ | 44,169    |  | $        | 4,239  |      
|2014       |  |   | 25,001    |  |          | 3,055  |      
|2015       |  |   | 21,833    |  |          | 2,391  |      
|2016       |  |   | 21,833    |  |          | 1,843  |      
|2017       |  |   | 21,833    |  |          | 1,275  |      
|Thereafter |  |   | 28,324    |  |          | 1,474  |      
|           |  | $ | 162,993   |  | $        | 14,277 |      

No interest expense was
capitalized in the years ended December 31, 2012, 2011 and 2010.

117

---



MFC INDUSTRIAL LTD.

NOTES TO CONSOLIDATED
FINANCIAL STATEMENTSDECEMBER 31, 2012

Note 23. Account
Payables and Accrued Expenses

|As at December 31:                                                                                |  | 2012 |        | 2011
|------------------------------------------------------------------------------------------------- |  | ---- | ------ | ----
|Trade and account payables                                                                        |  | $    | 60,846 |     
|Value-added, goods-and-sales and other taxes (other than income
      taxes)                      |  |      | 2,384  |     
|Compensation                                                                                      |  |      | 1,888  |     
|Interest                                                                                          |  |      | 848    |     
|Derivative liabilities                                                                            |  |      | 1,691  |     
|Short-sale of securities                                                                          |  |      | 367    |     
|Deferred revenues                                                                                 |  |      | 312    |     
|Deposits from customers                                                                           |  |      | 791    |     
|Acquisition price payables ($6,201 paid in
      January 2013 and the remainder in November 2013) |  |      | 8,459  |     
|                                                                                                  |  | $    | 77,586 |     

Trade payables arise from
the Group's day-to-day trading activities. The terms with affiliates in the
normal course of the Group's activities are no different than those with third
parties. The Group's expenses for services and other operational expenses are
included in account and other payables. Generally, these payable and accrual
accounts do not bear interest and they have a maturity of less than one year.

Note 24. Mazeppa
Processing Partnership (MPP)

MPP is a limited
partnership organized under the laws of the Province of Alberta, Canada and owns
certain midstream facilities, including natural gas plants and pipelines in
southern Alberta, through which the Group processes a significant portion of its
production. The Groups interaction with MPP is governed by agreements (the MPP
Agreements) which provide for:

(a) management of the
midstream facility;

(b) the payment to MPP of a
base processing fee and the reimbursement of MPPs net out-of-pocket
costs;

(c) the dedication through
April 30, 2024 of production and reserves from the defined area through the
facilities; and

(d) an option granted to
the Group to purchase the MPP at a predetermined amount on April 30,
2014.

The Group is considered to
be the beneficiary of MPPs operations, although it does not have an ownership
interest in the midstream facilities. Pursuant to SIC - 12, the assets,
liabilities, and operations of the Partnership are consolidated in these
financial statements. As a result of an option to purchase MPP, the equity in
MPP is attributable to the Group even though the Group currently does not have
an ownership interest in MPP.

The MPP term financing in
these consolidated financial statements comprised the following components at
December 31, 2012. The MPP term financing was not applicable to the Group prior
to the Groups acquisition of CPC in September 2012.

|Present value of the base process
    fees |  | $ | 8,628  |  
|------------------------------------------ |  | - | ------ | -
|Purchase option                            |  |   | 10,291 |  
|Unamortized transaction costs              |  |   | (201   | )
|Total                                      |  | $ | 18,718 |  
|                                          
|Represented by:                            |  |   |        |  
|Current portion                            |  | $ | 7,390  |  
|Long-term portion                          |  |   | 11,328 |  
|Total                                      |  | $ | 18,718 |  

The base processing fee
component of the MPP term financing is accounted for as an amortizing obligation
paid in full over its term to April 30, 2014, through a monthly principal and
interest payment totaling C$799 per month. The effective rate of interest is
12.1% per annum.

118

---



MFC INDUSTRIAL LTD.

NOTES TO CONSOLIDATED
FINANCIAL STATEMENTSDECEMBER 31, 2012

Note 24. Mazeppa
Processing Partnership (MPP) (continued)

In these consolidated
financial statements, the MPP net out-of-pocket costs are included in operating
expense, the interest component of the base processing fee is included in
finance costs and the principal component of the base processing fee is recorded
as a reduction in the MPP term financing liability.

The purchase option
represents the pre-determined price at which the Group may, at its discretion,
purchase MPP on April 30, 2014. If the Group does not exercise this purchase
option, it may renew the MPP Agreements with terms and conditions to be
negotiated at that time, or enter into an arrangement with the owners of the MPP
facilities to process natural gas for the Group at a fee to be determined at
that time. In substance, the purchase option is considered as a financing.

The MPP Agreements
prescribe minimum throughput volumes and dedicated reserves which, if not
exceeded, may require a buy-down of the purchase option. The minimum throughput
volume is an average of the throughput volume of the preceding two consecutive
calendar quarters. The prepayment amount is C$400 thousand per 1.0 mmcfd of
shortfall. Each prepayment of the purchase option will cause the minimum
throughput volume to be adjusted downward to the average throughput volume of
the preceding two consecutive calendar quarters. In the event that the estimated
dedicated reserves, as projected at April 30, 2014, are less than 200 BCF or
have a discounted reserve value of less than C$250 million using a 10% discount
rate, the prepayment amount is the greater of C$108 thousand per C$1 million of
reserve value shortfall and C$135 thousand per 1.0 BCF of the reserves
shortfall.

Note 25. ProvisionsWarranty
    
    TotalBalance, December 31, 2011
    
    $
    115
    
    
    $
    115Additions
    
    
    125
    
    
    
    125Paid
    
    
    (161
    )
    
    
    (161
    )Cumulative translation adjustment
    
    
    1
    
    
    
    1Balance, December 31, 2012
    
    $
    80
    
    
    $
    80Current portion
    
    
    
    
    
    $
    80Long-term portion
    
    
    
    
    
    
    -$
    80


Terminationof office
      lease
    
    Warranty
    
    TotalBalance, December 31, 2010
    
    $
    479
    
    
    $
    115
    
    
    $
    594Additions
    
    
    -
    
    
    
    124
    
    
    
    124Paid
    
    
    (102
    )
    
    
    (102
    )
    
    
    (204
    )Reversal
    
    
    -
    
    
    
    (15
    )
    
    
    (15
    )Deconsolidation of a subsidiary
    
    
    (377
    )
    
    
    -
    
    
    
    (377
    )Cumulative translation adjustment
    
    
    -
    
    
    
    (7
    )
    
    
    (7
    )Balance, December 31, 2011
    
    $
    -
    
    
    $
    115
    
    
    $
    115Current portion
    
    
    
    
    
    
    
    
    
    $
    115Long-term portion
    
    
    
    
    
    
    
    
    
    
    -$
    115


Note 26. Deferred Sale
Liabilities

|As at December 31 | : |   | 2012   |  | 2011
|----------------- | - | - | ------ |  | ----
|Current           |   | $ | 26,637 |  | $   
|Long-term         |   |   | -      |  |     
|                  |   | $ | 26,637 |  | $   

The Group entered into sale
and repurchase agreements, which are accounted for as financing arrangements. As
at December 31, 2012, the deferred liabilities are due on various dates in
2013.

119

---



MFC INDUSTRIAL LTD.

NOTES TO CONSOLIDATED
FINANCIAL STATEMENTSDECEMBER 31, 2012

Note 27. Decommissioning
Obligations

Changes in the carry amount
of the Groups decommissioning obligations during 2012 are as follows. The Group
did not have any decommissioning obligations during 2011 and 2010.

|                                                                                 |  | 2012
|-------------------------------------------------------------------------------- |  | ----
|Decommissioning obligations, beginning of
      year                             |  | $   
|Assumption upon
      acquisitions                                               |  |     
|Obligations incurred with development activities                                 |  |     
|Changes in estimates                                                             |  |     
|Obligations related to dispositions                                              |  |     
|Obligations settled                                                              |  |     
|Accretion                                                                        |  |     
|Effects of changes in foreign
      exchange rates                               |  |     
|Decommissioning obligations, end of
      year                                   |  | $   
|                                                                                
|Comprising:                                                                      |  |     
|Current portion (included in
      liabilities relating to assets held for sale) |  | $   
|Long-term portion                                                                |  |     
|                                                                                 |  | $   

_________________________

* including $153,959 on
hydrocarbon properties (of which $15,590 was included in liabilities relating to
assets held for sales)

As at December 31, 2012,
decommissioning obligations represented the present value of estimated
remediation and reclamation costs associated with interests in hydrocarbon
properties and property, plant and equipment. The Group discounted the
decommissioning retirement obligations using an average discount rate of 1.57%.
While the provision for abandonment is based on managements best estimates of
future costs and the economic lives of the underlying assets involved, there is
uncertainty regarding both the amount and timing of incurring these costs. The
Group will fund the decommissioning obligations from future cash flows from the
operations.

Note 28. Accrued Pension
Obligations, Net

A controlled entity (the
plan sponsor) has defined benefit plan for its employees. The pension
obligations are non-recourse to MFC Industrial.

The pension plan for the
employees of the plan sponsor is a defined benefit plan registered with the
Alberta Superintendent of Pensions and the Canada Revenue Agency which provides
benefits upon retirement, death and termination prior to retirement. The
benefits are based on final average earnings and are partially indexed to
inflation. As is typical of a defined benefit plan, the risk that additional
funding will be required to pay for the benefits promised to plan members lies
with the plan sponsor.

The plan is subject to the
funding rules of the Employment Pension Plans Act (EPPA) of Alberta and
regulations and the Income Tax Act (ITA) of Canada. The minimum funding rules
in the EPPA require that going concern deficiencies are funded over a maximum of
15 years and solvency deficiencies are funded over a maximum of 5 years. There
have been two funding relief options under the EPPA that temporarily altered the
funding requirements of the plan.

The plan sponsor is
required to provide the funding as required under provincial pension legislation
as determined by periodic actuarial funding valuations performed by an
independent actuary. Funding for 2012 was based on the December 31, 2011
actuarial funding valuation. The plan sponsor funds the pension plan for minimum
required contributions annually and assesses additional contributions if and
when needed.

120

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MFC INDUSTRIAL LTD.

NOTES TO CONSOLIDATED
FINANCIAL STATEMENTSDECEMBER 31, 2012

Note 28. Accrued Pension
Obligations, Net (continued)

In September 2012, the
Alberta government enacted temporary pension funding relief measures in response
to the continued market declines. The plan sponsor has applied for, and was
granted, this temporary pension funding relief which increases the number of
years over which the going concern deficiency is required to be eliminated
through additional contributions. This had no impact on 2012 payments; however,
is expected to reduce 2013 payments. The expected reduction in payments will be
determined at the completion of the December 31, 2012 actuarial funding
valuation report.

The plan is an ongoing,
open defined benefit plan, meaning that the plan accepts new entrants as
employees are hired. Approximately 65% of the liability is attributed to active
and disabled members who are accruing service in the plan. The duration of the
plan is approximately 17 years.

The investment of the
pension plan assets, including the performance of the investment managers, is
overseen by the pension committee which is composed of members of the plan
sponsor. The underlying objective is to earn an appropriate return given the
plan sponsors goal of preserving capital within an acceptable level of risk for
the pension plan assets.

To achieve the overall
performance goals for the pension plan, the pension plan assets are overseen by
external investment managers as per the pension plans investment policy and
governance framework. The pension committee reviews investment manager
performance on a regular basis.

The cost of pension
benefits earned by employees is determined using the projected-benefit method
prorated on employment services and is expensed as services are rendered. The
entity funds these plans according to federal and provincial government
regulations by contributing to trust funds administered by an independent
trustee. These funds are invested primarily in equities and bonds.

The plan sponsor was
acquired in September 2012 by the Group and there were no plan amendments,
curtailments, settlements or recognition of past service cost during 2012. The
Group did not have any defined benefit plan in 2011 and 2010.

|Reconciliation of the defined benefit
      obligations                                         |  | 2012
|----------------------------------------------------------------------------------------------- |  | ----
|Beginning of year                                                                               |  | $   
|Assumed upon
    acquisition                                                                    |  |     
|Net
      current service cost                                                                  |  |     
|Employer
    contributions                                                                      |  |     
|Obligation interest cost                                                                        |  |     
|Actuarial gains
    from changes in        financial assumptions                                |  |     
|Benefits paid                                                                                   |  |     
|Currency translation
      adjustments                                                          |  |     
|End of year                                                                                     |  | $   
|                                                                                               
|Defined benefit obligations from plans that
      are wholly unfunded                           |  | $   
|Defined benefit obligations from plans that are wholly or partly
      funded                   |  | $   
|                                                                                               
|Significant actuarial assumption for defined
      benefit obligations as at December 31, 2012: |  |     
|Discount rate                                                                                   |  |     
|Rate of
      salary increases                                                                  |  |     
|Consumer price index                                                                            |  |     

121

---



MFC INDUSTRIAL LTD.

NOTES TO CONSOLIDATED
FINANCIAL STATEMENTSDECEMBER 31, 2012

Note 28. Accrued Pension
Obligations, Net (continued)

|Reconciliation of
      the fair value of plan assets |  |   | 2012  
|----------------------------------------------------- |  | - | ------
|Beginning of year                                     |  | $ | -     
|Fair value of plan assets upon
      acquisition      |  |   | 10,047
|Return on
      plan assets                           |  |   | 598   
|Administration costs                                  |  |   | (4    
|Employer
      contributions                          |  |   | 184   
|Employee contributions                                |  |   | 29    
|Benefits
      paid                                   |  |   | (88   
|Currency translation
      adjustments                |  |   | (128  
|End of year                                           |  | $ | 10,638
|                                                     
|Interest income on plan assets                        |  | $ | 143   
|Actuarial gains                                       |  |   | 455   
|Return on
      plan assets                           |  | $ | 598   
|                                                     

|Reconciliation to
      the liability recognized in the statement of financial
      position |  |   | 2012    |  
|--------------------------------------------------------------------------------------------- |  | - | ------- | -
|Fair value of plan assets, end of
    year                                                    |  | $ | 10,638  |  
|Defined benefit obligations, end of year                                                      |  |   | (11,866 | )
|Plan
      deficit                                                                            |  |   | (1,228  | )
|                                                                                             
|Net
      liability                                                                           |  | $ | (1,228  | )
|                                                                                             

|Recognition of net
      liability                    |  |   | 2012   |  
|----------------------------------------------------- |  | - | ------ | -
|Beginning of year                                     |  | $ | -      |  
|Net liability assumed on
      acquisition            |  |   | (2,228 | )
|Employer
      contributions                          |  |   | 184    |  
|Expense recognized                                    |  |   | (173   | )
|Amount
      recognized in other comprehensive income |  |   | 961    |  
|Currency translation
      adjustments                |  |   | 28     |  
|End of year                                           |  | $ | (1,228 | )
|                                                     

|Current pension
      expense for the year* |  |   | 2012 |  
|------------------------------------------- |  | - | ---- | -
|Net current service cost                    |  | $ | 136  |  
|Obligation interest cost                    |  |   | 175  |  
|Interest income on plan assets              |  |   | (142 | )
|Administration costs                        |  |   | 4    |  
|End of year                                 |  | $ | 173  |  

____________________

*incurred during September 7 to December
31, 2012

|Recognition through
      other comprehensive income for the year*     |  |   | 2012 | 
|---------------------------------------------------------------------- |  | - | ---- | 
|Net gains during the year                                              |  | $ | 961  | 
|                                                                      
|Recognition of other comprehensive during
      the year               |  | $ | 961  | 
|                                                                      
|Comprising: experience adjustment on defined
      benefit obligations |  | $ | 506  | 
|Experience adjustment on assets                                        |  |   | 455  | 
|                                                                       |  | $ | 961  | 

____________________

* incurred during September
7 to December 31, 2012

122

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MFC INDUSTRIAL LTD.

NOTES TO CONSOLIDATED
FINANCIAL STATEMENTSDECEMBER 31, 2012

Note 28. Accrued Pension
Obligations, Net (continued)

Sensitivity
analysis

A sensitivity analysis for
each significant actuarial assumption as of December 31, 2012, showing how the
defined benefit obligations would have been affected by changes in the relevant
actuarial assumption that were reasonably possible at the date, is as follows:

|Discount Rate Sensitivity
      Analysis       |   | 2012  
|---------------------------------------------- | - | ------
|Effect of an increase of 1%                    |   |       
|Defined benefit
      obligations, end of year | $ | 10,141
|Effect of a decrease of 1%                     |   |       
|Defined benefit
      obligations, end of year | $ | 14,079
|                                              
|Salary Increase
      Sensitivity Analysis     |   | 2012  
|Effect of an increase of 1%                    |   |       
|Defined benefit
      obligations, end of year | $ | 11,903
|Effect of a decrease of 1%                     |   |       
|Defined benefit
      obligations, end of year | $ | 11,775

The defined benefit
obligation sensitivity figures were calculated using the same methods and
assumptions as the December 31, 2012 defined benefit obligation figures, with
the only assumption change being the 1% change in discount rate or salary scale
as indicated.

As is the case with the
actuarial valuations, formal materiality guidelines were not employed in the
derivation of the sensitivity analysis. All benefits were valued using
assumptions adopted for each relevant contingency and membership data that were
reviewed for consistency with previous data as well as overall reasonableness.
To the extent that the assumptions and methods adopted for the valuation were
appropriate for the purpose of the valuation; nothing was omitted as being
immaterial. Nevertheless, emerging experience differing from the assumptions
will result in gains or losses that will be revealed in future valuations and
could affect the validity of the sensitivity analysis.

Plan
assets

Plan assets are held by an
independent financial services company. The assets do not include the plan
sponsors or the Groups own financial instruments or any property occupied by,
or other assets used by, the Group.

|                                | Targeted
|------------------------------- | --------
|Plan asset allocation
      (%) |         
|Equity securities               | 60      
|Debt securities                 | 40      
|Total                           | 100     

The fair values of the
companys defined benefit pension plan assets at December 31, 2012 by asset
category are as follows:

|Fair value
      measurements          |   | 2012  
|-------------------------------------- | - | ------
|Asset category                         |   |       
|Cash                                   | $ | 23    
|Pooled fund: Balanced
      trust fund |   | 10,615
|Total                                  | $ | 10,638

The fund indicates that its
asset allocation is 40% bonds, 35% Canadian equities and 25% international
equities. As the plan assets are primarily invested in equity and debt
securities, the plan may expose the plan sponsor to a concentration of financial
securities risk.

123

---



MFC INDUSTRIAL LTD.

NOTES TO CONSOLIDATED
FINANCIAL STATEMENTSDECEMBER 31, 2012

Note 28. Accrued Pension
Obligations, Net (continued)

Expected
contributions and benefit payments

The expected contributions
for 2013 from the employer and employees are $1,016 and $89, respectively. The
employer contributions represent the minimum required contribution under pension
legislation.

The expected benefit
payments are as follows:

|2013           | $ | 289   
|-------------- | - | ------
|2014           |   | 352   
|2015           |   | 386   
|2016           |   | 436   
|2017           |   | 471   
|2018-2022      |   | 3,440 
|2023 and after |   | 6,492 
|Total          | $ | 11,866

Note 29. Puttable
Instrument Financial Liabilities

In connection with the
acquisitions of ACCR and Possehl in November 2012, the Group entered into call
and put agreements with the non-controlling interests, which allow or require
the Group to acquire up to 100% in each of the entities. As a result of the put
options, the non-controlling interests are classified as financial liabilities.

The following table
discloses the movement of the puttable instrument financial liabilities during
2012. There was no comparative transaction in 2011.

|                                                | 2012
|----------------------------------------------- | ----
|Puttable instrument financial
      liabilities |     
|Beginning of
    year                           | $   
|Recognized upon business
      combinations     |     
|Change in fair
      value                      |     
|End of year                                     | $   

The fair values of the
puttable instruments are determined using a DCF model. The option exercise
prices are based on the net tangible asset values of the underlying entities on
the calculation time (as defined) when the options are exercised, subject to
certain adjustments. The put options become exercisable in 2014 and
2015.

Note 30. Shareholders
Equity

Capital
Stock

The authorized share
capital of MFC Industrial consists of an unlimited number of common shares
without par value and without special rights or restrictions and an unlimited
number of Class A Preference shares without par value and with special rights
and restrictions.

124

---



MFC INDUSTRIAL LTD.

NOTES TO CONSOLIDATED
FINANCIAL STATEMENTSDECEMBER 31, 2012

Note 30. Shareholders
Equity (continued)

Holders of common shares
may receive dividends when, as and if declared by the board, subject to the
preferential dividend rights of any other classes or series of preferred shares
issued and outstanding. In no event may a dividend be declared or paid on the
common shares if payment of the dividend would cause the realizable value of the
assets of the Company to be less than the aggregate of its liabilities. Holders
of common shares are entitled to one vote per share at any meeting of
shareholders of any class of common shares, and in general and subject to
applicable law, all matters will be determined by a majority of votes cast other
than fundamental changes with respect to the Company. The holders of common
shares are entitled, in the event of a distribution of assets of the Company on
the liquidation, dissolution or winding-up of the Company (a Liquidation
Distribution), to receive, before any Liquidation Distribution is made to the
holders of the class A common shares or any other shares of the Company ranking
junior to the common shares, but after any prior rights of any preferred shares,
the stated capital with respect to each common share held by them, together with
all declared and unpaid dividends (if any and if preferential) thereon, up to
the date of such Liquidation Distribution, and thereafter the common shares
shall rank pari passu with all other classes of common shares in connection with
the Liquidation Distribution.

The rights and restrictions
attaching to the class A common shares are the same as those attaching to the
common shares, except that in the event of a Liquidation Distribution, the
holders of the class A common shares are entitled to receive such Liquidation
Distribution only after any prior rights of the preferred shares and common
shares or any other share ranking prior in right to the class A common
shares.

The Class A Preference
shares may include one or more series and the directors may alter the special
rights and restrictions to such series, or alter such rights or restrictions.
Except as may be set out in the rights and restrictions, the holders of the
Class A Preference shares are not entitled to vote at or attend shareholder
meetings. Holders of Class A Preference shares are entitled to receive repayment
of capital on the liquidation or dissolution of MFC Industrial before
distribution is made to holders of common shares.

Treasury
Stock

All treasury stock is held
by wholly-owned subsidiaries.

Note 31. Share-Based
Compensation

MFC Industrial has a 1997
Stock Option Plan and a 2008 Equity Incentive Plan.

1997 Stock Option
Plan (Amended)

MFC Industrial has a stock
option plan (1997 Plan) which enables certain employees and directors to
acquire common shares and the options may be granted under the plan exercisable
over a period not exceeding ten years. MFC Industrial is authorized to issue up
to 5,524,000 shares under this plan.

2008 Equity
Incentive Plan

Subject to the terms of the
2008 Equity Incentive Plan (2008 Plan), a committee, as appointed by the board
of directors, may grant awards under the plan, establish the terms and
conditions for those awards, construe and interpret the plan and establish the
rules for the plan's administration. The committee may grant nonqualified stock
options, incentive stock options, stock appreciation rights, restricted stock
awards, stock unit awards, stock awards, performance stock awards and tax bonus
awards under the plan. The maximum number of common shares of MFC Industrial
that are issuable under all awards granted under the plan is 1,500,000 common
shares.

125

---



MFC INDUSTRIAL LTD.

NOTES TO CONSOLIDATED
FINANCIAL STATEMENTSDECEMBER 31, 2012

Note 31. Share-Based
Compensation (continued)

Following is a summary of
the status of the plans:

|                                                       |  | 2008
      Plan |         | 2008
      Plan |  | 1997
      Plan |      | 1997
      Plan
|------------------------------------------------------ |  | --------------- | ------- | --------------- |  | --------------- | ---- | ---------------
|                                                       |  |                 |         |                 |  | Weighted        |      |                
|                                                       |  |                 |         |                 |  | Average         |      |                
|                                                       |  | Number of       |         | Exercise Price  |  | Number of       |      | Exercise Price 
|                                                       |  | Awards          |         | Per
      Share |  | Options         |      | Per
      Share
|Outstanding at December 31, 2009                       |  |                 | -       |                 |  | $               | -    |                
|Exercised                                              |  |                 | -       |                 |  |                 | -    |                
|Forfeited                                              |  |                 | -       |                 |  |                 | -    |                
|Outstanding at December 31, 2010                       |  |                 | -       |                 |  |                 | -    |                
|Granted                                                |  |                 | 915,000 |                 |  |                 | 7.81 |                
|Outstanding at December 31, 2011 and 2012              |  |                 | 915,000 |                 |  |                 | 7.81 |                
|As at December 31, 2012:                               |  |                 |         |                 |  |                 |      |                
|Options exercisable (with
      four years' remaining  |  |                 |         |                 |  |                 |      |                
|contractual
      life)                                |  |                 | 915,000 |                 |  |                 | 7.81 |                
|Options granted and
      exercised                    |  |                 | -       |                 |  |                 |      |                
|Options available for
      granting in future periods |  |                 | 585,000 |                 |  |                 |      |                

No stock options expired or
were granted in 2012 and 2010.

The following table
summarizes the share-based compensation expenses recognized by the Group:

|Years ended
      December 31                                                       | : | 2012 |   | 2011 |   | 2010  
|----------------------------------------------------------------------------------- | - | ---- | - | ---- | - | ------
|Share-based compensation recovery (expenses)
      arising from options granted by: |   |      |   |      |   |       
|MFC Industrial                                                                      | $ | -    |   |      | $ | (7,291
|A
      Canadian non-wholly owned subsidiary                                        |   | (9   | ) |      |   | 72    
|Total                                                                               | $ | (9   | ) |      | $ | (7,219
|As
      allocated to:                                                              |   |      |   |      |   |       
|Continuing
      operations                                                         | $ | (9   | ) |      | $ | (7,219
|Discontinued
      operations                                                       |   | -    |   |      |   | -     
|Total                                                                               | $ | (9   | ) |      | $ | (7,219

On January 1, 2011, options
to purchase 2,635,000 common shares of MFC Industrial were granted to directors
and certain employees of the Group. The information on the stock options granted
on January 1, 2011 is as follows. The Group used the Black-Scholes-Merton
formula to compute the share-based compensation for the stock options.

Number of options granted
    2,635,000Vesting requirements
    ImmediatelyContractual life
    5 yearsMethod of settlement
    In
      equityExercise price per share
    $7.81Market price per share on grant date
    $7.81Expected volatility
    60.09%Expected option life
    3
      yearsExpected dividends
    2.58%Risk-free interest rate
    0.97%Fair value of option per unit
    $2.767


The expected volatility was
determined based on the historical price movement over the expected option life,
with adjustments for underlying businesses. The award holders are not entitled
to dividends or dividend equivalents until the options are exercised.

126

---



MFC INDUSTRIAL LTD.

NOTES TO CONSOLIDATED
FINANCIAL STATEMENTSDECEMBER 31, 2012

Note 31. Share-Based
Compensation (continued)

The share-based
compensation expense is not tax deductible under the Canadian income tax act
and, therefore, the Group did not recognize any tax benefit from granting stock
options.

Note 32. Consolidated
Statements of Operations

Revenues

|Years ended December
      31 | : | 2012    |  | 2011 |         | 2010
|----------------------------- | - | ------- |  | ---- | ------- | ----
|Gross revenues as reported    | $ | 485,659 |  | $    | 520,709 |     

For the components of the
Group's total revenues, please see Note 5.

The Group's revenues
included the following items:

|Years ended December
      31                                                  | : | 2012 |  | 2011 |       | 2010
|------------------------------------------------------------------------------ | - | ---- |  | ---- | ----- | ----
|Realized gain on available-for-sale
      securities                           | $ | 264  |  | $    | -     |     
|Collection of underpayment of resource property royalty from prior
      years |   | -    |  |      | -     |     
|Interest income arising from an arbitration
      (included in other revenues) |   | -    |  |      | 1,236 |     
|Market value increment on commodities                                          |   | -    |  |      | -     |     
|Gain on derivative contracts, net                                              |   | -    |  |      | 6,805 |     

The Group's net gain on
securities comprised:

|Years ended December
      31                      | : | 2012  |   | 2011 |   | **2010**
|-------------------------------------------------- | - | ----- | - | ---- | - | --------
|Trading securities                                 | $ | 1,161 |   |      | $ | -       
|Available-for-sale securities                      |   | (94   | ) |      |   | -       
|Subsidiaries                                       |   | 206   |   |      |   | -       
|Holding gain (loss) on advance sales of securities |   | (123  | ) |      |   | -       
|Net gain on
      securities                       | $ | 1,150 |   |      | $ | -       

Expenses

The Group's costs of sales
comprised:

|Years ended December
      31                       | : | 2012    |   | 2011 |   | 2010   
|--------------------------------------------------- | - | ------- | - | ---- | - | -------
|Commodities and resources                           | $ | 382,232 |   |      | $ | 414,745
|Expiry of exploration and evaluation assets         |   | 931     |   |      |   | -      
|Loss on securities, net                             |   | -       |   |      |   | 4,314  
|Credit losses (recovery) on loans and receivables   |   | (521    | ) |      |   | (530   
|Fair value (gain) loss on investment
      property |   | (14     | ) |      |   | 56     
|Write-down on real estate held for sale             |   | -       |   |      |   | -      
|Market value decrease on
    commodities            |   | 1,509   |   |      |   | 4,422  
|Loss on derivative contracts, net                   |   | 57      |   |      |   | -      
|Write-off of inventories                            |   | 15,659  | * |      |   | (29    
|Other                                               |   | 7,773   |   |      |   | 12,414 
|Total cost of
    sales                             | $ | 407,626 |   |      | $ | 435,392

____________________

*The Group recognized an
inventory write-down of $19,434 as well as an impairment loss of $42,631 on its
interests in resource properties after the Supreme Court of India banned all
mining activities in the state in which the Groups extracting facilities were
located. In aggregate, the total loss on the write-down and impairment was
$48,231, net of income tax recovery of $13,834 (see Note 36).

127

---



MFC INDUSTRIAL LTD.

NOTES TO CONSOLIDATED
FINANCIAL STATEMENTSDECEMBER 31, 2012

Note 32. Consolidated
Statements of Operations (continued)

The Group's net loss on
securities comprised:

|Years ended December
      31 | : | 2012 |  | 2011 |        | **2010**
|----------------------------- | - | ---- |  | ---- | ------ | --------
|Trading securities            | $ | -    |  | $    | 6,507  |         
|Available-for-sale securities |   | -    |  |      | (1,721 | )       
|Subsidiaries                  |   | -    |  |      | (405   | )       
|Short-sale                    |   | -    |  |      | (67    | )       
|Net loss on
      securities  | $ | -    |  | $    | 4,314  |         

The Group included the
following items in its costs of sales:

|Years ended December
      31                                                                      | : | 2012    |  | 2011 |         | 2010
|-------------------------------------------------------------------------------------------------- | - | ------- |  | ---- | ------- | ----
|Inventories as
      costs of goods sold (including depreciation, amortization and
      depletion |   |         |  |      |         |     
|expenses allocated to
      costs of goods sold)                                                   | $ | 286,426 |  | $    | 373,048 |     

The Group collected a
reimbursement of legal costs from an arbitration of $nil, $1,503 and $nil in
2012, 2011 and 2010, respectively. The aforesaid reimbursement was shown as a
reduction in selling, general and administrative expenses.

Additional
information on the nature of expenses

|Years ended December
      31                  | : | 2012   |  | 2011 |        | 2010
|---------------------------------------------- | - | ------ |  | ---- | ------ | ----
|Depreciation, amortization and
      depletion | $ | 20,312 |  | $    | 13,204 |     
|Employee benefits expenses                     |   | 26,055 |  |      | 19,687 |     

Note 33. Income
Taxes

MFC Industrial's statutory
tax rate was 25.0%, 26.5% and 28.5% in 2012, 2011 and 2010, respectively.

A reconciliation of the
provision for income taxes calculated at applicable statutory rates in Canada to
the provision in the consolidated statements of operations is as follows:

|Years ended
      December 31                                       | : | 2012    |   | 2011 |   | 2010  
|------------------------------------------------------------------- | - | ------- | - | ---- | - | ------
|Income before income taxes from continuing
      operations         | $ | 224,995 |   |      | $ | 17,181
|Computed recovery of (provision for) income taxes at                |   |         |   |      |   |       
|MFC Industrial's
      statutory rates                              | $ | (56,248 | ) |      | $ | (4,553
|(Increase) decrease in taxes
    resulting                          |   |         |   |      |   |       
|from:                                                               |   |         |   |      |   |       
|Foreign
      tax rate differences                                  |   | 3,855   |   |      |   | (143  
|Non-taxable
      bargain purchase                                  |   | 61,751  |   |      |   | -     
|Benefit
      of purchased income tax reductions                    |   | 6,328   |   |      |   | 4,655 
|Other
      non-taxable income                                      |   | 1,949   |   |      |   | 2,724 
|Share-based
      compensation                                      |   | (2      | ) |      |   | (1,932
|Net
      tax reductions unrecognized in prior years                |   | -       |   |      |   | -     
|Taxable
      capital gains on dispositions, net                    |   | (121    | ) |      |   | (1,833
|Resource
      property revenue taxes                               |   | (4,426  | ) |      |   | (3,414
|Unrecognized
      losses in current year                           |   | (6,904  | ) |      |   | (1,160
|Permanent
      differences                                         |   | (893    | ) |      |   | -     
|Reduction
      in future tax rate                                  |   | (25     | ) |      |   | 906   
|Transfer
      of an interest in resource property                  |   | -       |   |      |   | (1,634
|Loss
      on investment in preferred shares of former subsidiaries |   | -       |   |      |   | -     
|Other,
      net                                                    |   | (2,638  | ) |      |   | 401   
|Recovery of (provision for) income taxes                            | $ | 2,626   |   |      | $ | (5,983
|Consisting of:                                                      |   |         |   |      |   |       
|Resource
      property revenue taxes                               | $ | (5,902  | ) |      | $ | (4,647
|Income
      taxes                                                  |   | 8,628   |   |      |   | (1,336
|                                                                    | $ | 2,626   |   |      | $ | (5,983

128

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MFC INDUSTRIAL LTD.

NOTES TO CONSOLIDATED
FINANCIAL STATEMENTSDECEMBER 31, 2012

Note 33. Income Taxes
(continued)

In addition, the aggregate
current and deferred tax relating to items that are charged to equity was $68
(recovery), $324 (recovery) and $256, respectively, in 2012, 2011 and 2010.

The Group's tax expense
above does not include any amounts for joint ventures and associates or
discontinued operations whose results are included in the consolidated statement
of operations net of taxes.

In general, dividend
payable by MFC Industrial to its shareholders is subject to customary Canadian
withholding tax for non-resident shareholders. Pursuant to applicable tax
treaties the withholding rate for eligible U.S. resident shareholders is 15%.
The dividend is an eligible dividend under theIncome Tax Act(Canada).

Note 34. Earnings Per
Share

Earnings per share data for
the years ended December 31 from operations is summarized as follows:

|                                                       | 2012 |         | 2011 |   | 2010  
|------------------------------------------------------ | ---- | ------- | ---- | - | ------
|Basic earnings from continuing                         |      |         |      |   |       
|operations available to
      holders of common shares | $    | 226,754 |      | $ | 12,193
|Effect of dilutive securities:                         |      | -       |      |   | -     
|Diluted earnings from continuing
      operations      | $    | 226,754 |      | $ | 12,193

|                                               | Number of
      Shares
|---------------------------------------------- | ----------------------
|                                               | 2012                  
|Weighted average number of common
      shares |                       
|outstanding 
    basic                        | 62,555,438            
|Effect of dilutive securities:                 |                       
|Options                                        | -                     
|Weighted average number of common
      shares |                       
|outstanding 
      diluted                    | 62,555,438            

As at both of December 31,
2012 and 2011, there were 2,635,000 stock options, respectively, outstanding
that could potentially dilute basic earnings per share in the future, but were
not included in the calculation of diluted earnings per share because they were
antidilutive for 2012 and 2011.

Note 35. Dividends paid

On January 17, 2012, MFC
Industrial announced its annual cash dividend for 2012. The 2012 annual cash
dividend was $0.22 per common share and paid in quarterly installments as
follows: (i) $0.05 per share on February 10, 2012 to shareholders of record on
January 27, 2012; (ii) $0.05 per share on April 10, 2012 to shareholders of
record on March 30, 2012; (iii) $0.06 per share on July 13, 2012 to shareholders
of record on July 2, 2012; and (iv) $0.06 per share on October 26, 2012 to
shareholders of record on October 15, 2012.

129

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MFC INDUSTRIAL LTD.

NOTES TO CONSOLIDATED
FINANCIAL STATEMENTSDECEMBER 31, 2012

Note 36. Commitments and
Contingencies

Leases as
lessors

The Group leases out land
and buildings, primarily classified under investment property, under
non-cancellable operating lease agreements. The leases have varying terms,
subject to the customary practices in the particular regions.

Future minimum rentals
under long-term non-cancellable operating leases are as follows:

|Years ending December
      31, |   | Amount
|------------------------------- | - | ------
|2013                            | $ | 1,830 
|2014                            |   | 1,586 
|2015                            |   | 1,526 
|2016                            |   | 1,487 
|2017                            |   | 1,472 
|Thereafter                      |   | 119   
|                                | $ | 8,020 

The leases have varying
terms, subject to the customary practices in the local regions. The Group
recognized rental income of $2,582 (including subleases of $51), $2,935
(including subleases of $84) and $330 for the years ended December 31, 2012,
2011 and 2010, respectively.

Leases as
lessees

Future minimum commitments
under long-term non-cancellable operating leases are as follows:

|Years
      ending December 31, |   | Amount
|------------------------------- | - | ------
|2013                            | $ | 2,910 
|2014                            |   | 2,329 
|2015                            |   | 2,237 
|2016                            |   | 1,611 
|2017                            |   | 1,063 
|Thereafter                      |   | -     
|                                | $ | 10,150

The leases have varying
terms, subject to the customary practices in the local regions. Minimum lease
payments recognized as expenses were $2,539 (including contingent rents of
$306), $2,803 (including contingent rents of $76) and $800 for the years ended
December 31, 2012, 2011 and 2010, respectively.

Litigation

The Group is subject to
litigation and tax audits in the normal course of business, the ultimate results
of which cannot be ascertained at this time. The Group records costs as they are
incurred or become determinable.

Guarantees

Guarantees are treated as
contingent liabilities unless it becomes probable that the Group will be
required to make payment under the guarantee.

As at December 31, 2012,
the Group had issued guarantees up to a maximum of $12,995 to its commodities
and financing partners in the normal course of its commodities activities, of
which $5,178 has been used and outstanding and has not been recorded as
liabilities in the consolidated statement of financial position. There has been
no claim against the guarantees.

130

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MFC INDUSTRIAL LTD.

NOTES TO CONSOLIDATED
FINANCIAL STATEMENTSDECEMBER 31, 2012

Note 36. Commitments and
Contingencies (continued)

Purchase
Obligations

As at December 31, 2012,
the Group had open purchase contracts aggregating $19,964 and take-or-pay
contracts aggregating $5,330 with respect to its commodities and resources
activities due in 2013. None of these had been recognized in the consolidated
statement of financial position as at December 31, 2012.

Contingent
Gain

In December 2012,
management was committed to a plan to sell the interests in the Indian
extracting facilities and, as such, the interests were reclassified as assets
for sale which were measured at their fair values less costs to sell. The sale
was completed in 2013. Pursuant to the share purchase agreement, the sale price
includes a certain percentage of the companys future free cash flow from its
operations and investment for a period of seven years. As a result of
significant uncertainties as to the probability of receipt of any future
consideration, management determined that the expected value of such future cash
flow was $nil at December 31, 2012.

Note 37. Consolidated
Statements of Cash Flows - Supplemental Disclosure

Interest paid and received,
dividends received and income taxes paid are classified as operating activities.
Dividends paid are classified as financing activities.

There are no circumstances
in which cash and cash equivalents held by an entity are not available for use
by the Group.

The Group had the following
non-cash transactions:

Non-cash transactions in
2012: (1) the Group acquired entities with purchase price of $8,514 payable in
2013 (see Note 3).

Non-cash transactions in
2011: (1) the Company derecognized a non-wholly-owned subsidiary as a result of
loss of control and reclassified it as an available-for-sale security which was
eventually written off; and (2) the Company reorganized its indirect royalty
interest by transferring it to another entity in exchange for an aggregate
economic interest of 99.44% in the entity (see Note 3).

Non-cash transactions in
2010: (1) the offsetting of a promissory note of C$1,750 plus accrued interest
thereon against payable due to the affiliate; (2) the Company acquired all of
the issued and outstanding common shares of Mass by issuing its own shares (see
Note 3); (3) the Company acquired shares in a former special purpose entity by
issuing 41,400 common shares of MFC Industrial, valued at $303; and (4) the
Group exchanged a publicly-traded security with a carrying value of $799 for
other publicly-traded securities with aggregate fair value of $1,457 from an
affiliate, resulting in a gain of $658.

Note 38. Related Party
Transactions

In the normal course of
operations, the Group enters into transactions with related parties which
include affiliates which the Group has a significant equity interest (10% or
more) in the affiliates or has the ability to influence the affiliates'
operating and financing policies through significant shareholding,
representation on the board of directors, corporate charter and/or bylaws. The
affiliates also include MFC Industrial's directors, President, Chief Executive
Officer, Chief Financial Officer, Chief Operating Officer and their close family
members, as well as any entity which has significant influence over MFC
Industrial. These related party transactions are made in arm's length
transactions at normal market prices and on normal commercial terms. In addition
to transactions disclosed elsewhere in these financial statements, the Group had
the following transactions with affiliates.

131

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MFC INDUSTRIAL LTD.

NOTES TO CONSOLIDATED
FINANCIAL STATEMENTSDECEMBER 31, 2012

Note 38. Related Party
Transactions (continued)

Continuing
operations

|Years ended
      December 31:                                              |   | 2012  |   | 2011 |   | 2010  
|--------------------------------------------------------------------------- | - | ----- | - | ---- | - | ------
|Dividend income on common shares*                                           | $ | -     |   |      | $ | 181   
|Royalty expense paid and payable*                                           |   | (693  | ) |      |   | (773  
|Sales of goods                                                              |   | 1,012 |   |      |   | 455   
|Fee income                                                                  |   | -     |   |      |   | 32    
|Purchases of goods                                                          |   | -     |   |      |   | (3,476
|Fee expense for managing resource property                                  |   | -     |   |      |   | -     
|Fee expense for management services,
      including expense reimbursements |   | -     |   |      |   | -     
|Directors salary paid by a subsidiary to a close family member of
      a  |   |       |   |      |   |       
|director                                                                    |   | (20   | ) |      |   | (21   
|Interest income                                                             |   | -     |   |      |   | 296   

|* |  | included in income
      from an interest in resource property
|- |  | --------------------------------------------------------------

Discontinued
Operations

|Years ended December
      31:                                              |   | 2012 |  | 2011 |   | 2010
|--------------------------------------------------------------------------- | - | ---- |  | ---- | - | ----
|Fee expense for management services,
      including expense reimbursements | $ | -    |  | $    | - |     

In addition to the
transactions above, the Group had the following transactions with related
parties:

In 2012, the Group entered into an agreement with a director of two of the Groups subsidiaries whereby the director agreed to purchase 100% of the shares of a subsidiary from the Group for a nominal amount. The subsidiary did not have significant assets or business at the time of disposition. Subsequent to 2012, the director acquired another subsidiary from the Group (see Notes 18 and 36).

In 2011, the Group, in the
normal course of business, purchased long-term available-for-sale securities
with a fair value of $1,415 for cash from an entity which was a related party
until June 2011.

In 2010, the Group entered
into an agreement with its former wholly-owned subsidiary whereby the Group
agreed to offset its payables to the former subsidiary against its note
receivable (C$1,750) from the former subsidiary plus accrued interest thereon.
Furthermore, the Group obtained bridge financing of $8,000 from the affiliate
for three days. The Company did not pay any interest and fees to this affiliate
in relation to such bridge financing.

Key management
personnel

The remuneration of key
management personnel of the Group was as follows:

|Years ended December
      31: |   | 2012  |  | 2011 |       | 2010
|------------------------------ | - | ----- |  | ---- | ----- | ----
|Short-term employee benefits   | $ | 794   |  | $    | 1,023 |     
|Post-employment benefits       |   | -     |  |      | -     |     
|Long term benefits             |   | -     |  |      | -     |     
|Termination benefits           |   | 456   |  |      | -     |     
|Share-based payments*          |   | -     |  |      | 2,089 |     
|Directors' fees                |   | 264   |  |      | 201   |     
|Total                          | $ | 1,514 |  | $    | 3,313 |     

|* |  | The share-based
      payments were computed by the reference to the fair value of options
      measured by Black-Scholes-Merton formula on the grant date (see Note
      31).
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Key management personnel
comprises the members of the Board of Directors, President, Chief Executive
Officer, Chief Financial Officer and Chief Operating Officer.

The termination benefits in
2012 represented amounts paid to a former Chief Financial Officer. The
termination benefits in 2010 represented amounts paid to a former Chief
Operating Officer.

132

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MFC INDUSTRIAL LTD.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTSDECEMBER 31, 2012

Note 38. Related Party Transactions
(continued)

In addition, in 2010, the Group paid
$1,026 (comprising $998 in cash and $28 (net book value at the time of
settlement) in a vehicle in aggregate to its former Chief Executive Officer as a
termination benefit which was not included in the above remuneration table. The
termination occurred in 2009 and the termination benefit was not recorded in
2009 until settled in 2010 and was included in the discontinued operations.

Note 39. Financial
Instruments

The fair value of financial instruments
at December 31 is summarized as follows:

|As at December
      31:                                      |  | 2012     |         | 2011 
|------------------------------------------------------------- |  | -------- | ------- | -----
|                                                              |  | Carrying |         | Fair 
|                                                              |  | Amount   |         | Value
|Financial Assets:                                             |  |          |         |      
|Fair value through
      profit or loss:                      |  |          |         |      
|Cash and cash
      equivalents, short-term cash deposits and |  |          |         |      
|restricted cash                                               |  | $        | 274,861 |      
|Short-term securities                                         |  |          | 6,658   |      
|Derivative
      assets                                       |  |          | 633     |      
|Loans and
      receivables:                                  |  |          |         |      
|Receivables*                                                  |  |          | 84,320  |      
|Bills
      of exchange                                       |  |          | -       |      
|Available-for-sale instruments:                               |  |          |         |      
|Securities, at market value                                   |  |          | 9,637   |      
|Total                                                         |  | $        | 376,109 |      
|                                                             
|Financial Liabilities:                                        |  |          |         |      
|Financial liabilities
      measured at amortized cost:       |  |          |         |      
|Short-term
      borrowings                                   |  | $        | 150,396 |      
|Accounts payable and accrued expenses*                        |  |          | 73,511  |      
|Debt                                                          |  |          | 162,993 |      
|Facility term financing                                       |  |          | 18,718  |      
|Fair value through profit or loss:                            |  |          |         |      
|Puttable instruments                                          |  |          | 7,761   |      
|Derivative
      liabilities                                  |  |          | 1,691   |      
|Total                                                         |  | $        | 415,070 |      

|* |  | Not including
      derivative and tax related items
|- |  | ----------------------------------------------------

Fair value of a financial instrument
represents the amount at which a financial instrument could be bought or sold in
a current transaction between willing parties under no compulsion to act (that
is, other than in a forced transaction, involuntary liquidation or distressed
sale). The best evidence of fair value is published price quotations in an
active market. When the market for a financial asset or financial liability is
not active, the Group establishes fair value by using a valuation technique. The
chosen valuation technique makes maximum use of inputs observed from markets,
and relies as little as possible on inputs generated by the Group. Internally
generated inputs take into account factors that market participants would
consider when pricing the financial instruments, such as liquidity and credit
risks. Use of judgment is significantly involved in estimating fair value of
financial instruments in inactive markets and actual results could materially
differ from the estimates. To value longer-term transactions and transactions in
less active markets for which pricing information is not generally available,
unobservable inputs may be used.

The fair value of cash and cash
equivalents, restricted cash and short-term cash deposits is based on reported
market value. The fair value of short-term trading securities is based on quoted
market prices (Level 1 fair value hierarchy). The fair value of
available-for-sale securities is based on quoted market prices, except for those
which are not quoted in an active market which are measured by an appropriate
valuation method (Level 3 fair value hierarchy). The fair values of bills of
exchange, short-term receivables, short-term borrowings and accounts payable and
accrued expenses, due to their short-term nature and normal trade credit terms,
approximate their carrying value. The fair values of long-term debt and other
long-term liabilities were determined using discounted cash flows at prevailing
market rates of interest for a similar instrument with a similar credit rating.
The carrying amount of facility term financing was determined based on a
discount rate of 12.1% which approximated the current market interest rate based
on similar risk profile.

133

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MFC INDUSTRIAL LTD.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTSDECEMBER 31, 2012

Note 39. Financial Instruments
(continued)

The fair values of the derivative
financial instruments are based on the quoted market prices when possible; if
not available, estimates from third-party brokers. These broker estimates are
corroborated with multiple sources and/or other observable market data utilizing
assumptions that market participants would use when pricing the asset or
liability, including assumptions about risk and market liquidity (Level 2 fair
value hierarchy). Inputs may be readily observable, market-corroborated or
generally unobservable. The puttable instruments are subject to put agreements
and held by non-controlling parties in an inactive market. The fair values of
the puttable instruments are determined using a DCF model (Level 3 fair value
hierarchy).

The following tables present the
financial instruments measured at fair value classified by the fair value
hierarchy as at December 31, 2012 and 2011:

|As at December 31,
      2012                                                 |  | Level 1 |         | Level 2 |   | Level 3 |  | Total
|----------------------------------------------------------------------------- |  | ------- | ------- | ------- | - | ------- |  | -----
|Financial Assets:                                                             |  |         |         |         |   |         |  |      
|Fair value through profit or loss:                                            |  |         |         |         |   |         |  |      
|Cash and cash
      equivalents, short-term cash deposits and restricted cash |  | $       | 274,861 |         | $ | -       |  | $    
|Short-term securities                                                         |  |         | 6,658   |         |   | -       |  |      
|Derivative
      assets                                                       |  |         | -       |         |   | 633     |  |      
|Available-for-sale securities                                                 |  |         | 9,637   |         |   | -       |  |      
|Total                                                                         |  | $       | 291,156 |         | $ | 633     |  | $    
|                                                                             
|Financial Liabilities:                                                        |  |         |         |         |   |         |  |      
|Fair value through profit or loss:                                            |  |         |         |         |   |         |  |      
|Puttable
      instruments                                                    |  | $       | -       |         | $ | -       |  | $    
|Derivative liabilities                                                        |  |         | -       |         |   | 1,691   |  |      
|                                                                              |  | $       | -       |         | $ | 1,691   |  | $    
|                                                                              |  |         |         |         |   |         |  |      
|As at December 31,
      2011                                                 |  | Level 1 |         | Level 2 |   | Level 3 |  | Total
|Financial Assets:                                                             |  |         |         |         |   |         |  |      
|Fair value through profit or loss:                                            |  |         |         |         |   |         |  |      
|Cash and cash
      equivalents, short-term cash deposits and restricted cash |  | $       | 387,838 |         | $ | -       |  | $    
|Short-term securities                                                         |  |         | 12,766  |         |   | -       |  |      
|Derivative
      assets                                                       |  |         | -       |         |   | 66      |  |      
|Available-for-sale securities                                                 |  |         | 11,902  |         |   | -       |  |      
|Total                                                                         |  | $       | 412,506 |         | $ | 66      |  | $    
|                                                                             
|Financial Liabilities:                                                        |  |         |         |         |   |         |  |      
|Fair value through profit or loss:                                            |  |         |         |         |   |         |  |      
|Derivative
      liabilities                                                  |  | $       | -       |         | $ | 887     |  | $    

|Movement of Level 3 of fair value
      hierarchy:          |   | 2012  |  | 2011
|----------------------------------------------------------- | - | ----- |  | ----
|Opening balance                                             | $ | -     |  | $   
|Addition as a result
      of derecognition of a subsidiary |   | -     |  |     
|Addition from
      business combination (see Note 29)      |   | 7,684 |  |     
|Change in fair value
      during the year                  |   | 77    |  |     
|Write-off                                                   |   | -     |  |     
|Ending balance                                              | $ | 7,761 |  | $   

Generally, management of the Group
believes that current financial assets and financial liabilities, due to their
short-term nature, do not pose significant financial risks. The Group uses
various financial instruments to manage its exposure to various financial risks.
The policies for controlling the risks associated with financial instruments
include, but are not limited to, standardized company procedures and policies on
matters such as hedging of risk exposures, avoidance of undue concentration of
risk and requirements for collateral (including letters of credit) to mitigate
credit risk. The Group has risk managers and other personnel to perform checking
functions and risk assessments to ensure that Group's procedures and policies
are complied with.

134

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MFC INDUSTRIAL LTD.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTSDECEMBER 31, 2012

Note 39. Financial Instruments
(continued)

Many of the Group's strategies,
including the use of derivative instruments and the types of derivative
instruments selected by the Group, are based on historical trading patterns and
correlations and the Group's management's expectations of future events.
However, these strategies may not be fully effective in all market environments
or against all types of risks. Unexpected market developments may affect the
Group's risk management strategies during the period, and unanticipated
developments could impact the Group's risk management strategies in the future.
If any of the variety of instruments and strategies the Group utilizes is not
effective, the Group may incur losses.

The Group does not trade in financial
instruments, including derivative financial instruments, for speculative
purposes.

The nature of the risk that the Group's
financial instruments are subject to as at December 31, 2012 is set out in the
following table:

|                                                          | Risks
|--------------------------------------------------------- | -----
|                                                          |      
|Financial
      instrument                                |      
|Cash and cash equivalents, short-term cash
      deposits |      
|and
      restricted cash                                 | X    
|Short-term securities                                     |      
|Long-term securities                                      |      
|Derivative assets and liabilities                         | X    
|Receivables                                               | X    
|Short-term bank borrowings                                |      
|Accounts payable and accrued
    expenses                 |      
|Long-term debt (including MPP term financing)             |      
|Puttable instruments                                      |      

A sensitivity analysis for each type of
market risk to which the Group is exposed at the end of the reporting period is
provided, showing how profit or loss and equity would have been affected by
changes in the relevant risk variable that were reasonably possible at that
date. These ranges of parameters are estimated by management, which are based on
the facts and circumstances available at the time estimates are made, and an
assumption of stable socio-economic and geopolitical states. No unusual and
exceptional events, for example, natural disasters or human-made crises and
calamities, are taken into consideration when the sensitivity analysis is
prepared. Actual occurrence could differ from these assumptions and such
differences could be material.

Interest rate
risk

Interest rate risk is the risk that the
fair value or future cash flows of a financial instrument will fluctuate due to
changes in market interest rates. Short-term financial assets and financial
liabilities are generally not exposed to significant interest rate risk, because
of their short-term nature. The Group's long-term debt is not exposed to
significant interest rate cash flow risk as the interest rates have been fixed
for approximately 75% of the Group's long-term debt.

Sensitivity
analysis:

At December 31, 2012, if benchmark
interest rates (such as LIBOR or prime rates) at that date had been 100 basis
points (1.00%) per annum lower with all other variables held constant, income
from continuing operations for the year 2012 would have been $150 higher,
arising mainly as a result of lower net interest expense. Conversely, if
benchmark interest rates at that date had been 100 basis points (1.00%) per
annum higher with all other variables held constant, income from continuing
operations for the year 2012 would have been $139 lower, arising mainly as a
result of higher net interest expense. There would have been no impact on the
Group's other comprehensive loss.

135

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MFC INDUSTRIAL LTD.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTSDECEMBER 31, 2012

Note 39. Financial Instruments
(continued)

Credit
risk

Credit risk is the risk that one party
to a financial instrument will fail to discharge an obligation and cause the
other party to incur a financial loss. Financial instruments which potentially
subject the Group to credit risk consist of cash and cash equivalents,
restricted cash, short-term cash deposits and derivative and credit exposures to
customers, including outstanding receivables and committed transactions. The
Group has deposited the cash and cash equivalents, restricted cash, short-term
cash deposits and entered into derivative contracts with reputable financial
institutions with high credit ratings, from which management believes the risk
of loss to be remote. The Group does not have exposure to Eurozone sovereign
debt for which the issuing states (Greece, Spain and Portugal) have experienced
credit downgrades or other indicators of financial difficulties, and customers
of these Eurozone states.

Most of the Groups credit exposures
are with counterparties in the commodities and resources industries and are
subject to normal industry credit risk. The Group has receivables from various
entities including customers and affiliates. Management does not believe that
any single customer or geographic region represents significant credit risk.
Credit risk concentration with respect to trade receivables is limited due to
the Group's large and diversified customer base. Credit risk from trade account
receivables is mitigated since they are credit insured, covered by letters of
credit, bank guarantees and/or other credit enhancements. The Group routinely
monitors credit risk exposures, including sector, geographic and corporate
concentrations of credit and set and regularly review counterpart credit limits
based on rating agency credit ratings and/or internal assessments of company and
industry analysis. The Group also uses factoring and credit insurances to manage
credit risk. Management believes that these measures minimize the Groups
overall credit risk; however, there can be no assurance that these processes
will protect the Group against all losses from non-performance.

The average contractual credit period
for trade receivables is about 60-90 days. However, due to the use of the
factoring facilities, the average life time of trade receivables are reduced to
approximately 10 days. The average contractual credit period for trade
receivables from hydrocarbon sales is about 30 days. For the aging analysis of
the past-due receivables, see Note 9.

The maximum credit risk exposure as at
December 31, 2012 is as follows:

|Amounts recognized
      in the consolidated statement of financial position: |   |        
|----------------------------------------------------------------------------- | - | -------
|                                                                              |   |        
|Cash and cash equivalents,
      short-term cash deposits and restricted cash | $ | 274,861
|Derivative assets                                                             |   | 633    
|Receivables                                                                   |   | 84,320 
|                                                                              |   | 359,814
|Guarantees (see Note
      36)                                                |   | 12,995 
|Maximum credit risk exposure                                                  | $ | 372,809

As at December 31, 2012, the Group had
issued guarantees up to a maximum of $12,995 to its trading and financing
partners in the normal course of its commodities activities. As of December 31,
2012, $5,178 has been used and outstanding and has not been recorded as
liabilities in the consolidated statement of financial position. In the past
five years, no claim has been made against the guarantees issued by the Group.
Typically, these guarantees are issued on behalf of the Group's trading and
financing partners and, in case of non-performance by a trading or financing
partner and a claim is made against the Group, the Group can make the claim
against the defaulting trading or financing partner to recover the loss.

136

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MFC INDUSTRIAL LTD.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTSDECEMBER 31, 2012

Note 39. Financial Instruments
(continued)

Currency
risk

Currency risk is the risk that the
value of a financial instrument will fluctuate due to changes in foreign
exchange rates. Currency risk does not arise from financial instruments that are
non-monetary items or from financial instruments denominated in the functional
currency. The Group operates internationally and is exposed to risks from
changes in foreign currency rates, particularly Euros and the United States
dollars. Currency risk arises principally from future trading transactions, and
recognized assets and liabilities. In order to reduce the Group's exposure to
foreign currency risk on material contracts denominated in foreign currencies
(other than the functional currencies of the Group companies), the Group may use
foreign currency forward contracts and options to protect its financial
positions. As at December 31, 2012 and 2011, the Group had derivative financial
instruments (foreign currency forward contracts and options) with aggregate
notional amounts of $86,966 and $nil, respectively, and a net unrealized fair
value loss of $1 and $nil, respectively.

The Group does not have any material
exposure to highly inflationary foreign currencies.

Sensitivity
analysis:

At December 31, 2012, if the U.S.
dollar had weakened 10% against the Group companies functional currencies with
all other variables held constant, income from continuing operations for the
year 2012 would have been $9,169 lower. Conversely, if the U.S. dollar had
strengthened 10% against the local functional currencies with all other
variables held constant, income from continuing operations would have been
$7,714 higher. The reason for such change is mainly due to certain currency
derivatives instruments. There would have been no material impact arising from
financial instruments on other comprehensive loss in either case.

At December 31, 2012, if the Euro had
weakened 10% against the Group companies functional currencies with all other
variables held constant, income from continuing operations for the year 2012
would have been $7,816 lower. Conversely, if the Euro had strengthened 10%
against the local functional currencies with all other variables held constant,
income from continuing operations would have been $7,867 higher. The reason for
such change is mainly due to certain Euro-denominated financial assets (net of
liabilities) held by entities whose functional currency is not the Euro. There
would have been no impact arising from financial instruments on other
comprehensive loss in either case.

At December 31, 2012, if the Canadian
dollars had weakened 10% against the Group companies functional currencies with
all other variables held constant, income from continuing operations for the
year 2012 would have been $12,370 lower. Conversely, if the Canadian dollars had
strengthened 10% against the local functional currencies with all other
variables held constant, income from continuing operations would have been
$10,915 higher. The reason for such change is mainly due to certain Canadian
dollar-denominated financial assets (net of liabilities) held by entities whose
functional currency is not the Canadian dollars and currency derivative
instruments. There would have been no impact arising from financial instruments
on other comprehensive loss in either case.

Other price
risk

Other price risk is the risk that the
value of a financial instrument will fluctuate as a result of changes in market
prices, whether those changes are caused by factors specific to the individual
instrument or its issuer or factors affecting all instruments traded in the
market. The Group's other price risk includes equity price risk whereby the
Group's investments in equities of other entities held for trading or as
available for sale are subject to market price fluctuation. The Group did not
hold any asset-backed securities.

Sensitivity
analysis:

At December 31, 2012, if the equity
price in general had weakened 10% with all other variables held constant, income
and other comprehensive income from continuing operations for the year 2012
would have been $524 and $951, respectively, lower. Conversely, if the equity
price in general had strengthened 10% with all other variables held constant,
income and other comprehensive loss would have been $524 and $951, respectively,
higher.

137

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MFC INDUSTRIAL LTD.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTSDECEMBER 31, 2012

Note 39. Financial Instruments
(continued)

The Group buys and sells commodities
future contracts on the London Metal Exchange and enters into financial
derivative contracts (e.g. futures and swaps) with banks, customers and
commodities brokers. Management uses the financial derivative contracts to
manage the price fluctuation for its own account or for customers. As at
December 31, 2012, the Group had outstanding commodity derivative financial
instruments with an aggregate notional amount of $30,818 primarily to hedge
against the long position in inventories, which resulted in a net unrealized
fair value loss of $1,059. There were no commodities derivative contracts at
December 31, 2011.

Sensitivity
analysis:

At December 31, 2012, if the commodity
price in the financial instrument contracts in general had weakened 10% with all
other variables held constant, income from continuing operations for the year
2012 would have been $1,226 higher. Conversely, if the commodity price in the
financial instrument contracts in general had strengthened 10% with all other
variables held constant, income from continuing operations would have been
$1,226 lower. There would have been no impact on other comprehensive loss in
either case.

The Group executes contracts with third
parties for the sale and physical delivery of commodities so as to intend to
achieve a targeted price. Contracts for such are not typically financial
instruments and therefore excluded from the fair value disclosure and
sensitivity analysis.

Liquidity
risk

Liquidity risk is the risk that an
entity will encounter difficulty in raising funds to meet commitments associated
with financial instruments. The Group requires liquidity specifically to fund
capital requirements, satisfy financial obligations as they become due, and to
operate the commodities and resources business. The Group put in place an
actively managed production and capital expenditure budgeting process for major
capital programs. The Group's approach to managing liquidity is to ensure, as
far as possible, that it always has sufficient liquidity to meet its liabilities
when they fall due, under normal and stress conditions, without incurring
unacceptable losses. The Group is not subject to material liquidity risk because
of its strong cash position. The Group also maintains adequate banking
facilities, including factoring arrangements. It is the Group's policy to invest
cash in highly liquid, diversified money market funds or bank deposits for a
period of less than three months. The Group may also invest in cash deposits
with an original maturity date of more than three months so as to earn a higher
interest income.

The Group also maintains an acid test
ratio greater than one, which indicates that the Group has strong short-term
assets to cover its immediate liabilities without selling inventory.

Generally, trade payables are due
within 90 days and other payables and accrued expenses are due within one year.
All derivative financial liabilities are to be settled within one year. Please
also refer to Note 22 for the Groups debt maturity schedule.

Concentration
risk

Management determines the concentration
risk threshold amount as any single financial asset (or liability) exceeding 10%
of total financial assets (or liabilities) in the Group's consolidated statement
of financial position.

The Group regularly maintains cash
balances in financial institutions in excess of insured limits. The Group has
deposited the cash and cash equivalents, restricted cash and term deposits with
reputable financial institutions with high credit rating, and management
believes the risk of loss to be remote. As at December 31, 2012, the Group had
cash and cash equivalents aggregating $22,800 with and an investment of $207 in
a banking group in Austria. The Group also owed $143,337 in aggregate short-term
banking borrowings and debt to the Austria banking group.

138

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MFC INDUSTRIAL LTD.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTSDECEMBER 31, 2012

Note 39. Financial Instruments
(continued)

Additional
disclosure

In addition to information disclosed
elsewhere in these consolidated financial statements, the Group had significant
items of income, expense, and gains and losses resulting from financial assets
and financial liabilities which were included in the consolidated statement of
operations for years ended December 31, 2012, 2011 and 2010 as follows:

|                                                                                     | 2012 |        | 2011 |  | 2010
|------------------------------------------------------------------------------------ | ---- | ------ | ---- |  | ----
|Interest income on
      financial assets not at fair value through profit or loss   | $    | 6,730  |      |  | $   
|Interest income on financial assets
      classified at fair value through profit or |      |        |      |  |     
|loss                                                                                 |      | 3,759  |      |  |     
|Total interest
      income                                                          | $    | 10,489 |      |  | $   
|                                                                                    
|Interest expense on
      financial liabilities not at fair value through profit or  |      |        |      |  |     
|loss                                                                                 | $    | 7,004  |      |  | $   
|Interest expense on financial liabilities
      classified at fair value through     |      |        |      |  |     
|profit or loss                                                                       |      | 4,661  |      |  |     
|Total interest
      expense                                                         | $    | 11,665 |      |  | $   
|                                                                                    
|Dividends income on
      financial assets at fair value through profit or loss      | $    | 256    |      |  | $   
|Dividends income on financial assets
      classified as available for sale,         |      |        |      |  |     
|resource property related*                                                           |      | -      |      |  |     
|Dividends income on
      financial assets classified as available for sale, other   |      | 104    |      |  |     
|Net gain (loss) on financial assets at fair
      value through profit or loss       |      | 1,104  |      |  |     
|Credit (recovery)
      losses                                                       |      | (521   | )    |  |     

|* |  | included in income from an
      interest in resource property
|- |  | --------------------------------------------------------------

139

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MFC INDUSTRIAL LTD.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTSDECEMBER 31, 2012

Note 40. MFC Industrial and its
Significant Subsidiaries

MFC Industrial has its principal
executive office at Suite 1620  400 Burrard Street, Vancouver, British
Columbia, Canada.

The following table shows the direct
and indirect significant subsidiaries as at December 31, 2012. The table
excludes subsidiaries which only hold intercompany assets and liabilities and do
not have an active business as well as subsidiaries whose results and net assets
did not materially impact the consolidated results and net assets of the
Group.

|                                                               |                  |  | Proportion
      of |   | Proportion
      of
|-------------------------------------------------------------- | ---------------- |  | ------------------- | - | -------------------
|                                                               | Country of       |  | Voting              |   | Beneficial         
|Subsidiaries                                                   | Incorporation    |  | Interest            |   | Interest           
|MFC Commodities
    GmbH                                       | Austria          |  | 100                 | % |                    
|MFC Trade & Financial Services
      GmbH                      | Austria          |  | 100                 | % |                    
|IC Managementservice
      GmbH                                | Austria          |  | 100                 | % |                    
|International Trade Services GmbH                              | Austria          |  | 100                 | % |                    
|MFC Metal Trading
      GmbH                                   | Austria          |  | 100                 | % |                    
|Kasese Cobalt Company Limited                                  | Uganda           |  | 75                  | % |                    
|AFM Aluminiumfolie
      Merseburg GmbH                        | Germany          |  | 55                  | % |                    
|MAW Mansfelder Aluminiumwerk GmbH                              | Germany          |  | 55                  | % |                    
|MFC (A) Ltd.                                                   | Marshall Islands |  | 100                 | % |                    
|MFC (D) Ltd.                                                   | Marshall Islands |  | 100                 | % |                    
|Brock Metals
    s.r.o.                                        | Slovakia         |  | 100                 | % |                    
|M Financial Corp.                                              | Barbados         |  | 100                 | % |                    
|Mednet (Shanghai) Medical
      Technical Developing Co., Ltd. | China            |  | 90                  | % |                    
|Hangzhou Zhe-er Optical Co. Ltd.                               | China            |  | 51                  | % |                    
|MFC Corporate Services
      AG                                | Switzerland      |  | 100                 | % |                    
|Compton Petroleum Austria GmbH                                 | Austria          |  | 100                 | % |                    
|Compton Petroleum
      Corporation                            | Canada           |  | 100                 | % |                    
|ACC Resources Co., L.P.                                        | U.S.             |  | 70                  | % |                    
|ACC Resources
    S.R.L.                                       | Argentina        |  | 70                  | % |                    
|Possehl Mexico S.A. de C.V.                                    | Mexico           |  | 60                  | % |                    

|* |  | The non-controlling interests are
      classified as puttable instrument financial liabilities on the
      consolidated statement of financial position.
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------

As at December 31, 2012, there were no
significant restrictions (including protective rights of non-controlling
interests) which could significantly restrict MFC Industrials ability to access
or use the assets and settle the liabilities of the Group.

Note 41. Subsequent
Events

Dividend

On January 14, 2013, MIL announced its
annual cash dividend for 2013 as follows:

- The 2013
  annual cash dividend will be $0.24 per common share in total, paid in
  quarterly installments.
- The first payment of $0.06 per common
  share was be paid on February 8, 2013 to shareholders of record on January 25,
  2013.
- The remaining quarterly dividend
  payments of $0.06 per common share in 2013 are expected to be made in March,
  June and September, respectively.
- The dividend is subject to customary
  Canadian withholding tax for non-resident shareholders. Pursuant to applicable
  tax treaties the withholding rate for eligible U.S. resident shareholders is
  15%. The dividend is an eligible dividend under the Income Tax Act
  (Canada).

Note 42. Approval of Consolidated
Financial Statements

These consolidated financial statements
were approved by the Board of Directors and authorized for issue on April 1,
2013.

140

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ITEM 19: EXHIBITS

Exhibits Required by Form 20-F

|Exhibit |  |                                                                                                                                                                                                                                                     
|------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Number  |  | Description                                                                                                                                                                                                                                         
|1.1*    |  | Amended and Restated Articles of MFC
      Industrial Ltd.                                                                                                                                                                                          
|        |  |                                                                                                                                                                                                                                                     
|1.2*    |  | Notice of Articles dated October 11, 2011 of
      MFC Industrial Ltd.                                                                                                                                                                              
|        |  |                                                                                                                                                                                                                                                     
|1.3*    |  | Certificate of Change of Name dated
      September 30, 2011 of MFC Industrial Ltd.                                                                                                                                                                 
|        |  |                                                                                                                                                                                                                                                     
|4.1     |  | Amendment to Mining Lease Agreement dated
      January 1, 1987 between MFC Industrial Ltd. and Wabush Iron Co. Limited,
      Stelco Inc. and Dofasco Inc. Incorporated by reference from our Form 10-K
      for the year ended December 31, 1989.
|        |  |                                                                                                                                                                                                                                                     
|4.2     |  | Memorandum of Agreement dated November 24,
      1987 between MFC Industrial Ltd. and Wabush Iron Co. Limited, Stelco Inc.
      and Dofasco Inc. Incorporated by reference from our Form 10-K for the year
      ended December 31, 1989.          
|        |  |                                                                                                                                                                                                                                                     
|4.3     |  | First Amendment to the Memorandum of
      Agreement between MFC Industrial Ltd. and Wabush Iron Co. Limited, Stelco
      Inc. and Dofasco Inc. Incorporated by reference from our Form 10-K for the
      year ended December 31, 1989.           
|        |  |                                                                                                                                                                                                                                                     
|4.4     |  | Amended 1997 Stock Option Plan. Incorporated
      by reference from our Form S-8 dated May 23, 2007.                                                                                                                                               
|        |  |                                                                                                                                                                                                                                                     
|4.5     |  | Arrangement Agreement dated February 26,
      2010 between MFC Industrial Ltd. and KHD Humboldt International
      (Deutschland) AG. Incorporated by reference from our Form 6-K dated March
      3, 2010.                                       
|        |  |                                                                                                                                                                                                                                                     
|4.6     |  | Agreement dated September 24, 2010 between
      MFC Industrial Ltd. and Mass Financial Corp. Incorporated by reference
      from our Form 6-K dated September 30, 2010.                                                                           
|        |  |                                                                                                                                                                                                                                                     
|4.7     |  | 2008 Equity Incentive Plan. Incorporated by
      reference from our Form F-4 dated October 7, 2010.                                                                                                                                                
|        |  |                                                                                                                                                                                                                                                     
|4.8     |  | Support agreement between MFC Industrial
      Ltd. and Compton Petroleum Corporation dated July 6, 2012. Incorporated by
      reference from our Form 6-K dated July 13, 2012.                                                                    
|        |  |                                                                                                                                                                                                                                                     
|8.1     |  | List of significant subsidiaries of our
      company as at April 1, 2013.                                                                                                                                                                          
|        |  |                                                                                                                                                                                                                                                     
|11.1    |  | Code of Ethics. Incorporated by reference
      from our Form 6-K dated October 5, 2009.                                                                                                                                                            
|        |  |                                                                                                                                                                                                                                                     
|12.1    |  | Certification of Chief Executive Officer
      pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                           
|        |  |                                                                                                                                                                                                                                                     
|12.2    |  | Certification of Chief Financial Officer
      pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                           
|        |  |                                                                                                                                                                                                                                                     
|13.1    |  | Certification of Chief Executive Officer
      pursuant to 18 U.S.C. section 1350, as adopted pursuant to Section 906 of
      the Sarbanes-Oxley Act of 2002.                                                                                      
|        |  |                                                                                                                                                                                                                                                     
|13.2    |  | Certification of Chief Financial Officer
      pursuant to 18 U.S.C. section 1350, as adopted pursuant to Section 906 of
      the Sarbanes-Oxley Act of 2002.                                                                                      
|        |  |                                                                                                                                                                                                                                                     
|15.1    |  | Consent dated April 1, 2013 of Deloitte
      LLP.                                                                                                                                                                                                  
|        |  |                                                                                                                                                                                                                                                     
|15.2    |  | Consent dated April 1, 2013 of Davidson & Company
  LLP.                                                                                                                                                                                            
|        |  |                                                                                                                                                                                                                                                     
|15.3    |  | Third Party Report on Reserves.                                                                                                                                                                                                                     
|        |  |                                                                                                                                                                                                                                                     
|15.4    |  | Consent dated April 1, 2013 of GLJ Petroleum
      Consultants Ltd.                                                                                                                                                                                 
|       
|16.1    |  | Mine Safety and Health Administration Safety
      Data.                                                                                                                                                                                            

|* |  | Incorporated by reference from
      our Form 20-F's filed in prior years.
|- |  | --------------------------------------------------------------------------

141

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SIGNATURES

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

|Date: April 1, 2013 |                                                      
|------------------- | -----------------------------------------------------
|                    | MFC INDUSTRIAL
      LTD.                            
|                   
|                    | /s/ Michael J. Smith                                 
|                    | Michael J. Smith                                     
|                    | Chairman, Chief Executive Officer and
      President

142

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