---

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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) OF THE SECURITIES EXCHANGE ACT OF
1934For the fiscal year
ended December 31, 2013

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 outstanding**as
of December 31, 2013.

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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OUR PRIMARY FOCUS IS THE GLOBALCOMMODITY
      SUPPLY CHAIN BUSINESS.  We source, produce, process,transport, warehouse,
finance and assess related risk regarding these commodities for producers and
consumers around the world. Our integrated operations span a wide range of commodities
such as metals, ceramics, minerals, oil natural gas, silicones, chemicals,
plastics, food and beverage additives, animal feed and wood products. These are
supported by our captive sources acquired through strategic investments and
offtake arrangements and other sourcing from third parties.


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SELECTED FINANCIAL DATA
  68%
  Increase inrevenuesfor the
twelve months of 2013, compared to the same period in 2012. HISTORICAL GROWTH
      OF TOTAL ASSETS AND TOTAL EQUITYAll amounts in United
      States dollarsTOTAL EQUITY
    TOTAL ASSETS
   HISTORICAL
      DEBTAll amounts in United
      States dollars, except ratiosTOTAL DEBT
    RATIOS


---



DEAR FELLOW SHAREHOLDERS We are pleased to present the
results of MFC Industrial Ltd. (MFC, the Company, we or us) for the year
ended December 31, 2013 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.) Our net income for the fourth
quarter of 2013 was disappointing, even though we saw revenue growth. This
situation primarily arose from comprehensive internal reviews that were carried
out at year end which resulted in significant non-cash adjustments totaling
$15.1 million. In 2013, our revenues grew by 68%
compared to the same period in 2012. This was good progress, but we can
certainly improve. Our EBITDA (earnings before interest, taxes, depreciation,
depletion and impairment), for the year was $65.4 million (EBITDA is not a financial performance measure under
International Financial Reporting Standards (IFRS) and has significant
limitations as an analytical tool and should not be considered in isolation or
as a substitute for our results as reported under IFRS. See page VI of this
Letter to Shareholders for a reconciliation of our net income). With the expansion of our
commodity platform into new products and new markets, we saw pricing of some
commodities come under pressure during the year. We still need to improve our
margins as they are not at what we believe are acceptable levels. During the past five years, global
markets for commodities experienced a contraction and have only recently started
to recover. This recovery has perhaps been most evident in North America,
particularly in the United States, with our principal markets in Europe
following at a much slower pace. The supply of commodities is a top-line driven
business with narrow margins and cyclical movements affect our operating results
accordingly. As the overall world economy continues to recover and grow, we
anticipate these revenues and operating results will be enhanced. In addition to this anticipated
organic growth, the recently announced acquisitions of FESIL AS Group (FESIL)
and F.J. Elsner & Co GmbH (Elsner) are expected to significantly increase
our commodities and resources revenues, which were $778.5 million in 2013, and
provide a meaningful contribution to net income. We have kept to our historic
policy, which with any expansion or acquisition is to not dilute our
shareholders by issuing any new shares, as well as maintaining our financial
discipline with our balance sheet and financial ratios. ILETTER TO SHAREHOLDERS


---



2013
      MAJOR DISAPPOINTMENTSFor the three months ended December
      31, 2013►
    
    Our net loss of $12.6 million for
      the fourth quarter of 2013 was disappointing.►
    
    Primary cause of the
      loss:Increased general and administrative
        expenses without immediate benefit.Reduction in our deferred income tax assets
        - $4.9 million.Adjustment of depletion and depreciation -
        $4.1 million.Impairment charge on our resource properties
        primarily because of a change in the forward price deck used in the 2013
        valuation versus 2012 which projected a lower long-term price for
        natural gas - $6.1 million.
  2013
      HIGHLIGHTSFor the year ended December 31,
      2013►
    
    Revenues increased by 68% to
      $813.9 million for the year ended December 31, 2013, compared to the same
      period in 2012.►
    
    EBITDA was $65.4 million for the
      year ended December 31, 2013.*►
    
    Net income for the year ended
      December 31, 2013 decreased to $9.7 million, or $0.15 per share on a
      diluted basis, compared to $200.1 million, or $3.20 per share for the same
      period of 2012.* This was primarily due to the recognition of a bargain
      purchase of $218.7 million, or $3.50 per share, in the 2012 period and
      higher costs of sales, depletion and impairments in 2013.►
    
    Completion of a participation
      arrangement with a drilling partner at Niton (the Drilling Partner), who
      will spend a minimum of CDN$50 million to drill at least 12 net wells
      on our undeveloped lands in the next three years. MFC can elect to
      participate for 30% on a look-back basis in such wells or we can elect to
      receive a 10% gross royalty on the related production. In addition, we
      will process a substantial portion of the natural gas though our
      processing plant. Our Drilling Partner has already commenced drilling its first
      well.►
    
    Annual cash dividend for 2013 was
      $0.24 per common share and was paid in equal quarterly installments of
      $0.06 per common share.►
    
    Our natural gas hedges currently
      consist of an outstanding short position of approximately $87.5 million of
      NYMEX natural gas swaps with maturities ranging from August 2014 to March
      2015 at an average weighted price of $4.39 per mcf.►
    
    Maintained the integrity of our
      balance sheet and financial ratios.  *Note:
    
    EBITDA is not a measure of financial performance under
      IFRS, has significant limitations as an analytical tool and should not be
      considered in isolation or as a substitute for analysis of our results as
      reported under IFRS. See page VI of this Letter to Shareholders for a
      reconciliation of our net income to
EBITDA. Certain 2012 figures were recast. Please refer to notes 3 and 41 of our audited annual financial statements for the year ended December 31, 2013.
  IILETTER TO SHAREHOLDERS


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2014
      MAJOR DEVELOPMENTSSubsequent events for the three
      months of 2014►
    
    Our acquisition of a 100%
      interest in FESIL, a vertically integrated supply-chain management company
      with a production facility in Norway, sales companies in Germany,
      Luxembourg, Spain, the United States and China and an interest in several
      quartz deposits in Spain, is completing concurrently herewith.
      Headquartered in Trondheim, Norway, FESIL is one of the leading producers
      of ferrosilicon, an essential alloy in the production of steel, stainless
      steel and cast iron.►
    
    On February 11, 2014, Cliffs
      Natural Resources (Cliffs), the operator of the Wabush Mine (Wabush),
      announced that it will idle Wabush by the end of the first quarter of 2014
      due to high operating costs at the mine. We have started a dialogue with
      other stakeholders to rationalize this asset.►
    
    On March 11, 2014, MFC acquired
      Elsner, a global commodities supply company which was founded in 1864,
      with its head office based in Vienna, Austria. Elsner is focused on a full
      range of steel and related products.►
    
    In March 2014, MFC announced its
      annual cash dividend for 2014 will be $0.24 per common share, as well as
      the appointment of a new Chief Financial Officer.►
    
    Our goal for 2014 is to double
      our commodities and resource revenue and realize the related margins as we
      integrate the new companies.
   FINANCIAL
      HIGHLIGHTSAll amounts
      in thousands, except per share amount and ratiosDecember 31, 2013Cash, cash equivalents and
      securities
    
    $
    334,241Short-term deposits
    
    
    4,381Trade receivables
    
    
    115,678Current assets
    
    
    711,021Total assets
    
    
    1,318,598Current liabilities
    
    
    314,709Working capital
    
    
    396,312Current ratio*
    
    
    2.26Acid test ratio*
    
    
    1.60Total liabilities
    
    
    618,857Shareholders equity
    
    
    699,570Equity per common share
    
    
    11.18  *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 (excluding
      liabilities relating to assets held for
sale).
 IIILETTER TO SHAREHOLDERS


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LIQUIDITY As at December 31, 2013, we had cash
and cash equivalents, short-term deposits and securities of $338.6 million. We
monitor our capital on the basis of our debt-to-adjusted capital ratio and
long-term debt-to-equity ratio. LIQUIDITYAll amounts in
      thousandsDecember 31, 2013
    
    
    December 31, 2012Total debt (current/long-term portions)
    
    $
    234,740
    
    
    $
    162,993Less: cash and cash
      equivalents
    
    
    (332,173
    )
    
    
    (273,790
    )Net
      debt (net cash & cash
    equivalents)
    
    
    (97,433
    )
    
    
    (110,797
    )Shareholders' equity
    
    
    699,570
    
    
    
    730,587
  LONG-TERM
DEBT The long-term debt-to-equity ratio is
calculated as long-term debt divided by shareholders equity. LONG-TERM DEBT AND DEBT METRICSAll amounts in thousands, except
      ratioDecember 31, 2013
    
    
    December 31, 2012Long-term debt, less current
      portion
    
    $
    189,871
    
    
    $
    118,824
    *Shareholders' equity
    
    
    699,570
    
    
    
    730,587Long-term debt-to-equity ratio
    
    
    0.27
    
    
    
    0.16  *Note:
    
    This table does not include the term financing
      relating to our gas processing plant as it involved a purchase option
      and future processing fees. The option was exercised in
      2013.
  CREDIT
FACILITIES We maintain various kinds of credit
lines and facilities with banks and insurers. Most of these facilities are
short-term and are used for day-to-day business and structured financing
activities in commodities. The amounts drawn under such facilities fluctuate
with the type and level of transactions being undertaken. As at December 31, 2013, we had credit
facilities aggregating $511.6 million, comprised of: (i) unsecured revolving
credit facilities aggregating $220.5 million from banks; (ii) revolving credit
facilities aggregating $68.9 million from banks for structured solutions, a
special trade financing where the margin is negotiable when the facility is
used; (iii) a non-recourse factoring arrangement with a bank for up to $130.9
million for our commodities activities. We may factor our commodity receivable
accounts upon invoicing at the inter-bank rate plus a margin; (iv) a foreign
exchange credit facility of $53.3 million with a bank; and (v) secured revolving
credit facilities aggregating $38.0 million. All of these facilities are
renewable on a yearly basis. 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 flow statements, our management believes it is
more useful and meaningful to analyze our cash flows by overall liquidity and
credit availability. 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. IVLETTER TO
SHAREHOLDERS


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RESULTS FOR THE
YEAR ENDED DECEMBER 31, 2013 Total revenues
for the year ended December 31, 2013 increased 68% to
$813.9 million, compared to $485.7 million in 2012. Revenues were up for the
year ended December 31, 2013 because of several factors, including the
integration of our new operations and increases in volumes for some of our
commodities. EBITDA for the year ended December 31, 2013 increased to $65.4
million. EBITDA has significant limitations as
an analytical tool and should not be considered in isolation or as a substitute
for our results as reported under IFRS. See page VI of this letter for a
reconciliation of net income to EBITDA. Net income for the year ended December 31, 2013 decreased to $9.7
million, or $0.15 per share on a diluted basis, from $200.1 million (which included a bargain purchase gain of $218.7
million), or $3.20
per share on a diluted basis, for the same period last year. Net income for the year was down
primarily due to: higher costs of sales;depreciation and depletion;impairments and income tax adjustments; andthe catastrophic flooding in Alberta,
  Canada. The income statement for the year ended
December 31, 2013 includes non-cash depletion and depreciation expenses of
approximately $28.1 million, as well as an impairment charge of $6.1 million,
representing an aggregate of $0.54 per share on a diluted basis. Depletion and
depreciation are non-cash expenses and represent the amortization of the
historical cost of our natural gas assets and other assets over their economic
life. They are income statement expenses but are added back in the cash flow
statement. Revenues for our commodities and
resources business were $778.5 million
for the year ended December 31, 2013, compared to $455.9 million for the same
period in 2012. Included are the gross revenues generated by our iron ore
royalty interest which, for the year ended December 31, 2013, were approximately
$25.7 million, compared to $29.1 million in 2012. A total of 2.8 million tons of
iron ore products were shipped during 2013, compared to 3.2 million tons shipped
during the same period in 2012. Revenues from our merchant
banking business were $12.6 million for
the year ended December 31, 2013, compared to $11.8 million for the same period
in 2012. Other
revenues, which encompass our corporate
and other operations, were $22.9 million for the year ended December 31, 2013,
compared to $18.0 million for the same period in 2012. Costs of sales
increased to $710.4 million during the year ended
December 31, 2013 from $406.7 million for the same period in 2012.
Selling, general and administrative
expenses increased to $63.1 million for the year ended
December 31, 2013 from $47.7 million for the same period in 2012. OVERVIEW OF OUR
RESULTS FOR THE YEAR ENDED DECEMBER 31, 2013 Our total revenues by operating segment
for each of the years ended December 31, 2013 and 2012 are broken out in the
table below: REVENUESAll amounts in
      thousandsDecember 31, 2013
    
    
    December 31, 2012twelve months
    
    
    twelve monthsCommodities and resources
    
    $
    778,487
    
    
    $
    455,898Merchant banking
    
    
    12,568
    
    
    
    11,751Other
    
    
    22,883
    
    
    
    18,010Total revenues
    
    $
    813,938
    
    
    $
    485,659
  VLETTER TO SHAREHOLDERS


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Our net income from operations for each
of the years ended December 31, 2013 and 2012 are broken out in the table
below: INCOME FROM
      OPERATIONSAll amounts
      in thousands, except per share amountsDecember 31, 2013
    
    
    December 31, 2012twelve months
    
    
    twelve monthsCommodities and
    resources
    
    $
    7,350
    
    
    $
    (23,946
    )(1)Merchant banking
    
    
    18,293
    
    
    
    231,632
    (2)Other
    
    
    (9,564
    )
    
    
    (9,301
    )Income before income
      taxes
    
    
    16,079
    
    
    
    198,385Income tax recovery
      (expenses)
    
    
    (1,574
    )
    
    
    8,528Resource property revenue
      tax     expenses
    
    
    (5,003
    )
    
    
    (5,902
    )Net loss
      (income) attributable to     non-controlling
      interests
    
    
    163
    
    
    
    (867
    )Net income
      attributable to      shareholders
    
    $
    9,665
    
    
    $
    200,144Earning per
      share, diluted
    
    $
    0.15
    
    
    $
    3.20
  Notes:(1)
    
    Including impairment of interest in resource properties
      of $42.6 million and inventory write-off of $19.4 million in a former
      subsidiary.(2)
    
    Including bargain purchase of $218.7
  million.
  EBITDA
BREAKDOWN EBITDA is defined as earnings before
interest, taxes, depreciation, depletion and impairment. Management uses EBITDA
as a yardstick measurement of its own operating results, and as a benchmark
relative to its competitors. Management considers it to be a meaningful
supplement to net income as a performance measure primarily because we incur
depreciation, depletion and impairment expenses and EBITDA generally represents
cash flow from operations. The following table reconciles our EBITDA to net
income for the year ended December 31, 2013. EBITDA
      (earnings before interest, taxes, depreciation, depletion and
      impairment)All amounts in thousandsDecember 31, 2013Net income
    
    $
    9,502Income taxes
    
    
    6,577Finance costs
    
    
    15,172Depreciation, depletion and impairment
    
    
    34,162EBITDA*
    
    $
    65,413  *Note:
    
    EBITDA is not a measure of financial performance under
      IFRS, has significant limitations as an analytical tool and should not be
      considered in isolation or as a substitute for analysis of our results as
      reported under IFRS.
  VILETTER TO SHAREHOLDERS


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REVENUE BREAKDOWN BY
REGION The following pie chart shows our
revenue by region for the year ended December 31, 2013.  COMMODITY
LINES As a result of our recently announced
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 will supply:   VIIILETTER TO SHAREHOLDERS


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UPDATE ON OUR
NATURAL GAS & MIDSTREAM FACILITIES Since the acquisition of the natural
gas and midstream facilities, which significantly expanded our global
commodities platform into the energy sector, we have been determined to expand
these operations as they present an opportunity for growth through value-added
projects and the consolidation of regional gas production. To this end, we are
in the process of segregating our various operations into three distinct
energy divisions: MFC Energy (MFCE) MFCE will
act as the corporate office and administrative center for all these energy
divisions. It will seek to leverage the existing asset base in transactions that
add value to MFC and its shareholders. MFC Processing (MFCP) This entity
will manage the existing natural gas processing assets of MFCE on a standalone
basis. The following table sets out our average sales prices, operating costs,
royalty amounts, transportation costs and total production for the year ended
December 31, 2013: NATURAL GAS WELLS (COSTS AND PRODUCTION)All amounts in
      Canadian dollars, except production numbersFor the year ended December 31,
      2013Natural Gas
    
    
    NGLs(1)
    
    
    Crude Oil
    
    
    Total($/mcf)
    
    
    ($/bbl)
    
    
    ($/bbl)
    
    
    ($/boe)Price(2)
    
    $ 3.46
    
    
    $ 75.63
    
    
    $ 84.98
    
    
    $ 30.72Royalties
    
    0.62
    
    
    24.53
    
    
    20.78
    
    
    6.81Transportationcosts
    
    0.14
    
    
    4.92
    
    
    2.29
    
    
    1.37Operating
      costs(3)
    
    ---
    
    
    ---
    
    
    ---
    
    
    12.38Production(4)
    
    17,522 mmcf
    
    
    411.6 mboe
    
    
    118.7 mbbl
    
    
    3,450 mboe
  *Notes*:
    (1) Includes
    sulphur.(2) Average sales price includes
      third party processing fees.
 IXLETTER TO SHAREHOLDERS


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(3)
    A portion of our natural gas
      production is associated with crude oil production. Excludes the impact of
      hedging on prices and does not include non-cash operating costs of
      CDN$8.96 per boe consisting of depletion and depreciation. Operating costs
      per individual product are not available as they are charged to gas
      production only and any allocation would be arbitrary.(4)
    Net of other working
      interests.
 Our land bank as at December 31, 2013
was 268,875 net undeveloped acres (1,088.1 square kilometers) which we do not
plan to sell or develop at this time. We will develop midstream businesses at
our existing Mazeppa facility and identify and grow the midstream business
through re-purposing existing midstream assets or by investing in new
projects. The restructuring of this emerging
midstream business is underway with several MFCE assets identified to be created
or transferred to this new division, including: Consolidation of the processing facility in the
  Niton area (the Niton Plant) into MFCP. The Niton Plant will process
  substantially all gas produced under the participation
  agreement.
  Consolidation of the processing facilities in the
  Callum & Cowley area into MFCP.
  Consolidation of our compression and gas gathering
  system, which is one of largest such systems in Southern Alberta.
  Construction of a 15MW generating plant at our
  facility, which is proceeding on schedule.
  Increasing the Niton Plants capacity through a
  debottlenecking project to increase processing revenue from our
  Drilling Partner and from other third party
  production. New drilling from our Drilling Partner should increase natural gas
  production in the area. Ø
    
    Our Drilling Partner will spend a
      minimum of CDN$50 million to drill at least three new wells per year for a
      total of 12 net wells (to a minimum of 800 horizontal meters each) during
      the initial three-year term. They are in the process of completing
      drilling of the first well.Ø
    
    Our Drilling Partner will pay 100% of the drilling and completion
      costs of each well at its own sole risk and expense.Ø
    
    After a well is drilled and there is continuous production, we can
      elect to participate for up to a 30% working interest in each well on a
      look-back basis by paying 25% of its actual costs; or we can elect to receive a 10% gross royalty on future
      production instead.Ø
    
    Drilling is currently underway. Planning strategies for a deep-cut and
  fractionation plant that will generate additional revenue from the sales of
  natural gas liquids (extracted from natural
  gas) including: ethane, propane and butane. MFC Marginal Wells (MFCW) (in
development) Provide up-stream marginal well production and
  services.
  Focus on improving production through innovation
  and cost optimization.
  Acquire similar marginal well assets and apply
  best practices to lower costs or raise production through economies of
  scale and technical ability. Ø
    
    MFCW would be an
      upstream-marginal well operator and a service
    provider.Ø
    
    MFCWs assets would be comprised of certain MFCEs assets located
      in Southern Alberta which share similar operating
      characteristics.Ø
    
    This division was created to operate a specialized low-cost
      structure that the shallow, dry and low-production wells require. In
      addition to the existing MFCE assets, MFCW would grow through the
      acquisition of similar assets that are accretive in terms of reduced
      operating costs and increased
production. Hedging Natural Gas
Derivatives In December 2013, to hedge the
volatility of natural gas prices and organically long nature of our natural gas
subsidiary, we entered into a short position of long-term NYMEX natural gas
swaps with a notional value of approximately $50 million. XLETTER TO SHAREHOLDERS


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In January and February, as
natural gas prices continued to rise, we increased our position using
shorter-duration swaps which had risen with the uncharacteristically cold winter
weather. We continue to hold these hedging derivatives and, as of March 28,
2014, we were short approximately $87.5 million of NYMEX natural gas swaps with
maturities ranging from August 2014 to March 2015 at an average weighted price
of $4.39 per mcf. UPDATE ON OUR
COMMODITIES PLATFORMS In 2013 MFC Commodities GmbH
(MFCC) continued to intensify its business relationships with the wood pellets
industry, which started in 2005. The global pellets industy is growing not only
in Europe but also in North America. MFCC will now purchase wood pellets from
their production in the United States and transport the goods by sea to
Europe. MFCC has further strengthened its
focus on structured supply chain transactions, in combination with its logistics
expertise. For example, MFCC has entered into an offtake agreement with a
Yakutian producer of sawn larch wood and structured the transaction. Besides
sales and risk management, transport logisitics from Yakutia to Europe are a key
element of such a transaction. MFCC has continued to integrate
its supply chain and logistics activities in order to enhance business
opportunities on a global scale. We have been able to identify additional
sourcing opportunities and have expanded our sales teams and continue to search
for specialists in these new markets. The importance of MFC China
continues to grow with our expansion, primarily in sourcing and supply. The
allocation of additional staff to work alongside existing employees in China
will improve our communications, quality control and logistics. UPDATE ON THE
ROYALTY INTEREST(WABUSH MINE) For the year ended December 31,
2013, Cliffs shipped a total of 2,840,039 tons of iron ore pellets and
concentrate, compared to 3,189,443 tons in 2012. The average gross royalty
realized price per ton (ore pellets and/or concentrate) for the year ended
December 31, 2013 was CDN$9.35. In February 2014 Cliffs announced
a significant reduction in previously planned 2014 capital expenditures and, due
to the current pricing environment, decided to idle Wabush by the end of the
first quarter of 2014. This will have an effect on our
earnings going forward and we have now started a dialogue with other
stakeholders to try to rationalize this asset. UPDATE ON OUR
CAPTIVE SOURCE OF FERROUS METALS AT PEA RIDGE The project is still currently at
a preliminary stage and any decision on proceeding, including development
activities, is dependent on the completion of further analysis, including
feasibility studies. Activities at the project are proceeding in an orderly
fashion and it is currently anticipated that substantial additional expenditures
will be incurred in order to determine the feasibility of the
project. 2014 MAJOR
DEVELOPMENTS(SUBSEQUENT EVENTS) FESIL AS
Group Our acquisition of FESIL is
completing concurrently herewith. FESIL is a vertically integrated commodity
supply chain company with a production facility in Norway, sales companies in
Germany, Luxembourg, Spain, the United States and China and an interest in
quartz deposits in Spain. Headquartered in Trondheim,
Norway, FESIL is one of the leading producers of ferrosilicon, an essential
alloy in the production of steel, stainless steel and cast iron. XIILETTER TO
SHAREHOLDERS


---



FESILs melting plant is located in Mo i
      Rana and produces a range of ferrosilicon products including granulated
      and refined qualities (high and semi-high purity), which makes up the bulk
      of its production. Annual capacity of the plant is approximately 80,000
      tonnes of ferrosilicon and 23,000 tonnes of microsilica. The facility is
      certified according to ISO 9001 and ISO 14001 and complies with Norways
      strict environmental and operational requirements. The purchase price of
      approximately 500 million Norwegian Krone (approximately $82 million) is
      based on the net tangible asset value as of September 30, 2013 and will
      be adjusted to reflect the fair value of certain assets and the operating results over the period to final closing. In
      addition to the purchase price, MFC will pay a royalty based on tiered ferrosilicon production at the Mo i Rana
      facility for two years, which is expected to equal approximately 2.9% of
      ferrosilicon revenue per annum at full production.  FESIL reported net revenues in
      2013 of approximately 2.9 billion Norwegian Krone (approximately $487.5
      million) with its alloy production representing just over 25% of net
      revenue. Approximately 60% of FESILs ferrosilicon production is sold
      directly through its own sales offices to customers which include some of
      the worlds leading steelworks, aluminum/iron foundries and chemical
      groups. The sales offices also sell a number of complementary products
      including ferroalloys, metals, minerals, and specialty
      products. FESIL is a strategic acquisition that will add geographic reach,
      a diverse product portfolio, an established brand name, a well-respected
      management team and excellent employees to our global commodity
      supply-chain platform.  F.J. Elsner & Co.
GmbH In March 2014, MFC acquired a 100%
      interest in Elsner, a global commodity supply chain company focused on
      steel and related products with offices in
      Vienna, Austria and which was founded in 1864.
      Elsners offerings include a full
      range of steel products including slabs, booms, billets, hot rolled steel
      plates, hot and cold rolled coils and sheets, reinforcing bars, galvanized
      material, pipes, tubes and merchant bars. Elsner has longstanding
      relationships with many steel mills in Eastern and Southern Europe as well
      as the Baltic States and the CIS.
      Revenue for the fiscal year ended
      June 30, 2013 was $145.5 million and they offer significant
      diversification with their products, customers and suppliers. The purchase
      price is for nominal consideration and certain contingent payments. The following highlights certain
opportunities related to the acquisition of Elsner:
      We will now offer structured solutions to Elsners
  customers and suppliers.
  The ability to market steel related raw materials
  to our current suppliers and industry contacts.
  Our supply chain structured solutions will reduce
  risks and expand the customer base.
  We may enter into exchange transactions for the
  supply of raw materials for offtake products with customers. Elsner is a company now approaching its
150th anniversary and provides MFC with a solid customer base, an
excellent product portfolio and an extremely well-respected management and
trading team which will enhance our global supply chain
platform. XIIILETTER TO
SHAREHOLDERS


---






---



2014 Cash
Dividend On March 24, 2014, MFC Industrial
Ltd. announced that its Board of Directors has declared an annual cash dividend
for 2014 of $0.24 per common share. The 2014 cash dividend will be paid in
quarterly installments by the Company. The first payment of $0.06 per
common share will be paid on April 22, 2014 to shareholders of record on April
10, 2014. For such payment, the Companys common shares will trade ex-dividend
on April 8, 2014. The remaining quarterly dividend payments in 2014 are expected
to be made as follows: Second payment of $0.06 will be made
  July;Third payment of $0.06 will be made
  September; andFinal payment of $0.06 will be made
  November. 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). Chief Financial Officer
Appointment The Company also announced on
March 24, 2014, that its Board of Directors had appointed James M. Carter as
Chief Financial Officer. He is a Chartered Accountant with over 40 years of
experience in both public and private companies, with an emphasis on the
commodities sector and international business markets. He has served as
Vice-President of the Company for over 15 years. The Board The Board of Directors also
elected Peter Kellogg as Chairman and appointed Dr. Shuming Zhao as a
Director of the Company. The Company is continuing its search for a new CEO and
announced that Michael Smith currently intends to retire at the annual meeting
of the Company scheduled for the end of this year. Mr. Smith will continue to serve
as a Director of the Company and plans to work with the Board in searching for a
successor to ensure an orderly transition. Corporate
Changes The Board of Directors of the
Company has also determined to declassify its Board structure so that all of the
Companys Directors will be elected on an annual basis. It is intended that
amendments to the Companys Articles will be submitted to the Companys
shareholders at its next annual meeting to effect this change. In addition, the
Board terminated the Companys shareholder rights plan agreement dated November
11, 2013. CORPORATE
TAXATION We are a company that strives to
be fiscally responsible. The corporate income tax paid in cash was approximately
$2.2 million for the year ended December 31, 2013. INDUSTRY GROUP
COMPARISON The following charts show, for
comparison purposes, selected ratios for MFC and the selected major players in
our industry. Glencore Xstrata PLC is an AngloSwiss multinational commodity
trading and mining company headquartered in Switzerland. The Noble Group
Limited, which manages a portfolio of global supply chains covering a range of
agricultural and energy products, as well as metals, minerals and ores is
headquartered in Hong Kong. Brenntag Group, the global market leader in chemical
distribution, covers all major markets with its extensive product and service
portfolio and is headquartered in Germany. Bunge Limited is a leading
agribusiness and food company with integrated operations that circle the globe,
and is headquartered in Austria. XVLETTER TO
SHAREHOLDERS


---



*Note:
    The above
      information for Glencore Xstrata PLC, Noble Group Limited, Brenntag Group
      and Bunge Limited is provided for information purposes only. In addition,
      some of these companies do not use IFRS for financial reporting and/or use
      other reporting currencies. Any of those factors may materially affect the
      accuracy and reliability of such comparisons. As a result you should not
      unduly rely on such comparisons.
  The following chart shows our year
to date share price in comparison to two other large companies in our
industry. SHARE PRICE COMPARISON*All amounts in US
      dollars, except change percentages*Company
    January 2, 2013
    December 31, 2013
    Changes In 2013Noble Group
    
    1.20
    
    
    1.07
    
    
    -10.83%Glencore International
    
    376.50
    
    
    312.70
    
    
    -15.98%MFC Industrial
    
    8.72
    
    
    7.99
    
    
    -8.14%
  PERSONAL
NOTE On a very personal note we
announced the passing of one of our Directors this year, Robert Ian Rigg. Ian
was a valuable member of the Board since 2010 and was the chair of our audit
committee and a member of our corporate governance committee. Ian provided
indispensable guidance to the Company in financial matters over the years. He
will truly be missed. Respectfully Submitted,Michael J. SmithPresident and CEO  XVILETTER TO
SHAREHOLDERS


---



|                                 | CORPORATE
      INFORMATION                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | 
|-------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | 
|                                 | **BOARD OF DIRECTORS**
      Michael J.
      SmithDirector since
      1987
      Indrajit
      Chatterjee*Director
      since 2005
      Silke S.
      Stenger*Director
      since 2013
      Peter R.
      KelloggDirector since
      2013
      William C. Horn
      III*Director since
      2013
      Dr. Shuming
      ZhaoDirector since
      2014
      * Member of the
      Audit Committee
      AUDITORS
      PricewaterhouseCoopers LLP Suite 700 Howe Street
      Vancouver, BC V6C 3S7 Canada Telephone: 1 (604) 806 7000
      www.pwc.com/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 | 
|XVIILETTER 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 AND OTHER
      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                                               |  
|             | Results of Operations                                              |  
|             | 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 Harbor                                                        |  
|             | 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                                       |  

(i)

---



|         | ITEM 9: THE OFFER AND
      LISTING                                        |    | 53 
|-------- | -------------------------------------------------------------------------- | -- | ---
|         | A.
      Offer and Listing Details                                         |    | 53 
|         | B. Plan of
      Distribution                                              |    | 53 
|         | C.
      Markets                                                           |    | 54 
|         | D. Selling
      Shareholders                                              |    | 54 
|         | E.
      Dilution                                                          |    | 54 
|         | F. Expenses of
      the Issue                                             |    | 54 
|         | ITEM 10:ADDITIONAL INFORMATION                                             |    | 54 
|         | A. Share
      Capital                                                     |    | 54 
|         | B.
      Memorandum and Articles of Association                            |    | 54 
|         | C. Material
      Contracts                                                |    | 56 
|         | D.
      Exchange Controls                                                 |    | 56 
|         | E.
      Taxation                                                          |    | 57 
|         | F.
      Dividends and Paying Agents                                       |    | 61 
|         | G. Statement by
      Experts                                              |    | 61 
|         | H.
      Documents on Display                                              |    | 61 
|         | I. Subsidiary
      Information                                            |    | 61 
|         | ITEM 11:QUANTITATIVE AND QUALITATIVE
      DISCLOSURES ABOUT MARKET RISK   |    | 61 
|         | ITEM 12:DESCRIPTION OF
      SECURITIES OTHER THAN EQUITY SECURITIES       |    | 61 
|PART II. |                                                                            | 61
|         | ITEM 13:DEFAULTS, DIVIDEND
      ARREARAGES AND DELINQUENCIES              |    | 61 
|         | ITEM 14:MATERIAL MODIFICATIONS TO RIGHTS OF
      SECURITY HOLDERS AND USE |    |    
|         | OF
      PROCEEDS                                                          |    | 61 
|         | ITEM 15:CONTROLS AND
      PROCEDURES                                      |    | 62 
|         | ITEM 16:
      [RESERVED]                                                  |    | 64 
|         | ITEM 16A: AUDIT
      COMMITTEE FINANCIAL EXPERT                           |    | 64 
|         | ITEM 16B:CODE OF
      ETHICS                                              |    | 64 
|         | ITEM 16C:PRINCIPAL ACCOUNTANT FEES AND SERVICES                            |    | 65 
|         | ITEM 16D:EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT
      COMMITTEES  |    | 65 
|         | ITEM 16E: PURCHASES
      OF EQUITY SECURITIES BY THE ISSUER AND           |    |    
|         | AFFILIATED
      PURCHASERS                                                |    | 65 
|         | ITEM 16F: CHANGE IN REGISTRANTS
      CERTIFYING ACCOUNTANT               |    | 65 
|         | ITEM 16G:CORPORATE GOVERNANCE                                              |    | 67 
|         | ITEM 16H:MINE SAFETY DISCLOSURE                                            |    | 67 
|         | ITEM 17:FINANCIAL
      STATEMENTS                                         |    | 67 
|         | ITEM 18:FINANCIAL STATEMENTS                                               |    | 68 
|         | ITEM 19:
      EXHIBITS                                                    |    | 144

(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 harbor
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; and our ability to expand our business. 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 forward-looking 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 may 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 and we may incur significant legal expenses in defending against such
  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 of interest
  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;
- we have identified material weaknesses in our
  internal control over financial reporting in connection with subsidiaries acquired in 2012 and, if such weaknesses are not
  fully remediated, our ability to produce accurate and timely financial statements could be impacted;
- 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;
- certain factors may inhibit, delay or prevent a
  takeover of our company, which may adversely affect the price of our common shares; and
- a small number of our shareholders could
  significantly influence our business.

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 the Securities and Exchange Commissions, referred to as the
SEC,Industry Guide 7and 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 theCanadian Oil and Gas Evaluation Handbookdefinitions 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 amounts, referred to as
boe, 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 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.

3

---



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.

*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 gas or gas* 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 form
(associated gas or non-associated gas). Non-hydrocarbon substances may include
hydrogen sulphide, carbon dioxide and nitrogen.

*Net acres or Net 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 that 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 interests 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 21, 2014, the noon buying rates 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
were C$1.00 = $0.8936 and €1.00 = $1.3783,
respectively.

NOTE ON FINANCIAL AND OTHER
INFORMATION

Unless otherwise stated, all financial information presented herein has
been prepared in accordance with 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.

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.

4

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All websites
referred to herein are inactive textual references only, meaning that the
information contained on such websites is not incorporated by reference herein
and you should not consider information contained on such websites as part of
this document unless expressly specified.

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,
2013, 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)

|                                           |  | 2013 |           | 2012(1) |   | 2011      |        | 2010(2)(3) |   | 2009   
|------------------------------------------ |  | ---- | --------- | ------- | - | --------- | ------ | ---------- | - | -------
|Net sales                                  |  | $    | 806,831   |         | $ | 479,507   |        |            | $ | 507,992
|Net income (loss) from
    continuing      |  |      |           |         |   |           |        |            |   |        
|operations(4)                              |  |      | 9,665     |         |   | 200,144   | (5)(6) |            |   | 12,193 
|Net income (loss) income from              |  |      |           |         |   |           |        |            |   |        
|discontinued operations(4)                 |  |      |          |         |   |          |        |            |   |       
|Basic earnings (loss)
      per share:     |  |      |           |         |   |           |        |            |   |        
|Continuing operations                      |  |      | 0.15      |         |   | 3.20      | (5)(6) |            |   | 0.19   
|Discontinued
      operations              |  |      |          |         |   |          |        |            |   |       
|Diluted earnings (loss) per
      share:   |  |      |           |         |   |           |        |            |   |        
|Continuing
      operations                |  |      | 0.15      |         |   | 3.20      | (5)(6) |            |   | 0.19   
|Discontinued operations                    |  |      |          |         |   |          |        |            |   |       
|Net
      income(4)                        |  |      | 9,665     |         |   | 200,144   | (5)(6) |            |   | 12,193 
|Net income per share:                      |  |      |           |         |   |           |        |            |   |        
|Basic                                      |  |      | 0.15      |         |   | 3.20      | (5)(6) |            |   | 0.19   
|Diluted                                    |  |      | 0.15      |         |   | 3.20      | (5)(6) |            |   | 0.19   
|Total
assets                               |  |      | 1,318,598 |         |   | 1,360,623 |        |            |   | 858,957
|Net assets                                 |  |      | 699,741   |         |   | 736,775   |        |            |   | 549,147
|Long-term debt, less
      current portion |  |      | 189,871   |         |   | 118,824   |        |            |   | 20,150 
|Shareholders equity                       |  |      | 699,570   |         |   | 730,587   |        |            |   | 546,623
|Capital stock, net of
      treasury stock |  |      | 314,136   |         |   | 314,136   |        |            |   | 314,172
|Weighted average number of
    common      |  |      |           |         |   |           |        |            |   |        
|stock outstanding, diluted                 |  |      | 62,757    |         |   | 62,555    |        |            |   | 62,561 
|Cash dividends paid
      to shareholders  |  |      | 15,013    |         |   | 13,762    |        |            |   | 12,512 

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

5

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|(4) | Net income
      attributable to our shareholders.                                                                                                                                                                                                                                                                             
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(5) | Includes a bargain
      purchase of $218.7 million, or $3.50 per share on a basic and diluted
      basis, primarily in connection with our acquisition of MFC Energy. The
      bargain purchase arose as the consideration under the transaction was less
      than the fair value of the net identifiable assets acquired.
|   
|(6) | Includes total
      impairment and write-down of $48.2 million, or $0.77 per share, net of
      income tax recovery, on a subsidiary in India, which was subsequently sold
      in 2013.                                                                                                                                    

B. Capitalization and
Indebtedness

Not
applicable.

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
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 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, metals and other
commodities may adversely affect our operating results.

6

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A weak global
economy may 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 improve or worsen and the
resultant impact it may have on our operations and the industry in general going
forward.

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 on 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, 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 Wabush 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 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 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.

On February 11, 2014, the operator of the Wabush iron ore mine announced
that it planned to idle production of the mine by the end of the first quarter
of 2014 as a result of increased costs and the lower iron ore pricing
environment. If production operations at the mine are not recommenced by the
operator, our royalty income from this interest will be limited to minimum
royalty payments of C$3.25 million per year, which would have a material adverse
effect on our results of operations.

7

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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 the
operator of the mine. 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 or the insolvency of the 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 or 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 would be 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.

In addition, we have no or very limited access to technical or geological
data relating to the mine, including data as to reserves, nor have we received
an NI 43-101 compliant technical report in respect of the mine. Accordingly, we
can provide no assurances as to the level of reserves at the mine. If the
operator 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, 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 the 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 related
costs, such as accounting, legal 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 these
businesses.

8

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Furthermore, any acquisitions of
businesses or facilities, including our recent acquisition of MFC Energy, 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.

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 such
counterparties 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.

9

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***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
and 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 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 any of 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 and unanticipated developments could impact our risk
management strategies in the future.

***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. Such
derivative transactions may expose us to unexpected market, credit and
operational risks that could cause us to suffer unexpected losses. Severe
declines in asset values, unanticipated credit events or unforeseen
circumstances may create losses from risks not appropriately taken into account
in the structuring and/or pricing of a derivative transaction. 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.***

Fluctuations 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,

10

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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, they
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, or other geological and mechanical conditions. Any of
these events that result in a shutdown or slowdown of operations would 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.

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.

11

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***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.

***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 or 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 be subject
to civil or criminal fines or penalties imposed for violations of applicable
laws or regulations.

We may not be 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 of such
obligations 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 could cause expected cash flows to change are:

- changes to laws and legislation;

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- construction of new facilities;
- changes in the reserve estimates and the
  resulting amendments 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.

***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.***

It may be necessary for us to obtain
financing with banks or financial institutions 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, 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 and we could 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,

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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 for settlements 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.

***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 Actand other laws
that prohibit improper payments or offers of payments to foreign governments and
their officials and political parties by the 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

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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.

***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.

***We have identified material weaknesses in
our internal control over financial reporting. If we fail to fully remediate
these or any future weaknesses or deficiencies or maintain proper and effective
internal controls, our ability to produce accurate and timely financial
statements could be impaired.***

We have identified material weaknesses in
our internal control over financial reporting in connection with: (i) the period end financial reporting process with respect to subsidiaries acquired in 2012; and (ii) the design and implementation of formal processes at the entity level to address risks critical to financial reporting with respect to the monitoring of controls, the control environment and information and communication following the integration of the new subsidiaries. A material weakness is defined by the Public Company
Accounting Oversight Board as a deficiency, or a combination of deficiencies, in
internal control over financial reporting, such that there is a reasonable
possibility that a material misstatement of the annual or interim financial
statements will not be prevented or detected on a timely basis. Please see
Item 15: Controls and Procedures 
Report of Management on Internal Control over Financial
Reporting for further information
regarding the material weakness in internal control that we have
identified.

We are taking steps to remediate the
material weaknesses described above. While we believe these steps will improve
the effectiveness of our internal control over financial reporting, if our
remediation efforts are insufficient to address the material weaknesses, or if
additional material weaknesses in our internal controls are discovered in the
future, our ability to report our financial results on a timely and accurate
basis could be impacted in a materially adverse manner, and, as a result, our
financial statements may contain material misstatements or omissions. If we
cannot maintain and execute adequate internal control over financial reporting
or implement new or improved controls that provide reasonable assurance of the
reliability of the financial reporting and preparation of our financial
statements for external use, we could suffer harm to our reputation, fail to
meet our public reporting requirements on a timely basis, cause investors to
lose confidence in our reported financial information or be unable to properly
report on our business and the results of our operations, and the trading price
of our common shares could be materially adversely affected.

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.

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***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, limiting the persons who may
call special meetings of shareholders and the adoption of an advance notice
policy. Our Articles also provide for a classified board of directors with
staggered, three-year terms. In March 2014, our board of directors determined to
declassify our board structure. Please see Item 6. Directors, Senior Management and Employees  C. Board
Practices for further information. 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.

***A small number of our shareholders could
significantly influence our business.***

A small number of shareholders control a
significant portion of our outstanding common shares, including Peter Kellogg,
our Chairman and a director, who has disclosed control of approximately 33% of
our outstanding common shares. In 2013, Mr. Kellogg and IAT Reinsurance Company,
Ltd., referred to as IAT, launched a proxy solicitation to, among other
things, appoint a majority of our board of directors that was the subject of
litigation. We entered into a settlement agreement with Mr. Kellogg and IAT in
February 2014. Please see Item 10:
Additional Information  C. Material Contracts. These few significant shareholders, either individually or acting
together, may be able to exercise significant influence over matters requiring
stockholder approval, including the election of directors and approval of
significant corporate transactions such as a merger or other sale of the company
or our assets. This concentration of ownership may make it more difficult for
other shareholders to effect substantial changes in the company, may have the
effect of delaying, preventing or expediting, as the case may be, a change in
control of the company, and may adversely affect the market price of our common
shares. Further, the interests of these few shareholders may not be in the best
interests of all shareholders.

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 theCanada Business Corporations Actin March 1980, under theBusiness CorporationsAct(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 its
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
expertise in the financing and risk management aspects of their
businesses.

Until the first quarter of 2010, we were
also active in the Industrial Business for the cement and mining industries.
During the course of 2010, we distributed our shares of the Industrial Business
to our shareholders and, following such distribution, we operated primarily in
the royalty and resources business.

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.

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Since completing the acquisition of Mass
in 2010, we have completed several additional acquisitions to further diversify
and expand the geographic reach of our global commodities supply chain business
and increase our revenues and volumes in order to achieve critical mass. In
December 2011, we acquired, together with our partner in the project, Alberici
Group, Inc., the Pea Ridge Iron Ore Mine project, located near Sullivan,
Missouri, U.S.A. In March 2012, we acquired a 75% equity interest in, and
certain debts of, Kasese Cobalt Company Limited, referred to as KCCL, whose
operations previously consisted of the recovery of cobalt metal from pyrite
tailings located near its refinery in Uganda and which also owns a
hydro-electric power station. In September 2012, we completed the take-over bid
of MFC Energy (formerly known as Compton Petroleum Corporation), which expanded
our commodities business to include the energy sector. In November 2012, we
acquired a controlling interest in each of MFC Resources Inc. (formerly known as
ACC Resources Co., L.P.), referred to as MFCR, 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.

***Recent
Developments***

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

Acquisition of
FESIL

On January 17, 2014, we announced that we
entered into an agreement to acquire a 100% interest in the FESIL AS Group,
referred to as FESIL. FESIL is a vertically integrated supply chain management
company and is also among the worlds leading producers of ferrosilicon through
its production plant located in Mo i Rana, Norway. FESILs operations include
sales offices in Germany, Luxembourg, Spain, the United States, India and China.
Through its production plant, FESIL produces a range of ferrosilicon products,
including granulated and refined qualities (high and semi-high purity), which
make up the bulk of its production. Annual capacity of the plants two furnaces
is approximately 80,000 MT of ferrosilicon and 23,000 MT of microsilica. The
facility is certified according to ISO 9001 and ISO 14001 and complies with
Norways strict environmental and operational requirements. The majority of
FESILs ferrosilica production is sold by its sales offices to customers, which
include established steelworks, aluminum and iron foundries and chemical groups.
Through its sales offices, FESIL also supplies customers with other ferroalloys,
metals, minerals and specialty products.

The acquisition does not include FESILs
interests in Mo Industripark AS. The purchase price of approximately 500 million
Norwegian Krone (approximately $82 million) is based on the net tangible equity
asset value of FESIL as of September 30, 2013 and is subject to adjustment to
reflect the fair value of certain assets and profit or loss until closing. In
addition to the purchase price, we will pay a two-year base royalty on tiered
ferrosilicon production at the Mo i Rana facility, which is expected to equal
approximately 2.9% of ferrosilicon revenue per annum at full production. The
transaction is currently scheduled to complete in the second quarter of 2014 and
is subject to customary conditions.

*Acquisition
Rationale* We determined to pursue the
acquisition of FESIL for the following key reasons, among others:

- the addition of FESILs operations are
  expected to significantly increase our revenues and commodities volumes, which we believe will help us achieve critical
  mass;
- the addition of FESILs ferrosilicon and
  microsilica production facility will further expand our captive sources of commodities and increase our customer
  base;
- the proposed acquisition will significantly
  add to our geographic reach through the addition of FESILs established global sales offices;
- FESIL has an established brand name, which is
  recognized by commodities customers for quality and logistical reliability; and
- the proposed transaction presents an
  opportunity for us to expand our existing commodities trading activity by leveraging FESILs existing established
  customer base.

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Acquisition of F.J.
Elsner

On March 11, 2014, we acquired an
indirect 100% interest in F.J. Elsner, referred to as Elsner, a global
commodities supply chain company with its head office in Vienna, Austria, and
offices in Austria, China, Dubai, Croatia, Albania, Serbia and the United
States. Elsner has longstanding relationships with various steel mills in
Eastern and Southern Europe and is focused on steel products, including slabs,
booms, billets, hot rolled steel plates, hot and cold rolled coils and sheets,
reinforcing bars, galvanized material, pipes, tubers and merchant
bars.

Pursuant to the transaction, we
indirectly acquired all of the outstanding share capital of Elsner for nominal
consideration, with additional contingent payments between the parties over a
10-year period based on recoveries from current inventories and accounts
receivable, existing legal actions and the utilization of certain tax loss
carry-forwards. In connection with the acquisition, the existing credit
facilities of Elsner were amended and we issued guarantees to secure payment
obligations under such credit lines and Elsners finance derivative transactions
with the same bank party to such credit lines. These credit facilities amount to
$90.2 million and amounts outstanding thereunder were approximately $70.0
million as of the date of the acquisition.

*Acquisition
Rationale* We determined to pursue and
complete the acquisition of Elsner for the following key reasons, among
others:

- the transaction offers an excellent
  opportunity for us to further diversify and increase the scope of our
  existing global commodity supply chain business
  and expand our customer relationships and procurement capabilities with minimal acquisition costs;
- Elsners product offering is complementary to
  our existing commodities portfolio, which presents an opportunity to increase sales by marketing Elsners
  products to our existing marketing base;
- the acquisition presents an opportunity to
  expand our existing structured solutions to Elsners existing customers and suppliers;
- Elsners existing management team and
  personnel complement and enhance our team, bringing specialized expertise in their existing products and markets;
  and
- there are significant synergies between our
  global commodities supply chain business and the existing business of Elsner.

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
operating segments: (i) commodities and resources, which includes our
commodities activities; (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.

Commodities and
Resources

Our commodity supply chain business is
globally focused and includes our integrated commodities operations and
interests. We conduct such operations primarily through our subsidiaries based
in Vienna, Austria, the United States, Latin America and Canada and we supply
various commodities, including minerals and metals, chemicals, plastics,
refractory and ceramic materials and wood products. 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.

Since entering the global supply chain
business in 2010, we have implemented a long-term growth strategy to achieve
critical mass by increasing our commodities volumes, revenues and geographic
reach and expanding and diversifying our product offerings. Over the last three
years, we completed several strategic acquisitions in furtherance of our
long-term strategy, including the acquisition of MFC Energy in September 2012,
which expanded our commodities portfolio into the production and processing of
natural gas and the acquisitions of MFCR and Possehl, which increased our global
exposure and presence in the North American and Latin American markets and
expanded our commodities platform to include refractory and ceramic materials
and other products. In 2014, we expect to significantly expand our revenues,
volumes, geographic reach and products through the previously announced
acquisition of Elsner and the proposed acquisition of FESIL.

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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.

We provide logistics, supply chain
management and other services to producers and consumers of commodities. These
activities provide cost effective and efficient transportation, as well as
providing payment terms for working capital requirements for our customers and
partners. They are supported by strategic direct and indirect investments in
natural resource assets operating in our core commodities.

Our commodities and resources
business employs personnel worldwide. Our main marketing office is located in
Vienna, Austria. We also maintain offices in Canada, the United States, Mexico,
Argentina and China and, as a result of the acquisition of Elsner, now have
offices in Dubai, Croatia, Albania and Serbia. 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 indirectly derive 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., which holds a
direct mining lease from the Province. The mine is operated by Cliffs Natural
Resources Inc., referred to as Cliffs. In 2013, 2012 and 2011, 2.8 million,
3.2 million and 3.5 million tons of iron products, respectively, were shipped
from Pointe Noire, Québec, Canada.

Iron ore shipments from the Wabush
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 prices of particular iron ore pellets. 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 the lessor and Cliffs applies a portion of the
royalty payments directly to the lessor.

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 and a determination for the
calculation of future royalty pricing. We have also provided the mine operator
with a notice of arbitration seeking recovery for royalty underpayments in 2010.
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.

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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 
| |      |  |                                                   |  |         |  |           |  |          |  | Total   |  | Gross       |     | Royalty 
| |      |  | Tonnage Shipped                                   |  | Tonnage |  | Royalties |  | Rate/Ton
| | Year |  | Q1                                                |  | Q2      |  | Q3        |  | Q4       |  | Shipped |  | Received(1) |     | Received
| |      |  | (In
      thousands, other than the Royalty Rate)
| | 2009 |  | 402                                               |  | 386     |  | 1,202     |  | 1,198    |  | 3,188   |  | C$ 17,350   |     |         
| | 2010 |  | 874                                               |  | 941     |  | 832       |  | 1,105    |  | 3,752   |  | 22,915      | (2) |         
| | 2011 |  | 719                                               |  | 796     |  | 1,311     |  | 646      |  | 3,472   |  | 31,607      |     |         
| | 2012 |  | 482                                               |  | 911     |  | 945       |  | 851      |  | 3,189   |  | 31,191      |     |         
| | 2013 |  | 393                                               |  | 465     |  | 1,177     |  | 805      |  | 2,840   |  | 26,555      |     |         

|Notes:
|------

|(1) |  | Subject to a 20% resource
      property revenue tax.  
|--- |  | -------------------------------------------------------
|    |  |                                                        
|(2) |  | Does not include the amount of
      arbitration award.

In 2013, Cliffs announced that it
idled the Pointe Noire pellet plant and transitioned to producing an iron ore
concentrate only product from the mine due to high production costs and lower
pellet premium pricing. Subsequent to the year ended December 31, 2013, Cliffs
announced that it would idle the Wabush mine by the end of the first quarter of
2014. While Cliffs has not announced a complete shutdown or closure of the mine,
at this time there can be no assurance that mining operations will be restarted
by Cliffs or a third party.

A minimum royalty payment of C$3.25
million per year continues to be payable while the mine is idled until the
expiry in 2055 of the mining sub-lease underlying the Companys royalty interest
in the mine, unless earlier terminated by the parties in accordance with its
terms.

We hold a 50% interest in the Pea
Ridge Iron Ore Mine, located near Sullivan, Missouri, U.S.A., approximately 70
miles southwest of St. Louis, Missouri, U.S.A. The mill was operated as an
underground mine between 1963 and 2001 and 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 until its closure in 2001. From 2001 until we acquired our interest
in the Pea Ridge Mine, operations had been limited to the reclamation of
resource settlement ponds located below the historical production facilities.
Historical data and records indicate that approximately 58.5 million short tons
of iron ore were removed from the mine between 1963 and 2001.

The Pea Ridge Mine 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 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 2013, together with our
partner, we are studying processing the tailings at, and re-opening, the Pea
Ridge Mine. In 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. The report was co-authored by Betty L. Gibbs, MMSA, and Derek
Rance, P. Eng, both of whom were qualified persons and independent of our
company, as such terms are defined in NI 43-101, as at August 13,
2012.

20

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In
addition to completion of the Pea Ridge Technical Report, as part of the work
necessary to evaluate the re-opening of the mine, we engaged consulting firms to
investigate the depth and shape of the top and bottom of the subsidence cave
zone which is present above the 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. We believe that
the results of this work will be useful in determining the best way to develop
the project. Additionally, in 2012 we commenced 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, is dewatering the existing
underground mine workings and completing additional analysis and investigations
in respect of the project. In the years ended December 31, 2013 and 2012, we
invested an additional $2.0 million and $5.0 million of capital, respectively,
to progress the project.

In the third quarter of 2012, our
commodities activities expanded to the energy sector. These activities include
the development, production and processing of natural gas, NGLs and, to a far
lesser degree, crude oil in 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. 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.

In October 2013, we exercised our
option under the term financing arrangements to acquire all the outstanding
units of the Mazeppa Processing Partnership, referred to as MPP, which owns
the Mazeppa Processing Facility in Alberta, Canada.

In November 2013, we entered into an
agreement, referred to as the Participation Agreement, with an established oil
and gas operator. Pursuant to the Participation Agreement, the third-party
operator has committed to spending a minimum of C$50.0 million to drill a total
of 12 net wells over an initial three-year term, with such drilling being
primarily focused on our undeveloped oil and gas properties located in the Niton
area of Alberta, Canada. Under the terms of the Agreement, the third-party
operator will pay 100% of the costs required to drill and complete each well. If
any of the initial 12 wells achieves continuous production, we may elect to: (i)
participate for up to a 30% interest in the well by reimbursing the operator 25%
of the costs of such well; or (ii) receive a 10% gross royalty on production.
Additionally, any gas produced from a large proportion of these wells will be
processed exclusively by our existing processing facility in the area. We
believe that the transactions contemplated by the Participation Agreement
provide us with the opportunity to further our undeveloped properties at minimal
investment risk and, at the same time, provide a potential source of revenue
expansion through royalty and processing arrangements. The operator commenced
its program under the Participation Agreement in January 2014 by spudding an
initial farm-out well, which is currently being completed. We currently expect
that an additional four wells will be drilled in 2014 pursuant to the
Participation Agreement.

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 or investing in the existing
indebtedness (secured and unsecured) of a business or in new equity or debt
issues. Our investing is

21

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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.

In addition, we utilize our
established relationships with international financial institutions, insurers
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 China-based subsidiaries and providing medical
services, equipment and supplies.

***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:

- Expanding our Global Commodity Supply Chain
  Business to Achieve Critical Mass.Since
  entering into the global commodity supply chain
  business in 2010, we have pursued a long-term strategy to achieve critical mass by increasing our commodities volumes,
  revenues and geographic reach. In furtherance of this strategy, from 2011 to 2013, we completed several strategic
  acquisitions, including the acquisitions of MFC
  Energy, MFCR and Possehl, and have increased our commodities and resource
  segment revenues by over 64% from $474.9
  million in 2011 to $778.5 million in 2013 and expanded our commodities
  platform, customer base and geographic reach.
  We expect that such revenues will significantly increase in 2014 as
  a result of the acquisition of Elsner, which completed
  earlier in 2014, and the acquisition of FESIL.
- 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.

22

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- 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 disciplined 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
  positions 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.
- 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
  expertise in 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 global commodities supply chain
business is relatively small compared to our competitors in the sector. Many of
our competitors have far greater financial resources, a broader range of
products and sources of supply, larger customer bases, greater name recognition
and marketing resources, a larger number of senior professionals

23

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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 of
our 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.

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 that only hold inter-company
assets and liabilities and do not have active businesses or whose results and
net assets do not materially impact our consolidated results and net
assets.

| |                                                                |  |                                |  | Beneficial 
| | -------------------------------------------------------------- |  | ------------------------------ |  | -----------
| |                                                                |  | Country of
      Incorporation |  | Interest(1)
| | 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                         |  | 100        
| | 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                          |  | 100        
| | Hangzhou Zhe-er Optical Co. Ltd.                               |  | China                          |  | 51         
| | MFC Corporate Services AG                                      |  | Switzerland                    |  | 100        
| | Compton Holding Austria GmbH                                   |  | Austria                        |  | 100        
| | Compton Petroleum Austria GmbH                                 |  | Austria                        |  | 100        
| | GPT
      Global Pellets Trading GmbH                          |  | Austria                        |  | 100        
| | MFC Energy Corporation                                         |  | Canada                         |  | 100        
| | MFC
      Energy (Montana), Inc.                               |  | U.S.                           |  | 100        
| | Mazeppa Processing Partnership                                 |  | Canada                         |  | 100        
| | MFC
      Resources Inc.                                       |  | U.S.                           |  | 100        
| | ACC Resources S.R.L.                                           |  | Argentina                      |  | 100        
| | Possehl Mexico S.A. de C.V.                                    |  | Mexico                         |  | 60         

|Notes:
|------

|(1) |  | Percentages rounded to nearest
      whole number.                                                                 
|--- |  | -------------------------------------------------------------------------------------------------------------------
|(2) |  | We derive 100% beneficial benefit from the subsidiary from our holding of a shareholder loan and 75% share capital.

24

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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; Beijing and Shanghai, China; New
Jersey and Miami, U.S.A.; Mexico City, Mexico; Buenos Aires, Argentina; Calgary,
Canada; Dubai, United Arab Emirates; Zagreb, Croatia; Tirana, Albania; and
Belgrade, Serbia.

We believe that our existing
facilities are adequate for our needs through the end of the year ending
December 31, 2014. 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.

Natural Gas
Interests

We are active in the energy sector
through the development, production and processing of natural gas and NGLs 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, 2013, we had an interest in 1,436
producing natural gas wells, 3 non-producing natural gas wells,
112producing oil wells, 3 non-producing oil wells and a land position that
includes 268,875net 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 72% working
interest in 86,000 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 411,400 gross acres of land at an
average 87% 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 We own the Mazeppa gas processing plant and the Mazeppa
  gas gathering system through our ownership of
  MPP. The MPP 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.

25

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- 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 MFC Energy 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 a 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.

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,
2013.

| |                                  |  | Reserves as of December
      31, 2013
| | -------------------------------- |  | --------------------------------------
| | Category                         |  | Natural Gas                           
| |                                  |  | **Company**                           
| |                                  |  | Gross                                 
| |                                  |  | (mmcf)                                
| | Proved                           |  |                                       
| | Developed
      Producing        |  | 137,841                               
| | Developed
      Non-Producing    |  | 1,020                                 
| | Undeveloped                      |  | 16,242                                
| | Total
Proved                     |  | 155,104                               
| | Probable                         |  | 66,850                                
| | Total Proved plus
      Probable |  | 221,954                               

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, 2013. 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

26

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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.

As at December 31, 2013, our
reserves estimates included 3,415 mboe (2,891 mboe on a net basis) of reserves
classified as proved undeveloped, compared to 3,298 mboe (2,788 mboe on a net
basis) as of December 31, 2012.

Production, Prices and
Costs

For the year ended December 31,
2013, we produced 17,522 mmcf of natural gas, 411.6 mboe of natural gas liquids
(including sulphur) and 118.7 mbbl of crude oil, for total production of natural
gas, natural gas liquids and crude oil of 3,450 mboe. The following table sets
forth our average daily production by field for the year ended December 31, 2013
and the period from September 7, 2012, the date we commenced consolidating MFC
Energy, to December 31, 2012:

| |                          |  | Year Ended December 31,
    2013 |         | September 7, 2012 to December 31,
      2012
| | ------------------------ |  | -------------------------------- | ------- | --------------------------------------------
| |                          |  | Natural                          |         |                                             
| |                          |  | Gas                              |         | NGLs                                        
| | Area                     |  |                                  | (mcf/d) |                                             
| | High River               |  | 12,812                           |         | 263                                         
| | Okotoks                  |  | 4,664                            |         | 185                                         
| | Callum/Cowley            |  | 3,358                            |         | 32                                          
| | Niton                    |  | 11,712                           |         | 492                                         
| | Other (Southern Alberta) |  | 15,460                           |         | 156                                         
| | Total                    |  | 48,006                           |         | 1,128                                       

|Note:
|-----

|(1) |  | Includes
  sulphur.
|--- |  | -------------------

The following table sets our average
sales prices, operating costs, royalty amounts and transportation costs for each
of the year ended December 31, 2013 and the period from September 7, 2012 to
December 31, 2012:

| |                            |  | Year Ended December 31,
    2013 |          | September 7, 2012 to December 31,
      2012
| | -------------------------- |  | -------------------------------- | -------- | --------------------------------------------
| |                            |  | Natural                          |          |                                             
| |                            |  | Gas                              |          | NGLs                                        
| | Area                       |  |                                  | (C$/mcf) |                                             
| | Price(2)                   |  | C$3.46                           |          | C$75.63                                     
| | Royalties                  |  | 0.62                             |          | 24.53                                       
| | Operating costs(3)         |  | N/A                              |          | N/A                                         
| | Transportation
      costs |  | 0.14                             |          | 4.92                                        

|Notes:
|------

|(1) |  | Includes sulphur.                                                                                                                                                                                        
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |  |                                                                                                                                                                                                          
|(2) |  | Includes third party processing
      fees.                                                                                                                                                              
|    |  |                                                                                                                                                                                                          
|(3) |  | A portion of our natural gas
      production is associated with crude oil production. As a result, per unit
      operating costs for each product reflect the allocation of certain common
      costs.

Our operating costs per boe
increased in 2013 primarily as a result of decreased production due to
evaluation and repair activities.

27

---



Present Activities and Productive
Wells

We did
not drill any wells during the period from September 7, 2012 to December 31,
2012 or during the year ended December 31, 2013. In November 2013, we entered
into the Participation Agreement with an established oil and gas operator,
pursuant to which it has committed to spending a minimum of C$50 million to
drill a total of 12 net wells over an initial three-year term, with such
drilling being primarily focused on our undeveloped oil and gas properties
located in Alberta, Canada. Please see Item
4. Information on the Company  B. Business Overview.

The following table summarizes the
location of our interests as at December 31, 2013 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**
| | Niton                          |  | 137       |                   |               | 106                      |           |                     |               |                           |       |             |        
| | High River                     |  | 151       |                   |               | 126                      |           |                     |               | 1                          |       |             |        
| | Okotoks                        |  | 25        |                   |               | 24                       |           |                     |               |                           |       |             |        
| | Callum/Cowley                  |  | 25        |                   |               | 24                       |           |                     |               |                           |       |             |        
| | Other
      (Southern Alberta) |  | 1,098     |                   |               | 800                      |           |                     |               | 2                          |       |             |        
| | Total
    wells                |  | 1,436     | (2)               |               | 1,080                    | (2)       |                     |               | 3                          |       |             |        

|Notes:
|------

|(1) |  | A portion of the non-producing
      wells are wells considered capable of production but which, for a variety
      of reasons including but not limited to a lack of markets and lack of
      development, cannot be placed on production at the present
  time.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |  |                                                                                                                                                                                                                                                                    
|(2) |  | The number of wells previously
      disclosed as at December 31, 2012 did not include certain uneconomic wells
      that were not previously subject to evaluation.                                                                                              

The following table sets forth the
acreage of our gross and net developed and undeveloped gas and oil properties as
at December 31, 2013.

| | Area                |  | Gross Acres |  | Net Acres
| | ------------------- |  | ----------- |  | ---------
| | Alberta, Canada     |  |             |  |          
| | Developed           |  | 483,592     |  |          
| | Undeveloped         |  | 234,645     |  |          
| | Montana,
    U.S.A. |  |             |  |          
| | Undeveloped         |  | 79,157      |  |          
| | Total               |  |             |  |          
| | **Developed**       |  | 483,592     |  |          
| | **Undeveloped**     |  | 313,802     |  |          

Delivery Commitments

Our
natural gas production is sold to creditworthy counterparties under contracts at
AECO Daily Index prices and is transported through regulated pipelines in the
Province of Alberta at tariffs that require either Provincial or Federal
regulatory approval.

NGLs are re-priced on an annual
basis reflecting purchaser monthly pool prices or are based on U.S. market hub
locations with a basis differential. Our crude oil sales are priced at market
using the Edmonton market hub as a benchmark and are typically made through
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. Sulphur production attracts market prices based on a
combination of domestic sales, off-shore at Vancouver, British Columbia and to Tampa, Florida. Sales are
with customers in the oil and gas industry and are subject to normal industry
credit risks.

Environmental

Our gas and oil operations are
subject to various Canadian governmental regulations including those imposed by
the Alberta Energy Resources Conversation Board and Alberta Utilities
Commission. Matters subject to regulation include discharge permits for drilling
operations, drilling and abandonment bonds, reports concerning operations, the
spacing of wells, and pooling of properties and taxation. The production,
handling, storage, transportation and disposal of oil and gas, by-products
thereof, and other substances and materials produced or used in connection with
oil and gas operations are also subject to regulation under federal, provincial
and local

28

---



laws and regulations relating primarily
to the protection of human health and the environment. We believe that our
operations comply in all material respects with applicable laws and regulations
and that the existence and enforcement of such laws and regulations have no more
restrictive an effect on our operations than on other similar companies in the
energy industry.

We are subject to decommissioning obligations in connection with our
ownership interests in hydrocarbon assets, including well sites, gathering
systems and processing facilities. The total decommissioning obligation is
estimated based on our net ownership interest in all wells and facilities,
estimated costs to reclaim and abandon these wells and facilities, and the
estimated timing of the costs to be incurred in future years. We have estimated
the net present value of decommissioning obligations to be $117.4 million as at
December 31, 2013.

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 fiscal years ended December 31, 2013, 2012 and
2011 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. As a result of adjustments and an error correction made
in the third quarter of 2013 during the measurement period for the acquisition
of MFC Energy, bargain purchase and certain expense accounts have been revised
for the year ended December 31, 2012. Please see Notes 3 and 41 to our audited
consolidated financial statements for the year ended December 31, 2013 for
further information.*

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,
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.

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, 2013, 2012 and 2011
is set forth below:

| |                                |  | December 31,                               |                           | December 31, |  | December 31,
| | ------------------------------ |  | ------------------------------------------ | ------------------------- | ------------ |  | ------------
| |                                |  | 2013                                       |                           | 2012(1)      |  | 2011        
| |                                |  | (United States dollars in
      thousands,
| |                                |  |                                            | except per share amounts) |             
| | Net book value                 |  |                                            | $                         | 699,570      |  |             
| | Net
      book value per share |  |                                            |                           | 11.18        |  |             

Note:


|(1) |  | In 2012, we
      consolidated MFC Energy. Includes measurement period adjustments and error
      correction related to the acquisition of MFC
Energy.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------

29

---



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.

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 2013. There can be no assurance as
to the stabilization and recovery of economic conditions in the near term. For
example, the steel sector has seen a drop in producer stocks, which has
negatively impacted prices and supply chain volumes.

Natural gas prices increased in 2013 with AECO prices averaging
approximately 33% higher than 2012 levels. Colder than normal weather in North
America in the fourth quarter of 2013 caused increased natural gas demand, which
reduced natural gas inventory build-up and subsequently led to increased gas
prices. From time to time, we may enter into hedging transactions to manage
pricing risks for our commodities. In December 2013, to hedge to the volatility
and the organically long nature of our natural gas subsidiary, we entered into a
short position of long-term NYMEX natural gas swaps with a notional value of
approximately $50 million. In January and February, as natural gas prices
continued to rise, we increased our position using shorter-duration swaps. We
continue to hold these hedging derivatives, and as of March 28, 2014 we were
short approximately $87.5 million of NYMEX natural gas swaps with maturities
ranging from August 2014 to March 2015 at an average weighted price of
$4.39.

Results of Operations

The following table sets forth certain selected operating results and
other financial information for each of the years ended December 31, 2013, 2012
and 2011:

| |                                                   |  | December
  31,                            
| | ------------------------------------------------- |  | ------------------------------------------
| |                                                   |  | 2013                                      
| |                                                   |  | (United States dollars in
      thousands,
| |                                                   |  | except per share amounts)                 
| | Net sales                                         |  | $                                         
| | Gross revenues                                    |  |                                           
| | Costs and expenses                                |  |                                           
| | Costs of sales                                    |  |                                           
| | Impairment of available-for-sale
      securities |  |                                           
| | Impairment of interest in resource properties     |  |                                           
| | Selling, general and administrative
      expense |  |                                           
| | Share-based compensation expense                  |  |                                           
| | Bargain purchase                                  |  |                                           
| | Finance costs                                     |  |                                           
| | Income (loss) from operations                     |  |                                           
| | Net
      income(2)                               |  |                                           
| | Earnings per share:                               |  |                                           
| | Basic                                             |  |                                           
| | Diluted                                           |  |                                           

Notes:


|(1) |  | We consolidated the operations of
      MFC Energy from September 7, 2012. Includes measurement period adjustments
      and error correction related to the acquisition of MFC
Energy.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |  |                                                                                                                                                                                        
|(2) |  | Net income attributable to our
      shareholders.                                                                                                                                     

30

---



The following table provides a
breakdown of our total revenues for each of the years ended December 31, 2013,
2012 and 2011:

|                                |  | December
  31,                            
|------------------------------- |  | ------------------------------------------
|                                |  | 2013                                      
|                                |  | (United
      States dollars in thousands,
|                                |  | except
      per share amounts)           
|Commodities and
      resources |  | $                                         
|Fees                            |  |                                           
|Gains on
      securities       |  |                                           
|Interest                        |  |                                           
|Dividend                        |  |                                           
|Equity income                   |  |                                           
|Other                           |  |                                           
|Total revenues                  |  | $                                         

Note:(1)       We consolidated the operations of
MFC Energy from September 7, 2012.

***Year Ended December 31, 2013
Compared to the Year Ended December 31, 2012***

The following is a breakdown of our gross revenues by segment for each of
the years ended December 31, 2013 and 2012:

| |                                 |  | December
      31,                  
| | ------------------------------- |  | ------------------------------------
| |                                 |  | 2013                                
| |                                 |  | (United States dollars in thousands)
| | Gross Revenues:                 |  |                                     
| | Commodities and
      resources |  |                                     
| | Merchant banking                |  |                                     
| | All
      other                 |  |                                     
| |                                 |  |                                     

The following charts illustrate our
revenues by business segment and geographic distribution in the fiscal year
ended December 31, 2013:

Revenues by
      Business Segment
    
    Revenues by
      Region


Based upon the yearly average exchange rates for 2013, the United States
dollar decreased by approximately 3.2% and increased by approximately 3.0% in
value against the Euro and the Canadian dollar, respectively, compared to the
average exchange rates in 2012. As at December 31, 2013, the United States
dollar had decreased by approximately 4.3% against the Euro and increased by
approximately 6.9% against the Canadian dollar since December 31,
2012.

Revenues for 2013 increased to $813.9 million (consisting of net sales of
$806.8 million and equity income from medical joint ventures of $7.1 million)
from $485.7 million (consisting of net sales of $479.5 million and equity income
from medical joint ventures of $6.2 million) in 2012, primarily as a result of
increased commodities sales resulting from the acquisition of MFC Energy, MFCR
and Possehl in the current period and increased transactions in wood pellets in
Europe through longer term off-take agreements. As the Euro was relatively
stable during 2013, currency fluctuations had no material impact on our revenues
when Euro-denominated revenues were translated into U.S. dollars.

31

---



Revenues for our commodities and resources business were $778.5 million
for 2013, compared to $455.9 million in 2012, primarily as a result of increased
commodities sales due to increases in both values and prices on some commodities
and the consolidation of MFC Energy, MFCR and Possehl.

During 2013, gross revenues generated by our royalty marginally decreased
to approximately $25.7 million from approximately $29.1 million in 2012. This
decrease in gross royalty revenues was mainly attributable to a lower tonnage of
shipments in 2013. A total of 2.8 million tons and 3.2 million tons of iron ore
products were shipped in 2013 and 2012, respectively.

Subsequent to the year ended December 31, 2013, the operator of the
Wabush mine announced that it planned to idle production of the mine by the end
of the first quarter of 2014 as a result of increased costs and the lower iron
or pricing environment. Our management reviewed related information and performed a sensitivity analysis on the expected future cash flows from our royalty
interest. The primary factor which impacts the recoverable amount is the duration of the idle period of the mine. Using a base case,
which assumes the mine will recommence production by 2016 and the remaining reserves will be processed over the remaining mine
life, we concluded that an impairment charge was not required as at December 31, 2013. We continue to monitor the situation as it develops. In the
event that the mine is idled for a prolonged period or if other circumstances
change, we may re-assess the value of this asset in the future.

Our commodities operations were adversely affected by historically severe
flooding in the Southern Alberta, Canada, region in and around the city of
Calgary during the third quarter of 2013. Such flooding caused us to lose 73
days of gas production and incur approximately C$1.9 million in capital
expenditures for repairs. These operations returned to normal levels on
September 26, 2013.

Revenues for our merchant banking business were $12.6 million for 2013,
compared to $11.8 million in 2012, primarily as a result of lower
activities.

Revenues for our other segment were $22.9 million for 2013, compared to
$18.0 million in 2012.

Costs of sales increased to $710.4 million for 2013 from $406.7 million
for 2012, primarily as a result of an increase in commodities and resource
activities, including as a result of the consolidation of MFC Energy, MFCR and
Possehl. In the prior period, we had a write-down of inventories of $15.7
million, of which $19.4 million related to our former 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, 2013 and 2012:

| |                                                         |  | December 31,                        
| | ------------------------------------------------------- |  | ------------------------------------
| |                                                         |  | 2013                                
| |                                                         |  | (United States dollars in thousands)
| | Commodities and resources                               |  |                                     
| | Credit losses
      (recovery) on loans and receivables |  |                                     
| | Fair
      value gain on investment property            |  |                                     
| | Market value
      (increase) decrease on commodities   |  |                                     
| | (Gain) loss on derivative contracts, net                |  |                                     
| | Write-off of
      inventories                          |  |                                     
| | Other                                                   |  |                                     
| | Total cost of sales                                     |  |                                     

Selling, general and administrative expenses, excluding share-based
compensation, increased to $63.1 million for 2013 from $47.7 million for 2012.
The increase is primarily as a result of the consolidation of MFC Energy, MFCR
and Possehl.

We recognized an impairment of interest in resource properties of $6.1
million (before an income tax recovery of $1.6 million) for 2013 in connection
with our hydrocarbon reserves as a result of a decline in the long-term pricing
outlook and future production volumes. In 2012, we recognized an impairment of
$42.6 million (before income tax recovery of $13.8 million) in connection with a
subsidiary that had engaged in iron ore activities in India (which was sold in
2013), as a result of the Supreme Court of Indias ban on all mining activities
in the State of Goa, India. The total impairment and write-down, net of income
tax recovery, was $48.2 million for 2012 in relation to such
interests.

Impairment of available-for-sale securities was $0.5 million for 2013,
compared to $4.3 million in 2012. This represented an other-than-temporary
impairment charge on our investment portfolio.

32

---



During 2013, we incurred finance costs of $15.2 million, primarily
related to our commodities business, compared to $11.6 million for 2012. Such
finance costs increased as a result of increased borrowings relating to the
acquisitions of MFC Energy, MFCR and Possehl.

For 2013, we incurred a net foreign currency transaction loss of $1.8
million, compared to a gain of $7.1 million for 2012, in the statement of
operations.

We recognized a bargain purchase of $218.7 million, or $3.50 per share,
during 2012, primarily in connection with the acquisition of MFC Energy. This
also included a bargain purchase gain of $2.4 million in connection with the
acquisition of KCCL. Please refer to Note 41 of our audited consolidated
financial statements for the year ended December 31, 2013 for further
information on the revised bargain purchase terms, which were recognized in
2012. 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 expense (other than resource property revenue
taxes) of $1.6 million in 2013, compared to an income tax recovery of $8.5
million in 2012. Our statutory tax rate was 25.75% in 2013, compared to 25% in
2012, and our effective tax rates are lower than our statutory tax rates in the
current period. The income tax paid in cash (excluding resource property revenue
taxes) during 2013 was $2.2 million compared to $4.9 million for
2012.

We also recognized resource property revenue taxes of $5.0 million in
2013 compared to $5.9 million in 2012. The resource property revenues tax rate
was 20% on our gross royalty revenue, deducted at source, which is reduced by
20% of deductible expenses. The decrease in taxes was primarily a result of a
decrease in gross royalty revenues in the current period.

Overall, we recognized an income tax expense of $6.6 million (provision
for income taxes of $1.6 million and resource property revenue taxes of $5.0
million) for 2013, compared to 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) in 2012.

For 2013, our income attributable to shareholders was $9.7
million, or $0.15 per share on a basic and diluted basis, compared to $200.1
million, or $3.20 per share on a basic and diluted basis, for 2012.

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

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                                      
| |                           |  | (United States dollars in
      thousands)
| | Gross Revenues:           |  |                                           
| | Commodities and resources |  |                                           
| | Merchant banking          |  |                                           
| | All
      other           |  |                                           
| |                           |  |                                           

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 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.

33

---



Revenues for 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 $513.9 million (consisting of net sales of $508.0 million and equity income
from medical joint ventures of $5.9 million) in 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 MFC Energy 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.

Revenues for our commodities and resources business were $455.9 million
for 2012, compared to $474.9 million for 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 MFC Energy since September 7, 2012.

During 2012, gross revenues generated by our royalty marginally decreased
to approximately $29.1 million from approximately $30.8 million 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 in 2012 and 2011, respectively.

Revenues for our merchant banking business were $11.8 million for 2012,
compared to $22.5 million for 2011, primarily as a result of lower
activities.

Revenues for our other segment were $18.0 million for 2012, compared to
$16.5 million for 2011.

Costs of sales decreased to $406.7 million during 2012 from $428.6
million for 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 ($19.4 million of which 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                                      
| |                                                     |  | (United States dollars in
      thousands)
| | Commodities and resources                           |  |                                           
| | Loss
      on securities, net                       |  |                                           
| | Credit recovery on loans and
      receivables      |  |                                           
| | Fair
      value (gain) loss on investment property |  |                                           
| | Market value decrease on
    commodities            |  |                                           
| | Loss
      (gain) on derivative contracts, net      |  |                                           
| | Write-off (recovery) of
inventories                 |  |                                           
| | Other                                               |  |                                           
| | Total
      cost of sales                           |  |                                           

Selling, general and administrative expenses, excluding share-based
compensation, increased to $47.7 million for 2012 from $40.4 million for 2011.
The increase was primarily linked to expenses incurred in connection with the
acquisition of MFC Energy 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 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 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. This represented an other-than-temporary
impairment charge on our investment portfolio.

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

During 2012, we incurred finance costs of $11.6 million, primarily
related to our commodities business, compared to $7.2 million for 2011. Such
finance costs increased as a result of increased interest payments on our long
term debt and credit facilities.

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

34

---



We recognized a bargain purchase of $218.7 million, or $3.50 per share,
during 2012, primarily in connection with the acquisition of MFC Energy. This
also included a bargain purchase gain of $2.4 million in connection with the
acquisition of KCCL. Please refer to Note 41 of our audited consolidated
financial statements for the year ended December 31, 2013 for further
information on the revised bargain purchase terms, which were recognized in
2012. 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 2012, compared to a provision for income
taxes of $1.3 million during 2011. Our statutory tax rate was 25% during 2012,
compared to 26.5% for 2011, and our effective tax rates were lower than our
statutory tax rates during 2011. The income tax paid in cash during 2012 was
$4.9 million, compared to $1.0 million for 2011.

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

For 2012, our income attributable to shareholders was $200.1 million, or
$3.20 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 2011.

Liquidity and Capital
Resources

***General***

Liquidity is of importance to companies in our businesses as 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 that
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 the end of the years indicated:

| |                                        |  | 2013                                       |                    | 2012(1) |  | 2011
| | -------------------------------------- |  | ------------------------------------------ | ------------------ | ------- |  | ----
| |                                        |  | (United
      States dollars in thousands)
| | Total long-term
      debt             |  | $                                          | 234,740            |         |  | $   
| | Less: cash and cash
    equivalents    |  |                                            | (332,173           | )       |  |     
| | Net long-term debt
      (net cash and |  |                                            |                    |         |  |     
| | cash
      equivalents)                |  |                                            | (97,433            | )       |  |     
| | Shareholders equity                   |  |                                            | 699,570            |         |  |     
| | Debt-to-adjusted
      capital ratio   |  |                                            | Not
    applicable |         |  |     

Note:


|(1) |  | This table does not include the
      MPP term financing as it involved a purchase option and future processing
      fees. The purchase option thereunder was exercised in October 2013.
      Includes measurement period adjustments and error correction related to
      the acquisition of MFC Energy.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

35

---



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, 2013, 2012 and 2011. The debt-to-adjusted capital ratio in 2013,
2012 and 2011 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 the end of the years indicated:

| |                                            |  | 2013                                       |         | 2012(1) |   | 2010   
| | ------------------------------------------ |  | ------------------------------------------ | ------- | ------- | - | -------
| |                                            |  | (United
      States dollars in thousands)
| | Long-term debt, less
      current portion |  | $                                          | 189,871 |         | $ | 118,824
| | Shareholders equity                       |  |                                            | 699,570 |         |   | 730,587
| | Long-term
      debt-to-equity ratio       |  |                                            | 0.27    |         |   | 0.16   

Note:


|(1) |  | This table does not include the
      MPP term financing as it involved a purchase option and future processing
      fees. The purchase option thereunder was exercised in October 2013.
      Includes measurement period adjustments and error correction related to
      the acquisition of MFC Energy.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

During 2013, our strategy, which was unchanged from 2012 and 2011, 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 equivalents balance after the
deduction of total long-term debt. Our long-term debt-to-equity ratio was 0.27,
0.16 and 0.04 as at December 31, 2013, 2012 and 2011, respectively.

***Financial
Position***

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

| |                                               |  | December
  31,                            
| | --------------------------------------------- |  | ------------------------------------------
| |                                               |  | 2013                                      
| |                                               |  | (United
      States dollars in thousands)
| | Cash and cash
      equivalents               |  | $                                         
| | Short-term cash deposits                      |  |                                           
| | Short-term
      securities                   |  |                                           
| | Trade receivables                             |  |                                           
| | Other
      receivables                       |  |                                           
| | Inventories                                   |  |                                           
| | Assets held for
      sale                    |  |                                           
| | Real estate held for sale                     |  |                                           
| | Deposits, pre-paid
      and other assets     |  |                                           
| | Total assets                                  |  |                                           
| | Working
    capital                           |  |                                           
| | Short-term bank borrowings                    |  |                                           
| | Long-term debt, less
      current portion(2) |  |                                           
| | Decommissioning obligations                   |  |                                           
| | Shareholders
      equity                    |  |                                           

Notes:


|(1) |  | Includes measurement period
      adjustments and error correction related to the acquisition of MFC
      Energy.                                                                             
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |  |                                                                                                                                                                                                
|(2) |  | This amount does not include the
      MPP term financing, as it involved a purchase option and future processing
      fees. The purchase option thereunder was exercised in October
    2013.

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, 2013, cash and
cash equivalents were $332.2 million, compared to $273.8 million and $387.1
million as at December 31, 2012 and 2011, respectively. The increase in cash was
primarily a result of cash flows from operating activities and increased
borrowings. We had assets held for sale of $97.3 million, representing certain
non-core natural gas assets and investment property as at December 31, 2013,
compared

36

---



to $124.2 million held by MFC Energy
and another entity (which was disposed of in February 2013) and $nil as at
December 31, 2012 and 2011, respectively. The decrease in assets held for sale
was primarily the result of the reclassification of natural gas properties to
unproved lands as a result of the Participation Agreement entered into in the
fourth quarter of 2013, the reclassification of property, plant and equipment
and a disposition of other assets in February 2013. As at December 31, 2013,
short-term securities decreased to $2.1 million from $6.7 million and $13.1
million as at December 31, 2012 and 2011, respectively. The decrease in
short-term securities in 2012 was a result of dispositions. Trade receivables
and other receivables were $115.7 million and $30.4 million, respectively as at
December 31, 2013, compared to $72.8 million and $18.3 million, respectively as
at December 31, 2012 and $21.2 million and $9.1 million respectively at December
31, 2011. The increase in trade receivables was primarily a result of an
increase in trading activities. The value of our inventories decreased to $88.8
million as at December 31, 2013, from $142.9 million and $81.2 million as at
December 31, 2012 and 2011, respectively. The decrease in inventories was
primarily due to the unwinding of sales and repurchase arrangements. The value
of real estate held for sale was $12.7 million as at December 31, 2013, compared
to $12.2 million and $12.0 million as at December 31, 2012 and 2011,
respectively. The value of deposits, prepaid and other assets was $27.1 million
as at December 31, 2013, compared to $27.8 million and $9.3 million as at
December 31, 2012 and 2011, respectively. As at December 31, 2013, we had
short-term cash deposits of $4.4 million, compared to $0.2 million and $0.2
million as at December 31, 2012 and 2011, respectively. The increase in
short-term cash deposits in 2013 was primarily a result of excess cash being
invested for higher interest income.

We have liabilities relating to assets held for sale of $11.5 million
primarily relating to decommissioning obligations associated with such
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, 2013, we had credit facilities aggregating $511.6
million comprised of: (i) unsecured revolving credit facilities aggregating
$220.5 million from banks; (ii) revolving credit facilities aggregating $68.9
million from banks for structured solutions, a special trade financing. The
margin is negotiable when the facility is used; (iii) a non-recourse specially
structured factoring arrangement with a bank for up to a credit limit of $130.9
million for our commodities activities. We may factor our commodity receivable
accounts upon invoicing at the inter-bank rate plus a margin; (iv) a foreign
exchange credit facility of $53.3 million with a bank; and (v) secured revolving
credit facilities aggregating $38.0 million. All of these facilities are
renewable on a yearly basis.

***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, 2013, the maturities of long-term debt were as follows:

| | Maturity   |  |                                            | Principal |  | Interest |        | Total
| | ---------- |  | ------------------------------------------ | --------- |  | -------- | ------ | -----
| |            |  | (United
      States dollars in thousands)
| | 2014       |  | $                                          | 44,869    |  | $        | 6,687  |      
| | 2015       |  |                                            | 33,074    |  |          | 5,360  |      
| | 2016       |  |                                            | 71,762    |  |          | 4,308  |      
| | 2017       |  |                                            | 30,074    |  |          | 2,547  |      
| | 2018       |  |                                            | 26,637    |  |          | 1,691  |      
| | Thereafter |  |                                            | 28,324    |  |          | 1,332  |      
| |            |  | $                                          | 234,740   |  | $        | 21,925 |      

During the year ended December 31, 2013, we paid off $36.7 million of
debt. We also incurred additional borrowings of $98.8 million in connection with
the development of our commodities business.

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.

37

---



Please refer to Note 21 to our audited consolidated financial statements
for the year ended December 31, 2013 for further information regarding interest
rates, maturities and other payment terms for our bank debts.

In October 2013, we exercised our option to acquire a 100% interest in
MPP for consideration of C$6.7 million. As a result, no amounts were outstanding
under the MPP term financing as at December 31, 2013.

***Cash Flows***

Due to the number of the 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 flow statements, our management believes it is more useful and meaningful
to analyze our cash flows by 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 currently have a sufficient
level of cash on hand and credit facility amounts and we believe that we have
sufficient cash flows from operations, cash on hand and credit availability to
meet our working capital and other requirements as well as unexpected cash
demands.

***Cash Flows from Operating
Activities***

Operating activities provided cash of $10.1 million in 2013, compared to
using cash of $144.4 million in 2012 and providing cash of $44.7 million in
2011. In 2013, a decrease in short-term bank borrowings for day-to-day business
requirements used cash of $26.4 million, compared to $115.5 million in 2012 and
an increase in same providing cash of $49.8 million 2011. A decrease in
inventories provided cash of $32.5 million in 2013, compared to an increase in
inventories using cash of $36.5 million and $22.8 million in 2012 and 2011,
respectively. An increase in receivables used cash of $29.1 million in 2013,
compared to $12.9 million and $8.3 million in 2012 and 2011, respectively. A
decrease in accounts payable and accrued expenses used cash of $2.7 million in
2013, compared to $9.1 million in 2012 and $1.4 million in 2011. Changes in
short-term securities provided cash of $10.2 million during 2013, compared to
$7.2 million and $5.3 million in 2012 and 2011, respectively. An increase in
short-term cash deposits used cash of $4.2 million during 2013, compared to
$16,000 and $4.1 million during 2012 and 2011, respectively. A decrease in
decommissioning obligations used cash of $4.1 million in the year ended December
31, 2013, compared to an increase of the same providing cash of $44,000 and $nil
in 2012 and 2011, respectively. A decrease in deposits, prepaid and other
provided cash of $1.2 million in 2013, compared to an increase using cash of
$8.9 million in 2012 and a decrease providing cash of $10.8 million in 2011. A
decrease in income tax liabilities used cash of $1.0 million in 2013, compared
to $2.3 million in 2012 and an increase in income tax liabilities providing cash
of $0.8 million in 2011. An increase in assets held for sale in connection with
natural gas properties used cash of $1.0 million in the year ended December 31,
2013, compared to $3.1 million and $nil in each of 2012 and 2011. Other items
provided cash of $2.4 million in 2013, compared to providing cash of $1.1
million in 2012 and using cash of $0.4 million in 2011.

***Cash Flows from Investing
Activities***

Investing activities used cash of $0.8 million in 2013, compared to $55.7
million in 2012 and $36.5 million in 2011, respectively. Proceeds from sales of
long-term investments provided cash of $7.0 million in 2013, compared to $2.6
million in 2012 and $7.4 million in 2011, respectively. Net distributions from
joint ventures provided net cash of $7.2 million in 2013, compared to $7.6
million and $5.1 million in 2012 and 2011, respectively. Purchases of
hydrocarbon assets, net of sales used cash of $4.6 million in 2013, compared to
$nil in each of 2012 and 2011. Purchases of long-term securities used cash of
$2.0 million in 2013, compared to $5.1 million in 2012 and $37.5 million in
2011, respectively. Purchases of property, plant and equipment, net of sales,
used cash of $2.0 million in 2013, compared to $2.1 million and $1.2 million in
2012 and 2011, respectively. The acquisitions of subsidiaries net of cash
acquired used cash of $6.6 million in 2013, compared to $78.5 million in 2012
and $95,000 in 2011. Other items provided cash of $74,000 in 2013, compared to
using cash of $48,000 in 2012 and providing cash of $3.8 million (primarily
consisting of sales of investment property) in 2011.

38

---



***Cash Flows from Financing
Activities***

Net cash provided by financing
activities was $46.6 million in 2013, compared to providing $83.4 million in
2012 and using cash of $17.4 million in 2011. A net increase in debt provided
cash of $62.1 million in 2013, compared to $105.2 million in 2012 and a decrease
in debt using cash of $4.3 million in 2011. In 2013, dividends paid to our
shareholders used cash of $15.0 million, compared to $13.8 million and $12.5
million in 2012 and 2011, respectively. Dividends paid to non-controlling
interests used cash of $0.8 million in 2013, compared to $0.7 million and $0.6
million in 2012 and 2011, respectively. A reduction in facility term financing
used cash of $21.9 million and $7.4 million in 2013 and 2012, respectively.
There was an increase in an amount due to a customer, which provided cash of
$22.2 million, in 2013. This amount was repaid to the customer in January 2014.

***Future
Liquidity***

We expect that there will be
acquisitions of businesses or commitments to projects in the future, including
the proposed acquisition of FESIL. 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 is 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 these currencies prevailing during that period.

In the year ended December 31, 2013,
we reported a net $31.4 million currency translation adjustment loss under other
comprehensive income within equity. This compared to losses of $7.9 and $1.4
million in 2012 and 2011, respectively. The increase in 2013 was primarily a
result of a weaker Canadian dollar against the United States dollar.

***Contractual
Obligations***

The following table sets out our
contractual obligations and commitments as at December 31, 2013 in connection
with our long-term liabilities.

Payments Due by Period(1)(United States dollars in
      thousands)Contractual
      Obligations(2)(3)
    
    
    Less
      than1
    Year
    
    1  3
      Years
    
    3  5
      Years
    
    More
      than5
      Years
    
    TotalLong-term debt obligations
    
    
    $
    51,556
    
    
    
    $
    114,504
    
    
    
    $
    60,949
    
    
    
    $
    29,656
    
    
    $
    256,665Operating lease obligations
    
    
    
    1,983
    
    
    
    
    2,018
    
    
    
    
    905
    
    
    
    
    192
    
    
    
    5,098Purchase obligations
    
    
    
    14,909
    
    
    
    
    1,390
    
    
    
    
    58
    
    
    
    
    
    
    
    
    16,357Puttable Instruments
    
    
    
    
    
    
    
    
    3,936
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,936Total
    
    
    $
    68,448
    
    
    
    $
    121,848
    
    
    
    $
    61,912
    
    
    
    $
    29,848
    
    
    $
    282,056


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

***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,

39

---



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.

***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 goods or 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.

***Summary of Quarterly
Results***

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

December
      31,2013
    
    **September 30,**2013
    
    June
      30,2013
    
    March
      31,2013(United States dollars in
      thousands,except per
      share amounts)Net sales
    
    $
    220,707
    
    
    
    $
    213,418
    
    
    $
    166,974
    
    $
    205,732Equity income
    
    
    1,428
    
    
    
    
    2,198
    
    
    
    1,959
    
    
    1,522Total revenues
    
    
    222,135
    
    
    
    
    215,616
    
    
    
    168,933
    
    
    207,254Net
      income (loss)(1)
    
    
    (12,562
    )(2)
    
    
    
    6,977
    
    
    
    6,811
    
    
    8,439Basic earnings (loss), per share
    
    
    (0.20
    )(2)
    
    
    
    0.11
    
    
    
    0.11
    
    
    0.13Diluted earnings (loss), per share
    
    
    (0.20
    )(2)
    
    
    
    0.11
    
    
    
    0.11
    
    
    0.13


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

December
      31,2012
    
    September
      30,2012(1)
    
    June
      30,2012
    
    March
      31,2012(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)(2)
    
    
    (45,498
    )(3)
    
    
    217,637
    (4)
    
    
    11,061
    
    
    16,944
    (5)Basic earnings (loss), per share
    
    
    (0.73
    )(3)
    
    
    3.48
    (4)
    
    
    0.18
    
    
    0.27
    (5)Diluted earnings (loss), per share
    
    
    (0.73
    )(3)
    
    
    3.48
    (4)
    
    
    0.18
    
    
    0.27
    (5)


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

40

---



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, 2013, we had recognized receivables (including trade and other
receivables) aggregating $146.1 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 has
experienced a decline in value, 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 also 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.

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.

41

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***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.

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 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;

42

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- 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 do 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

IFRIC 21,Levies,
provides the following guidance on recognition of a liability to pay
levies:

- The liability is recognized
  progressively if the obligating event occurs over a period of
  time.
- If an obligation is triggered on
  reaching a minimum threshold, the liability is recognized when that
  minimum threshold is reached.

The same recognition principles are
applied in interim financial reports. IFRIC 21 is effective for annual periods
beginning on or after 1 January 2014. We anticipate that the application of this
new standard will not have significant impacts on our consolidated financial
statements.

IFRS 9,Financial Instruments, referred to as IFRS 9, was published in November 2009
and contained requirements for financial assets. Requirements for financial
liabilities were added to IFRS 9 in October 2010. Most of the requirements for
financial liabilities were carried forward unchanged from International
Accounting Standard 39. However, some changes were made to the fair value option
for financial liabilities to address the issue of own credit risk. The IASB
decided that a mandatory date of January 1, 2015 would not allow sufficient time
for entities to prepare to apply the new standard because the impairment phase
of the IFRS 9 project has not yet been completed. Accordingly, the IASB decided
that a new date should be decided upon when the entire IFRS 9 project is closer
to completion. The amendments made to IFRS 9 in November 2013 remove the
mandatory effective date from IFRS 9. However, entities may still choose to
apply IFRS 9 early and management has decided not to early apply IFRS
9.

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.

We have outstanding issued
guarantees held by our trading and financial partners in connection with our
commodities and resources activities. As of December 31, 2013, we had issued
guarantees of up to a maximum of $51.4 million, of which $43.4 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.

43

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Safe
Harbor

The safe harbor provided in Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, applies to forward-looking information
provided under Off-Balance
Sheet Arrangements and
 Liquidity and Capital Resources
 Contractual Obligations.

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 ofCommencement
    
    Expiration ofof Office
    
    Term of OfficeName (Age)
    
    
    Present
      Position
    
    with our
      Company
    
    with our Company(1)Michael J. Smith (65)
    
    Chief Executive Officer and Director
    
    1986
    
    
    2014James M. Carter (68)(2)
    
    Chief
      Financial Officer
    
    2014
    
    
    Peter Kellogg (71)(3)
    
    Chairman, Director
    
    2013
    
    
    2016Dr. Shuming Zhao (61)(4)
    
    Director
    
    2014
    
    
    2014Indrajit Chatterjee
    (68)(3)(5)(6)
    
    Director
    
    2005
    
    
    2015Silke S. Stenger (45)(3)(5)(6)
    
    Director
    
    2013
    
    
    2015William C. Horn III (50)(5)
    
    Director
    
    2013
    
    
    2016


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

Michael J. Smith  Chief
Executive Officer and Director

Mr. Smith has been a director of our
company since 1986 and was Chairman from 2003 to March 2014. Mr. Smith was
appointed our Chief Executive Officer in March 2010 and served as our Chief
Financial Officer from 2010 to March 2014. 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 has served as a director and officer of various public
companies. Mr. Smith has experience in corporate finance and restructuring.

James M. Carter  Chief
Financial Officer

Mr. Carter was appointed Chief
Financial Officer in March 2014. Mr. Carter is a Chartered Accountant with over
40 years of experience in both public and private companies, with an emphasis on
the commodities sector and international business markets. He has served as
Vice-President of the Company and its predecessors for over 15 years. Mr. Carter
has also served as an officer and director of a number of other private and publicly traded companies.

Peter Kellogg  Chairman
and a Director

Mr. Kellogg has been a director of
our company since December 2013. Mr. Kellogg was appointed Chairman of our board
of directors in March 2014. He is currently the Chief Executive Officer of IAT.
He was the Senior Managing Director of Spear, Leeds
& Kellogg, one of the largest market making and securities clearing firms
in

44

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the U.S., until 2000, when it was acquired by Goldman Sachs. Mr. Kellogg has
been the Senior Advisory Director of Goldman Sachs/Spear, Leeds & Kellogg.
He served as the Chairman of Ziegler Companies Inc. since 2003 and a director of
Nam Tai Electronics since 2000. He also serves as a director of the Berkshire
School and the U.S. Olympic Ski Team. Previously, Mr. Kellogg served on the
board of Advest Group, MCM Corporation, Cityfed Financial Corp., Interstate Air
Taxi Inc. and Interstate/Johnson Lane, Inc.

Dr. Shuming Zhao 
Director

Dr. Zhao was a director of our
company from 2004 until December 2013 and was re-appointed to the board of directors in
March 2014. Dr. Zhao is the Chair Professor and Honorary Dean of the School of
Business, Nanjing University in the Peoples Republic of China. He also serves
as President of the International Association of Chinese Management Research
(IACMR, Third Term), Vice-President of Chinese Society of Management
Modernization, President of the Jiangsu Provincial Association of Human Resource
Management and Vice-President of the Jiangsu Provincial Association of Business
Management and Entrepreneurs. Since 1994, Dr. Zhao has acted as a management
consultant for several Chinese and international firms. He is also a director of
Daqo New Energy Corp. (China) and was a director of Little Swan Company, Ltd.
(China). Dr. Zhao has successfully organized and held seven international
symposia on multinational business management. 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. He has
also lectured in various countries, including the United States, Canada, Japan,
Singapore, South Korea, the United Kingdom, Germany, the Netherlands, Portugal,
and Australia.

Indrajit Chatterjee 
Director

Mr. Chatterjee has been a director
of our company since 2005. He 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.

Silke S. Stenger 
Director

Ms. Stenger has been a director of
our company since August2013. She is an independent
business consultant and business leadership coach and was a former director of
our company when our company was KHD Humboldt Wedag International Ltd. and has
been a director of KHD Humboldt Wedag International AG. Ms. Stenger was the
Chief Financial Officer of Management One Human Capital Consultants Ltd. Ms.
Stenger is a certified controller (German Chamber of Commerce IHK) and IFRS
accountant, specializing in corporate governance and
Sarbanes-Oxleycompliance.

William C. Horn III 
Director

Mr. Horn has been a director of our
company since December 2013. He is the President and Chief Operating Officer of
First Angel Capital (since 2004), a boutique investment firm focusing on
long/short and macro trading strategies, research, alternative investments,
private equity, lending and consulting to institutions for M&A and strategic
financial workout and turnaround. Mr. Horn served as a Director of LMS Medical
Systems, Inc. from 2008 to 2010 while also acting as interim Chief Executive
Officer and Chief Financial Officer of LMS Medical Systems, Inc. over the same
period. Prior to First Angel Capital, he was employed by State Street
Corporation as Vice-President of Risk Management and Compliance, overseeing risk
management and compliance for institutional equity trading and e-finance for
State Street Global Markets, State Streets institutional trading division. Mr.
Horn formerly worked for Fidelity Investments in a number of capacities,
including Vice-President of Global Risk Management, Senior Counter-Party Credit
Analyst and Mortgage-Backed Security Trader. Mr. Horn graduated from St.
Lawrence University with a degree in Economics.

***Family
Relationships***

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

45

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B.
Compensation

During fiscal year ended December
31, 2013, we paid an aggregate of approximately $1.8 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, 2013 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,
2013 to our Chief Executive Officer, former 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
      IncentiveCompensation PlanCompensation($)(1) |  |                             |  |                 |  |                                |         |                          |  |  | 
|--------------------------------- |  | ------- | --------- |  | -------------------- |  | ----------------------------- |  | ------------------------------------------------------------- |  | --------------------------- |  | --------------- |  | ------------------------------ | ------- | ------------------------ |  |  | 
|Name and Principal
      Position |  |         | Salary($) |  | Share-BasedAwards($) |  | **Option-**Based**Awards**($) |  | Annual**Incentive**Plans                                      |  | Long-Term**Incentive**Plans |  | PensionValue($) |  | All
      OtherCompensation($) |         | **TotalCompensation**($)
|Michael J. Smith                  |  |         |           |  |                      |  |                               |  |                                                               |  |                             |  |                 |  |                                |         |                          |  |  | 
|Chief
      Executive             |  |         |           |  |                      |  |                               |  |                                                               |  |                             |  |                 |  |                                |         |                          |  |  | 
|Officer
      and former          |  |         |           |  |                      |  |                               |  |                                                               |  |                             |  |                 |  |                                |         |                          |  |  | 
|Chairman
      and                |  |         |           |  |                      |  |                               |  |                                                               |  |                             |  |                 |  |                                |         |                          |  |  | 
|Chief
      Financial             |  |         |           |  |                      |  |                               |  |                                                               |  |                             |  |                 |  |                                |         |                          |  |  | 
|Officer(2)                        |  | 301,239 |           |  |                     |  |                              |  | 103,660                                                       |  |                            |  |                |  |                                | 190,745 | (3)                      |  |  | 
|Roland Schulien                   |  |         |           |  |                      |  |                               |  |                                                               |  |                             |  |                 |  |                                |         |                          |  |  | 
|Senior
      Vice President       |  |         |           |  |                      |  |                               |  |                                                               |  |                             |  |                 |  |                                |         |                          |  |  | 
|Finance,
      Europe             |  | 185,990 |           |  |                     |  |                              |  | 7,971                                                         |  |                            |  |                |  |                                | 27,098  | (4)                      |  |  | 
|Gerardo Cortina                   |  |         |           |  |                      |  |                               |  |                                                               |  |                             |  |                 |  |                                |         |                          |  |  | 
|Managing
      Director           |  |         |           |  |                      |  |                               |  |                                                               |  |                             |  |                 |  |                                |         |                          |  |  | 
|Mexico                            |  | 388,130 |           |  |                     |  |                              |  |                                                              |  |                            |  |                |  |                                | 4,236   | (5)                      |  |  | 
|Ernest Alders                     |  |         |           |  |                      |  |                               |  |                                                               |  |                             |  |                 |  |                                |         |                          |  |  | 
|Vice-President                    |  | 204,431 | (6)       |  |                     |  |                              |  | 14,206                                                        |  |                            |  |                |  |                                | 5,619   | (7)                      |  |  | 

|Notes:
|------
|(1)   
|      
|(2)   
|      
|(3)   
|      
|(4)   
|      
|(5)   
|      
|(6)   
|      
|(7)   

***Directors
Compensation***

The following table provides a
summary of compensation paid by us during the fiscal year ended December 31,
2013 to the directors of our company.

46

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DIRECTOR COMPENSATION
TABLE

Name
    
    
    FeesEarned($)
    
    Share-basedawards($)
    
    Option-basedawards($)
    
    Non-equityincentive
      plancompensation($)
    
    Pensionvalue($)
    
    All
      othercompensation($)
    
    Total($)Michael J. Smith(1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    Peter Kellogg(2)
    
    
    
    
    
    
    
    
    
    
    
    
    
    Dr. Shuming Zhao(3)
    
    87,500
    
    
    
    
    
    
    
    
    
    
    
    87,500Ian Rigg(4)
    
    121,233
    
    
    
    
    
    
    
    
    
    
    
    121,233Indrajit Chatterjee
    
    87,500
    
    
    
    
    
    
    
    
    
    
    
    87,500Ravin Prakash(5)
    
    
    
    
    
    
    
    
    
    
    
    
    
    Silke S. Stenger
    
    75,425
    
    
    
    
    
    
    
    
    
    
    
    75,425William C. Horn III(6)
    
    
    
    
    
    
    
    
    
    
    
    
    
    


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

A total of $0.4 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 a 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 Chief Executive
Officer, pursuant to which he provides us consulting services. 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, 2013, we would have
been required to make a maximum payment to Mr. Smith in the aggregate amount of
$3.1 million pursuant to the terms of his consulting arrangement. Ernest Alders
is also entitled to a payment of one months salary (including the pro rated
portion of his bonus for the last fiscal year) for each year of service in the
event that MFC or Mr. Alders terminates his engagement within six months after a
change of control pursuant to his applicable agreements.

***Pension Plan
Benefits***

As of December 31, 2013, we did not
have any defined benefit, defined contribution or deferred compensation plans
for any of our senior officers or directors.

47

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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
    
    2014Dr. Shuming Zhao
    
    2014
    
    2014Indrajit Chatterjee
    
    2005
    
    2015Silke S. Stenger
    
    2013
    
    2015Peter Kellogg
    
    2013
    
    2016William C. Horn III
    
    2013
    
    2016


In March 2014, our board of
directors determined to declassify our board structure and it is intended that
amendments to our Articles in connection therewith will be presented to our
shareholders for approval at our next annual general meeting. If approved,
directors would be elected on an annual basis moving forward.

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
Indrajit Chatterjee, Silke S. Stenger and William C. Horn III, who was appointed
to the Audit Committee, in March 2014. During the year ended December 31, 2013
and until his passing in 2014, Ian Rigg was a member of and served as the
Chairman of our Audit Committee. The Audit Committee operates pursuant to a
charter adopted by the board of directors on October 26, 2013, a copy of which
is available online at our website at www.mfcindustrial.com and attached as
Schedule C to our management proxy circular filed with the SEC on Form 6-K on
December 2, 2013. 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; (iii) the independence, qualifications
and performance of our independent auditors; and (iv) the performance and
structure of our internal audit function. The Audit Committee also reviews and
approves our hiring policies, establishes our procedures for dealing with
complaints, oversees our financial reporting processes and consults with
management and our independent auditors on matters related to our annual audit
and internal controls, published financial statements, risk assessment and risk
management, accounting principles and auditing procedures being
applied.

Our board of directors has
established a Compensation Committee. Our Compensation Committee currently
consists of Peter Kellogg, Indrajit Chatterjee and Silke S. Stenger. During the
year ended December 31, 2013 and until his passing in 2014, Ian Rigg also served
on our Compensation Committee. Our Compensation Committee operates pursuant to a
charter adopted by the board of directors on October 26,
2013, a copy of which is available online at our website at
www.mfcindustrial.com. The Compensation Committee is appointed and generally
acts on behalf of the board of directors. The Compensation Committee is
responsible for reviewing our board compensation practices and our selection,
retention and remuneration arrangements for our executive officers and employees
and reviewing and approving our Chief Executive Officers compensation in light
of our corporate goals and objectives. 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 incentive compensation plans and
equity-based compensation plans. The Compensation Committee also recommends
changes or additions to those plans, monitors our succession planning processes
and reports to our board of directors on other 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. Our
Nominating and Corporate Governance Committee currently consists of Indrajit
Chatterjee and Silke S. Stenger. During the year ended December 31, 2013 and
until his passing in 2014, Ian Rigg also served on our Nominating and Corporate
Governance Committee. Our Nominating and Corporate Governance Committee operates
pursuant to

48

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a charter adopted by our board of directors on October 26, 2013, a
copy of which is available online at our website at www.mfcindustrial.com. The
primary function of the Nominating and Corporate Governance Committee is to
assist our board of directors in developing our Corporate Governance Guidelines
and monitor the board and managements performance against the defined approach.
The Nominating and Corporate Governance Committee is also responsible for
evaluating the board and board committees structure and size and the
independence of existing and prospective directors, identifying and reporting on
candidates to be nominated to our board of directors, reporting on the boards
annual performance and overseeing our process for providing information to the
board.

D. Employees

At December 31, 2013, 2012 and 2011, we employed approximately 951, 955
and 616 people, respectively.

E. Share Ownership

There were 62,552,126 common shares, 2,525,000 stock options and no share
purchase warrants issued and outstanding as of March 30, 2014. 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,
2013, owned the following common shares:

| |                                              |  |                          |            |               |     |                        | Percentage of
      Total |  |  |         | 
| | -------------------------------------------- |  | ------------------------ | ---------- | ------------- | --- | ---------------------- | ------------------------- |  |  | ------- | 
| |                                              |  | Common
      Shares      |            | Common
Shares |     | Stock
      Options(1)
| |                                              |  | Beneficially
      Owned |            | Outstanding   |     | Held                  
| | Name and
      Principal Position            |  |                          | (#)        |               | (%) |                        | (#)                      
| | Michael J. Smith                             |  |                          |            |               |     |                        |                           |  |  |         | 
| | Chief Executive Officer, Director and former |  |                          |            |               |     |                        |                           |  |  |         | 
| | Chairman and Chief Financial Officer(2)      |  |                          | 272,727    |               |     |                        | 0.4%                      |  |  | 390,000 | 
| | Peter Kellogg                                |  |                          |            |               |     |                        |                           |  |  |         | 
| | Chairman and Director(3)                     |  |                          | 20,662,400 | (3)           |     |                        | 33.0%                     |  |  |        | 
| | Dr. Shuming Zhao                             |  |                          |            |               |     |                        |                           |  |  |         | 
| | Director(4)                                  |  |                          |           |               |     |                        |                          |  |  | 55,000  | 
| | Ian Rigg                                     |  |                          |            |               |     |                        |                           |  |  |         | 
| | Director(5)                                  |  |                          | 7,230      |               |     |                        | less than 0.1%            |  |  | 55,000  | 
| | Indrajit Chatterjee                          |  |                          |            |               |     |                        |                           |  |  |         | 
| | Director                                     |  |                          |           |               |     |                        |                          |  |  | 55,000  | 
| | Ravin Prakash                                |  |                          |            |               |     |                        |                           |  |  |         | 
| | Director(6)                                  |  |                          |           |               |     |                        |                          |  |  | 55,000  | 
| | Silke S. Stenger                             |  |                          |            |               |     |                        |                           |  |  |         | 
| | Director                                     |  |                          |           |               |     |                        |                          |  |  |        | 
| | William C. Horn III                          |  |                          |            |               |     |                        |                           |  |  |         | 
| | Director                                     |  |                          | 618        |               |     |                        | less than 0.1%            |  |  |        | 

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

49

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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 that 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, 2013. There were 1,720,000 options outstanding as at December 31,
2013. There were 12,344 options available for grant under the stock option plan
as at December 31, 2013.

***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 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. 915,000 Awards had been issued pursuant to the
Incentive Plan as at December 31, 2013. There were 585,000 Awards available for
grant under the Incentive Plan as at December 31, 2013.

ITEM 7: MAJOR SHAREHOLDERS AND
RELATED PARTY TRANSACTIONS

A. Major Shareholders

There were 62,552,126 common shares issued and outstanding as of March
24, 2014. The following table sets forth, as of the date hereof, 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 |  | 20,662,400(2) |                    | 33.0%

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

50

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

Peter Kellogg may be considered to control our company as a result of,
among other things, his ownership of approximately 33% of our common shares and
his position as a director on our board of directors.

As of March 24, 2014, there were 62,552,126 common shares issued and
outstanding held by 404 registered shareholders. Of those common shares issued
and outstanding, 62,472,513 common shares were registered in the United States
(365 registered shareholders).

On February 7, 2014, we entered into a mutual settlement agreement with
Peter Kellogg and IAT. Please refer to Item
10:Additional Information  C. Material Contracts for further information.

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, 2013, 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 I
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, 2013 and in this annual
report on Form 20-F, we had the following transactions with affiliates during
the year ended December 31, 2013:

| |                                       |  | Year
      Ended            
| | ------------------------------------- |  | ----------------------------
| |                                       |  | December 31, 2013           
| |                                       |  | (United States
      dollars
| |                                       |  | in
      thousands)         
| | Dividend income on common
    shares* |  |                             
| | Royalty expense paid and
    payable* |  |                             
| | Sales of goods                        |  |                             

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

In addition to the above transactions, in February 2013, we sold our
interest in a group (which held the resource properties in India to a director
of two of our sub-subsidiaries, resulting in a non-cash accounting gain of $0.4
million on its disposition. The director resigned from the sub-subsidiaries in
March 2013. In addition, a subsidiary sold its office furniture and equipment to
a company beneficially owned by our Chief Executive Officer for $14,000,
resulting in a gain of $14,000. Included in other receivables was an overpayment
of net director fees of $8,000, which was subsequently refunded by the director
in 2014. As at December 31, 2013, we had $0.2 million of trade receivables due
from affiliates in the normal course of business.

C. Interests of Experts and
Counsel

Not applicable.

51

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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.

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.

Our board of directors declared the following annual cash dividends per
common share, payable in four quarterly installments, for the three most
recently completed financial years:

2011
    
    2012
    
    2013Dividend declared
    
    $0.20
    
    $0.22
    
    $0.24


The following dividends per common share were paid during our three most recently completed financial
years:

Dividend paid2011January 31
    
    $0.05April 11
    
    $0.05July 11
    
    $0.05September 30
    
    $0.052012February 10
    
    $0.05April 10
    
    $0.05July 13
    
    $0.06October 26
    
    $0.062013February 8
    
    $0.06April 1
    
    $0.06July 30
    
    $0.06October 28
    
    $0.06


52

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On March 24,
2014, we announced that our board of directors had declared an annual cash
dividend for 2014 of $0.24 per common share, payable in four quarterly
instalments. The first 2014 dividend payment will be made on April 22, 2014 to
shareholders of record on April 10, 2014.

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, 2013.

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. The following table sets forth the high and
low sales of prices of our common shares on the NYSE for the periods
indicated.

| |                                |  | Exchange      
| | ------------------------------ |  | --------------
| |                                |  | High
      ($)
| | Annual Highs and
      Lows    |  |               
| | 2013                           |  | 10.39         
| | 2012                           |  | 8.80          
| | 2011                           |  | 9.00          
| | 2010                           |  | 16.10         
| | 2009                           |  | 14.20         
| |                                |  |               
| | Quarterly Highs and
      Lows |  |               
| | 2014                           |  |               
| | First Quarter                  |  | 8.19          
| | 2013                           |  |               
| | Fourth Quarter                 |  | 8.73          
| | Third Quarter                  |  | 9.05          
| | Second Quarter                 |  | 9.15          
| | First Quarter                  |  | 10.39         
| | 2012                           |  |               
| | Fourth Quarter                 |  | 8.77          
| | Third Quarter                  |  | 8.80          
| | Second Quarter                 |  | 7.59          
| | First Quarter                  |  | 8.16          
| |                               
| | Monthly Highs and
      Lows   |  |               
| | March 2014                     |  | 8.19          
| | February 2014                  |  | 8.16          
| | January 2014                   |  | 8.08          
| | December 2013                  |  | 8.08          
| | November 2013                  |  | 8.33          
| | October 2013                   |  | 8.73          

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.

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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.

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 on
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 that 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.

54

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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. In March 2014, our board of directors determined to declassify our
board structure. Please refer to Item 6:
Directors, Senior Management and Employees  C. Board Practices for further information.

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.

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. In addition, on November 18, 2013, we adopted an advance notice
policy, which, among other things, fixes a deadline by which director
nominations must be submitted to us prior to our meetings of shareholders and
sets forth the information that must be included in such notice in order for
such nominee to be eligible for election. In the case of an annual meeting,
notice must be given to us not less than 30 nor more than 65 days prior to the
date of such meeting; provided that if the meeting is to be held on a date that
is less than 50 days after the date on which the first public announcement of
the date of such meeting was made, notice may be given no later than the close
of business on the 10th day following such announcement. In the case of a
special meeting called for the purpose of electing directors that is not also an
annual meeting, notice must be provided to us no later than the close of
business on the 15th day following the day on which the first public
announcement of the date of such special meeting was made.

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).

55

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C. Material Contracts

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

In July 2012, we entered into the Support Agreement with MFC Energy,
pursuant to which we made the offer to acquire all of its outstanding common
shares, referred to as the Offer, for all of its issued and outstanding
shares. Pursuant to the Offer, on September 6, 2012, our indirect wholly-owned
subsidiary acquired approximately 93.8% of the outstanding 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 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.

On February 7, 2014, we entered into an agreement with Peter Kellogg and
IAT in connection with the settlement of litigation between the parties.
Pursuant to such agreement, among other things, each party agreed to provide the
other with a mutual release and Mr. Kellogg and IAT agreed to abide by certain
customary standstill provisions for a 30-month period, subject to earlier
termination in accordance with its terms.

On November 11, 2013, we entered into a Shareholder Rights Plan
Agreement, referred to as the Rights Plan, with Computershare Inc., as Rights
Agent. The Rights Plan was terminated in March 2014 by our board of directors in
accordance with its terms. Please refer to Item 14: Material Modifications to Rights of Security Holders and Use of
Proceeds for further information.

D. Exchange Controls

There are presently no governmental laws, decrees or regulations in
Canada that restrict the export or import of capital or that 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 be construed to be, legal advice to any holder or prospective
holder of our common shares and no opinion or representation to any holder or
prospective holder of our common shares is hereby made. Accordingly, holders and
prospective holders of our common shares should consult with their own legal
advisors with respect to the consequences 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 that 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 acquisition of control will be deemed to have occurred, for
purposes of theInvestment Canada
Actbut subject to certain exceptions, if
less than one-third of the voting shares 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 or where the responsible Minister determines there has been an
acquisition of control in fact by a state-owned enterprise. No financial
threshold applies to a national security review and lower financial thresholds
apply to state-owned enterprises. 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.

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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, the applicant 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 be construed to be, legal, business or tax advice to any
particular holder or prospective holder of our common shares and no opinion or
representation with respect to the tax consequences to any holder or prospective
holder of our common shares is hereby made. Accordingly, holders and prospective
holders of our common shares should consult their own tax advisors with respect
to the income tax consequences of purchasing, owning and disposing of our common
shares in their particular circumstances.**

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

57

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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 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 Act, of 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
the Income Tax Act, unless 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 the Income Tax Act, timber resource
property, as defined in the Income 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 the Income 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 the 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 that, 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 that 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 or prospective holder of our common shares and no opinion
or representation with respect to the United States Federal income tax
consequences to any such holder or prospective holder is hereby made.
Accordingly, holders and prospective holders of common shares 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
common shares.**

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.

58

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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 that are taxable dividends and that 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 are 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.

59

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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.

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 rateably
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
advisors regarding the potential application of the PFIC rules to their
ownership of our common 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.

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F. Dividends and Paying
Agents

Not
applicable.

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 that 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 their 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 36 of our annual consolidated financial statements
for the years ended December 31, 2013, 2012 and 2011 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,
2013.

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

A. Modifications to Rights of Security Holders

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Shareholder Rights
Plan

On November
11, 2013, we entered into the Rights Plan, pursuant to which our board of
directors authorized the issuance of one common share purchase right for each
common share to the shareholders of record at the close of business on November
22, 2013. The rights automatically attached to our common shares, including
shares issued in the future.

Subject to the terms of the Rights Plan and to certain exceptions
provided therein, the rights would become exercisable in the event that any
person, together, with any of its affiliates, associates or joint actors,
acquires or announced its intention to acquire 20% or more of our common shares
without complying with the permitted bid provisions of the Rights Plan and where
application of the Rights Plan was not waived by our board of directors in
accordance with its terms. The permitted bid provisions prevented the dilutive
effects of the Rights Plan from operating if a take-over bid was made to all
holders of our common shares (other than the bidder) by way of a take-over bid
circular that remained open for acceptance for a minimum of 60 days and that
satisfied certain other conditions. If a take-over bid did not comply with the
requirements of the Rights Plan or where the application of the Rights Plan was
not waived in accordance with its terms, the rights holders (other than the
acquiring person and its affiliates, associates and joint actors) would have
been entitled to purchase additional common shares of our company at a discount
to the market price. The acquiring persons would not have been entitled to
exercise their rights under the Rights Plan. If a shareholders beneficial
ownership of our common shares as of November 11, 2013 was at or above the 20%
threshold, that shareholders existing ownership would have been grandfathered
under the Rights Plan, but the rights issued would have become exercisable if
such grandfathered person increased its ownership by more than 0.01%, including
any acquisition of more than 0.01% of our common shares made after any
disposition of common shares. Certain derivative positions were also included in
the calculation of beneficial ownership under the Rights Plan.

The Rights Plan was terminated by the
board of directors in March 2014 in accordance with its terms.

Advance Notice Policy

At our Annual General and Special Meeting held on December 27, 2013, our
shareholders approved a resolution affirming, ratifying and approving our
companys advance notice policy, referred to as the Advance Notice Policy. The
Advance Notice Policy, among other things, fixes a deadline by which director
nominations must be submitted to us prior to any meeting of our shareholders and
sets forth the information that must be included in the notice in order for a
nominee to be eligible for election. No person will be eligible for election as
a director of our company unless nominated in accordance with the Advance Notice
Policy.

In the case of an annual meeting, notice to us must be given no less than
30 and no more than 65 days prior to the date of such meeting; provided that if
the meeting is to be held on a date that is less than 50 days after the date on
which the first public announcement of the date of such meeting was made, notice
may be given no later than the close of business on the 10th day following such
announcement.

In the case of a special meeting called for the purpose of electing
directors that is not also an annual meeting, notice to us must be made no later
than the close of business on the 15th day following the day on which the first
public announcement of the date of such special meeting was made.

The foregoing summary of the Advance Notice Policy is not complete and is
qualified in its entirety by reference to the full text of the Advance Notice
Policy, a copy of which is filed as Exhibit 1.4 of this Annual Report on Form
20-F.

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.

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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, 2013. 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.                                                                                                         

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, 2013. 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 (1992).

A material weakness is a deficiency, or a combination of deficiencies, in
internal control over financial reporting, such that there is a reasonable
possibility that a material misstatement of the annual or interim financial
statements will not be prevented or detected on a timely basis. Management has
identified the following material weaknesses in our internal control over
financial reporting:

In 2012, we acquired MFC Energy, MFCR and Possehl. These
entities have significant operations and had accounting systems that differ from
ours. As a result, as at December 31, 2013, we determined that we did not
maintain effective control over: (i) the period end financial reporting process
with respect to such new subsidiaries; and (ii) the design and implementation of
formal processes at the entity level to address risks critical to financial
reporting with respect to the monitoring of controls, the control environment
and information and communication following the integration of the new
subsidiaries. These control deficiencies resulted in significant audit
adjustments to net income, comprehensive loss, the statement of financial
position and the related disclosures in our consolidated financial statements
for the years ended December 31, 2013 and 2012. Unless remediated, these control
deficiencies could potentially result in a material misstatement of the companys
future consolidated financial statements for various reasons that would not be
prevented or detected.

During the period of integration of these subsidiaries, we have responded
to specific control deficiencies as they were identified, and implemented
remediation plans to address any issues. We are actively remediating these items
and are working to strengthen the integration of control procedures across all
recently acquired entities. We also recently appointed a new Chief Financial
Officer whose priority it will be to develop and implement a remediation plan
for the material weaknesses noted above.

As a result of the material weaknesses identified above, management has
concluded that, as of December 31, 2013, our companys internal control over
financial reporting was not effective.

The effectiveness of our companys internal control over financial
reporting as of December 31, 2013 has been audited by our independent registered
chartered accountants, PricewaterhouseCoopers LLP, who also audited our
consolidated financial statements for the year ended December 31, 2013.
PricewaterhouseCoopers LLP has expressed an adverse opinion on the
effectiveness of our internal control over financial reporting as of December
31, 2013. Their report is included in this annual report on Form
20-F.

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***Changes in Internal Control over
Financial Reporting***

We maintain
internal controls over financial reporting that have been designed to provide
reasonable assurance of the reliability of external financial reporting in
accordance with IFRS, as required by Canadian National Instrument 52-109 Certification of Disclosure in Issuers Annual
and Interim Filings.

Other than the control weaknesses described above, there were no changes in our internal control over financial reporting
that occurred during the year ended December 31, 2013 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

Ian Rigg was the Chairman of our Audit Committee in 2013 and until his
passing in March 2014. Our board of directors had determined that Mr. Rigg
qualified as an audit committee financial expert and was independent, as
such terms are used in Section 303A.02 of the NYSE Listed Company
Manual.

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 board of directors has adopted a written Code of Business Conduct and
Ethics and Insider Trading Policy on October 26, 2013 (the Code of Ethics).
Prior to the adoption of the Code of Ethics, the Board had previously adopted a
written code of ethics on November 9, 2006 and a code of conduct. Since such
adoption, our board of directors has conducted an assessment of its performance,
including the extent to which the board and each director comply therewith. It
is intended that such assessment will be conducted annually.

The Code of Ethics applies to all of our directors, officers and
employees. The purpose of the Code of Ethics is to, among other things, promote
honest and ethical behavior and conduct, including: (i) ethical handling of
actual or apparent conflicts of interest between personal and professional
relationships; (ii) full, fair, accurate, timely and understandable disclosure in
all reports and documents that we file with, or submit to, the SEC, the Canadian
securities regulatory authorities and in all other public communications made by
us; (iii) compliance with applicable governmental laws, rules and regulations;
(iv) prompt internal reporting of violations of the Code of Ethics to an
appropriate person or the persons identified therein; and (v) 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.

The foregoing summary of the Code of Ethics is not complete and is
qualified in its entirety by reference to the full text of the Code of Ethics, a
copy of which is available online at our website at www.mfcindustrial.com. A
copy of the Code of Ethics is filed as Exhibit 11.1 of this Annual Report on
Form 20-F.

We will provide a copy of the Code of Ethics 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.

64

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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 year ended December 31, 2013 by
PricewaterhouseCoopers LLP were C$1,710,000 (before goods and services tax). The aggregate fees for
audit services rendered for the audit of our annual financial statements for the
fiscal year ended December 31, 2012 by Deloitte LLP were C$1,682,000 (before
goods and services tax).

***Audit Related
Fees***

No such fees were billed by PricewaterhouseCoopers LLP during the year
ended December 31, 2013. For the fiscal year ended December 31, 2012, Deloitte
LLP performed assurance or related services relating to the performance of the
audit or review of our financial statements that are not reported under the
caption Audit Fees above, with aggregate fees for such audit related services
totalling C$330,000 (before
goods and services tax).

***Tax Fees***

During the fiscal year ended December 31, 2013, the aggregate fees billed
for tax compliance, tax advice and tax planning by PricewaterhouseCoopers LLP
were C$3,350 (before goods and services tax) and C$nil. For the fiscal year ended December 31, 2012, the aggregate
fees billed for tax compliance, tax advice and tax planning by Deloitte LLP were
C$nil.

***All Other
Fees***

During the fiscal year ended December 31, 2013, the aggregate fees billed
by PricewaterhouseCoopers LLP for all services not related to audit or tax were
C$93,750 (before goods and services tax). For the fiscal year ended December 31, 2012, the aggregate fees billed by
Deloitte LLP for all services not related to audit or tax were C$470,000 (before
goods and services tax), in
connection with valuation and other services in connection with our acquisition
of MFC Energy.

***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 years ended December 31, 2013 and 2012 by
PricewaterhouseCoopers LLP and Deloitte LLP, respectively, and believes that the
provision of the services for activities unrelated to the audit is compatible
with maintaining the independence of PricewaterhouseCoopers LLP and Deloitte
LLP, respectively.

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

Not applicable.

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

In 2013,
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

During the year ended December 31, 2013, the independent accountant that
was previously engaged as the principal accountant to audit our financial
statements, Deloitte LLP, resigned.

***Resignation of Deloitte
LLP***

Deloitte LLP resigned at our request as our principal accountant
effective September 23, 2013 and we appointed PricewaterhouseCoopers LLP as our
independent public accounting firm for the year ended December 31, 2013. Our
Audit Committee and board of directors considered and approved the decision to
change accountants.

65

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The audit report of Deloitte LLP on our financial statements for the
fiscal years ended December 31, 2012 and 2011, prepared in accordance with IFRS,
did not contain an adverse opinion, a disclaimer of opinion, a modification or a
qualification.

During our two most recent fiscal years, there were no disagreements with
Deloitte LLP on any matter of accounting principles or practices, financial
statement disclosure or auditing scope or procedure.

None of the following events occurred within our two most recent fiscal
years and any subsequent interim period preceding Deloitte LLPs
resignation:

| | (A) |  | Deloitte LLP
      advised us that the internal controls necessary for us to develop reliable
      financial statements did not exist;                                                                                                                                                    
| | --- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    
| | (B) |  | Deloitte LLP
      advised us that information came to Deloitte LLPs attention that has led
      it to no longer be able to rely on our managements representations or
      that had made it unwilling to be associated with the financial statements
      prepared by our management;
| |    
| | (C) |  | Deloitte LLP
      advised us of the need to expand significantly the scope of its audit or
      that information came to Deloitte LLPs attention during our two most
      recent fiscal years and any subsequent interim period that, if further
      investigated, may:              
| |    
| |     |  | (i)                                                                                                                                                                                                                                                                                        
| |    
| |     |  | (ii)                                                                                                                                                                                                                                                                                       
| |    
| |     |  | due to
      Deloitte LLPs resignation (due to audit scope limitations or otherwise),
      or for any other reason, Deloitte LLP, did not so expand the scope of its
      audit or conduct such further investigation; or                                                               
| |    
| | (D) |  | Deloitte LLP
      advised us that information came to Deloitte LLPs attention that it had
      concluded materially impacts the fairness or reliability of
    either:                                                                                                                  
| |    
| |     |  | (i)                                                                                                                                                                                                                                                                                        
| |    
| |     |  | (ii)                                                                                                                                                                                                                                                                                       
| |    
| |     |  | due to
      Deloitte LLPs resignation (due to audit scope limitations or otherwise),
      or for any other reason, the issue had not been resolved to Deloitte LLPs
      satisfaction prior to its resignation.                                                                       

***Appointment of
PricewaterhouseCoopers LLP***

Our board of
directors appointed PricewaterhouseCoopers LLP to be our principal accountant
effective September 23, 2013.

Except as they may have advised us in their position as the auditors of
our company, during our two most recent fiscal years and any subsequent interim
period prior to engaging PricewaterhouseCoopers LLP, we did not consult them
regarding (i) the application of accounting principles to a specified
transaction, either completed or proposed, or the type of audit opinion that
might be rendered on our financial statements or (ii) any matter that was either
the subject of a disagreement (as defined in Item 16F(a)(1)(iv) and the related
instructions to Item 16F of Form 20-F) or a reportable event (as described in
Item 16F(a)(1)(v) of Form 20-F).

***Disclosure Provided to Former
Accountants***

We have provided a member of Deloitte LLP and PricewaterhouseCoopers LLP
with a copy of our disclosure under Item 16F of this annual report on Form 20-F.
We have requested that Deloitte LLP, and provided the opportunity for
PricewaterhouseCoopers LLP to, furnish us with a letter addressed to the SEC
stating whether it agrees with the statements made by us in response to this
Item 16F(a) and, if not, stating the respects in which it does not agree. We
have filed the letter from Deloitte LLP as Exhibit 15.1 to this Annual Report on
Form 20-F.

66

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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.

67

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ITEM 18: FINANCIAL
STATEMENTS

The following
attached audit reports and financial statements are incorporated herein:

|1. |  | Report of Independent Auditors, PricewaterhouseCoopers LLP, dated March 31, 2014 on the
      consolidated financial statements of our company for the year ended
      December 31, 2013 and on the effectiveness of internal controls over financial reporting as at December 31, 2013 |  | 69
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --
|2. |  | Report of Independent Registered
      Chartered Accountants, Deloitte LLP, dated April 1, 2013 on the
      consolidated financial statements of our company as at December 31, 2012
      and the two years then ended                                                                 |  | 71
|3. |  | Consolidated statements of financial position as of
      December 31, 2013 and 2012                                                                                                                                                                                                     |  | 72
|4. |  | Consolidated statements of operations
      for the years ended December 31, 2013, 2012 and 2011                                                                                                                                                                                         |  | 73
|5. |  | Consolidated statements of comprehensive income for
      the years ended December 31, 2013, 2012 and 2011                                                                                                                                                                               |  | 74
|6. |  | Consolidated statements of changes in
      equity for the years ended December 31, 2013, 2012 and 2011                                                                                                                                                                                  |  | 75
|7. |  | Consolidated statements of cash flows for the years
      ended December 31, 2013, 2012 and 2011                                                                                                                                                                                         |  | 76
|8. |  | Notes to consolidated financial
      statements as of December 31, 2013                                                                                                                                                                                                                 |  | 77

68

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Independent Auditors
Report

To the Shareholders ofMFC
Industrial Ltd.

We have completed an integrated audit
of MFC Industrial Ltd. and its subsidiaries (together, the Company) 2013
consolidated financial statements and their internal control over financial
reporting as at December 31, 2013. Our opinions, based on our audits, are
presented below.

Report on the consolidated financial
statementsWe have audited the
accompanying consolidated financial statements of the Company, which comprise
the consolidated statement of financial position as at December 31, 2013 and the
consolidated statements of operations, comprehensive income/(loss), changes in
equity and cash flows for the year then ended, and the related notes, which
comprise a summary of significant accounting policies and other explanatory
information.

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

Auditors
responsibilityOur responsibility is to
express an opinion on these consolidated financial statements based on our
audit. We conducted our audit as at December 31, 2013 and for the year then
ended 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 plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free from
material misstatement. Canadian generally accepted auditing standards also
require that we comply with ethical requirements.

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

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

OpinionIn our opinion, the consolidated financial statements present
fairly, in all material respects, the financial position of the Company, as at
December 31, 2013 and its financial performance and its cash flows for the year
then ended in accordance with International Financial Reporting Standards as
issued by the International Accounting Standards Board.

Other mattersThe financial statements (before the effects of adjustments to reflect changes in purchase price allocation and
correction of an error described in Note 41) of the Company for the years ended
December 31, 2012 and 2011, were audited by another auditor who expressed an
unmodified opinion on those statements on April 1, 2013.

As part of our audit of the 2013
financial statements, we also audited the adjustments to reflect changes in
purchase price allocation and correction of an error described in Note 41 that
were applied to restate the 2012 financial statements. In our opinion, such
adjustments are appropriate and have been properly applied. We were not engaged
to audit, review, or apply any procedures to the 2012 financial statements of
the Company other than with respect to the adjustments described above and, accordingly, we do
not express an opinion or any other form of assurance on the 2012 financial
statements taken as a whole.

Report on internal control over
financial reportingWe have also audited
the Companys internal control over financial reporting as at December 31, 2013,
based on criteria established in Internal Control - Integrated Framework (1992)
issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO).

69

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Managements responsibility for
internal control over financial reportingManagement is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal
control over financial reporting, included in Item 15 of the Annual Report on
Form 20-F.

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

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

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

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

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

Adverse OpinionIn our opinion, the Company did not maintain, in all material
respects, effective internal control over financial reporting as at December 31,
2013, based on criteria established in Internal Control - Integrated Framework
(1992) issued by COSO because material weaknesses in internal control over
financial reporting existed as that date related (i) the period end financial
reporting process with respect to subsidiaries acquired in 2012; and (ii) the
design and implementation of formal processes at the entity level to address
risks critical to financial reporting with respect to the monitoring of
controls, the control environment and information and communication following
the integration of the new subsidiaries. A material weakness is a deficiency, or
a combination of deficiencies, in internal control over financial reporting,
such that there is a reasonable possibility that a material misstatement of the
annual or interim financial statements will not be prevented or detected on a
timely basis. The material weaknesses referred to above are described in
Managements Report on Internal Control Over Financial Reporting included in
Item 15 of the Annual Report on Form 20-F. We considered these material weaknesses
in determining the nature, timing, and extent of audit tests applied in our
audit of the December 31, 2013 consolidated financial statements and our opinion
regarding the effectiveness of the Companys internal control over financial
reporting does not affect our opinion on those consolidated financial
statements. We do not express an opinion or any other
form of assurance on managements statement referring to managements remediation plans.

/s/ PricewaterhouseCoopers LLPChartered
AccountantsVancouver, British Columbia
March 31, 2014

70

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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
Public Accounting Firm

To the Board of Directors and
Shareholders ofMFC Industrial Ltd.

We audited, before the effects of
adjustments to reflect changes in purchase price allocation and the correction
of an error as described in Notes 3 and 41 to the consolidated financial
statements, 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 the
consolidated statements of operations, comprehensive income, changes in equity,
and cash flows for the two years then ended, and a summary of significant
accounting policies and other explanatory information (the 2012 consolidated
financial statements before the effects of the adjustments described in Notes 3
and 41 to the consolidated financial statements are not presented
herein).

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, except
for the adjustments to reflect changes in the purchase price allocation and the
correction of an error described in Notes 3 and 41 to 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 their
financial performance and cash flows for the two years then ended in accordance
with International Financial Reporting Standards as issued by the International
Accounting Standards Board.

We were not engaged to audit, review or
apply any procedures to the adjustments to reflect changes in the purchase price
allocation of the correction of an error described in Notes 3 and 41 to the
consolidated financial statements and, accordingly, we do not express an opinion
or any form of assurance about whether such adjustments are appropriate and have
been properly applied. Those adjustments were audited by other
auditors.

/s/ Deloitte LLP

Chartered AccountantsApril 1,
2013Vancouver, Canada

71

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MFC INDUSTRIAL LTD.

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

|                       |                                                    |  |       |  | December 31, |   | December 31,
|---------------------- | -------------------------------------------------- |  | ----- |  | ------------ | - | ------------
|                       |                                                    |  | Notes |  | 2013         |   | 2012        
|                       |                                                    |  |       |  |              |   |             
|ASSETS                 |                                                    |  |       |  |              |   |             
|Current Assets         |                                                    |  |       |  |              |   |             
|                       | Cash and cash
      equivalents                    |  |       |  |              | $ | 332,173     
|                       | Short-term cash deposits                           |  |       |  |              |   | 4,381       
|                       | Securities                                         |  | 5     |  |              |   | 2,068       
|                       | Restricted cash                                    |  | 6     |  |              |   | 312         
|                       | Trade
      receivables                            |  | 7     |  |              |   | 115,678     
|                       | Other receivables                                  |  | 8     |  |              |   | 30,409      
|                       | Inventories                                        |  | 9     |  |              |   | 88,844      
|                       | Real estate held for sale                          |  |       |  |              |   | 12,676      
|                       | Deposits, prepaid and
      other                  |  | 10    |  |              |   | 27,136      
|                       | Assets held for sale                               |  | 11    |  |              |   | 97,344      
|                       | Total current
      assets                         |  |       |  |              |   | 711,021     
|Non-current Assets     |                                                    |  |       |  |              |   |             
|                       | Securities                                         |  | 12    |  |              |   | 2,465       
|                       | Equity method investments                          |  | 13    |  |              |   | 24,366      
|                       | Investment
      property                          |  | 14    |  |              |   |            
|                       | Property, plant and equipment                      |  | 15    |  |              |   | 94,493      
|                       | Interests in resource
      properties             |  | 16    |  |              |   | 359,822     
|                       | Hydrocarbon probable reserves                      |  | 17    |  |              |   | 75,267      
|                       | Hydrocarbon unproved
      lands                   |  | 17    |  |              |   | 31,354      
|                       | Accrued pension assets, net                        |  | 18    |  |              |   | 1,259       
|                       | Deferred income tax
      assets                   |  | 19    |  |              |   | 17,941      
|                       | Other                                              |  |       |  |              |   | 610         
|                       | Total non-current
      assets                     |  |       |  |              |   | 607,577     
|                       |                                                    |  |       |  |              | $ | 1,318,598   
|LIABILITIES AND EQUITY |                                                    |  |       |  |              |   |             
|Current Liabilities    |                                                    |  |       |  |              |   |             
|                       | Short-term bank
      borrowings                   |  | 20    |  |              | $ | 129,783     
|                       | Debt, current portion                              |  | 21    |  |              |   | 44,869      
|                       | Accounts payables and
      accrued expenses       |  | 22    |  |              |   | 126,649     
|                       | Facility term financing                            |  | 23    |  |              |   |            
|                       | Income tax
      liabilities                       |  |       |  |              |   | 1,891       
|                       | Deferred sale liabilities                          |  | 24    |  |              |   |            
|                       | Liabilities relating
      to assets held for sale |  | 11&25 |  |              |   | 11,517      
|                       | Total current liabilities                          |  |       |  |              |   | 314,709     
|Long-term Liabilities  |                                                    |  |       |  |              |   |             
|                       | Debt, less current portion                         |  | 21    |  |              |   | 189,871     
|                       | Facility term
      financing                      |  | 23    |  |              |   |            
|                       | Deferred income tax
    liabilities                |  | 19    |  |              |   | 3,571       
|                       | Decommissioning
      obligations                  |  | 25    |  |              |   | 105,854     
|                       | Accrued pension obligations,
    net               |  | 18    |  |              |   |            
|                       | Puttable instrument
      financial liabilities    |  | 26    |  |              |   | 3,936       
|                       | Other                                              |  |       |  |              |   | 916         
|                       | Total long-term
      liabilities                  |  |       |  |              |   | 304,148     
|                       | Total liabilities                                  |  |       |  |              |   | 618,857     
|Equity                 |                                                    |  |       |  |              |   |             
|                       | Capital stock, fully paid                          |  | 27    |  |              |   | 383,116     
|                       | Treasury
    stock                                 |  | 27    |  |              |   | (68,980     
|                       | Contributed surplus                                |  |       |  |              |   | 13,037      
|                       | Retained
      earnings                            |  |       |  |              |   | 398,448     
|                       | Accumulated other comprehensive
      income       |  |       |  |              |   | (26,051     
|                       | Total shareholders
      equity                   |  |       |  |              |   | 699,570     
|                       | Non-controlling interests                          |  |       |  |              |   | 171         
|                       | Total equity                                       |  |       |  |              |   | 699,741     
|                       |                                                    |  |       |  |              | $ | 1,318,598   

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

72

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MFC INDUSTRIAL LTD.

CONSOLIDATED STATEMENTS OF
OPERATIONSFor the Years Ended December 31, 2013, 2012 and 2011(United
States Dollars in Thousands, Except per Share Amounts)

|                                                           |                                                   |      | Notes |   | 2013    |            | 2012 |  | 2011               
|---------------------------------------------------------- | ------------------------------------------------- | ---- | ----- | - | ------- | ---------- | ---- |  | -------------------
|                                                           |                                                   |      |       |   |         |            |      |  | (Recast-Notes 3&41)
|Net sales                                                  |                                                   | 5&28 |       | $ | 806,831 |            |      |  | $                  
|Equity income                                              |                                                   | 13   |       |   | 7,107   |            |      |  |                    
|                                                           | Gross
      revenues                              |      |       |   |         | 813,938    |      |  |                    
|                                                           |                                                  
|Costs and Expenses:                                        |                                                   |      |       |   |         |            |      |  |                    
|                                                           | Costs of sales                                    |      | 28    |   |         | 710,355    |      |  |                    
|                                                           | Impairment of
      available-for-sale securities |      |       |   |         | 517        |      |  |                    
|                                                           | Impairment of interest in resource properties     |      |       |   |         | 6,077      |      |  |                    
|                                                           | Selling,
      general and administrative         |      |       |   |         | 63,092     |      |  |                    
|                                                           | Share-based compensation  selling, general and   |      |       |   |         |            |      |  |                    
|                                                           | administrative                                    |      | 29    |   |         |           |      |  |                    
|                                                           | Finance
      costs                               |      |       |   |         | 15,172     |      |  |                    
|                                                           |                                                  
|                                                           |                                                   |      |       |   |         | 795,213    |      |  |                    
|                                                           |                                                  
|Income (loss) from operations                              |                                                   |      |       |   | 18,725  |            |      |  |                    
|                                                           |                                                  
|Other items:                                               |                                                   |      |       |   |         |            |      |  |                    
|                                                           | Exchange differences on                           |      |       |   |         |            |      |  |                    
|                                                           | foreign currency transactions                     |      |       |   |         | (1,820     | )    |  |                    
|                                                           | Change in fair
      value of puttable            |      |       |   |         |            |      |  |                    
|                                                           | instrument financial liabilities                  |      |       |   |         | (826       | )    |  |                    
|                                                           | Bargain purchase                                  |      | 3     |   |         |           |      |  |                    
|                                                           |                                                  
|Income before income taxes                                 |                                                   |      |       |   | 16,079  |            |      |  |                    
|Income tax (expense) recovery:                             |                                                   |      |       |   |         |            |      |  |                    
|                                                           | Income
taxes                                      |      | 30    |   |         | (1,574     | )    |  |                    
|                                                           | Resource property revenue
    taxes               |      | 30    |   |         | (5,003     | )    |  |                    
|                                                           |                                                   |      |       |   |         | (6,577     | )    |  |                    
|Net income for the year                                    |                                                   |      |       |   | 9,502   |            |      |  |                    
|                                                           | Less: Net loss
      (income) attributable        |      |       |   |         |            |      |  |                    
|                                                           | to
      non-controlling interests                |      |       |   |         | 163        |      |  |                    
|Net income attributable to owners of                       |                                                   |      |       |   |         |            |      |  |                    
|                                                           | the parent company                                |      |       |   | $       | 9,665      |      |  |                    
|                                                           |                                                  
|Basic earnings per share                                   |                                                   | 31   |       | $ | 0.15    |            |      |  | $                  
|                                                           |                                                  
|Diluted earnings per share                                 |                                                   | 31   |       | $ | 0.15    |            |      |  | $                  
|                                                           |                                                  
|Weighted average number of common shares
      outstanding |                                                   |      |       |   |         |            |      |  |                    
|                                                           |  basic                                           |      | 31    |   |         | 62,552,126 |      |  |                    
|                                                           |  diluted                                         |      | 31    |   |         | 62,756,791 |      |  |                    

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

73

---



MFC INDUSTRIAL LTD.

CONSOLIDATED STATEMENTS OF
COMPREHENSIVE INCOMEFor the Years Ended December 31, 2013, 2012 and
2011(United States Dollars in Thousands)

|                                                                         |  | 2013 |         | 2012 |  | 2011             
|------------------------------------------------------------------------ |  | ---- | ------- | ---- |  | -----------------
|                                                                         |  |      |         |      |  | (Recast-         
|                                                                         |  |      |         |      |  | Notes
      3&41)
|Net income for the
      year                                            |  | $    | 9,502   |      |  | $                
|Other comprehensive income (loss), net
      of tax                      |  |      |         |      |  |                  
|Exchange differences
      arising from translating financial statements |  |      |         |      |  |                  
|of foreign operations and U.S. dollar reporting                          |  |      | (31,394 | )    |  |                  
|Reclassification adjustment for exchange differences to                  |  |      |         |      |  |                  
|statements of operations for subsidiaries deconsolidated                 |  |      |        |      |  |                  
|Net exchange differences                                                 |  |      | (31,394 | )    |  |                  
|                                                                        
|Fair value gain (loss)
      on available-for-sale securities            |  |      | (112    | )    |  |                  
|Reclassification of fair value loss on available-for-sale                |  |      |         |      |  |                  
|securities to statements of operations for securities disposed
of        |  |      | 312     |      |  |                  
|Net fair value gain (loss) on available-for-sale securities              |  |      | 200     |      |  |                  
|                                                                        
|Remeasurement of the net
      defined benefit liabilities               |  |      | 1,369   |      |  |                  
|                                                                        
|Other comprehensive
      loss                                           |  |      | (29,825 | )    |  |                  
|Total comprehensive (loss) income for
      the year                     |  |      | (20,323 | )    |  |                  
|Comprehensive loss
      (income) attributable to                        |  |      |         |      |  |                  
|non-controlling
      interests                                          |  |      | 97      |      |  |                  
|Comprehensive income (loss)
      attributable to owners                 |  |      |         |      |  |                  
|of
      the parent company                                              |  | $    | (20,226 | )    |  | $                
|Other comprehensive
      loss, net of income taxes, comprised amounts:  |  |      |         |      |  |                  
|will not be reclassified subsequently to profit or loss                  |  | $    | 6,788   |      |  | $                
|will be reclassified
      subsequently to profit or loss                |  |      |         |      |  |                  
|when specific conditions are met                                         |  |      | (36,613 | )    |  |                  
|                                                                         |  | $    | (29,825 | )    |  | $                

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

74

---



MFC INDUSTRIAL LTD.

CONSOLIDATED STATEMENTS OF CHANGES IN
EQUITY For the Years Ended December 31, 2013, 2012 and 2011(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, 2010      |  | 66,031,916        |   |                    | $ | 381,673             |   |            | (3,470,495 | )                |  |              | $ | (67,501        | ) |                 |  | ****                       | $ | 5,775        | **** |           |  | $           | 213,519 |                   |  |                 |                   | $        | 1,991 |        |   |  |  | $ |  |       |  |  | $ | 12,299 |         |   | 
|                                 
|Net income                        |  |                  |   |                    |   |                    |   |            |           |                  |  |              |   |               |   |                 |  |                            |   |             |      |           |  |             | 12,193  |                   |  |                 |                   |          |       |       |   |  |  |   |   |      |  |  |   |        |        |   | 
|Dividends paid                    |  |                  |   |                    |   |                    |   |            |           |                  |  |              |   |               |   |                 |  |                            |   |             |      |           |  |             | (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        |      |           |  |             |        |                   |  |                 |                   |          |       |       |   |  |  |   |   |      |  |  |   |        |        |   | 
|Net change in available-for-sale  |  |                   |   |                    |   |                     |   |            |            |                  |  |              |   |                |   |                 |  |                            |   |              |      |           |  |             |         |                   |  |                 |                   |          |       |        |   |  |  |   |   |       |  |  |   |        |         |   | 
|securities                        |  |                  |   |                    |   |                    |   |            |           |                  |  |              |   |               |   |                 |  |                            |   |             |      |           |  |             |        |                   |  |                 |                   |          |       | (6,750 | ) |  |  |   |   |      |  |  |   |        |        |   | 
|Net
      exchange differences    |  |                  |   |                    |   |                    |   |            |           |                  |  |              |   |               |   |                 |  |                            |   |             |      |           |  |             |        |                   |  |                 |                   |          |       |       |   |  |  |   |   |      |  |  |   |        | (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  |   | 
|                                 
|Net income                        |  |                  |   |                    |   |                    |   |            |           |                  |  |              |   |               |   |                 |  |                            |   |             |      |           |  |             | 200,144 |                   |  |                 |                   |          |       |       |   |  |  |   |   |      |  |  |   |        |        |   | 
|Cancellation of fractional shares |  | (3,267            | ) |                    |   |                    |   |            |           |                  |  |              |   |               |   |                 |  |                            |   |             |      |           |  |             |        |                   |  |                 |                   |          |       |       |   |  |  |   |   |      |  |  |   |        |        |   | 
|Purchase of subsidiaries          |  |                  |   |                    |   |                    |   |            |           |                  |  |              |   |               |   |                 |  |                            |   |             |      |           |  |             |        |                   |  |                 |                   |          |       |       |   |  |  |   |   |      |  |  |   |        |        |   | 
|Buy-back of odd-lot shares        |  | (6,028            | ) |                    |   | (36                 | ) |            |           |                  |  |              |   |               |   |                 |  |                            |   |             |      |           |  |             | (8      | )                 |  |                 |                   |          |       |       |   |  |  |   |   |      |  |  |   |        |        |   | 
|Dividends paid and payable        |  |                  |   |                    |   |                    |   |            |           |                  |  |              |   |               |   |                 |  |                            |   |             |      |           |  |             | (13,762 | )                 |  |                 |                   |          |       |       |   |  |  |   |   |      |  |  |   |        |        |   | 
|Share-based compensation          |  |                  |   |                    |   |                    |   |            |           |                  |  |              |   |               |   |                 |  |                            |   | 9            |      |           |  |             |        |                   |  |                 |                   |          |       |       |   |  |  |   |   |      |  |  |   |        |        |   | 
|Issuance of preferred shares      |  | 493,105           |   |                    |   | 493                 |   |            | (493,105   | )                |  |              |   | (493           | ) |                 |  |                            |   |             |      |           |  |             |        |                   |  |                 |                   |          |       |       |   |  |  |   |   |      |  |  |   |        |        |   | 
|Net
      fair value gain         |  |                  |   |                    |   |                    |   |            |           |                  |  |              |   |               |   |                 |  |                            |   |             |      |           |  |             |        |                   |  |                 |                   |          |       | 4,640  |   |  |  |   |   |      |  |  |   |        |        |   | 
|Net gain on remeasurements        |  |                  |   |                    |   |                    |   |            |           |                  |  |              |   |               |   |                 |  |                            |   |             |      |           |  |             |        |                   |  |                 |                   |          |       |       |   |  |  |   |   | 961   |  |  |   |        |        |   | 
|Net
      exchange differences    |  |                  |   |                    |   |                    |   |            |           |                  |  |              |   |               |   |                 |  |                            |   |             |      |           |  |             |        |                   |  |                 |                   |          |       |       |   |  |  |   |   |      |  |  |   |        | (7,984  | ) | 
|Balance at December 31, 2012      |  |                   |   |                    |   |                     |   |            |            |                  |  |              |   |                |   |                 |  |                            |   |              |      |           |  |             |         |                   |  |                 |                   |          |       |        |   |  |  |   |   |       |  |  |   |        |         |   | 
|(Recast-Notes 3&41)               |  | 67,132,106        |   |                    |   | 382,746             |   |            | (4,579,980 | )                |  |              |   | (68,610        | ) |                 |  |                            |   | 13,037       |      |           |  |             | 399,574 |                   |  |                 |                   |          |       | (119   | ) |  |  |   |   | 961   |  |  |   |        | 2,998   |   | 
|                                 
|Net income                        |  |                  |   |                    |   |                    |   |            |           |                  |  |              |   |               |   |                 |  |                            |   |             |      |           |  |             | 9,665   |                   |  |                 |                   |          |       |       |   |  |  |   |   |      |  |  |   |        |        |   | 
|Dividends paid                    |  |                  |   |                    |   |                    |   |            |           |                  |  |              |   |               |   |                 |  |                            |   |             |      |           |  |             | (15,013 | )                 |  |                 |                   |          |       |       |   |  |  |   |   |      |  |  |   |        |        |   | 
|Issuance of preferred shares      |  |                   |   |                    |   |                     |   |            |            |                  |  |              |   |                |   |                 |  |                            |   |              |      |           |  |             |         |                   |  |                 |                   |          |       |        |   |  |  |   |   |       |  |  |   |        |         |   | 
|as
      dividends                |  | 369,830           |   |                    |   | 370                 |   |            | (369,830   | )                |  |              |   | (370           | ) |                 |  |                            |   |             |      |           |  |             |        |                   |  |                 |                   |          |       |       |   |  |  |   |   |      |  |  |   |        |        |   | 
|Acquisition and elimination of    |  |                   |   |                    |   |                     |   |            |            |                  |  |              |   |                |   |                 |  |                            |   |              |      |           |  |             |         |                   |  |                 |                   |          |       |        |   |  |  |   |   |       |  |  |   |        |         |   | 
|noncontrolling
    interests      |  |                  |   |                    |   |                    |   |            |           |                  |  |              |   |               |   |                 |  |                            |   |             |      |           |  |             | 4,222   |                   |  |                 |                   |          |       |       |   |  |  |   |   |      |  |  |   |        |        |   | 
|Net fair value gain               |  |                  |   |                    |   |                    |   |            |           |                  |  |              |   |               |   |                 |  |                            |   |             |      |           |  |             |        |                   |  |                 |                   |          |       | 200    |   |  |  |   |   |      |  |  |   |        |        |   | 
|Net
      gain on remeasurements  |  |                  |   |                    |   |                    |   |            |           |                  |  |              |   |               |   |                 |  |                            |   |             |      |           |  |             |        |                   |  |                 |                   |          |       |       |   |  |  |   |   | 1,369 |  |  |   |        |        |   | 
|Net exchange differences          |  |                  |   |                    |   |                    |   |            |           |                  |  |              |   |               |   |                 |  |                            |   |             |      |           |  |             |        |                   |  |                 |                   |          |       |       |   |  |  |   |   |      |  |  |   |        | (31,460 | ) | 
|Balance at December 31, 2013      |  | 67,501,936        |   |                    | $ | 383,116             |   |            | (4,949,810 | )                |  |              | $ | (68,980        | ) |                 |  |                            | $ | 13,037       |      |           |  | $           | 398,448 |                   |  |                 |                   |          | $     | 81     |   |  |  |   | $ | 2,330 |  |  |   | $      | (28,462 | ) | 

Total Comprehensive Income (Loss) for the
      Year
    
    
    Shareholders
      Equity
    
    Non-Controlling
      Interests
    
    Total2011
    
    $
    4,126
    
    
    
    $
    (1,042
    )
    
    
    $  3,0842012
    
    
    197,761
    
    
    
    
    980
    
    
    
    198,7412013
    
    
    (20,226
    )
    
    
    
    (97
    )
    
    
    (20,323
    )  Common
Shares
    
    Preferred
      Shares*
    
    Total Capital
      StockComponents of Capital Stock
    
    
    Number of
    Shares
    
    Amount
    
    Number of
    Shares
    
    Amount
    
    Number of
    Shares
    
    AmountBalance at December 31, 2010
    
    
    62,889,660
    
    
    
    $
    369,139
    
    
    
    3,142,256
    
    
    
    $
    12,534
    
    
    
    66,031,916
    
    
    $
    381,673Issuance of preferred
      shares
    
    
    
    
    
    
    
    
    
    
    
    616,380
    
    
    
    
    616
    
    
    
    616,380
    
    
    
    616Balance at December 31, 2011
    
    
    62,889,660
    
    
    
    
    369,139
    
    
    
    3,758,636
    
    
    
    
    13,150
    
    
    
    66,648,296
    
    
    
    382,289Cancellation of
      fractional shares
    
    
    (3,267
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,267
    )
    
    
    Buy-back of odd-lot shares
    
    
    (6,028
    )
    
    
    
    (36
    )
    
    
    
    
    
    
    
    
    
    
    
    (6,028
    )
    
    
    (36
    )Issuance of preferred
      shares
    
    
    
    
    
    
    
    
    
    
    
    493,105
    
    
    
    
    493
    
    
    
    493,105
    
    
    
    493Balance at December 31, 2012
    
    
    62,880,365
    
    
    
    
    369,103
    
    
    
    4,251,741
    
    
    
    
    13,643
    
    
    
    67,132,106
    
    
    
    382,746Issuance of preferred
      shares
    
    
    
    
    
    
    
    
    
    
    
    369,830
    
    
    
    
    370
    
    
    
    369,830
    
    
    
    370Balance at December 31, 2013
    
    
    62,880,365
    
    
    
    $
    369,103
    
    
    
    4,621,571
    
    
    
    $
    14,013
    
    
    
    67,501,936
    
    
    $
    383,116   *
    All the Preferred
      Shares were and are held by the Group as Treasury
  Stock.


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

75

---



MFC INDUSTRIAL LTD.

CONSOLIDATED STATEMENTS OF CASH
FLOWSFor the Year Ended December 31, 2013, 2012 and 2011(United States
Dollars in Thousands)

|                                                                                                   |  | 2013 |         | 2012                      |  | 2011
|-------------------------------------------------------------------------------------------------- |  | ---- | ------- | ------------------------- |  | ----
|                                                                                                   |  |      |         | (Recast-Notes
      3&41) |  |     
|Cash flows from continuing operating
      activities:                                             |  |      |         |                           |  |     
|Net
      income                                                                                   |  | $    | 9,502   |                           |  | $   
|Adjustments for:                                                                                   |  |      |         |                           |  |     
|Amortization, depreciation and depletion                                                           |  |      | 28,085  |                           |  |     
|Exchange differences on foreign currency transactions                                              |  |      | 1,820   |                           |  |     
|(Gain) loss on short-term securities                                                               |  |      | (5,681  | )                         |  |     
|(Gain) loss on available-for-sale securities                                                       |  |      | (231    | )                         |  |     
|Impairment of available-for-sale securities                                                        |  |      | 517     |                           |  |     
|Impairment of interest in resource properties                                                      |  |      | 6,077   |                           |  |     
|Write-down of inventories                                                                          |  |      |        |                           |  |     
|Stock-based compensation                                                                           |  |      |        |                           |  |     
|Deferred income taxes                                                                              |  |      | (1,049  | )                         |  |     
|Equity income                                                                                      |  |      | (7,107  | )                         |  |     
|Market value (increase) decrease on commodity inventories                                          |  |      | (5,342  | )                         |  |     
|Credit losses                                                                                      |  |      | 3,976   |                           |  |     
|Change in fair value of puttable instrument financial
liabilities                                  |  |      | 826     |                           |  |     
|Bargain purchase                                                                                   |  |      |        |                           |  |     
|Changes in operating assets and liabilities, net of effects of
      acquisitions and dispositions |  |      |         |                           |  |     
|Short-term cash deposits                                                                           |  |      | (4,189  | )                         |  |     
|Short-term securities                                                                              |  |      | 10,154  |                           |  |     
|Restricted cash                                                                                    |  |      | 582     |                           |  |     
|Bills of exchange                                                                                  |  |      |        |                           |  |     
|Receivables                                                                                        |  |      | (29,056 | )                         |  |     
|Inventories                                                                                        |  |      | 32,541  |                           |  |     
|Deposits, prepaid and other                                                                        |  |      | 1,152   |                           |  |     
|Assets held for sale                                                                               |  |      | (1,017  | )                         |  |     
|Short-term bank borrowings                                                                         |  |      | (26,385 | )                         |  |     
|Accounts payable and accrued expenses                                                              |  |      | (2,680  | )                         |  |     
|Deferred sale liabilities                                                                          |  |      |        |                           |  |     
|Income tax liabilities                                                                             |  |      | (1,049  | )                         |  |     
|Provisions                                                                                         |  |      | (10     | )                         |  |     
|Decommissioning obligations                                                                        |  |      | (4,067  | )                         |  |     
|Accrued pension obligations                                                                        |  |      | 296     |                           |  |     
|Other                                                                                              |  |      | 2,448   |                           |  |     
|Cash flows provided by (used in)
      operating activities                                        |  |      | 10,113  |                           |  |     
|Cash flows from continuing investing
      activities:                                             |  |      |         |                           |  |     
|Purchases of property, plant and equipment, net                                                    |  |      | (1,983  | )                         |  |     
|Purchases of
      hydrocarbon assets, net                                                         |  |      | (4,617  | )                         |  |     
|Purchases of long-term investments                                                                 |  |      | (1,950  | )                         |  |     
|Proceeds from
      sales of long-term securities                                                  |  |      | 7,039   |                           |  |     
|Increase in loan receivables                                                                       |  |      |        |                           |  |     
|Decrease in
      loan receivables                                                                 |  |      |        |                           |  |     
|Distributions from joint ventures, net                                                             |  |      | 7,227   |                           |  |     
|Acquisition of
      subsidiaries (net of cash acquired)                                           |  |      | (6,637  | )                         |  |     
|Other                                                                                              |  |      | 74      |                           |  |     
|Cash flows provided by (used in) investing
      activities                                        |  |      | (847    | )                         |  |     
|Cash flows from continuing financing
      activities:                                             |  |      |         |                           |  |     
|Debt
      repayment                                                                               |  |      | (36,716 | )                         |  |     
|Debt borrowing                                                                                     |  |      | 98,842  |                           |  |     
|Reduction in
      facility term financing                                                         |  |      | (21,894 | )                         |  |     
|Due to a customer                                                                                  |  |      | 22,166  |                           |  |     
|Repurchases of
      shares                                                                        |  |      |        |                           |  |     
|Dividends paid to shareholders                                                                     |  |      | (15,013 | )                         |  |     
|Dividends paid
      to non-controlling interests                                                  |  |      | (781    | )                         |  |     
|Cash flows provided by (used in)
      financing activities                                        |  |      | 46,604  |                           |  |     
|Exchange rate effect on cash and cash
      equivalents                                            |  |      | 2,513   |                           |  |     
|Increase (decrease) in cash and cash
      equivalents                                             |  |      | 58,383  |                           |  |     
|Cash and cash equivalents, beginning of
    year                                                   |  |      | 273,790 |                           |  |     
|Cash and cash equivalents, end of
      year                                                       |  | $    | 332,173 |                           |  | $   
|Cash and cash equivalents at end of year consisted
      of:                                       |  |      |         |                           |  |     
|Cash                                                                                               |  | $    | 232,104 |                           |  | $   
|Money market
      and highly liquid funds                                                         |  |      | 100,069 |                           |  |     
|                                                                                                   |  | $    | 332,173 |                           |  | $   
|                                                                                                  
|Supplemental cash flows disclosure (see
      Note 30)                                             |  |      |         |                           |  |     
|Interest
      received                                                                            |  | $    | 2,875   |                           |  | $   
|Dividends received                                                                                 |  |      | 295     |                           |  |     
|Interest
      paid                                                                                |  |      | (9,233  | )                         |  |     
|Income taxes paid (including resource property revenue taxes)                                      |  |      | (7,753  | )                         |  |     

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

76

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MFC INDUSTRIAL LTD.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTSDECEMBER 31, 2013

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. The primary business of MFC Industrial is the
commodity supply chain business, which is globally focused. The Company, through
its subsidiaries, source, produce, process, transport, finance, assess risk and
warehouse these commodities for producers and customers around the
world.

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

**A. Basis of Presentation**

***Basis of Accounting***

These consolidated financial statements have been prepared in accordance
with International Financial Reporting Standards (IFRS) as issued by the
International Accounting Standards Board (the IASB). MFC Industrial complies
with all the requirements of IFRS.

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 and certain assets that are measured at fair
value less costs to sell) 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***

The Group adopted IFRS 10,Consolidated
Financial Statements(IFRS 10), IFRS 11,Joint Arrangements(IFRS 11), IFRS 12,Disclosure of
Interests in Other Entities(IFRS 12)and amendments toIAS 27,Separate Financial
Statements(IAS 27) and IAS 28,Investments in Associates and Joint
Ventures(IAS 28), effective January 1,
2013. The adoption of these new standards and amendments did not have
recognition and measurement impacts on the Companys consolidated financial
statements.

These consolidated financial statements include the accounts of MFC
Industrial and entities it controls (collectively, the Group). The Company
controls an investee if and only if the investor has all the following: (a)
power over the investee; (b) exposure, or rights, to variable returns from its
involvement with the investee; and (c) the ability to use its power over the
investee to affect the amount of the investors returns. When the Group holds,
directly or indirectly, more than 50% of the voting power of the investee, it is
presumed that the Group controls the investee, unless it can be clearly
demonstrated that this is not the case. The Group also consolidates a structured
entity if the Group is exposed, or has rights, to variable returns from its
involvement with the entity (consolidated structured entity), even though the
Group holds 50% or less of the voting power. 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.

77

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MFC INDUSTRIAL LTD.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS DECEMBER 31, 2013

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

When the proportion of the equity held by non-controlling interests changes, the
Group adjusts the carrying amounts of the controlling and non-controlling
interests to reflect the changes in their relative interests in the subsidiary.
The Group recognizes directly in equity any difference between the amount by
which the non-controlling interests are adjusted and the fair value of the
consideration paid or received, and attribute it to the owners of the
Group.

When the Group loses control of a subsidiary, it (a) derecognizes: (i) the
assets (including any goodwill) and liabilities of the subsidiary at their
carrying amounts at the date when control is lost; and (ii) the carrying amount
of any non-controlling interests in the former subsidiary at the date when
control is lost (including any components of other comprehensive income
attributable to them); (b) recognizes: (i) the fair value of the consideration
received, if any, from the transaction, event or circumstances that resulted in
the loss of control; (ii) if the transaction, event or circumstances that
resulted in the loss of control involves a distribution of shares of the
subsidiary to owners in their capacity as owners, that distribution; and (iii)
any investment retained in the former subsidiary at its fair value at the date
when control is lost: (c) reclassifies to profit or loss, or transfer directly
to retained earnings if required by other IFRSs, the amounts recognized in other
comprehensive income in relation to the subsidiary and (d) recognize any
resulting difference as a gain or loss in profit or loss attributable to the
Group.

**Interests in joint arrangements**- A joint arrangement is an arrangement of which two or more parties have
joint control and has the following characteristics: (a) the parties are bound
by a contractual arrangement and (b) the contractual arrangement gives two or
more of those parties joint control of the arrangement.

A
joint arrangement is either a joint operation or a joint venture. The
classification of joint arrangements requires the parties to assess their rights
and obligations arising from the arrangement. Generally, a joint arrangement
that is not structured through a separate vehicle is a joint operation. In such
cases, the contractual arrangement establishes the parties rights to the
assets, and obligations for the liabilities, relating to the arrangement, and
the parties rights to the corresponding revenues and obligations for the
corresponding expenses. A joint arrangement in which the assets and liabilities
relating to the arrangement are held in a separate vehicle can be either a joint
venture or a joint operation, in such a case the Group examines (i) the legal
form of the separate vehicle; (ii) the terms of the contractual arrangement; and
(iii) when relevant, other facts and circumstances. A joint venture is a joint
arrangement whereby the parties that have joint control of the arrangement have
rights to the net assets of the arrangement. The Group does not have interests
in joint operations.

The Group recognizes its interests in joint ventures as investments and accounts
for these investments using the equity method in accordance with IAS
28.

**Interests in associates**- An
associate is an entity over which the Group has significant influence.
Significant influence is the power to participate in the financial and operating
policy decisions of the investee but is not control or joint control of those
policies. When the Group holds, directly or indirectly, 20% or more of the
voting power of the investee, it is presumed that the Group has significant
influence, unless it can be clearly demonstrated that this is not the case. The
results, assets and liabilities of an associate are incorporated in these
consolidated financial statements using the equity method of
accounting.

Under the equity method, on initial recognition the investment in an associate
or a joint venture is recognized at cost, and the carrying amount is increased
or decreased to recognize the Groups share of the profit or loss of the
investee after the date of acquisition. The Groups share of the investees
profit or loss is recognized in the Groups profit or loss. Distributions
received from an investee reduce the carrying amount of the investment.
Adjustments to the carrying amount may also be necessary for changes in the
Groups proportionate interest in the investee arising from changes in the
investees other comprehensive income.

After application of the equity method, the Group applies IAS 39, Financial
Instruments: Recognition and Measurement (IAS 39), to determine whether it is
necessary to recognize any impairment loss with respect to its net investment in
an associate or joint venture and its interest in an associate or joint venture
that does not constitute part of the net investment and the amount of that
impairment loss.

The Group discontinues the use of the equity method of accounting from the date
when the entity in which has interests ceases to be an associate or a joint
venture.

78

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MFC INDUSTRIAL LTD.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS DECEMBER 31, 2013

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

The financial statements of MFC Industrial and its subsidiaries, joint
arrangements 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.

Prior to 2013, the Group consolidated special purpose entities pursuant to
SIC-12,Consolidation  Special Purpose
Entities(SIC-12). SIC-12 was superseded by
IFRS 10 in 2013.

***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 arrangements 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. The functional currency of MFC Industrial and the
majority of its foreign operations is currencies other than the U.S.
dollar.

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 denominated in a foreign currency that are measured in terms of historical
cost are translated using the exchange rate at the date of the transaction; and
(c) foreign currency non-monetary items that are measured at fair value are
translated using the exchange rates at the date when the fair value was
determined.

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 periods 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 recorded 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.

79

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MFC INDUSTRIAL LTD.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS DECEMBER 31, 2013

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

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    |  | RMB   
|------------------------------------- | ------ |  | ------ |  | ------
|Closing rate at December 31,
    2013 | 0.9402 |  | 1.3779 |  | 0.1652
|Average rate for the year 2013        | 0.9710 |  | 1.3284 |  | 0.1626
|Closing rate at December 31,
    2012 | 1.0051 |  | 1.3186 |  | 0.1605
|Average rate for the year 2012        | 1.0004 |  | 1.2855 |  | 0.1585
|Closing rate at December 31,
    2011 | 0.9833 |  | 1.2972 |  | 0.1589
|Average rate for the year 2011        | 1.0110 |  | 1.3918 |  | 0.1548

Fair Value
Measurement

Certain assets and liabilities of the Group are measured at fair
value.

Fair value is the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants at
the measurement date. A fair value measurement is for a particular asset or
liability. Therefore, when measuring fair value, the Group takes into account
the characteristics of the asset or liability if market participants would take
those characteristics into account when pricing the asset or liability at the
measurement date. A fair value measurement assumes that the transaction to sell
the asset or transfer the liability takes place either:

| | (a) | in the principal
      market for the asset or liability; or                                                 
| | --- | -------------------------------------------------------------------------------------------------------------
| |    
| | (b) | in the absence of a
      principal market, in the most advantageous market for the asset or
      liability.

The Group measures the fair value of an asset or a liability using the
assumptions that market participants would use when pricing the asset or
liability, assuming that market participants act in their economic best
interest.

The Group uses valuation techniques that are appropriate in the circumstances
and for which sufficient data are available to measure fair value, maximizing
the use of relevant observable inputs and minimizing the use of unobservable
inputs. IFRS 13,Fair Value
Measurement(IFRS 13), establishes a fair
value hierarchy that categorizes the inputs to valuation techniques used to
measure fair value into three levels:

Level 1 inputs are quoted prices (unadjusted) in active markets for identical
assets or liabilities that the entity can access at the measurement
date.

Level 2 inputs are inputs other than quoted prices included within Level 1 that
are observable for the asset or liability, either directly or
indirectly.

Level 3 inputs are unobservable inputs for the asset or liability.

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.

Non-current
Assets Held for Sale

A
non-current asset (or disposal group) is classified as held for sale if its
carrying amount will be recovered principally through a sale transaction rather
than through continuing use. For this to be the case, the asset (or disposal
group) must be available for immediate sale in its present condition subject
only to terms that are usual and customary for sale of such asset (or disposal
group), the appropriate level of management must be committed to a plan to sell
the asset (or disposal group) and an active program to locate a buyer and
complete the plan must have been initiated. Further, the asset (or disposal
group) must be actively marketed for sale at a price that is reasonable in
relation to its current fair value and the sale is highly probable to complete
within one year from the date of classification, except as permitted under
certain events and circumstances. If the aforesaid criteria are no longer met,
the Group ceases to classify the asset (or disposal group) as held for
sale.

80

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MFC INDUSTRIAL LTD.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS DECEMBER 31, 2013

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

Non-current assets (and disposal groups) are classified as held for sale and
measured at the lower of their carrying amounts and fair values less costs to
sell, except for investment property which is measured at fair value (see Note
1.B.(xi)). The Group does not depreciate or amortize a non-current asset while
it is classified as held for sale.

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.

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 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

81

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MFC INDUSTRIAL LTD.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS DECEMBER 31, 2013

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

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 which 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).

Regular way purchases and sales of financial assets are accounted for at the
settlement date.

A
gain or loss on a financial asset or financial liability classified as at fair
value through profit or loss is recognized in profit or loss for the period in
which it arises. A gain or loss on an available-for-sale financial asset is
recognized 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 profit or loss 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.

(ii) Cash and
Cash Equivalents

Cash and cash equivalents 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
maturities of three months or less from the date of acquisition and are
generally interest-bearing.

(iii) Restricted
Cash

Restricted cash is cash and cash equivalents whose use is restricted pursuant to
the terms of a contract or an agreement.

(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 profit or loss.

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.
Unrealized gains and losses are recorded in other comprehensive income, net of
income taxes. Upon disposition of available-for-sale securities, the gains and
losses previously recorded in other comprehensive income are reclassified to
profit or loss.

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.

82

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MFC INDUSTRIAL LTD.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS DECEMBER 31, 2013

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

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.

(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 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, which
does not apply to a 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.

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 consolidated statement of financial
position are recognized in profit or loss 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 profit or loss as they
arise.

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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 profit or loss 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 profit or loss. Amounts
accumulated in equity are reclassified to profit or loss 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 profit or loss.

(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 and is assigned by using the first-in, first-out formula for the
inventories in the commodity business and weighted average cost formula for
other inventories. 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.

All of real estate held for sale are located in Europe.

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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 in 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.

All of investment property located in Europe.

(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 profit or loss when incurred.

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

Lives
    
    MethodBuildings
    20 years
    
    straight-lineProcessing plant and
equipment
    5 to 20 years
    
    straight-lineRefinery and power
      plants
    20 to 30
    years
    
    straight-lineOffice 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(IAS 8). 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 amount
of property, plant and equipment is reviewed for impairment whenever events or
changes in circumstances indicate the carrying amount may not be
recoverable.

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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 profit or loss in the period in
which the item is derecognized.

(xiii)
Exploration and Evaluation Assets

Pre-license costs are recognized in profit or loss as incurred.

Exploration and evaluation costs, including the costs of acquiring undeveloped
land and drilling costs are initially capitalized until the drilling of the well
is complete and the results have been evaluated in order to determine the
technical feasibility and commercial viability of the asset. 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 land are reclassified to interests in resource
properties; or from hydrocarbon undeveloped land to hydrocarbon probable
reserves. The cost of hydrocarbon undeveloped land that expires or any
impairment recognized during a period is charged to profit or loss.

(xiv) Interests
in Resource Properties

The Groups interests in resource properties include a royalty interest in an
iron ore mine and hydrocarbon development and production assets, as well as
extracting facilities which were sold in 2013.

(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 profit or loss
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.

(c)
Depletion

The net carrying amount 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 calculated based on proved
producing reserves, taking into account estimated future development costs
necessary to bring those reserves into production and the estimated salvage
values of the assets at the end of their useful lives. 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

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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 the royalty interest in an iron ore and extracting facilities, depletion is
calculated based on proved and probable reserves. The estimate of the reserves
of 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 measured 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 intangible assets are reviewed on an annual basis and,
if necessary, changes in useful lives are accounted for
prospectively.

(xvi) Farm-out
Arrangements

The Group 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 amounts of its non-financial 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.

Hydrocarbon probable resources are tested for impairment when they are
reclassified to interests in resource properties or when indicators exist that
suggest the carrying value may exceed the recoverable amount. For purposes of
impairment testing, hydrocarbon probable resources are grouped with related
producing resource properties into a cash-generating unit (CGU) with common
geography and geological characteristics.

Unproved land is evaluated for indicators separately from interest in resource
properties and hydrocarbon probable resources. Impairment is assessed by
comparing the carrying value of unproved land to values determined by an
independent land evaluator based on recent market transactions.

The recoverable amount is the higher of an assets fair value less 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. A CGU
is the smallest identifiable group of assets that generates cash inflows that
are largely independent of the cash inflows from other assets or groups of
assets. 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 amounts 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.

An
assessment is made at 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.

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

A
reversal of an impairment loss for a CGU is allocated to the assets of the CGU,
pro-rata with the carrying amounts of those assets.

(xviii)
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.

(xix) 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 profit or loss. 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.

(xx) 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.

Current service cost and net interest on the net defined benefit liability
(asset) are recognized in profit or loss.

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 reclassified
to profit or loss in a subsequent period.

(xxi) 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.

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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.

(xxii)
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.

(xxiii)
Puttable Instrument Financial Liabilities

A puttable financial instrument
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 are classified as a
financial liability, which is recognized at an amount equals 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 profit or loss.

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

(xxiv) Own
Equity Instruments

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

(xxv)
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.

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Summary of Significant Accounting Policies (continued)

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.
Dividend income is recognized when the Groups right as a shareholder to receive
payment has been established.

(xxvi) 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 taxes as well as provision for warranty when applicable.

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

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

***(xxvii) 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.

***(xxviii) 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 profit or loss, 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 profit or loss
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.

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(xxix)
Finance Costs

Finance
costs comprise interest expense on borrowings, accretion of the discount on
provisions, decommissioning obligations and other 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 profit or loss 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 profit or loss 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.

***(xxx) 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 profit or loss 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 initialrecognition of an
      asset or liability in a transaction that is not a business combination
      and, at the time ofthe transaction,
      affects neither the accounting profit nor taxable profit or
      loss.                                                
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |  |                                                                                                                                                                                                                                                                                                                                                                                              
| | - |  | in respect of
      taxable temporary differences associated with investments in subsidiaries,
      branches andassociates, and interests in
      joint arrangements, except where the Group is able to control the timing
      of thereversal of the temporary
      differences and it is probable that the temporary differences will not
      reverse inthe 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 fromthe initial recognition of an
      asset or liability in a transaction that is not a business combination
      and, at thetime of the transaction,
      affects neither the accounting profit nor taxable profit or
      loss.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |  |                                                                                                                                                                                                                                                                                                                                                     
| | - |  | in respect of
      deductible temporary differences associated with investments in
      subsidiaries, branches andassociates, and
      interests in joint arrangements, deferred tax assets are recognized only
      to the extent thatit 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.

91

---



MFC INDUSTRIAL LTD.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTSDECEMBER 31, 2013

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

Deferred
income tax assets and liabilities are measured at the tax rates that are
expected to apply in 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 in other
comprehensive income or equity is recognized in other comprehensive income or
equity and not in profit or loss.

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 arrangement 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.

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

(xxxi)
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.

***(xxxii) Business
Combinations***

The Group 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.

92

---



MFC INDUSTRIAL LTD.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTSDECEMBER 31, 2013

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

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.

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(xxix)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)
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. In the event facts and circumstances
surrounding factors used to determine the Groups CGUs change, the Group will
re-determine its appropriate groupings of CGUs.

(ii) Assets
Held for Sale

The Group applies judgment to
determine whether an asset (disposal group) is available for immediate sale in
its present condition and that its sale is highly probable and therefore should
be classified as held for sale at the balance sheet date. In order to assess
whether it is highly probable that the sale can be completed within one year or
the extension period, management reviews the business and economic factors, both
macro and micro, which include the industry trends and capital markets. It is
also open to all forms of sales, including exchanges of non-current assets for
other non-current assets when the exchange will have commercial substance in
accordance with IAS 16,Property, Plant and
Equipment.

(iii)
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 and impairment tests.

93

---



MFC INDUSTRIAL LTD.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTSDECEMBER 31, 2013

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

**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.

***(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 amounts of the Groups interests 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) Recoverable Value of
Receivables***

The Group had recognized receivables
(including trade and other receivables) aggregating $146,087 at December 31,
2013. 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.

***(iii) Provision for
Inventories***

The Group had recorded inventories
of $88,844 at December 31, 2013. 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.

***(iv) Impairment of Assets Held
for Sale***

The Group had hydrocarbon assets
held for sale aggregating $61,659 at December 31, 2013. The Group measures a
non-current asset (or disposal group) classified as held for sale at the lower
of its carrying amount and fair value less costs to sell and recognizes an
impairment loss for any initial or subsequent write-down of the asset (or
disposal group) to fair value less costs to sell, to the extent that it has not
been recognized. Fair value is defined as the price that would be received to
sell an asset in an orderly transaction between market participants at the
measurement date, which generally does not include a transaction which takes
place under duress or when

94

---



MFC INDUSTRIAL LTD.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTSDECEMBER 31, 2013

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

the seller is experiencing financial
difficulty in a forced sale. Management relies on external valuation reports
using discounted cash flows to measure the fair values of the hydrocarbon
interests which are classified as assets held for sale. Such valuation is
reviewed and compared to market and industry data so as to ensure that the
trends and fluctuations are reconciled.

The Group
had investment property of $35,685 which was classified as assets held for sale
at December 31, 2013 and measured at fair value.

***(v) Impairment of Equity Method
Investments***

The Group had investments in joint
ventures accounted for using the equity method aggregating $24,366 at December
31, 2013. Investments in joint ventures are reviewed for impairment at the
reporting date. Determining whether an investment balance is impaired requires
an estimation of the recoverable amount of the joint venture. The recoverable
amount 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. Decreases
in estimates of future expected cash flows may result in a write-down of the
Groups investments in equity method investments.

***(vi) Impairment of Exploration
and Evaluation Assets***

The Group had recorded exploration
and evaluation assets of $106,621 at December 31, 2013. Exploration and
evaluation assets are assessed for impairment when facts and circumstances
suggest that the carrying amount of an exploration and evaluation asset may
exceed its recoverable amount. If such indicators exist, any impairment is
determined 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.

***(vii) Impairment of Other
Non-financial Assets***

The Group had property, plant and
equipment and interests in resource properties aggregating $454,315 at December
31, 2013. Impairment of the Groups non-financial assets is evaluated at the 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. Increases
in future costs and/or decreases in estimates of reserves, future production
rates and oil and gas prices may result in a write-down of the Groups property,
plant and equipment and interests in resource properties.

***(viii)
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, branches and associates and interests in joint
arrangements 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.

95

---



MFC INDUSTRIAL LTD.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTSDECEMBER 31, 2013

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 income 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 $17,941 at December 31, 2013. 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 and tax credit 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, branches and associates and interests in joint arrangements 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.

***(ix) Decommissioning
Obligations***

The Group estimates the
decommissioning obligations for its resource properties and facilities and had
recorded long-term obligations of $105,854 at December 31, 2013. In most
instances, dismantling of assets and remediation occurs many years into the
future. The amount to be recognized for the decommissioning obligations
fluctuates 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.

***(x)
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 accounted for 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**

IFRIC 21, Levies, provides the
following guidance on recognition of a liability to pay levies:

- The liability is recognized progressively if the
  obligating event occurs over a period of time.
- If an obligation is triggered on reaching a
  minimum threshold, the liability is recognized when that minimum threshold is reached.

96

---



MFC INDUSTRIAL LTD.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTSDECEMBER 31, 2013

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

The same
recognition principles are applied in interim financial reports. IFRIC 21 is
effective for annual periods beginning on or after 1 January 2014. Management
anticipates that the application of this new standard will not have significant
impacts on the Groups consolidated financial statements.

IFRS 9,Financial Instruments(IFRS
9),was
published in November 2009 and contained requirements for financial assets.
Requirements for financial liabilities were added to IFRS 9 in October 2010.
Most of the requirements for financial liabilities were carried forward
unchanged from IAS 39. However, some changes were made to the fair value option
for financial liabilities to address the issue of own credit risk. The IASB
decided that a mandatory date of 1 January 2015 would not allow sufficient time
for entities to prepare to apply the new Standard because the impairment phase
of the IFRS 9 project has not yet been completed. Accordingly, the IASB decided
that a new date should be decided upon when the entire IFRS 9 project is closer
to completion. The amendments made to IFRS 9 in November 2013 remove the
mandatory effective date from IFRS 9. However, entities may still choose to
apply IFRS 9 early and management has decided not to early apply IFRS
9.

|Note
      2. | Capital DisclosureontheGroupsObjectives,PoliciesandProcessesforManagingIts 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.

Consistent 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 other than amounts in
accumulated other comprehensive income relating to cash flow hedges, and
includes some forms of subordinated debt. The long-term debt-to-equity ratio is
calculated as long-term debt divided by shareholders equity. The calculations
are based on continuing operations.

| |                                                |  | 2013 |                    | 2012             
| | ---------------------------------------------- |  | ---- | ------------------ | -----------------
| |                                                |  |      |                    | (Recast-         
| |                                                |  |      |                    | Notes
      3&41)
| | Total debt                                     |  | $    | 234,740            |                  
| | Less: cash and cash
    equivalents            |  |      | (332,173           | )                
| | Net debt (net cash
      and cash equivalents) |  | $    | (97,433            | )                
| | Shareholders equity                           |  | $    | 699,570            |                  
| | Debt-to-adjusted
      capital ratio           |  |      | Not
    applicable |                  

97

---



MFC INDUSTRIAL LTD.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTSDECEMBER 31, 2013

|Note
      2. | Capital DisclosureontheGroupsObjectives,PoliciesandProcessesforManagingIts Capital Structure
  (continued)
|------------- | -----------------------------------------------------------------------------------------------------------

There
were no amounts in accumulated other comprehensive income relating to cash flow
hedges and no subordinated debt instruments as at December 31, 2013 and 2012.
The debt-to-adjusted capital ratio in 2013 and 2012 were not applicable since
the Group had a net cash and cash equivalents balance.

| |                                      |  | 2013 |         | 2012
| | ------------------------------------ |  | ---- | ------- | ----
| |                                      |  |      |         |     
| |                                      |  |      |         |     
| | Long-term
    debt                   |  | $    | 189,871 |     
| | Shareholders equity                 |  | $    | 699,570 |     
| | Long-term
      debt-to-equity ratio |  |      | 0.27    |     

During 2013, the Groups strategy,
which was unchanged from 2012, 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 0.27 and 0.16 as at December 31, 2013 and
2012, respectively. The increase in the debt-to-equity ratio in 2013 reflects
the Groups objectives of long-term business growth and development.

Note 3. Acquisitions of Consolidated
Entities

***Year
2013***

There were no business combinations
in 2013.

***Year
2012***

MFC Energy

On September 6, 2012, the Company
completed the take-over bid (the Offer) for all of the issued and outstanding
common shares of MFC Energy (the MFC Energy Shares) for cash consideration of
C$1.25 per MFC Energy Share. The Offer was made pursuant to a support agreement
between MFC Energy 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 MFC Energy 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 MFC Energy Shares not already owned by the Group.
As a result of such compulsory acquisition, the indirect wholly-owned subsidiary
acquired 100% ownership of MFC Energy.

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 MFC Energy, 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 MFC Energy Shares. No additional consideration was paid in connection
with the conversion of the Warrants.

The consideration paid by the Group
for the MFC Energy Shares under the Offer and compulsory acquisition was
approximately $33,535 (C$32,948) in cash.

MFC Energy is actively engaged in
the exploration, development and production of hydrocarbons in western Canada.
The acquisition was made to enhance the investment and strategic growth
objectives of the Groups global commodity supply chain business. As a result,
MFC Energys financial position and results were 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 MFC Energy Shares and $8,331 (C$8,185) paid for the Warrants.

98

---



MFC INDUSTRIAL LTD.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTSDECEMBER 31, 2013

Note 3. Acquisitions of Consolidated
Entities (continued)

The
following table summarizes the final purchase consideration, the preliminary
purchase price allocation in the Companys 2012 consolidated financial
statements and the final purchase price allocation, with the applicable recast
adjustments made upon finalization during 2013.

Preliminary
    
    
    
    
    
    
    
    
    
    
    
    
    
    Finalpurchase
    
    
    
    
    
    
    
    
    
    
    
    
    
    purchaseprice
    
    Recast
    
    Error
    
    priceallocation
    
    adjustments
    
    correction
    
    allocationReceivables
    
    $
    16,035
    
    
    
    $
    
    
    
    
    
    $
    
    
    
    
    $
    16,035Exploration and evaluation
    assets
    
    
    150,564
    
    
    
    
    (17,945
    )
    
    
    
    
    
    
    
    
    
    132,619Property, plant and
      equipment
    
    
    49,552
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    49,552Interests in resource
    properties
    
    
    223,057
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    223,057Assets held for
      sale
    
    
    117,062
    
    
    
    
    (4,465
    )
    
    
    
    
    
    
    
    
    
    112,597Deferred tax assets
    
    
    57,137
    
    
    
    
    7,130
    
    
    
    
    
    (6,504
    )
    
    
    
    57,763Other
assets
    
    
    5,089
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,089618,496
    
    
    
    
    (15,280
    )
    
    
    
    
    (6,504
    )
    
    
    
    596,712Short-term bank
      borrowings
    
    
    (115,061
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (115,061
    )Facility term financing
    
    
    (26,383
    )
    
    
    
    (4,804
    )
    
    
    
    
    
    
    
    
    
    (31,187
    )Accounts payables and
      accrued expenses
    
    
    (30,583
    )
    
    
    
    (1,737
    )
    
    
    
    
    
    
    
    
    
    (32,320
    )Decommissioning obligations
    
    
    (138,369
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (138,369
    )Deferred income tax
      liabilities
    
    
    (3,772
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,772
    )Accrued pension obligations,
    net
    
    
    (2,227
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,227
    )Liabilities relating
      to assets held for sale
    
    
    (15,590
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (15,590
    )Net assets
      acquired
    
    
    286,511
    
    
    
    
    (21,821
    )
    
    
    
    
    (6,504
    )
    
    
    
    258,186Total consideration
      paid
    
    
    41,866
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (41,866
    )Bargain
      purchase
    
    $
    244,645
    
    
    
    $
    (21,821
    )
    
    
    
    $
    (6,504
    )
    
    
    $
    216,320


For a recast and error correction of
the consolidated statement of financial position at December 31, 2012 and the
consolidated statement of operations for the year ended December 31, 2012,
please see Note 41.

MFC Energy 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 MFC Energy had
been much lower than its net assets at the time of acquisition. The Group
acquired the MFC Energy Shares at their market price. As a result, the Group
recognized $216,320 in bargain purchase gain in profit or loss which is
non-taxable.

The Group measured 100,000 MFC
Energy Shares held by the Group prior to the acquisition at the 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 profit or loss.

There were no intangible assets
other than goodwill acquired.

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 profit or loss.

As a result of the completion of the
Offer and related transactions, the Group has consolidated MFC Energys
operations since September 7, 2012. The amounts of revenue and net income of MFC
Energy since the acquisition date included in profit or loss for the reporting
period of 2012 were $30,402 and $1,916, respectively.

99

---



MFC INDUSTRIAL
LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDECEMBER 31, 2013

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 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 interest and
the shareholder loan 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. A bargain purchase gain of
$2,359 was recognized. The 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 Chinese
activities. The Group has 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
$2,313 was to be paid 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 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 26). 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.

In 2013, ACCR was
reorganized and became MFC Resources Inc. In 2013, the Group also settled the
puttable instruments with respect to ACCR and its affiliate (see Note
26).

***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.

**Note 4.
Business Segment Information**

The Group is
primarily in the global commodities supply chain business.

The Groups
integrated operations include a wide range of commodities such as metals,
ceramics, minerals, natural gas, oil, chemicals, plastics, food and beverage
additives, animal feed and wood products, which are supported by our captive
sources of commodities through strategic investments and other sources secured
by the Group from third parties.

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.

100

---



MFC INDUSTRIAL
LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDECEMBER 31,
2013

Note 4. Business Segment
Information (continued)

***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 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.

The 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.

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, 2013, 2012 and
2011, respectively:

2013
    
    2012
    
    2011Commodities and resources
    
    $
    768,795
    
    $
    443,055
    
    $
    470,242Fees
    
    
    9,440
    
    
    8,389
    
    
    6,670Gains on securities
    
    
    6,318
    
    
    1,150
    
    
    Interest
    
    
    2,385
    
    
    10,489
    
    
    10,701Dividend
    
    
    295
    
    
    360
    
    
    338Equity income
    
    
    7,107
    
    
    6,152
    
    
    5,912Other
    
    
    19,598
    
    
    16,064
    
    
    20,041Total revenues
    
    $
    813,938
    
    $
    485,659
    
    $
    513,904


The Groups
revenues for 2012 include the revenues of MFC Energy Group from September 7,
2012.

101

---



MFC INDUSTRIAL
LTD.

NOTES TO CONSOLIDATED
FINANCIAL STATEMENTSDECEMBER 31, 2013

Note 4. Business Segment
Information (continued)

***Segment
Operating Results***

Year ended December 31,
      2013Commodities
    
    Merchantand
    resources
    
    banking
    
    All other
    
    TotalRevenues from external customers
    
    $
    778,487
    
    
    
    $
    12,568
    
    
    
    $
    22,883
    
    
    
    
    $
    813,938Intersegment sale
    
    
    1,771
    
    
    
    
    7,641
    
    
    
    
    345
    
    
    
    
    
    9,757Interest expense
    
    
    14,491
    
    
    
    
    28
    
    
    
    
    73
    
    
    
    
    
    14,592Income (loss) from continuing operationsbefore income taxes
    
    
    7,350
    
    
    
    
    18,293
    
    
    
    
    (9,564
    )
    
    
    
    
    16,079


Year ended December 31,
2012Commodities
    
    Merchantand resources
    
    banking
    
    All other
    
    TotalRevenues from
      external customers
    
    $
    455,898
    
    
    
    
    $
    11,751
    
    
    
    
    $
    18,010
    
    
    
    
    $
    485,659Intersegment
      sale
    
    
    455
    
    
    
    
    
    10,950
    
    
    
    
    
    343
    
    
    
    
    
    11,748Interest
      expense
    
    
    11,616
    
    
    
    
    
    45
    
    
    
    
    
    4
    
    
    
    
    
    11,665(Loss) income from
      continuing operationsbefore income taxes
    
    
    (23,946
    )*
    
    
    
    
    231,632
    **
    
    
    
    
    (9,301
    )
    
    
    
    
    198,385


|*  |  | including
      impairment of interests in resource properties of $42,631 and inventory
      write-off of $19,434 in a former subsidiary (which was sold in 2013)(see
      Note 28).
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|** |  | including
      bargain purchase of $218,679.                                                                                                                                         

Year ended December 31,
2011Commodities
    
    Merchantand resources
    
    banking
    
    All other
    
    TotalRevenues from
      external customers
    
    $
    474,872
    
    
    
    $
    22,487
    
    
    
    $
    16,545
    
    
    
    
    $
    513,904Intersegment
      sale
    
    
    2
    
    
    
    
    14,651
    
    
    
    
    456
    
    
    
    
    
    15,109Interest
      expense
    
    
    6,588
    
    
    
    
    56
    
    
    
    
    42
    
    
    
    
    
    6,686Income (loss) from
      continuing operations beforeincome taxes
    
    
    23,157
    
    
    
    
    8,858
    
    
    
    
    (14,834
    )
    
    
    
    
    17,181


As at December 31,
      2013Commodities
    
    Merchantand
    resources
    
    banking
    
    All other
    
    TotalSegment assets
    
    $
    1,016,410
    
    
    
    $
    268,090
    
    
    
    $
    40,106
    
    
    
    $
    1,324,606Equity method investments (included insegment assets)
    
    
    19,113
    
    
    
    
    
    
    
    
    
    5,253
    
    
    
    
    24,366


As at December 31,
      2012(Recast-Notes 3&41)Commodities
    
    Merchantand
    resources
    
    banking
    
    All other
    
    TotalSegment assets
    
    $
    1,139,174
    
    
    
    $
    186,547
    
    
    
    $
    34,902
    
    
    
    $
    1,360,623Equity method investments (included insegment assets)
    
    
    17,163
    
    
    
    
    
    
    
    
    
    5,219
    
    
    
    
    22,382


As at December 31,
      2013Commodities
    
    Merchantand
    resources
    
    banking
    
    All other
    
    TotalSegment liabilities
    
    $
    557,825
    
    
    
    $
    49,585
    
    
    
    $
    11,447
    
    
    
    $
    618,857


As at December 31,
      2012(Recast-Notes 3&41)Commodities
    
    Merchantand
    resources
    
    banking
    
    All other
    
    TotalSegment liabilities
    
    $
    552,335
    
    
    
    $
    65,775
    
    
    
    $
    5,738
    
    
    
    $
    623,848


102

---



MFC INDUSTRIAL
LTD.

NOTES TO CONSOLIDATED
FINANCIAL STATEMENTSDECEMBER 31, 2013

Note 4. Business Segment
Information (continued)

***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.

Geographic results
are generally determined as follows:

Segment
    
    
    Basis for attributing
      revenuesCommodities and resources
    
    Locations of external customersLocations of clients, assets or the reporting units,
      whicheverMerchant banking
    
    is appropriateAll 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:
    
    2013
    
    2012
    
    2011Canada
    
    $
    116,371
    
    
    
    $
    61,864
    
    
    
    $
    37,410Africa
    
    
    4,990
    
    
    
    
    2,103
    
    
    
    
    7,914Americas
    
    
    172,006
    
    
    
    
    25,954
    
    
    
    
    49,887Asia
    
    
    21,760
    
    
    
    
    55,598
    
    
    
    
    87,208Europe
    
    
    498,811
    
    
    
    
    340,140
    
    
    
    
    331,485$
    813,938
    
    
    
    $
    485,659
    
    
    
    $
    513,904


Income from a
royalty interest in a resource property is earned from a third party entity
operating in Canada and amounted to $25,674, $29,065 and $30,782, respectively,
in 2013, 2012 and 2011.

Except for the
geographic concentrations as indicated in the above table and one trading
customer representing approximately 12% and 11% of the Groups total revenues in
2013 and 2012 respectively, there were no other revenue concentrations in 2013,
2012 and 2011.

The following
table presents non-current assets other than financial instruments, post
employment benefit assets and deferred tax assets by geographic area based upon
the location of the assets.

2013
    
    2012(Recast-As at December
      31:
    
    
    
    
    
    
    Notes 3&41)Canada
    
    $
    530,247
    
    
    
    $
    562,860Africa
    
    
    25,728
    
    
    
    
    26,136Americas
    
    
    3,118
    
    
    
    
    3,201Asia
    
    
    435
    
    
    
    
    434Europe
    ****
    
    1,408
    ****
    
    ****
    
    36,248
    ****$
    560,936
    
    
    
    $
    628,879


Investment
property, which was included in the non-current assets at December 31, 2012, has
been reclassified to assets held for sale under the current asset section and,
as a result, is not included in the geographic location table at December 31,
2013.

The non-current
assets located in Canada comprised primarily the Groups interests in resource
properties and hydrocarbon properties (see Notes 16 and 17).

103

---



MFC INDUSTRIAL
LTD.

NOTES TO CONSOLIDATED
FINANCIAL STATEMENTSDECEMBER 31, 2013

Note 5.
Securities

***Short-term
securities***

As at December
      31:
    
    
    2013
    
    2012Trading securities:Common shares, at fair
      value
    
    $2,068
    
    $6,658


At December 31,
2013, investments in publicly-listed common shares trading securities comprised
five companies (of which one company represented 93%).

At December 31,
2012, investments in publicly-listed common shares trading securities comprised
six companies (of which three companies represented 95%).

Note 6. Restricted
Cash

As at December
      31:
    
    2013
    
    2012Cash pledged with a bank in connection with sales of
      securities
    $
    239
    
    $
    359Bank accounts temporarily restricted (released in 2013)
    
    
    
    
    460Other
    
    73
    
    
    70$
    312
    
    $
    889


Note 7. Trade
Receivables

***Trade
Receivables***

As
      at December 31:
    
    2013
    
    2012Trade receivables, gross amount (including $240 and $nil due from
      affiliates asat December 31, 2013 and
      2012, respectively
    
    $
    116,704
    
    
    
    
    $
    74,066Less: Allowance for credit losses
    
    
    (1,026
    )
    
    
    
    
    (1,246
    )Trade receivables, net amount
    
    $
    115,678
    
    
    
    
    $
    72,820


Trade receivables
primarily arise from commodities and resources activities.

The Group has a
specially structured factoring arrangement with a bank for the Groups trade
receivables (see Note 20). As at December 31, 2013, trade receivables amounting
to $9,935 were used as security against bank debt (see Note 21).

As at December 31,
2013, trade receivables of $6,575 (2012: $17,006) were past due but not
impaired. The aging analyses of these trade receivables as at December 31, 2013
and 2012 are as follows:

Past-due
    
    2013
    
    2012Below 30 days
    $
    4,410
    
    $
    9,517Between 31 and 60 days
    
    762
    
    
    1,229Between 61 and 90 days
    
    567
    
    
    514Between 91 and 365 days
    
    835
    
    
    5,746Over 365 days
    
    1
    
    
    $
    6,575
    
    $
    17,006


104

---



MFC INDUSTRIAL
LTD.

NOTES TO CONSOLIDATED
FINANCIAL STATEMENTSDECEMBER 31, 2013

Note 7. Trade
Receivables (continued)

As
at December 31, 2013, trade receivables of $4,917 (2012: $4,998) were impaired
and an allowance for credit losses of $1,026 (2012: $1,246) 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
36). The aging analyses of these trade receivables as at December 31, 2013 and
2012 are as follows:

Past-due
    
    2013
    
    2012Below 30 days
    $
    448
    
    $
    789Between 31 and 60 days
    
    218
    
    
    Between 61 and 90 days
    
    300
    
    
    1Between 91 and 365 days
    
    1,167
    
    
    814Over 365 days
    
    2,784
    
    
    3,394$
    4,917
    
    $
    4,998


The movements in
the allowance for credit losses during 2013 and 2012 are as follows:

2013
    
    2012Balance, beginning of the year
    
    $
    1,246
    
    
    
    
    $
    719Additions
    
    
    4,117
    
    
    
    
    
    593Reversals
    
    
    (8
    )
    
    
    
    
    (12
    )Write-offs
    
    
    (4,517
    )
    
    
    
    
    Cumulative translation adjustment
    
    
    188
    
    
    
    
    
    (54
    )Balance, end of the year
    
    $
    1,026
    
    
    
    
    $
    1,246


As at December 31,
2013 and 2012, there was no trade receivable which would otherwise be past due
or impaired if the terms had not been renegotiated.

Note 8. Other
Receivables

As at December
      31:
    
    
    2013
    
    2012Investment income
    
    $
    260
    
    
    
    $
    219Government taxes (primarily value-added and goods-and-services
      taxes)
    
    
    6,503
    
    
    
    
    6,181Royalty income from an interest in resource property
    
    
    5,513
    
    
    
    
    7,528Employees travel advances
    
    
    14
    
    
    
    
    38Derivative assets
    
    
    1,394
    
    
    
    
    633Insurance compensation for trade receivables
    
    
    12,269
    
    
    
    
    Sale of securities
    
    
    
    
    
    
    
    1,683Suppliers with debit balance
    
    
    
    
    
    
    
    649Other
    
    
    4,456
    
    
    
    
    1,383$
    30,409
    
    
    
    $
    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,
2013 and 2012, there were no receivables which would otherwise be past due or
impaired if the terms had not been renegotiated.

105

---



MFC
INDUSTRIAL LTD.

NOTES TO
CONSOLIDATED FINANCIAL STATEMENTSDECEMBER 31, 2013

Note 9.
Inventories

As at December
      31:
    
    2013
    
    2012Raw materials
    $
    8,347
    
    $
    10,137Work-in-progress
    
    5,073
    
    
    4,546Finished goods
    
    16,316
    
    
    49,111Commodity inventories
    
    47,875
    
    
    75,802Goods-in-transit
    
    11,017
    
    
    2,366Other
    
    216
    
    
    963$
    88,844
    
    $
    142,925


As at December 31,
2013, inventories with a carrying amount of $6,676 were pledged as security for
liabilities.

Note 10. Deposits,
Prepaid and Other

As at December
      31:
    
    2013
    
    2012Prepayments and deposits for inventories
    $
    22,333
    
    $
    23,154Prepaid non-income taxes
    
    223
    
    
    287Intangible assets relating to order backlog on acquisition
      dates
    
    
    
    
    885Prepaid, deposits and other
    
    4,580
    
    
    3,507$
    27,136
    
    $
    27,833


Note 11. Assets Held for
Sale

As at December
      31:
    
    2013
    
    2012(Recast-Notes 3&41)Assets held for sale
    
    $
    97,344
    
    
    
    
    $
    124,192Liabilities relating to assets held for sale
    
    
    (11,517
    )
    
    
    
    
    (29,806
    )Net assets held for
    sale
    
    $
    85,827
    
    
    
    
    $
    94,386Represented by:Hydrocarbon properties
    
    $
    50,142
    
    
    
    
    $
    94,675Investment property
    
    
    35,685
    
    
    
    
    
    Extracting facilities
    
    
    
    
    
    
    
    
    (289
    )Net assets held for sale
    
    $
    85,827
    
    
    
    
    $
    94,386


In connection with
the acquisition of MFC Energy, management committed to a plan to sell certain
hydrocarbon properties and an active program to locate a buyer and complete the
plan was initiated. The assets were actively marketed for sale at a price that
was reasonable in relation to their current fair values. The sale was expected
to qualify for recognition as a completed sale within one year from September
2012 and actions required to complete the plan indicated that it was unlikely
that significant changes to the plan would be made or that the plan would be
withdrawn. In 2013, a participation agreement was entered into with a third
party with respect to certain assets held for sale. As a result, such assets of
$31,378 were reclassified to hydrocarbon properties (see Note 17). Furthermore,
a processing plant of $22,248 which was included in the assets held for sale no
longer met the classification criteria and, as a result, was reclassified out of
the assets held for sale into property, plant and equipment in 2013 (see Note
15). As a result, a catch-up depreciation to the date of reclassification of
$1,101 was recorded on assets previously recognized as held for sale. During the
initial one-year period, change in economic, industry and market circumstances
arose and, as a result, the remaining assets previously classified as held for
sale were not sold by the end of that period. However, management took action
necessary to respond to the change in circumstances and the assets are still
being actively marketed at a price that is reasonable. Accordingly, the Group
continues to classify the remaining assets as held for sale at December 31, 2013
as all classification criteria were met. As at December 31, 2013, the assets
held for sale (represented by interests in resource properties) and the related
liabilities (represented by decommissioning obligations) were $61,659 (2012:
$111,138) and $11,517 (2012: $16,463), respectively.

106

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MFC INDUSTRIAL
LTD.

NOTES TO CONSOLIDATED
FINANCIAL STATEMENTSDECEMBER 31, 2013

Note 11. Assets Held for
Sale (continued)

In
December 2012, management committed to a plan to sell the extracting facilities
and the sale was completed in 2013. As at December 31, 2013, the asset
classified as held for sale were $nil (2012: $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 $nil (2012: $13,343). The extracting facilities
did not represent 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.

In September 2013,
management committed to a plan to sell the investment property (Note 14). The
assets are measured at fair value and are included in the Groups merchant
banking segment.

Note 12. Long-term
securities

As at December
      31:
    
    
    2013
    
    2012Available-for-sale securities:Publicly-traded
    
    $2,465
    
    $9,637


At December 31,
2013, available-for-sale securities comprised four publicly-traded equity
securities and investment funds (of which the two largest companies represented
90%).

At December 31,
2012, available-for-sale securities comprised six publicly-traded equity
securities and investment funds (of which the largest company represented 61%).

Note 13. Equity method
investments

As at December
      31:
    
    
    2013
    
    2012Joint ventures  China
    
    $
    5,253
    
    $
    5,219Joint ventures  U.S.
    
    
    19,113
    
    
    17,163$
    24,366
    
    $
    22,382


Joint ventures 
China

Joint ventures in
China provide eye care business. The following table shows the Groups joint
ventures as at December 31, 2013:

Proportion ofownershipinterestZhejiang 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%


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, 2013 and
2012:

2013
    
    2012Current assets
    
    $
    4,512
    
    
    
    
    $
    2,819Long-term assets
    
    
    4,717
    
    
    
    
    
    5,1509,229
    
    
    
    
    
    7,969Current liabilities
    
    
    (3,976
    )
    
    
    
    
    (2,750
    )Net
    
    $
    5,253
    
    
    
    
    $
    5,219


The assets held by
the joint ventures primarily consist of medical equipment and are financed from
their own working capital and equity.

107

---



MFC INDUSTRIAL
LTD.

NOTES TO CONSOLIDATED
FINANCIAL STATEMENTSDECEMBER 31, 2013

Note 13. Equity method
investments (continued)

As
at December 31, 2013, the Group did not incur 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, 2013, 2012 and 2011:

2013
    
    2012
    
    2011Revenues
    
    $
    22,555
    
    
    
    
    $
    19,261
    
    
    
    
    $
    17,999Expenses
    
    
    (15,448
    )
    
    
    
    
    (13,109
    )
    
    
    
    
    (12,087
    )Net
      income
    
    $
    7,107
    
    
    
    
    $
    6,152
    
    
    
    
    $
    5,912


The Group did not
receive any fees to manage the joint ventures during the years ended December
31, 2013, 2012 and 2011.

The Group received
dividends of $7,690 from these joint ventures in 2013.

Joint ventures 
U.S.

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, 2013:

Proportion ofownershipinterestThayer Land Development Company, LLC
    50%TTTT
      Mining, LLC
    50%PRR
      Mining Inc.
    50%PRR
      Processing Inc.
    50%


The following
table presents the assets and liabilities related to the Groups interest in the
joint ventures as of December 31, 2013 and 2012:

2013
    
    2012Current assets
    
    $
    116
    
    
    
    
    $
    116Long-term assets
    
    
    20,240
    
    
    
    
    
    19,29920,356
    
    
    
    
    
    19,415Current liabilities
    
    
    (1,243
    )
    
    
    
    
    (2,252
    )Net
    
    $
    19,113
    
    
    
    
    $
    17,163


The assets held by
the joint ventures primarily consist of an interest in an exploration and
development stage iron ore mine.

In 2013, MFC
Industrial, on behalf of the U.S. joint ventures, entered into a research and
development contract with an institute. The outstanding payment obligation was
$375 as of December 31, 2013 which is to be funded by the joint ventures on a
pro rata basis. None of these obligations have been recognized in the
consolidated statement of financial position as at December 31, 2013.

Except for the
aforesaid, as at December 31, 2013, 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.

108

---



MFC INDUSTRIAL
LTD.

NOTES TO CONSOLIDATED
FINANCIAL STATEMENTSDECEMBER 31, 2013

Note 13. Equity method
investments (continued)

*Summarized
financial information:*

The following table presents summarized financial information (before
inter-company eliminations) of the joint ventures as at or for the year ended
December 31, 2013. These are amounts included in the IFRS financial statements
of the joint ventures and not the Groups share of those amounts. The summarized
financial information is then reconciled to the carrying amount of the Groups
interests in the joint ventures. No comparative information is required to be
provided for periods prior to 2013.

Financial
    
    
    
    
    
    
    
    Groupsinformation of
    
    Reconciliation
    
    interests inAs at or for the Year
      Ended December 31, 2013:
    
    investees
    
    adjustments
    
    investeesCurrent assets
    
    $
    232
    
    
    
    
    $
    (116
    )
    
    
    
    $
    116Non-current assets
    
    
    40,480
    
    
    
    
    
    (20,240
    )
    
    
    
    
    20,240Current liabilities
    
    
    (2,485
    )
    
    
    
    
    1,242
    
    
    
    
    
    (1,243
    )Non-current liabilities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Non-controlling interests
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Shareholders equity
    
    
    38,227
    
    
    
    
    
    (19,114
    )
    
    
    
    
    19,113


The Group did not
record income and expenses related to these joint ventures since their
acquisition in December 2011 as the resource property is being developed and all
the costs and expenses have been capitalized.

The following
financial information was included in the above summarized financial information
for 2013.

As at or for the Year
      Ended December 31, 2013:Cash and cash equivalents
    $
    103Current financial liabilities (excluding trade and other payables
      and provisions)
    
    2,482Non-current financial liabilities (excluding trade and other
      payables and provisions)
    
    


The Group received
$nil dividends from these joint ventures.

Note 14. Investment
property

2013
    
    2012Balance, beginning of year
    
    $
    34,152
    
    
    
    
    $
    33,585Additions
    
    
    
    
    
    
    
    
    1Disposals
    
    
    (74
    )
    
    
    
    
    (2
    )Change in fair value during the year
    
    
    
    
    
    
    
    
    14Reclassification to assets held for sale (Note 11)
    
    
    (34,979
    )
    
    
    
    
    Cumulative translation adjustment
    
    
    901
    
    
    
    
    
    554Balance, end of year
    
    $
    
    
    
    
    
    $
    34,152


The change in fair
value of investment property is included in costs of sales in the consolidated
statement of operations.

The amounts
recognized in profit or loss in relation to investment property during 2013,
2012 and 2011 are as follows:

2013
    
    2012
    
    2011Rental income
    
    $
    1,380
    
    
    
    $
    1,477
    
    
    
    $
    1,766Direct operating expenses (including repairs and maintenance)
      frominvestment property that
      generated rental income during the year
    
    
    333
    
    
    
    
    345
    
    
    
    
    760


109

---



MFC INDUSTRIAL
LTD.

NOTES TO CONSOLIDATED
FINANCIAL STATEMENTSDECEMBER 31, 2013

Note 15. Property, Plant
and Equipment

The following changes in property, plant and equipment were recorded in
2013:

|                           |  |             |             |        |               |  |               |   |                      | **Reclassified** |                         | **Cumulative**  |                 |           
|-------------------------- |  | ----------- | ----------- | ------ | ------------- |  | ------------- | - | -------------------- | ---------------- | ----------------------- | --------------- | --------------- | ----------
|                           |  | **Opening** |             |        |               |  |               |   |                      | **from assets**  |                         | **translation** |                 | **Ending**
|**Historical
      costs** |  |             | **balance** |        | **Additions** |  | **Disposals** |   | **Reclassification** |                  | **held for
      sale** |                 | **adjustments** |           
|Land and building          |  |             | $           | 2,822  |               |  |               | $ | 673                  |                  |                         |                 | $               |          
|Refinery and               |  |             |             |        |               |  |               |   |                      |                  |                         |                 |                 |           
|power plants               |  |             |             | 74,943 |               |  |               |   |                     |                  |                         |                 |                 |          
|Processing plant           |  |             |             |        |               |  |               |   |                      |                  |                         |                 |                 |           
|and equipment              |  |             |             | 5,435  |               |  |               |   | 363                  |                  |                         |                 |                 |          
|Office equipment           |  |             |             | 3,571  |               |  |               |   | 972                  |                  |                         |                 |                 | (79       
|                           |  |             | $           | 86,771 |               |  |               | $ | 2,008                |                  |                         |                 | $               | (79       

|                                   |             |             |        |               |  |               |   |                      | **Cumulative**  |                 |           
|---------------------------------- | ----------- | ----------- | ------ | ------------- |  | ------------- | - | -------------------- | --------------- | --------------- | ----------
|                                   | **Opening** |             |        |               |  |               |   |                      | **translation** |                 | **Ending**
|**Accumulated
      depreciation** |             | **balance** |        | **Additions** |  | **Disposals** |   | **Reclassification** |                 | **adjustments** |           
|Land and building                  |             | $           | 45     |               |  |               | $ | 266                  |                 |                 |           
|Refinery and power plants          |             |             | 3,065  |               |  |               |   | 3,876                |                 |                 |           
|Processing plant and equipment     |             |             | 1,911  |               |  |               |   | 775                  |                 |                 |           
|Office equipment                   |             |             | 1,611  |               |  |               |   | 702                  |                 |                 |           
|                                   |             | $           | 6,632  |               |  |               | $ | 5,619                |                 |                 |           
|Carrying amount                    |             | $           | 80,139 |               |  |               |   |                      |                 |                 |           

The following changes in property, plant and equipment were recorded in
2012:

|                           |  |                         |             |       |               |  |               |              |                 | **Reclassified** |                         | **Cumulative**  |                 |           
|-------------------------- |  | ----------------------- | ----------- | ----- | ------------- |  | ------------- | ------------ | --------------- | ---------------- | ----------------------- | --------------- | --------------- | ----------
|                           |  | **Opening**             |             |       |               |  |               | **Business** |                 | **to assets**    |                         | **translation** |                 | **Ending**
|**Historical
      costs** |  |                         | **balance** |       | **Additions** |  | **Disposals** |              | **combination** |                  | **held for
      sale** |                 | **adjustments** |           
|                           |  | **(Recast-Notes
3&41)**
|Land and buildings         |  |                         | $           | 482   |               |  |               | $            | 293             |                  |                         |                 | $               |          
|Refinery and               |  |                         |             |       |               |  |               |              |                 |                  |                         |                 |                 |           
|power plants               |  |                         |             |      |               |  |               |              |                |                  |                         |                 |                 |          
|Processing plant           |  |                         |             |       |               |  |               |              |                 |                  |                         |                 |                 |           
|and equipment              |  |                         |             | 2,885 |               |  |               |              | 418             |                  |                         |                 |                 |          
|Office equipment           |  |                         |             | 2,547 |               |  |               |              | 378             |                  |                         |                 |                 | (5        
|                           |  |                         | $           | 5,914 |               |  |               | $            | 1,089           |                  |                         |                 | $               | (5        

|                                   |             |             |       |               |  |               | **Reclassified** |                         | **Cumulative**  |                 |           
|---------------------------------- | ----------- | ----------- | ----- | ------------- |  | ------------- | ---------------- | ----------------------- | --------------- | --------------- | ----------
|                                   | **Opening** |             |       |               |  |               | **to assets**    |                         | **translation** |                 | **Ending**
|**Accumulated
      depreciation** |             | **balance** |       | **Additions** |  | **Disposals** |                  | **held for
      sale** |                 | **adjustments** |           
|Land and buildings                 |             | $           | 207   |               |  |               | $                | 93                      |                 |                 |           
|Refinery and power plants          |             |             |      |               |  |               |                  | 3,174                   |                 |                 |           
|Processing plant and equipment     |             |             | 719   |               |  |               |                  | 1,129                   |                 |                 |           
|Office equipment                   |             |             | 1,245 |               |  |               |                  | 695                     |                 |                 |           
|                                   |             | $           | 2,171 |               |  |               | $                | 5,091                   |                 |                 |           
|Carrying amount                    |             | $           | 3,743 |               |  |               |                  |                         |                 |                 |           

As
at December 31, 2013, land and buildings with a carrying amount of $1,082 were
used as security against bank debt (see Note 21).

During 2013, 2012 and 2011, $388, $nil and $nil, respectively, of
expenditures were recognized in the carrying amount of items of property, plant
and equipment in the course of their construction.

As
at December 31, 2013, there were no contractual commitments for the acquisition
of property, plant and equipment.

110

---



MFC INDUSTRIAL LTD.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS DECEMBER 31, 2013

Note 16. Interests in Resource
Properties

The Groups interests in resource properties comprised the
following:

As at December 31:
    
    
    2013
    
    2012(Recast-Notes 3&41)Royalty interest in an iron ore mine
    
    $
    163,186
    
    
    $
    168,071Interests in
      hydrocarbon properties
    
    
    196,636
    
    
    
    215,646Other
    
    
    
    
    
    
    28Total
    
    $
    359,822
    
    
    $
    383,745


Iron ore mine

The lease of
the Canadian iron ore mine expires 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.

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 acreage and properties containing
probable reserves only which are included in exploration and evaluation assets
(see Note 17). The hydrocarbon properties were acquired by the Group as a result
of the business combination in September 2012 (see Note 3).

Iron ore extracting facilities

An Indian subsidiary (which was sold in February 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 extracting
facilities were impaired and written off in December 2012 (see Note 28).

The following changes in interests in resource properties were recorded
in 2013:

|                       |  |         |         |                  |  |           |   |            |  |             |   |             |   |         |  |   |        |   |                 |  |             |   |         |   |  |  | Cumulative |   |         |   | 
|---------------------- |  | ------- | ------- | ---------------- |  | --------- | - | ---------- |  | ----------- | - | ----------- | - | ------- |  | - | ------ | - | --------------- |  | ----------- | - | ------- | - |  |  | ---------- | - | ------- | - | 
|                       |  | Opening |         |                  |  |           |   |            |  |             |   |             |   |         |  |   |        |   | Decommissioning |  | translation |   | Ending 
|                       |  | balance |         | Reclassification |  | Additions |   | Impairment |  | obligations |   | adjustments |   | balance
|Historical
      costs |  | $       | 422,301 |                  |  |           | $ | 35,270     |  |             | $ | 4,782       |   |         |  | $ | (6,077 | ) |                 |  |             | $ | (21,455 | ) |  |  |            | $ | (14,943 | ) | 
|Accumulated depletion  |  |         | (38,556 | )                |  |           |   |           |  |             |   | (22,466     | ) |         |  |   |       |   |                 |  |             |   |        |   |  |  |            |   | 966     |   | 
|Carrying
    amount    |  | $       | 383,745 |                  |  |           |   |            |  |             |   |             |   |         |  |   |        |   |                 |  |             |   |         |   |  |  |            |   |         |   | 

The following changes in interests in resource properties were recorded
in 2012:

|                      |  |         |         |             |  |           |         |            |  |             |         |             |  |         |   |                 |   |             |  |        |   |     |  |  | Cumulative |   |        |   | 
|--------------------- |  | ------- | ------- | ----------- |  | --------- | ------- | ---------- |  | ----------- | ------- | ----------- |  | ------- | - | --------------- | - | ----------- |  | ------ | - | --- |  |  | ---------- | - | ------ | - | 
|                      |  | Opening |         | Business    |  |           |         |            |  |             |         |             |  |         |   | Decommissioning |   | translation |  | Ending
|                      |  | balance |         | combination |  | Additions |         | Impairment |  | obligations |         | adjustments |  | balance
|Historical costs      |  | $       | 251,195 |             |  |           | 223,057 |            |  | $           | 1,073   |             |  |         | $ | (50,865         | ) |             |  |        | $ | 588 |  |  |            | $ | (2,747 | ) | 
|Accumulated depletion |  |         | (31,613 | )           |  |           |        |            |  |             | (15,221 | )           |  |         |   | 8,234           |   |             |  |        |   |    |  |  |            |   | 44     |   | 
|Carrying amount       |  | $       | 219,582 |             |  |           |         |            |  |             |         |             |  |         |   |                 |   |             |  |        |   |     |  |  |            |   |        |   | 

The Group did not capitalize any general and administrative costs in
respect of hydrocarbon development and production activities during the years
2013, 2012 and 2011. There were no borrowing costs capitalized in the current or
prior years, as the Group did not have any qualifying assets.

111

---



MFC INDUSTRIAL LTD.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS DECEMBER 31, 2013

Note 16. Interests in Resource
Properties (continued)

In February
2014, the operator of the iron ore mine announced that it would idle the mine.
Management of the Group reviewed the underlying legal documents and
performed a sensitivity analysis on the expected future cash flows from its royalty interest. The primary
factor which impacts the recoverable amount is the duration of the idle period of the mine. Using a base case which assumes the
mine will recommence production by 2016 and the remaining reserves will be processed over the
remaining mine life, management concluded that an impairment charge was not
required as at December 31, 2013. Management continues to monitor the
development of the events relating to the iron ore mine.

The recoverable amounts of the Groups hydrocarbon CGUs are determined on
an annual basis or where facts and circumstances provide impairment indicator.
The recoverable amounts are based on each CGUs future pre-tax cash flows
expected to be derived from the Groups hydrocarbon properties. The pre-tax cash
flows projections incorporate managements best estimates of future natural gas
prices, production based on current estimates of recoverable reserves and
resources, exploration potential, future operating costs, non-expansionary
capital expenditures and inflation. Natural gas pricing included in the cash
flow projections beyond five years is based on historical volatility and
consensus analyst pricing. Projected cash flows are discounted using a pre-tax
discount rate which reflects current market assessments of the time value of
money and the risks specific to the hydrocarbon interests for which the future
cash flow estimates have not been adjusted. At December 31, 2013, the Group
performed an annual impairment assessment on its hydrocarbon properties based on
a pre-tax discount rate of 10% and recognized an impairment of $6,077 before an
income tax recovery of $1,561.

During 2012, the Group recognized an impairment of $42,631 on its
extracting facilities. For 2011, there were no impairment indicators identified
and, accordingly, an impairment test was not required and there was no
impairment losses. The Group sold the extracting facilities in 2013.

Note 17. Hydrocarbon Probable
Reserves and Unproved 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 2013 and 2012 were as follows.

Probable
    
    Undevelopedreserves
    
    landsBalance, beginning of
      2013
    
    $
    99,142
    
    
    
    $
    31,701Additions
    
    
    
    
    
    
    
    421Reclassification from
      assets held for sale
    
    
    29,523
    
    
    
    
    1,855Land expiries
    
    
    
    
    
    
    
    (104
    )Reclassification-out
    
    
    (47,565
    )
    
    
    
    (627
    )Cumulative translation adjustment
    
    
    (5,833
    )
    
    
    
    (1,892
    )Balance, end of
      2013
    
    $
    75,267
    
    
    
    $
    31,354Probable
    
    Undevelopedreserves
    
    lands(Recast-Notes 3&41)Balance, beginning of
      2012
    
    $
    
    
    
    
    $
    Purchased through business combination
    
    
    100,393
    
    
    
    
    32,226Additions
    
    
    
    
    
    
    
    96Land expiries
    
    
    
    
    
    
    
    Cumulative translation
      adjustment
    
    
    (1,251
    )
    
    
    
    (621
    )Balance, end of 2012
    
    $
    99,142
    
    
    
    $
    31,701


In 2013 and
2012, no indicators of impairment were identified for exploration and evaluation
assets.

112

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MFC INDUSTRIAL LTD.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS DECEMBER 31, 2013

Note 17. Hydrocarbon Probable
Reserves and Unproved Lands (continued)

***Participation
Arrangement***

In November
2013, the Group entered into a participation agreement with an oil and gas
operator to develop certain oil and gas properties which have been classified as
assets held for sale. Pursuant to the agreement, (1) the operator will spend a
minimum of C$50 million to drill at least three net wells per year and a total
of 12 net wells (to a minimum of 800 horizontal meters each) during the initial
three-year term; (2) the operator will pay 100% of the drilling and completion
costs of each well at its sole risk and expense; (3) after a well is drilled and
there is continuous production from each well, the Group can elect to
participate for up to 30% on a look-back basis in the working interest of each
well by paying 25% of its actual costs or, alternatively, elect to receive a 10%
gross royalty on the production instead; and (4) the Group will process the
natural gas produced from the new wells through the Groups processing plant for
the life of the wells.

Note 18. Accrued Pension Assets
(Obligations), Net

This participation arrangement did not have financial impacts on these
consolidated financial statements as of December 31, 2013, except for the
reclassification of assets held for sale to unproved lands, until the drilling
is completed in the future.

A controlled entity (the plan sponsor) of the Group has a 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 minimum funding rules in Employment Pension
Plans Act in Alberta, Canada (the EPPA) which 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 2013 was based on
the December 31, 2012 actuarial funding valuation. The plan sponsor funds the
pension plan for minimum required contributions annually and assesses additional
contributions if and when needed.

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, reduced 2013 annual solvency payments from C$1,016 to
C$477.

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 16 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.

113

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MFC INDUSTRIAL LTD.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS DECEMBER 31, 2013

Note 18. Accrued Pension Assets
(Obligations), Net (continued)

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 plan sponsor 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 2013 and 2012. The Group did not have any defined benefit
plan in 2011.

***Reconciliation of the defined
benefit obligations***

2013
    
    2012Beginning of
      year
    
    $
    11,866
    
    
    $
    Assumed upon acquisition
    
    
    
    
    
    
    12,274Net current service
      cost
    
    
    378
    
    
    
    136Employee contributions
    
    
    78
    
    
    
    29Obligation interest
      cost
    
    
    505
    
    
    
    175Actuarial losses from changes in demographic assumptions andexperience
    
    
    468
    
    
    
    Actuarial gains from
      changes in financial assumptions
    
    
    (475
    )
    
    
    (506
    )Benefits paid
    
    
    (1,400
    )
    
    
    (88
    )Currency translation
      adjustments
    
    
    (753
    )
    
    
    (154
    )End of year
    
    $
    10,667
    
    
    $
    11,866Defined benefit
      obligations from plans that are wholly unfunded
    
    $
    
    
    
    $
    Defined benefit obligations from plans
      that are wholly or partly funded
    
    $
    10,667
    
    
    $
    11,866Significant actuarial assumption for
      defined benefit obligations as atDecember 31:
    
    2013
    
    2012Discount rate
    
    4.75%
    
    4.50%Rate of salary increases
    
    3.00%
    
    3.00%Consumer price
      index
    
    2.00%
    
    2.00%


***Reconciliation of the fair value
of plan assets***

2013
    
    2012Beginning of
      year
    
    $
    10,638
    
    
    $
    Fair value of plan assets upon acquisition
    
    
    
    
    
    
    10,047Return on plan
      assets
    
    
    1,925
    
    
    
    598Administration costs
    
    
    (13
    )
    
    
    (4
    )Employer
      contributions
    
    
    1,449
    
    
    
    184Employee contributions
    
    
    78
    
    
    
    29Benefits paid
    
    
    (1,400
    )
    
    
    (88
    )Currency translation adjustments
    
    
    (751
    )
    
    
    (128
    )End of year
    
    $
    11,926
    
    
    $
    10,638Interest income on plan
assets
    
    $
    455
    
    
    $
    143Actuarial
    gains
    
    
    1,424
    
    
    
    455Return on plan assets
    
    $
    1,879
    
    
    $
    598


114

---



MFC INDUSTRIAL LTD.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS DECEMBER 31, 2013

Note 18. Accrued Pension Assets
(Obligations), Net (continued)

**Reconciliation to the liability recognized in the statement
of financial position**

2013
    
    2012Fair value of plan
      assets, end of year
    
    $
    11,926
    
    
    $
    10,638Defined benefit obligations, end of
      year
    
    
    (10,667
    )
    
    
    (11,866
    )Plan surplus
      (deficit)
    
    
    1,259
    
    
    
    (1,228
    )Amount not recognized as an asset
      because of asset ceiling
    
    
    
    
    
    
    Additional liability
      recognized due to IFRIC 14
    
    
    
    
    
    
    Net asset (liability)
    
    $
    1,259
    
    
    $
    (1,228
    )


***Recognition of net asset
(liability)***

2013
    
    2012Beginning of
      year
    
    $
    (1,228
    )
    
    $
    Net liability assumed on acquisition
    
    
    
    
    
    
    (2,228
    )Employer
      contributions
    
    
    1,449
    
    
    
    184Expense recognized
    
    
    (441
    )
    
    
    (173
    )Amount
      recognized in other comprehensive income
    
    
    1,369
    
    
    
    961Currency translation adjustments
    
    
    110
    
    
    
    28End of
year
    
    $
    1,259
    
    
    $
    (1,228
    )


***Current pension expense for the
year***

2013
    
    2012*Net current service
      cost
    
    $
    378
    
    
    $
    136Obligation interest cost
    
    
    505
    
    
    
    175Interest income on
      plan assets
    
    
    (455
    )
    
    
    (142
    )Interest on effect of asset
      ceiling
    
    
    
    
    
    
    Administration
      costs
    
    
    13
    
    
    
    4End of year
    
    $
    441
    
    
    $
    173


|* |  | incurred during
      September 7 to December 31, 2012
|- |  | ------------------------------------------------------

***Recognition through other
comprehensive income for the year***

2013
    
    2012*Net gains during the
      year
    
    $
    1,432
    
    $
    961Effect of the asset ceiling
    
    
    
    
    
    Effect of impact of
      additional liability due to IFRIC 14
    
    
    
    
    
    Currency translation
    adjustments
    
    
    
    
    
    Recognition of other
      comprehensive during the year
    
    $
    1,432
    
    $
    961Comprising:
      experience adjustment on defined benefit obligations
    
    $
    8
    
    $
    506Experience adjustment on assets
    
    
    1,424
    
    
    455$
    1,432
    
    $
    961


|* |  | incurred during
      September 7 to December 31, 2012
|- |  | ------------------------------------------------------

115

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MFC INDUSTRIAL LTD.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS DECEMBER 31, 2013

Note 18. Accrued Pension Assets
(Obligations), Net (continued)

***Sensitivity
analysis***

A sensitivity
analysis for each significant actuarial assumption as of December 31, 2013,
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
    
    
    2013Effect of an increase of 1%Defined
      benefit obligations, end of year
    
    $
    9,025Effect of a decrease of 1%Defined benefit obligations,
      end of year
    
    $
    12,758  Salary Increase
      Sensitivity Analysis
    
    
    2013Effect of an increase of 1%Defined
      benefit obligations, end of year
    
    $
    10,694Effect of a decrease of 1%Defined benefit obligations,
      end of year
    
    $
    10,591


The defined benefit obligation sensitivity figures were calculated using
the same methods and assumptions as the December 31, 2013 defined benefit
obligation figures, with the only assumption change being the 1% change in
discount rate or salary scale as indicated. There was no change from the
previous period in the methods and assumptions used in preparing the sensitivity
analyses.

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.

TargetedPlan asset allocation
      (%)
    
    2013Equity securities
    
    
    60
    %Debt
      securities
    
    
    40
    %Total
    
    
    100
    %


The fair values of the companys defined benefit pension plan assets at
December 31, 2013 and 2012 by asset category are as follows:

Fair value
      measurements
    
    
    2013
    
    
    2012Asset categoryCash
    
    $
    798
    
    $
    23Pooled fund: Balanced
      trust fund
    
    
    11,128
    
    
    10,615Total
    
    $
    11,926
    
    $
    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.

116

---



MFC INDUSTRIAL LTD.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS DECEMBER 31, 2013

Note 18. Accrued Pension Assets
(Obligations), Net (continued)

***Expected contributions and
benefit payments***

The expected
contributions for 2014 from the employer and employees are $593 and $69,
respectively. The employer contributions represent the minimum required
contribution under pension legislation.

The expected benefit payments are as follows:

Years ending December
      31:2014
    
    $
    3412015
    
    
    3752016
    
    
    4292017
    
    
    4672018
    
    
    5062019-2023
    
    
    3,4922024 and after
    
    
    5,057Total
    
    $
    10,667


As at December 31, 2013, the defined benefit pension plan had a net
surplus of $1,259.

Note 19. 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:
    
    
    2013
    
    2012(Recast-Notes 3&41)Non-capital tax loss
carry-forwards
    
    $
    18,858
    
    
    
    $
    16,955Interests in resource properties
    
    
    (8,761
    )
    
    
    
    (3,368
    )Other assets
    
    
    8,014
    
    
    
    
    4,532Other liabilities
    
    
    (3,741
    )
    
    
    
    (2,374
    )$
    14,370
    
    
    
    $
    15,745Deferred income tax assets and liabilities are included in the
      consolidatedstatement of financial
      position as follows:Deferred income tax assets
    
    $
    17,941
    
    
    
    $
    19,136Deferred income tax
      liabilities
    
    
    (3,571
    )
    
    
    
    (3,391
    )Net
    
    $
    14,370
    
    
    
    $
    15,745


At December 31, 2013, 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 whichGross
    
    no deferred asset isCountry
    
    
    amount
    
    recognized
    
    Expiration
      datesCanada
    
    $
    65,890
    
    
    $
    
    
    
    2028-2032Germany
    
    
    5,170
    
    
    
    5,170
    
    
    IndefiniteSwitzerland
    
    
    3,492
    
    
    
    3,492
    
    
    2014-2018U.S.
    
    
    20,566
    
    
    
    20,566
    
    
    2024-2030Austria
    
    
    8,981
    
    
    
    
    
    
    IndefiniteSlovakia
    
    
    1,571
    
    
    
    1,571
    
    
    2014-2018


117

---



MFC INDUSTRIAL LTD.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTSDECEMBER 31, 2013

Note 19. Deferred Income Tax Assets
and Liabilities (continued)

At December
31, 2013, MFC Industrial had an aggregate amount of $443,679 of temporary
differences associated with its investments in subsidiaries, branches and
associates and interests in joint arrangements, 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 realizable by applying existing taxable profits of the Group. As
such, the deferred tax assets of the acquiree in the amount of $57,763 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 and has subsequently executed this planning strategy.
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.

In November 2012, the Company received from the Canada Revenue Agency (CRA) tax notices of reassessment relating to
the taxation years ended December 31, 2006 to December 31, 2010. The reassessments deny the application of losses and
deductions in computing taxable income and the application of credits in the computation of tax payable. The Company has
filed notices of objection with the CRA. The Company, in consultation with its legal advisors, remains of the view that its tax
filing position is appropriate and does not believe any additional assessment of income tax by the CRA is appropriate.
Accordingly, the Company has not recorded a liability in these consolidated financial statements in connection with the
reassessments. There can be no assurance that the Company will be successful in defending its position. If the CRA is
successful, then the Company will be required to pay a material amount of tax plus applicable interest. There continues to
be tax litigation in progress involving the CRA and other companies which may have a bearing on the Companys own tax
position with the CRA. The Company will continue to assess its position as such litigation progresses.

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 20. Short-term Bank
Borrowings

Short-term bank borrowings are repayable within a year from the borrowing
date. They are used to finance the Groups day-to-day commodities and resources
business.

As at December
      31:
    
    
    2013
    
    2012Credit facilities from banks
    
    $129,783
    
    $150,396


As at December 31, 2013, the Group had credit facilities aggregating $
511,599 as follows: (i) the Group had unsecured revolving credit facilities
aggregating $ 220,548 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 $68,895 from banks for structured solutions, a
special type of 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 $ 130,900 for the Groups commodities activities.
Generally, the Group factors its trade receivable accounts upon invoicing, at
inter-bank rate plus a margin; (iv) the Group had a foreign exchange credit
facility of $ 53,256 with a bank; and (v) the Group had secured revolving credit
facilities aggregating $ 38,000. All these facilities are renewable on a yearly
basis.

118

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MFC INDUSTRIAL LTD.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS DECEMBER 31, 2013

Note 21. Debt

As at December 31:
    
    
    2013
    
    2012Due to a bank, €1,200 and €2,400 at December
      2013 and 2012, respectively, interest at the Austrian Export Credit Agency
      financing rate plus an interest margin and backup guarantee fee (2.29% per
      annum at December 31, 2013) and payable quarterly and due in 2014 in equal
      installments
    
    $
    1,653
    
    $
    3,165Due to a bank, $6,000 and $3,000 at December
      31, 2013 and 2012, respectively, interest at LIBOR plus an interest margin
      (3.52% at December 2013) and payable monthly, secured by trade
      receivables and due in negotiated periodic repayment with final payment in
      October 2015
    
    
    6,000
    
    
    3,000Due to a bank, $13,053 and $7,519 at
      December 31, 2013 and 2012, respectively, interest at LIBOR plus an
      interest margin (3.9% at December 2013) and payable monthly, secured
      by real estate and trade receivables and due in negotiated periodic
      repayment with final payment in October 2018
    
    
    13,053
    
    
    7,519Due to banks, €66,475 and €80,000 at
      December 31, 2013 and 2012, respectively, interest and backup guarantee
      fee on €59,300 fixed at 2.8% per annum and the remainder at EURIBOR plus
      an interest margin and backup guarantee fee (approx. 1.88% per annum at
      December 2013) and payable quarterly due in semi-annual repayment with
      final payment in November 2020; final payment on the €7,175 portion with
      variable interest is in December 2014; 20% credit risk assumed by the
      Austrian Export Credit Agency
    
    
    91,569
    
    
    105,485Due to a bank, $28,000 and €28,000 at
      December 31, 2013 and 2012, respectively, interest at LIBOR plus an
      interest margin and backup guarantee fee (4.28% per annum at December 31,
      2013) and payable quarterly and due in equal yearly repayment with final
      repayment in August 2020; 20% credit risk assumed by the Austrian Export
      Credit Agency
    
    
    28,000
    
    
    28,000Due to a bank, €30,300 and nil at December
      31, 2013 and 2012, respectively, interest and backup guarantee fee on
      €24,700 fixed at 3.11% per annum and the remainder at EURIBOR plus an
      interest margin and backup guarantee fee (approx. 2.25% per annum at
      December 2013) and payable quarterly due in semi - annual repayment with
      final payment in May 2021; 20% credit risk assumed by the Austrian Export
      Credit Agency
    
    
    41,750
    
    
    Due to a bank, $10.000 and nil at December
      31, 2013 and 2012, respectively, interest at LIBOR plus an interest margin
      (2.136% at December 2013) and payable at November 28, 2016
    
    
    10,000
    
    
    Due to banks, €31,000 and nil at December
      31, 2013 and 2012, respectively, interest at LIBOR plus an interest margin
      (2.26% at December 2013) and payable at November 28, 2020
    
    
    42,715
    
    
    Due to a bank, €nil and €12,000 at December
      31, 2013 and 2012, respectively
    
    
    
    
    
    15,824$
    234,740
    
    $
    162,993Current portion
    
    $
    44,869
    
    $
    44,169Long-term
      portion
    
    $
    189,871
    
    
    118,824$
    234,740
    
    $
    162,993


119

---



MFC INDUSTRIAL LTD.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS DECEMBER 31, 2013

Note 21. Debt
(continued)

As of December
31, 2013, the maturities of debt are as follows:

Years ending December
      31:
    
    
    Principal
    
    Interest
    
    Total2014
    
    $
    44,869
    
    $
    6,687
    
    $
    51,5562015
    
    $
    33,074
    
    $
    5,360
    
    $
    38,4342016
    
    $
    71,762
    
    $
    4,308
    
    $
    76,0702017
    
    $
    30,074
    
    $
    2,547
    
    $
    32,6212018
    
    $
    26,637
    
    $
    1,691
    
    $
    28,328Thereafter
    
    $
    28,324
    
    $
    1,332
    
    $
    29,656$
    234,740
    
    $
    21,925
    
    $
    256,665


No interest expense was capitalized in the years ended December 31, 2013,
2012 and 2011.

Note 22. Account Payables and
Accrued Expenses

As at December
      31:
    
    
    2013
    
    2012Trade and account payables
    
    $
    83,190
    
    $
    62,583Value-added, goods-and-sales and other taxes (other than income
      taxes)
    
    
    3,976
    
    
    2,384Compensation
    
    
    1,879
    
    
    1,888Interest
    
    
    3,812
    
    
    848Derivative liabilities
    
    
    2,081
    
    
    1,691Provisions for warranty
    
    
    74
    
    
    80Short-sale of securities
    
    
    236
    
    
    367Deferred revenues
    
    
    1,815
    
    
    312Deposits from customers
    
    
    3,255
    
    
    791Acquisition price payables
    
    
    1,279
    
    
    8,459Sale of shares on behalf of other
    
    
    2,886
    
    
    Due to a customer
    
    
    22,166
    
    
    $
    126,649
    
    $
    79,403


Trade payables arise from the Groups day-to-day trading activities. The
Groups expenses for services and other operational expenses are included in
account and other payables. Generally, these payables and accrual accounts do
not bear interest and they have a maturity of less than one year. The amount due to a
customer was repaid in January 2014.

Note 23. 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. Until October 2013, the Groups
interaction with MPP was governed by agreements (the MPP Agreements) which
provided 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 was considered to be the beneficiary of MPPs operations and,
pursuant to SIC12 and IFRS 10, the assets, liabilities, and operations of the
partnership were consolidated into these financial statements even though the
Group did not have an ownership interest in the midstream facilities. As a
result of an option to purchase MPP, the equity in MPP was attributable to the
Group.

120

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MFC INDUSTRIAL LTD.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS DECEMBER 31, 2013

Note 23. Mazeppa Processing
Partnership (MPP) (continued)

The purchase option was exercised in October 2013 and as a result, MPP
became a wholly-owned subsidiary of the Group effective October 2013.

The MPP term
financing in these consolidated financial statements comprised the following
components at December 31, 2013 and 2012:

| |                                        |  | 2013 |   | 2012
| | -------------------------------------- |  | ---- | - | ----
| |                                        |  |      |   |     
| |                                        |  |      |   |     
| | Present value of the base process fees |  |      | $ |    
| | Purchase
    option                    |  |      |   |    
| | Total                                  |  |      | $ |    
| |                                        | 
| | Represented by:                        |  |      |   |     
| |                                        | 
| | Current portion                        |  |      | $ |    
| | Long-term
      portion                |  |      |   |    
| | Total                                  |  |      | $ |    

The base processing fee component of the MPP term financing was 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 was 4.0% per annum.

In these consolidated financial
statements, prior to the partnership being a wholly-owned subsidiary, the MPP
net out-of-pocket costs were included in operating expense, the interest
component of the base processing fee was included in finance costs and the
principal component of the base processing fee was recorded as a reduction in
the MPP term financing liability.

Note 24. Deferred Sale
Liabilities

| | As at December
      31: |  |  | 2013 |   | 2012
| | ------------------------ |  |  | ---- | - | ----
| | Current                  |  |  | $    |  |     
| | Long-term                |  |  |      |  |     
| |                          |  |  | $    |  |     

The Group entered into sale and repurchase agreements, which were
accounted for as financing arrangements. The agreements were unwound in 2013.

121

---



MFC INDUSTRIAL LTD.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS DECEMBER 31, 2013

Note 25. Decommissioning
Obligations

Changes in the
carrying amount of the Groups decommissioning obligations during 2013 and 2012
are as follows:

2013
    
    2012Decommissioning
      obligations, beginning of year
    
    $
    153,105
    
    
    $
    Assumption upon acquisitions
    
    
    
    
    
    
    154,784
    *Changes in
      estimates
    
    
    (24,499
    )
    
    
    (900
    )Obligations related to dispositions
    
    
    (577
    )
    
    
    (33
    )Obligations
      settled
    
    
    (4,759
    )
    
    
    Accretion
    
    
    3,085
    
    
    
    1,161Effects of
      changes in foreign exchange rates
    
    
    (8,984
    )
    
    
    (1,907
    )Decommissioning obligations, end of
      year
    
    $
    117,371
    
    
    $
    153,105Comprising:Current portion (included in liabilities relating to assets held for
      sale)
    
    $
    11,517
    
    
    $
    16,463Long-term
      portion
    
    
    105,854
    
    
    
    136,642$
    117,371
    
    
    $
    153,105


|* |  | including $153,959 on
      hydrocarbon properties (of which $15,590 was included in liabilities
      relating to assets held for sale)
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------

As at December 31, 2013, 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 2.61% (2012: 1.57%). The Group will fund the decommissioning
obligations from future cash flows from the operations.

Note 26. 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 2013 and 2012:

2013
    
    2012Puttable instrument
      financial liabilitiesBeginning of year
    
    $
    7,761
    
    
    $
    Recognized upon
      business combinations
    
    
    
    
    
    
    7,684Changes in estimates
    
    
    (1,053
    )
    
    
    Settlement
    
    
    (3,598
    )
    
    
    Change in fair value, recognized in profit or loss
    
    
    826
    
    
    
    77End of
      year
    
    $
    3,936
    
    
    $
    7,761


The fair values of the puttable instruments are determined using a
discount cash flow (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.

In 2013, the Group made claims against one of the vendors for
misrepresentation and breach of contracts. As a result, the Group converted all
the puttable instrument financial liabilities due to the vendor into the share
capital of the sub-subsidiaries and recognized a payable of $1,278. The
transaction resulted in $1,851 credited to the retained earnings account as a
result of the purchase of the non-controlling interests in
sub-subsidiaries.

122

---



MFC INDUSTRIAL LTD.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS DECEMBER 31, 2013

Note 27. 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.

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. 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.

All the issued capital stock are fully paid.

***Treasury
Stock***

As at December 31:
    
    
    2013
    
    2012Common shares
    
    
    328,239
    
    
    328,239Preferred
      Shares
    
    
    4,621,571
    
    
    4,251,741Total number of treasury stock
    
    
    4,949,810
    
    
    4,579,980Total carrying amount
      of treasury stock
    
    $
    68,980
    
    $
    68,610


All treasury stock are held by wholly-owned subsidiaries.

123

---



MFC INDUSTRIAL LTD.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS DECEMBER 31, 2013

Note 28. Consolidated Statements of
Operations

***Revenues***

Years ended December 31:
    
    
    2013
    
    2012
    
    2011Gross revenues as reported
    
    $
    813,938
    
    $
    485,659
    
    $
    513,904


For the
components of the Groups total revenues, please see Note 4.

The Groups revenues included the following items:

Years ended December 31:
    
    
    2013
    
    2012
    
    **2011**Realized gain on available-for-sale
    securities
    
    $
    231
    
    $
    264
    
    $
    Interest income
      arising from an arbitration(included in
      other revenues)
    
    
    
    
    
    
    
    
    1,236


The Groups net gain on securities comprised:

Years
      Ended December 31:
    
    
    2013
    
    2012
    
    2011Trading securities
    
    $
    5,681
    
    
    $
    1,161
    
    
    $
    Available-for-sale securities
    
    
    231
    
    
    
    (94
    )
    
    
    Subsidiaries
    
    
    415
    
    
    
    206
    
    
    
    Holding gain (loss) on advance sales of
      securities
    
    
    (9
    )
    
    
    (123
    )
    
    
    Net gain on
      securities
    
    $
    6,318
    
    
    $
    1,150
    
    
    $
    


Expenses

The Groups costs of sales comprised:

Years
      Ended December 31:
    
    
    2013
    
    2012
    
    2011Commodities and resources
    
    $
    705,951
    
    
    $
    382,245
    
    
    $
    414,745Loss on securities, net
    
    
    
    
    
    
    
    
    
    
    4,314Credit losses (recovery) on loans and
      receivables
    
    
    4,671
    
    
    
    (521
    )
    
    
    (530
    )Fair value (gain) loss on investment
    property
    
    
    
    
    
    
    (14
    )
    
    
    56Market value (increase) decrease on
      commodities
    
    
    (5,342
    )
    
    
    1,509
    
    
    
    4,422(Gain) loss on derivative contracts, net
    
    
    (4,488
    )
    
    
    57
    
    
    
    (6,805
    )Write-off (recovery) of inventories,
      net
    
    
    
    
    
    
    15,659
    *
    
    
    (29
    )Other
    
    
    9,563
    
    
    
    7,773
    
    
    
    12,414Total cost of
      sales
    
    $
    710,355
    
    
    $
    406,708
    
    
    $
    428,587


|* |  | The amount included an inventory
      write-down of $19,434. The Group recognized the inventory write-down and
      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.
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The Groups
net loss on securities comprised:

Years ended December 31:
    
    
    2013
    
    2012
    
    2011Trading securities
    
    $
    
    
    $
    
    
    $
    6,507Available-for-sale
      securities
    
    
    
    
    
    
    
    
    (1,721
    )Subsidiaries
    
    
    
    
    
    
    
    
    (405
    )Short-sale
    
    
    
    
    
    
    
    
    (67
    )Net loss on
      securities
    
    $
    
    
    $
    
    
    $
    4,314


124

---



MFC INDUSTRIAL LTD.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS DECEMBER 31, 2013

Note 28. Consolidated Statements of
Operations (continued)

The Group
included the following items in its costs of sales:

Years
      ended December 31:
    
    
    2013
    
    2012
    
    2011Inventories as costs of goods sold
      (including depreciation,amortization and depletion expenses allocated to costs ofgoods sold)
    
    $
    624,785
    
    
    $
    286,426
    
    $
    373,048Loss on unwinding sale and repurchase
      arrangements(see Note
      24)
    
    
    2,356
    
    
    
    
    
    
    Reduction in liabilities for
      claims
    
    
    (2,425
    )
    
    
    
    
    
    


The Group collected a reimbursement of legal costs from an arbitration of
$218, $nil and $1,503 in 2013, 2012 and 2011, respectively. The Group also
recognized a reversal of accrued advisory fees and other legal provisions of
$1,854, $nil and $nil in 2013, 2012 and 2011, respectively. The aforesaid
reimbursement and reversal were shown as a reduction in selling, general and
administrative expenses.

***Additional information on the
nature of expenses***

Years
      Ended December 31:
    
    
    2013
    
    2012
    
    2011Depreciation, amortization and
      depletion
    
    $
    28,085
    
    $
    20,312
    
    $
    13,204Employee benefits expenses
    
    
    28,732
    
    
    26,055
    
    
    19,687


Note 29. 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
STATEMENTS DECEMBER 31, 2013

Note 29. Share-Based Compensation
(continued)

Following is a
summary of the status of the plans:

2008 Plan
    
    2008 Plan
    
    1997 Plan
    
    1997 PlanWeighted
    
    
    
    Weightedaverage
    
    
    
    averageNumber of
    
    exercise price
    
    Number
    of
    
    exercise priceawards
    
    per share
    
    options
    
    per shareOutstanding at
      December 31, 2010
    
    ****
    
    ****
    
    
    
    
    
    
    
    
    Granted
    
    
    915,000
    
    
    
    7.81
    
    
    1,720,000
    
    
    7.81Outstanding at
      December 31, 2011 2012and
    2013
    
    
    915,000
    
    
    
    7.81
    
    
    1,720,000
    
    
    7.81As at December 31, 2013:Options
      exercisable (with two yearsremaining contractual life)
    
    
    915,000
    
    
    
    7.81
    
    
    1,720,000
    
    
    7.81Options granted and exercised
    
    
    
    
    
    
    
    
    
    3,791,656Options
      available for granting infuture periods
    
    
    585,000
    
    
    
    
    
    
    12,344


No stock options expired or were granted in 2013 and 2012.

The following table summarizes the share-based compensation expenses
recognized by the Group:

Years ended December 31:
    
    
    2013
    
    2012
    
    2011Share-based compensation recovery (expenses)
      arisingfrom options
      granted by:MFC
      Industrial
    
    $
    
    
    $
    
    
    
    $
    (7,291
    )A Canadian
      non-wholly owned subsidiary
    
    
    
    
    
    (9
    )
    
    
    72Total
    
    $
    
    
    $
    (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.

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.

126

---



MFC INDUSTRIAL LTD.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS DECEMBER 31, 2013

Note 29. Share-Based Compensation
(continued)

A director of
the Company was not re-elected to the board on December 27, 2013. As a result,
his options to purchase 55,000 common shares of MFC Industrial in aggregate
expired on January 26, 2014. Another director passed away in March 2014 and his
options to purchase 55,000 common shares of MFC Industrial will expire in 2014
if not exercised.

Note 30. Income Taxes

MFC Industrials statutory tax rate was 25.75%, 25.0% and 26.5% in 2013,
2012 and 2011, respectively. The increase in the tax rate in 2013 was due to the
increase in the British Columbia provincial corporation tax rate.

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:

2013
    
    2012
    
    2011(Recast-Notes 3&41)Income before income taxes from
      continuing operations
    
    $
    16,079
    
    
    $
    198,385
    
    
    $
    17,181Computed recovery of (provision for) income taxes
      atMFC
      Industrials statutory rates
    
    $
    (4,140
    )
    
    $
    (49,596
    )
    
    $
    (4,553
    )(Increase) decrease in taxes resulting
      from:Foreign tax
      rate differences
    
    
    48
    
    
    
    3,855
    
    
    
    (143
    )Non-taxable bargain purchase
    
    
    
    
    
    
    54,670
    
    
    
    Benefit of
      purchased income tax reductions
    
    
    701
    
    
    
    6,328
    
    
    
    4,655Other non-taxable income
    
    
    1,523
    
    
    
    1,949
    
    
    
    2,724Share-based
      compensation
    
    
    
    
    
    
    (2
    )
    
    
    (1,932
    )Revisions to prior years
    
    
    1,111
    
    
    
    
    
    
    
    Taxable capital
      gains on dispositions, net
    
    
    (58
    )
    
    
    (121
    )
    
    
    (1,833
    )Resource property revenue taxes
    
    
    (3,730
    )
    
    
    (4,426
    )
    
    
    (3,414
    )Unrecognized
      losses in current year
    
    
    (1,419
    )
    
    
    (6,904
    )
    
    
    (1,160
    )Permanent differences
    
    
    (940
    )
    
    
    (893
    )
    
    
    Change in
      future tax rate
    
    
    244
    
    
    
    (25
    )
    
    
    906Transfer of an interest in resource property
    
    
    
    
    
    
    
    
    
    
    (1,634
    )Other,
      net
    
    
    83
    
    
    
    (2,209
    )
    
    
    401Recovery of (provision for) income
      taxes
    
    $
    (6,577
    )
    
    $
    2,626
    
    
    $
    (5,983
    )Consisting of:Resource property revenue taxes
    
    $
    (5,003
    )
    
    $
    (5,902
    )
    
    $
    (4,647
    )Other income
      taxes
    
    
    (1,574
    )
    
    
    8,528
    
    
    
    (1,336
    )$
    (6,577
    )
    
    $
    2,626
    
    
    $
    (5,983
    )


In addition, the aggregate current and deferred tax relating to items
that are charged to equity was $80 (recovery), $68 (recovery) and $324
(recovery), respectively, in 2013, 2012 and 2011, all relating to the changes in
the values of the available-for-sale securities.

The Groups tax expense above does not include any amounts for joint
ventures and associates whose results are included in profit or loss net of
taxes.

127

---



MFC INDUSTRIAL LTD.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTSDECEMBER 31, 2013

Note 31. Earnings Per
Share

Earnings per
share data for the years ended December 31 from operations is summarized as
follows:

2013
    
    2012
    
    2011(Recast-Notes
      3&41)Basic earnings
      available to holders of common shares
    
    $
    9,665
    
    $
    200,144
    
    $
    12,193Effect of dilutive
securities:
    
    
    
    
    
    
    
    
    Diluted
      earnings
    
    $
    9,665
    
    $
    200,144
    
    $
    12,193Number of
    Shares2013
    
    2012
    
    2011Weighted average
      number of common sharesoutstanding 
      basic
    
    
    62,552,126
    
    
    62,555,438
    
    
    62,561,421Effect of dilutive
securities:Options
    
    
    204,665
    
    
    
    
    
    Weighted average
      number of common sharesoutstanding 
      diluted
    
    
    62,756,791
    
    
    62,555,438
    
    
    62,561,421


As at both 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 32. Dividends
paid

On January 14, 2013, MFC Industrial announced its annual cash dividend
for 2013. The 2013 annual cash dividend was $0.24 per common share in total,
paid in quarterly installments as follows: (i) $0.06 per common share on
February 8, 2013 to shareholders of record on January 25, 2013; (ii) $0.06 per
common share on April 22, 2013 to shareholders of record on April 12, 2013;
(iii) $0.06 per common share on July 30, 2013 to shareholders of record on July
19, 2013 and (iv) $0.06 per common share on October 28, 2013 to shareholders of
record on October 15, 2013.

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 33. 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:
    
    
    Amount2014
    
    
    $
    1,9652015
    
    
    
    1,8632016
    
    
    
    1,7622017
    
    
    
    1,6942018
    
    
    
    190Thereafter
    
    
    
    65$
    7,539


128

---



MFC INDUSTRIAL LTD.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS DECEMBER 31, 2013

Note 33. Commitments and
Contingencies (continued)

The leases
have varying terms, subject to the customary practices in the local regions. The
Group recognized rental income of $2,364 (including sublease of $14), $2,582
(including subleases of $51) and $2,935 (including subleases of $84) for the
years ended December 31, 2013, 2012 and 2011, respectively.

***Leases as
lessees***

Future minimum commitments under long-term non-cancellable operating
leases are as follows:

Years
      ending December 31:
    
    
    Amount2014
    
    
    $
    1,9832015
    
    
    
    1,3272016
    
    
    
    6912017
    
    
    
    5602018
    
    
    
    345Thereafter
    
    
    
    192$
    5,098


The leases have varying terms, subject to the customary practices in the
local regions. Minimum lease payments recognized as expenses were $4,063, $2,539
(including contingent rents of $306) and $2,803 (including contingent rents of
$76) for the years ended December 31, 2013, 2012 and 2011,
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, 2013, the Group had issued guarantees up to a maximum
of $51,393 to its commodities and financing partners in the normal course of its
commodities activities, of which $43,354 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.

***Purchase
Obligations***

As at December 31, 2013 the Group had open purchase contracts aggregating
$13,733 due in 2014 and take-or-pay contracts aggregating $2,624 due in 2014 to
2017, with respect to its commodities and resources activities. None of these
had been recognized in the consolidated statement of financial position as at
December 31, 2013.

***Contingent
Gain***

In February 2013, the Group sold its interests in the Indian extracting
facilities. Pursuant to the share purchase agreement, the sale price includes a
certain percentage of the sold entitys future free cash flow from its
operations and investment for a period of seven years. As a result of the
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, 2013.

Note 34. 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.

129

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MFC INDUSTRIAL LTD.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS DECEMBER 31, 2013

Note 34. Consolidated Statements of
Cash Flows - Supplemental Disclosure (continued)

The Group had
the following non-cash transactions:

Non-cash transactions in 2013: (1) conversion of puttable instrument
financial liabilities into the share capital of non-wholly-owned subsidiaries
(see Note 26); (2) the Group sold its interest in a group (which held the
resource properties in India) and recognized a non-cash accounting gain of $415
on its disposition (see Notes 16 and 33); (3) the Group acquired the
non-controlling interests in a group for no consideration, resulting in $489
credited to the retained earnings account; and (4) the Group entered into a
participation arrangement (see Note 17).

Non-cash transaction 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).

Note 35. Related Party
Transactions

In the normal course of operations, the Group enters into transactions
with related parties which include affiliates in which the Group has a
significant equity interest (10% or more) or has the ability to influence the
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 person and entity which have significant influence over
MFC Industrial. These related party transactions are conducted 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.

***Continuing
operations***

Years ended December 31:
    
    
    2013
    
    2012
    
    2011Dividend income on common shares*
    
    $
    277
    
    
    $
    
    
    
    $
    181Royalty expense paid
      and payable*
    
    
    (604
    )
    
    
    (693
    )
    
    
    (773
    )Sales of goods
    
    
    1,969
    
    
    
    1,012
    
    
    
    455Fee income
    
    
    
    
    
    
    
    
    
    
    32Purchases of goods
    
    
    
    
    
    
    
    
    
    
    (3,476
    )Directors salary
      paid by a subsidiary to a close family memberof a director
    
    
    
    
    
    
    (20
    )
    
    
    (21
    )Interest income
    
    
    
    
    
    
    
    
    
    
    296


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

In addition to the transactions above, the Group had the following
transactions with related parties:

In February 2013, the Group sold its interest in a group (which held the
resource properties in India (see Notes 16 and 33)) to a director of two of the
Groups sub-subsidiaries, resulting in non-cash accounting gain of $415 on its
disposition. The director resigned from the subsidiaries in March 2013. In
addition, a subsidiary sold its office furniture and equipment to a company
beneficially owned by the Chairman of the Company for $14, resulting in a gain
of $14. Included in other receivables was an overpayment of net director fee of
$8 which was subsequently refunded by the director in 2014.

In 2012, the Group entered into an agreement with a director of two of
the Groups sub-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.

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.

130

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MFC INDUSTRIAL LTD.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS DECEMBER 31, 2013

Note 35. Related Party Transactions
(continued)

***Key management
personnel***

The
remuneration of key management personnel of the Group was as follows:

| | Years ended December 31:                          |  |   | 2013  |  | 2012 |       | 2011
| | ------------------------------------------------- |  | - | ----- |  | ---- | ----- | ----
| | Short-term employee benefits                      |  | $ | 723   |  | $    | 794   |     
| | Contributions to
      defined contribution plans |  |   |      |  |      |      |     
| | Post-employment benefits                          |  |   |      |  |      |      |     
| | Other long term
      benefits                    |  |   |      |  |      |      |     
| | Termination benefits                              |  |   |      |  |      | 456   |     
| | Share-based
      payments*                       |  |   |      |  |      |      |     
| | Directors fees                                   |  |   | 372   |  |      | 264   |     
| | Total                                             |  | $ | 1,095 |  | $    | 1,514 |     

|* |  | 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
      29).
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Key management
personnel comprises the members of the Board of Directors, President, Chief
Executive Officer and Chief Financial Officer.

The termination benefits in 2012 represented amounts paid to a former
Chief Financial Officer.

Note 36. Financial
Instruments

The fair value of financial instruments at December 31 is summarized as
follows:

| | As at December 31:                                        |  | 2013     |         | 2012 
| | --------------------------------------------------------- |  | -------- | ------- | -----
| |                                                           |  | Carrying |         | Fair 
| |                                                           |  | Amount   |         | Value
| |                                                           |  |          |         |      
| | Financial Assets:                                         |  |          |         |      
| | Fair value
      through profit or loss:                  |  |          |         |      
| | Cash and cash
      equivalents, short-term cash deposits |  |          |         |      
| | and restricted cash                                       |  | $        | 336,866 |      
| | Short-term securities                                     |  |          | 2,068   |      
| | Derivative
      assets                                   |  |          | 1,394   |      
| | Loans and
      receivables:                              |  |          |         |      
| | Receivables*                                              |  |          | 138,190 |      
| | Available-for-sale instruments:                           |  |          |         |      
| | Securities, at
      market value                         |  |          | 2,465   |      
| | Total                                                     |  | $        | 480,983 |      
| |                                                           |  |          |         |      
| | Financial Liabilities:                                    |  |          |         |      
| | Financial
      liabilities measured at amortized cost:   |  |          |         |      
| | Short-term
      borrowings                               |  | $        | 129,783 |      
| | Accounts payable and accrued expenses*                    |  |          | 120,592 |      
| | Debt                                                      |  |          | 234,740 |      
| | Facility term financing                                   |  |          |        |      
| | Puttable
      instruments                                |  |          | 3,936   |      
| | Fair value
      through profit or loss:                  |  |          |         |      
| | Derivative
      liabilities                              |  |          | 2,081   |      
| | Total                                                     |  | $        | 491,132 |      

|* |  | not including
      derivative and tax related items
|- |  | ----------------------------------------------------

131

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MFC INDUSTRIAL LTD.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS DECEMBER 31, 2013

Note 36. Financial Instruments
(continued)

Fair value of
a financial instrument represents the price that would be received to sell an
asset or paid to transfer a liability in an orderly transaction in the principal
(or most advantageous) market at the measurement date under current market
conditions regardless of whether that price is directly observable or estimated
using another valuation technique. The price for a transaction which takes place
under duress or the seller is forced to accept the price in the transaction
might not represent the fair value of an asset or a liability. 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 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 which approximated the current market
interest rate for instruments with similar risk profile. The fair values of the
puttable instruments approximate their carrying amounts as the carry amounts are
revised using a DCF model or other valuation technique.

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 approximate
their carrying amounts.

132

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MFC INDUSTRIAL LTD.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTSDECEMBER 31, 2013

Note 36. Financial Instruments
(continued)

The following tables present the financial instruments measured at fair
value classified by the fair value hierarchy as at December 31, 2013 and
2012:

| | As at December 31, 2013                  |  | Level 1 |        | Level
      2 |   | Level 3 |  | Total
| | ---------------------------------------- |  | ------- | ------ | ------------- | - | ------- |  | -----
| | Financial Assets:                        |  |         |        |               |   |         |  |      
| | Fair value through profit or
      loss: |  |         |        |               |   |         |  |      
| | Short-term
      securities              |  | $       | 2,068  |               | $ |        |  |      
| | Derivative assets                        |  |         |       |               |   | 1,394   |  |      
| | Available-for-sale
      securities      |  |         | 2,465  |               |   |        |  |      
| | Total                                    |  | $       | 4,533  |               | $ | 1,394   |  |      
| |                                         
| | Financial Liabilities:                   |  |         |        |               |   |         |  |      
| | Fair value through profit or
      loss: |  |         |        |               |   |         |  |      
| | Derivative
      liabilities             |  | $       |       |               | $ | 2,081   |  |      
| |                                         
| | As at December 31, 2012                  |  | Level 1 |        | Level 2       |   | Level 3 |  | Total
| | Financial Assets:                        |  |         |        |               |   |         |  |      
| | Fair value through profit or
      loss: |  |         |        |               |   |         |  |      
| | Short-term
      securities              |  | $       | 6,658  |               | $ |        |  |      
| | Derivative assets                        |  |         |       |               |   | 633     |  |      
| | Available-for-sale
      securities      |  |         | 9,637  |               |   |        |  |      
| | Total                                    |  | $       | 16,295 |               | $ | 633     |  |      
| |                                         
| | Financial Liabilities:                   |  |         |        |               |   |         |  |      
| | Fair value through profit or
      loss: |  |         |        |               |   |         |  |      
| | Derivative
      liabilities             |  | $       |       |               | $ | 1,691   |  |      

The following table presents the level of the fair value hierarchy within
which the fair value measurements are categorized for those financial
instruments not measured at fair values but for which the fair values are
disclosed:

| |                                                                               |  | Fair
      Value Measurements at
| | ----------------------------------------------------------------------------- |  | --------------------------------
| |                                                                               |  | Reporting Date Using            
| |                                                                               |  | Level 1                         
| | Assets                                                                        |  |                                 
| | Cash and cash
      equivalents, short-term cash deposits and restricted cash |  | X                               
| | Receivables                                                                   |  |                                 
| | Short-term
      borrowings                                                   |  |                                 
| | Accounts payable and accrued expenses                                         |  |                                 
| | Debt                                                                          |  |                                 
| | Puttable instruments                                                          |  |                                 

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.

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

133

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MFC INDUSTRIAL LTD.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTSDECEMBER 31, 2013

Note 36. Financial Instruments
(continued)

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, 2013 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 on its financial instruments 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.

***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 (including outstanding receivables and
committed transactions). The Group has deposited 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, primarily,
trade customers. 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

134

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MFC INDUSTRIAL LTD.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTSDECEMBER 31, 2013

Note 36. Financial Instruments
(continued)

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
7.

The maximum credit risk exposure as at December 31, 2013 is as
follows:

| | Amounts recognized in
      the consolidated statement of financial position: |  |   |         | 
| | ----------------------------------------------------------------------------- |  | - | ------- | 
| | Cash and cash equivalents, short-term
      cash deposits and restricted cash |  | $ | 336,866
| | Derivative assets                                                             |  |   | 1,394  
| | Receivables                                                                   |  |   | 138,190
| |                                                                               |  |   | 476,450
| | Guarantees (see Note 33)                                                      |  |   | 51,393 
| | Maximum credit risk exposure                                                  |  | $ | 527,843

As at December 31, 2013, the Group
had issued guarantees up to a maximum of $51,393 to its trading and financing
partners in the normal course of its commodities activities. As of December 31,
2013, $43,354 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.

***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 puts 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. All
short-term bank borrowings are renewable on a yearly basis. Please also refer to
Note 21 for the Groups debt maturity schedule. These future payment data are
based on the historical payment patterns and managements interpretation of
contractual arrangements. The actual cash outflows might occur significantly
earlier than indicated in the data or be for significantly different amounts
from those indicated in the data.

135

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MFC INDUSTRIAL LTD.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTSDECEMBER 31, 2013

Note 36. 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, Canadian dollars and 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,
2013 and 2012, the Group had derivative financial instruments (foreign currency
forward contracts and options) with aggregate notional amounts of $171,932 and
$86,966, respectively, and a net unrealized fair value loss of $389 and $1,
respectively. The Group does not have any material exposure to highly
inflationary foreign currencies.

*Sensitivity analysis:*

At December 31, 2013, 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 2013 would have been $6,285
higher. 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 $6,285 lower. The reason for such change
is mainly due to certain U.S. dollar denominated financial instrument
liabilities (net of assets). There would have been no material impact arising
from financial instruments on other comprehensive loss in either
case.

At December 31, 2013, 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 2013 would have been $17 higher.
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 $17 lower. The reason for such change is mainly due
to certain Euro-denominated financial liabilities (net of assets) 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, 2013, 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 2013 would have been
$3,932 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 $3,932 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. There would have been no impact arising from financial
instruments on other comprehensive loss in either case.

***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 61% of the Groups
long-term debt.

*Sensitivity analysis:*

At December 31, 2013, 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
2013 would have been $2,758 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

136

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MFC INDUSTRIAL LTD.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTSDECEMBER 31, 2013

Note 36. Financial Instruments
(continued)

held constant, income from
continuing operations for the year 2013 would have been $2,743 lower, arising
mainly as a result of higher net interest expense. There would have been no
impact arising from financial instruments on the Groups other comprehensive
loss.

***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, 2013, 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 2013 would have been $206 and $240,
respectively, lower. Conversely, if the equity price in general had strengthened
10% with all other variables held constant, income and other comprehensive loss
from continuing operations would have been $206 and $240, respectively,
higher.

In addition, 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, 2013 and 2012, the Group had
outstanding commodity derivative financial instruments with an aggregate
notional amount of $49,695 and $30,818, respectively, primarily to hedge against
the long position in inventories, which resulted in a net unrealized fair value
loss of $299 and $1,059, respectively.

*Sensitivity analysis:*

At December 31, 2013, 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 2013 would have been $1,149
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 $1,149 lower. There would have been
no impact arising from financial instruments on other comprehensive income 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.

***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, 2013, the Group had
cash and cash equivalents aggregating $131,257 with and an investment of $176 in
a banking group in Austria. The Group also owed $230,448 in aggregate short-term
banking borrowings and debt to the Austria banking group.

137

---



MFC INDUSTRIAL LTD.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTSDECEMBER 31, 2013

Note 36. 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 profit or loss in 2013, 2012 and 2011 as follows:

| |                                                                                 |  | 2013 |        | 2012 |   | 2011  
| | ------------------------------------------------------------------------------- |  | ---- | ------ | ---- | - | ------
| | Interest income on
      financial assets not at fair value through             |  |      |        |      |   |       
| | profit or loss                                                                  |  | $    | 61     |      | $ | 6,730 
| | Interest income on financial assets
      classified at fair value through      |  |      |        |      |   |       
| | profit or loss                                                                  |  |      | 2,324  |      |   | 3,759 
| | Total interest
      income                                                     |  | $    | 2,385  |      | $ | 10,489
| | Interest expense on financial
      liabilities not at fair value through       |  |      |        |      |   |       
| | profit or loss                                                                  |  | $    | 9,110  |      | $ | 7,004 
| | Interest expense on
      financial liabilities classified at fair value        |  |      |        |      |   |       
| | through profit or
      loss                                                    |  |      | 5,482  |      |   | 4,661 
| | Total interest expense                                                          |  | $    | 14,592 |      | $ | 11,665
| | Dividends income on
      financial assets at fair value through profit or loss |  | $    | 225    |      | $ | 256   
| | Dividends income on financial assets
      classified as available for sale,    |  |      |        |      |   |       
| | resource property related*                                                      |  |      | 277    |      |   |      
| | Dividends income on
      financial assets classified as available for          |  |      |        |      |   |       
| | sale, other                                                                     |  |      | 70     |      |   | 104   
| | Net gain (loss) on financial assets at
      fair value through profit or loss  |  |      | 10,169 |      |   | 1,104 
| | Credit (recovery)
      losses                                                  |  |      | 4,671  |      |   | (521  

*      
included in income from an interest in resource property

Note 37. Fair Value
Disclosure

The Group adopted IFRS 13 effective January 1, 2013 on a prospective
basis. Accordingly, comparative information for 2012 is not required.

Assets and Liabilities Measured at
Fair Value on a Recurring Basis as of December 31, 2013:

| |                                      |  | Fair
      Value Measurements at
| | ------------------------------------ |  | --------------------------------
| |                                      |  | Reporting Date
      Using      
| |                                      |  | Level 1                         
| | Assets:                              |  |                                 
| | Trading securities*                  |  | $                               
| | Available-for-sale
      securities* |  |                                 
| | Commodity inventories                |  |                                 
| | Derivative
      assets*             |  |                                 
| | Investment property                  |  |                                 
| | Total                                |  | $                               
| |                                      | 
| | Liabilities:                         |  |                                 
| | Derivative liabilities*              |  | $                               

*      
These are financial instruments. Please see Note 36 on further
disclosure.

138

---



MFC INDUSTRIAL LTD.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTSDECEMBER 31, 2013

Note 38. MFC Industrial and its
Significant Subsidiaries

MFC Industrial has its principal executive office at Suite 1620  400
Burrard Street, Vancouver, British Columbia, Canada. A subsidiary is an entity
that is controlled by MFC Industrial. The following table shows the direct and
indirect significant subsidiaries as at December 31, 2013. 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 |          | Proportion   
| | ----------------------------------------- |  | ---------------------- | ------------- | ---------- | -------- | -------------
| |                                           |  | Country
      of       |               | of Voting  |          | of Beneficial
| | Subsidiaries                              |  |                        | Incorporation |            | 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                  |               |            | 100%     |              
| | Hangzhou Zhe-er
      Optical Co. Ltd.    |  | China                  |               |            | 51%      |              
| | MFC Corporate Services AG                 |  | Switzerland            |               |            | 100%     |              
| | Compton Holding
      Austria GmbH        |  | Austria                |               |            | 100%     |              
| | Compton Petroleum Austria GmbH            |  | Austria                |               |            | 100%     |              
| | GPT Global Pellets
      Trading GmbH     |  | Austria                |               |            | 100%     |              
| | MFC Energy Corporation                    |  | Canada                 |               |            | 100%     |              
| | MFC Energy (Montana),
      Inc.          |  | U.S.                   |               |            | 100%     |              
| | Mazeppa Processing Partnership            |  | Canada                 |               |            | 100%     |              
| | MFC Resources
      Inc.                  |  | U.S.                   |               |            | 100%     |              
| | ACC Resources S.R.L.                      |  | Argentina              |               |            | 100%     |              
| | Possehl Mexico S.A.
      de C.V.         |  | Mexico                 |               |            | 60%      |              

|*  |  | The Group derives 100%
      beneficial benefit from the subsidiary from its holding of a shareholder
      loan and 75% share capital.                   
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------
|   |  |                                                                                                                                                           
|** |  | The non-controlling
      interests are classified as puttable instrument financial liabilities on
      the consolidated statement of financial
position.

As at December 31, 2013, the Group controlled entities in which the Group
held more than 50% of the voting rights. Conversely, as at December 31, 2013,
the Group did not control any entities in which the Group held 50% or less of
the voting rights.

As of December 31, 2013, none of non-controlling interests are material
to the Group. Also, there were no significant restrictions (statutory,
contractual and regulatory restrictions, including protective rights of
non-controlling interests) on MFC Industrials ability to access or use the
assets and settle the liabilities of the group.

During the year 2013, the Groups sold its interest in a group (which held
the resource properties in India) and recognized a non-cash accounting gain of
$415 on its disposition. The gain was included in the net sales in the
consolidated statement of operations. The Groups also acquired the
non-controlling interests in 0915988 B.C. Ltd. (which was a special purpose
entity prior to 2013 and became a consolidated structured entity in 2013) and

139

---



MFC INDUSTRIAL LTD.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTSDECEMBER 31, 2013

Note 38. MFC Industrial and its
Significant Subsidiaries (continued)

another group. There was no income or
loss impact on the transactions and non-controlling interests aggregating $2,371
were reclassified to retained earnings. The Group also credited $1,851 to the
retained earnings account when it acquired the remaining equity interest in MFC
Resources Inc. (see Note 26).

Note 39. Subsequent
Events

***Dividend***

On March 24, 2014, MIL announced its annual cash dividend for 2014 will
be $0.24 per common share, payable quarterly. Payment and ex-dividend dates and
additional information regarding the dividend will be announced in due course.

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 theIncome Tax
Act(Canada).

***Business
Combination***

(a) FESIL AS

In January 2014, the Company announced that it has entered into an
agreement to acquire a 100% interest in the FESIL AS Group (FESIL), a
vertically integrated supply-chain management company with a production facility
in Norway, sales companies in Germany, Luxembourg, Spain, United States, India
and China, and an interest in several quartz deposits in Spain.

Headquartered in Trondheim, Norway, FESIL is one of the leading producers
of ferrosilicon, an essential alloy in the production of steel, stainless steel,
and cast iron. FESILs melting plant is located in Mo i Rana, Norway and
produces a range of ferrosilicon products including granulated and refined
qualities (high and semi-high purity), which makes up the bulk of its
production.

The purchase price of approximately 500 million Norwegian Krone
(approximately $82 million) is based on the net tangible equity asset value as
of September 30, 2013, and will be adjusted to reflect the fair value of certain
assets and the profit and loss over the period to final closing. In addition to
the purchase price, the Company will pay a royalty based on tiered ferrosilicon
production at the Mo i Rana facility for two years, expected to equal
approximately 2.9% of ferrosilicon revenue per annum at full production. The
transaction is currently scheduled to complete in the second quarter of 2014 and
is subject to customary conditions.

(b) Elsner & Co. GmbH

In March 2014, the Company announced that it acquired 100% interest in
F.J. Elsner & Co. GmbH (Elsner), a global commodity company focused on
steel and related products which was founded in 1864 with its head office based
in Vienna Austria.

Elsners offerings include a full range of steel products including
slabs, booms, billets, hot rolled steel plates, hot and cold rolled coils and
sheets, reinforcing bars, galvanized material, pipes, tubers and merchant bars.
Elsner has longstanding relationships with many steel mills in Eastern and
Southern Europe as well as the Baltic States and the Commonwealth of Independent
States.

The purchase price is for nominal consideration and certain contingent
payments.

Since the acquisition of the entity was completed in March 2014, the
initial accounting for the business combination is incomplete at the time these
consolidated financial statements are authorized for issue. Accordingly, the
disclosures required by IFRS 3 for the acquisition of FESIL could not be
made.

***Royalty Interest in an Iron Ore
Mine***

In February 2014, the operator of the iron ore mine announced that it
would idle the iron ore mine. Management of the Group expects that the
operators decision will have profit or loss and cash flow impacts in 2014 and
2015. Please see Note 16.

140

---



MFC INDUSTRIAL LTD.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTSDECEMBER 31, 2013

Note 40.Approval of
Consolidated Financial Statements

These consolidated financial statements were approved by the Board of
Directors and authorized for issue on March 31, 2014.

Note 41.Recast of
Consolidated Statements during the Measurement Period and Correction of an
Error

In September 2012, the Group acquired a 100% equity interest in MFC
Energy and recognized a bargain purchase of $244,645 in the consolidated
financial statements for the year ended December 31, 2012. During the
measurement period from acquisition through to September 2013 and an error correction, the fair values
of the assets and liabilities of MFC Energy were finalized and it was determined
that the bargain purchase was $216,320 on the acquisition date. As a result,
interest on liabilities was recomputed and finance costs were reduced by $797
for the year ended December 31, 2012. In addition, expiry loss of the unproved
lands of $918 was derecognized for the year ended December 31, 2012.

Pursuant to IFRS 3,Business
Combinations,comparative information for
prior periods presented in financial statements has been revised to account for
the above-mentioned adjustments retrospectively.

141

---



MFC INDUSTRIAL LTD.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTSDECEMBER 31, 2013

Note 41. Recast of Consolidated
      Statements during the Measurement Period and Correction of an Error
      (continued)

***Reconciliation of net income for
the year ended December 31, 2012:***

| |                                                |  |                |         |                  |  | Recast            |   | Recast         |   | Error      |  |  |   |       
| | ---------------------------------------------- |  | -------------- | ------- | ---------------- |  | ----------------- | - | -------------- | - | ---------- |  |  | - | ------
| |                                                |  | **Historical** |         | **adjustments*** |  | **adjustments**** |   | **correction** |   | **Recast**
| | Net sales                                      |  | $              | 479,507 |                  |  |                   | $ |               |   |            |  |  | $ |      
| | Equity income                                  |  |                | 6,152   |                  |  |                   |   |               |   |            |  |  |   |      
| | Gross revenues                                 |  |                | 485,659 |                  |  |                   |   |               |   |            |  |  |   |      
| |                                               
| | Costs and
      Expenses:                      |  |                |         |                  |  |                   |   |                |   |            |  |  |   |       
| | Costs of sales                                 |  |                | 407,626 |                  |  |                   |   |               |   |            |  |  |   | (918  
| | Impairment of
      available-for-sale         |  |                |         |                  |  |                   |   |                |   |            |  |  |   |       
| | securities                                     |  |                | 4,265   |                  |  |                   |   |               |   |            |  |  |   |      
| | Impairment of interest in resource             |  |                |         |                  |  |                   |   |                |   |            |  |  |   |       
| | properties                                     |  |                | 42,631  |                  |  |                   |   |               |   |            |  |  |   |      
| | Selling, general and
      administrative      |  |                | 47,737  |                  |  |                   |   |               |   |            |  |  |   |      
| | Share-based compensation  selling,            |  |                |         |                  |  |                   |   |                |   |            |  |  |   |       
| | general and administrative                     |  |                | 9       |                  |  |                   |   |               |   |            |  |  |   |      
| | Finance costs                                  |  |                | 12,431  |                  |  |                   |   |               |   |            |  |  |   | (797  
| |                                                |  |                | 514,699 |                  |  |                   |   |               |   |            |  |  |   | (1,715
| |                                               
| | Loss from
      operations                     |  |                | (29,040 | )                |  |                   |   |               |   |            |  |  |   | 1,715 
| |                                               
| | Other
items:                                   |  |                |         |                  |  |                   |   |                |   |            |  |  |   |       
| | Exchange differences on foreign                |  |                |         |                  |  |                   |   |                |   |            |  |  |   |       
| | currency transactions                          |  |                | 7,108   |                  |  |                   |   |               |   |            |  |  |   |      
| | Change in fair value of
      puttable         |  |                |         |                  |  |                   |   |                |   |            |  |  |   |       
| | instrument financial liabilities               |  |                | (77     | )                |  |                   |   |               |   |            |  |  |   |      
| | Bargain purchase                               |  |                | 247,004 |                  |  |                   |   | (21,821        | ) |            |  |  |   |      
| |                                               
| | Income before income
      taxes               |  |                | 224,995 |                  |  |                   |   | (21,821        | ) |            |  |  |   | 1,715 
| | Income tax (expense)
recovery:                 |  |                |         |                  |  |                   |   |                |   |            |  |  |   |       
| | Income taxes                                   |  |                | 8,528   |                  |  |                   |   |               |   |            |  |  |   |      
| | Resource property revenue taxes                |  |                | (5,902  | )                |  |                   |   |               |   |            |  |  |   |      
| |                                                |  |                | 2,626   |                  |  |                   |   |               |   |            |  |  |   |      
| | Net income for the year                        |  |                | 227,621 |                  |  |                   |   | (21,821        | ) |            |  |  |   | 1,715 
| | Less: Net (income) loss
      attributable to  |  |                |         |                  |  |                   |   |                |   |            |  |  |   |       
| | non-controlling interests                      |  |                | (867    | )                |  |                   |   |               |   |            |  |  |   |      
| | Net income attributable to owners of
      the |  |                |         |                  |  |                   |   |                |   |            |  |  |   |       
| | parent company                                 |  | $              | 226,754 |                  |  |                   | $ | (21,821        | ) |            |  |  | $ | 1,715 
| | Basic and diluted earnings per share           |  | $              | 3.62    |                  |  |                   | $ | (0.35          | ) |            |  |  | $ | 0.03  

|*  |  | Adjustments reflecting
      new information obtained during the measurement period about facts and
      circumstances that existed as of the acquisition date.
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |  |                                                                                                                                                                 
|** |  | Adjustments
      representing effects on the post-combination earnings as a result of the
      revision of assets and liabilities at the acquisition
  date.  

The net income, total comprehensive
income and comprehensive income attributable to owners of the parent company for
the year ended December 31, 2012 were reduced by $26,610 (representing the
sum of the recast adjustments and error correction).

142

---



MFC INDUSTRIAL LTD.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTSDECEMBER 31, 2013

Note 41. Recast of Consolidated
      Statements during the Measurement Period and Correction of an Error
      (continued)

***Reconciliation of financial
position as at December 31, 2012:***

| |                                   |  |                |           |                  |  | Recast            |   | Recast         |   | Error      |  |   |       |     
| | --------------------------------- |  | -------------- | --------- | ---------------- |  | ----------------- | - | -------------- | - | ---------- |  | - | ----- | ----
| |                                   |  | **Historical** |           | **adjustments*** |  | **adjustments**** |   | **correction** |   | **Recast**
| | ASSETS                            |  |                |           |                  |  |                   |   |                |   |            |  |   |       |     
| | Current Assets                    |  |                |           |                  |  |                   |   |                |   |            |  |   |       |     
| | Assets held for
      sale        |  | $              | 128,657   |                  |  |                   | $ | (4,465         | ) |            |  | $ |      |     
| | Other current assets              |  |                | 555,621   |                  |  |                   |   |               |   |            |  |   |      |     
| | Total current assets              |  |                | 684,278   |                  |  |                   |   | (4,465         | ) |            |  |   |      |     
| | Non-current Assets                |  |                |           |                  |  |                   |   |                |   |            |  |   |       |     
| | Hydrocarbon unproved
      lands  |  |                | 48,728    |                  |  |                   |   | (17,945        | ) |            |  |   | 918   |     
| | Deferred income tax assets        |  |                | 18,510    |                  |  |                   |   | 7,130          |   |            |  |   |      |     
| | Other non-current
      assets    |  |                | 629,973   |                  |  |                   |   |               |   |            |  |   |      |     
| | Total non-current assets          |  |                | 697,211   |                  |  |                   |   | (10,815        | ) |            |  |   | 918   |     
| |                                   |  | $              | 1,381,489 |                  |  |                   | $ | (15,280        | ) |            |  | $ | 918   |     
| |                                  
| | LIABILITIES AND EQUITY            |  |                |           |                  |  |                   |   |                |   |            |  |   |       |     
| | Current Liabilities               |  |                |           |                  |  |                   |   |                |   |            |  |   |       |     
| | Account payables
      and        |  |                |           |                  |  |                   |   |                |   |            |  |   |       |     
| | accrued expenses                  |  | $              | 77,586    |                  |  |                   | $ | 1,737          |   |            |  | $ | 80    | *** 
| | Facility term financing           |  |                | 7,390     |                  |  |                   |   | 3,869          |   |            |  |   | (797  | )   
| | Other current
      liabilities   |  |                | 253,954   |                  |  |                   |   |               |   |            |  |   | (80   | )***
| | Total current liabilities         |  |                | 338,930   |                  |  |                   |   | 5,606          |   |            |  |   | (797  | )   
| | Long-term
      liabilities       |  |                |           |                  |  |                   |   |                |   |            |  |   |       |     
| | Facility term financing           |  |                | 11,328    |                  |  |                   |   | 935            |   |            |  |   |      |     
| | Other long-term
      liabilities |  |                | 267,846   |                  |  |                   |   |               |   |            |  |   |      |     
| | Total long-term liabilities       |  |                | 279,174   |                  |  |                   |   | 935            |   |            |  |   |      |     
| | Total liabilities                 |  |                | 618,104   |                  |  |                   |   | 6,541          |   |            |  |   | (797  | )   
| | Equity                            |  |                |           |                  |  |                   |   |                |   |            |  |   |       |     
| | Capital stock, fully
      paid   |  |                | 382,746   |                  |  |                   |   |               |   |            |  |   |      |     
| | Treasury stock                    |  |                | (68,610   | )                |  |                   |   |               |   |            |  |   |      |     
| | Contributed
      surplus         |  |                | 13,037    |                  |  |                   |   |               |   |            |  |   |      |     
| | Retained earnings                 |  |                | 426,184   |                  |  |                   |   | (21,821        | ) |            |  |   | 1,715 |     
| | Accumulated
    other             |  |                |           |                  |  |                   |   |                |   |            |  |   |       |     
| | comprehensive income              |  |                | 3,840     |                  |  |                   |   |               |   |            |  |   |      |     
| | Shareholders equity              |  |                | 757,197   |                  |  |                   |   | (21,821        | ) |            |  |   | 1,715 |     
| | Non-controlling
      interests   |  |                | 6,188     |                  |  |                   |   |               |   |            |  |   |      |     
| | Total equity                      |  |                | 763,385   |                  |  |                   |   | (21,821        | ) |            |  |   | 1,715 |     
| |                                   |  | $              | 1,381,489 |                  |  |                   | $ | (15,280        | ) |            |  | $ | 918   |     

|*   |  | Adjustments reflecting
      new information obtained during the measurement period about facts and
      circumstances that existed as of the acquisition date.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |  |                                                                                                                                                                 
|**  |  | Adjustments
      representing effects on the post-combination earnings as a result of the
      revision of assets and liabilities at the acquisition date.    
|   
|*** |  | Reclassification.                                                                                                                                               

***Cash flow statement for the year ended December 31, 2012:***

The re-cast adjustments and error correction did not have cash flow impacts on operating activities, investing activities and
financing activities, respectively in 2012, though the recast adjustments had immaterial cash flow impacts on
certain components within the operating activities which offset each other.

143

---



ITEM 19:EXHIBITS

Exhibits Required by Form 20-F

|Exhibit |  |                                                                                                                                                                                                                                                     
|------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Number  |  | Description                                                                                                                                                                                                                                         
|1.1     |  | Amended and Restated Articles of MFC
      Industrial Ltd. dated February 7, 2014. Incorporated by reference from our
      Form 6-K dated February 10, 2014.                                                                                       
|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.                                                                                                                                                                 
|1.4     |  | Advance Notice Policy adopted by board of directors
      of MFC Industrial Ltd. on November 18, 2013. Incorporated by reference
      from Exhibit 99.2 of our Form 6-K dated November 19, 2013.                                                   
|2.1     |  | Shareholder Rights Plan Agreement
      between MFC Industrial Ltd. and Computershare Inc., as Rights Agent, dated
      November 11, 2013. Incorporated by reference from Exhibit 99.2 of our Form
      6-K dated November 12, 2013.              
|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 MFC Energy Corporation (formerly Compton Petroleum
      Corporation) dated July 6, 2012. Incorporated by reference from our Form
      6-K dated July 13, 2012.                            
|4.9     |  | Mutual Settlement Agreement between MFC Industrial
      Ltd., Peter Kellogg and IAT Reinsurance Company, Ltd. dated February 7,
      2014. Incorporated by reference from our Form 6-K dated February 10,
      2014.                             
|8.1     |  | List of significant subsidiaries of MFC Industrial Ltd. as at March 31, 2014.                                                                                                                                                                       
|11.1    |  | Code of Business Conduct and Ethics and Insider
      Trading Policy.                                                                                                                                                                               
|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    |  | Letter dated March 31, 2014 of Deloitte
      LLP as required by Item 16F of Form 20-F.                                                                                                                                                             
|15.2    |  | Consent dated March 31, 2014 of
      PricewaterhouseCoopers LLP.                                                                                                                                                                                   
|15.3    |  | Consent dated March 31, 2014 of
      Deloitte LLP.                                                                                                                                                                                                 
|15.4    |  | Third Party Report on Reserves.                                                                                                                                                                                                                     
|15.5    |  | Consent dated March 31, 2014 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.

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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: March 31, 2014

MFC INDUSTRIAL LTD.

| | /s/ Michael J. Smith                        | 
| | ------------------------------------------- | 
| | Michael J.
      Smith                     
| | Chief Executive Officer and
      President | 

145

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