**Exhibit 2**

 

Management’sResponsibility for Financial Reporting

 

The accompanying consolidatedfinancial statements have been prepared by management inaccordance with Canadian generally acceptedprinciples. Financial statements are not precise since they include certain amounts based on estimates and judgments.When alternative methods exist,management has chosen those it deems most appropriate in the circumstances inorder to ensure that theconsolidated financial statements are presented fairly, in all materialrespects, in accordance withgenerally accepted accounting principles. The financial information presented elsewherein the annual report is consistent with that in the consolidated financialstatements.

 

Falconbridgemaintains adequate systems of internal accounting and administrative controls,consistent with reasonable cost. Such systems are designed to providereasonable assurance that the financial information is relevant and reliable,and that Falconbridge’s assets are appropriately accounted for and adequatelysafeguarded.

 

TheBoard of Directors of the Company is responsible for ensuring that managementfulfills its responsibilities for financial reporting, and is ultimatelyresponsible for reviewing and approving the consolidated financial statementsand the accompanying management’s discussion and analysis. The Board carriesout this responsibility principally through its Audit Committee.

 

TheAudit Committee is appointed by the Board, and all of its members arenon-management directors. The Audit Committee meets periodically withmanagement and the external auditors todiscuss internal controls, auditing matters and financial reportingissues, and to satisfy itself that eachparty is properly discharging its responsibilities. The Audit Committee alsoreviews the consolidatedfinancial statements, management’s discussion and analysis, the externalauditors’ report, and examinesthe fees and expenses for audit services, and considers the engagement or reappointmentof the external auditors. The Audit Committee reports its findings to the Boardfor its consideration whenapproving the consolidated financial statements for issuance to theshareholders. Ernst &Young, the external auditors, have full and free access to the Audit Committee.

 
|                                          |                                                         |
|------------------------------------------|---------------------------------------------------------|
| Derek Pannell                            | Steven Douglas                                          |
| *President  and Chief Executive Officer* | *Executive  Vice-President and Chief Financial Officer* |
| * *                                 | * *                                                |
| February 22, 2006                   |                                                    |

 

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Auditors’ Report

 

To the Shareholders of Falconbridge Limited

 

We have audited the consolidated balance sheets of Falconbridge Limited(formerly Noranda Inc.) as at December 31, 2005 and 2004 and the consolidatedstatements of income and retained earnings (deficit) and cash flows for theyears then ended. These financial statements are the responsibility of theCompany’s management. Our responsibility is to express an opinion on thesefinancial statements based on our audits.

 

We conducted our audits inaccordance with Canadian generally accepted auditing standards. Those standardsrequire that we plan and perform an audit to obtain reasonable assurancewhether the financial statements are free of material misstatement. An auditincludes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements. An audit also includes assessing theaccounting principles used and significant estimates made by management, aswell as evaluating the overall financial statement presentation.

 

In our opinion, theseconsolidated financial statements present fairly, in all material respects, thefinancial position of the Company as at December 31, 2005 and 2004 and theresults of its operations and its cash flows for the years then ended inaccordance with Canadian generally accepted accounting principles.

 

 

*Chartered Accountants*

 

Toronto, Canada

February 7, 2006

(*except as to Note 23 which is as of March 16, 2006)*

 

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Consolidated Balance Sheets

*FalconbridgeLimited (Incorporated under the laws of Ontario) (formerly Noranda Inc.)*

 
| **(US$ millions)**                                    | ** ** | ** **     | ** ** | ** ** | ** ** | ** **                                | ** ** |
|------------------------------------------------------------|------------|----------------|------------|------------|------------|-------------------------------------------|------------|
| **As at December 31**                       | ** ** | **Notes**      | ** ** | **2005**   | ** ** | **2004**                                  | ** ** |
| ** **                                                 | ** ** | ** **     | ** ** | ** ** | ** ** | **Restated – Note 2** | ** ** |
| ASSETS                                                     |       |           |       |       |       |                                      |       |
| Current assets                                             |       |           |       |       |       |                                      |       |
| Cash and  cash equivalents                                 | ** ** | ** **     |       | **$**      | **886**    |                                      | $          | 884 |   |
| Accounts  receivable                                       |       | 19             | ** ** | **1,007**  |       | 948                                       |       |
| Metals and  other inventories                              | ** ** | ** **     |       | **1,708**  |       | 1,436                                     |       |
| ** **                                                 |       | ** **     |       | **3,601**  |       | 3,268                                     |       |
| Operating capital assets                                   |       | 7              | ** ** | **6,803**  |       | 4,870                                     |       |
| Development projects                                       |       | 8              | ** ** | **1,707**  |       | 1,166                                     |       |
| Investments and other assets                               |       | 9              | ** ** | **307**    |       | 324                                       |       |
| ** **                                                 |       | ** **     |       | **$**      | **12,418** |                                      | $          | 9,628 |   |
|                                                       |       |           |       |       |       |                                      |       |
| LIABILITIES AND SHAREHOLDERS’ EQUITY                  |       |           |       |       |       |                                      |       |
| Current liabilities                                        |       |           |       |       |       |                                      |       |
| Accounts and  taxes payable                                |       | 16 and 19      | ** ** | **$**      | **1,691**  |                                      | $          | 1,265 |   |
| Debt due  within one year                                  |       | 10             | ** ** | **353**    |       | 570                                       |       |
| ** **                                                 |       | ** **     |       | **2,044**  |       | 1,835                                     |       |
| Long-term debt                                             |       | 10, 11 and  12 | ** ** | **3,474**  |       | 2,858                                     |       |
| Future income taxes                                        |       | 16             | ** ** | **1,156**  |       | 304                                       |       |
| Asset retirement obligation, pension and  other provisions |       | 13             | ** ** | **659**    |       | 595                                       |       |
|                                                       |       |           |       |       |       |                                      |       |
| Stockholders’ interests                               |       |           |       |       |       |                                      |       |
| Interests of  other shareholders                           |       | 14             | ** ** | **54**     |       | 1,197                                     |       |
| Shareholders’  equity                                 |       | 11 and 15      | ** ** | **5,031**  |       | 2,839                                     |       |
| ** **                                                 |       | ** **     |       | **$**      | **12,418** |                                      | $          | 9,628 |   |

 

*Commitmentsand contingencies (notes 17 and 18)*

*(Seeaccompanying notes)*

 

 

On behalf of the Board:
|                           |                                    |
|---------------------------|------------------------------------|
| Derek Pannell, *Director* | André Bérard, *Director* |

 

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Consolidated Statements of Incomeand Retained Earnings (Deficit)

*FalconbridgeLimited (Incorporated under the laws of Ontario) (formerly Noranda Inc.)*

 
| **(US$ millions, except per share amounts)** | ** ** | ** ** | ** ** | ** **      | ** ** | ** **                                | ** ** |
|-----------------------------------------------------------------------|------------|------------|------------|-----------------|------------|-------------------------------------------|------------|
| **Years ended December 31**                            | ** ** | **Notes**  | ** ** | **2005**        | ** ** | **2004**                                  | ** ** |
| ** **                                                            | ** ** | ** ** | ** ** | ** **      | ** ** | **Restated – Note 2** | ** ** |
| Revenues                                                              |       |       | ** ** | **$**           | **8,148**  | ** **                                | $          | 6,764 |   |
| Operating expenses                                                    |       |       |       |            | ** ** |                                      |       |
| Mining,  processing and refining costs                                |       |       | ** ** | **2,538**       | ** ** | 1,976                                     |       |
| Purchased  raw materials                                              |       |       | ** ** | **3,235**       | ** ** | 2,904                                     |       |
| Depreciation,  amortization and accretion                             |       |       | ** ** | **555**         | ** ** | 493                                       |       |
|                                                                  |       |       | ** ** | **6,328**       | ** ** | 5,373                                     |       |
| Income generated by operating assets                                  |       |       | ** ** | **1,820**       | ** ** | 1,391                                     |       |
|                                                                  |       |       |       |            | ** ** |                                      |       |
| Interest expense, net                                                 |       | 10         | ** ** | **152**         | ** ** | 120                                       |       |
| Corporate and general administration                                  |       |       | ** ** | **80**          | ** ** | 66                                        |       |
| Research, development and exploration                                 |       |       | ** ** | **59**          | ** ** | 47                                        |       |
| Minority interest in earnings of  subsidiaries                        |       |       | ** ** | **155**         | ** ** | 297                                       |       |
| Income before undernoted                                              |       |       | ** ** | **1,374**       | ** ** | 861                                       |       |
| Gain, net of restructuring costs and other                            |       | 4          | ** ** | **(17**         | **)**      | (84                                       | )          |
| Tax expense                                                           |       | 16         | ** ** | **511**         | ** ** | 351                                       |       |
| Net income from continuing operations                                 |       |       | ** ** | **$**           | **880**    | ** **                                | $          | 594 |   |
| Loss on  discontinued operations, net of tax                          |       | 5          | ** ** | **8**           | ** ** | 73                                        |       |
| Net income                                                            |       |       | ** ** | **$**           | **872**    | ** **                                | $          | 521 |   |
| Dividends on preferred shares                                         |       |       | ** ** | **17**          | ** ** | 13                                        |       |
| Net income attributable to common shares –  basic                |       |       | ** ** | **855**         | ** ** | 508                                       |       |
| Net income per common share – basic                              |       |       |       |            | ** ** |                                      |       |
| Continuing  operations                                                |       |       | ** ** | **$**           | **2.54**   | ** **                                | $          | 1.96 |   |
| Discontinued  operations                                              |       |       | ** ** | **(0.02**       | **)**      | (0.25                                     | )          |
| Net income per common share – basic                              |       |       | ** ** | **$**           | **2.52**   | ** **                                | $          | 1.71 |   |
| Net income per common share – diluted                            |       |       |       |            | ** ** |                                      |       |
| Continuing  operations                                                |       |       | ** ** | **$**           | **2.52**   | ** **                                | $          | 1.94 |   |
| Discontinued  operations                                              |       |       | ** ** | **(0.02**       | **)**      | (0.24                                     | )          |
| Net income per common share – diluted                            |       |       | ** ** | **$**           | **2.50**   | ** **                                | $          | 1.70 |   |
| Basic weighted average number of shares                               |       |       | ** ** | **339,756,276** | ** ** | 296,245,753                               |       |
| Diluted weighted average number of shares                             |       |       | ** ** | **346,173,501** | ** ** | 303,458,182                               |       |
|                                                                  |       |       |       |            | ** ** |                                      |       |
| Retained earnings (deficit)                                           |       |       |       |            | ** ** |                                      |       |
| Balance, as  previously reported                                      |       |       | ** ** | **$**           | **288**    | ** **                                | $          | (130 | ) |
| Change in  accounting policy                                          |       | 2          | ** ** | **(57**         | **)**      | (38                                       | )          |
| Balance,  after accounting policy change                              |       |       | ** ** | **231**         | ** ** | (168                                      | )          |
| Income                                                                |       |       | ** ** | **872**         | ** ** | 521                                       |       |
| Dividends                                                             |       |       |       |            | ** ** |                                      |       |
| Common                                                                |       |       | ** ** | **(133**        | **)**      | (110                                      | )          |
| Preferred                                                             |       |       | ** ** | **(17**         | **)**      | (12                                       | )          |
| Cost of  shares repurchased in excess of their stated value           |       | 12         | ** ** | **(799**        | **)**      | —                                    |       |
| Balance, end of year                                                  |       | 15         | ** ** | **$**           | **154**    | ** **                                | $          | 231 |   |

 

*(See accompanying notes)*

 

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Consolidated Statements ofCash Flows

*FalconbridgeLimited (Incorporated under the laws of Ontario) (formerly Noranda Inc.)*

 
| **(US$ millions)**                                      | ** ** | ** ** | ** ** | ** ** | ** ** | ** **                                | ** ** |
|--------------------------------------------------------------|------------|------------|------------|------------|------------|-------------------------------------------|------------|
| **Years ended December 31**                   | ** ** | **Notes**  | ** ** | **2005**   | ** ** | **2004**                                  | ** ** |
| ** **                                                   | ** ** | ** ** | ** ** | ** ** | ** ** | **Restated – Note 2** | ** ** |
| Cash realized from (used for):                               |       |       |       |       | ** ** |                                      |       |
| Operations                                                   |       |       |       |       | ** ** |                                      |       |
| Net income                                                   |       |       | ** ** | **$**      | **872**    | ** **                                | $          | 521 |   |
| Charges  (credits) not affecting cash:                       |       |       |       |       | ** ** |                                      |       |
| Depreciation  and amortization                               |       |       | ** ** | **548**    | ** ** | 484                                       |       |
| Future taxes                                                 |       |       | ** ** | **141**    | ** ** | 212                                       |       |
| Minority  interest                                           |       |       | ** ** | **155**    | ** ** | 297                                       |       |
| Foreign  exchange, restructuring and other                   |       |       | ** ** | **(66**    | **)**      | (53                                       | )          |
|                                                         |       |       | ** ** | **1,650**  | ** ** | 1,461                                     |       |
|                                                         |       |       | ** ** | ** ** | ** ** |                                      |       |
| Net change in accounts receivable,  inventories and payables |       |       | ** ** | **(15**    | **)**      | (277                                      | )          |
| Cash from operations                                         |       |       | ** ** | **1,635**  | ** ** | 1,184                                     |       |
| Investment activities                                        |       |       |       |       | ** ** |                                      |       |
| Capital  investments                                         |       |       | ** ** | **(737**   | **)**      | (666                                      | )          |
| Investments  and advances                                    |       |       | ** ** | **(27**    | **)**      | 105                                       |       |
| Proceeds on  dispositions                                    |       | 4 and 5    | ** ** | **93**     | ** ** | 6                                         |       |
| Cash used in investment activities                           |       |       | ** ** | **(671**   | **)**      | (555                                      | )          |
| Financing activities                                         |       |       |       |       | ** ** |                                      |       |
| Long-term  debt, including current portion                   |       |       |       |       | ** ** |                                      |       |
| Issued                                                       |       |       | ** ** | **551**    | ** ** | 344                                       |       |
| Repaid                                                       |       |       | ** ** | **(1,394** | **)**      | (470                                      | )          |
| Issue of  shares – common                               |       | 15         | ** ** | **49**     | ** ** | 23                                        |       |
| Loan  repayment under share purchase plan                    |       | 15         | ** ** | **3**      | ** ** | —                                    |       |
| Dividends  paid                                              |       |       | ** ** | **(150**   | **)**      | (122                                      | )          |
| Issue of  shares – minority shareholders, net           |       |       | ** ** | **18**     | ** ** | 15                                        |       |
| Dividends  paid to minority shareholders                     |       |       | ** ** | **(39**    | **)**      | (36                                       | )          |
|                                                         |       |       | ** ** | **(962**   | **)**      | (246                                      | )          |
| Increase in cash and cash equivalents                        |       |       | ** ** | **2**      | ** ** | 383                                       |       |
| Cash and cash equivalents, beginning of  year                |       |       | ** ** | **884**    | ** ** | 501                                       |       |
| Cash and cash equivalents, end of year                       |       |       | ** ** | **$**      | **886**    | ** **                                | $          | 884 |   |

 

*(See accompanying notes)*

 

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Notesto Consolidated Financial Statements

*December 31,2005 (US$ millions except as otherwise indicated)*

 

**1.ACCOUNTING POLICIES**

 

BASIS OF PRESENTATION OF THECONSOLIDATED FINANCIAL STATEMENTS

 

The accompanying consolidatedfinancial statements have been prepared in accordance withCanadian generally accepted accountingprinciples (“Canadian GAAP”) which are in conformity, in all material respects, with United Statesgenerally accepted accounting principles (“U.S. GAAP”), except as described in Note 22. Theconsolidated financial statements include the accounts of Falconbridge Limited (formerly Noranda Inc.)and all of its subsidiaries and joint ventures (together, “Falconbridge” or “the Company”). Long-term investments incompanies in which Falconbridgehas significant influence are accounted for on the basis of cost plus equity inundistributed earnings since the dates of investment. The interests of theCompany and Novicourt Inc. (“Novicourt”)in their joint ventures are proportionately consolidated.

 

REPORTING CURRENCY ANDTRANSLATION OF FOREIGN CURRENCIES

 

The United States dollar (“U.S.dollar”) is adopted as the functional currency of Falconbridge’snon-U.S. wholly-owned operations whichreflects significant operational exposure to the U.S. dollar and predominantly the U.S. dollar-based assetand investment base of the Company.

 

Theassets and liabilities of Falconbridge’s self-sustaining operations having afunctionalcurrency otherthan the U.S. dollar are translated into U.S. dollars using the exchange ratein effect at the period end andrevenues and expenses are translated at the average rate during the period. Cumulative exchange gains and losseson translation of the Company’s net equity investment in these operations are deferred as a separate component ofshareholders’ equity. Gains orlosses on foreign currency loans and transactions that are designated as hedgesof a net investment inself-sustaining foreign operations are reported in shareholders’ equity in thesame manner as translationadjustments.

 

Foreigncurrency balances and the financial statements of integrated foreign operationsaretranslated into U.S.dollars using the temporal method. Under the temporal method, foreign-denominatedmonetary assets and liabilities are translated at the exchange rates prevailingat the year end, and revenue andexpenses (other than depreciation and amortization) at average rates of exchange during the year. Non-monetary assetsand liabilities are translated at historical exchange rates and depreciation and amortization aretranslated at the same exchange rates as the assets to which they relate. Exchange gains and lossesarising on the translation of the accounts are included in the consolidated statement of income.

 

CASH AND CASH EQUIVALENTS

 

Cash and cash equivalentsinclude cash on account, demand deposits and short-term investmentswith original maturities of three months orless and are stated at cost, which approximates market value. Cash and cash equivalents of $886 (2004– $884) include $34 of restricted cash (2004 – $35) as reserves related to the senior debt of Compañía Minera AntaminaS.A. (“Antamina”).

 

VALUATION OF INVENTORIES

 

Mining and metallurgicalproduct inventories are valued at the lower of net realizable value andaverage cost where costs are comprised ofdirect costs and an allocation of production overheads and depreciation of production-related assets.Nickel, aluminum and fabricated product inventories are valued at the lower of cost (determined ona first-in, first-out basis, comprised of direct costs and an allocation of production overheads anddepreciation of production-related assets) and net realizable value. Inventories of operatingsupplies and raw materials are valued at the lower of average direct acquisition cost andreplacement value.

 

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REVENUE RECOGNITION

 

Revenues from the sale ofbase metals, aluminum and fabricated products and from by-productmaterials are recorded at the time of sale,when the rights and obligations of ownership pass to the buyer.

 

Underthe terms of concentrate sales contracts with third parties, final prices formetals in theconcentrateare set based on the prevailing spot metal prices on a specified future datebased on the date that theconcentrate is delivered. The Company records revenues under these contracts basedon the forward prices at the time of the sale and the revenues are adjusted ateach subsequent balance sheetdate to the then current forward prices. Price changes for shipments which at year end are awaiting final pricingcould have a material effect on future revenues. As at December 31, 2005, there was $403 inrevenues that was awaiting final pricing.

 

FINANCIAL INSTRUMENTS ANDHEDGING ACTIVITIES

 

Falconbridge enters intointerest rate swap agreements to alter the interest characteristics of aportion of its outstanding debtfrom a fixed to a floating-rate basis. These agreements involve the receipt of fixed-rate amounts in exchange forfloating-rate interest payments over the life of the agreement without an exchange of theunderlying principal amount. Falconbridge also enters into interest rate swap agreements that involve thepayment of fixed-rate amounts in exchange for the receipt of floating-rate interest over thelife of the agreement. The differential paid or received on the interest rate swap agreements that qualifyfor hedge accounting is reflected as an addition to a reduction from interest on the statements ofearnings. For those contracts that do not qualify for hedge accounting, or for those whichFalconbridge does not seek hedge accounting, the net interest received/paid on those positions isshown as a component of gain, net of restructuring costs and other, together with the change infair value of those contracts during the period.

 

Falconbridgeuses forward foreign exchange and option contracts to hedge the effect ofexchange rate changes onidentifiable foreign currency exposures and futures, and forward and option contracts to hedge the effect of pricechanges on a portion of the commodities it sells. Gains and losses on these contracts arereported as a component of the related transactions. Gains and losses on early termination of hedgingcontracts are deferred until the hedged items are recognized in earnings. From time to time,Falconbridge enters into futures and forward contracts for the purchase or sale of commodities andcurrencies not related to production, or not designated as hedges. These contracts are carried atestimated fair values and gains or losses arising from the changes in the market values of these contractsare recognized in the earnings of the period in which the changes occur.

 

Falconbridgealso uses cross-currency swap agreements which are used to hedge the interestrate risk and foreign currencyexposures related to its non-U.S. dollar-denominated debt. Gains or losses on these contracts are accounted for inthe same manner as the interest rate swap agreements and forward exchange contracts discussed above.

 

Financialinstruments designated as hedges are tested for effectiveness on a quarterlybasis.Gains and losses onthose contracts that are proven to be effective are reported as a component of therelated transaction. Falconbridge uses the critical terms method and regressionanalysis to assess the hedgeeffectiveness of interest rate swaps, and uses match-terms and thedollar-offset approach to assessthe hedge effectiveness of its foreign exchange contracts.

 

Falconbridgeformally documents all relationships between hedging instruments and hedgeditems, as well as its riskmanagement objective and strategy for undertaking various hedge transactions. This process includes linkingall derivatives to specific firm commitments or forecasted transactions.

 

Falconbridgedoes not consider the credit risk associated with its financial instruments tobesignificant. Interestrate swaps, foreign currency contracts and commodity hedge contracts are maintainedwith high-quality counterparties, and Falconbridge does not anticipate that anycounterparty will fail to meet itsobligations.

 

DEPRECIATION AND AMORTIZATION

 

Depreciation of property,plant and equipment is based on the estimated service lives of the assets(4 to 40 years), calculatedprimarily on a straight-line basis for metallurgical operations and on a unit-of-productionbasis for mining operations. Resources properties are depleted and pre-productionand mine development expenditures are amortized over a unit-of-productionmethod. Depreciation andamortization under the unit-of-production method is measured as the net book

 

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value of the related assetmultiplied by the ratio of tonnes milled during the period over provenand probable reserves at start of the period.Construction in progress will be depreciated once the project is substantially completed.

 

ASSET RETIREMENT OBLIGATIONS

 

Asset retirement obligationsare recognized when incurred and recorded as liabilities at fair value.The amount of the liability is subject tore-measurement at each reporting period. The liability is accreted over time through periodic charges toearnings. In addition, the asset retirement cost is capitalized as part of the asset’scarrying value and amortized over the estimated life of the mine. The key assumptions on which the fair value ofthe asset retirement obligations is based includes the estimated future cash flows, the timing ofthose cash flows and the credit-adjusted risk-free rate or rates on which the estimated cashflows have been discounted.

 

Theasset retirement obligation and closure costs may change materially basedon futurechanges inoperations, costs of reclamation and closure activities, regulatoryrequirements and the outcome oflegal proceedings.

 

PRE-PRODUCTION COSTS

 

Pre-production costs relatedto major projects are deferred until the facilities achieve commercialproduction or are deemed to be uneconomic.These deferred costs are amortized on a unit-of-production method over the estimated useful life of theproject or are written off when the project is determined to be uneconomic.

 

ASSET VALUATION

 

The Company assesseslong-lived assets, such as operating capital assets, for recoverabilitywhenever indicators of impairment exist. Whenthe carrying value of a long-lived asset is greater than its net recoverable value as determinedon an undiscounted basis, an impairment loss is recognized to the extent that its fair value, measured as the discountedcash flows over the life of theasset when quoted market prices are not readily available, is below the asset’scarrying value.

 

EXPLORATION

 

Mining explorationexpenditures are charged against current earnings unless they relate toproperties that have been subjected tosufficient pre-feasibility work that indicates future mine production is reasonably certain. Gains on thesale of mining exploration properties or recoveries of costs previously written off are creditedagainst exploration expense.

 

INCOME AND PRODUCTION TAXES

 

Current taxes are recognizedfor the estimated income and mining taxes payable for the current year.

 

Futuretax assets and liabilities are recognized for temporary differences between thetax andaccounting basesof assets and liabilities as well as for the benefit of losses available to becarried forward to future yearsfor tax purposes that are more likely than not to be realized. Future taxes aremeasured using the tax rates and laws that will be in effect when thedifferences are expected toreverse or the losses to be realized.

 

INTEREST

 

Interest incurred is chargedto earnings, except for interest that can be identified with a majorcapital expenditure program. Under the policy,interest is capitalized as it arises from indebtedness incurred to finance major projects, eitherdirectly or indirectly, until the project achieves commercial production.

 

EMPLOYEE FUTURE BENEFIT PLANS

 

The cost of retirementbenefits and certain post-employment benefits are recognized as thebenefits are earned by the employees.Falconbridge uses the accrued benefit method pro-rated on length of service and management’s bestestimate assumptions to value its pensions and other retirement benefits. Assets are valued at fairvalue for the purpose of calculating the expected return on plan assets. Past service costs fromplan amendments are amortized on a straight-line basis over the term of the collective agreements being ratified. Theexcess of the net actuarial gain

 

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(loss) over 10% of thegreater of the benefit obligation and the fair value of plan assets isamortized over the expected average remaining service life of active employees.

 

Underits defined contribution retirement savings program, Falconbridge makespayments basedon employeeearnings and partially matches employee contributions, to a defined maximum.Employees may receive profit sharingcredits based on earnings.

 

Whena defined benefit plan gives rise to an accrued benefit asset, Falconbridgerecognizes avaluationallowance for the excess of the adjusted benefit asset over the expected futurebenefit to be realized from theplan asset. Changes in the allowance are included in the determination of pensionexpense.

 

STOCK-BASED COMPENSATIONPLANS

 

The Company has stock-basedcompensation plans. The Company accounts for stock options usingthe fair value method. Under this method,compensation expense for stock options granted since January 1, 2002 is measured at fair valueat the grant date using the Black-Scholes valuation model and recognized over the vesting periodof the options granted.

 

TheCompany also has an employee share savings plan through which employees canpurchaseshares of theCompany at market prices. For each dollar employees contribute to the plan, theCompany contributes a prescribed percentage, which is expensed as employeecompensation. For the Company’sdeferred unit plans, a liability is recorded to the extent that the Company’scommon share price exceeds thenotional purchase price of the units. Notional dividends on the units arerecorded as a direct charge to retainedearnings.

 

EARNINGS PER SHARE

 

Earnings per share isdetermined by dividing net earnings, after deducting preferred sharedividends by the weighted average number ofcommon shares outstanding during the year, excluding shares securing employee share purchase loans.

 

Dilutedearnings per share assumes that outstanding dilutive stock options areexercised at thebeginningof the period (or at the time of issuance, if later) and the proceeds are usedto purchase common stock at theaverage market price during the period, and that dilutive convertible debentures are converted into common shares atthe beginning of the period.

 

USE OF ESTIMATES

 

The preparation of financialstatements in conformity with generally accepted accounting principlesrequires management to make estimates andassumptions. These estimates affect the reported amounts of assets and liabilities and the disclosure of contingentassets and liabilities at the date ofthe financial statements and the reported amounts of revenues and expensesduring the reported period.Actual results could differ from those estimates.

 

COMPARATIVE CONSOLIDATEDFINANCIAL STATEMENTS

 

The comparative consolidatedfinancial statements have been reclassified from statements previouslypresented to conform to the presentation of the 2005 consolidatedfinancial statements.

 

**2. CHANGESIN ACCOUNTING POLICIES**

 

*(a) ConvertibleDebentures*

 

The principal amount ofFalconbridge’s outstanding convertible debentures of Cdn$131 million(Note 11) due on April 30, 2007 waspreviously classified as an equity instrument due to the Company’s ability to settle principal paymentby issuance of its shares. In accordance with the amended standard under CICA 3860 – *Financial Instruments*–*Presentation and Disclosure*, the convertible debenture is a compound financialinstrument that contains both a liability element and an equity element and therefore should bebifurcated into separate liability and equity elements. Falconbridge’s obligation to make scheduled interest paymentsin cash and Falconbridge’s optionto redeem the debentures in a variable number of common shares of the Company constitutes a financial liability. Theholder’s option to convert the liability into equity of the Company is an equity instrument.

 

72

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Thecarrying value of the liability element which represents the present value ofthe Company’s obligations to make future interest payments in cash and tosettle the redemption value of the debentures in a variable number of shares ispresented as a long-term debt on the consolidated balance sheet. The statedinterest payments and accretion expense from adjusting the time value of theprincipal of the debentures over time using the effective interest method ofamortization are recorded as interest expense on the consolidated statement ofearnings. The equity component represents the fair value of the holder’sconversion option established at the issuance of the debentures and ispresented as a component of shareholders’ equity. Upon conversion, when theCompany settles the obligations in the common shares of the Company, thecarrying amount of the equity element and the carrying amount of the liabilityare transferred to share capital.

 

Thecumulative impact of the adoption of the standard on January 1, 2004 wasto decrease retained earnings by $33, increase the liability component ofconvertible debentures by $82, decrease equity by $41 and decrease thecumulative translation adjustment by $8. The adoption of this standard resultedin a decrease by $14 to the previously reported earnings for the year ended December 31,2004 and a decrease by $44 to the previously reported retained earning as at December 31,2004. Further disclosure regarding the convertible debentures is presented inNote 11.

 

*(b) PreferredShares Series H*

 

The Company has Cdn$150million (Note 12) of Cumulative Preferred Shares, Series H, whichprovide the holders with an entitlement toconvert the shares to the Company’s common shares after a specified date and were previously reportedas equity instruments in accordance with their legal form. The new accounting recommendations underCICA 3860, on presentation of financial instruments, provide that the preferred shares are reclassified asliabilities because their conversion feature represents a fixed obligation to the Company. The dividends paidare reported as interest expensein the consolidated statement of earnings.

 

Thecumulative impact of the adoption of the standard on January 1, 2004 wasto decreaseretainedearnings by $5, increase liabilities by $113, decrease equity by $99 anddecrease cumulative translationadjustment by $9. Adoption of the new standard reduced previously reported earnings by $16 for the year ended December 31,2004 and resulted in a decrease by $13to the previously reported retained earnings as at December 31, 2004.Further disclosure regarding theliabilities for the Preferred Shares, Series H, is presented in Note 12.

 

*(c) VariableInterest Entities (“VIEs”)*

 

As of January 1, 2005,the Company adopted the recommendations of AcG-15 requiringFalconbridge to identify variable interestentities, in which it has significant variable interest, to determine whether Falconbridge is the primarybeneficiary of such entities and, if so, consolidate them. VIEs include entities where the equityinvested is considered insufficient to finance the entity’s activities without additionalsubordinated financial support from other parties. The recommendations require the Company toconsolidate VIEs if the investment it holds in these entities and/or the relationship it has withthem result in it being exposed to a majority of their expected losses, being able to benefit from amajority of their expected residual returns, or both.

 

The adoption of therecommendations resulted in the Company consolidating a customersecuritization vehicle, which was operated asa trust and purchased trade accounts receivable from the Company. The application of therecommendations had no impact on the Company’s financial statements on January 1, 2004. Thecumulative impact of the consolidation of the vehicle on January 1, 2005 was to increase currentassets by $17 and increase current liabilities by $17 with no impact on opening retained earnings. In2005, the receivable purchase agreement between the Company and the trust was terminated and thetrust is no longer a VIE of the Company.

 

**3. BUSINESSCOMBINATION**

 

On June 30, 2005, theCompany completed the two-step acquisition of 41.5% of all the issuedand outstanding common shares of the formerFalconbridge that it did not previously own, pursuant to the offer to purchase dated March 9, 2005. Theacquisition was completed by way of an amalgamation (the “Amalgamation”) of Noranda Inc. and the formerFalconbridge Limited (the “formerFalconbridge”) and the newly amalgamated company continued under the name FalconbridgeLimited. The acquisition was done on a share-exchange basis with one commonshare

 

73

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of the former Falconbridgeexchanged for 1.77 common shares of the Company. The former Falconbridge was aproducer of nickel, copper, cobalt and platinum with mining and metallurgical operationsmainly in Canada and South America.

 

The first step of theacquisition was completed on May 5, 2005 when the Companysuccessfully acquired 32.3% of all the issuedand outstanding common shares of the former Falconbridge, increasing its ownership to 90.8% of the outstandingformer Falconbridge common shares.On June 30, 2005, the Company completed the second step of the acquisitionof the remaining 9.2% of theformer Falconbridge common shares and assumed 100% of the preferred share and stock option obligations of theformer Falconbridge. The results of operations of the former Falconbridge from January 1, 2005to May 4, 2005 have been included in the Company’s consolidated statement of earnings at 58.5%and from May 5, 2005 to June 30, 2005 at 90.8%. Beginning July 1, 2005, 100% ofthe results from operations have been included in the Company’s consolidated statement of earnings.

 

The acquisition has beenaccounted for using the purchase method, whereby the purchaseconsideration was allocated to the estimatedfair values of the assets acquired and liabilities assumed on the date of acquisition. TheCompany has not yet finalized the allocation of the purchase price related to this acquisition andit will be refined as information relating to the valuation of operating capital assets anddevelopment projects is finalized. The preliminary fair values of the assets and liabilities of theformer Falconbridge and the preliminary allocation of the purchase consideration are as follows:

 
| **(US$ millions, except share price and number of shares)**                                                                                               | ** ** | **2005**        | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------|------------|
| Calculation  of preliminary allocation of purchase price                                                                                                                                          |       |            |       |
| Common  shares of the Company issued to the former Falconbridge shareholders                                                                                                                      | ** ** | **132,840,681** | ** ** |
| The average  closing market price of the Company’s shares over the six trading days from March 4  through March 11, 2005 (the purchase offer announcement was March 9,  2005) | ** ** | **$**           | **19.07**  | ** ** |
| Fair value  of the Company’s common stock issued                                                                                                                                             | ** ** | **$**           | **2,534**  | ** ** |
| Fair value  of vested options assumed by the Company                                                                                                                                              | ** ** | **6**           | ** ** |
| Direct  acquisition costs incurred by the Company                                                                                                                                                 | ** ** | **22**          | ** ** |
| Total  purchase price                                                                                                                                                                             | ** ** | **$**           | **2,562**  | ** ** |
|                                                                                                                                                                                              |       |            |       |
| Preliminary  fair value of assets acquired by the Company                                                                                                                                         |       |            |       |
| Cash and  cash equivalents                                                                                                                                                                        | ** ** | **$**           | **353**    | ** ** |
| Accounts  receivable                                                                                                                                                                              | ** ** | **178**         | ** ** |
| Metals and  other inventories                                                                                                                                                                     | ** ** | **308**         | ** ** |
| Operating  capital assets                                                                                                                                                                         | ** ** | **3,154**       | ** ** |
| Development  projects                                                                                                                                                                             | ** ** | **565**         | ** ** |
| Investments  and other assets                                                                                                                                                                     | ** ** | **45**          | ** ** |
|                                                                                                                                                                                              |       |            |       |
| Preliminary  fair value of liabilities assumed by the Company                                                                                                                                     |       |            |       |
| Accounts and  taxes payable                                                                                                                                                                       | ** ** | **(177**        | **)**      |
| Debt due  within one year                                                                                                                                                                         | ** ** | **(106**        | **)**      |
| Long-term  debt                                                                                                                                                                                   | ** ** | **(480**        | **)**      |
| Future  income taxes                                                                                                                                                                              | ** ** | **(876**        | **)**      |
| Asset  retirement obligation, pension and other provisions                                                                                                                                        | ** ** | **(257**        | **)**      |
| Interests of  other shareholders                                                                                                                                                                  | ** ** | **(15**         | **)**      |
| Preferred  shares assumed by the Company                                                                                                                                                          | ** ** | **(130**        | **)**      |
| Net assets  purchased                                                                                                                                                                             | ** ** | **$**           | **2,562**  | ** ** |

 

74

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**4. GAIN NET OFRESTRUCTURING COSTS AND OTHER**

 
| ** **                                       | ** ** | **2005**   | ** ** | **2004** | ** ** |
|--------------------------------------------------|------------|------------|------------|----------|------------|
|                                             |       |       | ** ** |     |       |
| Gain on sale of investment and other             | ** ** | **$**      | **(19**    | **)**    | $          | (7 | ) |
| Restructuring costs                              | ** ** | **2**      | ** ** | 3        |       |
| Gain on settlement of alumina contract  (Note 6) | ** ** | **—** | ** ** | (80      | )          |
| ** **                                       |       | **$**      | **(17**    | **)**    | $          | (84 | ) |

 

**5.DISCONTINUED OPERATIONS**

 

In June 2005, Falconbridgedisposed of a subsidiary that manufactures and distributes aluminum wheels. Thesubsidiary was sold for proceeds of $40.5, amounting to a net gain on sale of$1. Included in discontinued operations, net of tax is a loss of $9 (2004 – $40)from operations prior to the sale. In 2004, Falconbridge recorded an impairmentloss of $50 related to the subsidiary determined using a discounted cash flowanalysis. The impact from discontinued operations on the consolidated balancesheets and consolidated statements of cash flows has not been separately disclosed,as it is not considered material.

 

**6. JOINT VENTURES**

 

Falconbridge’s share of the assets, liabilities and equity,revenues and expenses and cash flows of its major joint ventures for the yearsended December 31, 2005 and 2004 are as follows:

 
| ** **                                   | ** ** | ** **   | ** ** | ** **     | ** ** | ** **   | ** ** | ** **    | ** ** | ** **     | ** ** | **2005**   | ** ** |
|----------------------------------------------|------------|--------------|------------|----------------|------------|--------------|------------|---------------|------------|----------------|------------|------------|------------|
| ** **                                   | ** ** | **Antamina** | ** ** | **Collahuasi** | ** ** | **Gramercy** | ** ** | **Magnesium** | ** ** | **Louvicourt** | ** ** | **Total**  | ** ** |
| Balance Sheets                               |       |         |       |           |       |         |       |          |       |           |       |       |       |
| Current assets                               | ** ** | **$**        | **341**    | ** **     | **$**      | **413**      | ** ** | **$**         | **53**     | ** **     | **$**      | **13**     | ** ** | **$** | **3** | ** ** | **$** | **823** | ** ** |
| Capital assets and other                     | ** ** | **608**      | ** ** | **981**        | ** ** | **139**      | ** ** | **280**       | ** ** | **—**     | ** ** | **2,008**  | ** ** |
| ** **                                   | ** ** | **$**        | **949**    | ** **     | **$**      | **1,394**    | ** ** | **$**         | **192**    | ** **     | **$**      | **293**    | ** ** | **$** | **3** | ** ** | **$** | **2,831** |   |
| Current liabilities                          | ** ** | **$**        | **165**    | ** **     | **$**      | **146**      | ** ** | **$**         | **35**     | ** **     | **$**      | **1**      | ** ** | **$** | **1** | ** ** | **$** | **348** | ** ** |
| Long-term debt and other                     | ** ** | **267**      | ** ** | **636**        | ** ** | **52**       | ** ** | **24**        | ** ** | **3**          | ** ** | **982**    | ** ** |
| Falconbridge’s investment               | ** ** | **517**      | ** ** | **612**        | ** ** | **105**      | ** ** | **268**       | ** ** | **(1**         | **)**      | **1,501**  | ** ** |
| ** **                                   | ** ** | **$**        | **949**    | ** **     | **$**      | **1,394**    | ** ** | **$**         | **192**    | ** **     | **$**      | **293**    | ** ** | **$** | **3** | ** ** | **$** | **2,831** |   |
| Statements of Earnings (Loss)                |       |         |       |           |       |         |       |          |       |           |       |       |       |
| Sales and other revenues                     | ** ** | **$**        | **623**    | ** **     | **$**      | **682**      | ** ** | **$**         | **225**    | ** **     | **$**      | **—** | ** ** | **$** | **29** | ** ** | **$** | **1,559** | ** ** |
| Operating expenses                           | ** ** | **188**      | ** ** | **256**        | ** ** | **211**      | ** ** | **—**    | ** ** | **11**         | ** ** | **666**    | ** ** |
| Income generated by operating assets         | ** ** | **$**        | **435**    | ** **     | **$**      | **426**      | ** ** | **$**         | **14**     | ** **     | **$**      | **—** | ** ** | **$** | **18** | ** ** | **$** | **893** | ** ** |
| Expenses                                     | ** ** | **$**        | **138**    | ** **     | **$**      | **126**      | ** ** | **$**         | **6**      | ** **     | **$**      | **5**      | ** ** | **$** | **—** | ** ** | **$** | **275** | ** ** |
| Minority interest                            | ** ** | **—**   | ** ** | **38**         | ** ** | **—**   | ** ** | **—**    | ** ** | **7**          | ** ** | **45**     | ** ** |
| Falconbridge’s share of earnings (loss) | ** ** | **$**        | **297**    | ** **     | **$**      | **262**      | ** ** | **$**         | **8**      | ** **     | **$**      | **(5**     | **)**      | **$** | **11** | ** ** | **$** | **573** | ** ** |
| Statements of Cash Flows                     |       |         |       |           |       |         |       |          |       |           |       |       |       |
| Cash realized from (used for):               |       |         |       |           |       |         |       |          |       |           |       |       |       |
| Operations                                   | ** ** | **$**        | **417**    | ** **     | **$**      | **387**      | ** ** | **$**         | **7**      | ** **     | **$**      | **(9**     | **)**      | **$** | **34** | ** ** | **$** | **836** | ** ** |
| Investment activities                        | ** ** | **(22**      | **)**      | **(30**        | **)**      | **(12**      | **)**      | **—**    | ** ** | **2**          | ** ** | **(62**    | **)**      |
| Financing activities                         | ** ** | **(153**     | **)**      | **(94**        | **)**      | **—**   | ** ** | **(1**        | **)**      | **—**     | ** ** | **(248**   | **)**      |

 

75

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| ** **                                   | ** ** | ** **   | ** ** | ** **     | ** ** | ** **   | ** ** | ** **    | ** ** | ** **     | ** ** | **2004**  | ** ** |
|----------------------------------------------|------------|--------------|------------|----------------|------------|--------------|------------|---------------|------------|----------------|------------|-----------|------------|
| ** **                                   | ** ** | **Antamina** | ** ** | **Collahuasi** | ** ** | **Gramercy** | ** ** | **Magnesium** | ** ** | **Louvicourt** | ** ** | **Total** | ** ** |
| Balance Sheets                               |       |         |       |           |       |         |       |          |       |           |       |      |       |
| Current assets                               |       | $            | 223        |           | $          | 392          |       | $             | 38         |           | $          | 12        |       | $ | 18 |   | $ | 683 |   |
| Capital assets and other                     |       | 630          |       | 955            |       | 133          |       | 272           |       | 4              |       | 1,994     |       |
|                                         |       | $            | 853        |           | $          | 1,347        |       | $             | 171        |           | $          | 284       |       | $ | 22 |   | $ | 2,677 |   |
| Current liabilities                          |       | $            | 73         |           | $          | 179          |       | $             | 18         |           | $          | —    |       | $ | 2 |   | $ | 272 |   |
| Long-term debt and other                     |       | 346          |       | 628            |       | 56           |       | 27            |       | 5              |       | 1,062     |       |
| Minority interest in subsidiaries            |       | —       |       | 222            |       | —       |       | —        |       | 6              |       | 228       |       |
| Falconbridge’s investment               |       | 434          |       | 318            |       | 97           |       | 257           |       | 9              |       | 1,115     |       |
|                                         |       | $            | 853        |           | $          | 1,347        |       | $             | 171        |           | $          | 284       |       | $ | 22 |   | $ | 2,677 |   |
| Statements of Earnings (Loss)                |       |         |       |           |       |         |       |          |       |           |       |      |       |
| Sales and other revenues                     |       | $            | 351        |           | $          | 575          |       | $             | 39         |           | $          | —    |       | $ | 47 |   | $ | 1,012 |   |
| Operating expenses                           |       | 137          |       | 205            |       | 38           |       | —        |       | 23             |       | 403       |       |
| Income generated by operating assets         |       | $            | 214        |           | $          | 370          |       | $             | 1          |           | $          | —    |       | $ | 24 |   | $ | 609 |   |
| Expenses                                     |       | $            | 84         |           | $          | 114          |       | $             | —     |           | $          | 5         |       | $ | — |   | $ | 203 |   |
| Minority interest                            |       | —       |       | 105            |       | —       |       | —        |       | 9              |       | 114       |       |
| Falconbridge’s share of earnings (loss) |       | $            | 130        |           | $          | 151          |       | $             | 1          |           | $          | (5        | )          | $ | 15 |   | $ | 292 |   |
| Statements of Cash Flows                     |       |         |       |           |       |         |       |          |       |           |       |      |       |
| Cash realized from (used for):               |       |         |       |           |       |         |       |          |       |           |       |      |       |
| Operations                                   |       | $            | 196        |           | $          | 272          |       | $             | 13         |           | $          | (3        | )          | $ | 27 |   | $ | 505 |   |
| Investment activities                        |       | (15          | )          | (20            | )          | (5           | )          | —        |       | —         |       | (40       | )          |
| Financing activities                         |       | (69          | )          | (66            | )          | —       |       | (1            | )          | —         |       | (136      | )          |

 

Falconbridge holds a 33.75%interest in Antamina, a copper/zinc mine in Peru.

 

Falconbridge holds a 44%interest in Compañía Minera Doña Inés de Collahuasi S.C.M.(“Collahuasi”), a corporation which owns themining and water rights and other assets relating to the Collahuasi mine, and which securedfinancing, conducts the operations and markets the products of the property.

 

In October 2004, the Companyassumed a 50% interest in Kaiser Aluminum’s Gramercyalumina plant in Gramercy, Louisiana andKaiser Aluminum’s related bauxite assets in Jamaica, in exchange for the settlement of an aluminasupply contract and $11.5. The Company recorded a gain of $80 on the settlement of the contract(Note 4). The total consideration of $91.5, comprised of cash and the gain on the settlement of thecontract, was allocated as $11.5 to working capital, $129 to capital assets and $49 to future income taxes.

 

Falconbridge owns an 80%joint-venture interest in the Magnesium project, a facility for theextraction of magnesium from mining residuesin Danville, Quebec. As a result of depressed global magnesium prices, the Company temporarily shutdown its Magnesium operation in April 2003.

 

Through its 62.1%-ownedsubsidiary, Novicourt, the Company holds a 45% joint-ventureinterest in the Louvicourt copper/zinc mine innorthwestern Quebec which closed in 2005.

 

**7. OPERATING CAPITAL ASSETS**

 
| ** **                                      | ** ** | **Mines, mining plants and** | ** ** | ** **       | ** ** | ** **     | ** ** | ** **       | ** ** | ** ** | ** ** | ** **       | ** ** | ** ** | ** ** | ** **       | ** ** | ** **                | ** ** |
|-------------------------------------------------|------------|---------------------------------------------|------------|------------------|------------|----------------|------------|------------------|------------|------------|------------|------------------|------------|------------|------------|------------------|------------|---------------------------|------------|
| ** **                                      | ** ** | **ancillary mining assets**       | ** ** | **Smelters**     | ** ** | **Refineries** | ** ** | **Other**        | ** ** | ** ** | ** ** | ** **       | ** ** |
| ** **                                      | ** ** | ** **                                  | ** ** | **Accumulated**  | ** ** | ** **     | ** ** | **Accumulated**  | ** ** | ** ** | ** ** | **Accumulated**  | ** ** | ** ** | ** ** | **Accumulated**  | ** ** | **Deferred**              | ** ** | ** ** | ** ** |
| ** **                                      | ** ** | ** **                                  | ** ** | **depreciation** | ** ** | ** **     | ** ** | **depreciation** | ** ** | ** ** | ** ** | **depreciation** | ** ** | ** ** | ** ** | **depreciation** | ** ** | **preproduction**         | ** ** | ** ** | ** ** |
| ** **                                      | ** ** | ** **                                  | ** ** | **and**          | ** ** | ** **     | ** ** | **and**          | ** ** | ** ** | ** ** | **and**          | ** ** | ** ** | ** ** | **and**          | ** ** | **development and**  | ** ** | **Net** | ** ** |
| **As at December 31, 2005** | ** ** | **Cost**                                    | ** ** | **amortization** | ** ** | **Cost**       | ** ** | **amortization** | ** ** | **Cost**   | ** ** | **amortization** | ** ** | **Cost**   | ** ** | **amortization** | ** ** | **exploration, net** | ** ** | **book value** | ** ** |
| Copper                                          | ** ** | **$**                                       | **2,021**  | ** **       | **$**      | **810**        | ** ** | **$**            | **999**    | ** ** | **$**      | **651**          | ** ** | **$**      | **686**    | ** **       | **$**      | **395**                   | ** ** | **$** | **1,852** | ** ** | **$** | **344** | ** ** | **$** | **448** | ** ** | **$** | **3,806** | ** ** |
| Nickel                                          | ** ** | **1,210**                                   | ** ** | **737**          | ** ** | **265**        | ** ** | **166**          | ** ** | **400**    | ** ** | **249**          | ** ** | **1,165**  | ** ** | **107**          | ** ** | **333**                   | ** ** | **2,114** | ** ** |
| Zinc                                            | ** ** | **433**                                     | ** ** | **357**          | ** ** | **198**        | ** ** | **145**          | ** ** | **—** | ** ** | **—**       | ** ** | **3**      | ** ** | **1**            | ** ** | **8**                     | ** ** | **139** | ** ** |
| Aluminum                                        | ** ** | **10**                                      | ** ** | **—**       | ** ** | **745**        | ** ** | **490**          | ** ** | **6**      | ** ** | **—**       | ** ** | **623**    | ** ** | **184**          | ** ** | **1**                     | ** ** | **711** | ** ** |
| Other                                           | ** ** | **246**                                     | ** ** | **223**          | ** ** | **—**     | ** ** | **—**       | ** ** | **—** | ** ** | **—**       | ** ** | **49**     | ** ** | **45**           | ** ** | **6**                     | ** ** | **33** | ** ** |
| Total                                           | ** ** | **$**                                       | **3,920**  | ** **       | **$**      | **2,127**      | ** ** | **$**            | **2,207**  | ** ** | **$**      | **1,452**        | ** ** | **$**      | **1,092**  | ** **       | **$**      | **644**                   | ** ** | **$** | **3,692** | ** ** | **$** | **681** | ** ** | **$** | **796** | ** ** | **$** | **6,803** | ** ** |

 

76

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| ** **                  | ** ** | **Mines, mining plants and** | ** ** | ** **       | ** ** | ** **     | ** ** | ** **       | ** ** | ** ** | ** ** | ** **       | ** ** | ** ** | ** ** | ** **       | ** ** | ** **               | ** ** |
|-----------------------------|------------|---------------------------------------------|------------|------------------|------------|----------------|------------|------------------|------------|------------|------------|------------------|------------|------------|------------|------------------|------------|--------------------------|------------|
| ** **                  | ** ** | **ancillary mining assets**       | ** ** | **Smelters**     | ** ** | **Refineries** | ** ** | **Other**        | ** ** | ** ** | ** ** | ** **       | ** ** |
| ** **                  | ** ** | ** **                                  | ** ** | **Accumulated**  | ** ** | ** **     | ** ** | **Accumulated**  | ** ** | ** ** | ** ** | **Accumulated**  | ** ** | ** ** | ** ** | **Accumulated**  | ** ** | **Deferred**             | ** ** | ** ** | ** ** |
| ** **                  | ** ** | ** **                                  | ** ** | **depreciation** | ** ** | ** **     | ** ** | **depreciation** | ** ** | ** ** | ** ** | **depreciation** | ** ** | ** ** | ** ** | **depreciation** | ** ** | **preproduction**        | ** ** | ** ** | ** ** |
| ** **                  | ** ** | ** **                                  | ** ** | **and**          | ** ** | ** **     | ** ** | **and**          | ** ** | ** ** | ** ** | **and**          | ** ** | ** ** | ** ** | **and**          | ** ** | **development and** | ** ** | **Net** | ** ** |
| **As at December 31, 2004** | ** ** | **Cost**                                    | ** ** | **amortization** | ** ** | **Cost**       | ** ** | **amortization** | ** ** | **Cost**   | ** ** | **amortization** | ** ** | **Cost**   | ** ** | **amortization** | ** ** | **exploration,  net**    | ** ** | **book  value** | ** ** |
| Copper                      |       | $                                           | 2,224      |             | $          | 849            |       | $                | 984        |       | $          | 477              |       | $          | 670        |             | $          | 380                      |       | $ | 612 |   | $ | 282 |   | $ | 388 |   | $ | 2,890 |   |
| Nickel                      |       | 1,233                                       |       | 745              |       | 256            |       | 157              |       | 385        |       | 234              |       | 153        |       | 92               |       | 279                      |       | 1,078 |   |
| Zinc                        |       | 434                                         |       | 349              |       | 195            |       | 138              |       | —     |       | —           |       | 3          |       | 1                |       | 14                       |       | 158 |   |
| Aluminum                    |       | 4                                           |       | —           |       | 738            |       | 478              |       | 2          |       | —           |       | 600        |       | 164              |       | —                   |       | 702 |   |
| Other                       |       | 347                                         |       | 319              |       | —         |       | —           |       | —     |       | —           |       | 129        |       | 119              |       | 4                        |       | 42 |   |
| Total                       |       | $                                           | 4,242      |             | $          | 2,262          |       | $                | 2,173      |       | $          | 1,250            |       | $          | 1,057      |             | $          | 614                      |       | $ | 1,497 |   | $ | 658 |   | $ | 685 |   | $ | 4,870 |   |

 

In 2005, approximately$1,966 was allocated to the operating assets as preliminary fair market valueincrements from the purchase accounting pertaining to the acquisition of 41.5%of all the issued and outstanding common shares of the former Falconbridge thatit did not previously own (Note 3). The preliminary fair market valueincrements are allocated to different business units as other operating capitalassets, based on the preliminary allocation of the purchase cost for theacquisition.

 

**8. DEVELOPMENT PROJECTS**

 

Development projects consist of brownfield and greenfieldprojects that are in the pre-production stage. Major projects in the categoryare as follows:

 
| **As at December 31**                             | ** ** | **2005** | ** ** | **2004** | ** ** |
|------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Kidd Creek – deep expansion                                 | ** ** | **$**    | **518**    |     | $          | 404 |   |
| Koniambo – New Caledonia                                    | ** ** | **276**  |       | 180      |       |
| Nickel Rim South                                                 | ** ** | **173**  |       | 101      |       |
| Magnesium                                                        | ** ** | **280**  |       | 272      |       |
| Other development projects                                       | ** ** | **205**  |       | 209      |       |
| Preliminary allocation of fair market value  increments (Note 3) | ** ** | **255**  |       | —   |       |
| ** **                                                       |       | **$**    | **1,707**  |     | $          | 1,166 |   |

 

The increase in carrying valueattributed to the magnesium operations in 2005 is a result of the appreciationof the Canadian dollar compared to the U.S. dollar during 2005.

 

**9. INVESTMENTSAND OTHER ASSETS**

 
| **As at December 31**                    | ** ** | **2005** | ** ** | **2004** | ** ** |
|---------------------------------------------------------|------------|----------|------------|----------|------------|
| Equity accounted investment – Noranda  Income Fund | ** ** | **$**    | **40**     |     | $          | 43 |   |
| Cost accounted investments                              | ** ** | **39**   |       | 33       |       |
| Derivative financial instruments (Note 17)              | ** ** | **102**  |       | 120      |       |
| Antamina net proceeds interest                          | ** ** | **21**   |       | 23       |       |
| Debenture discount and issue expenses, net              | ** ** | **20**   |       | 18       |       |
| Supplies inventory                                      | ** ** | **19**   |       | 25       |       |
| Deposits and other assets                               | ** ** | **66**   |       | 62       |       |
| ** **                                              |       | **$**    | **307**    |     | $          | 324 |   |

 

As at December 31, 2005, thefair market value of the cost accounted investments was $53 (2004 – $46).

 

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**10. DEBT**

 
| ** **                                             | ** ** | **Principal repayment schedule as at December 31, 2005** | ** ** |
|--------------------------------------------------------|------------|---------------------------------------------------------------------------------------------|------------|
| ** **                                             | ** ** | **Interest**                                                                                | ** ** | **Total** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **2011** | ** ** | **After** | ** ** | **Total** | ** ** |
| ** **                                             | ** ** | **rates(1)**                                                                                | ** ** | **2005** | ** ** | **2006** | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** | **to 2014** | ** ** | **2014** | ** ** | **2004** | ** ** |
| Debt of the Company and its wholly-owned subsidiaries: |       |                                                                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Senior debentures (a)                                  |       | 6.22                                                                                        | %          | $ | 2,342 |   | $ | 250 |   | $ | — |   | $ | 150 |   | $ | — |   | $ | — |   | $ | 850 |   | $ | 1,092 |   | $ | 2,245 |   |
| Other loans and capital leases (b)                     |       | 4.93                                                                                        | %          | 74 |   | 16 |   | 20 |   | 24 |   | 1 |   | 6 |   | 7 |   | — |   | 361 |   |
| Convertible debentures (Note 11)                       |       | 5.00                                                                                        | %          | 105 |   | — |   | 105 |   | — |   | — |   | — |   | — |   | — |   | 112 |   |
| Preferred share liabilities (Note 12)                  |       | 6.25                                                                                        | %          | 876 |   | — |   | — |   | 126 |   | — |   | 300 |   | 300 |   | 150 |   | 122 |   |
|                                                   |       | 6.14                                                                                        | %          | 3,397 |   | 266 |   | 125 |   | 300 |   | 1 |   | 306 |   | 1,157 |   | 1,242 |   | 2,840 |   |
| Debt of joint ventures (c)                             |       | 6.30                                                                                        | %          | 430 |   | 87 |   | 87 |   | 87 |   | 87 |   | 40 |   | 42 |   | — |   | 588 |   |
| Total                                                  |       | 6.17                                                                                        | %          | $ | 3,827 |   | $ | 353 |   | $ | 212 |   | $ | 387 |   | $ | 88 |   | $ | 346 |   | $ | 1,199 |   | $ | 1,242 |   | $ | 3,428 |   |
| Debt due within one year                               |       |                                                                                        |       | $ | 353 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | $ | 570 |   |
| Long-term debt                                         |       |                                                                                        |       | $ | 3,474 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | $ | 2,858 |   |

 

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(1) Weighted average interestrates after swap contracts, as at December 31, 2005

 

(a) Senior debentures of $2,342 (2004 – $2,245) are directunsecured obligations of the Company. 

 

On June 8, 2005,Falconbridge issued $250 of 12-year notes and $250 of 30-year notes under theCompany’s base shelf prospectus. The 12-year notes, which are unsecured, bearinterest at the rate of 5.5% per annum and mature on June 15, 2017. The 30-yearnotes, which are also unsecured, bear interest at the rate of 6.2% per annumand mature on June 15, 2035. Both series of notes are redeemable in whole or inpart at any time at a redemption price equal to 100% of their principal amountplus a make-whole premium.

 

(b) Other loans and capital leases include borrowings underdemand lines and unsecured committed bank lines of credit that are structuredto provide the Company with the right to borrow at floating rates and repaythese amounts over the next five years. At December 31, 2005, Falconbridge had utilized$nil (2004 – $246) from its total committed lines of $780 (2004 – $1,112).

 

The Company has anuncommitted letter of credit facility of $20 and Cdn$85 million (2004 – $21).Letters of credit of $46 (2004 – $17) were outstanding under this facility at December31, 2005. 

 

(c) Debt of joint ventures includes $188, Falconbridge’s33.75% share of the $557 of borrowings under Antamina’s original $1,320 seniorcredit facilities. These facilities, provided by a consortium of internationalbanks and national import/export credit agencies, have maturity dates rangingfrom less than one year to five years. With the exception of $228, all of thesefacilities are insured for political risks or are otherwise guaranteed forpolitical risks by multilateral, national or private sector institutions.Falconbridge’s guarantee of Antamina’s debt was removed during 2003 as the completiontests were met. 

 

(d) After taking into account current interest rates andcredit spreads, the fair value of the Company’s debt, excluding the debt ofjoint ventures, at December 31, 2005 was greater than book value by $129 (2004 –$206). 

 

(e) Interest rate swap agreements of $1,250 (2004 – $1,050)have been entered into by the Company, whereby fixed rates of interest arereceived and floating rates are paid for terms up to 9.5 years. In addition,interest rate swap agreements of $250 (2004 – $550) have been entered into bythe Company, whereby fixed rates of interest are paid and floating rates arereceived for a period up to 6.5 years. As at December 31, 2005, the estimatedaggregate fair value of the interest rate swap agreements of the Company had amark-to-market gain of $7 (2004 – $41).

 

The Company has enteredinto several cross-currency interest rate swap transactions whereby rates ofinterest on debentures in the amount of $111 (2004 – $111) are swapped tofloating rates of interest and $25 (2004 – $25) are swapped to fixed rates ofinterest for terms of three years. At December 31, 2005, the mark-to-marketvalue of these positions was a gain of $47 (2004 – $45). 

 

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| **Interest, net**      | ** ** | **2005** | ** ** | **2004** | ** ** |
|-----------------------------|------------|----------|------------|----------|------------|
| Interest on long-term debt  | ** ** | **$**    | **234**    |     | $          | 164 |   |
| Interest on short-term debt | ** ** | **17**   |       | 16       |       |
| Interest income             | ** ** | **(46**  | )          | (24      | )          |
| ** **                  |       | **205**  |       | 156      |       |
| Capitalized interest        | ** ** | **(53**  | )          | (36      | )          |
| ** **                  |       | **$**    | **152**    |     | $          | 120 |   |

 

**11. CONVERTIBLEDEBENTURES**

 

The Cdn$131 million (2004 – Cdn$150 million) adjustable rateconvertible subordinated debentures Series 1, due April 30, 2007, bear interestat a rate which is the greater of 5%, and of 1% plus the percentage that twotimes the common share dividend paid in the previous six months is of theconversion price. The debentures are convertible at the holder’s option intocommon shares of the Company at a conversion price of Cdn$27.55 per commonshare, on or before the last business day prior to the maturity date of thedebentures, or the last business day prior to redemption. The Company has theoption of redeeming the debentures, and upon maturity they are redeemable, atthe Company’s option, for common shares of the Company. 

 

The Company’s convertibledebentures contain both debt and equity components (Note 2).  At December 31, 2005, the liability componentamounted to $105 (2004 – $112) (Note 10).  The equity component representing the fairvalue of the holders’ option to convert the debentures into the common sharesof the Company was classified as a component of shareholders’ equity and amountedto $37 at December 31, 2005 (2004 – $42) (Note 15). 

 

During 2005, debentureswith face value of Cdn$19 million were converted to the common shares ofFalconbridge by the holders (Note 15). Upon conversion, the carrying value ofthe related liability and the fair value of the holders’ option for theconverted debentures were reclassified from liability and shareholders’ equityrespectively to share capital. 

 

**12. PREFERRED SHARES LIABILITIES**

 
| ** **                         | ** ** | **2005** | ** ** | **2004** | ** ** |
|------------------------------------|------------|----------|------------|----------|------------|
| Junior Preference Shares, Series 1 | ** ** | **$**    | **300**    |     | $          | — |   |
| Junior Preference Shares, Series 2 | ** ** | **300**  |       | —   |       |
| Junior Preference Shares, Series 3 | ** ** | **150**  |       | —   |       |
| Preference Shares, Series H        | ** ** | **126**  |       | 122      |       |
|                               | ** ** | **$**    | **876**    |     | $          | 122 |   |

 

JUNIOR PREFERENCE SHARES 

 

On May 4, 2005, 63.4 million common shares of the Companywere repurchased in exchange for 50 million of three series of juniorpreference shares with a fair value of $1,250. These preference shares areaccounted for as liabilities since Falconbridge has to redeem these shares by aspecific date in the future and this mandatory redeemable feature represents afixed obligation to Falconbridge. These preference shares were measured attheir fair value, being the closing quoted market price on their first tradingday of May 5, 2005. These preference shares rank junior to all other preferredshares of Falconbridge with respect to priority in the payment of dividends andthe distribution of assets of Falconbridge in the event of any liquidation,dissolution or winding-up of Falconbridge. 

 

On August 11, 2005, theCompany redeemed a total of $500 of 20 million outstanding junior preferenceshares. The Company redeemed 8 million Junior Preference Shares, Series 1, 8million Junior Preference Shares, Series 2, and 4 million Junior PreferenceShares, Series 3. Each junior preference share was redeemed at a price of$25.25 plus accrued and unpaid dividends for the period from July 1, 2005 toAugust 10, 2005. Included in interest expense on the consolidated statement ofincome and retained earnings was $5 million paid as premium on early redemptionof the preference shares. The details of each series of the junior preferenceshares are as follows: 

 

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*(a) Junior Preference Shares Series 1*

 

As at December 31, 2005, the Company had 11,999,899 of JuniorPreference Shares Series 1 outstanding. The holders of Junior Preference SharesSeries 1 are entitled to receive dividends in the amount of $1.50 per share,per annum, payable quarterly. 

 

The Junior PreferenceShares Series 1 are redeemable by the Company at any time, on or before June28, 2008 at $25.25 per share, and thereafter at $25.00 per share, and must be redeemedby the Company on May 6, 2010 at $25.00 per share. On its Final RedemptionDate, the Junior Preference Shares Series 1 are convertible, in whole or inpart, at the option of the Company, into that number of freely tradable commonshares determined by dividing the aggregate of $25.00, by the greater of $2.00and 90% of the U.S. dollar equivalents of the volume weighted average tradingprice of the common shares on the Toronto Stock Exchange (“TSX”) for a periodof 20 consecutive trading days ending on the fourth trading day prior to the datespecified for conversion. 

 

*(b) Junior Preference Shares Series 2*

 

As at December 31, 2005, the Company had 11,999,899 of JuniorPreference Shares Series 2 outstanding. The holders of Junior Preference SharesSeries 2 are entitled to receive dividends in the amount of $1.5625 per share,per annum, payable quarterly. From June 30, 2010 until June 30, 2012, holdersof Junior Preference Shares Series 2 will be entitled to receive fixedpreferential cumulative dividends at a rate per annum equal to the greater of(i) 6.25%; and (ii) a rate equal to the seven-year U.S. treasury bond yield atthe commencement of such subsequent fixed-rate period plus 2.05%. 

 

The Junior PreferenceShares Series 2 are redeemable by the Company at any time, on or before June30, 2010 at $25.25 per share, and thereafter until June 29, 2012 at $25.00 per share,and must be redeemed by the Company on June 30, 2012 at $25.00 per share. Onits Final Redemption Date, the Junior Preference Shares Series 2 areconvertible, in whole or in part, at the option of the Company, into thatnumber of freely tradable common shares determined by dividing the aggregate of$25.00, by the greater of $2.00 and 90% of the U.S. dollar equivalents of thevolume weighted average trading price of the common shares on the Toronto StockExchange (“TSX”) for a period of 20 consecutive trading days ending on thefourth trading day prior to the date specified for conversion. 

 

*(c) Junior Preference Shares Series 3*

 

As at December 31, 2005, the Company had 5,999,903 of JuniorPreference Shares Series 3  outstanding.The holders of Junior Preference Shares Series 3 are entitled to receivedividends in the amount of $1.625 per share, per annum, payable quarterly. FromJune 30, 2010 until June 30, 2012 and for each succeeding two-year subsequentfixed-rate period until June 30, 2015, holders of Junior Preference SharesSeries 3 will be entitled to receive fixed preferential cumulative dividends ata rate per annum equal to the greater of (i) 6.5%; and (ii) a rate equal to theten-year U.S. treasury bond yield at the commencement of such subsequent fixed-rateperiod plus 2.35%. Dividends may be paid in cash or in a number of commonshares determined by dividing the declared dividend amount by 95% of the U.S.dollar equivalent of the volume weighted average trading price of the commonshares on the TSX for a period of 20 consecutive trading days ending on thefourth trading day prior to the date specified for payment of the dividend. 

 

The Junior Preference SharesSeries 3 are redeemable by the Company at any time, on or before June 30, 2013at $25.25 per share, and thereafter until June 29, 2015 at $25.00 per share,and must be redeemed by the Company on June 30, 2015 at $25.00 per share. Onits Final Redemption Date, the Junior Preference Shares Series 3 areconvertible, in whole or in part, at the option of the Company, into thatnumber of freely tradable common shares determined by dividing the aggregate of$25.00, by the greater of $2.00 and 90% of the U.S. dollar equivalents of thevolume weighted average trading price of the common shares on the Toronto StockExchange (“TSX”) for a period of 20 consecutive trading days ending on thefourth trading day prior to the date specified for conversion. 

 

PREFERRED SHARES SERIES H 

 

At December 31, 2005, there were 6,000,000 (2004 – 6,000,000)Series H Preferred Shares outstanding. These preferred shares are presented asliabilities since their conversion feature represents a fixed obligation toFalconbridge (Note 2). Holders of the Series H Preferred Shares are entitled tofixed cumulative preferential cash dividends, if, as and when declared by theCompany’s 

 

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Board of Directors, at a rate of Cdn$1.625 per share perannum, payable quarterly, in equal installments of Cdn$0.40625 per share, onthe last day of March, June, September and December of each year. 

 

On and after March 31,2008, the Company may, at its option (i) redeem the outstanding Series HPreferred Shares in whole at any time or in part from time to time, by thepayment of Cdn$25.00 per share, together with all accrued and unpaid dividendsup to but excluding the date fixed for redemption; or (ii) subject, ifrequired, to stock exchange approvals, convert the outstanding Series HPreferred Shares into Falconbridge common shares. The number of common sharesinto which each Series H Preferred Share may be so converted will be determinedby dividing the redemption price per Series H Preferred Share, together withall accrued and unpaid dividends up to but excluding the date fixed forconversion, by the greater of Cdn$2.00 and 95% of the current market price ofFalconbridge common shares at such time. 

 

On or after June 30,2008, each Series H Preferred Share will be convertible at the option of theholder on the last day of March, June, September and December in each year intothat number of Falconbridge common shares determined by dividing Cdn$25.00,together with all accrued and unpaid dividends up to but excluding the datefixed for conversion, by the greater of Cdn$2.00 and 95% of the current marketprice of Falconbridge common shares at such time. If a holder of Series HPreferred Shares elects to convert any of those shares into Falconbridge commonshares, the Company may, on not less than 20 days notice prior to theconversion date, elect to redeem those Series H Preferred Shares for Cdn$25.00per share, together with all accrued and unpaid dividends up to but excludingthe date fixed for conversion or arrange for the sale of those shares tosubstitute purchasers at such price. 

 

**13. ASSET RETIREMENT OBLIGATION, PENSION ANDOTHER PROVISIONS**

 
| **As at December 31**                         | ** ** | **2005** | ** ** | **2004** | ** ** |
|--------------------------------------------------------------|------------|----------|------------|----------|------------|
| Asset retirement obligation (a)                              | ** ** | **$**    | **424**    |     | $          | 436 |   |
| Employee future benefits costs (assets)  liability (Note 20) | ** ** | **102**  |       | (12      | )          |
| Other provisions                                             | ** ** | **133**  |       | 171      |       |
| ** **                                                   |       | **$**    | **659**    |     | $          | 595 |   |

 

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(a) The business conducted by Falconbridge has been, and mayin the future be, affected by changes in environmental legislation and otherrequirements including those related to asset retirement obligations andprogressive site restoration costs. As Falconbridge operates in many countries,both the likelihood of changes in legislation and its impact upon Falconbridgeare not predictable. Falconbridge’s policy is to meet and, if possible, surpassstandards set by relevant legislation, through the application of innovativeand technically proven economical measures in advance of prescribed deadlines.Falconbridge incurs substantial removal and site restoration costs on anongoing basis, which, it believes, will mitigate future removal and siterestoration costs. A long-term obligation, equal to the fair value of the legalobligation for asset retirement is recorded based on an annual assessment ofprojected asset retirement and progressive reclamation costs. The keyassumptions on which the fair value of the asset retirement obligations arebased include the estimated future cash flows, the timing of those cash flows,and the credit-adjusted risk-free rate or rates at which the estimated cashflows have been discounted.

 

Falconbridge uses discountrates ranging from 5.0% to 8.0%. As of December 31, 2005, undiscounted cashoutflows approximating $1,542 million are expected to occur over a periodexceeding 50 years. In view of the uncertainties concerning future assetretirement and progressive reclamation costs, the ultimate costs toFalconbridge could differ materially from the amounts estimated. The estimatefor the future liability is subject to change based on amendments to applicablelaws and legislation, the nature of ongoing operations and technologicalinnovations. Future changes, if any, due to their nature and unpredictability,could have a significant impact and would be reflected prospectively, as achange in an accounting estimate.

 

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The following table explainsthe change in the asset retirement obligations:

 
| **Year ended December 31**         | ** ** | **2005**   | ** ** | **2004** | ** ** |
|---------------------------------------------------|------------|------------|------------|----------|------------|
| Asset retirement obligation, beginning of  period | ** ** | **$**      | **(436**   | **)**    | $          | (412 | ) |
| Liabilities incurred                              | ** ** | **—** | ** ** | (5       | )          |
| Liabilities settled                               | ** ** | **62**     | ** ** | 36       |       |
| Gain on settlement of liabilities                 | ** ** | **2**      | ** ** | 5        |       |
| Accretion expense                                 | ** ** | **(37**    | **)**      | (24      | )          |
| Revision in estimated cash flows                  | ** ** | **(4**     | **)**      | (9       | )          |
| Foreign exchange                                  | ** ** | **(11**    | **)**      | (27      | )          |
| Asset retirement obligation, end of period        | ** ** | **$**      | **(424**   | **)**    | $          | (436 | ) |

 

**14. INTERESTS OF OTHER SHAREHOLDERS**

 
| **As at December 31** | ** ** | **2005** | ** ** | **2004** | ** ** |
|--------------------------------------|------------|----------|------------|----------|------------|
| Preferred shares of subsidiaries     | ** ** | **$**    | **—** |     | $          | 130 |   |
| Common equity interests              | ** ** | **54**   |       | 1,067    |       |
| ** **                           |       | **$**    | **54**     |     | $          | 1,197 |   |

 

On June 30, 2005, theCompany completed the acquisition of 41.5% of all the issued and outstandingcommon shares of the former Falconbridge that it did not previously own (Note3). The preferred shares of the former Falconbridge were assumed by the Companyupon acquisition. 

 

**15. SHAREHOLDERS’****EQUITY**

 

CAPITAL STOCK

 

Authorized:

Preferred shares, an unlimited number

Common shares, an unlimited number

Participating shares, an unlimited number

 
| ** **                                                 | ** ** | **2005**   | ** ** | **2004** | ** ** |
|------------------------------------------------------------|------------|------------|------------|----------|------------|
| Issued:                                                    |       |       |       |     |       |
| Preferred Shares, Series F                                 | ** ** | **$**      | **59**     |     | $          | 59 |   |
| Preferred Shares, Series G                                 | ** ** | **137**    |       | 137      |       |
| Preferred Shares, Series 1 (Note 3)                        | ** ** | **1**      |       | —   |       |
| Preferred Shares, Series 2 (Note 3)                        | ** ** | **78**     |       | —   |       |
| Preferred Shares, Series 3 (Note 3)                        | ** ** | **51**     |       | —   |       |
| Equity element of convertible debentures  (Notes 2 and 11) | ** ** | **37**     |       | 42       |       |
| Common shares                                              | ** ** | **4,264**  |       | 2,107    |       |
| Stock option valuation                                     | ** ** | **10**     |       | 3        |       |
|                                                       | ** ** | **4,637**  |       | 2,348    |       |
| Retained earnings                                          | ** ** | **154**    |       | 231      |       |
| Currency translation adjustment                            | ** ** | **240**    |       | 263      |       |
|                                                       | ** ** | **5,031**  |       | 2,842    |       |
| Share purchase plan                                        | ** ** | **—** |       | (3       | )          |
|                                                       | ** ** | **$**      | **5,031**  |     | $          | 2,839 |   |

 

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PREFERRED SHARES SERIES F 

 

The Company had 3,246,057 (2004 – 3,246,057) Cumulative,Redeemable Preferred Shares, Series F (the “Series F Preferred Shares”)outstanding at December 31, 2005. 

 

Prior to November 1,2001, holders of Series F Preferred Shares received a quarterly fixed dividendat a rate of 5.8% per annum. On November 1, 2001, the Series F Preferred Sharescommenced paying a monthly floating dividend based on a dividend rate thatfluctuates over time between 50% and 100% of Prime for each month. The dividendrate is adjusted upwards or downwards on a monthly basis by an AdjustmentFactor whenever the Calculated Trading Price, being the market price of theSeries F Preferred Shares, is Cdn$24.875 or less or Cdn$25.125 or more,respectively. The Adjustment Factor for a month is based on the CalculatedTrading Price of the Series F Preferred Shares for the preceding month. Themaximum Adjustment Factor for any month is ±4.00%. The annual floating dividendrate for any month is Prime multiplied by the Designated Percentage for suchmonth (the Adjustment Factor for such month plus the Designated Percentage forthe preceding month). 

 

Holders of Series FPreferred Shares had the right to convert their shares, effective on November1, 2001, on a one-for-one basis into Cumulative, Redeemable Preferred Shares, SeriesG (the “Series G Preferred Shares”). Of the 12,000,000 outstanding Series FPreferred Shares, 8,753,943 were converted into Series G Preferred Shares.Holders will again have the right to convert their shares, on a one-for-onebasis into Series G Preferred Shares on November 1, 2006, and every five yearsthereafter. On November 1, 2001, the Series F Preferred Shares becameredeemable, at the option of the Company, at Cdn$25.50 per share plus unpaidand accrued dividends. 

 

PREFERRED SHARES SERIES G 

 

The Company had 8,753,943 (2004 – 8,753,943) Series GPreferred Shares outstanding at December 31, 2005. These Series G PreferredShares were issued as a result of the conversion of the same number of Series FPreferred Shares into Series G Preferred Shares on November 1, 2001. 

 

For each of the fiveyears commencing November 1, 2001, holders of Series G Preferred Shares willreceive, as and when declared by the Board of Directors, a quarterly fixeddividend at a rate of 6.10% per annum. On November 1, 2006, the Series GPreferred Shares will be redeemable, at the option of the Company, at Cdn$25.00per share plus unpaid and accrued dividends. Subject to certain conditions,holders of Series G Preferred Shares will have the right to convert theirshares into Series F Preferred Shares on a one-for-one basis on November 1,2006 and on November 1 of every fifth year thereafter. 

 

PREFERRED SHARES SERIES 1 

 

On March 7, 1997, the Company issued 8,000,000 Units, at a priceof Cdn$10.00 per Unit, with each Unit consisting of one Cumulative PreferredShare Series 1 (the “Preferred Share Series 1”)  and one Cumulative Preferred Share Series 2Purchase Warrant (the “Warrant”). Since September 1, 1998, the quarterly cashdividend on Preferred Share Series 1 has been Cdn$0.02  per share. The holders of the Units had theright to acquire on certain dates, for each Unit held, one Cumulative PreferredShare Series 2 (the “Preferred Share Series 2”) of the Company by the combinedeffect of tendering for conversion one Preferred Share Series 1 and theexercise of one Warrant together with the cash payment of Cdn$15.00 perWarrant. A total of 7,910,165 warrants have been converted into Preferred ShareSeries 2. The remaining unexercised warrants cannot be exercised. 

 

PREFERRED SHARES SERIES 2 

 

Until March 1, 2004, holders of the Preferred Share Series 2were entitled to fixed cumulative preferential cash dividends, as and whendeclared by the Board of Directors, which accrued from the date of issue andwere payable quarterly in the amount of Cdn$0.3672 per share or Cdn$1.4688  per share per annum. From March 1, 2004, thePreferred Share Series 2 are entitled to floating adjustable cumulativepreferential cash dividends as and when declared by the Board of Directors. 

 

Holders of PreferredShare Series 2 had the right to convert their shares into Cumulative PreferredShare Series 3 (the “Preferred Share Series 3”) of the Company, subject tocertain conditions, on March 1, 2004, and will continue to have the right everyfive years thereafter. On March 1, 2004, the Company had the right to redeemfor cash the Preferred Share Series 2, in 

 

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whole but not in part, at the Company’s option, at Cdn$25.00per share plus accrued and unpaid dividends. Subsequent to March 1, 2004, theCompany has the right to redeem at any time for cash the Preferred Share Series2, in whole but not in part, at the Company’s option, at Cdn$25.50  per share plus accrued and unpaid dividends.Effective March 1, 2004, the Preferred Share Series 2 shares pay a monthlyadjustable floating dividend based on a percentage of the Canadian prime rate.A total of 3,122,882 units have been converted into Preferred Share Series 3. 

 

PREFERRED SHARES SERIES 3 

 

Holders of Preferred Share Series 3 are entitled to fixedcumulative preferential cash dividends, as and when declared by the Board ofDirectors, which accrue from March 1, 2004. The dividends are payable quarterlyon the first day of March, June, September, and December in the amount of Cdn$0.2863per share or Cdn$1.1452 per share per annum until March 1, 2009. The Preferred ShareSeries 3 are not redeemable prior to March 1, 2009. The Preferred Share Series3 will be redeemable on March 1, 2009 and on March 1 every fifth yearthereafter, in whole but not in part, at the Company’s option, at Cdn$25.00 pershare, together with accrued and unpaid dividends up to but excluding the dateof redemption. Holders of Preferred Share Series 3, upon giving notice, willhave the right to convert on March 1, 2009, and on March 1 in every fifth yearthereafter, their shares into an equal number of Preferred Share Series 2,subject to the automatic conversion provisions. 

 

NON-VOTING PARTICIPATING SHARES 

 

The authorized and unissued non-voting participating sharesparticipate ratably with the holders of common shares in dividends anddistributions of the assets of the Company. 

 

SUMMARY OF COMMON SHARE TRANSACTIONS 

 
| ** **                                                    | ** ** | **Shares (000)** | ** ** | **Amount** | ** ** |
|---------------------------------------------------------------|------------|-----------------------|------------|------------|------------|
| Common shares, December 31, 2003                              |       | 295,228               |       | $          | 2,084      |   |
| Issued under dividend re-investment                           |       | 38                    |       | 1          |       |
| Issued on exercise of stock options                           |       | 1,704                 |       | 22         |       |
| Common shares, December 31, 2004                              |       | 296,970               |       | $          | 2,107      |   |
|                                                          |       |                  |       |       |       |
| Issued upon Amalgamation                                      | ** ** | **132,841**           | ** ** | **$**      | **2,534**  | ** ** |
| Repurchased by issuance of junior preferred  shares (Note 12) | ** ** | **(63,377**           | **)**      | **(451**   | **)**      |
| Issued on exercise of stock options                           | ** ** | **3,486**             | ** ** | **52**     | ** ** |
| Issued upon conversion of debentures (Note  11)               | ** ** | **703**               | ** ** | **21**     | ** ** |
| Issued under dividend re-investment                           | ** ** | **65**                | ** ** | **1**      | ** ** |
| Common shares, December 31, 2005                              | ** ** | **370,688**           | ** ** | **$**      | **4,264**  | ** ** |

 

EARNINGS PER SHARE 

 

Earnings per share is determined by dividing net income,after deducting preferred share dividends of $17 (2004 – $13), by the weightedaverage number of common shares outstanding of 339,756,276 (2004 – 296,245,753)during the year, excluding shares securing employee share purchase loans. 

 

Diluted earnings pershare assumes that outstanding dilutive stock options are exercised at the beginningof the period (or at the time of issuance, if later) and the proceeds are usedto purchase common stock at the average market price during the period, andthat dilutive convertible debentures are converted into common shares at thebeginning of the period. 

 

Diluted earnings pershare is determined by dividing net income attributable to common shares, afteradding the dilutive effect of convertible debentures of $8 (2004 – $7), by thediluted weighted average number of shares of 346,173,501 (2004 – 303,458,182). 

 

SHARE PURCHASE PLAN 

 

In 1998, 2001 and 2002, loans were issued to executives ofthe Company for the purchase of common shares under the share purchase plan.The loans were repayable on demand, mature in ten years, and were secured by apledge of 331,950 common shares at December 31, 2004.  Loans receivable at December 31, 2004 of $3were recorded as a reduction of shareholders’ 

 

84

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equity. The loans were repaid in full in 2005 and therepayment was accounted for as a corresponding increase in shareholders’ equity.

 

STOCK OPTIONS 

 

The Company has a stock option plan through which options maybe granted to directors, officers and employees for the purchase of commonshares. Options were granted at prices equal to the five-day average price priorto the grant. Stock options generally have a 10-year term and contain vestingprovisions of 20% on the first anniversary following the date of the grant, anda further 20% on each of the four subsequent anniversary dates. Stock optionsgranted from January 1, 2000 to February 28, 2002 have a 10-year term and thesame vesting provisions; however, they also contain an accelerated vestingfeature specifying that on the first day that the market price of the commonshares is 20% greater than the exercise price of the option, the final trancheof certain unvested options outstanding on that date will immediately vest andbe exercisable.

 

During 2005, three stockoption series totaling 1,301,197 options at a weighted average price ofCdn$23.32 were granted. The compensation expense associated with these stockoptions series was calculated using the Black-Scholes valuation model assumingthe following weighted average parameters; 10-year expected life, 25%volatility, expected dividend of 2.41% annually and an interest rate of 4.00%.The stock option value is charged against net income over its vesting period.

 

On June 30, 2005, theCompany assumed the stock option obligations of the former Falconbridge uponacquisition of the former Falconbridge (Note 3). The stock options retainedtheir original attributes with the exception that the number of stock optionsincreased by a ratio of 1.77  and theexercise prices decreased by a ratio of 1.77 to reflect the acquisition priceof one common share of the former Falconbridge exchanged for 1.77 common sharesof the Company. The fair value of the unvested stock options as at June 30,2005 amounted to $17. The value of the stock options was calculated using theBlack Scholes valuation model, using the following weighted averageassumptions: a seven-year expected life, 26% volatility, an expected dividendof 2.34%  and an interest rate of 3.58%.The value is being charged against net income over the vesting periods of thestock options. 

 

Corporate and generaladministration expenses in 2005 include compensation costs of $6  (2004 – $4) relating to outstanding optionsgranted since January 1, 2002. 

 

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

 
| ** **                                 | ** ** | **2005**               | ** ** | **2004**                  | ** ** |
|--------------------------------------------|------------|------------------------|------------|---------------------------|------------|
| ** **                                 | ** ** | ** **             | ** ** | **Weighted**              | ** ** | ** ** | ** ** | **Weighted** | ** ** |
| ** **                                 | ** ** | ** **             | ** ** | **average exercise** | ** ** | ** ** | ** ** | **average exercise** | ** ** |
| ** **                                 | ** ** | **Options (000)** | ** ** | **price ($Cdn)**     | ** ** | **Options (000)** | ** ** | **price ($Cdn)** | ** ** |
| Outstanding, beginning of year             | ** ** | **7,416**              | ** ** | **$**                     | **16.75**  |   | 9,584 |   | $ | 16.35 |   |
| Options assumed upon Amalgamation (Note 3) | ** ** | **3,049**              | ** ** | **12.91**                 |       | — |   | — |   |
| Granted                                    | ** ** | **1,301**              | ** ** | **23.32**                 |       | 882 |   | 20.42 |   |
| Exercised                                  | ** ** | **(3,486**             | **)**      | **16.23**                 |       | (1,704 | ) | 16.24 |   |
| Cancelled                                  | ** ** | **(738**               | **)**      | **15.77**                 |       | (1,346 | ) | 16.64 |   |
| Outstanding, end of year                   | ** ** | **7,542**              | ** ** | **$**                     | **17.37**  |   | 7,416 |   | $ | 16.75 |   |

 

The following table summarizes information about stockoptions outstanding at December 31, 2005: 

 
| ** **                                              | ** ** | ** **                      | ** ** | **Options outstanding**           | ** ** | **Options exercisable** | ** ** |
|---------------------------------------------------------|------------|---------------------------------|------------|----------------------------------------|------------|------------------------------|------------|
| ** **                                              | ** ** | ** **                      | ** ** | ** **                             | ** ** | **Weighted**                 | ** ** | ** ** | ** ** | **Weighted** | ** ** |
| ** **                                              | ** ** | **Number (000)**           | ** ** | **Weighted average**              | ** ** | **average**                  | ** ** | **Number (000)** | ** ** | **average** | ** ** |
| ** **                                              | ** ** | **outstanding at**         | ** ** | **remaining**                          | ** ** | **exercise price**      | ** ** | **exercisable at** | ** ** | **exercise price** | ** ** |
| **Range of exercise prices ($Cdn)** | ** ** | **December 31, 2005** | ** ** | **contractual life (years)** | ** ** | **($Cdn)**                   | ** ** | **December 31, 2005** | ** ** | **($Cdn)** | ** ** |
| $8.85 to $12.85                                         | ** ** | **1,227**                       | ** ** | **6.7**                                | ** ** | **$**                        | **9.46**   | ** ** | **253** | ** ** | **$** | **9.56** | ** ** |
| $13.82 to $15.00                                        | ** ** | **723**                         | ** ** | **7.0**                                | ** ** | **13.87**                    | ** ** | **158** | ** ** | **14.05** | ** ** |
| $15.05 to $19.16                                        | ** ** | **2,860**                       | ** ** | **5.7**                                | ** ** | **16.38**                    | ** ** | **1, 981** | ** ** | **12.46** | ** ** |
| $19.29 to $26.91                                        | ** ** | **2,732**                       | ** ** | **8.7**                                | ** ** | **22.87**                    | ** ** | **161** | ** ** | **21.42** | ** ** |
|                                                    | ** ** | **7,542**                       | ** ** | **7.1**                                | ** ** | **$**                        | **17.37**  | ** ** | **2,553** | ** ** | **$** | **12.84** | ** ** |

 

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DIRECTOR DEFERRED STOCK UNITPLAN

 

Under the Deferred Stock Unit (DSU) Plan for the Company’s non-employeedirectors, each eligibledirectormay elect to be paid annual retainer fees and/or meeting attendance fees inDSUs rather than in cash. A DSUis a notional unit, equivalent in value to a common share.

 

Deferred stock units arecredited with “dividend equivalents” when dividends are paid on thecommon shares of the Company, and suchdividend equivalents are converted into additional units based on the fair market value of commonshares on the date credited.

 

Payment of DSUs is not madeuntil such time as the director leaves the Board, and may be incash or in common shares of the Companypurchased on the open market.

 

As of December 31, 2005 thetotal DSUs held by participating directors was 105,336 (2004 –61,351), the accrual in respect of which isnominal at December 31, 2005 and 2004.

 

MANAGEMENT DEFERRED SHAREUNIT PLAN (MDSUP)

 

Management deferred share units (“Units”) may be granted each year atthe discretion of theBoardto senior executives in lieu of all or part of their annual cash bonus awards.The annual bonus awards would beconverted to Units based on a rate set on the award date. The portion ofthe annual bonus award elected to bereceived in Units by the executive may, at the discretion of the Human Resources Committee, be increased bya factor of up to two times for purposes of calculating the number of Units to be allocated under the MDSUP.

 

An executive who holds Unitswill receive additional Units as dividends are paid on thecommon shares of the Company, on the samebasis as if the dividends were reinvested pursuant to the Company’s dividend reinvestment plan. TheUnits will vest over a five-year period and participants will only be allowed to redeem the Units upon cessation ofemployment.

 

The cash value of the Unitswhen redeemed will be equivalent to the market value of anequivalent number of Falconbridge commonshares at the time of cessation of employment with the Company.

 

As of December 31, 2005, atotal of 93,866 Units were held by executives of the Company(2004 – 44,274), the accrual in respect ofwhich is nominal at December 31, 2005 and 2004.

 

DIVIDEND REINVESTMENT PLAN

 

Canadian resident shareholders may elect to reinvest their cashdividends from common shares topurchase additional shares. During 2005, 64,642 (2004 – 37,910) commonshares were issued under thedividend reinvestment plan. The dividend reinvestment plan was indefinitelysuspended on October 20, 2005according to the terms of the Inco Limited and Falconbridge support agreement related to the Inco offer topurchase Falconbridge common shares.

 

**16. INCOMEAND PRODUCTION TAXES**

 

The provision for income and production taxes differs from the amountthat would have resulted byapplyingstatutory income tax rates to earnings as described below:

 
| ** **                                                                                          | ** ** | **2005** | ** ** | **2004**   | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|----------|------------|------------|------------|
| Income before the following:                                                                        |       |     | ** ** |       |       |
| Income and production taxes and minority  interest                                                  | ** ** | **$**    | **1,546**  | ** ** | $          | 1,242 |   |
| Provision based on combined federal and  composite provincial tax rate of 33.2% (2004 – 37.6%) | ** ** | **$**    | **513**    | ** ** | $          | 467 |   |
| Increase (decrease) in taxes resulting  from:                                                       |       |     | ** ** |       |       |
| Resource and depletion allowances                                                                   | ** ** | **(32**  | **)**      | (26        | )          |
| Royalties and mineral taxes                                                                         | ** ** | **22**   | ** ** | 22         |       |
| Rate differences from foreign and  manufacturing activities                                         | ** ** | **(76**  | **)**      | (116       | )          |
| Non-taxable items                                                                                   | ** ** | **(7**   | **)**      | (57        | )          |
| Capital taxes                                                                                       | ** ** | **25**   | ** ** | 7          |       |
| Foreign exchange adjustments                                                                        | ** ** | **46**   | ** ** | 51         |       |
| Non-recurring and other                                                                             | ** ** | **20**   | ** ** | 3          |       |
| Income and production taxes                                                                         | ** ** | **$**    | **511**    | ** ** | $          | 351 |   |

 

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Consolidated income andproduction taxes are as follows:  

 
| ** **                          | ** ** | **2005** | ** ** | **2004** | ** ** |
|-------------------------------------|------------|----------|------------|----------|------------|
| Current:                            |       |     |       |     |       |
| Federal and provincial income taxes | ** ** | **$**    | **13**     |     | $          | 25 |   |
| Provincial mining taxes             | ** ** | **12**   |       | 5        |       |
| Foreign taxes                       | ** ** | **269**  |       | 75       |       |
|                                | ** ** | **$**    | **294**    |     | $          | 105 |   |
| Future:                             |       |     |       |     |       |
| Federal and provincial income taxes | ** ** | **$**    | **24**     |     | $          | 32 |   |
| Provincial mining taxes             | ** ** | **12**   |       | 18       |       |
| Foreign taxes                       | ** ** | **181**  |       | 196      |       |
|                                | ** ** | **$**    | **217**    |     | $          | 246 |   |

 

The components of thefuture tax asset and future tax liability at December 31, 2005 and 2004 are asfollows: 

 
| ** **                       | ** ** | **2005**                    | ** ** | **2004**                   | ** ** |
|----------------------------------|------------|-----------------------------|------------|----------------------------|------------|
| ** **                       | ** ** | **Legal entities**     | ** ** | **Legal entities**    | ** ** | **Legal entities** | ** ** | **Legal entities** | ** ** |
| ** **                       | ** ** | **where assets**       | ** ** | **where liabilities** | ** ** | **where assets** | ** ** | **where liabilities** | ** ** |
| ** **                       | ** ** | **exceed liabilities** | ** ** | **exceed assets**     | ** ** | **exceed liabilities** | ** ** | **exceed assets** | ** ** |
| Future tax assets:               |       |                        |       |                       |       |   |   |   |   |
| Property plant and equipment     | ** ** | **$**                       | **—** | ** **                 | **$**      | **—** | ** ** | $ | 15 |   | $ | — |   |
| Pensions                         | ** ** | **14**                      | ** ** | **—**                 | ** ** | — |   | — |   |
| Post-retirement benefits         | ** ** | **98**                      | ** ** | **—**                 | ** ** | — |   | 69 |   |
| Asset retirement obligation      | ** ** | **18**                      | ** ** | **13**                     | ** ** | 50 |   | 51 |   |
| Exploration                      | ** ** | **66**                      | ** ** | **—**                 | ** ** | 30 |   | 15 |   |
| Inventory valuations             | ** ** | **3**                       | ** ** | **—**                 | ** ** | — |   | 10 |   |
| Non-capital losses               | ** ** | **67**                      | ** ** | **87**                     | ** ** | 74 |   | 95 |   |
| Research and development         | ** ** | **119**                     | ** ** | **—**                 | ** ** | 86 |   | 21 |   |
| Other                            | ** ** | **68**                      | ** ** | **29**                     | ** ** | 167 |   | 39 |   |
|                             | ** ** | **$**                       | **453**    | ** **                 | **$**      | **129** | ** ** | $ | 422 |   | $ | 300 |   |
| Future tax liabilities:          |       |                        |       |                       | ** ** |   |   |   |   |
| Property plant and equipment     | ** ** | **$**                       | **(26**    | **)**                      | **$**      | **(1,068** | **)** | $ | — |   | $ | (473 | ) |
| Development and pre-production   | ** ** | **(187**                    | **)**      | **(269**                   | **)**      | (5 | ) | (210 | ) |
| Foreign exchange                 | ** ** | **(78**                     | **)**      | **(2**                     | **)**      | (27 | ) | (33 | ) |
| Pensions                         | ** ** | **—**                  | ** ** | **(22**                    | **)**      | (6 | ) | (28 | ) |
| Asset retirement obligation      | ** ** | **—**                  | ** ** | **—**                 | ** ** | — |   | — |   |
| Exploration                      | ** ** | **—**                  | ** ** | **—**                 | ** ** | — |   | — |   |
| Other                            | ** ** | **(36**                     | **)**      | **(50**                    | **)**      | (92 | ) | (152 | ) |
|                             | ** ** | **$**                       | **(327**   | **)**                      | **$**      | **(1,411** | **)** | $ | (130 | ) | $ | (896 | ) |
| Net future tax asset (liability) | ** ** | **$**                       | **126**    | ** **                 | **$**      | **(1,282** | **)** | $ | 292 |   | $ | (596 | ) |

 

As of December 31, 2005,the company had the following net operating loss carry-forwards which arescheduled to expire in the following years: 

 
| **Year of Expiry** | ** ** | **Net Operating Losses** | ** ** |
|------------------------------|------------|------------------------------------|------------|
| 2006-2015                    |       | $                                  | 82         |   |
| 2016-2025                    |       | 243                                |       |
| Indefinitely                 |       | 299                                |       |
|                         |       | $                                  | 624        |   |

 

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**17. FINANCIAL INSTRUMENTS**

 

Falconbridge uses various strategies to manage its marketrisk, including the use of derivative contracts to limit, offset or reduce theCompany’s market exposure. Derivative instruments are used to manage well-definedcommodity price, foreign exchange and interest rate risks arising from Falconbridge’sprimary business activities. The fair values of Falconbridge’s derivativeinstruments, as summarized later in this note, are based on quoted marketprices for similar instruments and on market closing prices at year end. 

 

*(a) Fixed Forward Price Hedges*

 

Some customers request a fixed-sales price instead of theCOMEX or London Metal Exchange (“LME”) average price in the month of shipment.Falconbridge enters into futures contracts that will allow it to receive theCOMEX or LME average price in the month of shipment while customers pay theagreed upon fixed price. Falconbridge accomplishes this by settling the futurescontracts during the month of shipment, which generally results in therealization of the COMEX or LME average price. 

 

At December 31, 2005, themark-to-market value of these positions was a gain of $6 (2004 – gain of $8). 

 

*(b) Commodity Hedges*

 

Falconbridge purchases metal in concentrate or scrap to beprocessed eventually into refined metal for sale to customers. The raw materialfeed is purchased from third parties at prices that are often different fromthe eventual sale price to metal customers, largely due to price changes thatmay occur while processing. To mitigate the price risk resulting from thedifference between the timing of purchases and sales, Falconbridge hedges suchtransactions. The hedge transactions involve the purchase or sale of over-the-counteror LME or COMEX exchange-traded contracts. In the month that the refined metalis sold, the corresponding commodity hedge position is liquidated at the COMEXor LME average price for the month of sale. 

 

As at December 31, 2005the mark-to-market value of these positions was a loss of $7  (2004 – loss of $1). 

 

*(c) Hedges of Foreign-denominatedExpenditures*

 

Since Falconbridge’s functional and reporting currency is theU.S. dollar, Falconbridge hedges its Canadian dollar costs using foreigncurrency exchange contracts. When the Canadian dollar strengthens significantlyagainst the U.S. dollar, the increase in value of future Canadian dollar costsis partially offset by gains in the value of the forward currency contractsdesignated as hedges. Conversely, when the Canadian dollar weakens, thedecrease in the value of future Canadian dollar costs is partially offset bylosses in the value of the forward currency contracts. 

 

At December 31, 2005,Falconbridge had forward currency exchange contracts to purchase Cdn$12 millionmaturing over the next one and half years at an average exchange rate of Cdn$1.52.The mark-to-market value of these positions at December 31, 2005 was a gain of$1. 

 

In addition, Falconbridgemaintains a program to hedge its Norwegian kroner and Chilean peso expenditures.At December 31, 2005, Falconbridge entered into short-term forward foreign exchangecontracts to hedge its Norwegian and Chilean commitments, whereby it wouldpurchase notional amounts with a U.S. dollar equivalent of $19 (2004 – $9). AtDecember 31, 2005, the mark-to-market value of these contracts was nominal(2004 – mark-to-market gain of $4). 

 

Falconbridge’s operatingcosts to December 31, 2005 include realized exchange gains from the settlementof various cost hedge contracts of $63 (2004 – exchange gain of $77). 

 

*(d) Hedge of Net Investment in ForeignOperations*

 

The Company uses forward foreign exchange contracts andforeign-denominated obligations to protect the value of its investments in itsforeign subsidiaries. 

 

At December 31, 2004, theCompany had outstanding foreign exchange contracts to sell Cdn$77 million,maturing over the next seven years, designated as hedges against Canadiandollar net assets. In addition, a series of foreign exchange contracts to buyCdn$40 million and sell Cdn$23 million are designated as hedges against foreign-denominatedmonetary assets of the Company. The Company had a series of short-term foreignexchange contracts to purchase a notional amount of Cdn$520 million as a hedgeagainst foreign-denominated monetary assets and liabilities. As at December 31,2004, the unrealized loss on these contracts was $75. 

 

88

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At December 31, 2005, theCompany had outstanding foreign exchange contracts to sell Cdn$77 million,maturing over the next six years, designated as hedges against Canadian dollar netassets. In addition, a series of foreign exchange contracts to buy Cdn$516million are designated as hedges against foreign-denominated monetaryliabilities of the Company. As at December 31, 2005, the unrealized loss onthese contracts was $88. 

 

The Company has alsoentered into short-term forward foreign exchange contracts to sell £1 million(2004 – £3 million) and purchase U.S. dollars as a hedge against poundssterling net assets. At December 31, 2005 and 2004, the fair value of thesecontracts approximated their carrying value. 

 

Derivative financialinstruments involve credit and market risk. Credit risk arises from the potentialfor a counter-party to default on its contractual obligations and is limited tothose contracts where the Company would incur a loss in replacing the defaultedtransaction. The Company minimizes credit risk through the selection,monitoring and diversification of counter-parties, use of the InternationalSwaps and Derivatives Association (ISDA) documentation and master nettingagreements, collateral and other credit mitigation techniques. 

 

**18. COMMITMENTS AND CONTINGENCIES**

 

(a) As a result of the sale of the CEZ processing facility tothe Noranda Income Fund in 2002, the Company entered into a 15-year supply andprocessing agreement with the Fund. The Company has committed to sell up to550,000 tonnes of zinc concentrate annually to the refinery (its annualconcentrate requirement to operate to its full current capacity) at marketrates for the payable metal, less a fixed-treatment charge initially set at$0.352 per pound of “payable zinc metal”. Commencing January 1, 2004, theProcessing Fee is the Processing Fee in the previous year adjusted annually (i)upward by 1% and (ii) upward or downward by 10% of the year-over-year percentagechange in the average cost of electricity per megawatt hour for the ProcessingFacility.  “Payable zinc metal” inrespect of a quantity of concentrate will be equal to 96% of the assayed zincmetal content in the concentrate under the Supply and Processing Agreement. 

 

The Company has alsocommitted to manage the processing facility through operating and marketingagreements and will act as an agent for the sale of the facility’s zincproduction for the duration of the supply agreement. 

 

(b) On October 11, 2005, Inco Limited (“Inco”) announced atake-over bid for all outstanding common shares of the Company. The offer wascomprised of part cash and part Inco shares. The completion of the take-overbid requires acceptance by 66.66% of all common shareholders of the Company ona fully-diluted basis and is subject to regulatory approvals. The Company wouldbe required to provide for the payment of a fee of up to $320 to Inco in theevent that the acquisition is not completed for certain reasons. 

 

(c) On April 19, 2005, Falconbridge and Barrick Gold enteredinto a joint-venture agreement regarding the Kabanga nickel deposit and relatedconcessions in Tanzania. Under the agreement, Falconbridge acquired a 50%indirect interest in the Kabanga Project for $15 and became the operator of thejoint venture. 

 

Over the next severalyears, Falconbridge will fund and conduct a $50 work plan that will includeadditional exploration, infill drilling, and technical work to update theresource model for Kabanga. 

 

(d) On December 28, 2005, Falconbridge and its joint-venturepartner, *Société Minière du Sud**Pacifique S.A.*(“SMSP”) acquired a 49% and51% interest, respectively, in the Koniambo Nickel project. Under the BercyAccord, Falconbridge assumed responsibility for arranging financing of up to100% of the project. During 2005, Falconbridge committed to providing at least$100 for equipment and services relating to the project. 

 

(e) From time to time, Falconbridge is involved inlitigation, investigations or proceedings relating to claims arising out of itsoperations in the ordinary course of business. In the opinion of Falconbridge’smanagement, these claims and lawsuits in the aggregate will not have a materialadverse effect on the consolidated financial statements. 

 

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**19. RELATED-PARTY TRANSACTIONS**

 

(a) Falconbridge’s ownership interest in the Noranda IncomeFund was 25% during the year.  Includedin revenues are $9 (2004 – $7) representing the Company’s share of income fromthe Fund accounted for under the equity method. 

 

Falconbridge has enteredinto a Supply and Processing Agreement and a Management Service Agreement withthe Fund which have contracted Falconbridge to provide concentrate and servicesto the Fund on a regular basis (see Note 18). Falconbridge has sold $210 (2004 –$127) of concentrate to the Fund at terms in accordance with the Supply &Processing Agreement. As of December 31, 2005, Falconbridge has tradereceivables of $36 (2004 – $16) from the Fund due to the concentrate sold.Falconbridge has also provided $65 (2004 – $61) of administration, managementand operating services to the Fund at their negotiated value. As of December31, 2005, Falconbridge has a receivable of $8 (2004 – $11) from the Fund due tothe services provided. In addition, Falconbridge has made purchases of $35(2004 – $29) of zinc metals and by-products from the Fund at terms that reflectexchange amounts. Falconbridge has sold metals and operating supplies of $3(2004 – $5) to the Fund at terms that reflect market rates. Included inaccounts payable as at December 31, 2005 is $11 (2004 – $8) of amounts due tothe Fund. Included in accounts receivable as at December 2005 is $nil (2004 –$1) of amounts due from the Fund. 

 

(b) Falconbridge has undertaken a number of transactions withAntamina in which Falconbridge has a 33.75% ownership interest. Included in rawmaterial costs are purchases of concentrate of $260 (2004 – $159) from Antaminathat are recorded at agreed upon exchange amounts. As of December 31, 2005,Falconbridge has a payable of $65 (2004 – $42) to Antamina. 

 

(c) Falconbridge has undertaken a number of transactions withGramercy in which Falconbridge has a 50% interest. Included in raw materialcosts are purchases of alumina of $136 (2004 –  $14) from Gramercy that are recorded at agreedupon exchange amounts. As of December 31, 2005, Falconbridge has a payable of$6 (2004 – $2) to Gramercy. 

 

(d) Falconbridge has undertaken a number of transactions withCollahuasi in which Falconbridge has a 44% interest. Included in raw materialcosts are purchases of copper cathode of $109  (2004 – $79) from Collahuasi that are recordedat agreed upon exchange amounts. As of December 31, 2005, Falconbridge has apayable of $25 (2004 – $19) to Collahuasi. 

 

(e) Included in accounts receivable are loans receivable fromofficers of the Company in the amount of $2 (2004 – $3), secured by collateralthat has market values in excess of cost for both years. 

 

(f) Brookfield Asset Management Inc. (formerly BrascanCorporation “Brascan”), which was a major shareholder of the Company prior tothe acquisition of the former Falconbridge, sold its ownership in the Companyin August, 2005. The transactions of the Company with Brascan and itssubsidiaries prior to the sale of its ownership were as follows: 

 

Noranda Aluminum Inc.(“Aluminum”), a wholly-owned subsidiary of Falconbridge, entered into a powersupply contract with Brascan Energy Marketing Inc. (“BEMI”), a wholly-ownedsubsidiary of Brascan, on June 1, 2003. Under the arrangement, BEMI is obligedto provide Aluminum’s New Madrid primary aluminum smelter up to 490 MW/h ofelectricity annually for a two-year period commencing June 1, 2003 at rateswith a variable component based on market prices. Aluminum has purchased $52(2004 – $127) of electricity under this contract. Upon completion of the contracton June 1, 2005, the contract was not renewed. 

 

The Company has soldcertain trade receivables to a securitization trust which is owned by BrascanFinancial Corporation for a total of $4 (2004 – $315) in cash, under anagreement that came into effect in November 2003. The arrangement wasterminated in October 2005. 

 

Brascan FinancialCorporation, a subsidiary of Brascan, provided the Company with a committed creditfacility in the principal amount of Cdn$25 million with an expiry date ofJanuary 31, 2006.  The facility wascancelled after Brascan sold its ownership in the Company in August, 2005. 

 

The above transactionshave been recorded at their exchange amounts. 

 

**20. EMPLOYEE FUTURE BENEFIT PLANS**

 

Falconbridge has a number of defined benefit plans providingpension, health, dental and life insurance benefits to substantially allemployees after one or two years of continuous service.  Pension benefits are calculated based uponlength of service and either final average earnings or a specific amount peryear of service. Hourly employees are generally members of negotiated plans. 

 

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Defined benefit planassets consist primarily of cash, equity securities and fixed-income securities.The defined benefit plan holds less than 1% of its assets in common shares of Falconbridgeand its related parties. 

 

Falconbridge’s fundingpolicy is to contribute amounts sufficient to meet minimum funding requirementsas set forth by the regulations of the appropriate jurisdictions plus suchadditional amounts as Falconbridge may determine to be appropriate. 

 

The obligation forbenefits and the benefits expenses under these plans is determined through periodicactuarial reports that are based on the following weighted average assumptions:

 
| ** **                                          | ** ** | **Pension Benefit Plans** | ** ** | **Other Benefit Plans** | ** ** |
|-----------------------------------------------------|------------|-------------------------------------|------------|-----------------------------------|------------|
| ** **                                          | ** ** | **2005**                            | ** ** | **2004**                          | ** ** | **2005** | ** ** | **2004** | ** ** |
| Assumptions used to calculate benefit  obligations: |       |                                |       |                              |       |   |   |   |   |
| Discount rate                                       | ** ** | **5.00**                            | **%**      | 5.75                              | %          | **5.01** | **%** | 5.75 | % |
| Rate of compensation increase                       | ** ** | **3.75**                            | **%**      | 3.61                              | %          | **3.50** | **%** | 3.67 | % |
|                                                |       |                                |       |                              |       |   |   |   |   |
| Assumptions used to calculate benefit  expense:     |       |                                |       |                              |       |   |   |   |   |
| Discount rate                                       | ** ** | **5.75**                            | **%**      | 6.25                              | %          | **5.75** | **%** | 6.25 | % |
| Expected long-term rate of return on plan  assets   | ** ** | **7.00**                            | **%**      | 7.19                              | %          | **n/a** | **%** | n/a |   |
| Rate of compensation increase                       | ** ** | **3.50**                            | **%**      | 3.72                              | %          | **3.50** | **%** | 3.67 | % |

 

The cost of pension andother post-retirement benefits earned by employees is actuarially determinedusing the projected benefit method pro-rated on service and management’s best estimateof expected plan investment performance, salary escalation, retirement ages ofemployees and health care costs. Plan obligations are discounted using ratesthat reflect the market yields, as of the measurement date on high-quality debtinstruments with cash flows that match expected benefit payments.

 

The health care costtrend rate is assumed to be the following: 

 
| ** **                             | ** ** | **2005** | ** ** | **2004** | ** ** |
|----------------------------------------|------------|----------|------------|----------|------------|
| Initial medical trend rate             | ** ** | **7.94** | **%**      | 8.44     | %          |
| Ultimate medical trend rate            | ** ** | **4.51** | **%**      | 4.50     | %          |
| Number of years to reach trend rate    | ** ** | **8**    | ** ** | 9        |       |
| Initial and ultimate dental trend rate | ** ** | **4.00** | **%**      | 4.00     | %          |

 

In 2005, Falconbridgeratified new collective agreements at four of its operations. The impact ofthese agreements on the employee future benefit costs is nominal. 

 

The funded status ofFalconbridge’s post-employment benefit plans and net accrued benefit asset(obligation) are as follows: 

 

*PensionBenefits*

 
| **As at December 31**                      | ** ** | **2005**                | ** ** | **2004**               | ** ** |
|-----------------------------------------------------------|------------|-------------------------|------------|------------------------|------------|
| ** **                                                | ** ** | **Plans**               | ** ** | **Plans**              | ** ** | ** ** | ** ** | **Plans** | ** ** | **Plans** | ** ** | ** ** | ** ** |
| ** **                                                | ** ** | **where assets**   | ** ** | **where benefit** | ** ** | ** ** | ** ** | **where assets** | ** ** | **where benefit** | ** ** | ** ** | ** ** |
| ** **                                                | ** ** | **exceed benefit** | ** ** | **obligations**        | ** ** | ** ** | ** ** | **exceed benefit** | ** ** | **obligations** | ** ** | ** ** | ** ** |
| ** **                                                | ** ** | **obligations**         | ** ** | **exceed assets** | ** ** | **Net** | ** ** | **obligations** | ** ** | **exceed assets** | ** ** | **Net** | ** ** |
| Plan assets                                               | ** ** | **$**                   | **966**    | ** **             | **$**      | **1,145** | ** ** | **$** | **2,111** |   | $ | 947 |   | $ | 921 |   | $ | 1,868 |   |
| Benefit obligations                                       | ** ** | **877**                 | ** ** | **1,415**              | ** ** | **2,292** |   | 833 |   | 1,202 |   | 2,035 |   |
| Excess (deficit) of plan assets over  benefit obligations | ** ** | **89**                  | ** ** | **(270**               | **)**      | **(181** | ) | 114 |   | (281 | ) | (167 | ) |
| Net accrued asset                                         | ** ** | ** **              |       |                   |       | **$** | **228** |   |   |   |   |   | $ | 289 |   |
|                                                           |            |                         |            |                        |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

91

----

 

*Other Benefit Plans*

 
| **As at December 31**                      | ** ** | **2005**                | ** ** | **2004**               | ** ** |
|-----------------------------------------------------------|------------|-------------------------|------------|------------------------|------------|
| ** **                                                | ** ** | **Plans**               | ** ** | **Plans**              | ** ** | ** ** | ** ** | **Plans** | ** ** | **Plans** | ** ** | ** ** | ** ** |
| ** **                                                | ** ** | **where assets**   | ** ** | **where benefit** | ** ** | ** ** | ** ** | **where assets** | ** ** | **where benefit** | ** ** | ** ** | ** ** |
| ** **                                                | ** ** | **exceed benefit** | ** ** | **obligations**        | ** ** | ** ** | ** ** | **exceed benefit** | ** ** | **obligations** | ** ** | ** ** | ** ** |
| ** **                                                | ** ** | **obligations**         | ** ** | **exceed assets** | ** ** | **Net** | ** ** | **obligations** | ** ** | **exceed assets** | ** ** | **Net** | ** ** |
| Plan assets                                               | ** ** | **$**                   | **31**     | ** **             | **$**      | **—** | ** ** | **$** | **31** | ** ** | $ | 30 |   | $ | — |   | $ | 30 |   |
| Benefit obligations                                       | ** ** | **27**                  | ** ** | **412**                | ** ** | **439** | ** ** | 24 |   | 349 |   | 373 |   |
| Excess (deficit) of plan assets over  benefit obligations | ** ** | **4**                   | ** ** | **(412**               | **)**      | **(408** | **)** | 6 |   | (349 | ) | (343 | ) |
| Net accrued liability                                     | ** ** | ** **              |       |                   |       | **$** | **(330** | **)** |   |   |   |   | $ | (277 | ) |
|                                                           |            |                         |            |                        |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The measurement date usedfor financial reporting purposes of the plan assets and benefit obligations isDecember 31, 2005. For material plans, the most recent actuarial valuationsfiled for funding purposes were prepared as of December 31, 2004. Althoughactuarial valuations are generally required every three years, someinternational and U.S. Plans have valuations every year. 

 

The change in the fundedstatus of Falconbridge’s post-employment benefit plans was as follows: 

 
| ** **                                                     | ** ** | **Pension Benefit Plans** | ** ** | **Other Benefit Plans** | ** ** |
|----------------------------------------------------------------|------------|-------------------------------------|------------|-----------------------------------|------------|
| ** **                                                     | ** ** | **2005**                            | ** ** | **2004**                          | ** ** | **2005** | ** ** | **2004** | ** ** |
| Change in benefit obligation                                   |       |                                |       |                              |       |   |   |   |   |
| Obligation at beginning of year                                | ** ** | **$**                               | **2,035**  | ** **                        | $          | 1,764 |   | **$** | **373** | ** ** | $ | 325 |   |
| Current service                                                | ** ** | **29**                              | ** ** | 26                                |       | **10** | ** ** | 8 |   |
| Benefits paid                                                  | ** ** | **(141**                            | **)**      | (123                              | )          | **(21** | **)** | (19 | ) |
| Interest cost on benefit obligation                            | ** ** | **117**                             | ** ** | 108                               |       | **21** | ** ** | 20 |   |
| Plan amendments/Transitional obligations                       | ** ** | **—**                          | ** ** | 4                                 |       | **10** | ** ** | — |   |
| Actuarial losses                                               | ** ** | **195**                             | ** ** | 127                               |       | **33** | ** ** | 14 |   |
| Transfer to other plans                                        | ** ** | **4**                               | ** ** | —                            |       | **—** | ** ** | — |   |
| Effect of exchange rate change                                 | ** ** | **54**                              | ** ** | 128                               |       | **14** | ** ** | 25 |   |
| Increase (decrease) due to curtailment/settlement              | ** ** | **(1**                              | **)**      | 1                                 |       | **(1** | **)** | — |   |
| Obligation at end of year                                      | ** ** | **$**                               | **2,292**  | ** **                        | $          | 2,035 |   | **$** | **439** | ** ** | $ | 373 |   |
| Change in plan assets                                          |       |                                | ** ** |                              |       |   | ** ** |   |   |
| Fair value of assets at beginning of year                      | ** ** | **$**                               | **1,868**  | ** **                        | $          | 1,603 |   | **$** | **30** | ** ** | $ | 25 |   |
| Employer and participant contributions                         | ** ** | **101**                             | ** ** | 107                               |       | **19** | ** ** | 20 |   |
| Benefits paid                                                  | ** ** | **(141**                            | **)**      | (123                              | )          | **(21** | **)** | (19 | ) |
| Surplus paid out to employer                                   | ** ** | **(3**                              | **)**      | (2                                | )          | **—** | ** ** | — |   |
| Return on plan assets                                          | ** ** | **224**                             | ** ** | 167                               |       | **2** | ** ** | 1 |   |
| Transfer from other plans                                      | ** ** | **9**                               | ** ** | —                            |       | **—** | ** ** | — |   |
| Effect of exchange rate change                                 | ** ** | **53**                              | ** ** | 116                               |       | **1** | ** ** | 3 |   |
| Fair value assets at end of year                               | ** ** | **$**                               | **2,111**  | ** **                        | $          | 1,868 |   | **$** | **31** | ** ** | $ | 30 |   |
| Deficit status of plan at end of year                          | ** ** | **$**                               | **(181**   | **)**                             | $          | (167 | ) | **$** | **(408** | **)** | $ | (343 | ) |
| Unamortized:                                                   |       |                                | ** ** |                              |       |   | ** ** |   |   |
| Past service costs                                             | ** ** | **10**                              | ** ** | 22                                |       | **(2** | **)** | (3 | ) |
| Transitional asset/obligation                                  | ** ** | **—**                          | ** ** | —                            |       | **10** | ** ** | — |   |
| Net actuarial losses                                           | ** ** | **399**                             | ** ** | 434                               |       | **70** | ** ** | 69 |   |
| Accrued benefit asset (liability), net of  valuation allowance | ** ** | **$**                               | **228**    | ** **                        | $          | 289 |   | **$** | **(330** | **)** | $ | (277 | ) |

 

92

----

 

Past service costsresulting from plan amendments are amortized over the remaining average servicelife of active employees.  Past servicecosts from negotiated plan improvements are amortized over the term of thecollective agreement. 

 

For most plans, the netactuarial gain (loss) that exceeds 10% of the greater of the benefit obligationand the value of plan assets is amortized over the remaining service period ofactive employees. 

 

Accrued post-retirementbenefits asset (liability) is recorded in pension and other provisions.  Falconbridge’s post-employment benefit expenseincluded the following components: 

 
| ** **                             | ** ** | **Pension Benefit Plans** | ** ** | **Other Benefit Plans** | ** ** |
|----------------------------------------|------------|-------------------------------------|------------|-----------------------------------|------------|
| ** **                             | ** ** | **2005**                            | ** ** | **2004**                          | ** ** | **2005** | ** ** | **2004** | ** ** |
| Current year expense                   |       |                                |       |                              |       |   |   |   |   |
| Current service                        | ** ** | **$**                               | **29**     | ** **                        | $          | 26 |   | **$** | **10** | ** ** | $ | 8 |   |
| Interest cost on on benefit obligation | ** ** | **117**                             | ** ** | 108                               |       | **21** | ** ** | 20 |   |
| Expected return on plan assets         | ** ** | **(133**                            | **)**      | (114                              | )          | **(2** | **)** | (1 | ) |
| Amortization of:                       |       |                                | ** ** |                              |       |   | ** ** |   |   |
| Past service costs                     | ** ** | **9**                               | ** ** | 9                                 |       | **—** | ** ** | — |   |
| Net actuarial losses                   | ** ** | **19**                              | ** ** | 17                                |       | **2** | ** ** | 3 |   |
| Valuation allowance                    | ** ** | **—**                          | ** ** | (5                                | )          | **—** | ** ** | — |   |
| Defined benefit expense                | ** ** | **$**                               | **41**     | ** **                        | $          | 41 |   | **$** | **31** | ** ** | $ | 30 |   |
| Defined contribution expense           | ** ** | **15**                              | ** ** | 12                                |       | **—** | ** ** | — |   |
| Total expense                          | ** ** | **$**                               | **56**     | ** **                        | $          | 53 |   | **$** | **31** | ** ** | $ | 30 |   |

 
| ** **                                                                                    | ** ** | **Pension Benefit Plans** | ** ** | **Other Benefit Plans** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|-------------------------------------|------------|-----------------------------------|------------|
| ** **                                                                                    | ** ** | **2005**                            | ** ** | **2004**                          | ** ** | **2005** | ** ** | **2004** | ** ** |
| Reconciliation of defined benefit expense  recognized with defined benefits expense incurred: |       |                                | ** ** |                              |       |   | ** ** |   |   |
| Total defined benefit expense recognized                                                      | ** ** | **$**                               | **41**     | ** **                        | $          | 41 |   | **$** | **31** | ** ** | $ | 30 |   |
| Difference between:                                                                           |       |                                | ** ** |                              |       |   | ** ** |   |   |
| Expected and actuarial return on plan  assets                                                 | ** ** | **(91**                             | **)**      | (53                               | )          | **—** | ** ** | — |   |
| Actuarial losses (gains) amortized and  arising                                               | ** ** | **176**                             | ** ** | 111                               |       | **31** | ** ** | 12 |   |
| Past service costs amortized and arising                                                      | ** ** | **(9**                              | **)**      | (5                                | )          | **—** | ** ** | — |   |
| Transitional obligation amortized and  arising                                                | ** ** | **—**                          | ** ** | —                            |       | **10** | ** ** | — |   |
| Change in valuation allowance                                                                 | ** ** | **—**                          | ** ** | 5                                 |       | **—** | ** ** | — |   |
| Total defined benefit expense incurred                                                        | ** ** | **$**                               | **117**    | ** **                        | $          | 99 |   | **$** | **72** | ** ** | $ | 42 |   |

 

In 2002 and 2003,Falconbridge offered certain groups of employees the opportunity to switch fromthe current defined benefit plan to a defined contribution plan. Pension assetsof $22 were allocated from the defined benefit plan to the defined contributionplan. Regulatory approval was received and the asset transfer was completed in2005. 

 
| ** **                                                     | ** ** | **2005** | ** ** | **2004** | ** ** |
|----------------------------------------------------------------|------------|----------|------------|----------|------------|
| Effect of 1% increase in assumed health  care cost trend rates |       |     |       |     |       |
| Total of service and interest cost  components                 | ** ** | **$**    | **3**      |     | $          | 3 |   |
| Post-retirement benefit obligation                             | ** ** | **39**   |       | 40       |       |
| Effect of 1% decrease in assumed health  care cost trend rates |       |     |       |     |       |
| Total of service and interest cost  components                 | ** ** | **(2**   | **)**      | (2       | )          |
| Post-retirement benefit obligation                             | ** ** | **(31**  | **)**      | (33      | )          |
|                                                                |            |          |            |          |            |  |  |

 

93

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The expected rate ofreturn on plan assets assumption is reviewed annually by management.  The assumption is based on expected returnsfor the various asset classes, weighted by the portfolio allocation.Anticipated future long-term performance of individual asset categories isconsidered, reflecting expected future inflation and real yields on fixedincome securities and equities. 

 
| ** **               | ** ** | **Pension Benefit Plans** | ** ** | **Other Benefit Plans** | ** ** |
|--------------------------|------------|-------------------------------------|------------|-----------------------------------|------------|
| ** **               | ** ** | **2005**                            | ** ** | **2004**                          | ** ** | **2005** | ** ** | **2004** | ** ** |
| Actual asset allocation: |       |                                |       |                              |       |   | ** ** |   |   |
| Equity securities        | ** ** | **51**                              | **%**      | 53                                | %          | **—** | ** ** | — |   |
| Debt securities          | ** ** | **48**                              | **%**      | 47                                | %          | **100** | **%** | 100 | % |
| Other                    | ** ** | **1**                               | **%**      | —                            |       | **—** | ** ** | — |   |
| Total                    | ** ** | **100**                             | **%**      | 100                               | %          | **100** | **%** | 100 | % |
|                     |       |                                | ** ** |                              |       |   | ** ** |   |   |
| Target asset allocation: |       |                                | ** ** |                              |       |   | ** ** |   |   |
| Equity securities        | ** ** | **54**                              | **%**      | 56                                | %          | **—** | ** ** | — |   |
| Debt securities          | ** ** | **46**                              | **%**      | 44                                | %          | **100** | **%** | 100 | % |
| Other                    | ** ** | **—**                          | ** ** | —                            |       | **—** | ** ** | — |   |
| Total                    | ** ** | **100**                             | **%**      | 100                               | %          | **100** | **%** | 100 | % |

 

CASH FLOWS 

 

Falconbridge made cash contributions during the year of $116to pension benefit plans and $19  toother benefit plans. 

 

Our best estimate of theamounts we expect to contribute for the year ending December 31, 2006 is $104for pension benefit plans and $23 for other benefit plans. 

 

The projected benefitpayments from the pension benefit plans and other benefit plans in the next 10years are estimated as follows: 

 
| ** **                   | ** ** | **Pension Benefit Plans** | ** ** | **Other Benefit Plans** | ** ** |
|------------------------------|------------|-------------------------------------|------------|-----------------------------------|------------|
| Benefit payment projections: |       |                                |       |                              |       |
| 2006                         |       | $                                   | 140        |                              | $          | 24 |   |
| 2007                         |       | $                                   | 139        |                              | $          | 26 |   |
| 2008                         |       | $                                   | 139        |                              | $          | 28 |   |
| 2009                         |       | $                                   | 140        |                              | $          | 29 |   |
| 2010                         |       | $                                   | 141        |                              | $          | 31 |   |
| 2011 to 2015                 |       | $                                   | 715        |                              | $          | 176 |   |

 

94

----

 

**21. SEGMENTED INFORMATION**

 

Falconbridge has four operating segments: Copper, Nickel, Zinc andAluminum. Inter-segmentsalesand purchases are made at market prices and trade terms. Operations andidentifiable assets by operatingand geographic segment are presented below:

 

*(a) Operating Segments*

 
| **Year ended December 31, 2005** | ** ** | **Copper** | ** ** | **Nickel** | ** ** | **Zinc**  | ** ** | **Aluminum** | ** ** | **Other**  | ** ** | **Total** | ** ** |
|------------------------------------------------------|------------|------------|------------|------------|------------|-----------|------------|--------------|------------|------------|------------|-----------|------------|
| Revenues                                             | ** ** | **$**      | **4,421**  | ** ** | **$**      | **2,146** | ** ** | **$**        | **504**    | ** ** | **$**      | **1,077** | ** ** | **$** | **—** | ** ** | **$** | **8,148** | ** ** |
| Operating  expenses                                  |       |       |       |       |       |      |       |         |       |       |       |      |       |
| Mining, processing and refining costs                | ** ** | **993**    | ** ** | **810**    | ** ** | **168**   | ** ** | **583**      | ** ** | **(16**    | **)**      | **2,538** | ** ** |
| Purchased raw materials                              | ** ** | **2,082**  | ** ** | **574**    | ** ** | **243**   | ** ** | **335**      | ** ** | **1**      | ** ** | **3,235** | ** ** |
| Depreciation, amortization and accretion             | ** ** | **260**    | ** ** | **165**    | ** ** | **33**    | ** ** | **53**       | ** ** | **44**     | ** ** | **555**   | ** ** |
|                                                 | ** ** | **3,335**  | ** ** | **1,549**  | ** ** | **444**   | ** ** | **971**      | ** ** | **29**     | ** ** | **6,328** | ** ** |
| Income  (loss) generated by operating assets         | ** ** | **$**      | **1,086**  | ** ** | **$**      | **597**   | ** ** | **$**        | **60**     | ** ** | **$**      | **106**   | ** ** | **$** | **(29** | **)** | **$** | **1,820** | ** ** |
| Interest expense, net                                |       |       |       |       |       |      |       |         |       |       | ** ** | **(152**  | **)**      |
| Corporate and general administration                 |       |       |       |       |       |      |       |         |       |       | ** ** | **(80**   | **)**      |
| Research, development and exploration                |       |       |       |       |       |      |       |         |       |       | ** ** | **(59**   | **)**      |
| Minority interest in earnings of  subsidiaries       |       |       |       |       |       |      |       |         |       |       | ** ** | **(155**  | **)**      |
| Income  before undernoted                            |       |       |       |       |       |      |       |         |       |       | ** ** | **$**     | **1,374**  | ** ** |
| Other income                                         |       |       |       |       |       |      |       |         |       |       | ** ** | **17**    | ** ** |
| Tax expense                                          |       |       |       |       |       |      |       |         |       |       | ** ** | **(511**  | **)**      |
| Net income  from continuing operations               |       |       |       |       |       |      |       |         |       |       | ** ** | **$**     | **880**    | ** ** |
| Loss on discontinued operations, net of tax          |       |       |       |       |       |      |       |         |       |       | ** ** | **(8**    | **)**      |
| Net income                                           |       |       |       |       |       |      |       |         |       |       | ** ** | **$**     | **872**    | ** ** |
| Total  assets, excluding cash and cash equivalents   | ** ** | **$**      | **6,087**  | ** ** | **$**      | **3,316** | ** ** | **$**        | **385**    | ** ** | **$**      | **1,044** | ** ** | **$** | **700** | ** ** | **$** | **11,532** | ** ** |
| Capital  investments                                 | ** ** | **$**      | **258**    | ** ** | **$**      | **367**   | ** ** | **$**        | **21**     | ** ** | **$**      | **56**    | ** ** | **$** | **35** | ** ** | **$** | **737** | ** ** |

 
| **Year ended December 31, 2004** | ** ** | **Copper** | ** ** | **Nickel** | ** ** | **Zinc** | ** ** | **Aluminum** | ** ** | **Other** | ** ** | **Total** | ** ** |
|------------------------------------------------------|------------|------------|------------|------------|------------|----------|------------|--------------|------------|-----------|------------|-----------|------------|
| Revenues                                             |       | $          | 3,592      |       | $          | 1,824    |       | $            | 415        |      | $          | 935       |       | $ | (2 | ) | $ | 6,764 |   |
| Operating  expenses                                  |       |       |       |       |       |     |       |         |       |      |       |      |       |
| Mining, processing and refining costs                |       | 803        |       | 604        |       | 158      |       | 420          |       | (9        | )          | 1,976     |       |
| Purchased raw materials                              |       | 1,882      |       | 447        |       | 187      |       | 388          |       | —    |       | 2,904     |       |
| Depreciation, amortization and accretion             |       | 234        |       | 136        |       | 56       |       | 38           |       | 29        |       | 493       |       |
|                                                 |       | 2,919      |       | 1,187      |       | 401      |       | 846          |       | 20        |       | 5,373     |       |
| Income  (loss) generated by operating assets         |       | $          | 673        |       | $          | 637      |       | $            | 14         |      | $          | 89        |       | $ | (22 | ) | $ | 1,391 |   |
| Interest expense, net                                |       |       |       |       |       |     |       |         |       |      |       | (120      | )          |
| Corporate and general administration                 |       |       |       |       |       |     |       |         |       |      |       | (66       | )          |
| Research, development and exploration                |       |       |       |       |       |     |       |         |       |      |       | (47       | )          |
| Minority interest in earnings of  subsidiaries       |       |       |       |       |       |     |       |         |       |      |       | (297      | )          |
| Income  before undernoted                            |       |       |       |       |       |     |       |         |       |      |       | $         | 861        |   |
| Other income                                         |       |       |       |       |       |     |       |         |       |      |       | 84        |       |
| Tax expense                                          |       |       |       |       |       |     |       |         |       |      |       | (351      | )          |
| Net income  from continuing operations               |       |       |       |       |       |     |       |         |       |      |       | $         | 594        |   |
| Loss on discontinued operations, net of tax          |       |       |       |       |       |     |       |         |       |      |       | (73       | )          |
| Net income                                           |       |       |       |       |       |     |       |         |       |      |       | $         | 521        |   |
| Total  assets, excluding cash and cash equivalents   |       | $          | 4,544      |       | $          | 2,015    |       | $            | 400        |      | $          | 1,003     |       | $ | 782 |   | $ | 8,744 |   |
| Capital  investments                                 |       | $          | 285        |       | $          | 316      |       | $            | 5          |      | $          | 32        |       | $ | 28 |   | $ | 666 |   |

 

95

----

 

*(b) Geographic Segments*

 
| ** **    | ** **      | **Revenues** | ** ** | **Capital assets** | ** ** |
|---------------|-----------------|--------------|------------|-------------------------|------------|
| ** **    | ** **      | **2005**     | ** ** | **2004**                | ** ** | **2005** | ** ** | **2004** | ** ** |
|          |            |         |       |                    |       |   |   |   |   |
| Canada        | – Domestic | ** **   | **$**      | **1,282**               |       | $ | 1,107 | ** ** | **$** | **—** |   | $ | — |   |
|          | – Export   | ** **   | **2,267**  |                    | 1,997      | ** ** | **—** |   | — |   |
| Canada        | ** **      | **$**        | **3,549**  |                    | $          | 3,104 | ** ** | **$** | **3,521** |   | $ | 2,619 |   |
| United States | ** **      | **1,519**    |       | 1,345                   | ** ** | **706** |   | 706 |   |
| Chile         | ** **      | **1,576**    |       | 1,308                   | ** ** | **2,814** |   | 1,529 |   |
| Peru          | ** **      | **490**      |       | 270                     | ** ** | **643** |   | 669 |   |
| Other         | ** **      | **1,014**    |       | 737                     | ** ** | **826** |   | 513 |   |
| Total         | ** **      | **$**        | **8,148**  |                    | $          | 6,764 | ** ** | **$** | **8,510** |   | $ | 6,036 |   |

 

**22. SIGNIFICANT DIFFERENCES FROM UNITED STATESACCOUNTING PRINCIPLES**

 

These consolidated financial statements have been prepared in accordancewith Canadian generallyacceptedaccounting principles (“Canadian GAAP”). Canadian GAAP varies in certainsignificant respects from theprinciples and practices generally accepted in the United States (“U.S. GAAP”).The effect of these principaldifferences on the Company’s financial statements is quantified below and described in the accompanying notes.

 
| **Years ended December 31 (US$ millions, except per share amounts)** | ** ** | **2005**   | ** ** | **2004**              | ** ** |
|-------------------------------------------------------------------------------------------------------------------|------------|------------|------------|-----------------------|------------|
| ** **                                                                                                        | ** ** | ** ** | ** ** | **Restated (b)** | ** ** |
| Net income – Canadian GAAP                                                                                   | ** ** | **$**      | **872**    | ** **            | $          | 521 |   |
| Adjustment of certain financial instruments  to market (c)                                                        | ** ** | **6**      | ** ** | (11                   | )          |
| Start-up costs and exploration (d)                                                                                | ** ** | **(91**    | **)**      | (94                   | )          |
| Amortization of start-up costs and  exploration (d)                                                               | ** ** | **6**      | ** ** | 7                     |       |
| Pensions and post-employment benefits (f)                                                                         | ** ** | **2**      | ** ** | (2                    | )          |
| Stock options (e)                                                                                                 | ** ** | **(2**     | **)**      | (1                    | )          |
| Interest expense (b) (l)                                                                                          | ** ** | **13**     | ** ** | 11                    |       |
| Purchase accounting (m)                                                                                           | ** ** | **9**      | ** ** | —                |       |
| Foreign exchange difference (n)                                                                                   | ** ** | **(10**    | **)**      | 11                    |       |
| Tax effecting of adjustments                                                                                      | ** ** | **28**     | ** ** | 26                    |       |
| Net income – U.S. GAAP                                                                                       | ** ** | **$**      | **833**    | ** **            | $          | 468 |   |
| Net income per share reported under U.S.  GAAP ($ per share):                                                |       |       | ** ** |                  |       |
| Basic earnings per share                                                                                          | ** ** | **$**      | **2.34**   | ** **            | $          | 1.50 |   |
| Diluted earnings per share                                                                                        | ** ** | **$**      | **2.32**   | ** **            | $          | 1.48 |   |
| Retained earnings (deficit) under U.S.  GAAP:                                                                     |       |       | ** ** |                  |       |
| Balance, beginning of year                                                                                        | ** ** | **$**      | **80**     | ** **            | $          | (258 | ) |
| Income                                                                                                            | ** ** | **833**    | ** ** | 468                   |       |
| Dividends:                                                                                                        |       |       | ** ** |                  |       |
| Common                                                                                                            | ** ** | **(133**   | **)**      | (110                  | )          |
| Preferred                                                                                                         | ** ** | **(25**    | **)**      | (20                   | )          |
| Other (Note 12)                                                                                                   | ** ** | **(809**   | **)**      | —                |       |
| Balance, end of year                                                                                              | ** ** | **$**      | **(54**    | **)**                 | $          | 80 |   |

 

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STATEMENTS OF COMPREHENSIVE INCOME

 
| **Years ended December 31**              | ** ** | **2005**   | ** ** | **2004**              | ** ** |
|---------------------------------------------------------|------------|------------|------------|-----------------------|------------|
| ** **                                              | ** ** | ** ** | ** ** | **Restated (b)** | ** ** |
| Net income  under U.S. GAAP                             | ** ** | **$**      | **833**    | ** **            | $          | 468 |   |
| Other  comprehensive income (loss): (a)                 |       |       | ** ** |                  |       |
| Foreign currency translation adjustments  (g) (n)       | ** ** | **(2**     | **)**      | 19                    |       |
| Unrealized gains (loss) on long-term investments  (h)   | ** ** | **7**      | ** ** | 1                     |       |
| Derivative financial instruments: (c)                   |       |       | ** ** |                  |       |
| Net amount reclassified into earnings                   | ** ** | **(60**    | **)**      | (52                   | )          |
| Net changes associated with current period  hedging     | ** ** | **—** | ** ** | 27                    |       |
| Minimum additional pension liability  adjustment (i)    | ** ** | **95**     | ** ** | (19                   | )          |
| Tax effect of adjustments on comprehensive  loss        | ** ** | **(11**    | **)**      | 10                    |       |
| Other  comprehensive income (loss) – U.S. GAAP (a) | ** ** | **$**      | **29**     | ** **            | $          | (14 | ) |
| Comprehensive  income under U.S. GAAP (a)               | ** ** | **$**      | **862**    | ** **            | $          | 454 |   |

 

----

(a) Comprehensive income is measured in accordance with *Statement of Financial Accounting**Standards*(“FAS”) No. 130, *Reporting Comprehensive Income*. This standard defines comprehensiveincome as all changes in equity other than those resulting from investments byowners and distributions to owners.Comprehensive income is comprised of net earnings and other comprehensive income where other comprehensiveincome (“OCI”) is the change in equity during the period that arises from transactions and other events that arerelated to non-owner sources. Theconcept of comprehensive income does not exist under Canadian GAAP.

 

(b) Effective January 1, 2005, Falconbridge retroactively adopted theamended standard CICA3860*Financial Instruments – Presentation andDisclosure*. Further disclosure regarding the convertible debentures is presented in Notes 2(a) and 11.

 

Under U.S. GAAP, the entireamount of interest payments on the convertible debentures isaccounted for as interest expense. Comparativefigures for the year ended December 31, 2004 have been adjusted to reflect this change in accounting policy underCanadian GAAP.

 

(c) Under Canadian GAAP, certain financial instruments qualify as ahedge for accounting purposesand therefore gains and losses on these contracts are recognized inrevenue at the time the anticipatedcash flows are realized. U.S. GAAP, specifically under FAS No. 133 *Accounting for**Derivative Instruments andHedging Activities*and No.138 *Accounting for Certain Derivative**Instruments andHedging Activities*(together,“FAS 133”), requires a company to recognize all of its derivative instruments, whether designatedin hedging relationships or not, on the balance sheet at fair value. The accounting for changes inthe fair value (i.e. gains or losses) of a derivative instrument depends on whether it has beendesignated and qualifies as part of a hedging relationship. For derivatives designated as fair valuehedges, the effective portion of the change in the fair value of the derivative is offset by changesin the fair value of its hedged item. For cash flow hedges and hedges of the net investment inself-sustaining operations, the effective portion of the changes in the fair value of the derivative isaccumulated in OCI and then is released from OCI and included in income when the hedged item affects earnings. All otherderivatives are carried at fairvalue. FAS 133 establishes certain criteria to be met in order to designate aderivative instrument as a hedgeand to deem a hedge as effective.

 

(i) Fair Value Hedges:Falconbridge has chosen to designate its fixed forward price hedges andcertain interest rate swaps as fair valuehedges. These hedging instruments were effective during 2005 and 2004.

 

(ii) Cash Flow Hedges:Falconbridge has chosen to designate its foreign currency-denominated expenditurehedges as cash flow hedges. No ineffectiveness to these hedging instruments wasincurred during 2005 and 2004. AtDecember 31, 2005, the Company does not expect to reclassify any amount of net losses (2004 – $55) onderivative instruments from accumulated OCI to earnings during the next 12 months according to contract settlementdates.

 

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(iii) Hedges of Foreign NetAssets: During the year ended December 31, 2005, the Companyrecognized a net loss of $5 (2004 – $6),included in other comprehensive income, related to the forward foreign exchange contracts andforeign-denominated fixed-rate debt.

 

(iv) Other Hedges: For allother derivative instruments, Falconbridge has chosen not to designate them ashedging instruments.

 

(d) Under Canadian GAAP, Falconbridge capitalizes exploration costs whensufficient pre-feasibilityworkindicates that future mine production is reasonably certain and capitalizescosts incurred during thestart-up phase of a project until commercial production commences. Under U.S.GAAP, exploration costs cannot becapitalized until the Company has objective reasonable assurance as to their recovery, generally upon receipt of abankable feasibility study. Statement of Position 98-5 requires start-up costs to be expensed asincurred. As a result of the differences in the carrying amount of capital assets under Canadian andU.S. GAAP, there are differences in depreciation expense in subsequent periods. Further, a difference in depreciationexpense arises due to the earliercommencement of depreciation under U.S. GAAP.

 

(e) Effective January 1, 2002, Falconbridge prospectively adopted FASNo. 123 *Accounting for**Stock-based Compensation*whereby compensation expense for optionsgranted or modified after January1, 2002 is measured at fair value at the grant date or modification date usingthe Black- Scholes valuationmodel and recognized over the remaining vesting period of the options granted ormodified.

 

Prior to June 30, 2002,Falconbridge’s stock option plan allowed for, at the option of the holder, theexercise of the employee’s vested option whereby the difference between thegrant price and the market price is paid on exercise by the Company, with noincrease in the capital stock issued. Under U.S. GAAP, such a feature requiresthe mark-to-market obligation to be recognized through the income statement ofthe Company.

 

On June 30, 2002,Falconbridge’s stock option plan was modified to remove the cashsettlement feature. As a result, under U.S.GAAP additional compensation expense is being recognized over the remaining vesting period of these modified optionsto the extent that the fair valueof the options outstanding on the modification date exceeded the previouslyrecorded compensation expense ofthese options.

 

Under Canadian GAAP, there isno requirement to account for options that contain a cash settlement featurewhen the cash settlement feature is removed by June 30, 2002.

 

(f) Under Canadian GAAP, when a defined benefit plan gives rise to anaccrued benefit asset, a company must recognize a valuation allowance for theexcess of the adjusted benefit asset over theexpected future benefit to be realized fromthe plan asset. U.S. GAAP does not provide for a valuation allowance against pension assets. As a result, a differencebetween U.S. and Canadian GAAPhas been recorded for the effects of recognizing a pension valuation allowanceand changes therein underCanadian GAAP. Further differences result from the different transition rulesand timing of the adoption of thecurrent U.S. and Canadian standards for post-employment costs.

 

(g) Under U.S. GAAP, foreign exchange gains and losses on translation ofself-sustaining foreignoperationsare recorded in OCI. Under Canadian GAAP, such gains and losses are included asa separate component ofshareholders’ equity referred to as cumulative translation adjustment.

 

(h) U.S. GAAP requires that certain long-term investments not held fortrading be recorded at fairvalue,with unrealized holding gains and losses excluded from the determination ofearnings and reported as aseparate component of OCI.

 

(i) U.S. GAAP requires the recognition of an additional minimum pensionliability in the amount oftheexcess of the Company’s unfunded accumulated benefits obligation over therecorded pension benefitsliability. An offsetting intangible pension asset is recorded no greater thanthe unrecognized prior servicecosts, with any difference recorded as a reduction in accumulated OCI.

 

(j) U.S. GAAP requires investments in joint ventures to be accounted forunder the equity method,whileunder Canadian GAAP, the accounts of joint ventures are proportionatelyconsolidated. However, underrules promulgated by the Securities and Exchange Commission, a foreignregistrant may, subject to theprovision of additional information, continue to follow proportionate consolidation for the purposes of registrationand other filings notwithstanding the departure from U.S. GAAP. A joint venture is qualified forthe accommodation if it is an operating entity, the significant financial operating policies ofwhich are, by contractual arrangement, jointly controlled by all parties having an equity interest inthe entity. The joint ventures that the Company has

 

98

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proportionately consolidated for the reportingperiods are Antamina, Collahuasi, Magnesium,Louvicourt, and Gramercy. All of the Company’sjoint ventures qualify for the accommodation as their significant financial operating policies are, by contractual arrangement,jointly controlled by all parties having an equity interest in theentity. Consequently, the consolidated balance sheets, statements of income, and cash flow statementshave not been adjusted to restate the accounting for these joint ventures under U.S. GAAP.

 

If the Company was notgranted the accommodation, the equity accounting method would beused to account for the investment inAntamina, Collahuasi, Louvicourt, Magnesium and Gramercy. Compared to proportionate consolidation,equity accounting would result in no impact to the net income reported in the U.S. GAAP incomestatement reconciliation. In terms of the U.S. GAAP balance sheet, each item on the balance sheetwould be adjusted to exclude the Company’s share of these joint-ventures’ assets and liabilities. Included in investmentsand other assets would be theCompany’s share of the joint-ventures’ net assets. The U.S. GAAP cash flowstatement would need to beadjusted to correspond with the adjustments on the balance sheet.

 

Additional informationconcerning the Company’s interests in these five joint ventures ispresented in Note 6, including the Company’sshare of the assets, liabilities and equities, revenues, expenses and cash flows for the years ended December 31, 2005,and 2004.

 

(k) U.S. GAAP does not permit the subtotal of cash from operationsbefore net changes in non-cash working capital.

 

(l) Under Canadian GAAP, capital stockredeemable at the option of the holder must be recognizedas debt and the related dividend payments arerecognized as interest expense. Under U.S. GAAP, only capital stock that is mandatorily redeemable for assets of theCompany must be recognized as adebt. Since the Company does not have an unconditional obligation to redeemPreferred Shares Series H for assets of the Company (note 12), thePreferred Shares Series H have been classified as equity under U.S. GAAP and dividend payments on the Preferred SharesSeries H have been recognized asa reduction in retained earnings.

 

Since Preferred Shares Series H is denominatedin Canadian dollars, its redeemable value isdetermined by the foreign exchange rate at theend of the reporting period and is subject to changes at different reporting periods. Under U.S. GAAP, the change inits redeemable value from foreignexchange translation is amortized directly to the retained earnings over theperiod to the earliest redemptiondate. As the Preferred Shares Series H is considered a liability under Canadian GAAP, changes in value resulting from fluctuations in foreign exchange ratesare recognized immediately intoincome.

 

(m) Under U.S. GAAP, the book values of thenet assets acquired from the business combination asmentioned in Note 3 are different from theirbook values under Canadian GAAP. The difference in book values arose from the historicalaccounting differences between U.S. GAAP and Canadian GAAP for theacquired company prior to the business combination. While the preliminary fairvalues of the assets acquired andliabilities assumed from the business combination are the same under both U.S. GAAP and Canadian GAAP, thedifference in their book values results in a difference in preliminary fair value increments allocated tothe assets and liabilities under U.S. GAAP and Canadian GAAP. The difference in fair value increments under U.S. andCanadian GAAP creates a reductionof $4 in mining, processing and refining costs and a reduction of $5 ininterest expense under U.S. GAAPafter the business combination.

 

(n) Under Canadian GAAP, a gain or loss equivalent to a proportionateamount of the exchangegainsand losses accumulated in the foreign cumulative translation adjustment isrecognized into income when therehas been a reduction in the net investment which results from a reduction inthe equity of a foreign operation as aresult of certain capital transactions, such as dividend distributions. Under U.S. GAAP, no gain orloss would be recognized unless substantially all of the investment was liquidated.

 

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The following summarizes theadjustments to the Company’s balance sheets and cash flow statements in orderto conform to U.S. GAAP.

 

BALANCE SHEET

 
| **Years ended December 31**    | ** ** | **2005**     | ** ** | **2004**               | ** ** |
|-----------------------------------------------|------------|--------------|------------|------------------------|------------|
| ** **                                    | ** ** | ** **   | ** ** | ** **             | ** ** | **Restated (b)** | ** ** |
| ** **                                    | ** ** | **Canadian** | ** ** | **United States** | ** ** | **Canadian** | ** ** | **United States** | ** ** |
| ** **                                    | ** ** | **GAAP**     | ** ** | **GAAP**               | ** ** | **GAAP** | ** ** | **GAAP** | ** ** |
|                                          |       |         |       |                   |       |   |   |   |   |
| Assets                                        |       |         |       |                   |       |   |   |   |   |
| Accounts  receivable (c) (m)                  | ** ** | **$**        | **1,007**  | ** **             | **$**      | **1,023** | ** ** | $ | 948 |   | $ | 979 |   |
| Investments  and other assets (c) (h)         | ** ** | **307**      | ** ** | **315**                | ** ** | 324 |   | 381 |   |
| Capital  assets (d) (m)                       | ** ** | **8,510**    | ** ** | **8,170**              | ** ** | 6,036 |   | 5,614 |   |
|                                          |       |         |       |                   | ** ** |   |   |   |   |
| Liabilities                                   |       |         |       |                   | ** ** |   |   |   |   |
| Accounts and  taxes payable (c) (m)           | ** ** | **1,691**    | ** ** | **1,724**              | ** ** | 1,265 |   | 1,338 |   |
| Long-term  debt (b) (c) (l) (m)               | ** ** | **3,474**    | ** ** | **3,359**              | ** ** | 2,858 |   | 2,743 |   |
| Deferred  credits (c) (f) (m)                 | ** ** | **659**      | ** ** | **753**                | ** ** | 595 |   | 791 |   |
| Future  income tax liability (m)              | ** ** | **1,156**    | ** ** | **969**                | ** ** | 304 |   | 138 |   |
| Minority  interest in subsidiaries            | ** ** | **54**       | ** ** | **51**                 | ** ** | 1,197 |   | 1,028 |   |
|                                          |       |         |       |                   | ** ** |   |   |   |   |
| Shareholders’  equity                    |       |         |       |                   | ** ** |   |   |   |   |
| Retained  earnings (deficit)                  | ** ** | **154**      | ** ** | **(54**                | **)**      | 231 |   | 80 |   |
| Capital  stock (e) (l)                        | ** ** | **4,600**    | ** ** | **4,747**              | ** ** | 2,306 |   | 2,440 |   |
| Equity  element of convertible debentures (b) | ** ** | **37**       | ** ** | **—**             | ** ** | 42 |   | — |   |
| Currency  translation adjustment (g)          | ** ** | **240**      | ** ** | **—**             | ** ** | 263 |   | — |   |
| Accumulated  other comprehensive income       | ** ** | **—**   | ** ** | **198**                | ** ** | — |   | 169 |   |
|                                               |            |              |            |                        |            |  |  |  |  |  |  |  |  |

 

CASHFLOW STATEMENT

 
| **Years ended December 31**    | ** ** | **2005**     | ** ** | **2004**               | ** ** |
|-----------------------------------------------|------------|--------------|------------|------------------------|------------|
| ** **                                    | ** ** | **Canadian** | ** ** | **United States** | ** ** | **Canadian** | ** ** | **United States** | ** ** |
| ** **                                    | ** ** | **GAAP**     | ** ** | **GAAP**               | ** ** | **GAAP** | ** ** | **GAAP** | ** ** |
| Operating  activities                         | ** ** | **$**        | **1,635**  | ** **             | **$**      | **1,552** | ** ** | $ | 1,184 |   | $ | 1,089 |   |
| Investment  activities                        | ** ** | **(671**     | **)**      | **(580**               | **)**      | (555 | ) | (460 | ) |
| Financing  activities                         | ** ** | **(962**     | **)**      | **(970**               | **)**      | (246 | ) | (246 | ) |
| Cash and  cash equivalents, beginning of year | ** ** | **884**      | ** ** | **884**                | ** ** | 501 |   | 501 |   |
| Cash and  cash equivalents, end of year       | ** ** | **886**      | ** ** | **886**                | ** ** | 884 |   | 884 |   |
|                                               |            |              |            |                        |            |  |  |  |  |  |  |  |  |

 

**IMPENDING ACCOUNTING CHANGES**

* *

*Canadian GAAP*

 

In January 2005, the CICA approved Handbook Sections 1530, *Comprehensive Income*, 3855,*Financial Instruments –Recognition and Measurement*3865,*Hedges*, and 3251, *Equity*which will become effective for the Companybeginning January 1, 2007. These standards will increase harmonization with U.S. and Internationalaccounting standards.

 

The standards require thatall financial assets be classified as trading, available for sale, held tomaturity, or loans andreceivables. In addition, the standards require that all financial assets,including all derivatives, be measuredat fair value with the exception of loans, receivables and investments intended to be held to maturity,which should be measured at amortized cost.

 

Changes in the fair value oftrading securities will continue to be reported in earnings, whilechanges in the fair value ofavailable-for-sale securities will be reported within other comprehensive income,until the financial asset is disposed of, or becomes impaired.

 

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Similarly, thestandards require that all financial liabilities be measured at fair value whenthey are held for trading or are derivatives. Other financial liabilitiesshould be measured at cost.

 

The standards permit anentity to designate any financial instrument, on initial recognition, as onethat it will measure at fair value with gains and losses recognized in netincome in the period in which they arise.

 

Derivatives will beclassified as trading, unless they are specifically designated within aneffective hedge relationship. The standards permit three types of hedgerelationships: fair value hedges, cash flow hedges, and hedges of netinvestments in self-sustaining foreign operations. For fair value hedges, the effectiveportion of changes in the fair value derivative instruments is offset inearnings against the changes in fair value of derivative instruments is offsetin earnings against the changes in fair value, attributed to the risk beinghedged in the underlying asset, liability or firm commitment. For cash flowhedges, and hedges of net investments in self-sustaining foreign operations,the effective portion of changes in fair value of derivative instruments isoffset through other comprehensive income, until the variability in cash flowsbeing hedged is recognized in earnings in future accounting periods or uponde-recognition of the net investment. Where a derivative instrument isdesignated as a hedge and meets the criteria for hedge effectiveness, earningsoffset is available, but only to the extent that the hedge is effective. Anyineffectiveness in a hedge relationship will be recognized in current earnings.

 

Other comprehensive incomewill be included on the consolidated balance sheets as a separate component ofshareholders’ equity (net of tax), and will include net unrealized gains onavailable-for-sale securities, net unrealized gains on derivative instrumentsdesignated within an effective cash flow hedge, and unrealized foreign currencytranslation gains and losses and offsetting hedges on self-sustaining foreignoperations. The Company is presently evaluating the impact of these newstandards.

 

*U.S. GAAP*

 

In 2002, the Company adopted FAS 123 on aprospective basis. In December 2004, the FASB issued SFAS 123 (revised 2004), *Share-Based Payment*(SFAS 123-R), whichreplaces the existing SFAS 123, *Accountingfor Stock-Based Compensation*and supersedes Accounting PrinciplesBoard (APB) 25, *Accounting for Stock Issuedto Employees*. SFAS 123-R requires companies to measure and recordcompensation expense for stock options and other share-based payments based onthe instrument’s fair value on the grant date. The cost of the award must berecognized in the consolidated statements of operations over the vesting periodof the award.

 

In November 2004, the FASBissued SFAS 151, *Inventory Costs – anAmendment of ARB No. 43, Chapter 4*. This standard providesclarification that abnormal amounts of idle facility expense, freight handlingcosts, and spoilage should be recognized as current-period charges.

 

In March 2005, the FASBratified the consensus in EITF 04-06 which concludes that a mining company’scosts incurred during production for the removal of overburden and wastematerial from a mine, in order that the underlying mineral deposit may beextracted (production-related stripping costs), should be considered variableproduction costs included in the costs of the inventory produced during theperiod that the stripping costs are incurred. EITF 04-06 does not address theaccounting for stripping costs incurred during the pre-production phase of amine. As is current general practice, those costs may continue to be accountedfor as mine development expenditures subject to capitalization and amortizationover the life of the mineral deposit benefited from the expenditure.

 

The above U.S. GAAP standardsare effective for the Company beginning January 1, 2006. The Company ispresently evaluating the impact of these new standards.

 

**23. SUBSEQUENTEVENT**

 

The Company announced on March 16, 2006 that itintends to redeem a total of 20,000,000, or $500, of its outstandingjunior preference shares. The junior preference shares will be redeemed onApril 16, 2006 from holders of record on March 22, 2006. The Company intends toutilize its internal cash resources to fund the redemption.

 

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Management’s Discussion & Analysis

 

The following analysis anddiscussion of the Company’s activities take into account management’s knowledgeof all material facts andeventsup to and including February 22, 2006. Unless otherwise noted, all amounts in thisdiscussion are expressed in U.S. dollars. The 2004 financial results, as presented in this discussion, represent theconsolidated results of “Noranda Inc.”, which was renamed “Falconbridge Limited” after the amalgamationof Noranda and the former Falconbridge on June 30, 2005. The 2005 financialresults, and the balance of thisdiscussion, represent the results and activities of Falconbridge Limited, theamalgamated company.

 

Additional information onFalconbridge, including Falconbridge’s Annual Information Form, is available onSEDAR at *www.sedar.com*.

 

**CORPORATE OVERVIEW**

 

Falconbridge Limited is aglobal integrated copper and nickel producer with investments inintegrated zinc and aluminum assets. TheCompany employs approximately 14,500 people at its operations and offices in 18 countries and islisted on the Toronto Stock Exchange (FAL.LV) and the New York Stock Exchange (FAL).

 

Falconbridge’s goal is todeliver superior returns to shareholders by owning, developing andefficiently managing fully-integrated copperand nickel operations, and opportunistically investing in zinc, aluminum and other mining and metalsprocessing activities. Falconbridge is focused on aggressively managing assets to maximizeproduction, while minimizing invested capital.

** **

**CORPORATE DEVELOPMENTS**

* *

*Merger ofNoranda Inc. and Falconbridge Limited*

 

In March 2005, as neither improvedfundamentals for base metals nor improvements in NorandaInc.’s operations were being reflected in theCompany’s share price, Noranda announced an all-encompassing plan to combine Noranda and the formerFalconbridge to create one of North America’s largest base-metals companies. This merger resolved the dualpublic ownership structure ofNoranda and Falconbridge (Noranda held 59% of Falconbridge), and broughtNoranda’s strategic alternativesreview process to a close.

 

Prior to completing themerger, Noranda completed an issuer bid to exchange Noranda commonshares for the new Noranda junior preferredshares on May 5, 2005. A total of 63,377,140 Noranda common shares were repurchased as a result of this offer and atotal of 50,000,000 new Norandajunior preferred shares were issued as consideration.

 

On May 6, 2005, Norandaannounced the results of its merger offer to former FalconbridgeLimited minority common shareholders wherebyit offered to exchange 1.77 Noranda common shares for each outstanding former Falconbridge common share that itdid not own. Pursuant to theoffer, 58,476,589 former Falconbridge common shares were tendered, representing78% of the shares held by theminority shareholders, increasing Noranda’s ownership in former Falconbridge to 164,235,689, or 91% of theoutstanding former Falconbridge common shares.

 

Noranda and formerFalconbridge shareholders approved the amalgamation of the two companieson June 30, 2005. Theamalgamated company chose to continue operating under the name Falconbridge Limited and effective July 6,2005, began trading under a new stock symbol (TSX: FAL.LV and NYSE: FAL). The new Falconbridge,with a market capitalization of $10 billion, became a more widely held copper/nickel-focusedmining and metals company with simplified governance, improved risk management, increased liquidityand greater financial strength and capacity.

* *

*FalconbridgeEndorses Inco Offer*

 

On October 11, 2005, IncoLimited announced an offer to acquire all outstanding common sharesof Falconbridge. The offer was comprised ofpart cash and part Inco common shares, which when pro-rated subject to the maximum amountsoffered would provide Cdn$7.50 and 0.524 Inco shares for each Falconbridge common share. Both Boards of Directorsunanimously endorsed the acquisitionoffer and the Falconbridge Board recommended the Company’s shareholders tender theirshares to the offer, which remains open for acceptance to June 30, 2006.

 

24

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The combined organization,which would be known as Inco Limited, would be one of theworld’s premier mining and metals companies.It would be the world’s largest producer of nickel and eighth-largest producer of copper, andwould also operate integrated zinc and aluminum businesses. The new company would have one of the mining industry’smost attractive portfolios oflow-cost, profitable growth projects. The new Inco would benefit from estimatedannual synergies ofapproximately $350 million starting in late 2007.

 

Inco has obtained regulatoryclearances from the Canadian Competition Bureau. It continues toproceed to meet all information and otherrequests from antitrust/competition authorities reviewing the pending acquisition and to work with theU.S. Department of Justice and competition authorities in Europe to obtain the remaining required regulatoryclearances for the transaction. 

 

Statements regarding thecombination of Falconbridge and Inco are subject to various risks andassumptions. See “Forward-looking Information”on page 63.

** **

**KEY FACTORS AFFECTING OUR BUSINESS**

 

Falconbridge’s business isinternational in scope and, in essence, is the production and marketingof base metal commodities and the by-productsof those production processes and the treatment of custom feed materials. As a result,profitability and cash flows from operations are determined primarily by the price of the metals sold andthe Company’s ability to produce at a low cost.

* *

*Prices andMarkets*

 

Historically, the Companyhas experienced and expects to continue to be subject to volatilecommodity prices, which are influencedprimarily by the world supply-demand balance for those commodity products and related processingservices, and other related factors such as speculative activities by market participants, productionactivities by competitors, political and economic conditions, as well as production costs inmajor producing regions. The realized price for metals is also influenced by regional supply-demandfactors, the availability and price of secondary or metal containing scrap materials, and othersubstitute commodity products. Falconbridge generally realizes prevailing market prices and doesnot hedge the price it realizes on the sale of its own production. A detailed analysis of relevantmetal markets is discussed in “Metal Markets” on page 51.

* *

*ProductionCosts*

 

The other primarydeterminant of profitability and cash flow from operations is the Company’sability to produce at a lowcost. Production costs are largely influenced by ore grades, mine planning, processing technology, energy andsupply costs and the impact of exchange rate fluctuations on costs of operations.

* *

*BusinessRisks*

 

The primary risks facingFalconbridge are:

•      Fluctuating metal prices 

•      Mining and processing risks

•      Environmental risks 

•      Labour relations 

•      Uncertainty of reserve and productionestimates

•      Exchange rate fluctuations

•      Interest rate and counter-party risks

•      Energy supply and prices

•      Foreign operations

•      Market access

•      Production technology

•      Legal proceedings

•      Raw material procurement risks

 

The nature, implications andtools used to manage these risks are discussed in “Risk Factors” starting onpage 58.

* *

*Capital*

 

Falconbridge’s business iscapital intensive with significant costs involved in exploration activities,and the development andmaintenance of mining and metallurgical facilities. As such, securing low-cost capital is instrumental inprofitability. Historically, Falconbridge has sourced capital from common and preferred equity markets, publicdebt markets and bank debt. A more detailed description of the Company’s use of interest rate and foreign currencymanagement instruments is providedin “Financial Instruments and Other Instruments” on page 54.

 

25

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**SUPPLEMENTAL PERFORMANCE MEASURES**

 

The Management Discussionand Analysis contains a number of measures that are not defined bygenerally accepted accounting principles (“GAAP”).The measures, as calculated by the Company, may not be comparable to similar measures presented by other issuers.

* *

*Incomegenerated from operating assets*is defined as follows: net income before interest expense, net; corporate and general administration;research, development and exploration; minority interest in earnings of subsidiaries; gain, net ofrestructuring costs and other; and tax expense. Since this measure captures the Company’s key revenuesand operating expenses of assets currently in operation, income generated from operating assets is a key performancemeasurement that management usesto evaluate the performance of both individual assets and business units.

 

*Net-debt-to-capitalizationratio*is calculatedas follows:

 
| ** **                              | ** ** | ** **  | ** ** | **Dec. 31,** | ** ** | **Dec. 31,** | ** ** |
|-----------------------------------------|------------|-------------|------------|--------------|------------|--------------|------------|
| **($ millions)**                   | ** ** | ** **  | ** ** | **2005**     | ** ** | **2004**     | ** ** |
| Long-term  debt                         | ** ** | ** **  |       | **$**        | **3,474**  | ** **   | $          | 2,858 |   |
| Debt due  within one year               | ** ** | ** **  |       | **353**      | ** ** | 570          |       |
| Cash and  cash equivalents              | ** ** | ** **  |       | **(886**     | **)**      | (884         | )          |
| Net debt                                |       | (1)         | ** ** | **2,941**    | ** ** | 2,544        |       |
| Interests of  other shareholders        | ** ** | ** **  |       | **54**       | ** ** | 1,197        |       |
| Shareholders’  equity              | ** ** | ** **  |       | **5,031**    | ** ** | 2,839        |       |
| Stockholders’  interests (equity)  |       | (2)         |       | **5,085**    | ** ** | 4,036        |       |
| Total  capitalization                   |       | (3)=(1)+(2) |       | **8,026**    | ** ** | 6,580        |       |
| Net-debt-to-total-capitalization  ratio |       | (1)/(3)     |       | **36.7**     | **%**      | 38.7         | %          |
|                                         |            |             |            |              |            |              |            |  |  |

 

Management believes thepresentation of this measure is relevant and useful for investorswhen assessing the Company’s liquidity andits ability for growth and investment. This measure should not be considered an alternative toliquidity as determined under generally accepted accounting principles.

* *

*Integratedcash cost or operating cash costs*include all cash costs of operations and selling costs, net of processing credits and by-productcredits, and are calculated as follows. Continuing costs incurred during shutdowns or strikes areexcluded.

 
| ** **                                           | ** ** | **Copper****(Integrated)** |       | **Nickel****(Mined)** |       | **Zinc****(Mined)** |       | **Aluminum****(1)  (Integrated)** | ** ** |
|------------------------------------------------------|------------|----------------------------|------------|-----------------------|------------|---------------------|------------|----------------------------------------|------------|
| **($ millions, except as noted)**               | ** ** | **2005**                   | ** ** | **2004**              |       | **2005**            | ** ** | **2004**                               |       | **2005** | ** ** | **2004** |   | **2005** | ** ** | **2004** | ** ** |
|                                                 |       |                       | ** ** |                  |       |                | ** ** |                                   |       |   | ** ** |   |   |   | ** ** |   |   |
| Mining, processing, and refining costs, as  reported | ** ** | **$**                      | **993**    | ** **            | $          | 803                 |       | **$**                                  | **810**    | ** ** | $ | 604 |   | **$** | **168** | ** ** | $ | 158 |   | **$** | **300** | ** ** | $ | 282 |   |
| Non-mining costs                                     | ** ** | **—**                 | ** ** | —                |       | **—**          | ** ** | —                                 |       | **(47** | **)** | (73 | ) | **—** | ** ** | — |   |
| By-product and processing credits                    | ** ** | **(899**                   | **)**      | (613                  | )          | **(238**            | **)**      | (206                                   | )          | **(58** | **)** | (68 | ) | **(76** | **)** | (76 | ) |
| Processing fee on sale of concentrates               | ** ** | **178**                    | ** ** | 125                   |       | **—**          | ** ** | —                                 |       | **121** | ** ** | 127 |   | **—** | ** ** | — |   |
| Purchases of raw materials                           | ** ** | **—**                 | ** ** | —                |       | **—**          | ** ** | —                                 |       | **—** | ** ** | — |   | **113** | ** ** | 103 |   |
| Other operating and non-cash costs                   | ** ** | **8**                      | ** ** | 36                    |       | **40**              | ** ** | 117                                    |       | **18** | ** ** | 72 |   | **9** | ** ** | 12 |   |
| Cash costs – net                                | ** ** | **280**                    | ** ** | 351                   |       | **612**             | ** ** | 515                                    |       | **202** | ** ** | 216 |   | **346** | ** ** | 321 |   |
| Volumes – 000s lbs.(2)                          | ** ** | **900,504**                | ** ** | 921,900               |       | **175,500**         | ** ** | 176,030                                |       | **494,677** | ** ** | 684,530 |   | **546,241** | ** ** | 548,900 |   |
| Cash cost per pound – $                         |       | **0.31**                   |       | 0.38                  | ** ** | **3.49**            |       | 2.93                                   | ** ** | **0.41** |   | 0.32 | ** ** | **0.63** |   | 0.58 | ** ** |
|                                                      |            |                            |            |                       |            |                     |            |                                        |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

----

(1).  Represents Primary operations only: Aluminumsegment cost of operations reported for 2005 totals $583 million (2004 – $420million), which includes foil processing and other costs of $283 million (2004 –$138 million).

(2).  Volumes as shown are based on production,except for Aluminum business, which represent shipments of primary aluminum.

 

26

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Integrated cash costs arefurnished to provide additional information about the cash generatingcapabilities of the Company’s business unitsand operations. Since this measure captures the key costs of operations and the impact of ourprocessing credits and the prices of our by-products, it is a key performance measurement that managementuses to evaluate our costs and operations. Integrated cash costs is not intended to be considered as an alternativeto determining “mining, processingand refining costs” as determined under GAAP.

** **

**SELECTED ANNUAL INFORMATION**

 

The analysis containedherein is based upon the financial position, results of operations and cashflows defined under CanadianGenerally Accepted Accounting Principles. Unless otherwise noted, all amounts in this report are expressed inU.S. dollars.

 
| **($ millions, except per share data)**       | ** ** | **2005**     | ** ** | **2004**   | ** ** | **2003** | ** ** |
|----------------------------------------------------|------------|--------------|------------|------------|------------|----------|------------|
| Results of operations                              |       |         | ** ** |       |       |     |       |
| Revenues                                           | ** ** | **$**        | **8,148**  | ** ** | $          | 6,764    |       | $ | 4,456 |   |
| Income generated by operating assets               | ** ** | **1,820**    | ** ** | 1,391      |       | 409      |       |
| Net income from continuing operations              | ** ** | **880**      | ** ** | 594        |       | 33       |       |
| Net income                                         | ** ** | **872**      | ** ** | 521        |       | 2        |       |
| Net income (loss) per common share – basic    |       |         | ** ** |       |       |     |       |
| Continuing operations                              | ** ** | **$**        | **2.54**   | ** ** | $          | 1.96     |       | $ | 0.07 |   |
| Discontinued operations                            | ** ** | **$**        | **(0.02**  | **)**      | $          | (0.25    | )          | $ | (0.12 | ) |
| Net income (loss)                                  | ** ** | **$**        | **2.52**   | ** ** | $          | 1.71     |       | $ | (0.05 | ) |
| Net income (loss) per common share –  diluted |       |         | ** ** |       |       |     |       |
| Continuing operations                              | ** ** | **$**        | **2.52**   | ** ** | $          | 1.94     |       | $ | 0.07 |   |
| Discontinued operations                            | ** ** | **$**        | **(0.02**  | **)**      | $          | (0.24    | )          | $ | (0.12 | ) |
| Net income (loss)                                  | ** ** | **$**        | **2.50**   | ** ** | $          | 1.70     |       | $ | (0.05 | ) |
|                                               |       |         | ** ** |       |       |     |       |
| Cash flow                                          |       |         | ** ** |       |       |     |       |
| Cash flow from operating activities                | ** ** | **$**        | **1,635**  | ** ** | $          | 1,184    |       | $ | 408 |   |
| Investment in growth projects                      | ** ** | **409**      | ** ** | 432        |       | 307      |       |
| Sustaining capital expenditures                    | ** ** | **328**      | ** ** | 234        |       | 182      |       |
| Dividends per common share                         | ** ** | **Cdn$0.48** | ** ** | Cdn$0.48   |       | Cdn$0.64 |       |
|                                               |       |         | ** ** |       |       |     |       |
| Financial position                                 |       |         | ** ** |       |       |     |       |
| Cash and short-term investments                    | ** ** | **$**        | **886**    | ** ** | $          | 884      |       | $ | 630 |   |
| Operating capital assets                           | ** ** | **6,803**    | ** ** | 4,870      |       | 4,765    |       |
| Development projects                               | ** ** | **1,707**    | ** ** | 1,166      |       | 973      |       |
| Total assets                                       | ** ** | **12,418**   | ** ** | 9,628      |       | 8,351    |       |
| Long-term debt                                     | ** ** | **3,474**    | ** ** | 2,858      |       | 2,975    |       |
| Shareholders’ equity                          | ** ** | **5,031**    | ** ** | 2,839      |       | 2,401    |       |
| Net-debt-to-capitalization ratio                   | ** ** | **37**       | **%**      | 39         | %          | 47       | %          |

 

*FinancialImpact of Merger of Noranda and Falconbridge*

 

Prior to the merger ofNoranda and Falconbridge, Noranda had consolidated the results ofoperations and the financial position offormer Falconbridge in its financial statements reflecting its ownership of 58.5% of the common shares.On May 5, 2005, Noranda increased its ownership in Falconbridge to 90.8%, and to 100% on June 30, 2005 through theissuance of approximately $2.5billion in common shares. Upon completion of the merger, the combined entitywas renamed FalconbridgeLimited.

 

27

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The preliminary fair valueof the 41.5% of the assets and liabilities acquired from formerFalconbridge exceeds the book value of thoseassets by approximately $1.4 billion, which has been allocated to the assets and liabilities ofthe acquired assets at their respective preliminary fair values. The preliminary allocation of thesevalues is as follows:

 
| **($ millions)**                                                   | ** ** | ** ** | ** ** |
|-------------------------------------------------------------------------|------------|------------|------------|
| Preliminary  fair value increment of assets acquired by the Company     |       |       |       |
| Accounts receivable                                                     | ** ** | **$**      | **9**      | ** ** |
| Metals and other inventories                                            | ** ** | **42**     | ** ** |
| Operating capital assets                                                | ** ** | **1,966**  | ** ** |
| Development projects                                                    | ** ** | **255**    | ** ** |
| Investments and other assets                                            | ** ** | **(41**    | **)**      |
|                                                                    |       |       |       |
| Preliminary  fair value increment of liabilities assumed by the Company |       |       |       |
| Long-term debt                                                          | ** ** | **8**      | ** ** |
| Future income taxes                                                     | ** ** | **(708**   | **)**      |
| Asset retirement obligation, pension and  other provisions              | ** ** | **(114**   | **)**      |
| Net assets  acquired                                                    | ** ** | **$**      | **1,417**  | ** ** |
| Book value  of minority interest and other                              | ** ** | **1,117**  | ** ** |
| Acquisition  value                                                      | ** ** | **$**      | **2,534**  | ** ** |

 

**FINANCIAL OVERVIEW**

 

Falconbridge’s consolidatedassets totaled $12.4 billion as at December 31, 2005 on a book-valuebasis compared with $9.6 billion at the endof 2004. The increase is primarily due to the acquisition of the common shares of the former Falconbridge Limitedthat the company did not alreadyown, as discussed in Corporate Developments. Total revenues increased to $8.1billion during 2005, an increaseof $1.3 billion over the $6.8 billion in revenue generated in 2004, due to stronger metals prices and higher copperand nickel sales volumes. Falconbridge generated net income of $872 million, or $2.50 per share ona diluted basis, an increase of $351 million from the net income of $521 million, or $1.70 pershare on a diluted basis in 2004. The improved results were mostly attributable to higher base metals prices,partially offset by the impact of a weaker U.S. dollar on operating costs at all Canadian and SouthAmerican operations and increasingenergy and supply costs throughout the operations.

 

Net income for 2005 includesa loss of $8 million, or $0.02 per basic share and $0.02 perdiluted share from discontinued operations.This compares to a loss of $73 million, or $0.25 per basic share and $0.24 per diluted share fromdiscontinued operations in 2004. Discontinued operations reflect the operating results of the Company’s custom wheelmanufacturing operations priorto its disposal in June 2005 and the net gain recorded from its disposal.

 

At December 31, 2005,Falconbridge held cash and cash equivalents of $886 million. During2005, Falconbridge’s consolidatednet-debt-to-capitalization declined to 37% as cash generated from operations was utilized in part toreduce debt instruments issued to effect the reorganization of the Company. Cash resources, combined withundrawn credit facilities of over $1.6 billion, provide the Company with sufficient liquidity to pursue its developmentprojects, new investment anddevelopment opportunities currently contemplated and repay near-term debtmaturities.

 

28

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**OPERATING ASSETS**

 

Of the $12.4 billion ofassets, the book value of capital assets currently contributing to earningstotaled $6.8 billion, whileprojects under development which are not currently contributing to earnings totaled $1.7 billion. Combined,these assets represent 69% of the total asset base of the Company. Included in the $6.8 billion ofoperating assets is the $2 billion preliminary fair market value increment on the operating assets forthe purchase accounting of acquisition of the former Falconbridge, as well as $77 million beingtransferred from projects under development to operating capital assets for the completion of the new Montcalmnickel/copper mine near Timmins, Ontario.The operating assets are distributed in the Company’s business segments asfollows:

 
| **($ millions)**     | ** ** | **2005**  | ** ** | **2004** | ** ** |
|---------------------------|------------|-----------|------------|----------|------------|
| Operating  capital assets |       |      |       |     |       |
| Copper                    | ** ** | **$**     | **3,807**  |     | $          | 2,890 |   |
| Nickel                    | ** ** | **2,114** |       | 1,078    |       |
| Zinc                      | ** ** | **139**   |       | 158      |       |
| Aluminum                  | ** ** | **710**   |       | 702      |       |
| Other                     | ** ** | **33**    |       | 42       |       |
| Total                     | ** ** | **$**     | **6,803**  |     | $          | 4,870 |   |

 

**INTEGRATED OPERATIONS**

 

As an integrated producer ofmetals, Falconbridge’s operations include mines and metallurgicalfacilities which provide the Company withmaximum flexibility in both minimizing costs and maximizing operating performance by processing its own minerals. Thisintegration also reduces theCompany’s exposure to treatment-charge fluctuations and shipping-ratevolatility.

 

When milling, smelting orrefining capacity exceeds the Company’s own mine production,Falconbridge acquires third-partyconcentrates and secondary feeds to utilize this capacity and realize incremental treatment revenues. Thesetreatment revenues provide incremental income to the Company and absorb fixed costs at metallurgical sites, with custommilling, smelting and refiningoperations being conducted throughout the Company as capacity allows. Operationsconducting custom feed processing ofcopper and nickel feeds are located in North and South America, and Norway.This integration allows Falconbridge to maintain what it believes to be someof the lowest cash cost operations inthe industry. The flexibility of the processing facilities also enables the Company to treat complex ores,concentrates and secondary feeds. The Company also captures the sulphur content of theconcentrates that it treats at its metallurgical sites and produces sulphuric acid as a marketableby-product. This by-product can provide incremental revenues that help reduce cash operatingcosts.

 

The price paid to suppliersof custom feeds varies with the prevailing price of the metals beingtreated and as such, Falconbridge’s exposureto increasing metals prices is primarily based upon its own mine production. Falconbridge’scontinued focus on the identification and development of long-life, high-quality copper and nickelmining assets will continue to increase its leverage to copper and nickel while current metallurgicalsite infrastructure will minimize the investment required to bring new deposits into commercial production.

 

29

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RESULTS OFOPERATIONS

 
| **($ millions, except per share information)**     | ** ** | ** **  | ** ** | ** ** | ** ** |
|---------------------------------------------------------|------------|-------------|------------|------------|------------|
| **Years ended December 31**                             | ** ** | **2005**    | ** ** | **2004**   | ** ** |
| Revenue                                                 | ** ** | **$**       | **8,148**  | ** ** | $          | 6,764 |   |
| Operating expenses                                      |       |        | ** ** |       |       |
| Mining, processing and refining costs                   | ** ** | **2,538**   | ** ** | 1,976      |       |
| Purchased raw materials                                 | ** ** | **3,235**   | ** ** | 2,904      |       |
| Depreciation, amortization and accretion                | ** ** | **555**     | ** ** | 493        |       |
| Total operating expenses                                | ** ** | **6,328**   | ** ** | 5,373      |       |
|                                                    |       |        | ** ** |       |       |
| Income generated by operating assets                    | ** ** | **1,820**   | ** ** | 1,391      |       |
| Corporate costs(1)                                      | ** ** | **291**     | ** ** | 233        |       |
| Minority interest                                       | ** ** | **155**     | ** ** | 297        |       |
| Gain, net of restructuring costs and other              | ** ** | **(17**     | **)**      | (84        | )          |
| Taxes                                                   | ** ** | **511**     | ** ** | 351        |       |
| Net income from continuing operations                   | ** ** | **880**     | ** ** | 594        |       |
| Loss on discontinued operations, net of tax             | ** ** | **8**       | ** ** | 73         |       |
| Net income                                              | ** ** | **872**     | ** ** | 521        |       |
| Deduct                                                  |       |        | ** ** |       |       |
| Preferred share dividends                               | ** ** | **17**      | ** ** | 13         |       |
| Income available to common shareholders –  basic   | ** ** | **855**     | ** ** | 508        |       |
| Impact of convertible debentures                        | ** ** | **9**       | ** ** | 7          |       |
| Income available to common shareholders –  diluted | ** ** | **864**     | ** ** | 515        |       |
| Basic weighted average number of shares –  000s    | ** ** | **339,756** | ** ** | 296,246    |       |
| Diluted weighted average number of shares –  000s  | ** ** | **346,174** | ** ** | 303,458    |       |
| Net income per common share – basic                |       |        | ** ** |       |       |
| Continuing operations                                   | ** ** | **$**       | **2.54**   | ** ** | $          | 1.96 |   |
| Discontinued operations                                 | ** ** | **(0.02**   | **)**      | (0.25      | )          |
| Net income                                              | ** ** | **$**       | **2.52**   | ** ** | $          | 1.71 |   |
| Net income per common share – diluted              |       |        | ** ** |       |       |
| Continuing operations                                   | ** ** | **$**       | **2.52**   | ** ** | $          | 1.94 |   |
| Discontinued operations                                 | ** ** | **(0.02**   | **)**      | (0.24      | )          |
| Net income                                              | ** ** | **$**       | **2.50**   | ** ** | $          | 1.70 |   |

 

----

(1).  Corporate Costs include net interest,corporate and general administration, research and development and explorationcosts.

 

*Revenues*

 

For 2005, total revenuesincreased to $8.1 billion from $6.8 billion for the year prior primarily due tothe significant increase in realized metals prices. Copper reached a newhistorical high and zinc and aluminum also finished the year at multi-yearhighs. Average historical realized prices for copper, nickel, zinc and aluminumare as follows:

 
| **($ per pound)** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|------------------------|------------|----------|------------|----------|------------|----------|------------|
| Copper                 | ** ** | **1.71** |       | 1.30     |       | 0.82     |       |
| Nickel                 | ** ** | **6.85** |       | 6.40     |       | 4.40     |       |
| Zinc                   | ** ** | **0.70** |       | 0.52     |       | 0.43     |       |
| Aluminum               | ** ** | **0.91** |       | 0.84     |       | 0.68     |       |

 

Prices for by-product metalssuch as lead, molybdenum and precious metals, which are found and processed inconjunction with core metals, have also experienced similar price increases duringthese periods.

 

Sales volumes of refinedcopper, nickel and fabricated aluminum products were all higher in 2005 than2004 levels. Due to the closure of the Bell Allard mine in October 2004, minedzinc sales volumes were lower in 2005. Bauxite and alumina sales to thirdparties increased as the Company recorded its first full year of jointownership of the St. Ann and Gramercy operations since their acquisition inOctober 2004. The Company also recorded significantly higher molybdenumconcentrate sales from the Antamina mine and produced its first molybdenum concentratefrom the Collahuasi mine in the fourth quarter of 2005.

 

30

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* *

*OperatingExpenses*

 

Operating expenses totaled$6.3 billion in 2005, 18% higher than $5.4 billion in the same period lastyear. Mining, processing and refining costs increased to $2.5 billion, a 28%increase from 2004 levels of $2.0 billion, largely due to the impact of aweaker U.S. dollar on operating costs at all Canadian and South Americanoperations and increasing energy costs throughout the operations. Mining,processing and refining costs included $191 million of costs associated with thenew operations at the new Montcalm mine and the acquired operations at St. Annand Gramercy. The average value of the Canadian dollar increased 8% to US$0.83versus US $0.77 during 2004. Upon completion of the acquisition of formerFalconbridge minority shares, the carried value of inventory on hand wasincreased by $42 million to reflect its preliminary fair value, which ischarged to income as the related inventory is sold. As a result, the increasedcost reduces 2005 income by $42 million, lowering income in 2005 as a result ofthe acquisition.

 

The value of raw materialpurchases was $3,235 million, 11% higher than $2,904 million in 2004, due tohigher metal prices and increased custom feed processing at the Nikkelverknickel refinery and at all copper smelting and refining operations. Higherpurchased raw material values are recovered at the time of sale of the metalscontained in the materials treated.

 

Depreciation, amortizationand accretion expense increased to $555 million from $493 million a year ago,with $21 million of the increase being attributable to the amortization of the preliminaryfair value increment related to the purchase of the Falconbridge minorityshareholders’ interest and the resulting increase in the book value of themining and processing assets acquired. Depreciation, amortization and accretionexpense also increased due to the addition of amortization expenses associatedwith the new operations at Montcalm and the acquired assets at St. Ann andGramercy.

* *

*Incomefrom Operating Assets and Net Income*

 

Income generated byoperating assets for 2005 was $1,820 million, 31% higher than $1,391 million in2004. Income from operating assets increased 61% to $1,086 million in thecopper business, decreased 6% to $597 million in the nickel business, increasedto $60 million in the zinc business and increased 19% to $106 million in thealuminum business.

 

Interest expense increasedto $152 million in 2005, an increase of 27% over $120 million in2004, due mostly to the inclusion ofdividends that were paid on the new junior preference shares that were issued in 2005, offset partially bylower average debt levels and interest rates below the levels of 2004. Interest expense included aone-time early redemption premium of $5 million paid to the holders at the time of the partial redemption of the juniorpreferred shares in August, 2005.Corporate and general administration costs as well as research and developmentcosts increased from 2004primarily due to strengthening of the Canadian dollar.

 

Minority interest inearnings of subsidiaries decreased to $155 million from $297 million,largely as a result of the elimination of theformer Falconbridge minority share ownership since the completion of the merger on June 30, 2005.

 

In 2005, the Company alsorecorded a $17-million gain, net of restructuring costs and other,compared to $84 million in 2004. Included inthe $84-million gain in 2004 was the $80-million gain on the settlement of an alumina supply contract upon acquisitionof Gramercy alumina joint venture.Tax expenses recorded increased to $511 million from $351 million during 2005,due primarily to the increase innet income from continuing operations before taxes and minority interest to $1,546 million from $1,242 million.

 

Net income for the yearended December 31, 2005 was $872 million or $2.50 per commonshare on a diluted basis, compared with a netincome of $521 million or $1.70 per common share on a diluted basis for 2004. The significant improvement in 2005results is due to higher averagerealized prices for all four primary metals and strong operational performancefrom each business unitsupported by improved by-product credits. Offsetting the impact of priceincreases and cost containmentinitiatives was the impact of rising energy costs and supply costs, combined withthe further weakening of the U.S. dollar relative to both the Canadian dollarand Chilean peso, therebyincreasing operating costs in those jurisdictions.

 

31

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**Copper MineLife**

(estimated years)

 

 

***Note: Statementsregarding estimated********mine life aresubject to risks and********uncertainties.See “Forward-looking********Information” onpage 63.***

 

**Copper Mining, Processing and Refining Costs**

 

 

*Production*

 

Production of refined copper and nickelincreased substantially in 2005, as increased quantities ofconcentrates were processed, versus 2004levels. Copper production benefited from increased anode production at the Altonorte smelter and theramp-up of cathode production at the CCR refinery. Nickel production benefited from increasedcustom feed processing. Production of refined zinc was lower than 2004 levels mostly due to amonth-long strike at the Kidd Creek metallurgical complex in October. Mined copper production washigher in 2005, at the Antamina, Kidd Creek, Lomas Bayas and Montcalm mines, but was offset bylower production at the Collahuasi mine and reduced production from the Louvicourt mine which closed in July 2005.Mined nickel production wasstable in 2005 as the new Montcalm mine contributed its first full year ofproduction offsetting lowerproduction at Raglan and Sudbury mines, resulting from lower grades. Mined zincproduction was lower due to the closure of the Bell Allard mine, which closedin October 2004. Primaryaluminum production was slightly lower in 2005 than in 2004, due mostly to theimpact of the fall hurricanes,while fabricated aluminum products sales were higher versus the year prior. Furtherinformation on production and sales volumes can be found on page 103/104 ofthis report.

 

COPPER BUSINESS UNIT

 

The Copper Business is afully-integrated producer of copper metal and concentrate, molybdenum,precious metals and sulphuric acid. It iscomprised mostly of long-life, low-cost mines located primarily in South America. They includeFalconbridge’s interest in the Antamina copper and zinc mine in Peru, the Collahuasi and Lomas Bayasmines in Chile and the Kidd Creek mine in Ontario, Canada. In addition to these mines, theoperations include the Altonorte copper smelter in Chile, as well as refining, smelting and recyclingfacilities in Canada and the United States. There are several potential brownfield and greenfieldexpansion opportunities which can further increase earnings from this business (see “CapitalExpenditures, Capacity Enhancements and Projects Under Development” on page 44).

 
| ** **                                               | ** ** | **2005**  | ** ** | **2004** | ** ** |
|----------------------------------------------------------|------------|-----------|------------|----------|------------|
| Revenues ($ millions)                               | ** ** | **4,421** |       | 3,592    |       |
| Mining,  processing and refining costs ($ millions) | ** ** | **993**   |       | 803      |       |
| Purchased  raw materials ($ millions)               | ** ** | **2,082** |       | 1,882    |       |
| Income  generated by operating assets ($ millions)  | ** ** | **1,086** |       | 673      |       |
| Realized  copper price ($ per pound)                | ** ** | **$**     | **1.71**   |     | $          | 1.30 |   |
| Operating  cash cost ($ per pound of copper)        | ** ** | **$**     | **0.31**   |     | $          | 0.38 |   |
| Sales and  throughput (000s tonnes)(1)                   |       |      |       |     |       |
| Copper in concentrates                                   | ** ** | **267**   |       | 275      |       |
| Copper metal                                             | ** ** | **627**   |       | 612      |       |
| Copper concentrate processed                             | ** ** | **1,899** |       | 1,810    |       |
| Zinc in concentrates                                     | ** ** | **83**    |       | 68       |       |
| Zinc metal                                               | ** ** | **116**   |       | 120      |       |
| Sulphuric acid                                           | ** ** | **811**   |       | 749      |       |

 

----

(1). 100% basis except forCollahuasi (44%) and Antamina (33.75%).

* *

*Revenues:*For the year, consolidated revenues for theCopper Business were $4,421 million, an increase of 23%, over the $3,592 million for the same period of 2004.Higher realized copper, zinc andmolybdenum prices accounted for the increase in revenues. During 2005, therealized copper price averaged$1.71/lb., compared to $1.30/lb. in 2004. Sales volumes of refined copper andcopper anodes increased 2% in 2005, as a result of increased production at CCR,Altonorte, Kidd Creek and LomasBayas. By-product revenues from molybdenum also increased from $19 million in 2004, to $138 million in 2005.

* *

*Costs:*Total operating expenses were $3,335 millionin 2005, versus $2,919 million in 2004. Mining, processing and refining costs totaled $993 million in 2005,versus $803 million in 2004. Theincrease was due to higher energy costs, supply costs, contractor costs, andthe impact of the weaker U.S.dollar. Value of purchased raw materials increased to $2,082 million from$1,882 million, a 11% increaseyear over year due to higher metal prices and increased throughput at CCR andAltonorte. In 2005, the operating cash cost of producing a pound of copper was$0.31/lb. versus $0.38/lb. in2004.

 

32

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*Income generatedby operating assets:*CopperBusiness income generated byoperating assets was $1,086 million in 2005, compared to $673 million in the same period for 2004. The $413 million increase was mainly attributableto higher copper, zinc andmolybdenum prices which more than offset lower mine production from Collahuasi and higheroperating costs resulting fromthe impact of a weaker U.S. dollar and higher energy and supply costs.

* *

*Production:*For 2005, minedcopper production totaled 415,000tonnes, compared to 430,000 tonnes during 2004. Higher production from Antamina, Kidd Creek and Lomas Bayas was more than offset by lower production fromCollahuasi. At Antamina, higherrecoveries more than offset a 3% reduction in ore milled. At Kidd Creek, higher mill throughput more than offset lower copper grades as the new Mine Dexpansion provided more stablefeed for the mill. At Collahuasi, lower production was a result of lower head grades,material handling issues and temporary problems with one of the mill motors.Copper anode production fromcopper smelters increased from 534,000 tonnes in 2004 to 563,000 tonnes in 2005 due to increased production atAltonorte. During the fourth quarter, annual production at the Horne smelter was increased from the recent past operatingrate of 140,000 tonnes per yearto 170,000 tonnes per year.

 

Copper cathode production atCCR and Kidd Creek increased to 415,000 tonnes from 404,000tonnes as increased production at CCR morethan offset lower production at Kidd Creek, which was affected by a month-long strike in October.CCR refined cathode output benefited from the agreement reached with Inco Limited earlier in the year whereby CCRbegan the treatment of Inco’s Sudburyoperations copper anode output. CCR is investing in expanding its capacity totreat anodes that are higher innickel. This is expected to allow CCR to achieve its full capacity of 370,000 tonnes,compared to an average output of less than 300,000 tonnes in recent years.Total copper cathode productionin 2005 was 505,000 tonnes, compared to 492,000 tonnes in the previous year as higher production from CCR,Collahuasi and Lomas Bayas more than offset lower production from Kidd Creek.

 

During the year, the Companyalso completed the modification of a former copper roaster atthe Altonorte smelter and began the tollingof molybdenum concentrates. Construction of the $6 million project was completed on time and on budget. Tollingoperations started at the end of June2005 and reached the design capacity run-rate of 10,000 tonnes per year shortlythereafter.

 

By-product mined zinc in concentrate totaled182,000 tonnes in 2005 versus 152,000 tonnes in 2004. Zinc concentrate volumesincreased due to higher mill throughput and higher zinc gradesat Kidd Creek. By-product refined zincvolumes in 2005 were 114,000 tonnes versus 122,000 tonnes in 2004, due to thelabour disruption at Kidd Creek metallurgical facilities. Mined molybdenumproduction at Antamina was 2,300tonnes, compared to 1,200 tonnes in 2004, mainly due to the increase in recoveries.

 

NICKEL BUSINESS UNIT

 

The Nickel Business iscomprised of Integrated Nickel Operations (INO), which includes nickelmines and processing facilities in Sudbury,Timmins and northern Quebec, Canada, and a refinery in Kristiansand, Norway; and a ferronickeloperation at Falcondo in the Dominican Republic. Mine concentrate is acquired from both the Company’smining operations and through purchases of custom feeds. The business produces and sells ferronickel and refinesand markets nickel, copper, cobaltand significant quantities of precious and platinum-group metals. Nickelexploration and new minedevelopment is one of the core-growth focuses for the Company.

 

33

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**Nickel MineLife**

(estimated years)

 

 

***Note: Statementsregarding estimated mine life are subject to risks and uncertainties. See “Forward-lookingInformation” on page 63.***

 

**Nickel Mining, Processing and Refining Costs**

 

 

 
| ** **                                                    | ** ** | **2005**  | ** ** | **2004** | ** ** |
|---------------------------------------------------------------|------------|-----------|------------|----------|------------|
| Revenues ($ millions)                                    | ** ** | **2,146** |       | 1,824    |       |
| Mining,  processing and refining costs ($ millions)      | ** ** | **810**   |       | 604      |       |
| Purchased  raw materials ($ millions)                    | ** ** | **574**   |       | 447      |       |
| Income  generated by operating assets ($ millions)       | ** ** | **597**   |       | 637      |       |
| Realized  nickel price ($ per pound)                     | ** ** | **$**     | **6.85**   |     | $          | 6.40 |   |
| Realized  ferronickel price ($ per pound)                | ** ** | **$**     | **6.74**   |     | $          | 6.37 |   |
| Operating  cash cost ($ per pound of nickel/ferronickel) | ** ** | **$**     | **3.49**   |     | $          | 2.93 |   |
| Operating  cash cost ($ per pound of nickel)             | ** ** | **$**     | **2.97**   |     | $          | 2.57 |   |
| Operating  cash cost ($ per pound of ferronickel)        | ** ** | **$**     | **4.40**   |     | $          | 3.50 |   |
| Sales (000s  tonnes)                                          |       |      |       |     |       |
| Nickel                                                        | ** ** | **85**    |       | 71       |       |
| Ferronickel                                                   | ** ** | **26**    |       | 29       |       |
| Cobalt                                                        | ** ** | **4**     |       | 4        |       |

 

*Revenues:*For 2005, consolidated revenues for thenickel business were $2,146 million, an increase of 18%, over the $1,824 million recorded in 2004. At the INO,sales volumes of nickel andcopper increased by 20% and 16%, respectively in 2005, as a result of increasedproduction from the Montcalmmine, which achieved commercial production at the end of 2004 and due to increasedvolumes of custom feeds. Cobalt sales increased 5% from 2004 levels due toincreases in production relatedto custom feeds. At Falcondo, sales volumes decreased 9% to 26,300 tonnesfrom 28,900 tonnes in 2004, reflectingdestocking in the stainless steel market and the lower production level in 2005. Realized nickelprices of $6.85/lb. increased by 7%, compared with $6.40/lb. in 2004. The realized ferronickelprice increased 6% in 2005, compared to 2004. Realized cobalt prices decreased by 33% versus 2004.

* *

*Costs:*Total nickel operating expenses were $1,549million in 2005 versus $1,187 million in 2004. Mining, processing and refining costs totaled $810 million in2005, versus $604 million in 2004,an increase of $206 million reflecting a full year of operations at Sudbury(the 2004 results were impactedby a three-week labour strike), new production costs related to the Montcalmmine, increased oil purchasecosts at Falcondo and the impact of the change in the value of the Canadian dollaron operating costs at the Canadian operations. The value of purchased rawmaterials increased from $447million to $574 million due to higher metal prices and increased volumes.

 

The weighted averageoperating cash cost per pound of mined nickel for all of Falconbridge was$3.49 in 2005, compared with$2.93 in 2004. At INO, in 2005, the operating cash cost of producing a pound of nickel from INO mineswas $2.97 prior to the inclusion of custom feed processing credits. This cost was $0.40/lb., or 16% higher than the2004 cost due to the impact of thestronger Canadian dollar on operating costs at the Canadian operations, theimpact of lower ore grades onmine production and higher energy costs which offset the impact of increases inby-product credits due to highermetal prices. At Falcondo, operating cash cost per pound of ferronickel was $4.40 in 2005, compared with $3.50 in2004. The increase in costs was largely due to the significant increase in the oil price. Oil costs rose from $36.63per barrel in 2004, to $49.09 in2005. Purchased fuel oil costs accounted for 71% of total operating cash costsin 2005. 

 

*Incomegenerated by operating assets:*For 2005, nickel businessincome generated by operating assets was $597 million, compared with $637 million for 2004. The $40-million decrease was mainly due to the amortizationof the preliminary fair valueincrement relating to the Noranda/Falconbridge merger, and higher unit costs, again caused in part by the strengthening of the Canadian dollar, whichoffset the impact of highernickel and copper prices and increases in sales volumes.

 

*Production:*Refined nickelproduction totaled 113,600 tonnes in 2005, compared to 100,900 tonnes in 2004, setting a new record for production. During 2005, Sudburymines nickel production was19,700 tonnes, compared with 22,600 tonnes in 2004. The reduction in nickel production was attributable to a reduction in ore grade. For 2005, Raglannickel-in-concentrate productionwas 22,200 tonnes, compared with 26,600 tonnes of

 

34

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nickel in 2004. The decreasein production from 2004 levels was due to the impact of a lowernickel ore grade. In its first full yearafter achieving commercial production, the Montcalm mine produced 9,000 tonnes of nickel. In Sudbury,smelter production of nickel in matte, which established a new annual production record, was 63,100 tonnes in 2005,compared with 52,600 tonnes in2004, as a result of the treatment of higher concentrate tonnages with lowerfeed grades. At Nikkelverk, 2005refined nickel production of 84,900 tonnes was higher than the 71,400 tonnes produced in 2004, establishing a newannual production record. Nikkelverk cobalt production also set a new record at 5,000 tonnes. The Falcondoferronickel operation produced 28,700tonnes of nickel in ferronickel, compared to 29,500 tonnes in 2004.

 

ZINC BUSINESS UNIT

 

The Zinc Business includesthe Brunswick mine and the Brunswick lead metallurgical operations(lead smelter and refinery), General Smelting(zinc and lead alloy foundry), and Falconbridge’s 25% interest in the Noranda Income Fund,which owns 100% of the Canadian Electrolytic Zinc refinery. The zinc business is an integratedoperation that produces and sells zinc and lead concentrates and refines and markets zinc and lead metal and asignificant amount of by-product silverand sulphuric acid.

 
| ** **                                               | ** ** | **2005** | ** ** | **2004** | ** ** |
|----------------------------------------------------------|------------|----------|------------|----------|------------|
| Revenues ($ millions)                               | ** ** | **504**  |       | 415      |       |
| Mining,  processing and refining costs ($ millions) | ** ** | **168**  |       | 158      |       |
| Purchased  raw materials ($ millions)               | ** ** | **243**  |       | 187      |       |
| Income  generated by operating assets ($ millions)  | ** ** | **60**   |       | 14       |       |
| Realized  zinc price ($ per pound)                  | ** ** | **$**    | **0.70**   |     | $          | 0.52 |   |
| Realized  lead price ($ per pound)                  | ** ** | **$**    | **0.50**   |     | $          | 0.43 |   |
| Operating  cash cost ($ per pound of zinc)          | ** ** | **$**    | **0.41**   |     | $          | 0.32 |   |
| Sales (000s  tonnes)                                     |       |     |       |     |       |
| Zinc in concentrates                                     | ** ** | **219**  |       | 293      |       |
| Lead metal                                               | ** ** | **74**   |       | 83       |       |

 

*Revenues:*For the year, revenues for the Zinc Businessincreased 21%, to $504 million from $415 million in 2004, as higher realized prices for zinc and lead morethan offset lower production andsales volumes. Sales volumes of zinc in concentrate decreased in 2005, by 25%to 219,400 tonnes, compared to292,500 tonnes in 2004, principally due to the closure of the Bell Allard mine in Quebec in October 2004. Leadmetal sales volumes decreased in 2005, by 11% to 73,700 from 83,200 tonnes in 2004. The decrease in lead metal sales isprimarily due to a decrease inlead metal production in 2005, versus 2004, due to lower tonnage processed atthe Brunswick lead metallurgicaloperation.

* *

*Costs:*Zinc Business operating expenses totaled $444million in 2005, an increase from $401million in 2004. Mining, processing and refining costs totaled $168 million in2005, versus $158 million in2004. The value of purchased raw materials increased from $187 million in 2004,to $243 million in 2005 primarily due to higher metal prices. In 2005, theoperating cash cost of producinga pound of zinc increased 28% to $0.41, from $0.32 in 2004. The increase is mainly due to astronger Canadian dollar, higherenergy costs, higher consumable costs, and higher freight charges and alsoreflects the loss of production from the Bell Allard mine which closed in October 2004.

 

*Incomegenerated by operating assets:*For 2005, the Zinc Businessincome generated by operating assets was $60 million, compared to $14 million in 2004. The $46-million increase was mainly relating to higher metalprices, which were partiallyoffset by lower sales volumes and the negative effect of the stronger Canadian dollar on costs.

 

**Zinc Mining, Processing and Refining Costs**

 

 

 

35

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**Aluminum Mining, Processing and Refining Costs**

 

 

*Production:*During 2005,contained zinc in mine production was 265,600 tonnes, compared to 367,000 tonnes in 2004. The decrease in mineproduction in 2005 is attributable to the loss of production from the Bell Allard mine.Brunswick mine production was 265,600 tonnes of zinc in concentrate in 2005, compared with 268,100tonnes of zinc in concentrate in 2004. The decrease in zinc production was attributable to ore-pass operatingissues and a rock burst during thefourth quarter of 2005. During 2005, the Brunswick smelter consumed 189,700tonnes of feed, compared to205,500 tonnes of feed in 2004. Refined lead production totaled 76,100 tonnes in 2005 versus 83,800 tonnes in 2004,a decrease of 9% resulting from a reduction in tonnage of material processed.

 

The principal zinc and leadconcentrate producing asset within the Zinc Business is theBrunswick mine. At planned operating rates,the Brunswick mine has an estimated life of four to five years. Detailed technical and economicstudies of the additional mineral resources and other mining remnants located throughout the mineare continuing. If this evaluation is successful in converting remaining resources to reserves,the four-year mine life could be extended by an additional year of operation, subject to the risks and hazardsassociated with the mining businessand the mine in its final stage of extraction. At current zinc and lead prices,the existing zinc business isexpected to be a significant contributor of cash flow to the Company, providing a very high rate of return on thebook value of these assets. Falconbridge’s strategy also has the potential to maintainapproximately one billion pounds per year exposure to the zinc price via the potential development of itsbrownfield and greenfield projects, described under “Capital Expenditures, Capacity Enhancementsand Projects Under Development”. (Note: Statements regarding estimated mine life and projections of future cashflows and rates of return aresubject to risks and uncertainties. See “Forward-looking Information” on page63.)

 

ALUMINUM BUSINESS UNIT

 

Falconbridge’sfully-integrated aluminum operations consist of a primary aluminum reductionfacility in New Madrid,Missouri, and four modern aluminum rolling mills, capable of producing a varietyof foil and sheet products to fulfill numerous applications. The primary androlling operations are supportedby the Company’s 50% interest in the St. Ann bauxite mine in Jamaica and the Gramercy alumina refinery inGramercy, Louisiana. The St. Ann bauxite mine is the major source of raw material for the Gramercyalumina refinery and is also the main supplier of raw material for the primary aluminum smelter inNew Madrid. During 2005, the New Madrid smelter accounted for approximately 10% of aluminum production in the U.S. andthe foil operations suppliedapproximately 23% of North American demand for aluminum foil sheet.Falconbridge now has the benefitof being a fully-integrated aluminum producer and has full leverage to thecurrent strong aluminum prices.

 
| ** **                                               | ** ** | **2005**  | ** ** | **2004** | ** ** |
|----------------------------------------------------------|------------|-----------|------------|----------|------------|
| Revenues ($ millions)                               | ** ** | **1,077** |       | 935      |       |
| Mining,  processing and refining costs ($ millions) | ** ** | **583**   |       | 420      |       |
| Purchased  raw materials ($ millions)               | ** ** | **335**   |       | 388      |       |
| Income  generated by operating assets ($ millions)  | ** ** | **106**   |       | 89       |       |
| Realized  aluminum price ($ per pound)              | ** ** | **$**     | **0.91**   |     | $          | 0.84 |   |
| Average  fabricating spread ($ per pound of foil)   | ** ** | **$**     | **0.46**   |     | $          | 0.42 |   |
| Operating  cash cost ($ per pound of aluminum)      | ** ** | **$**     | **0.63**   |     | $          | 0.58 |   |
| Sales (000s  tonnes)                                     |       |      |       |     |       |
| Primary aluminum                                         | ** ** | **248**   |       | 249      |       |
| Aluminum foil                                            | ** ** | **178**   |       | 174      |       |

 

*Revenues:*For the year, consolidated revenues for theAluminum Business increased 15%, to $1,077 million from $935 million in 2004. Primary sales volumes wereslightly lower than 2004, resultingfrom fewer average number of operating pots. Realized Mid-West prices in 2005increased by 8% to $0.91/lb., from$0.84/lb. in 2004. For the rolled products division, sales volumes were up by2% for the year mainly due to improved production levels. Overall weightedfabrication spreads were up $0.04/lb.,or 10% from 2004 levels, due entirely to strong demand and related price increases in heavy-gaugeproduct lines.

 

36

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*Costs:*Total Aluminum Business operating expensestotaled $971 million in 2005,versus $846 million in 2004, primarily due to the inclusion of Falconbridge’s share of the newly acquired St. Ann bauxite mine and Gramercyalumina refinery operatingcosts, which are offset by the benefits of a fully-integrated aluminum business and certainty of long-term aluminasupply. Mining, processing and refining costs totaled $583 million in 2005, versus $420 million in2004, an increase of $163million. Operating costs were negatively affected by the temporary production disruption at the Gramercy alumina refinery that resulted from theimpact of hurricane Katrina andthe resulting higher natural gas costs. Energy costs at the New Madrid smelter were negativelyimpacted by slightly higherelectricity rates that came into effect under the new fifteen-year electricity supply contract, butthese contract rates comparevery favourably with electricity costs incurred by other U.S. aluminum producers. The value ofpurchased raw materials decreased to $335 million from $388 million in 2004, due to the fact thatalumina purchases in 2004 were from third-parties prior to the fourth quarteracquisition of Gramercy Alumina. The primary aluminum smelter continues to benefit from the secure internalsupply of alumina at very favourable cost compared to current spot-market prices.

 

For the year, the netoperating cash cost at the primary division was $0.63/lb., compared with$0.58/lb. in 2004. Highernatural gas and electrical energy costs were the major contributors to the higher unit costs. For the rolledproducts division, conversion costs on average were down 6% from last year, due in part to aheavier-gauge product mix and improvements in manufacturing efficiencies at all plants offsetting thenegative impact of higher natural gas prices.

 

*Income generated by operating assets:*For 2005, income generated by operatingassets for the Aluminum Businesswas $106 million, compared with $89 million for 2004. The increase was mainly due to higher metal prices andfabrication margins, improved production levels at the rolled products divisions, and higher marginsreceived on value-added product sales such as rod, billet and rolled aluminum products.

* *

*Production:*For the year 2005,production of primary aluminum was 245,600 tonnes, compared to 247,500 tonnes in the same period in 2004.For the rolled products operations, shipments were 177,900 tonnes for the year, up 2% comparedto 173,900 tonnes in 2004.

** **

**AVERAGE REALIZED PRICES**

 

Average realized prices forthe company’s main products during 2005 and 2004, as well as estimated currentrealized prices in 2006, are as follows:

 
| **($ per pound)** | ** ** | **Estimated Current Price(1)** | ** ** | **2005**  | ** ** | **2004** | ** ** |
|------------------------|------------|--------------------------------|------------|-----------|------------|----------|------------|
| Copper                 |       | 2.24                           | ** ** | **1.71**  |       | 1.30     |       |
| Nickel                 |       | 6.67                           | ** ** | **6.85**  |       | 6.40     |       |
| Ferronickel            |       | 6.29                           | ** ** | **6.74**  |       | 6.37     |       |
| Zinc                   |       | 1.02                           | ** ** | **0.70**  |       | 0.52     |       |
| Aluminum               |       | 1.15                           | ** ** | **0.91**  |       | 0.84     |       |
| Lead                   |       | 0.65                           | ** ** | **0.50**  |       | 0.43     |       |
| Cobalt                 |       | 12.46                          | ** ** | **14.97** |       | 22.48    |       |
| Molybdenum             |       | 23.50                          | ** ** | **31.09** |       | 16.21    |       |

 

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(1). As at Feb. 16, 2006

 

37

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**SENSITIVITIES**

 

The following table showsthe annualized impact on Falconbridge’s net income from changes in metalsprices and the U.S./Canadian dollar exchange rate.

 
| ** **                     | ** ** | **Change in**     | ** ** | **Impact on**  | ** ** | **Impact on**        | ** ** |
|--------------------------------|------------|-------------------|------------|----------------|------------|----------------------|------------|
| **($ millions)**          | ** ** | **US$/lb. Price** | ** ** | **Net income** | ** ** | **Income per share** | ** ** |
| Copper                         |       | $                 | 0.05       |           | $          | 37                   |       | $ | 0.10 |   |
| Nickel                         |       | $                 | 0.50       |           | 63         |                 | 0.17       |   |
| Zinc                           |       | $                 | 0.05       |           | 38         |                 | 0.10       |   |
| Aluminum                       |       | $                 | 0.05       |           | 19         |                 | 0.05       |   |
| Lead                           |       | $                 | 0.05       |           | 6          |                 | 0.02       |   |
|                           |       |              |       |           |       |                 |       |
| Exchange  rate Cdn$ = US$ |       | $                 | 0.01       |           | 12         |                 | 0.03       |   |
|                                |            |                   |            |                |            |                      |            |  |  |  |

 

**MINING OPERATIONS AND RECOVERIES**

 

The following table detailsthe results of milling operations and recoveries at the Company’s operatingmines in 2005:

 
| ** **                    | ** ** | ** **         | ** ** | **Copper** | ** ** | **Nickel**   | ** ** | **Zinc**  | ** ** |
|-------------------------------|------------|--------------------|------------|------------|------------|--------------|------------|-----------|------------|
| ** **                    | ** ** | **Ore  treated**   | ** ** | **Grade**  | ** ** | **Recovery** | ** ** | **Grade** | ** ** | **Recovery** | ** ** | **Grade** | ** ** | **Recovery** | ** ** |
| ** **                    | ** ** | **(000s  tonnes)** | ** ** | **(%)**    | ** ** | **(%)**      | ** ** | **(%)**   | ** ** | **(%)** | ** ** | **(%)** | ** ** | **(%)** | ** ** |
| Copper Mines                  |       |               |       |       |       |         |       |      |       |   |   |   |   |   |   |
| Antamina                      |       | 10,241             |       | 1.35       |       | 90.3         |       | —    |       | — |   | 0.92 |   | 82.7 |   |
| Collahuasi(1)                 |       | 20,495             |       | 1.15       |       | 81.6         |       | —    |       | — |   | — |   | — |   |
| Kidd Creek                    |       | 2,320              |       | 2.02       |       | 93.0         |       | —    |       | — |   | 6.19 |   | 83.5 |   |
| Lomas Bayas – heap leach |       | 13,286             |       | 0.50       |       | 76.8         |       | —    |       | — |   | — |   | — |   |
| Lomas Bayas – ROM leach  |       | 22,432             |       | 0.22       |       | 24.6         |       | —    |       | — |   | — |   | — |   |
| Louvicourt                    |       | 369                |       | 2.20       |       | 95.0         |       | —    |       | — |   | 1.85 |   | 85.6 |   |
|                          |       |               |       |       |       |         |       |      |       |   |   |   |   |   |   |
| Nickel Mines                  |       |               |       |       |       |         |       |      |       |   |   |   |   |   |   |
| Falcondo                      |       | 3,920              |       | —     |       | —       |       | 1.18      |       | 75.3 | (2) | — |   | — |   |
| Montcalm                      |       | 750                |       | 0.79       |       | 85.6         |       | 1.52      |       | 82.1 |   | — |   | — |   |
| Raglan                        |       | 934                |       | 0.84       |       | 80.4         |       | 2.84      |       | 86.4 |   | — |   | — |   |
| Sudbury                       |       | 2,171              |       | 1.26       |       | 93.3         |       | 1.16      |       | 80.5 |   | — |   | — |   |
|                          |       |               |       |       |       |         |       |      |       |   |   |   |   |   |   |
| Zinc Mines                    |       |               |       |       |       |         |       |      |       |   |   |   |   |   |   |
| Brunswick                     |       | 3,529              |       | 0.35       |       | 48.9         |       | —    |       | — |   | 8.59 |   | 87.7 |   |

 

----

(1). Collahuasi figuresreflect a weighted average of sulphide and oxide ores.

(2). Falcondo upgradecircuit.

 

**PRODUCTIONFORECAST**

 
| ** **     | ** ** | ** ** | **2006  Forecast** | ** ** | **2005  Actual** | ** ** |
|----------------|------------|------------|--------------------|------------|------------------|------------|
| **Production** | ** ** | ** ** | **(tonnes)**       | ** ** | **(tonnes)**     | ** ** |
| Copper         | Mined      |       | 475,000            | ** ** | **462,000**      | ** ** |
|           | Refined    | ** ** | 635,000            | ** ** | **544,000**      | ** ** |
| Nickel         | Mined      |       | 82,000             | ** ** | **80,000**       | ** ** |
|           | Refined    | ** ** | 115,000            | ** ** | **114,000**      | ** ** |
| Zinc           | Mined      |       | 460,000            | ** ** | **454,000**      | ** ** |
|           | Refined(1) |       | 210,000            | ** ** | **182,000**      | ** ** |
| Aluminum       | Primary    |       | 250,000            | ** ** | **246,000**      | ** ** |
|           | Fabricated | ** ** | 195,000            | ** ** | **178,000**      | ** ** |

 

----

(1).  Includes 100% of Kidd Creek refinery productionand 25% of the Noranda Income Fund CEZ refinery production

 

Statements regardingproduction forecasts are subject to various risks and assumptions.

See “Forward-lookingInformation” on page 63.

 

38

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**QUARTERLY EARNINGS**

 
| **($ millions, except per share data)**             | ** ** | **Q1** | ** ** | **Q2** | ** ** | **Q3** | ** ** | **Q4** | ** ** | **2005**  | ** ** | **Q1** | ** ** | **Q2** | ** ** | **Q3**     | ** ** | **Q4** | ** ** | **2004** | ** ** |
|----------------------------------------------------------|------------|--------|------------|--------|------------|--------|------------|--------|------------|-----------|------------|--------|------------|--------|------------|------------|------------|--------|------------|----------|------------|
| Results of  operations                                   |       |   |       |   |       |   |       |   |       |      | ** ** |   |       |   |       |       |       |   |       |     |       |
| Revenues                                                 |       | $      | 1,920      |   | $          | 2,057  |       | $      | 2,006      |      | $          | 2,165  | ** ** | **$**  | **8,148**  | ** ** | $          | 1,603  |       | $        | 1,632      |   | $ | 1,662 |   | $ | 1,867 |   | $ | 6,764 |   |
| Mining,  processing and refining costs                   |       | 595    |       | 643    |       | 615    |       | 685    | ** ** | **2,538** | ** ** | 435    |       | 477    |       | 517        |       | 547    |       | 1,976    |       |
| Purchased raw  materials                                 |       | 748    |       | 804    |       | 816    |       | 867    | ** ** | **3,235** | ** ** | 688    |       | 744    |       | 656        |       | 816    |       | 2,904    |       |
| Depreciation,  amortization and accretion                |       | 118    |       | 147    |       | 140    |       | 150    | ** ** | **555**   | ** ** | 116    |       | 124    |       | 118        |       | 135    |       | 493      |       |
| Income generated  by operating assets                    |       | 459    |       | 463    |       | 435    |       | 463    | ** ** | **1,820** | ** ** | 364    |       | 287    |       | 371        |       | 369    |       | 1,391    |       |
| Interest expense,  net                                   |       | 28     |       | 37     |       | 51     |       | 36     | ** ** | **152**   | ** ** | 26     |       | 36     |       | 30         |       | 28     |       | 120      |       |
| Corporate and  general administration                    |       | 17     |       | 19     |       | 18     |       | 26     | ** ** | **80**    | ** ** | 13     |       | 15     |       | 17         |       | 21     |       | 66       |       |
| Research,  development and exploration                   |       | 11     |       | 16     |       | 16     |       | 16     | ** ** | **59**    | ** ** | 7      |       | 12     |       | 14         |       | 14     |       | 47       |       |
| Minority interest  in earnings of subsidiaries           |       | 94     |       | 55     |       | 5      |       | 1      | ** ** | **155**   | ** ** | 79     |       | 64     |       | 76         |       | 78     |       | 297      |       |
| Income before  undernoted                                |       | 309    |       | 336    |       | 345    |       | 384    | ** ** | **1,374** | ** ** | 239    |       | 160    |       | 234        |       | 228    |       | 861      |       |
| Gain, net of  restructuring costs and other              |       | 1      |       | 1      |       | (5     | )          | (14    | )          | **(17**   | **)**      | (6     | )          | (11    | )          | 6          |       | (73    | )          | (84      | )          |
| Tax expense                                              |       | 124    |       | 133    |       | 136    |       | 118    | ** ** | **511**   | ** ** | 88     |       | 58     |       | 101        |       | 104    |       | 351      |       |
| Net income from  continuing operations                   |       | 184    |       | 202    |       | 214    |       | 280    | ** ** | **880**   | ** ** | 157    |       | 113    |       | 127        |       | 197    |       | 594      |       |
| Loss on  discontinued operations, net of tax             |       | 8      |       | — |       | — |       | — | ** ** | **8**     | ** ** | 5      |       | 5      |       | 9          |       | 54     |       | 73       |       |
| Net income                                               |       | 176    |       | 202    |       | 214    |       | 280    | ** ** | **872**   | ** ** | 152    |       | 108    |       | 118        |       | 143    |       | 521      |       |
| Net income per  common share from continuing operations: |       |   |       |   |       |   |       |   |       |      | ** ** |   |       |   |       |       |       |   |       |     |       |
| Basic                                                    |       | $      | 0.61       |   | $          | 0.62   |       | $      | 0.56       |      | $          | 0.75   | ** ** | **$**  | **2.54**   | ** ** | $          | 0.52   |       | $        | 0.37       |   | $ | 0.42 |   | $ | 0.65 |   | $ | 1.96 |   |
| Diluted                                                  |       | $      | 0.60       |   | $          | 0.61   |       | $      | 0.56       |      | $          | 0.74   | ** ** | **$**  | **2.52**   | ** ** | $          | 0.51   |       | $        | 0.37       |   | $ | 0.41 |   | $ | 0.64 |   | $ | 1.94 |   |
| Net income per  common share:                            |       |   |       |   |       |   |       |   |       |      | ** ** |   |       |   |       |       |       |   |       |     |       |
| Basic                                                    |       | $      | 0.58       |   | $          | 0.62   |       | $      | 0.57       |      | $          | 0.75   | ** ** | **$**  | **2.52**   | ** ** | $          | 0.50   |       | $        | 0.35       |   | $ | 0.39 |   | $ | 0.47 |   | $ | 1.71 |   |
| Diluted                                                  |       | $      | 0.57       |   | $          | 0.61   |       | $      | 0.56       |      | $          | 0.74   | ** ** | **$**  | **2.50**   | ** ** | $          | 0.49   |       | $        | 0.35       |   | $ | 0.38 |   | $ | 0.47 |   | $ | 1.70 |   |

 

**FOURTH QUARTER 2005 RESULTS**

 

Net income for the fourth quarter of 2005 was$280 million, or $0.74 per share on a dilutedbasis, compared to $143 million or $0.47 pershare on a diluted basis for the same period in 2004. This increase was as a result of significantly higher metalsprices realized in the fourth quarterof 2005 versus 2004 offset by the impact of a strong Canadian dollar. Realizedcopper prices increased to $1.99/lb. in the fourth quarter of 2005, compared with$1.43/lb. realized in the sameperiod of 2004, while nickel prices realized in the fourth quarter of 2005averaged $5.88/lb. versus$6.45/lb. realized in the fourth quarter of 2004. Zinc prices realized in thefourth quarter of 2005 averaged$0.80/lb. versus $0.56/lb. realized in the fourth quarter of 2004, while realizedaluminum prices increased to $0.94/lb. in the fourth quarter of 2005, comparedwith  $0.89/lb. realized in the same period of 2004.

 

COPPER BUSINESS UNIT

* *

*Revenues:*For the fourth quarter of 2005, consolidatedrevenues of $1,276 million increased 28% from $997 million in the fourth quarter of 2004. The increase reflectshigher average realized copper,zinc, molybdenum and precious metals prices. Total sales of copper during thequarter were 232,000 tonnesversus 243,000 tonnes in the same period in 2004. Increased sales of CCR cathodes,Antamina concentrates, Altonorte anodes and Horne concentrates were more thanoffset

 

39

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by decreased sales ofCollahuasi concentrates and Kidd Creek cathodes. Sales of by-product zincmetal from Kidd Creek were lowerdue to the one-month labour disruption at the Kidd Creek metallurgical operations. The realized copperprice of $1.99/lb. increased by 39% in the quarter, compared to $1.43/lb. realized in the sameperiod in 2004.

 

*Costs:*Total operating expenses increased to $917million from $827 million in the fourth quarter of 2004. Mining, processing and refining costs increased to $246million from $227 million in the sameperiod last year as a result of the impact of a weaker U.S. dollar and higherenergy and supply costs.Purchased raw materials increased to $600 million from $534 million in thefourth quarter of 2004, due tothe rise in copper prices. The operating cash cost of producing a pound of copperin the fourth quarter of 2005 decreased to $0.35/lb., from $0.43/lb. in thefourth quarter of 2004.

* *

*IncomeGenerated by Operating Assets:*Income generated by operating assets for the Copper Business in the fourth quarter of 2005increased to $359 million from $170 million a year ago, due to the impact of higher copper, zinc andmolybdenum prices. Offsetting the stronger revenues were increased costs resulting from theimpact of a weaker U.S. dollar on Canadian and South American operating costs, as well as higherenergy and supply costs.

* *

*Production:*During the fourthquarter of 2005, copper mine production from Canadian and South American operations totaled 108,800 tonnes,compared to 117,500 tonnes a year ago. Lower copper grades at Collahuasi more than offset higher production fromAntamina and Kidd Creek. Refinedcopper production was 120,900 tonnes of copper cathode in the fourth quarter of2005 versus 133,800 tonnes inthe fourth quarter of 2004 as lower production from Kidd Creek more than offset increased production from CCR.Kidd Creek production of refined copper and zinc were impacted by a one-month strike during October2005. By-product zinc-in-concentrate production decreased to 27,600 tonnes from 38,900 tonnes in the fourth quarter of2004 due to lower zinc grades.Mined molybdenum in concentrate at Antamina increased to 800 tonnes from 600tonnes due to improvedrecoveries.

 

NICKEL BUSINESS UNIT

* *

*Revenues:*For the fourth quarter of 2005, consolidatedrevenues of $489 million decreased from $495 million in the fourth quarter of 2004. Sales volumes of refinednickel increased 4% to 20,500tonnes from 19,800 tonnes in the fourth quarter of 2004. At Falcondo,ferronickel sales volumesincreased by 2% to 8,300 tonnes from 8,100 tonnes in the fourth quarter of2004. In the fourth quarter2005, by-product copper sales volumes of 13,700 tonnes increased 9% from12,500 tonnes in the same period a yearago. Cobalt sales volumes decreased by 18% to 900 tonnes. Realized nickel prices of $5.88/lb. decreased by 9% in thequarter, compared with $6.45/lb.in the same period in 2004. Realized ferronickel prices of $5.93/lb. decreasedby 8% in the quarter, comparedwith $6.42/lb. in the same period in 2004. Precious metals revenues increased by $5 million in the fourth quarterof 2005 compared to the same period in 2004.

* *

*Costs:*Total operating expenses increased to $414million from $327 million in the fourth quarter of 2004. Mining, processing and refining costs increased to $235million from $174 million in the sameperiod last year largely due to the exchange rate impact on operating costs atCanadian operations andincreases in energy prices. In addition, 2005 mining, processing and refiningcosts include a full quarter ofcosts from the Montcalm nickel mine. The value of purchased raw materials increased to $131 million from $105million in the fourth quarter of 2004 due to increased sales volumes. The operating cash cost per pound of minednickel for all of Falconbridge (includingINO and Falcondo) was $4.03 in the fourth quarter of 2005, compared with $3.05for the same period in 2004. Theoperating cash cost of producing a pound of nickel from INO mines, was $3.52. The $1.06/lb., or 43%, increasefrom 2004 costs was the result of the impact of the stronger Canadian dollar on operating costsat Canadian operations, higher energy costs, the impact on costs and mine production of the mill conversion at Raglan,and lower ore grades, which offsetthe impact of increased by-product credits due to higher metal prices. AtFalcondo, operating cash costper pound of ferronickel was $4.80 in 2005, compared with $4.17 in 2004. Theincrease in costs was largely due to the increase in the oil price, as averageoil costs rose from $42.34 perbarrel in 2004 to $55.63 per barrel in 2005. Oil is the source of fuel for theelectricity plant operated on site.Fuel oil represented 73% of total operating costs at Falcondo during the fourth quarter of 2005.

 

40

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*Incomegenerated by operating assets:*Fourth quarter income generated by operating assets for the nickel business totaled $75 million, comparedto $168 million in the fourth quarter of 2004. The $93 million decrease was mainly due to the impact of lower nickeland cobalt prices, higher depreciationand amortization charges, largely as a result of the amortization of the fairvalue increment relating to theNoranda/Falconbridge merger, and higher unit costs, caused in part by the stronger Canadian dollar.

* *

*Production:*Total mined nickelproduction was 18,100 tonnes during the quarter versus 21,100 tonnes during the same period in 2004.Sudbury mines production was 3,900 tonnes of nickel and 4,200 tonnes of copper during the fourthquarter of 2005, compared with 5,700 tonnes of nickel and 6,800 tonnes of copper during the same period in 2004. Thereduction in mine output relatesprimarily to lower ore grades and unplanned ore-pass repairs at the ThayerLindsley mine.

 

At Raglan, nickel-in-concentrateproduction in the quarter was 4,600 tonnes and copper production was 1,200tonnes, compared with 6,700 tonnes of nickel and 1,700 tonnes of copperin 2004. Mill output in the quarter wasreduced due to the planned conversion of the mill and lower mine ore grades.

 

At Montcalm, nickelproduction in the quarter was 2,300 tonnes.

 

At the Sudbury smelter,nickel-in-matte production in the fourth quarter of 2005 decreased to 16,100tonnes from 18,100 tonnes in the same period of 2004 as a result of thetreatment of lower concentrate tonnages with lower feed grades. Total refinednickel production was 20,800 tonnes in the fourth quarter of 2005, compared to20,500 tonnes in the same period in 2004.

 

In the fourth quarter of2005, Falcondo produced 7,300 tonnes of nickel in ferronickel, a 2% increasefrom 7,200 tonnes in the fourth quarter of 2004.

 

ZINC BUSINESS UNIT

* *

*Revenues:*Total zinc revenues increased to $155 millionor 30% higher than $119 million recordedduring the fourth quarter of 2004. In the fourth quarter of 2005, sales volumesof zinc in concentratesdecreased 39% to 39,800 tonnes from 64,800 tonnes in the fourth quarter of2004. Fourth quarter 2005 leadmetal sales decreased to 19,500 tonnes from 23,100 tonnes in the same period a year ago, primarily as a resultof lower tonnage processed at the Brunswick lead smelter. The average realized price per pound of zinc during the fourthquarter was $0.80/lb. versus$0.56/lb. in the same period last year. The average realized price per pound oflead during the fourth quarterwas $0.54/lb. versus $0.46/lb. in the same period last year.

* *

*Costs:*Total operating expenses increased to $131million from $114 million in the fourth quarter of 2004. Mining, processing and refining costs decreased to $33 millionfrom $45 million in the sameperiod last year, while the value of purchased raw materials increased to $91million from $60 million in thefourth quarter of 2004. The value of raw materials increased along with therise in zinc and lead prices. Theoperating cash cost per pound of mined zinc increased to $0.48 in the fourth quarter of 2005 from $0.32 for thesame period in 2004 due to higher costs and reduced mine production volumes.

* *

*Incomegenerated by operating assets:*The fourth quarter 2005 income generating from operating assets for the Zinc Business was $24 million,compared to $5 million for the fourth quarter of 2004. The $19-million increase was due to the impact of higher metalprices and decreased depreciationand amortization charges which were partially offset by the impact of lowersales volumes, and anunfavourable impact on costs due to the foreign exchange variance caused by thestrengthening of the Canadian dollar.

* *

*Production:*Contained zincproduction was 59,400 tonnes in the fourth quarter of 2005, compared to 74,900 tonnes in the same periodin 2004. The decrease was due to the closure of the Bell Allard mine in October, 2004 and also attributable to ore-passoperating issues and a rock burstat Brunswick mine.

 

The Brunswick lead smelterprocessed 57,100 tonnes of lead concentrates and secondaries duringthe fourth quarter of 2005, compared to61,700 tonnes during the same period in 2004. Lead metal production was 23,900 tonnes in the fourthquarter of 2005, compared to 25,900 tonnes in the same period in 2004. The decreased feedconsumption and lead metal output at the Brunswick smelter was due to process reliabilityissues, which are currently being addressed.

 

41

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ALUMINUM BUSINESS UNIT

* *

*Revenues:*Aluminum business revenues were $244 million,compared to $257 million recorded duringthe fourth quarter of 2004. Sales volumes of primary aluminum increased to63,200 tonnes, compared to61,700 in the fourth quarter of 2004. The fourth quarter rolled-products salesvolumes increased by 3% to 43,200 tonnes, compared to 42,000 tonnes the sameperiod a year ago primarily dueto manufacturing throughput improvements. The realized mid-west primary aluminum price increased by 6% in the quarterto $0.94/lb., compared with $0.89/lb. in the same period in 2004.

* *

*Costs:*Aluminum business operating expensesdecreased to $223 million from $228 million in the fourth quarter of 2004. Mining, processingand refining costs increased to $162 million from $102 million in the same period last year. Inaddition, 2005 mining, processing and refining costs include a full quarter of costs from Gramercyand St. Ann aluminum operations. Operating costs were impacted by significantly higher natural gas costs at the Gramercyalumina refinery and increasedelectrical energy costs at the New Madrid smelter that came into effect underthe new fifteen-year electricitysupply contract. These rates compare very favourably with electricity costs incurredby other U.S. aluminum producers. The value of purchased raw materialsdecreased to $44 million in thefourth quarter from $116 million in the fourth quarter of 2004.

 

The operating cash cost perpound of primary aluminum metal production was $0.68/lb. in thefourth quarter of 2005, an increase from$0.57/lb. for the same period in 2004. Higher electrical energy and alumina costs were the majorcontributors to the higher unit costs. The cost per pound at the rolled products division was 6% lowerin the fourth quarter of 2005, compared the same period in 2004.

* *

*Incomegenerated by operating assets:*Fourth quarter 2005 income generated by operating for the aluminum business was $21 million, comparedwith $29 million for the fourth quarter of 2004. The $8-million decrease was mainly due to higher power costs as well ashigher natural gas costs. Thesecosts increases were somewhat offset by the benefits of the increased aluminumprice. 

 

*Production:*In the fourth quarterof 2005, primary aluminum production was 62,300 tonnes, unchanged compared to the same period lastyear. For the rolled products operations, shipments were 43,200 tonnes, compared with 42,000tonnes for the fourth quarter of 2004.

** **

**FINANCIAL POSITION AND LIQUIDITY**

 

During 2005, the corporateinitiatives undertaken to simplify the ownership structure of Falconbridgeresulted in a significant repositioning of the Company to enhance liquidity andreduce the cost of capital.

 

On May 4, 2005, the Companycompleted a $1.25-billion issuer bid and acquired for cancellation 63.4 millioncommon shares in exchange for the issue of $1.25 billion of junior preferred sharesat a price of Cdn$19.72 per common share. The junior preferred shares wereissued in these series as follows:

 
| ** ** | ** ** | ** **            | ** ** | **Mandatory**        | ** **    | ** **         | ** ** |
|------------|------------|-----------------------|------------|----------------------|---------------|--------------------|------------|
| ** ** | ** ** | **Principal  Amount** | ** ** | **Redemption  date** | ** **    | **Dividend  rate** | ** ** |
| Series 1   |       | $                     | 500M       |                 | June 30, 2008 |               | 6.0        | % |
| Series 2   |       | $                     | 500M       |                 | June 30, 2010 |               | 6.2        | % |
| Series 3   |       | $                     | 250M       |                 | June 30, 2013 |               | 6.5        | % |
| Total      |       | $                     | 1,250M     |                 |          |               |       |   |

 

The issuer bid representedan opportunity for the Company to acquire 63.4 million commonshares at attractive price levels, andreduced the dilution of common shareholder interest when common shares were subsequently issued toacquire the remaining common shares outstanding of the former Falconbridge.

 

The junior preferred shareswere issued at a time of relative uncertainty regarding theCompany’s ability to complete the acquisitionof the former Falconbridge and therefore have unrestricted access to the cash flow of the combined entity. As such,the junior preferred shares wereissued with the Company retaining the right to redeem these shares at any timefor 101% of fair value; wereissued with an average term to maturity of seven years to provide anopportunity to refinance theseinstruments without placing undue strain on the liquidity of the Company and;the Company retained the rightto repay the junior preferred shares at their maturity in common shares

 

42

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of the Company at the thenprevailing common share price. In the event of a change in control ofthe Company, these instruments areretractable at the option of the holder. These provisions provided the Company with maximumflexibility. As a result of the share attributes, the junior preferred shares were classified as debt instrumentson the balance sheet and dividend payments on these instruments were classified as interest expense.

 

On June 30, 2005, theCompany completed the acquisition of the minority interest inFalconbridge through the two-step transactionand the issuance of 132,840,641 common shares, representing a total acquisition price of $2.5 billion. Theconsolidation of the ownership and simplificationof the capital structure of the combined entity created a financially strongerentity with opportunities tofurther reduce the weighted average cost of capital of the combined entity.

 

Following the successfulcompletion of the merger of Noranda and the former Falconbridge,Falconbridge received affirmation of itsratings from its respective rating agencies in recognition of the combined entities continued strongcash flow, liquidity and the sustained strength of metal prices.

 

The completion of the mergeralso altered the credit risk profile of the combined entity, and theenhancement of the availability of otherlong-term sources of capital as a result of the investment grade ratings caused the Company to redeem$500 million of junior preferred shares for cash in August 2005, from available cash resources.

 

Falconbridge maintainslong-term credit arrangements and relationships with a variety of financialinstitutions and investors inorder to facilitate its ongoing access to domestic and international financial markets to meet its funding needs.Falconbridge’s future financial requirements related to debt maturities, operating costs, theprojects currently under development and other capital investments will be funded primarily from acombination of existing cash balances, committed bank lines, operating cash flows, projectfinancings and new long- and short-term borrowings.

 

Working capital*, excludingcash and cash equivalents, and debt due within a year, decreasedto $1,024 million from $1,119 million at theend of 2004. During the year, Falconbridge continued to improve its balance sheet and operating capacity to supportits strategic objective of maintainingan investment grade credit rating.

 

Cash and cash equivalents atDecember 31, 2005 totaled $886 million, compared to $884million at December 31, 2004. In addition toits cash balances, Falconbridge’s liquidity and financial flexibility is augmented by revolving credit facilities.Committed lines of credit at December31, 2005 totaled $780 million, none of which had been drawn upon. These banklines are provided by variousCanadian and international chartered banks and are scheduled to expire in August2010.

 

Long-term debt, excludingthe amount due in less than one year and junior preferred sharesliabilities, amounted to $2,598 million atDecember 31, 2005, compared to $2,736 million a year earlier. In June 2005, the Company issued $250 million aggregateprincipal amount of 12-yearnotes and $250 million aggregate principal amount of 30-year notes. The 12-yearnotes, which are unsecured, bearinterest at the rate of 5.5% per annum and mature on June 15, 2017. The 30-year notes, which are also unsecured,bear interest at the rate of 6.2% per annum and mature on June 15, 2035. Both series of notes are redeemable in whole,or in part, at any time, at aredemption price equal to 100% of their principal amount plus a make-wholepremium. At December 31, 2005, Falconbridge’s consolidatednet-debt-to-total-capitalization ratio was 36.7%, compared to 38.7% at December 31, 2004,following the repayment of in excess of $1 billion in debt during 2005.

 

Shareholders’ equity at theend of 2005 was $5 billion, an increase of $2.2 billion due to theissue of common shares to acquire theminority interest of Falconbridge, retained earnings in excess of dividends paid, offset by thereduction in common equity as a result of the substantial issuer bid completed in May 2005.

 

Falconbridge’s long-termpublic debt ratings at December 31 are noted below:

 
| ** **                     | ** ** | **2005** | ** ** | **2004** | ** ** |
|--------------------------------|------------|----------|------------|----------|------------|
| Standard & Poor’s     | ** ** | **BBB**  | –     | BBB      |       |
| Moody’s                   | ** ** | **Baa3** |       | Baa3     |       |
| Dominion Bond Rating  Services | ** ** | **BBB**  |       | BBB      |       |

 

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Note: A security rating isnot a recommendation to buy, sell or hold securities, and may be subject torevision or withdrawal at any time by a rating organization.

 

*Defined as current assets,less current liabilities on the consolidated balance sheets.

 

43

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CASH FLOWS

* *

*OperatingActivities*

 

Cash generated fromoperations, before net changes in non-cash working capital, totaled $1,650million in 2005, up from $1,461million in 2004. The increase is primarily the result of the higher sales volumes, and higher metal pricesdespite the adverse impact of increasing energy and supply costs and foreign exchange movementson the mining, processing and refining costs. Higher accounts receivable and inventories resultingfrom higher metal prices were mostly offset by higher accounts and taxes payable as non-cashworking capital increased by $15 million during the year.

* *

*InvestmentActivities*

 

Capital investments totaled$737 million in 2005, compared to $666 million in 2004. Majorcapital expenditures during 2005 included theexpansion and transfer of the mining operations at the Collahuasi copper mine, the Kidd CreekMine D underground extension, the Montcalm nickel mine, the Nickel Rim South undergroundexploration project (initiated in early 2005) and $100 million for equipment and services relatingto the Koniambo project. Capital investments for 2006 are budgeted to be $750 million. A moredetailed discussion is provided on page 47. During 2006, proceeds from dispositions totaled $93million mostly from the sale of the Company’s wholly-owned wheel manufacturer and from the sale of cost-accountedinvestments.

* *

*FinancingActivities*

 

In 2005, Falconbridge used$843 million to reduce its net debt outstanding (repaid $1,394million of debt while issuing $551 million).This does not include the junior preferred share transaction as this did not involve the receipt of any cash by theCompany. During 2005, Falconbridge’scommon and preferred share dividend payments were $150 million, compared to $123million in 2004. Total dividend obligations increased due to the increase inthe total common shareoutstanding that resulted from the acquisition of the minority interest informer Falconbridge that theCompany did not already own. The annual common share dividend was Cdn$0.48 per share in 2005, which remainedunchanged from 2004.

 

Significant futureobligations of Falconbridge and its partially-owned subsidiaries, excluding theemployee future benefit obligations, are summarized as follows:

 
| **($ millions)**                    | ** ** | **Payments  by year** | ** ** |
|------------------------------------------|------------|-----------------------|------------|
| **Nature  of obligation:**               | ** ** | **2006**              | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** | **Thereafter** | ** ** | **Total** | ** ** |
| Convertible debentures and other loans   |       | $                     | 15         |   | $ | 120 |   | $ | 23 |   | $ | — |   | $ | 5 |   | $ | — |   | $ | 163 |   |
| Senior debentures                        |       | 250                   |       | — |   | 150 |   | — |   | — |   | 1,943 |   | 2,343 |   |
| Preferred share liabilities(1)           |       | —                |       | — |   | 126 |   | — |   | 300 |   | 450 |   | 876 |   |
|                                     |       | 265                   |       | 120 |   | 299 |   | — |   | 305 |   | 2,393 |   | 3,382 |   |
| Debt of joint ventures                   |       | 87                    |       | 87 |   | 87 |   | 87 |   | 40 |   | 42 |   | 430 |   |
| Capital leases                           |       | 1                     |       | 5 |   | 1 |   | 1 |   | 1 |   | 7 |   | 16 |   |
| Operating leases and purchase commitment |       | 172                   |       | 18 |   | 13 |   | 9 |   | 8 |   | 21 |   | 241 |   |
| Total                                    |       | 525                   |       | 230 |   | 400 |   | 97 |   | 354 |   | 2,463 |   | 4,069 |   |
|                                          |            |                       |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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(1)   May be redeemed for commonshares

 

**CAPITAL EXPENDITURES, CAPACITY ENHANCEMENTS ANDPROJECTS UNDER DEVELOPMENT**

 

Falconbridge has investedsignificant capital in the expansion of its operating capacity with theaddition of world-class, low-cost assets andthe improvement of existing operations. The Company increased its copper and nickel ore reserves,enhanced its copper and nickel processing capacity, added new zinc projects, expanded its primaryand fabricated production capacity and acquired bauxite mining and alumina refining assets to fully integrate itsaluminum operations. These investmentshave substantially increased the Company’s baseline earnings and its leverageto metal prices. The followingis a summary of these initiatives and their impact on Falconbridge.

 

Investments in developmentprojects at the end of the year totaled $1,707 million, an increaseof $541 million since December 31, 2004.Nickel and copper mining remains the focus of the Company’s growth program. As shown in thefollowing table, Falconbridge has expansion projects in both these commodities that are currentlyunder development.

 

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PROJECTS UNDER DEVELOPMENT –CAPITAL SPENDING 2005

 
| ** **           | ** ** | **Falconbridge**            | ** ** | **Book Value at**     | ** ** | **Book Value at**     | ** ** |
|----------------------|------------|-----------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **           | ** ** | **Limited’s Interest** | ** ** | **Dec. 31, 2004**     | ** ** | **Dec. 31, 2005**     | ** ** |
| ** **           | ** ** | **(%)**                     | ** ** | **($ millions)** | ** ** | **($ millions)** | ** ** |
| Copper               |       |                        |       |                  |       |                  |       |
| El Morro Feasibility |       | 70.0                        |       | $                     | 12         | ** **            | **$**      | **16** | ** ** |
| Kidd Creek Mine      |       |                        |       |                  |       |                  |       |
| Extension            |       | 100.0                       |       | 404                   | ** ** | **518**               | ** ** |
|                 |       |                        |       |                  |       |                  |       |
| Nickel               |       |                        |       |                  |       |                  |       |
| Koniambo             |       | 49.0                        |       | 180                   | ** ** | **276**               | ** ** |
| Nickel Rim South     |       | 100.0                       |       | 101                   | ** ** | **173**               | ** ** |
| Kabanga              |       | 50.0                        |       | —                | ** ** | **34**                | ** ** |
| Other                |       |                        | ** ** | 469                   | ** ** | **690**               | ** ** |
| Total                |       |                        | ** ** | $                     | 1,166      | ** **            | **$**      | **1,707** | ** ** |

 

PROJECTS UNDER DEVELOPMENT –2005

 

Expectations with respect todevelopment projects are subject to various risks and assumptions. See “Forward-lookingInformation” on page 63.

 

EL MORRO, REGION III, CHILE

 

Favourably situated close totwo copper smelters, the deposit is a large copper porphyry with highgold co-product credits that would result inlow net copper cash costs. It has inferred resources of 466 million tonnes grading 0.61% copper and0.50 gram of gold per tonne. El Morro also features a high-grade resource core and a low pre-strippingratio, as well as further exploration potential. In 2005, Falconbridge paid $10 million to earn a70% interest in the El Morro property from Metallica Resources Inc. In 2006, Falconbridge expects to beginfeasibility-level work, including a 30,000 metre drilling program for in-fill drilling and metallurgicaltest work.

 

EL PACHÓN, ARGENTINA

 

El Pachón is an attractivecopper mine development project situated less than five kilometres fromthe Chilean border and the Las Pelambrescopper mine. It features a high-grade core, unusually low strip ratio and favourable metallurgicalrecoveries which will substantially reduce mining and capital costs. The orebody has the potentialto produce over 200,000 tonnes of copper in concentrate per year over a life of more than 20 years. During 2005, aconceptual study of the ElPachón project was completed. Two bulk samples were extracted from an existingexploration tunnel andprocessed, engineering studies were completed and environmental information wascompiled to add to the environmental base line. In addition, important advanceswere realized on El Pachón’sspecific protocol within the Mining Integration Treaty between Chile andArgentina. In 2006, work isexpected to progress in road re-opening, field studies, engineering studies andenvironmental data collection.

 

KIDD CREEK, TIMMINS, CANADA

 

Kidd Creek mining operationsare transitioning to the newly developed Mine D, which is improvingoperational stability and predictability, andshould lead to improved financial performance. A new target schedule and budget were finalized andapproved in mid-2005, becoming the project baseline. Production from block 2 began in the fourth quarter of 2005and production from block 3 isnow expected to begin in the third quarter of 2006. The capital investment isnow expected to total Cdn$684million. The capital expenditures associated with this project increasedfollowing the approval of a newtarget schedule and budget that became the project baseline in April 2005, as wellas escalation associated with delineation drilling that will take place in2006. At the end of 2005,overall project progress was 90% based on this new target schedule and budget.

 

45

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KONIAMBO, NEW CALEDONIA

 

Good progress was madeduring 2005 in advancing Falconbridge’s objectives with respect to theKoniambo ferronickel project in the NorthernProvince of New Caledonia. Final agreements were put in place by and among Falconbridge, *Société Minière du Sud Pacifique S.A.*(SMSP),and other relevant parties toprovide for the transfer of the Koniambo orebody in New Caledonia to Koniambo NickelSAS, a company owned 49% by Falconbridge and 51% by SMSP. Falconbridge hadannounced in late December 2005 that ithad met the relevant conditions of the Bercy Accord for this transfer to take place, including havingplaced firm orders for at least $100 million in total for equipment and services relating to theproject.

 

It is currently planned thatthe Koniambo project will encompass the construction of a 60,000-tonne-per-yearferronickel processing plant and related development of the mine site andinfrastructure. A detailedfeasibility study was completed in December 2004. The feasibility study was subject to two independent reviews in2005, by two international engineering firms and feedback from both reviews has been positive.

 

The capital cost of theproject is estimated to be $2.2 billion in 2004 dollars excluding interestto be incurred duringconstruction and initial working capital requirements. The capital cost of $2.2billion includes the construction of a $600-million power station with aninstalled generating capacity of390 MW. The remaining $1.6 billion relates to the metallurgical plant, minedevelopment, and other infrastructuresuch as the port and road facilities.

 

Detailed engineering for theproject continues in 2006. Falconbridge expects to receive thenecessary construction and operating permitsin 2006, enabling the construction phase to commence in 2007. Based on these key milestones being met as currentlyplanned, start-up of the projectis expected to occur in 2009/2010.

 

Falconbridge has, subject tocertain terms and conditions, agreed to arrange for or provide upto 100% of the financing required for theproject. Given these financing arrangements, the project’s free cash flow would first be used to service and repay debtincurred to finance the constructionof the project before any distributions would be available to the equity ownersin the project.

 

Koniambo is one of the world’slargest and highest grade nickel laterite deposits. At a 2.0%nickel cut-off grade, the deposit containsmeasured plus indicated resources of 75.6 million tonnes at 2.47% nickel. These resources wereconverted to proven and probable mineral reserves of 62.5 million tonnes grading 2.4% nickel.In addition, the project has an inferred limonite resource estimated at 100 million tonnes at1.6% nickel and 0.2% cobalt that could be developed at a later date.

 

In 1998, Falconbridgeentered into a joint-venture agreement with *SociétéMinière du Sud**Pacifique S.A.*(SMSP) and its controlling shareholder, *Société de Financement et d’Investissement**de la Province Nord*, for the evaluation and development of the60,000-tonne-per-year nickel in ferronickelmining and smelting complex.

 

When developed, Koniambowill be one of the largest nickel producers in the world with initialproduction of 60,000 tonnes per year. Inaddition, future expansion could take advantage of the large resource base, which has an estimatedlife in excess of 50 years.

 

NICKEL RIM SOUTH, SUDBURY,CANADA

 

In 2001, Falconbridgediscovered Nickel Rim South – a high grade 13.4-million tonne resourcegrading 1.8% nickel, 3.3% copper andsignificant platinum, palladium and gold. A five-year underground definition and developmentprogram was initiated in 2004 at this deposit, located nine kilometres from Falconbridge’s Sudburysmelter, and progressed in 2005. Ventilation shaft sinking began in February, 2005 and was 1,092 metresat the end of 2005. Main shaft sinking began in April 2005 and was at 467 metres at the end of 2005. The mine plan wasoptimized in 2005 to includeadditional information from the ongoing drilling program. The capital cost ofthis project is $524 million,reflecting an increase of $100 million in foreign exchange and escalationvariations. This project isexpected to be completed in 2009, with production expected to begin in 2009.

 

KABANGA, TANZANIA

 

In April 2005, Falconbridgeannounced a joint-venture agreement with Barrick Gold Corporation onthe Kabanga nickel deposit, located innorthwestern Tanzania. Barrick’s current estimated inferred resource is 26.4 million tonnes grading 2.6%nickel. Under the terms of the agreement,

 

46

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Falconbridge acquired a 50%indirect joint-venture interest in respect of the Kabanga Project for$15 million and will be the operator of thejoint venture. Over the next several years, Falconbridge will fund and conduct a further $50-millionwork plan. Current work, including exploration and infill diamond drilling, metallurgicaltesting and engineering study work will lead to the completion of a scoping study in the first quarter of2006.

 

CAPACITY ENHANCEMENTS – 2005

 

COLLAHUASI, CHILE

 

Construction of a$36-million molybdenum recovery circuit was completed in the fourth quarter of2005, ahead of schedule andunder budget. In 2006, production of molybdenum in concentrate is expected to be approximately 3,800 tonnes.Production will increase over time as a result of the increase in molybdenum grades at depth in theRosario orebody.

 

LOMAS BAYAS, CHILE

 

The Fortuna de Cobredeposit, adjacent to the Lomas Bayas mine, could expand production orextend the mine life at Lomas Bayas by fiveyears to 2020. A pre-feasibility study was initiated during the year and development of anexploration tunnel began in March 2005. Construction of the pilot plant was completed in August 2005.The metallurgical test program was initiated in the last quarter of 2005. Fortuna de Cobre is anattractive growth opportunity because of its low stripping ratio, proximity to existing infrastructure and favourablemineralogy and leaching kinetics. Falconbridgehas the option to purchase Fortuna de Cobre by mid-2006.

 

RAGLAN, NUNAVIK TERRITORY,CANADA

 

The conversion of the millfrom autogenous to semi-autogenous grinding was completed in October2005. This conversion will increase the levelof annual throughput to approximately one million tonnes of ore per year and increase the mill’sability to process harder ore. This project was completed on schedule and on budget with total project investment ofCdn$33 million. The next phasewill focus on utilizing increased mill capacity by expanding siteinfrastructure and ore productionto allow for the mining, milling and processing of 1.3 million tonnes of oreannually, resulting inapproximately 30,500 tonnes of annual contained nickel production. Phase II is expectedto be completed in early 2008.

 

PLANNED CAPITAL INVESTMENTS –2006

 

Capital investments for 2006are expected to total $750 million as the development of theNickel Rim South and Koniambo projectsadvance towards operating status. Sustaining capital expenditures average approximately $250million annually. All of the currently projected capital investments can be funded from the currentcapital structure. Falconbridge’s capital investment projections and its major components areshown in the following table.

 
| **($ millions)**         | ** ** | ** **                                                            | ** ** | **Capital  investments** | ** ** |
|-------------------------------|------------|-----------------------------------------------------------------------|------------|--------------------------|------------|
| **Metal**                     | ** ** | **Growth project**                                                    | ** ** | **2005**                 | ** ** | **2006F** | ** ** |
| Copper                        |       | Copper  development projects  (El Morro, El Pachón, Lomas Bayas) | ** ** | **$**                    | **4**      |   | $ | 50 |   |
|                          |       | Kidd Creek Mine Extension                                             | ** ** | **114**                  |       | 90 |   |
|                          |       |                                                                  |       |                     |       |   |   |
| Nickel                        |       | Koniambo                                                              | ** ** | **96**                   |       | 180 |   |
|                          |       | Nickel Rim South                                                      | ** ** | **74**                   |       | 85 |   |
|                          |       | Nickel  development projects  (Kabanga, Raglan)                       | ** ** | **61**                   |       | 30 |   |
| Sustaining capital and  other | ** ** | ** **                                                            |       | **388**                  |       | 315 |   |
| Total Capital Investments     | ** ** | ** **                                                            |       | **$**                    | **737**    |   | $ | 750 |   |

 

----

F: Forecast

 

Statements regarding plannedcapital investments are subject to various risks and assumptions. See “Forward-lookingInformation” on page 63.

 

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CAPACITY ENHANCEMENTS ANDPROJECTS UNDER DEVELOPMENT – 2006

 

BROWNFIELD OPPORTUNITIES

 

Brownfield development sites represent expansions to existingoperations which have a reduced risk profile due to their proximity to existinginfrastructure and known geological composition. These developments alsousually require less capital than new operating environments and remain a key focus for near-term investment,including:

 
| Copper                                   |   |                                                                                                                                                                                                                                                                                                                               |
|------------------------------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                     |   |                                                                                                                                                                                                                                                                                                                               |
| *Collahuasi mine, Chile*                 |   | Debottlenecking project to  increase nominal design capacity of the sulphide circuit is currently  underway.                                                                                                                                                                                                                       |
|                                     |   |                                                                                                                                                                                                                                                                                                                               |
|                                     |   | Studying Phase 3 production  capacity expansion. Expect to complete study on approach to be followed by  end of 2006.                                                                                                                                                                                                              |
|                                     |   |                                                                                                                                                                                                                                                                                                                               |
| *Lomas Bayas mine, Chile*                |   | Studying adjacent Fortuna  de Cobre deposit to expand production or extend mine life by five years to  2020.                                                                                                                                                                                                                       |
|                                     |   |                                                                                                                                                                                                                                                                                                                               |
| *Antamina mine, Peru*                    |   | Reviewing installation of  pebble crusher circuit and other means of increasing overall throughput.                                                                                                                                                                                                                                |
|                                     |   |                                                                                                                                                                                                                                                                                                                               |
| *CCR refinery, Quebec, Canada*           |   | Refinery expansion to  increase capacity to refine anodes that are higher in nickel. The expansion  will allow the refinery to achieve full capacity of 370,000 tonnes of refined  copper per year.                                                                                                                                |
|                                     |   |                                                                                                                                                                                                                                                                                                                               |
| *Kidd Creek mine, Timmins, Canada*       |   | Transitioning to newly  developed Mine D, improving operational stability and predictability;  provides access to additional 11.9 million tonnes of inferred reserves with  2.7% copper and 4.8% zinc.                                                                                                                             |
|                                     |   |                                                                                                                                                                                                                                                                                                                               |
| Nickel                                   |   |                                                                                                                                                                                                                                                                                                                               |
|                                     |   |                                                                                                                                                                                                                                                                                                                               |
| *Nickel Rim South mine, Sudbury, Canada* |   | A five-year underground  definition and development program was initiated in 2004 and is ongoing. It  is a high-grade 13.4-million tonne resource grading 1.8% nickel, 3.3% copper  and significant platinum, palladium and gold.                                                                                                  |
|                                     |   |                                                                                                                                                                                                                                                                                                                               |
| *Raglan mine, Nunavik Territory, Canada* |   | Focused on utilizing  increased mill capacity by expanding site infrastructure and ore production  to allow for the mining, milling and processing of 1.3 million tonnes of ore  annually, resulting in approximately 30,500 tonnes of annual contained nickel  production. Expected completion is early 2008.                     |
|                                     |   |                                                                                                                                                                                                                                                                                                                               |
| *Fraser Morgan mine, Sudbury, Canada*    |   | Exploration development has  been extended and another phase of underground exploration drilling has been  initiated in 2006. Fraser Morgan contains 4.9 million tonnes of measured and  indicated resources plus 2.4 million tonnes of inferred resources.                                                                        |
|                                     |   |                                                                                                                                                                                                                                                                                                                               |
| *Onaping Depth deposit, Sudbury, Canada* |   | Contains 14.6 million  tonnes of high-grade indicated resources and inferred resources of 1.2  million tonnes, which is located below the Craig Mine, and could be  accessible using Craig Mine infrastructure by deepening the existing shaft.  Continuing research on enabling technologies to mine safely at greater  depths.   |
|                                     |   |                                                                                                                                                                                                                                                                                                                               |
| *Montcalm mine, Timmins, Canada*         |   | Evaluating the possibility  of increasing the annual mining rate from 875,000 tonnes to one million  tonnes per year.                                                                                                                                                                                                              |
|                                     |   |                                                                                                                                                                                                                                                                                                                               |
| Zinc                                     |   |                                                                                                                                                                                                                                                                                                                               |
|                                     |   |                                                                                                                                                                                                                                                                                                                               |
| *Lennard Shelf mine, Australia*          |   | The mining operations are  presently under care and maintenance and the partners are conducting a  long-term exploration program. The partners are continuing to apply a  disciplined approach to bringing this operation back on line. Measured and  indicated resources of 2.8 million tonnes grading 8.47% zinc and 1.96% lead. |
|                                     |   |                                                                                                                                                                                                                                                                                                                               |
| *Perseverance deposit, Matagami, Canada* |   | Evaluating options and  timing to develop this Matagami camp deposit. Measured and indicated  resources of 5.12 million tonnes grading 15.82% zinc and 1.24% copper; could  utilize existing mill and concentrator infrastructure.                                                                                                 |

 

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GREENFIELD OPPORTUNITIES

 

Greenfield opportunities, orthose potential projects which are located in regions whereFalconbridge does not currently operate,represent significant growth potential to Falconbridge. Projects currently being reviewed fordevelopment are as follows:

 
| Copper                      |   |                                                                                                                                                                                                                                                                                                                                                                                                                              |
|-----------------------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                        |   |                                                                                                                                                                                                                                                                                                                                                                                                                              |
| *El Pachón, Argentina* |   | A very large and promising  deposit with measured and indicated resources of 724 million tonnes grading  0.65% copper; capable of producing over 200,000 tonnes per year for more than  20 years.                                                                                                                                                                                                                                 |
|                        |   |                                                                                                                                                                                                                                                                                                                                                                                                                              |
| *El Morro, Chile*           |   | A porphyry copper deposit  with inferred resources of 466 million tonnes grading 0.61% copper and 0.50  grams per tonne gold. Feasibility work beginning in 2006.                                                                                                                                                                                                                                                                 |
|                        |   |                                                                                                                                                                                                                                                                                                                                                                                                                              |
| Nickel                      |   |                                                                                                                                                                                                                                                                                                                                                                                                                              |
|                        |   |                                                                                                                                                                                                                                                                                                                                                                                                                              |
| *Koniambo,   New Caledonia* |   | Potential for a  60,000-tonnes per year operation; detailed engineering plans being advanced  in 2006 with the start of construction expected in 2007. Proven and probable  mineral reserves are 62.5 million tonnes grading 2.40% nickel.                                                                                                                                                                                        |
|                        |   |                                                                                                                                                                                                                                                                                                                                                                                                                              |
| *Kabanga, Tanzania*         |   | This is a joint-venture  agreement project with Barrick Gold Corporation on the Kabanga nickel  deposit, located in northwestern Tanzania. The current estimated inferred  resource is 26.4 million tonnes grading 2.6% nickel. Current work, including  exploration and infill diamond drilling, metallurgical testing and  engineering study work will lead to the completion of a scoping study in the  first quarter of 2006. |
|                        |   |                                                                                                                                                                                                                                                                                                                                                                                                                              |
| Zinc                        |   |                                                                                                                                                                                                                                                                                                                                                                                                                              |
|                        |   |                                                                                                                                                                                                                                                                                                                                                                                                                              |
| *Lady Loretta, Australia*   |   | Falconbridge owns a 75%  joint-venture interest in the Lady Loretta deposit, located close to the Mt.  Isa, Queensland camp. The orebody has measured and indicated resources of  11.6 million tonnes grading 16.1% zinc and 5.7% lead. Work undertaken to date  indicates possible estimated production of more than 125,000 tonnes of zinc  in concentrate and 40,000 tonnes of lead in concentrate over more than ten  years.  |

 

Expectations with respect to development projectsare subject to various risks and assumptions. See “Forward-looking Information”on page 63.

 

**RISK ASSESSMENT AND REDUCTION IN THE EVALUATION, SELECTIONAND IMPLEMENTATION OF PROJECTS**

 

Falconbridge’s preference for lower-risk brownfield expansion projectsprovides inherent riskreductiondue to the Company’s knowledge of the environment in which the expansionproject is to be undertaken and its ability to tap into existing human andphysical resources. When Falconbridge chooses to invest and grow via the development of greenfield projects,away from existing infrastructure,risk assessment and reduction is the Company’s top priority.

 

Falconbridgehas taken several steps to ensure the success of all its current and futurecapitalprojects includingthe following:

 

•      Formation of highly experienced projects group with world-class projectleaders dedicated to securing theinvestment performance of major capital projects;

•      Implementation of Six Sigma-based Stage Gate process for projectevaluation. This process is adisciplined system which addresses and quantifies key sources of project impactand risk in support of managementdecision making;

•      Addition of parameters in the Stage Gate process that measure social,business and strategic elements;

•      Recognition of investment returns as the primary measure of projectsuccess; and

•      Assignment of accountability.

 

SIX SIGMA

 

Since significant deploymentin 1999 and company-wide adoption in 2002, application of Six Sigmahas contributed to improving performance atFalconbridge. Six Sigma is a process-centered, step-by-step analytical approach to reviewing operationalperformance and driving continuous improvement. During 2005, 154 Six Sigma projects were completed for total annualizedbenefit of $60 million at an average savings value of $390,000 per project.

 

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**EXPLORATION**

 

The objectives of the exploration team are aligned with those of thecopper, nickel and zincbusinessunits and with the corporate strategy of focusing primarily on copper andnickel growth opportunities,worldwide. The company’s goal is to be the most valued and sought after partnerin the mining and metalsbusiness. The Company’s approach is one of consistently being a fair and honestpartner, complemented by strong technical skills and a solid track record witha “win-win” philosophy.Joint-venture arrangements are pursued with both junior and senior miningcompanies to increase the levelof focused exploration activity thereby sharing cost and risk, and improvingthe likelihood of success. Theexploration team is supported by an experienced mergers and acquisitions team and a strong projectengineering team with a track record of building mines around the world.

 

Asa Founding Patron of the Association of Professional Geoscientists of Ontarioand a FoundingPartner ofthe Prospector and Developers Association of Canada’s Environmental Excellencein Exploration initiative, the teamof geoscientists is committed to being fully compliant with National Instrument43-101 requirements and in consistently conducting safe and environmentallyresponsible global exploration.

 

Theexploration team consists of 119 employees, including 92 geologists andgeophysicists. For2006,Falconbridge forecasts exploration expenditures of $49 million, compared toexpenditures of $47 million in2005. Exploration activity is primarily focused on Canada, Chile, Brazil,Mexico, Norway, Australia,Africa, Papua New Guinea, China and Mongolia.

 

EXPLORATION HIGHLIGHTS – 2005

 

COPPER

 

•      In October 2005, Falconbridge announced a preliminary resourceestimate for the Rosario Oestezone at Collahuasi. The zone, located only 300 metres from the Rosario openpit, is estimated to contain aninferred resource of 248 million tonnes grading 1.54% copper at a 0.4% cut-offgrade. The resource remains open to the north, south, and at depth, and theseearly stage results suggest that RosarioOeste has the potential to expand the existing reserve base and extend the life of the currentoperation.

•      The Frieda River project in Papua New Guinea contains a primary porphyrycopper inferred mineral resourceplus higher grade copper-gold mineralization in the Nena deposit. Recent drilling at the Nena deposit firmed up a measured and indicated mineral resourceof 42.7 million tonnes of 3.09% copper and 0.59 grams of gold. Exploration ofother high-grade targets areexpected to be pursued in 2006.

 

NICKEL

 

•      A new nickel laterite deposit has been discovered in Para State, Brazil.A mineral resource estimate willbe completed in 2006. The thickness of mineralization intersected to dateranges from 2.0 to 93 metres andaverages 15.3 metres with a nickel content ranging from 1.0 to 3.2%.

•      The 2005 Raglan, Quebec program returned the best exploration resultssince the mine commencedproduction, with 2.5 million tonnes of new resources (mostly inferredresources) discovered, exceeding2005 production of 934,000 tonnes.

•      In Norway, a nickel joint-venture exploration program with BlackstoneVentures Inc. continues toproduce promising results in four separate areas (as an example, 7.2 metres of1.05% nickel, 0.46% copper atVesle). The joint venture has been expanded to include five new prospectiveareas in South Norway. Geological/geophysical surveys and diamond drilling willcontinue in 2006.

 

ZINC

 

•      New zinc mineralization has been discovered at the Pallas Green projectin Ireland where the best intersection todate has been 9.2% zinc over 10.5 metres. Additional diamond drilling willbe required to determine thesignificance of this mineralization.

 

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EXPLORATION OBJECTIVES – 2006

 

Expectations with respect toexploration objectives are subject to various risks and assumptions. See “Forward-lookingInformation” on page 63.

 

COPPER

 

•      Chile – establish an indicated/measured mineral resource at the El Morroproject in support of a feasibility study.

•      Chile – establish an indicated mineral resource at the recentlydiscovered Rosario Oeste zone at Collahuasi in support of a feasibility study.

•      Papua New Guinea – explore the remaining targets for high-grademineralization and implement metallurgical test work on the higher grade Nenamineral resource in support of a scoping study.

 

NICKEL

 

•      Canada – establish an indicated mineral resource at Zone 5-8 in supportof a feasibility study at Raglan, Quebec.

•      Brazil – establish an indicated/inferred mineral resource at theAraguaia laterite discovery by the second quarter 2006 in support of a scopingstudy.

•      Africa – define and expand the North Zone massive sulphides at Kabangain Tanzania and test additional priority targets within a radius of fivekilometres in support of a pre-feasibility study.

•      Norway – continue geophysical surveys and diamond drilling toinvestigate encouraging mineralization at two joint-venture projects.

 

ZINC

 

•      Ireland – assess the significance of recently discovered zincmineralization at the Pallas Green project.

 

**METALS MARKETS**

 

Current global economicgrowth conditions and prospects remain above trend levels despitehurricanes and high oil prices. Global GDP isexpected to grow by over 4% for both 2005 and 2006. Global growth for 2004 to 2006 inclusive, is shaping up to highaverage levels not experiencedsince the 1976 to 1978 period.

 

The resilience of the U.S. economy, a sustainedrecovery in Japan and a strong Chinese economy, showing no signs of waning, areall reasons to be positive on both global economic prospects and the expectedincrease in base metals demand.

 

On the supply side, capacity constraints, lowinventory levels, higher energy costs, the likelihood of production disruptionsand a shortage of mining materials and labour will continue to be marketsupportive. Despite the notion that high prices should spur investmentactivity, the supply response has been muted and there is little sign of anoutput surge or even large amounts of new capacity coming on stream.

 

Another positive factor, which cannot be underestimated,is that investment funds are viewing base metals favourably, and expect themarket to be stronger for longer. For 2006, strong fundamentals underlyingsupport for above-average base metals prices are forecast.

 

Expectations and outlooks with respect to metalmarket projections are subject to various risks and assumptions. See “Forward-lookingInformation” on page 63.

 

COPPER MARKET

 

The expected increase inglobal mine production in 2005 was hampered by a combination of plantequipment failures, labour disputes andnatural disasters. Copper mine production continued to grow as high prices have encouraged allproducers to maximize output. In 2005, global mine production is expected to be just over 15.3million tonnes of contained copper. Mine output growth continues to be driven by restarts and ongoing brownfieldexpansions triggered in late 2004 andearly 2005.

 

Therecovery in mine-concentrate output has allowed smelters to rebuild their depleted concentrate stocks and increase operating rates. Despite a number ofmaintenance shutdowns and productiondisruptions, smelter production increased 6.8% in 2005. The area of most rapidgrowth in smelter capacity andoutput has been China and as its copper smelting and refining capacity

 

51

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grows, its copper concentrateimport requirements will also grow rapidly to fill the shortfall in domesticmine production growth.

 

On the metal side, 2005 marks the third consecutiveyear of a global refined copper market deficit. LME stocks increased by only43,675 tonnes to 92,225 tonnes at the end of 2005 from 48,550 tonnes at yearend 2004. Historically high copper prices and sustained low copper exchangeinventories likely resulted in a significant de-stocking of refined metalinventories held by producers and consumers. A first-time auctioning of copperby the Chinese SRB in November and December (20,000 tonnes each),combined with deliveries made to exchange warehouses, failed to put significantdownward pressure on the copper price. The copper price averaged $1.67/lb. in2005, $0.37/lb. greater than the 2004 average of $1.30/lb. Robust fundamentalsand favourable fund buying in 2005, propelled the copper price to a high of$2.11/lb. in December.

 

Looking at mine supply, despite theless-than-expected mine output growth in 2005, the concentrate market recoveredfrom critically low levels as mine production expanded. For 2006, theconcentrate market is forecast to be in surplus, as higher mine production isexpected and smelter capacity should remain somewhat constrained. It istherefore expected that treatment and refining charges should remain abovelong-term benchmark averages. Declining ore grades, high-energy costs andequipment shortages should continue to act as constraints and put upwardpressure on the cash costs.

 

In 2006, global refined copper production isforecast to be in surplus for the first time in three years. Global copperconsumption growth is forecast to decline to 3.6% from 4.7% in 2005, mainlyreflecting moderating growth in both China and the U.S. The forecast surplus of 419,000 tonnes of refined metal pales in comparison tothe cumulative deficit of 1.4 million tonnes experienced over the past three years. This cumulative deficitcontributed to the dramatic reductionin exchange inventories witnessed over those years. Until exchange inventoriesbegin rebuilding and maintainingmore normal levels, higher copper prices should continue to prevail.

 

NICKEL MARKET

 

The strong demand conditionsexperienced in the first half of 2005 quickly turned around in thethird quarter as stainless steel millsinitiated a period of heavy de-stocking for the balance of the year. Nickel prices averaged $7.20/lb. in thefirst half of the year, but with prolonged shutdowns and cutbacks at the stainless steel mills,nickel prices entered a temporary period of decline averaging $6.17/lb. during the second half.For the year, nickel prices averaged $6.69/lb., a 7% increase over the 2004 average. With nickelproducers operating at close to capacity in the first half of the year, surging demand had to be metfrom LME inventories, which declined from 20,898 tonnes at the start of the year to a low of 4,926 tonnes bymid-May. The fall-off in demandfrom the stainless steel sector in the latter part of 2005, resulted inLME stocks creeping back up to end the year at 36,042 tonnes.

 

While demand for nickel was strong overall in thefirst half of the year, an imbalance developed in stainless steel supply/demandfundamentals by mid-year leading to rising stock levels, declining prices andreduced margins for the mills, precipitating numerous stainless steelproduction cuts. With the ramp-up of significant new Chinese stainless steelcapacity, this curtailed the need for stainless steel imports from Westernproducers. The net effect was reduced primary nickel consumption and increasedstainless steel scrap availability. Consequently, global stainless steelproduction estimates for 2005 were at the same level as 2004. In addition, thetrend towards substitution out of nickel bearing stainless steel gradescontinued during 2005, as sustained high nickel prices have driven stainlesssteel mills to switch to greater production of non- or lower nickel bearinggrades of stainless steel.

 

Other nickel consuming sectors are estimated to havegrown by 6%, supported by strong high nickel alloy and battery demand. Robustdemand is being seen from all end-use sectors across all geographical regions.

 

As a result of nickel producers pushing theirutilization rates, increased production glitches and maintenance outages wereexperienced in 2005. World nickel production is forecast to have increased byonly 1.2% over 2004 given that producers were running near full capacityleaving little room to raise output. Overall, a 15,000 tonne supply/demandsurplus was forecast for 2005.

 

Based on technical analysis, the stainless steelmarket is anticipated to rebound sometime during the first half of 2006, inline with the accelerating momentum of the industrial production cycle. With arebound in stainless steel production and continued healthy non-stainlessdemand, total nickel consumption is expected to grow by over 7% and totalglobal nickel supply is forecast to increase by 6% with a projected balanced market for the year.

 

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Forthe remainder of this decade, it is expected that the nickel market willcontinue to benefitfromconstrained supply, strong demand driven by Chinese stainless steel plantexpansions, and limited majorgreenfield nickel projects coming on stream.

 

ZINC MARKET

 

LME zinc prices started 2005at $0.55/lb., then fluctuated between $0.53/lb. and $0.65/lb. formost of the year before rising strongly in thefourth quarter to a high of $0.87/lb. on the final day of the year. The LME cash-settlement zincprice averaged $0.63/lb. in 2005, 31% higher than the average of $0.48/lb. in 2004. Pricesgained strength on expectations that the ongoing supply/demand deficit may not be alleviated by new mine supply andavailable metal stocks.

 

Oversupplyand historically low zinc prices at the start of the decade led to thedepletion andclosure ofmany mines, and even the demise of some companies. Meanwhile, demand for zinc metalincreased, driven by growth in China and the developing world. The result has been not enough zincmine concentrates to feed zinc smelters, and insufficient new metal to satisfyzinc consumption, in turn driving zinc prices higher. Since 2002, the recoveryin global economic activity and industrial output has led to a resurgence inzinc demand, especially from the steel galvanizing sector. Leading all regionshas been China, where zinc demand rose approximately 11% in 2005. Demand forzinc metal in the United States declined temporarily as high steel inventorieswere worked down.

 

While zinc smelting capacity has continued toexpand, mainly in China, actual zinc metal production has only increased byapproximately 2% worldwide in 2005, due to the extremely short supply ofconcentrates from mines. In China, the tight global zinc concentrates market,combined with accelerating domestic demand, resulted in China remaining a netimporter of zinc metal for the second year in a row, a significant change fromhistorically being a large zinc metal exporter. With global metal demandoutweighing supply, metal steadily flowed out of LME warehouses for most of theyear except for the delivery in June of just over 100,000 tonnes ofpreviously unreported stocks. Overall, LME stocks droppedat an average of roughly 20,000 tonnes per month. For 2005, LME stocks plummeted a net 235,575 tonnes to close at393,550 tonnes by the end of theyear. The global refined zinc supply/demand balance is estimated to have beenin deficit by 293,000 tonnes in2005.

 

ALUMINUM MARKET

 

The LME cash-settlementaluminum price averaged $0.85/lb. in 2005, a 9% increase over theaverage of $0.78/lb. in 2004. However, theprice was somewhat volatile throughout the year. The LME aluminum cash price opened the year 2005at $0.83/lb. The low point of $0.76/lb. was reached in June. By the end of the year the price was at a sixteen-yearhigh of $1.03/lb.

 

Aluminum’ssupply-demand fundamentals were essentially balanced in 2005. LME warehouseinventories were 695,000 tonnesat the beginning of 2005. By year’s end this stockpile had decreased to 645,000 tonnes.This decline in LME stocks was offset by combined increases of 122,000 tonnesin NYMEX warehouse stocks and IAI inventories.

 

Both the Chinese and North American economies areexpected to support strong demand again during 2006. Effective January 1,2005, China began applying an export tax on aluminum, copper, and nickelexports. China is expected to double the tax on primary aluminum exports to 10%in early 2006, in a further move to cool domestic investment in theenergy-intensive aluminum sector. Given that the country continues to be asignificant exporter of aluminum, the export tax should help to slow the growthof Chinese aluminum production and exports – causing inefficient Chinese producers to close orconsolidate. Additionally, Chinese smelters are in discussions to curtailaluminum production by 10% (600,000 to 700,000 tonnes) in 2006, in an effort tocombat the escalating price of alumina. If they carry through with this plan, itshould add upward pressure to the aluminum price.

 

Therehas been a dramatic shift in the cost base associated with the production ofprimaryaluminum. Whilevirtually all raw material and energy costs have risen significantly, the costcomponent increases impacting aluminumsmelters the most are electrical power and alumina. Together, they account for over two-thirds oftotal production costs. Global spot-alumina prices increased almost 50% during 2005, from$400/tonne to almost $600/tonne. Power is much more of a localized issue. Smelters faced withrenegotiating power contracts, most notably in the U.S. and Europe, have faced substantial costincreases or even lack of available supply. In some cases, the result is permanent closure of thesmelters in question.

 

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Operating rates of aluminum rolling mills in theU.S. have been above 90%, a historically high number, for the past two yearsand will likely continue above this rate through to 2010. The HVAC Fin Stockmarket in the U.S., Falconbridge’s largest flat-rolled aluminum product, isexpected to grow by 5 to 10% in 2006, mainly due to increased U.S. governmentmandated improvements inefficiencyratings of residential air-conditioners.

 

**OUTSTANDINGSHARES**

 

As at December 31, 2005,Falconbridge’s issued and outstanding shares and securities were as follows:

 
| **Name of new Falconbridge Security** | ** ** | **Trading Symbol** | ** ** | **Shares Outstanding** | ** ** |
|-----------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| Common Shares(1)                                          |       | FAL.LV,FAL              |       | 370,688,138                 |       |
| Preferred Shares, Series 1                           |       | N/A                     |       | 89,835                      |       |
| Preferred Shares, Series 2                           |       | FAL.PR.A                |       | 4,787,283                   |       |
| Preferred Shares, Series 3                           |       | FAL.PR.B                |       | 3,122,882                   |       |
| Preferred Shares, Series F                           |       | FAL.PR.F                |       | 3,246,057                   |       |
| Preferred Shares, Series G                           |       | FAL.PR.G                |       | 8,753,943                   |       |
| Preferred Shares, Series H                           |       | FAL.PR.H                |       | 6,000,000                   |       |
| Junior Preference Shares, Series 1(2)                |       | FAL.PR.X                |       | 11,999,899                  |       |
| Junior Preference Shares, Series 2(2)                |       | FAL.PR.Y                |       | 11,999,899                  |       |
| Junior Preference Shares, Series 3(2)                |       | FAL.PR.Z                |       | 5,999,903                   |       |

 

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(1).  Falconbridge common shares trade on the Toronto and New York StockExchanges under the symbols FAL.LV and FAL, respectively. Falconbridge commonshares also trade in U.S. dollars on the Toronto Stock Exchange under thesymbol FAL.LV.U.

(2).  8,000,000 junior preference shares, series (X), 8,000,000 juniorpreference shares, series (Y) and 4,000,000 junior preference shares, series (Z)were redeemed on August 11, 2005, as previously announced.

 

**FINANCIAL INSTRUMENTS AND OTHER INSTRUMENTS**

 

Falconbridge uses financialand other instruments in the following instances:

 

*ForeignCurrency Exposure*

 

Falconbridge may useforward foreign exchange and option contracts to hedge the effect ofexchange rate changes on identifiable foreigncurrency exposures. Falconbridge may hedge up to 50% of its current-year Canadian dollaroperating cost for the next two years and 25% of the subsequent three years. No significant foreignexchange hedge contracts were in place at December 31, 2005.

 

Falconbridgemay enter into futures and forward contracts for the purchase or sale ofcurrenciesnot designatedas hedges. These contracts would be carried at estimated fair values and gainsor losses arising from thechanges in the market values of these contracts would be recognized in the earningsof the period in which the changes occur.

 

*CommodityPrice Exposure*

 

Generally, Falconbridge does not hedge theprice it realizes on the sale of its own production andaccepts realizations based on market pricesprevailing around the time of delivery of metals to customers. Under certain circumstances,Falconbridge enters into futures and option contracts to hedge the effect of price changes on a portionof the raw materials it purchases on a custom processing or resale basis. Gains and losses on these contracts arereported as a component of the relatedtransactions. Designated contracts, meeting the definition for hedge accountingunder GAAP, are not recorded.Falconbridge may also enter into futures and forward contracts for the purchaseor sale of commodities not designated as hedges. These contracts are carried at estimated fair values. Gains or losses arising from the changes in the marketvalues of these contracts arerecognized in the earnings of the period in which the changes occur.

 

*Interest-rateManagement*

 

Falconbridge also enters intointerest rate swap agreements, including foreign exchange cross-currencyswaps, to modify the interestcharacteristics of its outstanding debt. The differential to be paid or received, for interest rate swaps forwhich Falconbridge receives hedge accounting, is accrued and recognized as an adjustment to interest expense related tothe debt. A summary of thesepositions is tabled opposite:

 

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| **Interest rate swaps (notional principal amount in $ millions)** | ** ** | **Total** | ** ** |
|-----------------------------------------------------------------------------------------------------------|------------|-----------|------------|
| Maturity (2006)                                                                                           |       | $         | 325        |   |
| Maturity (2008)(1)                                                                                        |       | 136       |       |
| Maturity (2011)                                                                                           |       | 300       |       |
| Maturity (2012)                                                                                           |       | 350       |       |
| Maturity (2015)                                                                                           |       | 550       |       |
| Fair value(2)                                                                                             |       | 54        |       |
|                                                                                                           |            |           |            |  |

 

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(1).  Includes a cross-currency interest rate swap (with a notional amount of$111 million) designated as a hedge of a Canadian dollar debenture. The total fair value of thisinstrument at December 31, 2005 was $47 million of which $39 millionrelated to the currency componentof the swap and $8 million related to the interest component.

(2).  Includes the fair value of $39 million related to the currency componentof the cross currency interest rate swap discussed in Note 1 above.

 

**OFF-BALANCE SHEET ARRANGEMENTS**

 

Falconbridge does not haveany unconsolidated affiliates. The Company does not enter into off-balance-sheetarrangements with special purpose entities in the normal course of business.Its onlysignificantoff-balance-sheet arrangements are the Canadian dollar expenditure hedgesdiscussed under the “FinancialInstruments and Other Instruments” section of this document.

 

**TRANSACTIONS WITH RELATED PARTIES**

 

Related-party transactionsfor the year ended of 2005 and the fourth quarter of 2005 are summarized asfollows:

 

*Year ended December 31, 2005*

*($ millions)*

 
| ** **             | ** ** | ** **                                      | ** ** | ** **  | ** ** | **Product** | ** ** | **Service**   | ** ** | ** **      | ** ** | ** **   | ** ** |
|------------------------|------------|-------------------------------------------------|------------|-------------|------------|-------------|------------|---------------|------------|-----------------|------------|--------------|------------|
| **Related Party** | ** ** | **Description**                                 | ** ** | **Revenue** | ** ** | **Revenue** | ** ** | **Purchases** | ** ** | **Receivables** | ** ** | **Payables** | ** ** |
| Noranda  Income Fund   |       | Processing &  administration agreement | ** ** | **$**       | **210**    | ** **  | **$**      | **65**        | ** ** | **$**           | **—** | ** **   | **$**      | **44** | ** ** | **$** | **—** | ** ** |
| Noranda  Income Fund   |       | Trading  activity                               | ** ** | **—**  | ** ** | **3**       | ** ** | **35**        | ** ** | **—**      | ** ** | **11**       | ** ** |
| Antamina               |       | Trading  activity                               | ** ** | **—**  | ** ** | **—**  | ** ** | **260**       | ** ** | **—**      | ** ** | **65**       | ** ** |
| Gramercy               |       | Trading  activity                               | ** ** | **—**  | ** ** | **—**  | ** ** | **136**       | ** ** | **—**      | ** ** | **6**        | ** ** |
| Collahuasi             |       | Trading  activity                               | ** ** | **—**  | ** ** | **—**  | ** ** | **109**       | ** ** | **—**      | ** ** | **25**       | ** ** |
|                        |            |                                                 |            |             |            |             |            |               |            |                 |            |              |            |  |  |  |  |  |

 

*Quarter ended December 31, 2005*

*($ millions)*

 
| ** **             | ** ** | ** **                                      | ** ** | ** **  | ** ** | **Product** | ** ** | **Service**   | ** ** | ** **      | ** ** | ** **   | ** ** |
|------------------------|------------|-------------------------------------------------|------------|-------------|------------|-------------|------------|---------------|------------|-----------------|------------|--------------|------------|
| **Related Party** | ** ** | **Description**                                 | ** ** | **Revenue** | ** ** | **Revenue** | ** ** | **Purchases** | ** ** | **Receivables** | ** ** | **Payables** | ** ** |
| Noranda  Income Fund   |       | Processing &  administration agreement |       | $           | 79         |        | $          | 15            |       | $               | —     |         | $          | 44 |   | $ | — |   |
| Noranda  Income Fund   |       | Trading  activity                               |       | —      |       | 1           |       | 11            |       | —          |       | 11           |       |
| Antamina               |       | Trading  activity                               |       | —      |       | —      |       | 82            |       | —          |       | 65           |       |
| Gramercy               |       | Trading  activity                               |       | —      |       | —      |       | 90            |       | —          |       | 6            |       |
| Collahuasi             |       | Trading  activity                               |       | —      |       | —      |       | 40            |       | —          |       | 25           |       |
|                        |            |                                                 |            |             |            |             |            |               |            |                 |            |              |            |  |  |  |  |  |

 

**CRITICAL ACCOUNTING ESTIMATES**

 

Management is required tomake estimates in preparing its financial statements in conformity withgenerally accepted accounting principles.These estimates affect the reported amounts of assets and liabilities and the disclosure of contingentassets and liabilities at the date of the financial statements and the reported amounts of revenues andexpenses during the reporting period. Changes to these estimates would result in material changes to these line items.The critical accounting estimatesmade by Falconbridge relate to the Company’s accounting for the followingitems:

 

•      Property, plant and equipment

•      The determination of mineral reserves

•      Impairment assessments of long-lived assets

•      Amortization of property, plant and equipment

 

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•      Employee future benefits

•      Asset retirement obligations

•      The determination of taxes

 

*Property,Plant and Equipment*

 

Included in operating capitalassets of $6.8 billion at December 31, 2005, was primarily property,plant and equipment. As such, theestimates used in accounting for property, plant and equipment and the related depreciation and amortizationcharges are critical and have a material impact on the Company’s financial condition andearnings. Property, plant and equipment and related capitalized interest and development andpre-production expenditures are recorded at cost and are subject to impairment testing as discussedbelow.

 

*Determinationof Mineral Reserves*

 

One of the most significantestimates which impacts the accounting for property, plant andequipment and the related depreciation andamortization, is the estimate of proven and probable mineral reserves. The process of estimatingreserves is complex, requiring significant assumptions, estimates and decisions regarding economic(i.e. metal prices, production costs, and exchange rates), engineering, geophysical andgeological data. A material revision to existing reserve estimates could occur because of changes to any of theseinputs. Changes in reserves could result in impairment of the carrying amount of property, plant and equipment and achange in amortization expense.

 

*ImpairmentAssessments of Long-lived Assets*

 

We review and evaluate the Company’slong-lived assets for impairment when events or changes incircumstances indicate that the carryingamount may not be recoverable. Asset impairment is considered to exist if the total estimatedfuture cash flows on an undiscounted basis are less than the carrying amount of the asset. Animpairment loss is measured and recorded based on recoverable minerals, expected commodityprices (considering current and historical prices, price trends and related factors), productionlevels, capital and reclamation costs, and are all based on detailed life-of-mine plans. The term “recoverableminerals” refers to the estimated amount of metal that will be obtained from proven and probable ore/mineralreserves, after taking into account losses during ore processing and treatment. Significant managementjudgement is involved in estimatingthese factors, which include inherent risks and uncertainties. The assumptions Falconbridgeuses are consistent with its internal planning. Management periodicallyevaluates and updates theestimates based on the conditions that influence these factors. The variabilityof these factors depends on anumber of conditions, including uncertainty about future events, and thus accounting estimates may change from period to period. If other assumptionsand estimates had been used inthe current period, the asset balances could have been materially impacted. Ifmanagement uses different assumptions orif different conditions occur in future periods, future operating results could be materiallyimpacted.

 

Inestimating future cash flows, assets are grouped at the lowest levels for whichthere areidentifiablecash flows that are largely independent of future cash flows from other assetgroups, taking into considerationmovements of intermediate products to ensure the utilization of available capacityacross the Company’s operations. All assets at a particular operation areconsidered together for purposes of estimating future cash flows.

 

*Amortizationof Property, Plant and Equipment*

 

Depreciation of property,plant and equipment is based on the estimated service lives of the assets(4-40 years), calculatedprimarily on a straight-line basis for metallurgical operations and on a units-of-productionmethod for mining operations. Resource properties are depleted andpreproduction and minedevelopment expenditures are amortized on a units-of-production method. Units-of-production method is defined astonnes milled during the period over proven and probable ore reserves at the start of the period.Construction in progress will be depreciated once the project is substantially completed.

 

The most critical estimateswhich impact the above accounting policy are the estimatedquantities of proven and probable mineralreserves which are the underlying bases for the calculation for the units-of-production method. Changes in the quantityof reserves would result in changesin amortization expense in the periods subsequent to the revision.

 

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*EmployeeFuture Benefits*

 

Assets are valued at currentmarket value. The expected return on plan assets, currently 7%, isbased on current bond yields and expectedlong-term rate of return on equities. The long-term rate of return on assets assumption is reviewed onan annual basis.

 

Liabilitiesare determined as a present value of future anticipated cash flows using adiscountrate based oncorporate AA bond yields at the valuation date and an inflation expectation consistentwith the corporate AA bond yield curve. Differences between the estimatedfuture results and actual futureresults are amortized (to the extent that the cumulative experience gain orloss is in excess of the permitted 10%corridor under Canadian GAAP) over the expected average remaining service life of the active members(EARSL). This 10% corridor represents 10% of the greater of the post-retirement benefits obligations and the fair valueof plan assets. The return on assetsassumption and the discount rate, salary and inflation assumptions used tovalue the liabilities arereviewed annually and are determined based on a consistent framework from yearto year. The most significantrisk is that the assumption will prove to be either too high or too low in thelong term. It is reasonable to assume that there will be a significantvariation between the assumptions(which are set within the framework of a long-term commitment) and actualexperience in any one year, but areexpected to produce an appropriate reflection of costs over the long term.

 

Forpost-employment benefits other than pensions, the discount rate is the same asforpensions. Theinflation rate assumed for medical costs is based on the Company’s history of healthcarespending. The assumption for the ultimate health care trend rates relates tothe overall economic trends.

 

Wecurrently estimate that a 0.5% increase or decrease in the return on assetsassumptionwould result ina corresponding $10-million increase or decrease in annual pension expense. Changesto the return on asset assumption would have no significant effect on fundingrequirements, as the Company’scontributions are primarily determined based on the applicable Canadian regulatory solvency fundingrequirements. Under this valuation methodology, liabilities for solvency valuation are based on marketbond yields, and the excess of liabilities over assets must be amortized over a five-year period. Weestimate that a 0.5% increase or decrease in the discount rate assumption would result in a corresponding $10-millionincrease or decrease in the pensionexpense.

 

*AssetRetirement Obligations*

 

As a result of the Company’smining activities, we incur legal obligations associated with theretirement of tangible long-lived assets, fromthe acquisition, construction, development or normal operations of those assets, which an entity isrequired to settle as a result of an existing or enacted law or contract. CICA 3110, which was adopted January 1,2004, requires that, when a legal obligationis incurred, we record the fair value of estimated asset retirement obligationsand a corresponding deferredcharge presented as an asset grouped with property plant and equipment. The liabilities are accreted to full valueover time through a charge to earnings. The asset is depreciated over the useful life of theassociated long-lived asset on a straight-line basis. The fair value of the obligation as of December 31,2005 was $424 million.

 

Thefair value of these obligations are determined by discounting the projectedcash flowsrequired tosettle the legal obligations at the Company’s credit adjusted risk-freeinterest rate over the timeperiods over which the obligations were incurred. The future cash flowsrequired to settle theobligations were determined by detailed engineering and environmental reviewsassuming the most probableoutcome based on present facts, circumstances and legislation.

 

Criticalestimates and judgement were made by management in the determination of thefairvalue of the Company’sobligation. Cash outflows to settle these obligations will be incurred for periodsexceeding 50 years. Due to the combined effect of the uncertainty associatedwith such extended time periods,the estimated discount and inflation factors, and potential changes to applicable legislation, the fair value of theCompany’s asset retirement obligations could materially change from period to period.

 

*Income andMining Taxes*

 

The provision or relief forincome taxes is calculated based on the expected tax treatment oftransactions recorded in the consolidatedfinancial statements. The objectives of accounting for income and mining taxes are to recognize theamount of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future taxconsequences of events that

 

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have been recognized in theconsolidated financial statements or tax returns. In determining boththe current and future components of incomeand mining taxes, we interpret tax legislation in a variety of jurisdictions as well as makeassumptions about the expected timing of the reversal of future tax assets and liabilities. If theCompany’s interpretation differs from those of tax authorities or if the timing of reversals is not asanticipated, the provision or relief for income and mining taxes could increase or decrease in futureperiods. In estimating deferred income and mining tax assets, a valuation allowance is determined toreduce the future income tax assets to the amount that is more likely than not to be realized.

 

**RISK FACTORS**

 

*Take-overBid*

 

The Company is currently thesubject of a take-over bid by Inco Limited. Upon successfulcompletion of this transaction, there could besignificant changes to the business, operations and management of the Company. Should thetake-over not be completed, the Company expects to continue operating as it has in the past andthe anticipated benefits from the combination of Inco and the Company, as previously discussed, would not occur.

 

*FluctuatingMetal Prices*

 

Falconbridge’s earnings areaffected by fluctuations in the prices of the metals the Companyproduces. The prices are subject to volatileprice movements over short periods of time. Falconbridge generally does not hedge prices of the metals the Companyproduces. Market prices can beaffected by numerous factors beyond the Company’s control, includingexpectations for inflation,speculative activities, relative exchange rates to the U.S. dollar, productionactivities of competitors, globaland regional demand and supply, political and economic conditions including availabilityof subsidies and tax incentives to competitors and production costs in majorproducing regions. The prices forcopper, nickel, zinc, aluminum or other metals produced by Falconbridge,may decline significantly fromcurrent levels. A reduction in the prices of one or more of these metals could materially adversely affect thevalue and amount of the Company’s reserves and business, financial condition, liquidity and operating results.

 

*Mining andProcessing Risks*

 

The business of mining andprocessing of metals is generally subject to a number of risks andhazards, including unusual or unexpectedgeological conditions, ground conditions, phenomena such as inclement weather conditions, floodsand earthquakes and the handling of hazardous substances, emissions of contaminants and other liability exposures.Such risks and hazards could resultin personal injury or death, damage to, or destruction of, mineral properties,processing or productionfacilities or the environment, monetary losses and possible legal liability.Falconbridge’s business,financial condition, liquidity and operating results could be materiallyadversely affected if any ofthese developments were to occur.

 

AlthoughFalconbridge maintains insurance which Falconbridge believes is consistent withmining industry practice to theextent available to cover some of these risks and hazards, no assurance can be given that such insurancewill continue to be available, or that it will be available at economically feasible premiums.Falconbridge’s property, business interruption and liability and other insurance may notprovide sufficient coverage for losses related to these or other risks or hazards. In such event, Falconbridge’sbusiness, financial condition, liquidity and results of operations could be materially adverselyaffected.

 

*EnvironmentalRisks*

 

Environmental legislationaffects nearly all aspects of the Company’s operations worldwide. Thistype of legislation requires Falconbridge toobtain operating licenses and imposes standards and controls on activities relating to mining,exploration, development, production, closure and the refining, distribution and marketing ofcopper, nickel, zinc and other metals products. Environmental assessments are required before initiatingmost new products or undertaking significant changes to existing operations. Compliance with environmentallegislation can require significant expenditures, including expenditures for clean-up costs and damagesarising out of contaminated properties.In addition to current requirements, Falconbridge expects that additionalenvironmental regulations willlikely be implemented to protect the environment and quality of life, given issues

 

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of sustainable developmentand other similar requirements which governmental and supra-governmentalorganizations and other bodieshave been pursuing. Some of the issues currently under review by environmental regulatory agencies include reducing orstabilizing various emissions,including sulphur dioxide and greenhouse gas emissions, mine reclamation and restoration,and water, air and soil quality and absolute liability for spills andexceedences.

 

Canadaratified the Kyoto Protocol to the United Nations Framework Convention onClimate Change in late 2002. The protocol entered into force in February 2005.Various levels of government in Canada are developing a number of policymeasures in order to meet Canada’s emission reduction obligations under theprotocol. While the impact of the protocol and measures cannot be quantified atthis time, the likely effect will be to increase costs for fossil fuels,electricity and transportation, restrict industrial emission levels, imposeadded costs for emissions in excess of permitted levels and increase costs formonitoring, reporting and financial accounting. Compliance with theseinitiatives could have a material adverse effect on the Company’s business,financial condition, liquidity and operating results.

 

Furtherchanges in environmental laws, new information on existing environmentalconditions or other events, including legal proceedings brought based upon suchconditions or an inability to obtain necessary permits, could have a materialadverse effect on product demand, product quality and methods of production anddistribution or could require increased financial reserves or complianceexpenditures or otherwise have a material adverse effect on Falconbridge’sbusiness, financial condition, liquidity and operating results.

 

Failureto comply with environmental legislation may result in the imposition offines and penalties, liability for clean-up costs, damages and the loss ofimportant permits. There can be no assurance that Falconbridge will at alltimes be in compliance with all environmental regulations orthat steps required to bring the Company intocompliance would not materially adversely affect Falconbridge’s business, financial condition, liquidity or operatingresults.

 

Inview of the uncertainties concerning future removal and site restoration costsonFalconbridge’sproperties, the ultimate costs for future removal and site restoration toFalconbridge could differ fromthe amounts estimated. The estimate for this future liability is subject tochange based on amendments toapplicable laws and legislation, the nature of ongoing operations and technological innovations. Future changes, ifany, due to their nature and unpredictability, could have a significant impact and would bereflected prospectively as a change in an accounting estimate. In addition, regulatory authoritiesin various jurisdictions around the world may require Falconbridge to post financial security tosecure in whole or in part future reclamation and restoration obligations in such jurisdictions.In some instances, Falconbridge has already provided this security. In other instances, suchsecurity may be required to be posted upon the occurrence of certain events including if Falconbridgeceases to maintain a minimum investment grade credit rating, if the regulatory authority ceases toaccept alternative forms of comfort to secure the obligation or as a property nears the end ofits operation. Although the posting of this security does not increase the future reclamation andrestoration costs (other than costs associated with posting such security), a portion of Falconbridge’scredit may be required to back up these commitments, which could adversely affect Falconbridge’sliquidity.

 

*LabourRelations*

 

Collective agreementscovering unionized employees at Norandal-Newport, St. Ann (production andmaintenance employees), andGramercy were all renewed in 2005. At the Kidd Metallurgical site, a collective agreement was signed with the CAWafter a one-month strike in October 2005.

 

Eleven collective agreements will expire in 2006:

 

•      General Smelting (Montreal) – January 31

•      Brunswick mine (Bathurst) – February 28

•      Brunswick smelter (Bathurst) – February 28

•      Horne smelter (Rouyn) – March 1

•      Bulk Handling Operation (Bathurst) – March 31

•      Raglan mine (Rouyn) – April 30

•      Lomas Bayas mine (Chile) – April 30

•      Nikkelverk refinery (Norway) – May 31

•      Antamina mine (Peru) – July 24

•      Norandal – Salisbury rolling mill (Salisbury) – November 20

•      Altonorte smelter (Chile) – December 12

 

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Collectiveagreements covering unionized hourly employees at CEZ, CEZ (Effluent TreatmentOperators), CCR, CCR (Security),Noranda Recycling – Roseville (two agreements), Noranda Recycling – San Jose, Sudbury Operations(Production & Maintenance), Sudbury Operations (Office, Clerical & Technical),Collahuasi, New Madrid, Norandal – Newport, Gramercy, St. Ann (Production & Maintenance) and KiddMetallurgical division are currently in place and will expire between 2007 and 2008.

 

*Uncertaintyof Reserve Estimates and Production Estimates*

 

Falconbridge’s reportedmineral reserves as of December 31, 2005 are estimated quantities ofproven and probable ore thatunder present and anticipated conditions can be legally and economically mined and processed by theextraction of their mineral content. Falconbridge determines the amount of mineral reserves inaccordance with the requirements of the applicable Canadian securities regulatory authorities andestablished mining standards. Falconbridge does not use outside sources to verify its reserves.The volume and grade of reserves actually recovered and rates of production from Falconbridge’spresent mineral reserves may be less than geological measurements of the reserves. Market pricefluctuations in nickel, copper, other metals and exchange rates, and changes in operating and capital costs, may inthe future render certain mineralreserves uneconomic to mine. In addition, short-term operating factors relatingto the mineral reserves, such asthe need for orderly development of ore bodies or the processing of new or different ore grades, may causemineral reserves to be modified or Falconbridge’s operations to be unprofitable in any particular fiscalperiod.

 

Noassurance can be given that the estimated amount of ore will be recovered orthat it will berecoveredat the prices assumed by Falconbridge in determining reserves. Mineral reserve estimatesare based on limited sampling and, consequently, are uncertain because thesamples may not berepresentative of the entire orebody. As more knowledge and understanding ofthe orebody are obtained, the reserve estimates may change significantly,either positively or negatively.

 

Falconbridgeprepares estimates of future production for particular operations. Theseproduction estimates are based on, among other things, reserve estimates;assumptions regarding ground conditions and physical characteristics of ores,such as hardness and presence or absence of particular metallurgicalcharacteristics; and estimated rates and costs of mining and processing.Falconbridge’s actual production may vary from estimates for a variety ofreasons, including actual ore mined varying from estimates of grade, tonnage,dilution and metallurgical and othercharacteristics; short-term operating factors relating to the mineralreserves, such as the need for sequentialdevelopment of ore bodies and the processing of new or different ore grades;risks and hazards associated withmining; natural phenomena, such as inclement weather conditions, floods,and earthquakes; and unexpected labourshortages or strikes. No assurance can be given that production estimates will be achieved. Failureto achieve production estimates could have a material adverse impact on Falconbridge’s future cash flows, earnings,results of operations and financialcondition.

 

*ExchangeRate Fluctuations*

 

Fluctuations in currencyexchange rates, principally the Canadian/U.S. dollar exchange rate and, toa lesser extent, Chilean peso,Peruvian sole, Norwegian kroner and euro exchange rates against the U.S. dollar, can significantly impactFalconbridge’s earnings and cash flows. These exchange rates have fluctuated substantially over time,including over the last five years. Most of Falconbridge’s revenues and debt are denominated in U.S.dollars, whereas a significant portion of operating costs at Falconbridge’s Canadian sites are incurredin Canadian dollars. Furthermore, a portion of Chilean operating costs are peso-denominated and Nikkelverk’s costs areincurred in Norwegian kroner.Falconbridge has been reporting its financial results in U.S. dollars since July 1,2003. Fluctuations in exchangerates between the U.S. dollar and the Canadian dollar and between the U.S. dollar and other currencies may giverise to foreign currency exposure and gains and losses, either favourable or unfavourable, which may inthe future materially impact Falconbridge’s financial results. Falconbridge, from time to time, may hedge aportion of its currency exposures andrequirements to try to limit any adverse effect of exchange rate fluctuationswith respect to Falconbridge’sCanadian dollar and other costs, but there can be no assurance that such hedgeswill eliminate the potential material adverse effect of such fluctuations.

 

*InterestRate and Counterparty Risk*

 

Falconbridge’s exposure tochanges in interest rates results from investing and borrowing activitiesundertaken to manage Falconbridge’s liquidity and capital requirements.Falconbridge has entered

 

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into interest rate swapagreements to manage the interest rate risk associated with a portion of itsfixed-rate debt. The interestrate swap changes exposure to interest risk by effectively converting a portion of fixed-rate debt to a floating rate.Falconbridge may elect in the future to enter into interest rate swaps to effectively convertfloating-rate debt to fixed-rate debt or to enter into additional fixed-rate to floating-rate swaps.There can be no assurance that Falconbridge will not be materially adversely affected by interestrate changes in the future, notwithstanding its use of interest rate swaps.

 

In addition, Falconbridge’sinterest rate swaps, metals hedging and foreign currency and energy riskmanagement activities expose us to the risk of default by the counter-partiesto such arrangements. Any such default could have a material adverse effect onFalconbridge’s business, financial condition and results of operations.

 

*EnergySupply and Prices*

 

Falconbridge’s operations and facilities areintensive users of natural gas, electricity and oil. Theprocurement dynamics of these energy types arebecoming more connected as supply and demand conditions become more interdependent on a global basis. Uncontrollablefactors such as strong demandfrom the Asia-Pacific region, political, regulatory and economic uncertainties,and the cost of emissions fromfossil fuels, as well as problems related to local production and delivery conditions,continue to put upward pressure on prices. Falconbridge’s supply contracts are governed by standard energy risk management principles, which ensure thatsupply, price and credit risksare managed effectively.

 

Thesecurity of energy supply is of primary importance. Falconbridge’s businessoperations could be adversely affected, including loss of production and damageto its plants and equipment, if, even temporarily, the supply of energy to oneor more of its facilities was interrupted. Additionally, prolonged loss ofsupply could materially adversely affect the Company’s business, financialcondition, liquidity and results of operations. As a significant portion ofFalconbridge’s costs relate to energy consumption, Falconbridge’s earnings aredirectly related to fluctuations in the cost of natural gas, electricity andoil. The current trend of increasing energy prices is expected to continue andas a result there is an increased focus within the operations on the managementof energy use and the impact of rising energy costs on financial performance.

 

*ForeignOperations*

 

Some of Falconbridge’sactivities and related assets are located in countries outside North America,some of which may beconsidered to be, or may become, politically or economically unstable.Exploration or development activities insuch countries may require protracted negotiations with host governments, international organizationsand other third parties, including non-governmental organizations, and are frequently subject toeconomic and political considerations, such as taxation, nationalization, inflation, currencyfluctuations and governmental regulation and approval requirements, which could adversely affect theeconomics of projects. These projects and investments could be adversely affected by war, civil disturbances andactivities of foreign governmentswhich limit or disrupt markets, restrict the movement of funds or supplies orresult in the restriction ofcontractual rights or the taking of property without fair compensation.

 

Falconbridgeperforms a thorough risk assessment on a country-by-country basis whenconsideringforeignactivities and attempts to conduct business and financial affairs so as toprotect against political, legal,regulatory and economic risks applicable to operations in the various countrieswhere the Company operates, but there can be no assurance that Falconbridgewill be successful in soprotecting the Company. These projects and investments could also be adverselyaffected by changes in Canadianlaws and regulations relating to foreign trade, investment and taxation.

 

*MarketAccess*

 

Global and regional demandfor metals is influenced by regulatory and voluntary initiatives torestrict or eliminate the use of certainmetals in particular products or applications. Impacts of such measures can be global, creatingnon-tariff barriers to international trade and affecting product design and specifications on a globalbasis. Such measures could affect the balance between supply and demand and depress metal prices andtreatment/refining charges. Metals with a limited number of major applications are most susceptible to changesin demand and price in responseto such measures.

 

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*ProductionTechnology*

 

Falconbridge believes thatthe technology used to produce and process metals is significantlyadvanced and, in part due to highinvestment costs, subject only to slow technological change. However, there can be no assurance that moreeconomical production or processing technology will be developed, nor that the economic conditionsin which current technology is applied will remain the same.

 

*LegalProceedings*

 

The nature of Falconbridge’sbusiness subjects the Company to numerous regulatory investigations,claims, lawsuits and other proceedings in theordinary course of the Company’s business. The results of these legal proceedings cannot be predicted with certainty.There can be no assurance thatthese matters will not have a material adverse effect on results of operationsin any future period, and asubstantial judgment could have a material adverse impact on Falconbridge’s business,financial condition, liquidity and results of operations.

 

*SulphuricAcid*

 

Sulphur dioxide is aby-product from the smelting of copper, zinc, nickel and lead sulphideconcentrates. Falconbridge captures sulphurdioxide to minimize acid rain emissions, and converts it into sulphuric acid. Due to increasinglystrict environmental standards worldwide for sulphur dioxide emissions, involuntary production ofsulphuric acid by smelters is growing. The balance of world acid production is largely based onelemental sulphur, whose supply is now a by-product of oil and gas production, and growing morerapidly than demand. Long term, these factors may make it more difficult to obtain satisfactoryprices for sulphuric acid. However, Falconbridge’s production of sulphuric acid cannot be reduced inresponse to low prices, or dropping sales volumes, without a corresponding reduction in production ofmetals.

 

*RawMaterial Procurement Risks*

 

Procurement of raw materialsinvolves the risks typically connected with commercial transactions,which can include trade barriers, politicalinstability and problems due to local production conditions. In addition, Falconbridge’s supply contracts provide thatsuppliers of concentrate may be released from their delivery obligationsif certain “force majeure” events occur. Falconbridge’s business operations could be adverselyaffected, at least temporarily, if supplies of raw materials are interrupted as a result of the impositionof trade barriers or other events and if Falconbridge is unable, on short notice, to shift toalternative sources of supply. Falconbridge also processes copper scrap, the availability of which inpast years has been subject to significant fluctuations. The availability of scrap, blister copper andother material the Company processes can be significantly affected by competing demand from industrializing nationsalong with unforeseen productionand logistical disruptions.

 

**EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES**

 

As of December 31, 2005,an evaluation of the effectiveness of the issuer’s disclosure controlsand procedures (as such term is defined underthe rules adopted by the Canadian securities regulatory authorities and by the U.S.Securities Exchange Commission) was carried out by our management, under the supervision of, and withthe participation of, our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”).Based upon that evaluation, the CEO and CFO concluded that as of such date our disclosure controls and procedureswere effective such that informationrelating to us, including our consolidated subsidiaries, required to bedisclosed by us in the reports wefile or submit to such regulatory authorities (a) is recorded, processed,summarized and reported within the timeperiods specified under applicable securities laws and (b) is accumulated and communicated toour management, including our principal executive and principal financial officers, or personsperforming similar functions, as appropriate, to allow timely decisions regarding disclosure.

 

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**FORWARD-LOOKING INFORMATION**

 

Certain statements contained in thisManagement’s Discussion and Analysis are forward-lookingstatements (as defined in applicablesecurities legislation). Examples of such statements include, but are not limited to, statements concerning (i) ourassessment of the outlook for metal markets in 2006, (ii) Inco’s offer to acquire all of the common shares ofFalconbridge Limited and the benefits of such combination, (iii) our future financial requirements andfunding of those requirements, (iv) ourexpectations with respect to our development projects, (v) our productionforecast for 2006, (vi) ourcapital expenditure forecasts, and (vii) our dividend schedule. Inherentin forward-looking statements arerisks and uncertainties well beyond our ability to predict or control. Actual results and developments are likely to differ, and may differ materially, fromthose expressed or implied by theforward-looking statements contained in this Management’s Discussion andAnalysis. Such statements arebased on a number of assumptions which may prove to be incorrect,including, but not limited to,assumptions about the timing, steps to be taken and completion of Inco’s offerto acquire all of our commonshares, the ability to successfully compete against global metals and mining and exploration companies by creatingthrough such a combination an enterprise of increased scale; strong demand for nickel, copper and other metals inemerging markets such as China;approximately $350 million per annum in pre-tax operating and other synergiesand cost savings, and otherbenefits being realized based on the achievement of operational efficienciesfrom restructuring, integrationand other initiatives relating to the combination of Falconbridge and Inco; theapprovals or clearances required to be obtained by Inco and Falconbridge fromregulatory and other agencies andbodies being obtained in a timely manner; divestitures required by regulatoryagencies being acceptable and completedin a timely manner; there being limited costs, difficulties or delays related to the integration of theFalconbridge’s operations with those of Inco; the timely completion of the steps required to be takenfor the eventual combination of the two companies; business and economic conditions generally;exchange rates, energy and other anticipated and unanticipated costs and pension contributions and expenses; the supplyand demand for, deliveries of,and the level and volatility of prices of, nickel, copper, aluminum, zinc andother primary metals products andother metal products Inco and Falconbridge produce; the timing of the receiptof remaining regulatory andgovernmental approvals for the development projects and other operations; thecontinued availability of financing on appropriate terms for developmentprojects; Falconbridge’s costs ofproduction and production and productivity levels, as well as those of itscompetitors; market competition;mining, processing, exploration and research and development activities; theaccuracy of ore/mineral reserveestimates; premiums realized over LME cash and other benchmark prices; tax benefits/charges; the resolutionof environmental and other proceedings and the impact on the combined company of variousenvironmental regulations and initiatives; assumptions concerning political and economic stability incountries or locations in which Falconbridge operates or otherwise and the ability to continue topay quarterly cash dividends in such amounts as Falconbridge’s Board of Directors may determine in light of otheruses for such funds and otherfactors.

 

Inherent in those statementsare known and unknown risks, uncertainties and other factors wellbeyond the Company’s ability to control orpredict. Some of these known risks and uncertainties are outlined in filings by Falconbridge withapplicable securities regulatory authorities, including in Falconbridge’s annual information form.Readers are encouraged to consult such filings. While Falconbridgeanticipates that subsequent events and developments may cause Falconbridge’sviews to change, the Companyspecifically disclaims any obligation to update these forward-looking statements. These forward-looking statementsshould not be relied upon as representing the Company’s views as of any date subsequent to the date of this Management’sDiscussion and Analysis. Although the Company has attempted to identifyimportant factors that could cause actualactions, events or results to differ materially from those described inforward-looking statements, theremay be other factors that cause actions, events or results not to be asanticipated, estimated or intended.There can be no assurance that forward-looking statements will prove to be accurate, as actual results andfuture events could differ materially from those anticipated in such statements. Accordingly, readers should not placeundue reliance on forward-looking statements.These factors are not intended to represent a complete list of the factors thatcould affect Falconbridge and thecombination of Inco and Falconbridge.

 

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