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Exhibit 4.1    
    

        RENEWAL ANNUAL INFORMATION FORM  

 OF  

 HUDBAY MINERALS INC.  

March 29, 2005  

  

 
 

TABLE OF CONTENTS    
    

	CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS	 	1
	CURRENCY PRESENTATION AND EXCHANGE RATE DATA	 	1
	DOCUMENTS INCORPORATED BY REFERENCE	 	1
	GENERAL DEVELOPMENT OF THE BUSINESS	 	2
	OUR BUSINESS	 	5
	RISK FACTORS	 	22
	INDUSTRY REGULATION	 	30
	MINERAL POTENTIAL OF OUR MATERIAL PROPERTIES	 	34
	DIVIDENDS	 	35
	DESCRIPTION OF CAPITAL STRUCTURE	 	35
	MARKET FOR SECURITIES	 	38
	ESCROWED SECURITIES	 	39
	DIRECTORS AND OFFICERS	 	39
	AUDIT COMMITTEE DISCLOSURE	 	42
	INDEBTEDNESS OF DIRECTORS AND EXECUTIVE OFFICERS	 	44
	LEGAL PROCEEDINGS	 	44
	INTEREST OF MANAGEMENT AND OTHERS IN MATERIAL TRANSACTIONS	 	44
	TRANSFER AGENT AND REGISTRAR	 	46
	MATERIAL CONTRACTS	 	46
	INTEREST OF EXPERTS	 	46
	ADDITIONAL INFORMATION	 	47
	GLOSSARY OF MINING TERMS	 	48

ii

 
 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS    
    

        We make "forward-looking statements" throughout this annual information form ("AIF") including, but not limited to, statements with respect to our future
financial or operating performance and that of our subsidiaries and projects, the future price and consumption of zinc and copper, the estimation of mineral reserves and mineral resources, the
realization of mineral reserve estimates, the timing and amount of estimated future production, costs of production, capital, operating and exploration expenditures (including environmental capital
costs for closure and reclamation of mines), the availability of third party concentrate, mine life projections and cash flow estimates. Whenever you read a statement that is not simply a statement of
historical fact, such as when we describe what we or others "plan", "expect", "project", "intend", "believe", "predict", "estimate", "forecast", or "anticipate" or a statement that certain events or
conditions "may" or "will" occur, you must remember that these expectations may not be correct or that we or others, as the case may be, may not accomplish such goals. Similarly, statements that
describe our objectives, plans or goals are or may be forward-looking statements. Forward-looking statements are based on our opinions and estimates at the date of such statements, and are subject to
a variety of risks and uncertainties and other factors that could cause actual events or results to differ materially from what we project in the forward-looking statements. These factors include the
inherent risks of fluctuating metal prices and currency exchange rates, hedging risks, the impact of governmental regulation, the exploration, development and operation of mineral properties, the
uncertainties involved in interpreting drilling results, project cost overruns or unanticipated costs and expenses, uncertainties relating to the availability and costs of financing needed in the
future and other factors described in this AIF under the heading "Risk Factors". Unless required by applicable securities laws, we have no intention to update or revise any forward-looking statements
if circumstances, estimates or opinions change. You are cautioned not to place undue reliance on forward-looking statements. 

 
 

CURRENCY PRESENTATION AND EXCHANGE RATE DATA    
    

        This AIF contains references to both United States dollars and Canadian dollars. All dollar amounts referenced, unless otherwise indicated, are expressed
in Canadian dollars and United States dollars are referred to as "United States dollars" or "US$". 

        The
closing, high, low and average exchange rates for the United States dollar in terms of the Canadian dollar for each of the three years ended December 31, 2004, 2003 and
2002 as reported by the Bank of Canada, were as follows: 

	 
	 	Year ended December 31,

	 
	 	2004
	 	2003
	 	2002

	Closing	 	$	1.20	 	$	1.30	 	$	1.58
	High	 	 	1.39	 	 	1.58	 	 	1.62
	Low	 	 	1.17	 	 	1.28	 	 	1.40
	Average(1)	 	 	1.30	 	 	1.40	 	 	1.57

	(1)
	Calculated
as an average of the daily noon rates for each period. 

        On March 29, 2005, the Bank of Canada noon rate of exchange was US$1.00 = Cdn $1.2136 

 
 

DOCUMENTS INCORPORATED BY REFERENCE    
    

        Any statement contained in a document incorporated or deemed to be incorporated by reference herein shall be deemed to be modified or superseded for purposes of
this AIF to the extent that a statement contained herein, or in any other subsequently filed document that also is incorporated or is deemed to be incorporated by reference herein, modifies or
supersedes such statement. The modifying or superseding statement need not state that it has modified or superseded a prior statement or include any other information set forth in the document that it
modifies or supersedes. The making of a modifying or superseding statement will not be deemed an admission for any purposes that the modified or superseded statement, when made, constituted a
misrepresentation, an untrue statement of a material fact or an omission to state a material fact that is required to be stated or that is necessary to make a statement not misleading in light of the
circumstances in which it was made. Any statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part of this AIF. No document or statement therein
shall be incorporated or deemed to be incorporated by reference in this AIF unless such document or statement, as the case may be, is specifically 

 

stated
to be incorporated or deemed to be incorporated by reference herein. See "General Development of the Business — Acquisition of HBMS" in respect of the
incorporation by reference of the business acquisition report that we filed in connection with our acquisition of HBMS (as defined herein). 

Unless the context otherwise suggests, references to "we", "us", "our" and similar terms, as well as references to the "Company", refer to HudBay Minerals Inc. Unless
otherwise stated, all information regarding share capital reflects the consolidation of our common shares on the basis of one new common share for every 30 old common shares, which was effected
on December 21, 2004.

 
 

GENERAL DEVELOPMENT OF THE BUSINESS    
    

        We were formed by the amalgamation of Pan American Resources Inc. and Marvas Developments Ltd. on January 16, 1996, pursuant to the  Business
Corporations Act (Ontario). On March 12, 2002, we acquired OntZinc Corporation, a private Ontario corporation, through a reverse
takeover and changed our name to ONTZINC Corporation. On December 21, 2004, we acquired Hudson Bay Mining and Smelting Co., Limited ("HBMS") and changed our name to HudBay
Minerals Inc. 

        Our
registered office is located at 6 Adelaide Street East, Suite 300, Toronto, Ontario M5C 1H6. Our principal executive office is located at
2200-201 Portage Avenue, Winnipeg, Manitoba R3B 3L3. 

Our History  

        In November 2001, we entered into a joint venture agreement with Regal Consolidated Ventures Limited ("Regal"), pursuant to which we acquired a 50%
interest in the Gay's River Property. Pasminco Resources Canada Company ("Pasminco") holds a 2% net smelter return royalty in respect of the Gay's River Property. In November 2002, we purchased
the remaining 50% interest in the Gay's River Property from Regal and in connection therewith we issued to Regal 400,000 Common Shares. We have agreed to issue to Regal an additional
66,666 Common Shares upon the completion of the business plan for re-opening the Gay's River mine and an additional 133,333 Common Shares upon a production decision being
made. In March 2004, we paid to Pasminco $2 million in satisfaction of the purchase price of the Gay's River Property. We now have a 100% interest in the Gay's River Property subject to
a 2% net smelter royalty payable to Pasminco. 

        Pursuant
to a securities exchange agreement entered into in January 2002, we changed our name from Pan American Resources Inc. to ONTZINC Corporation and the corporation
formerly named OntZinc Corporation changed its name to Pan American Resources Corp. and became our wholly-owned subsidiary. As a result of the foregoing, we indirectly acquired a 100% interest in the
Southwestern Ontario Project. 

        In
May 2002, we sold our interest in the San Antonio Project, a copper and gold porphyry project, to a private Chilean mining group for US$850,000. On April 5, 2004, we
regained control of the project following the failure of the purchaser to complete scheduled payments. We currently indirectly hold a 100% interest in the San Antonio Project. 

        As
of September 2003, one of our subsidiaries acquired the Balmat Mine from ZCA Mines, Inc. ("ZCA") for US$20 million, pursuant to an asset purchase agreement
(the "Balmat Acquisition Agreement"). The purchase price is payable wholly out of 30% of any future net cash flow from operations after allowing for reasonable capital and exploration
expenditures and a further US$5 million is payable if the price of zinc is sustained at US$0.70 per pound for a consecutive 24 month period in the five years following the date of the
Balmat Acquisition Agreement. Pursuant to the Balmat Acquisition Agreement, we assumed certain future liabilities, including, all future debts, obligations, commitments and liabilities arising out of
or directly relating to the ownership and operation of the Balmat Mine and, in particular, any future liabilities relating to the reclamation of such mine. 

        In
order to meet the anticipated financial requirements associated with maintaining and reactivating the Balmat Mine, we have completed several private placements of securities. Proceeds
of these private placements have also been used for working capital purposes. 

2

 

Acquisition of HBMS  

        On October 7, 2004, we entered into an acquisition agreement to acquire from Anglo American International, S.A. all of the issued and outstanding
shares of 152640 Canada Inc. (the "Acquisition"), which held all of the issued and outstanding shares of HBMS, for a purchase price of $325 million, subject to adjustment
on closing. Effective December 13, 2004 the parties amended the Acquisition Agreement to provide that the net purchase price would be paid in cash in the amount of approximately
$303 million and as to $13 million by the issuance to Anglo American of 5,777,777 common shares of the Company and 86,666,667 share purchase warrants
(the "Warrants"). Following the Acquisition, we consolidated our common shares on the basis of one new common share of the Company for every 30 old common shares
(the "Consolidation"). As a result of the Consolidation, every 30 Warrants are exercisable for one common share, at a price of $3.15 per common share, at any time prior to
5:00 p.m. (Toronto time) on December 21, 2009. The business acquisition report, dated March 3, 2005, in respect of the Acquisition is incorporated by reference into and forms an
integral part of this AIF. 

        To
fund the Acquisition, we completed an offering (the "Subscription Receipt Offering") of 1,917,510,000 subscription receipts (the "Subscription Receipts") for
gross proceeds of approximately $143.8 million and one of our wholly-owned subsidiaries completed an offering (the "Debt Financing") of 95/8% senior secured notes
(the "Notes") due January 15, 2012 for gross proceeds of US$175 million. Upon closing of the Acquisition, each Subscription Receipt was exchanged for one
pre-Consolidation Common Share and one-half of a Warrant. The Notes contain covenants that, among other things, restrict our ability in certain circumstances to declare or pay
dividends or make other distributions on our Common Shares, incur additional debt, enter into sale or leaseback transactions, create liens, make investments, engage in transactions with affiliates,
consolidate or merge into other entities or sell assets. 

        Pursuant
to a guarantee ("Parent Guarantee") dated as of March 24, 2005, we have unconditionally guaranteed the debt obligations of HBMS under the Notes. We have fully and
unconditionally guaranteed all payments on the exchange notes, including payments of principal, premium (if any) and interest. The guarantee is unsecured and ranks subordinate in right of
payment to all senior indebtedness of the Company. The guarantee will terminate on the date upon which we cease to hold a majority of the outstanding voting shares of HBMS. 

3

 

        We
hold the principal subsidiaries and properties shown in the following chart. The chart shows the jurisdiction of incorporation of our principal subsidiaries and the percentage of
voting securities we beneficially own or over which we have control or direction. For each of our principal properties, the chart also shows our beneficial interest in the project and the location of
the project. 

  

4

  

 
 

OUR BUSINESS    
    

Our Business  

        We are an integrated base metals mining and smelting company. We have: 

	•
	the
777 and Trout Lake zinc and copper mines near Flin Flon, Manitoba, the Chisel North Zinc Mine near Snow Lake, Manitoba and the Konuto Lake Copper Mine in
Saskatchewan (collectively, the "HBMS Mines"), which had, at January 1, 2005, aggregate estimated proven and probable mineral reserves of approximately 21.6 million tonnes of ore,
grading 4.8% zinc and 2.2% copper, and an additional estimated 3.9 million tonnes of inferred mineral resources, grading 6.1% zinc and 1.9% copper;

	•
	a
metallurgical complex located in Flin Flon, Manitoba and a zinc concentrator near Snow Lake, Manitoba; the Flin Flon metallurgical complex is comprised of a zinc and
copper concentrator, a zinc pressure leach and electro-winning plant and a copper smelter, with an annual production capacity of 115,000 tonnes of cast zinc and 90,000 tonnes of anode
copper, as well as gold and silver by-products;

	•
	a
zinc oxide plant with annual production capacity of 45,000 tonnes that takes between 32,000 and 41,000 tonnes of our annual zinc metal production;

	•
	a
seasoned exploration team with a proven track record of discovering new ore bodies, together with a land position of more than 200,000 hectares located primarily in
Manitoba and Saskatchewan, offering potential for further mineral discoveries;

	•
	experienced
mine and production management, and a stable work-force with an excellent health and safety record; and

	•
	a
50% interest in an established marketing joint venture, Considar Metal Marketing Inc. ("CMM"), which markets our metals and identifies and acquires additional zinc
and copper concentrate for our metallurgical complex. 

        In
2004, we completed a $435 million capital expenditure program (the "777 Project"), that involved the construction and development of the 777 mine in Flin
Flon and the Chisel North mine in Snow Lake, expansion of the Flin Flon concentrator, expansion of the Flin Flon zinc plant, including construction of an electrolytic cellhouse and other
infrastructure upgrades. This project has led to improvements in operating margins of the mines, workplace productivity and workplace safety. 

        Total
2004 HBMS production was approximately 110,200 tonnes of refined zinc, 76,900 tonnes of refined copper, 79,000 ounces of gold and 1,114,600 ounces of
silver, derived from 223,000 tonnes of zinc concentrate (including 3,500 tonnes of purchased concentrate) and 284,100 tonnes of copper concentrate (including 98,700 tonnes
of purchased concentrate). 

        We
also own two development projects: the Balmat mine in the State of New York, and the Gay's River mine in the Province of Nova Scotia, Canada; and, in addition to the
exploration lands in Manitoba and Saskatchewan, exploration properties in the Province of Ontario and Chile. 

Our Competitive Strengths  

        We believe that the following business strengths will enable us to increase our production and profitability. 

Modern, Upgraded Facilities  

        Between 1998 and 2004, we invested approximately $435 million to expand, modernize and improve our mines and plants. The 777 Project involved
construction and development of the modern 777 and Chisel North mines, capacity expansion at the zinc concentrator in Flin Flon and expansion of our zinc plant, including the installation of an
electrolytic cellhouse. The design of our zinc plant permits a further 15% capacity expansion. The 777 Project improved our productivity through both the implementation of new technology and
streamlining of our workforce. This has translated into operating efficiencies, cost reductions and the production of higher grades of ore. 

5

 

Land Position with Strategic Exploration Potential  

        We hold a land position of more than 200,000 hectares in Manitoba and Saskatchewan. Over the more than 75 year operating history of HBMS, we have
brought into production over 25 ore bodies on HBMS lands. Currently, we operate four mines on this land. Our land position includes select portions of the highly productive Flin Flon greenstone
belt that we believe has excellent potential for further ore body discoveries. Since much of this property is within 100 kilometres of our two concentrators, we anticipate that we will be able
to economically exploit even small ore bodies that we discover. 

        We
also own 51,276 acres of mineral rights in northern New York and lease an additional 4,774 acres of mineral rights in the areas proximate to the Balmat mine. 

Vertically Integrated Operations  

        Our Flin Flon and Snow Lake operations are comprised of four operating mines, two concentrators, a 90,000 tonne per year copper smelter and a
115,000 tonne per year zinc plant. These integrated operations limit our exposure to fluctuating third party treatment and refining charges. In addition, we have available capacity at our
metallurgical plants, currently filled by purchased concentrates, which gives us the flexibility to develop ore bodies in the area of Flin Flon and Snow Lake that a mining company without proximate
metallurgical plants could not develop profitably after payment of transportation and treatment charges. Our zinc oxide production division, Zochem, receives and processes a significant amount of our
zinc metal production. This off-take mitigates the impact on us of volume cycles and price volatility in the zinc metal market. Through CMM, our marketing joint venture, we monitor and
maintain customer relationships that have, historically, supported demand and premium pricing for our zinc, zinc oxide and copper. 

Experienced Management Team  

        Our management and directors have considerable experience in identifying, acquiring and financing mining operations as well as managing public companies. We
believe this experience provides a solid base on which to expand our operations. Our management team also has a proven record of success in various aspects of the mining industry, including mining,
processing, marketing and the subsequent reclamation of mines. The experience of management at HBMS was integral to the success of the 777 Project, which was completed ahead of schedule and on
budget. 

Skilled and Stable Workforce and Strong Safety Record  

        The HBMS workforce is well trained, historically stable and has significant operational experience at all levels. There has not been a labour work stoppage at the
existing HBMS operations in over 30 years, despite significant labour reductions since 1991. Moreover, HBMS has a labour stability agreement in place until 2012 providing a framework for labour
relations that mitigates the risk of strikes or lockouts at its operations. See "Our Business — Operations — Employees." 

        HBMS
has established a strong safety record. In 2004, HBMS was recommended for registration of its Safety Management System under Occupational Health and Safety Assessment
Series 18001 ("OHSAS 18001"). For the three years ended December 31, 2004, HBMS experienced an average annual rate of approximately 0.8 lost time injury frequency per
200,000 hours worked. We believe that improvements in the safety of the HBMS workforce assist in maintaining healthy labour relations between the HBMS management and workforce. 

Well-Developed Low-cost Infrastructure  

        We have a well-developed, low-cost infrastructure. Substantially all of our electrical power is supplied by Manitoba Hydro from both its
and Saskatchewan Power Corporation's power grids, which are fed by three hydroelectric generating stations. Historically, the price of electricity from Manitoba Hydro has been among the lowest offered
by major energy utilities in North America. The water supply for the Flin Flon metallurgical complex is pumped from nearby Trout Lake. Further, the Flin Flon properties have well developed access to
rail, road and air transportation. Rail access allows concentrate and many other key consumables, such as propane and fuel oil, to be purchased in bulk. It also provides the lowest cost transport of
our products. 

6

 

Our Strategy  

        Our strategy is to leverage our proven operating assets, significant mineral reserves and experienced workforce to: 

Identify Further Opportunities to Lower our Costs  

        Over the past decade, we have lowered our costs through infrastructure investments, a focus on workplace safety, targeted workforce reduction and an increase in
production. We will continue to review further opportunities to reduce our costs of production, including lowering our costs for copper refining through the anticipated purchase by CMM of the White
Pine copper refinery. Increasing production of concentrate from the HBMS Mines or other of our properties proximate to or otherwise synergistic with our metallurgical facilities is our most
significant opportunity to reduce our costs and improve our profitability. 

Investigate Opportunities for Mine Development and Mineral Reserve Exploration  

        We plan to exploit ore bodies and pursue expanded exploration programs. We believe that there remains significant potential to discover additional mineral
reserves within the HBMS Mines, particularly at the Trout Lake and 777 mines. We also intend to focus our exploration program on the HBMS land position in Manitoba and Saskatchewan. Reopening
the Balmat mine is also a priority. Using the experienced operations managers from HBMS and the marketing experience of CMM, we believe that we can reproduce many of the operational efficiencies of
HBMS at the Balmat mine. We will also investigate the potential for integrating these operations with our metallurgical facilities in Flin Flon. We will otherwise focus our development and exploration
programs on our other existing projects or future projects to the extent they present attractive opportunities to expand our mineral reserves. 

Pursue Growth Through Selective Acquisitions  

        We believe there is opportunity for future growth through selective acquisitions of operating assets and properties at an advanced state of development.
Leveraging the expertise of our management team, we intend to pursue a selective and disciplined acquisition strategy in areas of political stability, with a particular focus on properties in North
America, South America and Australia. 

Maintain Strong Safety and Environmental Performance  

        One of our core values is protecting the health and welfare of our employees and the environment. We have achieved an excellent safety record in recent years and
we are committed to maintaining this record. We intend to continue to adhere to strict environmental compliance standards with a goal of continually improving our environmental performance. Each of
the Flin Flon and Snow Lake operations has been certified to the ISO 14001:1996 Environmental Management System. We believe that our ability to minimize lost-time injuries and
environmental regulatory violations is a significant factor in maintaining and realizing opportunities to improve overall operational efficiency. 

7

 

Operations  

        We are a vertically integrated base metals mining and smelting company. The following chart outlines our current operations flow. 

  

        The
following map shows the locations of our facilities in Manitoba and Saskatchewan. 

  

        The
Balmat mine is located in St. Lawrence County, New York State, approximately 32 kilometres south of the St. Lawrence River. 

Historical Production  

        We produce zinc and copper products from concentrates sourced from the HBMS Mines ("domestic concentrates") and from concentrates purchased from other parties
("purchased concentrates"). The chart 

8

 

below
sets out our total metal production from the HBMS operations for the years ended December 31, 2004, 2003 and 2002. 

	 
	 	 
	 	Production Summary

	 
	 	Units
	 	2004
	 	2003
	 	2002

	Metal Production from Domestic Concentrates	 	 	 	 	 	 	 	 
	 	Zinc	 	000s tonnes	 	108.4	 	93.0	 	102.1
	 	Copper	 	000s tonnes	 	43.7	 	42.1	 	45.2
	 	Gold	 	000s troy ounces	 	77.6	 	57.0	 	57.1
	 	Silver	 	000s troy ounces	 	696.5	 	630.3	 	802.8
	
Metal Production from Purchased Concentrates	
 	

 	
 	

 	
 	

 	
 	

 
	 	Zinc	 	000s tonnes	 	1.8	 	24.8	 	6.0
	 	Copper	 	000s tonnes	 	33.2	 	41.3	 	40.7
	 	Gold	 	000s troy ounces	 	1.4	 	3.6	 	4.9
	 	Silver	 	000s troy ounces	 	418.1	 	460.5	 	486.5
	
Total Metal Production	
 	

 	
 	

 	
 	

 	
 	

 
	 	Zinc	 	000s tonnes	 	110.2	 	117.8	 	108.1
	 	Copper	 	000s tonnes	 	76.9	 	83.4	 	85.9
	 	Gold	 	000s troy ounces	 	79.0	 	60.6	 	62.0
	 	Silver	 	000s troy ounces	 	1,114.6	 	1,090.8	 	1,289.3

Underground Mining Operations  

        Our material properties are the HBMS Mines and related plants and the Balmat mine. The HBMS Mines consist of the 777, Trout Lake and Chisel North mines in
northern Manitoba and the Konuto Lake mine in northern Saskatchewan. The Balmat mine is not currently in operation. Each of the HBMS Mines and the Balmat mine is an underground mine. 

The HBMS Mines  

 Location  

        Other than the Chisel North mine, the HBMS Mines are within 24 kilometres of Flin Flon. The Chisel North mine is approximately 215 kilometres east
of Flin Flon. The Town of Flin Flon is approximately 750 kilometres north of Winnipeg, the capital of the Province of Manitoba. Flin Flon has a population of approximately 7,000 people,
with an additional 3,000 people living in the surrounding community, and has well developed access to road, rail and air transportation. 

        The
water supply for Flin Flon is taken from Trout Lake. Electrical power is supplied from the Manitoba Hydro and Saskatchewan Power Corporation power grids, which are fed by three
hydroelectric generating stations. 

        Annual
rental costs for the mineral rights are approximately $280,000, based on a rate of $8.00 per hectare. 

        The
geographical area has cool summers and very cold winters with a mean annual temperature of -2.5oC. The predominant vegetation is closed stands of black
spruce and jack pine with a shrub layer of ericaceous shrubs and ground cover of mosses and lichens. 

9

 

 Geology  

        The HBMS Mines are located in the Canadian shield, one of the world's largest exposed areas of Precambrian rocks. Within the Canadian shield are large, deformed
remnants of ancient volcanic-sedimentary terrain ("greenstone belts"), which historically have been proven locations of base and precious metals. 

        The
ore bodies of the Flin Flon greenstone belt occur in a highly prospective early Proterozoic island-arc assemblage that stretches for an exposed length of
250 kilometres
east-west and 75 kilometres north-south. The deposits are precious metal rich and of the copper-zinc volcanic massive sulphide ("VMS") type hosted in both felsic and
mafic volcanic rocks with the felsic type hosting the largest deposits. VMS deposits are best classified into just two major groups, copper-zinc type and
zinc-lead-copper type, respectively, which reflects the associations of major ore metals and other geological characteristics. VMS deposits in the area range in size from less
than 100,000 tonnes to the more than 100 million tonne Flin Flon/777/Callinan cluster of ore bodies. 

 History  

        HBMS has operated in the Flin Flon greenstone belt for more than 75 years. During this period, HBMS has mined approximately 155 million tonnes of
ore. 

        In
the mid-1990s, a strategic review of the HBMS operations showed a company in decline; HBMS had declining reserves, lower ore grades, rising costs and a poor safety record.
At this time, HBMS concluded that it had less than a ten-year mine life and planned closure of operations before 2005. 

        In
connection with the closure plan, HBMS decided to continue exploration efforts until 1998, the latest time an ore body could be developed for production prior to the planned closure.
In 1993, based on its drilling program, HBMS discovered the 777 deposit and by 1997 had defined this ore body. HBMS determined that the 777 ore body had the potential to extend its
operations for another 12 to 16 years, if a number of critical factors were first addressed. As a result, HBMS significantly lowered its overall unit operating cost, improved its safety
performance and created a performance-oriented culture. 

 777 Mine  

        The 777 mine is situated approximately one kilometre north of Flin Flon and is part of the Flin Flon deposit cluster of ore bodies. The 777 mine
contains approximately 76.8% of the estimated HBMS mineral reserves as at January 1, 2005. 

        This
mine was first indicated in 1993 by an underground exploration hole that intersected the mineralization at a depth of 1,000 metres. In 1995, a drilling program delineated the
ore body. In 1999, HBMS commenced the development of the 777 mine as part of the 777 Project and commercial production from the mine commenced in January 2004. 

        The
Flin Flon cluster of ore bodies, which encompasses the Flin Flon and 777 ore bodies, is comprised of a sequence of volcanic flow and volcaniclastic rocks that are
predominantly basaltic in nature. In the mine area, the mine horizon stratigraphic sequence lies on the west side of the Hidden Lake Syncline and strikes about 350 degrees true and dips
50 to 60 degrees to the east. 

        The
mine has an internal ramp system to allow movement between working levels. The 777 shaft is a 6.7 metre diameter vertical shaft to a depth of 1,530 metres. Ore
and waste hoisting is with a double-drum hoist with a capacity in excess of 1.35 million tonnes per year using 16-tonne skips. A separate double drum hoist operates a
cage and counterweight and a single drum hoist operates a small cage. 

        Mining
is by a combination of mechanized cut and fill and longhole open stoping. Paste backfill is used to fill mined stopes and is delivered from the Flin Flon concentrator by pumping
through a network of lined boreholes and pipes. Pillars are left as regional support in addition to the backfill. The host country rock, particularly in the hanging wall, is competent. 

        Ventilation
control is adequate and the main shaft is the primary fresh air intake. Dedicated compressors supply compressed air. Air and water pipes are installed to distribute the
compressed air and water through the mine. The mine also has adequate electrical power for mining purposes. 

10

 

        The
following chart sets forth the production of the 777/Callinan mine for the years ended December 31, 2004, 2003 and 2002. 

 
 

777/Callinan Mine Historical Statistics    
    

	 
	 	 
	 	December 31,
	 
	 
	 	Units
	 	2004
	 	2003
	 	2002
	 
	Ore Mined	 	000s tonnes	 	975.9	 	709.2	 	601.1	 
	Zinc	 	%	 	4.50	 	3.96	 	3.95	 
	Copper	 	%	 	2.89	 	2.80	 	2.31	 
	Gold	 	grams/tonne	 	2.26	 	1.92	 	1.95	 
	Silver	 	grams/tonne	 	23.14	 	21.81	 	19.17	 
	Manpower	 	persons	 	188	 	177	 	177	 
	Contained Zinc	 	tonnes

(Mm lbs)	 	43,906

(96.8	
)	28,090

(61.93	
)	23,714

(52.28	
)
	Contained Copper	 	tonnes

(Mm lbs)	 	28,203

(62.2	
)	19,871

(43.81	
)	13,862

(30.56	
)
	Contained Gold	 	kilograms

(troy oz)	 	2,013

(70,999	
)	1,362

(43,777	
)	1,175

(37,769	
)
	Contained Silver	 	kilograms

(troy oz)	 	20,585

(726,125	
)	15,464

(497,179	
)	11,521

(370,401	
)

 Trout Lake Mine  

        The Trout Lake mine is located beneath Trout Lake, approximately six kilometres northeast of Flin Flon. The Trout Lake mine contains approximately 15.3% of the
estimated HBMS mineral reserves. 

        The
Trout Lake mine was discovered by Granges Exploration in the 1970s, as a result of testing by drilling an electromagnetic geophysical target located in an area beneath Trout Lake
believed to be underlain by felsic volcanic rocks similar to those that host the Flin Flon ore bodies. Commercial production commenced at the Trout Lake mine in 1988. 

        The
Trout Lake ore body sub-crops beneath Trout Lake and contains more than 30 lenses in several zones. The lenses dip approximately 60 degrees and the average
lens width is 8 metres. The ore body is a proximal volcanic massive sulphide deposit. Chalcopyrite and sphalerite are the main base metal sulphides and occur with pyrite in massive sulphide
layers. 

11

  

        The main shaft has been sunk to a depth of 1,091 metres. The mine development includes a number of inclined ramps and steeply inclined ventilation shafts and ore passes. The main
shaft is a circular two-compartment 4.9 metre diameter vertical shaft operating to a depth of 1,091 metres. The ramp extends to 1,100 metres below surface at an
inclination of 15% from the horizontal. A 762 metre long inclined conveyor delivers the ore from the underground crusher to the coarse ore bin adjacent to the shaft. 

        Mining
is by longhole open stoping using trackless equipment. Crushed ore is trucked from the mine site to the Flin Flon concentrator for processing and subsequent treatment in HBMS'
zinc plant and copper smelter. 

        The
following chart sets forth the production of the Trout Lake mine for the years ended December 31, 2004, 2003 and 2002. 

 
 

Trout Lake Mine Historical Statistics    
    

	 
	 	 
	 	December 31,
	 
	 
	 	Units
	 	2004
	 	2003
	 	2002
	 
	Ore Mined	 	000s tonnes	 	916.1	 	872.7	 	898.6	 
	Zinc	 	%	 	5.32	 	4.82	 	4.21	 
	Copper	 	%	 	1.46	 	1.17	 	1.63	 
	Gold	 	grams/tonne	 	1.47	 	1.78	 	1.34	 
	Silver	 	grams/tonne	 	13.58	 	20.40	 	12.10	 
	Manpower	 	persons	 	177	 	183	 	181	 
	Contained Zinc	 	tonnes

(Mm lbs)	 	48,773

(107.5	
)	42,018

(92.63	
)	37,832

(83.41	
)
	Contained Copper	 	tonnes

(Mm lbs)	 	13,412

(29.6	
)	10,219

(22.53	
)	14,639

(32.27	
)
	Contained Gold	 	kilograms

(troy oz)	 	1,231

(43,422	
)	1,556

(50,021	
)	1,202

(38,632	
)
	Contained Silver	 	kilograms

(troy oz)	 	11,337

(399,890	
)	17,802

(572,352	
)	10,876

(349,669	
)

 Konuto Lake Mine  

        The Konuto Lake mine is situated in Saskatchewan, approximately 24 kilometres southwest of Flin Flon. The Konuto Lake mine contains approximately 1.0% of
the estimated HBMS mineral reserves. 

        The
Konuto Lake ore body was discovered by an airborne geophysical survey in 1994 with follow-up diamond drilling taking place the same year. The Konuto project capital
development and construction started in 1997 and production began in 1999. In 2001 a parallel, wide lens was discovered and is currently being mined. The mine produces approximately 300,000 ore
tonnes per annum from near vertical multiple lenses between 40m and 465m depths. Initial mining was by cut and fill using unconsolidated waste rockfill and since 2003 includes longhole open stoping. 

        The
deposit consists of volcanic hosted massive sulphides overlain by barren basalt volcanic flows. Chalcopyrite and minor sphalerite are the main base metal sulphides and occur with
pyrite in massive sulphide layers conformable to stratigraphy. The horizon that hosts the deposit has been repeated by north trending isoclinal folding and may be the same horizon that hosted the
Birch-Flexar ore bodies two kilometres east of the Konuto Lake deposit. 

        The
mine consists of a ramp to a depth of 456 metres. Mining is by a combination of longhole open and cut and fill stoping. The ore is crushed on surface under a contract and then
hauled over a company road to the concentrator at Flin Flon. 

12

 

        The
following chart sets forth the production of the Konuto Lake mine for the years ended December 31, 2004, 2003 and 2002. 

 
 

Konuto Lake Mine Historical Statistics    
    

	 
	 	 
	 	December 31,
	 
	 
	 	Units
	 	2004
	 	2003
	 	2002
	 
	Ore Mined	 	000s tonnes	 	327.2	 	321.5	 	298.9	 
	Zinc	 	%	 	2.08	 	1.82	 	2.12	 
	Copper	 	%	 	4.07	 	3.73	 	4.06	 
	Gold	 	grams/tonne	 	1.92	 	1.99	 	2.02	 
	Silver	 	grams/tonne	 	9.60	 	9.50	 	7.58	 
	Manpower	 	persons	 	42	 	55	 	55	 
	Contained Zinc	 	tonnes

(Mm lbs)	 	6,793

(15.0	
)	5,841

(12.9	
)	6,334

(14.0	
)
	Contained Copper	 	tonnes

(Mm lbs)	 	13,308

(29.3	
)	11,985

(26.4	
)	12,146

(26.8	
)
	Contained Gold	 	kilograms

(troy oz)	 	573

(20,200	
)	639

(20,553	
)	605

(19,441	
)
	Contained Silver	 	kilograms

(troy oz)	 	2,863

(100,999	
)	3,053

(98,158	
)	2,265

(72,823	
)

 Chisel North Mine  

        The Chisel North mine is ten kilometres west of the Snow Lake concentrator and about six kilometres south of the town of Snow Lake, which is approximately
215 kilometres from Flin Flon. The Chisel North mine contains approximately 6.8% of the estimated HBMS mineral reserves. 

        In
1986, an exploration program was initiated to systematically explore the Chisel basin. Additional drilling was carried out between 1993 and 1997 to suitably define the ore body for a
feasibility study. A total of 77,632 metres in 130 holes and wedges were drilled by 1998. Commercial production commenced at the Chisel North mine in June 2000. 

        The
deposit consists of massive sulphides overlain by barren basalt volcanic flows. Sphalerite and minor amounts of chalcopyrite are the main base metal sulphides and occur with pyrite
in massive sulphide layers
conformable to stratigraphy. The ore resources are between 400 metre and 650 metre depths in four stacked zinc rich sulphide lenses. 

        The
mine is currently being operated from the 502 metre level to the 687 metre level. Mining is by room and pillar and post pillar cut and fill using trackless equipment.
The ore is hauled to surface for crushing and trucking to the Snow Lake concentrator, by independent trucking contractors. 

13

 

        The
following chart sets forth the production of the Chisel North mine for the years ended December 31, 2004, 2003 and 2002. 

 
 

Chisel North Mine Historical Statistics    
    

	 
	 	 
	 	December 31,
	 
	 
	 	Units
	 	2004
	 	2003
	 	2002
	 
	Ore Mined	 	000s tonnes	 	327.9	 	303.2	 	259.5	 
	Zinc	 	%	 	9.99	 	11.32	 	10.57	 
	Copper	 	%	 	0.16	 	0.20	 	0.22	 
	Gold	 	grams/tonne	 	0.48	 	0.62	 	0.55	 
	Silver	 	grams/tonne	 	25.47	 	20.26	 	18.82	 
	Manpower	 	persons	 	65	 	72	 	65	 
	Contained Zinc	 	tonnes

(Mm lbs)	 	32,736

(72.2	
)	34,319

(75.7	
)	27,418

(60.4	
)
	Contained Copper	 	tonnes

(Mm lbs)	 	518

(1.1	
)	606

(1.3	
)	561

(1.2	
)
	Contained Gold	 	kilograms

(troy oz)	 	143

(5,060	
)	187

(6,015	
)	142

(4,577	
)
	Contained Silver	 	kilograms

(troy oz)	 	7,612

(268,517	
)	6,143

(197,504	
)	4,885

(157,053	
)

The Balmat Mine  

        Note that Imperial units of measurement (i.e. tons, acres, etc.) are used in this description of the Balmat Mine. 

        The
Balmat Mine is a development property located in the Balmat-Edwards mining district in St. Lawrence County, New York State about 32 kilometres south of the St. Lawrence
river. The area has been a mining district for over 90 years and all the infrastructure required for ongoing operations at the Balmat mine is available in the immediate area. 

        The
Balmat property comprises several reclaimed zinc mines and one (the Balmat Mine) currently on care and maintenance, as well as related assets, including a
5,000-ton per day concentrator, a rail siding and related maintenance facilities, administration buildings and associated infrastructure. The mine was put on care and maintenance in
October 2001 due to low zinc prices, and is currently under evaluation for re-activation. 

        We
indirectly own 51,276 acres of mineral rights in St. Lawrence (51,175 acres) and Franklin (101 acres) counties in northern New York. We lease an additional
4,774 acres of mineral rights in the areas proximate to the Balmat mine. 

        The
four main ore bodies that comprise the Balmat Mine are the Mud Pond, Mahler, New Fold and Northeast Fowler. Leased claims cover 38% of the Mud Pond ore body, 15% of the Mahler
ore body, 33% of the New Fold ore body and 40% of the Northeast Fowler trend. The leased claims are subject to a 4% net smelter return royalty. With the exception of one ten-year
lease that expires in 2014, the leases have an initial 20-year term, with the first set to expire in 2021, and are renewable for additional terms of 20 years. 

 History  

        Between 1915 and 2001, over 43 million tons of ore grading 9.4% zinc were mined from the four mines that have comprised the Balmat-Edwards zinc district.
Drilling and development subsequent to 1996 led to a ten-fold increase in Mud Pond mineral reserves. The Mahler orebody was discovered in 2000, while high-grade mineralization
was intersected in the New Fold and Northeast Fowler trends in 1997 and 2004 respectively. Prior to October 2001, when the mine was put on care and maintenance, over 9.4 million
tons of ore grading 8% zinc was produced from the Balmat mine. 

14

 

 Geology  

        The Balmat-Edwards district occurs in the Frontenac Arch, an area characterised by a northwesterly trending window of Precambrian rocks overlain by and exposed
beneath younger Paleozoic strata and Pleistocene glacial and lacustrine deposits. 

        The
Balmat-Edwards zinc deposits occur in Proterozoic metasedimentary rocks of the Grenville Supergroup. 

        The
zinc orebodies occur in siliceous dolomitic and evaporite-bearing marbles of the Upper Marble Formation, the uppermost of four metasedimentary formations mapped in the district. The
Upper Marble is exposed in the core of the Sylvia Lake syncline, a major recumbent, doubly plunging, isoclinal fold lying between the towns of Balmat and Edwards. The Balmat mine is located in the
southwestern hinge area of the Sylvia Lake syncline. 

 Mineralization  

        The majority of the 14 orebodies in the Balmat Mine are arranged in three "clusters", containing three to five orebodies each. 

        The
mineralization is dominantly zinc sulphide with lead sulphide and iron sulphide. The zinc to lead ratio is approximately 35 to 1. 

        Stratiform
"parent" and stratabound but generally crosscutting "daughter" massive sulphide orebodies plunge gently (15 to 25 degrees) from north-northwest to northeast and
generally range in size from 500,000 to 10,000,000 tons. Ore occurs as both tabular and podiform bodies with complex cross-sectional configurations. 

 Sampling and Analysis  

        All assays are done at the mine site using appropriate quality-control, quality-assurance checks. 

        The
assay laboratory/metallurgical testing facility has established, documented and supervised procedures for sample preparation, assaying and metallurgical tests. In addition, there is
a documented procedure for quality control assurance. 

        Historic
data indicates consistently very close correlation between estimated mill head grades versus calculated mill head grades, concentrate grades and tailings losses. 

Concentrators  

 Flin Flon Concentrator  

        At the Flin Flon concentrator, we produce zinc and copper concentrates from ore mined at the 777, Trout Lake and Konuto Lake mines. As part of the
777 Project, the capacity of the Flin Flon concentrator was expanded from 1.81 million tonnes of ore per year to 2.18 million tonnes of ore per year. The concentrator can handle
ore from each mine separately and blending is done at the grinding stage. 

        The
Flin Flon concentrator facility includes a paste backfill, copper sulphate and lime slaking plant. The facility also includes associated infrastructure facilities such as maintenance
shops and laboratories. 

        The
ore is crushed in a two-staged process using cone crushers to -19mm with a combination of screens and recycling of oversized material. The fine material is
stored in seven 725 tonne fine ore bins. The grinding circuit has two 3.8 metre by 4.9 metre rod mills and a 5.0 metre by 9.7 metre ball mill operating in closed
circuit with six cyclones. The final product is 80% passing 70 microns at a rate of 300 tonnes per hour. 

        The
copper circuit has six 40 m3 cells for roughing/scavenging and a bank of four 16 m3 and four 8 m3 cells for closed
circuit cleaning. On removal of the copper, the slurry is fed to the zinc circuit with nine 40m3 cells for roughing/scavenging and a three stage cleaning circuit. The system includes an
on stream analyzer. 

        The
concentrates are dewatered in two 8 metre diameter high rate thickeners and five 2.6 metre by 6 metre vacuum disc filters. Both copper and zinc concentrate are
transferred to the concentrator storage sheds prior to 

15

 

treatment
in the metallurgical complex. Tailings from the concentrator are pumped to the Flin Flon tailings impoundment immediately adjacent to the concentrator. We plan to expand the tailings pond in
2005. 

 Snow Lake Concentrator  

        The Snow Lake concentrator is approximately 215 kilometres east of Flin Flon. The facility processes only the Chisel North mine ore and produces zinc
concentrate that is processed at the zinc plant in Flin Flon. Concentrate is shipped by truck to Flin Flon. 

        After
being shut down in 1998, we reopened the Snow Lake Concentrator in 2000 in connection with the commencement of production at the Chisel North mine. The Snow Lake concentrator has a
rated capacity of 1.4 million tonnes of ore per year including crushing, grinding, flotation, thickening, filtering and drying capabilities. However, all of the circuits necessary to throughput
rated capacity are not in operation at this time. Power, water, vacuum and other services are available to allow refurbishment to the full production rate. 

        The
ore is crushed to -19mm material by a single primary crusher. The oversize is processed through a cone crusher and delivered to a 750 tonne fine ore bin. The
crushed ore is first ground in a rod mill and then in a ball mill. The zinc flotation is by a set of four zinc rougher cells, three scavenger cells and a three stage cleaning circuit. The concentrates
are dewatered and held in a storage shed. 

        Tailings
generated by the Snow Lake concentrator are deposited in Anderson Lake, which we believe mitigates environmental concerns. We expect that the tailings area will have sufficient
volume for the projected mine life. 

 Balmat Concentrator  

        The 5,000 ton per day Balmat concentrator was commissioned in 1971. In the past, the Balmat concentrator has produced zinc concentrate that is coarse
grained and free from any appreciable amounts of elements deletrious to the smelting and refining process. The Balmat concentrator has not been in operation since October 2001. 

16

 

 Concentrator Production  

        The following chart sets forth certain information regarding the total concentrate produced at the HBMS Mines during the most recently completed three fiscal
years. 

	 
	 	 
	 	Flin Flon Concentrator
	 	Snow Lake Concentrator

	 
	 	 
	 	December 31,
	 	December 31,

	Production Data
 
	 	 

	 	 
	 	2004
	 	2003
	 	2002
	 	2004
	 	2003
	 	2002

	Ore Milled	 	000s tonnes	 	2,156.1	 	1,902.7	 	1,810.1	 	327.9	 	304.0	 	259.8
	 	Zinc	 	%	 	4.50	 	3.99	 	3.76	 	9.99	 	11.32	 	10.56
	 	Copper	 	%	 	2.46	 	2.22	 	2.28	 	0.16	 	0.20	 	0.22
	 	Gold	 	grams/tonne	 	1.89	 	1.89	 	1.68	 	0.48	 	0.62	 	0.55
	 	Silver	 	grams/tonne	 	17.31	 	19.03	 	13.71	 	25.47	 	20.26	 	18.82
	Zinc Concentrate	 	000s tonnes	 	152.5	 	121.2	 	103.5	 	61.8	 	65.1	 	51.9
	 	Zinc Grade	 	%	 	50.4	 	49.6	 	50.05	 	51.50	 	51.41	 	51.42
	 	Zinc Recovery to Zinc Concentrate	 	%	 	79.2	 	79.1	 	76.0	 	97.3	 	97.3	 	97.2
	Copper Concentrate	 	000s tonnes	 	209.0	 	166.3	 	159.1	 	—	 	—	 	—
	 	Copper Grade	 	%	 	23.6	 	23.2	 	24.28	 	—	 	—	 	—
	 	Copper Recovery to Copper Concentrate	 	%	 	93.0	 	91.5	 	93.7	 	—	 	—	 	—
	 	Gold Recovery to Copper Concentrate	 	%	 	69.7	 	46.7	 	57.0	 	—	 	—	 	—
	 	Silver Recovery to Copper Concentrate	 	%	 	68.1	 	47.9	 	63.0	 	—	 	—	 	—
	Manpower:	 	persons	 	83	 	81	 	79	 	25	 	25	 	23
	Productivity:	 	tonnes milled per employee per month	 	2,165	 	1,958	 	1,909	 	1,093	 	1,013	 	941

Zinc Plant  

        Our zinc plant produces special high-grade ("SHG") zinc metal of varying dimensions, from zinc concentrate. Our plant is one of four primary zinc
producers in North America. We produced 110,200 tonnes of refined cast zinc in 2004. As part of the 777 Project, the capacity of the zinc plant was expanded by 15% to
115,000 tonnes of cast zinc per year. 

        Both
domestic concentrate and purchased concentrate are processed at the plant. Approximately 20% and 2% of concentrate treated at our zinc plant in 2003 and 2004, respectively, was
purchased concentrate. We expect that our need for purchased concentrate will increase, due to declining zinc production at our mines. In the past, we have purchased zinc concentrate from a number of
North American mines. We do not currently have any contracts to purchase zinc concentrate. However, we anticipate that future concentrate requirements will be fully met from both North and South
American sources. 

        The
plant incorporates a two-stage zinc pressure leach plant. The zinc pressure leach plant uses Dynatec technology to recover zinc from zinc sulphide concentrate. The
concentrate is treated in a high acid leach autoclave and a low acid leach autoclave that recovers most of the zinc. The zinc plant also includes a solution purification stage and a modern
electro-winning cellhouse designed by Asturiana de Zinc, which uses the largest cathodes in operation. Included in the zinc plant are an oxygen plant, a concentrate handling, storage and regrinding
facility, a zinc pressure leach plant, a solution purification plant, a cellhouse, a casting plant and a zinc storage area with the ability to load trucks or rail cars. 

        The
zinc solutions from the pressure leach plant are treated in a four-stage purification process to remove impurities such as copper and cadmium. Following purification, the
solution is pumped to the cell house for electro-winning to produce SHG zinc. The cathode zinc is then melted in an induction furnace at the casting plant. The casting plant can produce SHG and zinc
alloys in three sizes. 

17

 

        The
zinc plant has a dedicated leach residue disposal facility. The bulk of the waste material is gypsum and iron. Wastewater is treated and recycled through the zinc plant. 

        The
zinc casting plant is certified to ISO 9001-2000 (quality). 

Copper Smelter  

        At our copper smelter, copper concentrates are processed into anodes, which are then shipped by rail to the White Pine copper refinery. There the anodes are
refined into market standard copper cathodes. 

        The
copper smelter has an annual capacity of 90,000 tonnes of anode copper. In 2004, we produced 76,900 tonnes, while undergoing a one-month shutdown during the
year. 

        Both
domestic concentrate and purchased concentrate are refined at the smelter. Approximately 40% and 35% of concentrate treated at our copper smelter in 2003 and 2004, respectively, was
purchased concentrate. Concentrate has previously been purchased from a number of North American mines, with the principal supplier being the Highland Valley Copper mine in British Columbia. A frame
agreement with Highland Valley Copper provides for 72,000 dry metric tonnes (dmt) of concentrate per year through 2008. There is also an evergreen concentrate agreement for 40,000 dmt of
concentrate per year with Collahuasi, a Chilean company, which agreement expires in 2008. In the past, concentrate deliverable under the Collahuasi concentrate agreement, has been swapped for North
American concentrate. 

        Copper
concentrate is delivered to the smelter by conveyor or rail. The copper smelter includes facilities for concentrate handling and storage, flux blending, roasting, calcine
handling, smelting in a reverberatory furnace, processing in converting furnaces, anode refining and casting and rail car loading of anodes. 

        The
converter gas handling system at the smelter has reduced fugitive gas emissions at ground level by 90% since 2000, and HBMS has reduced total particulate emission in compliance with
regulations and the voluntary Accelerated Reduction and Elimination of Toxics ("ARET") program. 

        The
concentrate is roasted in one of five 6.6 metre by 9.1 metre roasters to remove approximately half of the sulphur. The calcine is then processed through a reverberatory
furnace to produce copper matte. The matte is converted into blister copper in converters and then refined and cast into anode in a wheel mould. 

        The
smelter has procedures to handle all the wastes produced by the process. The roaster gases are passed through an electrostatic precipitator to remove dust, which is recycled to the
furnaces. The slag is dumped in a slag dumpsite and is used for tailings dam construction. 

Zochem  

        Zochem is the value-added zinc oxide production division of HBMS, located in Brampton, Ontario. Zochem is a stand-alone operation that takes between
32,000 tonnes and 41,000 tonnes of our zinc metal production per year, buffering our production schedules and inventories against the impact of zinc market cyclicality. In 2004, Zochem
was the third largest producer of zinc oxide in North America, accounting for approximately 18% of the North American market. 

        The
Zochem facilities have a total capacity of 45,000 tonnes per year of zinc oxide. In 2004, Zochem produced approximately 38,724 tonnes of zinc oxide. The zinc oxide
produced by Zochem is sold through CMM. 

        Zochem
is registered to ISO 9001:2000 (quality), OHSAS 18001 (safety management system) and ISO 14001:1996 (environmental management system). 

White Pine Copper Refinery  

        The White Pine copper refinery processes copper anode into refined copper cathode. The White Pine copper refinery is located in the western upper peninsula of
Michigan. Pursuant to a tolling agreement with CMM, White Pine Copper Refinery Inc. has agreed to process approximately 85,000 short tons of copper anode per year supplied by CMM at a
toll charge of US$0.08375 per pound of cathode copper. 

18

 

        The
tolling agreement will terminate upon CMM exercising its option to acquire White Pine Copper Refinery Inc., which option CMM holds pursuant to an agreement with Considar WP
Acquisition Corp., a subsidiary of Considar Inc. ("Considar"), which is our joint venture partner in CMM. This call option may be exercised after June 30, 2005 but before
September 30, 2005 or after June 30, 2006 but before September 30, 2006. Pursuant to the agreement, Considar WP Acquisition Corp. may also compel CMM to purchase White Pine Copper
Refinery Inc. This put option may be exercised between July 1 and September 30, 2005. We anticipate that CMM will purchase the White Pine copper refinery. The purchase price to be
paid by us for White Pine Copper Refinery Inc. is US$13 million, subject to certain adjustments. 

        The
White Pine Copper Refinery Inc. is the beneficiary of an agreement with the State of Michigan pursuant to which the State of Michigan has covenanted not to take any action
against White Pine for cleanup costs at the White Pine property in connection with contamination that existed at the time it acquired the property, including contamination emanating from, or
attributable to, such contamination, under certain sections of the Natural Resources and Environmental Protection Act (Michigan). Pursuant to this
agreement, White Pine Copper Refinery Inc. has agreed to certain conditions, including certain remedial obligations. If we purchase the White Pine Copper Refinery we expect that this covenant
not to sue will continue for our benefit. 

Employees  

        We have approximately 1,390 permanent employees in the Flin Flon and Snow Lake areas, of whom approximately 1,113 are unionized. Unions representing
steelworkers, machinists and aerospace workers, electrical workers, boilermakers, carpenters, painters and operating engineers are among the unions represented. In 1998, HBMS entered into an amending
agreement in respect of certain existing collective bargaining agreements, establishing a framework for union/management relations to 2012, subject to the satisfaction of certain ongoing conditions.
The amending agreement prohibits strikes and lockouts and provides for binding arbitration in the event that negotiated contract settlements are not achieved. All current collective bargaining
agreements are for three-year terms, with the current term ending on December 31, 2005. We also have a profit sharing plan whereby 10% of HBMS' after tax earnings for any given
fiscal year will be distributed to all employees at the Flin Flon/Snow Lake operations, with the exception of executive officers and key management personnel. 

        Our
Zochem division employs 42 people, 26 of whom are unionized. Zochem and the Communication, Energy, and Paperworkers union have a three-year collective
agreement, which expires in July, 2006. The Flin Flon amending agreement does not apply to the Zochem collective bargaining agreement. 

        Since
1991, we have maintained a rigorous manpower reduction strategy, which reduced our workforce by 1,138 permanent positions, including 120 positions in late 2003.
Consistent with our ongoing reduction of personnel, the 2003 restructuring focused largely on administrative and overhead activities. Restructured work systems were built around the concept of shared
services, which saw previously distributed service groups such as engineering, maintenance and loss control consolidated so as to optimize skill utilization and labour efficiency. Experience through
2004 demonstrated that the reductions are permanent and sustainable, and have resulted in a streamlining of our Company. 

        In
connection with the Acquisition, HBMS agreed to pay approximately $1.89 million to approximately 23 current employees to cover payments to be made under a retention
plan, payable in two equal installments — the first payment of which has been made and the second payment is due in September 2005. In addition, we have
agreed to pay retention bonuses in the aggregate amount of $1 million to those HBMS employees appointed as our officers following the Acquisition, which payments have been and will be made in
three equal installments on the closing of the Acquisition and six and twelve months thereafter. See "Our Directors and Officers". 

Health and Safety  

        The safety performance at our HBMS facilities is measured by a variety of indices and has markedly improved in all categories over the last ten years. Lost time
accident (LTA) frequency rates per 200,000 hours worked have fallen from 16.2 accidents in 1994 to consistently in the 0.8 range over the last three years. Injury 

19

 

severity
per 200,000 hours worked has also dropped from 7,289 days in 1994 to 638 in 2004. There was a slight increase in lost time accidents from 2003 to 2004, which resulted in
an overall increase in lost time severity. 

        As
a result of the significant reduction in the LTA and severity frequency rate per 200,000 hours worked, there was a reduction in HBMS' Worker's Compensation Board assessments
from approximately $5 million in 1995 to approximately $1.3 million in 2004. Compensation costs in 2004 were approximately $0.3 million higher than 2003, with the increase mainly
due to costs associated with an accident that occurred in 2001. 

        In
October 2004, we received certification for our Safety Management System under OHSAS 18001. 

Principal Products and Marketing  

        Our primary products are zinc metal, copper metal and zinc oxide. We also produce gold, silver and lead as by-products. 

        We
market our metals through CMM. We formed CMM as a joint venture company with Considar. Both Considar and us own 50% of the shares of Considar Metal Marketing S.A., which in
turns owns CMM. CMM markets, predominantly in North America, all of our zinc metal, copper metal and zinc oxide production. CMM also assists us in identifying and acquiring additional zinc and copper
concentrates to fill the capacity of the HBMS metallurgical complex. 

        Based
on targeted marketing, quality products and long-standing customer relationships, we have historically received a market premium on zinc and copper sales, typically in
the range of US$0.025 to US$0.055 per pound of zinc and US$0.01 to US$0.04 per pound of copper. Our continuing receipt of these premiums will depend on regional supply and demand within the North
American market and the continued success of the marketing efforts of CMM. 

        White
Pine Copper Refinery Inc. has agreed to purchase approximately 85,000 short tons of copper per year from CMM, pursuant to the tolling agreement. See "Our
Business — Operations — White Pine Copper Refinery". 

20

  

Suppliers and Raw Materials  

        We spend a significant percentage of our annual consolidated revenue to procure goods and services in support of our business activities. Principal goods and
services include copper and zinc concentrate, maintenance and repair parts and services, electricity, fuel and lubricants, ground support materials, explosives, tires, chemical reagents and
ventilation supplies. We use suppliers or independent contractors for a portion of our equipment rebuilds and repairs both on and off-site, as well as for construction and reclamation
activities and to support computer systems. 

        In
the past, we have purchased concentrate from a number of North American mines, with the principal supplier being the Highland Valley Copper mine in British Columbia. We also have an
evergreen concentrate agreement for concentrate with Collahuasi, which agreement expires in 2008. Historically, concentrate deliverable under the Collahuasi concentrate agreement have been swapped for
North American concentrate. 

Competition  

        The base metals mineral exploration and mining business is highly competitive. We compete with numerous other companies for the discovery and acquisition of
mineral rich properties that can be developed and produced economically, the technical expertise to find, develop, and operate such properties, the labour to operate the properties, and the capital
for the purchase of such properties. Many of these companies are substantially larger and have greater financial resources than we do. Our ability to acquire additional mineral reserves in the future
will depend not only on our ability to develop and operate our current properties, but also on our ability to identify and acquire suitable producing properties or prospects for base metals
development or mineral exploration. We also compete with manufacturers of substitute materials or products for which zinc and copper are traditionally used. For example, steel treated with epoxy
resins or paint may be used in place of zinc-based galvanized steel and aluminum based conductors may be used in place of copper-based conductors. However, due to the metallic properties
of zinc and copper, there are few, if any, substitutes of either that are of comparable quality. 

Environmental Liabilities  

        We have a dedicated team of seven engineers and technicians at HBMS who are charged with managing our environmental activities and our environmental compliance
with all applicable standards and regulations. 

Air Quality  

        During the past ten years, we have invested a significant amount to reduce emissions from our copper smelter, resulting in reductions of airborne emissions. We
have participated in the Environment Canada ARET and Strategic Options Process ("SOP") programs. We have substantially achieved the ARET reductions and 73% of the 2008 SOP reduction targets. By 2008,
we expect to reduce our emissions to 80% of 1988 levels but this may require capital expenditures. 

        On
September 25, 2004, the Canadian federal government issued a proposed notice requiring the preparation and implementation of pollution prevention plans in respect of specified
toxic substances released from base metal smelters and refineries and zinc plants. The proposed notice would set annual air release targets for sulphur dioxide, particulate matter and mercury as
factors to be considered in the preparation of the pollution prevention plans utilizing best available techniques. The air release targets are divided into two phases, with the first reductions being
set for December 31, 2008 with a subsequent reduction by December 31, 2015. The mercury reduction targets in the proposed notice are consistent with the Canada-wide Standard
(CWS) for Mercury Emissions endorsed by the Manitoba provincial government. Recent studies have confirmed that our current mercury emissions are of a similar order as those reported in recent years.
These targets are below our current emissions levels for the specified substances and, if implemented in its proposed form, the costs of meeting these targets would be material. 

        In
an effort to improve ambient air quality in the Flin Flon area close to the tailings deposition site, we have placed a slag cover over exposed tailings beaches. Further, we are
currently changing our tailings deposit plan to minimize dusting potential. 

21

 

Water Quality  

        Water management and water quality is an area on which HBMS has focused attention over recent years. The acid generating nature of the concentrate tailings,
common to all base metals operations of this type, has the potential to affect activities downstream from the tailings management facility. Currently, treated effluents from the tailings management
facility are in compliance with environmental regulations. 

        Since
the introduction of MMER in 2002, HBMS has had three events that have resulted in seven situations in which environmental thresholds were exceeded. HBMS has acted to resolve each
of these events. No fines have been levied in respect of such events to date. 

Contaminated Soils and Facilities  

        The concentrators, metallurgical facilities and mine sites reflect the impact of historic and current operations. HBMS has undertaken some clean up of the plant
and mine areas as part of recent plant site improvements and waste management programs. Full cleanup and restoration will only be undertaken at closure. We believe that progressive reclamation of past
operating sites has occurred with good results. We have estimated that total reclamation costs relating to the closure of all our facilities in Manitoba and Saskatchewan will be approximately
$51.6 million and the net present value of these costs is $30.8 million. In connection with our acquisition of HBMS we requested that Howe prepare a worst case scenario estimate of the
total environmental capital costs for closure and reclamation, which Howe estimated to be $92 million. 

        In
December 2004, the Provinces of Manitoba and Saskatchewan informed us that, in their view, the HBMS estimate of reclamation costs may be too low and the security for the
reclamation obligations may not be sufficient. 

        We
have had preliminary discussions with the Provinces of Saskatchewan and Manitoba and have agreed to conduct a feasibility study to more accurately determine the estimated reclamation
costs. The study has been awarded to an engineering firm and is to be completed by the end of June 2005. 

        We
believe that our current reclamation cost estimate of approximately $51.6 million is adequate and is sufficiently secured by the existing security. However, we have provided
additional security in the form of letters of credit in the aggregate amount of $13 million, which will remain in place during the period of the reclamation study. After completion of the
feasibility study, the appropriate security will be determined with the provinces. 

        See
"Risk Factors — Reclamation and mine closure costs could adversely affect our cash flow from operations". 

 
 

RISK FACTORS    
    

        An investment in our securities is speculative and involves significant risks that should be carefully considered by prospective investors before purchasing such
securities. In addition to the risk factors described elsewhere in this AIF, the risk factors that should be taken into account in any investment decision include, but are not limited to, those set
out below. Any one or more of these risks could have a material adverse effect on the value of our securities and should be taken into account in assessing our activities. 

The market price of metals is volatile.  

        Our earnings and financial condition depend upon the market prices of metals, which can fluctuate widely. Metal prices ultimately depend on demand in the end
markets for which metals are used. The principal end markets for zinc and copper are the steel and automotive industries and the electrical and electronics industries, respectively. These industries,
as well as certain other industries that use zinc or copper, are cyclical in nature. Demand is affected by numerous factors beyond our control, including the general level of industrial production,
interest rates, the rate of inflation, and the stability of exchange rates, any of which can cause significant fluctuations in zinc and copper prices. Such external economic factors are in turn
influenced by changes in international investment patterns, monetary systems and political developments. The price of zinc, copper and other metals has fluctuated widely in recent years. Future price
declines may materially reduce our profitability 

22

 

and
could cause us to reduce output at our operations (including, possibly, closing one or more of our mines or plants), all of which could reduce our cash flow from operations. 

        Furthermore,
a significant decrease in commodity prices may require us to revise our mineral reserve calculations and life-of-mine plans, which could result in
material write-downs of our investment in mining properties and increased amortization, reclamation and closure charges. In addition to adversely affecting our mineral reserve estimates and our
financial condition, declining commodity prices can impact operations by requiring a reassessment of the feasibility of a particular project. Such a reassessment may be the result of a management
decision or may be required under financing arrangements related to a particular project. Even if the project is ultimately determined to be economically viable, the need to conduct such a
reassessment may cause substantial delays or may interrupt operations until the reassessment can be completed. 

        We
may in the future engage in hedging activities, such as forward sales contracts and commodity put and call option contracts, to minimize the effect of declines in metal prices on our
operating results. While these hedging activities may protect us, to some extent, against low metal prices, they also limit the price we can receive on hedged products. As a result, we may be
prevented from realizing possible revenues in the event that the market price of a metal exceeds the price stated in a forward sale or call option contract, which could adversely affect our results of
operations. 

Our operations are subject to currency fluctuations.  

        As our core operations are located in Canada, our costs are incurred primarily in Canadian dollars. However, our revenue is tied to market prices for zinc and
copper, which are denominated in United States dollars. If the Canadian dollar gains value against the United States dollar, our results of operations and financial condition could be
materially adversely affected. Although we may use hedging strategies to limit our exposure to currency fluctuations, there can be no assurance that such hedging strategies will be successful or that
they will mitigate the risk of such fluctuations. 

We face significant environmental risks.  

        All phases of our operations are subject to environmental regulation in the various jurisdictions in which we operate. Environmental legislation is evolving in a
manner that will require stricter standards and enforcement, increased fines and penalties for non-compliance, more stringent environmental assessments of proposed projects and a
heightened degree of responsibility for companies and their officers, directors and employees. For example, on September 25, 2004, the Canadian federal government issued a proposed notice
requiring the preparation and implementation of pollution prevention plans in respect of specified toxic substances released from base metals smelters and refineries and zinc plants, including our
metallurgical complex in Manitoba. The proposed notice would set target emissions for mercury, sulphur dioxide and particulate matter below our current emission levels. There is no assurance that
existing or future environmental regulation will not materially adversely affect our business, financial condition and results of operations. There is contamination on properties that we own or owned
or for which we have or have had care, management or control that may result in a requirement to remediate that could involve material costs. In addition, environmental hazards may exist on the
properties on which we hold interests that are unknown to us at present and that have been caused by previous or existing owners or operators of the properties. We may also acquire properties with
environmental risks. 

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

        Amendments
to current laws, regulations and permits governing operations and activities of mining companies, or more stringent implementation thereof, could have a material adverse
impact on us and cause increases in exploration expenses, remedial and reclamation obligations, capital expenditures or production costs, reduction in levels of production at producing properties, or
abandonment or delays in development of new mining properties. 

23

 

We are subject to substantial government regulation.  

        Our mining, processing, development and mineral exploration activities are subject to various laws governing prospecting, development, production, taxes, labour
standards and occupational health, mine safety, toxic substances and other matters. Mining and exploration activities are also subject to various laws and regulations relating to the protection of the
environment. Although we believe that our exploration activities are currently carried out in accordance with all applicable rules and regulations, no assurance can be given that new rules and
regulations will not be enacted or that existing rules and regulations will not be applied in a manner that could limit or curtail production or development of our properties. Amendments to current
laws and regulations governing our operations and activities or more stringent implementation thereof could have a material adverse effect on our business, financial condition and results of
operations. 

The costs of compliance with the Kyoto Protocol could have a material adverse effect on our operations.  

        Canada ratified the Kyoto Protocol to the United Nations Framework Convention on Climate Change in late 2002. The Kyoto Protocol came into effect in Canada in
February 2005. Various levels of governments in Canada are developing a number of policy measures in order to meet Canada's emission reduction obligations under the protocol. While the impact
of the protocol and these measures cannot be quantified at this time, the likely effect will be to increase costs for fossil fuels, electricity and transportation, restrict industrial emission levels,
impose added costs for emissions in excess of permitted levels and increase costs for monitoring and reporting. Compliance with these initiatives could have a material adverse effect on our results of
operations. 

Increased concentrate costs could adversely affect our operations.  

        We rely on the availability of reasonably priced copper and, to a lesser extent, zinc concentrate to operate the HBMS metallurgical complex at full capacity.
Production of concentrate from the HBMS Mines has not been sufficient to operate the metallurgical plants at full capacity. As a result, we purchase significant quantities of copper and, to a lesser
degree, zinc concentrate from third parties. Our purchases of copper and zinc concentrate may increase significantly in the future as a result of declining production at the HBMS
Mines, which may adversely affect our profitability as processing purchased concentrate is less profitable than domestic concentrate. 

        The
availability of concentrate may be influenced by a number of factors, many of which are not within our control, including operational difficulties at the concentrate suppliers'
mines. Shortages of these concentrates have occurred in the past and may occur in the future. We do not have any purchased zinc concentrate contracts in place. Although we have such contracts for
copper concentrate, no assurance can be given that agreed upon quantities will be provided by the applicable supplier or that, if supplied, they will be sufficient for our purposes. The price we pay
for concentrate is dependent upon (i) treatment and refining charges, which are set on the basis of supply and demand for concentrate, and agreed between the vendors of the concentrate and
HBMS, and (ii) freight costs of transporting the concentrate to HBMS' Flin Flon metallurgical complex, both of which can vary significantly. Accordingly, any price increase in, or reduced
availability of, concentrate will adversely affect our profitability and the economic viability of our processing operations. 

Our exploration activities may not result in discoveries of commercial quantities of ore.  

        The exploration for and development of mineral deposits involves significant risks. Few properties that are explored are ultimately developed into producing
mines. Whether a mineral deposit will be commercially viable depends on a number of factors, including: the particular attributes of the deposit, such as size, grade and proximity to infrastructure;
metal prices, which are highly cyclical; and government regulations, including regulations relating to prices, taxes, royalties, land tenure, land use, importing and exporting of minerals and
environmental protection. Even if we identify and acquire an economically viable ore body, several years may elapse from the initial stages of development. We may incur major expenses to locate and
establish mineral reserves, to develop metallurgical processes and to construct mining and processing facilities. As a result, we cannot assure you that our exploration or development efforts will
result in any new commercial mining operations or yield new mineral reserves to replace or expand current mineral reserves. 

24

 

Estimates of mineral reserves, mineral resources, and projected cash flows may prove to be inaccurate.  

        There are numerous uncertainties inherent in estimating mineral reserves and the future cash flows that might be derived from their production. Accordingly, the
figures for mineral reserves and mineral resources and future cash flows contained in this AIF are estimates only. In respect of mineral reserve and mineral resource estimates, no assurance can be
given that the anticipated tonnages and grades will be achieved, that the indicated level of recovery will be realized or that a mineral reserves can be mined or processed profitably. In addition, in
respect of future cash flows, actual cash flows may differ materially from estimates. Estimates of mineral reserves and mineral resources, and future cash flows to be derived from the production of
such mineral reserves and mineral resources, necessarily depend upon a number of variable factors and assumptions, including, among others, geological and mining conditions that may not be fully
identified by available exploration data or that may differ from experience in current operations, historical
production from the area compared with production from other producing areas, the assumed effects of regulation by governmental agencies and assumptions concerning metal prices, exchange rates,
interest rates, inflation, operating costs, development and maintenance costs, reclamation costs, and the availability and cost of labour, equipment, raw materials and other services required to mine
and refine the ore. In addition, there can be no assurance that mineral recoveries in small scale laboratory tests will be duplicated in larger scale tests under on-site conditions or
during production. For these reasons, estimates of our mineral reserves and mineral resources in this AIF, including classifications thereof based on probability of recovery, and any estimates of
future cash flows expected from the production of those mineral reserves and mineral resources, prepared by different engineers or by the same engineers at different times may vary substantially. The
actual volume and grade of mineral reserves mined and processed, and the actual cash flows derived from that production, may not be as currently anticipated in such estimates. If our actual mineral
reserves and mineral resources or cash flows are less than our estimates, our results of operations and financial condition may be materially impaired. 

Mining operations are inherently dangerous and subject to conditions or events beyond our control, which could have a material adverse effect on our business; Insurance may not
cover these risks and hazards adequately or at all.  

        Mining operations, including the exploration and development of mineral deposits, generally involve a high degree of risk. Our operations are subject to all the
hazards and risks normally encountered in the exploration, development and production of zinc metal and copper metal including: adverse environmental conditions; industrial accidents; metallurgical
and other processing problems; unusual or unexpected rock formations; ground or slope failures; structural cave-ins or slides; flooding or fires; seismic activity; rock bursts; equipment
failures; and periodic interruptions due to inclement or hazardous weather conditions. 

        These
risks could result in damage to, or destruction of, mines and other producing facilities resulting in partial or complete shutdowns, personal injury or death, environmental or
other damage to our properties or the properties of others, delays in mining, monetary losses and potential legal liability. Milling operations are subject to hazards such as equipment failure or
failure of retaining dams around tailings disposal areas that may result in environmental pollution and consequential liabilities. 

        Our
insurance will not cover all the potential risks associated with our operations. In addition, although certain risks are insurable, we may be unable to maintain insurance to cover
these risks at economically feasible premiums. Moreover, insurance against risks such as environmental pollution or other hazards as a result of exploration and production is not generally available
to us or to other companies in the mining industry on acceptable terms. We might also become subject to liability for pollution or other hazards that may not be insured against or that we may elect
not to insure against because of premium costs or other reasons. Losses from these events may cause us to incur significant costs that could have a material adverse effect upon our financial
performance and results of operations. 

Title to some of our mineral properties may be challenged or defective.  

        The acquisition of title to mineral properties is a very detailed and time-consuming process. Title to mineral concessions may be disputed. Although
we believe we have taken reasonable measures to ensure proper title to our properties, there is no guarantee that title to any of our properties will not be challenged or impaired. Third 

25

 

parties
may have valid claims underlying portions of our interests, including prior unregistered liens, agreements, transfers or claims, including aboriginal land claims, and title may be affected by,
among other things, undetected defects. As a result, we may be constrained in our ability to operate our properties or unable to enforce our rights with respect to our properties. An impairment to or
defect in our title to our properties could have a material adverse effect on our business, financial condition or results of operations. 

Our significant indebtedness could adversely affect our ability to operate our business.  

        We have a significant amount of indebtedness comprised of the long-term portion of obligations under capital leases, senior secured notes, and a
government loan. As at December 31, 2004, we had outstanding indebtedness of $235.2 million with a ratio of debt to equity of 1.54 to 1. In addition, we have other obligations
that include pension, employee future benefits and asset retirement obligations. 

        As
of March 24, 2005, we have unconditionally guaranteed the debt obligations of HBMS under the Notes. We have fully and unconditionally guaranteed, on a subordinated basis, all
payments on the Notes, including principal, premium (if any) and interest. 

        This
high degree of leverage could materially and adversely affect us in a number of ways including: 

	•
	limiting
our flexibility to plan for, or react to, changes in our business or market conditions;

	•
	limiting
our ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions or general corporate purposes, and in particular
for the exploration and development of our current properties and projects;

	•
	limiting
our access to cash available from operations for future acquisitions and our business in general;

	•
	increasing
our vulnerability to the impact of adverse economic and industry conditions; and

	•
	placing
us at a disadvantage compared to our competitors that have a lower degree of leverage. 

        In
addition, we may not be able to generate sufficient cash flows from operations to service our indebtedness, in which case, we may be required to sell assets, reduce capital
expenditures, refinance all or a portion of our existing indebtedness or obtain additional financing, any of which could materially adversely affect our operations and ability to implement our
business strategy. 

Restrictive covenants in the indenture governing the Notes and in any new credit facility may prevent us from pursuing business activities that could otherwise improve our
results of operations.  

        The terms of the indenture governing the Notes limit the ability of certain of our principal subsidiaries to, among other things: 

	•
	incur
additional indebtedness or contingent obligations;

	•
	enter
into sale and leaseback transactions;

	•
	make
investments;

	•
	grant
liens;

	•
	make
capital expenditures;

	•
	enter
into transactions with affiliates;

	•
	sell
assets; and

	•
	acquire
the assets of, or merge or consolidate with, other companies. 

        We
expect that any new credit facility will have similar restrictive covenants and will further require us to maintain certain financial ratios and satisfy other
non-financial maintenance covenants. Compliance with these restrictive covenants and financial ratios, as well as those that may be contained in any future debt agreements, may impair our
ability to finance our future operations or capital needs or to take advantage of other favourable business opportunities. Our ability to comply with these restrictive covenants and financial ratios
will depend on 

26

 

our
future performance, which may be affected by events beyond our control. Our failure to comply with any of these restrictive covenants or financial ratios will result in a default under the
particular debt instrument, which could permit acceleration of the indebtedness under that instrument and, in some cases, the acceleration of indebtedness under other instruments that contain
cross-default or cross-acceleration provisions. In the event of a default, or a cross-default or cross-acceleration, we may not have sufficient funds available to make the required payments under our
debt agreements. If we are unable to repay amounts owed under the terms of the credit agreement governing any credit facility that we may enter into in the future, those lenders may be entitled to
take possession of the collateral securing that facility to the extent required to repay those borrowings. In such event, we may not be able to fully repay the notes, if at all. 

We may not be able to acquire desirable mining assets in the future.  

        One of our strategies is to grow our business by acquiring attractive, quality mining assets. We expect to selectively seek strategic acquisitions in the future.
However, there can be no assurance that suitable acquisition opportunities will be identified. Further, restrictive covenants in our current or future debt instruments may restrict and limit our
ability to pursue future acquisitions. Our ability to consummate and to integrate effectively any future acquisitions on terms that are favourable to us may be limited by the number of attractive
acquisition targets, internal demands on our resources, competition from other mining companies and, to the extent necessary, our ability to obtain financing on satisfactory terms, if at all. 

Intense competition could reduce our market share or harm our financial performance.  

        The mining industry is intensely competitive and we compete with many companies possessing greater financial and technical resources than us. Since mines have a
limited life, we must compete with others who seek mineral reserves through the acquisition of new properties. In addition, we also compete for the technical expertise to find, develop, and operate
such properties, the labour to operate the properties, and the capital for the purpose of funding such properties. Many competitors not only explore for and mine base metals, but conduct refining and
marketing operations on a global basis. Such competition may result in us being unable to acquire desired properties, to recruit or retain qualified employees or to acquire the capital necessary to
fund our operations and develop our properties. We also compete with manufacturers of substitute materials or products for which zinc and copper are typically used. Existing or future competition in
the mining industry could materially adversely affect our prospects for mineral exploration and success in the future. 

Increased energy prices could adversely affect our operations.  

        Mining operations and facilities are intensive users of electricity and carbon based fuels. Energy prices can be affected by numerous factors beyond our control,
including global and regional supply and demand, political and economic conditions, and applicable regulatory regimes. The prices of various sources of energy may increase significantly from current
levels. An increase in energy prices could materially adversely affect our results of operations and financial condition. 

Our revenues will be dependent on our metal production; sustaining current production levels or increasing our mineral production depends on our ability to bring new mines into
production and to expand mineral reserves at existing mines.  

        We generate revenues primarily through the production and sale of metals. Subject to any future expansion or other development, production from existing
operations at the HBMS Mines is expected to decline over the life of mine. In addition, these production estimates and the life-of-mine estimates included in this AIF may vary
materially from the actual production from, or productive life of, the subject mines because the feasibility of mining a mineral deposit is largely dependent on market conditions, the regulatory
environment, and available technology. As a result, our ability to maintain our current production or increase our annual production of metals and generate revenues therefrom will depend significantly
upon our ability to discover or acquire and to successfully bring new mines into production and to expand mineral reserves at existing mines. 

27

 

Reclamation and mine closure costs could adversely affect our cash flow from operations.  

        In view of the uncertainties concerning future removal and site restoration costs on our properties including those held by HBMS, the ultimate timing of and costs
for future removal and site restoration could differ from current estimates. Our estimates for this future liability are subject to change based on amendments to applicable laws and legislation, the
nature of ongoing operations and technological innovations. At our request Howe estimated a worst case scenario of the total environmental capital costs for closure and reclamation of
$92 million. We had previously estimated that total reclamation costs relating to the closure of all of our facilities in Manitoba and Saskatchewan would be approximately $51.6 million.
The Provinces of Saskatchewan and Manitoba have informed us that, in their view, the previous estimate of reclamation costs is too low and that the security for the reclamation obligations may not be
sufficient. Any future changes to our reclamation and mine closure costs (either in our estimates or in the actual costs) could have a material and adverse effect on our future operating results. 

        In
addition, regulatory authorities in various jurisdictions require us to post financial assurances to secure in whole or in part future reclamation and restoration obligations in such
jurisdictions. The amount and nature of the financial assurances are dependent upon a number of factors, including our financial condition and reclamation cost estimates. Changes to these amounts, as
well as the nature of the collateral to be provided, could significantly increase our costs, making the maintenance and development of existing and new mines less economically feasible. Currently, the
security that we provide to the governments of the Provinces of Saskatchewan and Manitoba consists of the equipment, buildings and fixtures located at the HBMS metallurgical complex. In connection
with the provinces informing us of a potential deficiency in our previous estimate of reclamation obligations, we have provided additional security in the form of letters of credit in the aggregate
amount of $13 million pending the outcome of a new reclamation study to be completed in 2005. However, the Provinces may require further financial assurances. To the extent that the value of
the collateral provided to the Provinces is or becomes insufficient to cover the amount of financial assurance we are required to post, we would be required to replace or supplement the existing
security with more expensive forms of security, which might include cash deposits, which would reduce our cash available for operations and financing activities. There can be no guarantee that we will
be able to maintain or add to our current level of financial assurance. We may not have sufficient capital resources to further supplement our existing security. 

        Although
we accrue for future closure costs, we do not reserve cash in respect of these obligations or otherwise fund these obligations in advance. As a result, we will have significant
cash costs when we are required to close and restore mine sites that may, among other things, affect our ability to satisfy our obligations under our indebtedness or other contractual commitments.
Given the significance of these cash costs, we may not be able to fund them with cash from our operating activities or other available capital resources. We cannot assure you that we will be able to
obtain financing on satisfactory terms to fund these costs. If we are unable to fund the removal and site restoration costs, regulatory authorities may foreclose on the collateral securing those
obligations. We may not have sufficient capital resources to further supplement our existing security. Additionally, any capital resources that we do utilize for this purpose will reduce our resources
available for our operations and commitments, including satisfying our obligations on the Notes. 

The temporary shutdown of any of our operations could expose us to significant costs and adversely affect our access to skilled labour.  

        From time to time, we may have to temporarily shutdown our copper smelting and/or zinc refining operations or one or more of our mines if they are no longer
considered commercially viable. There are a number of factors that may cause our operations to be no longer commercially viable, many of which are beyond our control. These factors include adverse
changes in interest rates or currency exchange rates, decreases in the price of zinc or copper or the market rates for treatment and refining charges, increases in concentrate transportation costs,
and increases in labour costs. During such temporary shutdowns, we will have to continue to expend capital to maintain the plant and equipment. We may also incur significant labour costs as a result
of a temporary shutdown if we are required to give employees notice prior to any layoff or to pay severance for any extended layoff. Furthermore, temporary shutdowns may adversely affect our future
access to skilled labour, as employees who are laid off may seek employment elsewhere. As well, if the copper smelting and/or zinc refining operations are shutdown for an extended period of time, we
may be required to engage in environmental 

28

 

remediation
of the plant sites, which would require us to incur additional costs. Given the costs involved in a temporary shutdown of our operations, we may instead choose to continue to operate those
operations at a loss. This could have a material adverse effect on our results of operations and financial conditions. 

We are required to obtain government permits in order to conduct mining operations.  

        Government approvals and permits are currently required in connection with all of our operations and further approvals and permits may be required in the future.
We must obtain and maintain a variety of licences and permits including air quality control, water, electrical and municipal licences. The duration and success of our efforts to obtain permits are
contingent upon many variables outside of our control. Obtaining governmental permits may increase costs and cause delays depending on the nature of the activity to be permitted and the interpretation
of applicable requirements implemented by the permitting authority. There can be no assurance that all necessary permits will be obtained and, if obtained, that the costs involved will not exceed our
estimates or that we will be able to maintain such permits. To the extent such approvals are required and not obtained or maintained, our operations may be curtailed or we may be prohibited from
proceeding with planned exploration, development, or operation of mineral properties. 

Disruption of transportation services or increased transportation costs could have a material adverse effect on our business, financial condition and results of operations.  

        At the HBMS properties, we are dependent upon a single railway and certain short-line rail networks to transport purchased concentrate to our Flin
Flon metallurgical complex and to transport products from the Flin Flon metallurgical complex for further processing and to our customers. We may have similar dependencies at future mining and
processing operations. Disruption of these transportation services
due to weather-related problems, strikes, lock-outs or other events could have a material adverse effect on our operations. If transportation for our products becomes unavailable, our
ability to market our products could suffer. In addition, increases in our transportation costs relative to those of our competitors could make our operations less competitive and could affect our
profitability. 

We are dependent upon key management personnel and executives.  

        We are dependent upon a number of key management personnel, including the services of certain key employees. Our ability to manage our exploration and development
activities, and hence our success, will depend in large part on the efforts of these individuals. We face intense competition for qualified personnel, and there can be no assurance that we will be
able to attract and retain such personnel. We do not maintain "key person" life insurance. Accordingly, the loss of the services of one or more of such key management personnel could have a material
adverse effect on us. 

29

  

Our business will depend on good relations with our employees.  

        Production at our mining operations depends on the efforts of our employees. Although certain HBMS unionized employees have agreed to "no-strike"
clauses in their collective bargaining agreements, which run until 2012, there can be no assurance that our business will not suffer from work stoppages. Further, relations with employees may be
affected by changes in the scheme of labour relations that may be introduced by the relevant governmental authorities in whose jurisdictions we carry on business. Changes in such legislation or
otherwise in our relationship with our employees may result in strikes, lockouts or other work stoppages, any of which could have a material adverse effect on our business, results of operations and
financial condition. 

We are exposed to credit risk from customers to whom CMM provides credit in the normal course of its operations and in connection with certain derivative contracts.  

        Our accounts receivable are with CMM. CMM provides credit to its customers in the normal course of its operations. Although CMM mitigates credit risk by carrying
out credit evaluations on its customers, making a significant portion of its sales on a cash basis and maintaining insurance on its accounts receivable, if customers default on the credit extended to
them, results of operations could be materially adversely affected. Further, we enter into derivative contracts for which we do not obtain collateral or other security. In the event of
non-performance by counterparties in connection with such derivative contracts, we will be further exposed to credit risk. 

 
 

INDUSTRY REGULATION    
    

Land and Mineral Rights  

        Our mining interests are governed by the laws of the province in which the mining interests are situated. We have interests in mining interests that are held as
freehold titles, mine or mineral claims, mineral leases, mining leases, quarrying dispositions, quarry mineral leases, quarry permits, sand and gravel leases, surface leases, surface permits,
Order-in-Council leases, leases of Crown lands or minerals, general permits relating to Crown lands and exploration licences. The rights applicable to such interests are
described, circumscribed, limited, restricted and qualified by the laws of the province applicable to such interests, and by the terms of the grant of such interests. Royalty payments may be required
to be paid on mineral leases. 

Manitoba  

        Manitoba mineral leases are granted, under The Mines and Minerals Act (Manitoba), generally for terms of
21 years. Upon application, a lessee is entitled to the renewal of the lease for further terms of 21 years if, at the time of the application for renewal, the lessee is in compliance
with The Mines and Minerals Act and the terms and conditions of the mineral lease. 

        The
annual lease rental rate for a mineral lease in production is currently $8.00 per hectare per year. There are no other charges required to maintain the leases. Prior to obtaining a
mineral lease in Manitoba, the applicant must first obtain a mineral prospecting licence and a mineral exploration licence. The cost associated with a mineral prospecting licence, if issued to a
corporation, is $200. The mineral exploration licence application fee is $300 with a deposit of $0.50 per hectare also required. 

        A
mineral lease includes and is subject to a reserve, in favour of the Province, of royalties in respect of minerals that are produced under the lease. The royalty reserved to the
Province in respect of a mineral must be calculated in accordance with the regulations. However, no royalties will be paid in respect of a mineral for which a royalty would otherwise be payable, if a
tax is payable under The Mining Tax Act (Manitoba). 

Saskatchewan  

        Saskatchewan leases for provincial mineral lands are granted under The Crown Minerals Act (Saskatchewan) and  The
Mineral Disposition Regulations, 1986 (Saskatchewan). The term of a lease is ten years, renewable for a further term of ten years if the holder has
complied with The Crown Minerals Act (Saskatchewan) and associated regulations. Annual license fees of $25 per hectare are payable in each of the first
ten years of the lease, with a minimum of $400 per lease; $50 per hectare in years 11 through 20 of a renewed lease, with a minimum of $800 

30

 

per
lease; and $75 per hectare thereafter, with a minimum of $1,200 per lease. Prior to obtaining a mineral lease in Saskatchewan, the applicant must first apply for a permit or claim to explore
provincial mineral lands. The costs associated with a permit to explore provincial mineral lands include: a recording fee of $0.15 per hectare with a minimum of $1,500 and a maximum of $7,500, a cash
deposit of $15,000, and expenditure requirements of $1.25 per hectare in the first permit year and $4.00 per hectare in subsequent permit years. The term of the permit is two years and may not be
renewed. A permit may be converted into a claim. The costs associated with a claim to explore provincial mineral lands include: a recording fee of $0.30 per hectare with a minimum of $10; expenditure
requirements of $12 per hectare in claim years 2 through 10, with a minimum of $192 per claim; and $25 per hectare for each claim year after year 10, with a minimum of $400 per claim. A claim
may be converted into a lease. 

        Royalty
payments are payable under a lease of provincial mineral land upon or in respect of all materials produced, saved or recovered from, or allocated under a unitization agreement to
any provincial mineral lands. 

Environmental Regulation  

        The mining industry is subject to extensive regulation by federal, provincial and local authorities as to matters including, but not limited to: 

	•
	employee
health and safety;

	•
	air
quality;

	•
	water
quality and availability;

	•
	the
protection and enhancement of the environment (including the protection of plants and wildlife);

	•
	the
generation, handling, use, storage, transportation, release, disposal and clean-up of regulated materials, including wastes; and

	•
	the
reclamation and restoration of mining properties after mining is completed. 

        Our
mining operations are regulated primarily by provincial legislation, although we must also comply with applicable federal legislation and local by-laws. 

        Both
of the provinces in which we operate have stringent environmental legislation and requirements. These laws require regulatory approval of many aspects of our mining and production
operations. The construction, development and operation of a mine entails compliance with applicable environmental legislation and the obtaining of various permits, licences and approvals from various
governmental authorities, which can include costly and time consuming environmental impact assessments. In addition, legislation requires that sites be abandoned and reclaimed to the satisfaction of
provincial authorities. A breach of environmental legislation (including permits, licences and approvals) may result in the imposition of fines, other penalties, clean-up orders or the
interruption of our activities, which could have a material adverse effect on our operations. 

Provincial Environmental Legislation  

        In general, Manitoba and Saskatchewan have similar environmental legislation. Both Manitoba and Saskatchewan have requirements for environmental impact
assessments of new projects or major expansions. These assessments typically involve extensive stakeholder consultation, including public advertising and input. Each province also has its own
legislation with respect to heritage and cultural resources, the handling and transportation of dangerous goods and site remediation and reclamation. 

        In
Manitoba, air emissions from our metallurgical complex are governed by the Inco Limited and Hudson Bay Mining and Smelting Co., Limited Smelter Complex
Regulation (the "HBMS Regulation"), made under The Environment Act (Manitoba) (the "EA"). The HBMS Regulation sets
maximum levels of sulphur dioxide emissions and particulate emissions that HBMS may emit. The HBMS Regulation also sets requirements for ambient air monitoring, stack sampling, and particulate
emission monitoring and measurement. 

        Under  The Mines and Minerals Act (Manitoba), before the holder of a mineral lease in Manitoba may commence mining, the holder must first
submit a mine closure plan. A mine closure plan sets out a program for 

31

 

protection
of the environment during the life of a project and for rehabilitation of the project site upon closing of the project, which includes the provision of security to the Province for
performance of rehabilitation work in accordance with an approved mine closure plan. 

        In
Saskatchewan, environmental matters relating to mining operations are governed primarily by The Environmental Management and Protection Act,
2002 (Saskatchewan) (the "EMPA") and the Mineral Industry Environmental Protection Regulations, 1996 (Saskatchewan)
(the "MIEP") made under the EMPA. The EMPA and its regulations require permits and approvals for the operation of any facility that discharges a pollutant into the environment. Under the MIEP,
the Saskatchewan government also regulates the decommissioning, abandonment and reclamation of a mine or operation and requires that an assurance fund be established to ensure the completion of the
decommissioning and reclamation of the mining site. We have entered into security agreements in favour of the Provinces of Saskatchewan and Manitoba, whereby we have pledged certain HBMS mining assets
as collateral to cover decommissioning costs. 

        In
Ontario, environmental matters related to the Zochem plant are primarily governed by the Environmental Protection Act (Ontario)
("EPA"), Ontario Water Resources Act ("OWRA") and the regulations thereunder. The EPA regulates discharges to the natural environment including air,
land, noise, odour and vibration. The EPA also regulates waste handling, storage, disposal and transportation. The OWRA regulates discharges to surface and ground water. Zochem may be required under
either or both the EPA and the OWRA to obtain certain permits and certificates relating to, among other things, the storage of hazardous products, storm water management and water use. Both the EPA
and the OWRA provide for penalties and clean-up orders to be levied in the event of non-compliant discharges. 

Federal Environmental Legislation  

        We must comply with the Canadian Environmental Protection Act, 1999 ("CEPA"), which regulates certain restricted
and prohibited substances, and can require the preparation of pollution prevention plans. Emissions to water from our mining operations are regulated by the MMER. On September 25, 2004, the
Canadian federal government issued a proposed notice requiring the preparation and implementation of pollution prevention plans in respect of specified toxic substances released from base metals
smelters and refineries and zinc plants, including our metallurgical complex. The proposed notice would set target emissions for mercury, sulphur dioxide and particulate matter below our current
emission levels. 

        The
federal Canadian Environmental Assessment Act ("CEAA") requires that an environmental impact assessment be conducted with respect to
certain proposed projects. Projects that are subject to CEAA include projects requiring the disposition of federal lands and projects requiring federal approvals. 

        Zinc
and copper mining frequently involves crossing, impounding, diverting and using surface waters. Such activities can require approval under federal legislation, such as the  Fisheries Act (Canada) for the
construction of a project that may result in the harmful alteration of fish habitat, or the  Navigable Waters Protection Act (Canada) if the water course is navigable by watercraft. 

Municipal By-laws  

        We are also subject to local laws, including by-laws passed by local municipalities relating to local land use, rural road closures, storm
run-off and sanitary discharges and nuisance situations. 

Kyoto Protocol  

        The processing of zinc and copper results in the production of various combustion products including carbon compounds. Canada, as a party to the  United Nations
Framework Convention on Climate Change (the "Convention") and the subsequent implementation protocol that was adopted in 1997
(known as the "Kyoto Protocol"), has stated its intention to reduce overall greenhouse gas emissions to 94% of 1990 levels by no later than 2012. One of the greenhouse gases of concern is carbon
dioxide, which results from zinc and copper production. Many other countries are also party to the Convention and the Kyoto Protocol and have similar intentions to limit greenhouse gas emissions. The
Kyoto Protocol came into effect in Canada in February 2005. 

32

 

Environmental Management and Compliance  

        We have established a comprehensive environmental management program directed at environmental protection. The program consists of an environmental policy, codes
of practice, regular audits, the integration of environmental procedures with operating procedures, employee training and emergency prevention and response procedures. 

        We
believe that we are in material compliance with all applicable environmental legislation. We believe that all approvals currently required to conduct our current mining operations
have been obtained. Given the nature of the extensive and comprehensive regulatory requirements, violations during mining operations inevitably occur from time to time. We have been cited for few
environmental violations, none of which have
had a material adverse effect on the environment, our ability to continue any operation or on our financial condition. 

        We
may be required to prepare and present to federal, provincial or local authorities data relating to the impact that a proposed development or existing zinc and copper mine may have on
the environment. Such requirements could prove costly and time-consuming and could delay commencing and continuing exploration or production operations. 

        Future
legislation and administrative regulations may further emphasize the protection and enhancement of the environment and, as a consequence, our activities may be even more closely
regulated. Such legislation and changes to legislation, as well as future interpretations of laws and increased enforcement, may result in increased capital and/or operating costs as well as delays,
interruptions or a termination of operations, the extent of which cannot be predicted. 

Health and Safety and Labour Regulations  

        The Act Respecting Hudson Bay Mining and Smelting Co., Limited (Canada) was enacted in 1947, placing HBMS
under federal jurisdiction. As a result, HBMS is governed by federal labour legislation and must report annually under the Employment Equity Act
(Canada). 

        The
Act Respecting Hudson Bay Mining and Smelting Co., Limited was amended to delegate safety and health matters to the Manitoba
government and, as a result, the following pieces of Manitoba legislation apply to HBMS: The Workplace Safety and Health Act (Manitoba),  The Manitoba Hydro Act (Manitoba), The Fires and Prevention and Emergency Response Act (Manitoba),  The Gas and Oil Burner Act (Manitoba), The
Elevator Act (Manitoba) and The Steam
and Pressure Plants Act (Manitoba). As a result, generally, labour matters are regulated federally and workplace safety and health is regulated provincially. 

Aboriginal Rights  

        Canadian courts have recognized that aboriginal peoples may continue to have unenforced rights at law in respect of land used or occupied by their ancestors where
treaties have not been concluded to deal with those rights. These rights may vary from limited rights of use for traditional purposes to a right of aboriginal title and will depend upon, among other
things, the nature and extent of prior aboriginal use and occupation. The courts have encouraged the federal and provincial governments and aboriginal peoples to resolve rights claims through
negotiation of treaties. In Manitoba and Saskatchewan there are many treaties in place. Aboriginal rights and claims are currently handled primarily under the terms of those treaties. 

Electric Utility Industry  

        The electric utility industry is subject to extensive regulation regarding the environmental impact of electricity generation activities. Future legislation
changes could increase the price at which electrical power is available to us and, as a result, could increase our costs of zinc and copper production. 

33

 

 
 

MINERAL POTENTIAL OF OUR MATERIAL PROPERTIES    
    

        Our material properties are the HBMS Mines and the Balmat mine. At this time, only the HBMS Mines are producing. The Balmat mine is currently under evaluation for
re-opening. 

HBMS Mines  

Mineral reserves and Inferred Mineral Resources  

        The mineral resource estimates have been prepared under the guidance of Kim Lau BSc. P.Geo., who is employed by HBMS as a Senior Mineral Resource Analyst and who
is a Qualified Person under National Instrument 43-101 Standards of Disclosure for Mineral Projects
("NI 43-101"). The mineral reserve estimates as at January 1, 2005 have been prepared under the guidance of Garry Allen MSc. P.Eng., who is employed by HBMS as Manager of
Mines Technical Services and who is a Qualified Person under NI 43-101. 

        The
categorization of mineral resource is determined in a twelve step process, which includes determination of the integrity and validation of the data collected, including confirmation
of specific gravity, assay results and methods of data recording. The process also includes determining the appropriate geological model, selection of data and the application of statistics models
including probability plots and restrictive kriging to establish continuity and model validation. The resultant estimates of measured and indicated mineral resources are converted to proven and
probable mineral reserves by the application of mining dilution and recovery, as well as the determination of economic viability using historical operating costs. Other factors such as depletion from
production are applied as appropriate. 

Estimate of HBMS Mineral Reserves (as at January 1, 2005)(1)(2)  

	 
	 	Tonnes
	 	Au (g/t)
	 	Ag (g/t)
	 	Cu (%)
	 	Zn (%)

	Trout Lake	 	 	 	 	 	 	 	 	 	 
	Proven	 	1,584,000	 	1.2	 	14.0	 	1.3	 	4.6
	Probable	 	1,727,000	 	1.2	 	15.1	 	1.8	 	4.0
	
777	
 	

 	
 	

 	
 	

 	
 	

 	
 	

 
	Proven	 	2,963,000	 	2.4	 	30.7	 	2.2	 	4.5
	Probable	 	13,633,000	 	2.1	 	27.6	 	2.4	 	4.7
	
Konuto Lake	
 	

 	
 	

 	
 	

 	
 	

 	
 	

 
	Proven	 	184,000	 	2.3	 	7.2	 	4.0	 	0.9
	Probable	 	34,000	 	1.9	 	5.3	 	4.8	 	0.9
	
Chisel North	
 	

 	
 	

 	
 	

 	
 	

 	
 	

 
	Proven	 	628,000	 	0.2	 	21.0	 	0.1	 	9.5
	Probable	 	846,000	 	0.5	 	18.9	 	0.3	 	8.1
	Total Proven	 	5,360,000	 	1.8	 	23.8	 	1.8	 	5.0
	Total Probable	 	16,240,000	 	1.9	 	25.8	 	2.3	 	4.8
	Total Reserve	 	21,600,000	 	1.9	 	25.3	 	2.2	 	4.8

	(1)
	The
zinc price used for mineral reserve estimation was US$0.52 per pound, the copper price was US$0.91 per pound, the gold price was US$325 per ounce and the silver price was US$4.25
per ounce.

	(2)
	The
estimate as at January 1, 2005 was prepared in accordance with NI 43-101 and the Canadian Institute on Mining, Metallurgy and Petroleum "CIM
Standards on Mineral Resources and Reserves: Definitions and Guidelines" 

        In addition to the mineral reserves, we have an estimated 3.9 million tonnes of inferred mineral resources, grading 6.1% zinc and 1.9%
copper. Mineral resources that are not mineral reserves do not have demonstrated economic viability. 

34

 

Balmat Mine  

        A report entitled "Reserve and Resource Audit, Balmat No. 4 Mine, Balmat-Edwards Mining District, Balmat, New York, USA", dated January 2003,
(the "Balmat Report") has been prepared for the Company by John E. Steers, P. Eng., a qualified person under National Instrument 43-101. The Balmat Report estimated our
Balmat mineral reserves at 1.976 million tons grading 11.9% zinc, and additional inferred mineral resources at approximately 3.1 million tons grading 12.9% zinc. The classifications were
based on the CIM Council Standards on Mineral Resources and Reserves Definitions and Guidelines adopted by the CIM Council on August 20, 2003. The mineral reserves were calculated using a
cut-off grade of 6% zinc per ton and an average mining recovery of 85%, and minimum heights in the 5.5 to 8.0 foot range depending on mining method. Dilution is incorporated
in the mineral resource estimate through minimum mining heights assumed. Mineral resources that are not mineral reserves do not have demonstrated economic viability. 

        The
Balmat mine, currently under care and maintenance, is being reviewed for re-activation. A comprehensive review of mineral reserves and mineral resources is underway,
including an assessment of appropriate mining methods and associated mine production rates, as well as proposed additional stepout and infill diamond drilling that will bring the confidence of the
estimate to a level suitable for a production decision. A feasibility study for Balmat will be completed on a priority basis, leading to a decision regarding re-activation of the mine. 

 
 

DIVIDENDS    
    

        We have never paid a dividend on the Common Shares and do not expect to do so in the foreseeable future. The actual timing, payment and amount of any dividends
paid by us will be determined by the board of directors from time to time based upon, among other things, our cash flow, results of operations and financial condition, our need for funds to finance
ongoing operations and such other business considerations as the board of directors considers relevant. 

 
 

DESCRIPTION OF CAPITAL STRUCTURE    
    

Common Shares  

        We are authorized to issue an unlimited number of Common Shares of which there are 80,714,692 issued and outstanding as of March 29, 2005. 

        Holders
of Common Shares are entitled to receive notice of any meetings of our shareholders, to attend and to cast one vote per Common Share at all such meetings. Holders of Common
Shares do not have cumulative voting rights with respect to the election of directors and, accordingly, holders of a majority of the Common Shares entitled to vote in any election of directors may
elect all directors standing for election. Holders of Common Shares are entitled to receive on a pro-rata basis such dividends, if any, as and when declared by the Company's board of
directors at its discretion from funds legally available therefor and upon our liquidation, dissolution or winding up are entitled to receive on a pro-rata basis our net assets after
payment of debts and other liabilities, in each case subject to the rights, privileges, restrictions and conditions attaching to any other series or class of shares ranking senior in priority to or on
a pro-rata basis with the holders of Common Shares with respect to dividends or liquidation. The Common Shares do not carry any pre-emptive, subscription, redemption or
conversion rights, nor do they contain any sinking or purchase fund provisions. 

Preference Shares  

        We are authorized to issue an unlimited number of Preference Shares, none of which are issued and outstanding as of March 29, 2005. 

        Preference
Shares may from time to time be issued and the directors may fix the designation, rights, privileges, restrictions and conditions attaching to any series of Preference Shares.
Preference Shares shall be entitled to preference over the Common Shares and over any other of our shares ranking junior to the Preference Shares with respect to the payment of dividends and the
distribution of assets or return of capital in the event of our liquidation, dissolution or winding up or any other return of capital or distribution of our assets among our shareholders for the
purpose of winding up our affairs. Preference Shares may be convertible into 

35

 

Common
Shares at such rate and upon such basis as the directors in their discretion may determine. No holder of Preference Shares will be entitled to receive notice of, attend, be represented at or
vote at any annual or special meeting, unless the meeting is convened to consider our winding up, amalgamation or the sale of all or substantially all of our assets, in which case each holder of
Preference Shares will be entitled to one vote in respect of each Preference Share held. Holders of Preference Shares will not be entitled to vote or have rights of dissent in respect of any
resolution to, among other things, amend our articles to increase or decrease the maximum number of authorized Preference Shares, increase or decrease the maximum number of any class of shares having
rights or privileges equal or superior to the Preference Shares, exchange, reclassify or cancel Preference Shares, or create a new class of shares equal to or superior to the Preference Shares. 

Warrants  

        The Warrants were created and issued pursuant to a warrant indenture (the "Warrant Indenture") between us and Equity Transfer Services Inc., as
warrant agent thereunder (the "Warrant Agent"). The following summary of certain provisions of the Warrant Indenture is not complete and is qualified in its entirety by reference to the
provisions of the Warrant Indenture. 

        Every
30 Warrants entitle the holder to purchase one Common Share at a price of $3.15. The exercise price and the number of Common Shares issuable upon exercise are both subject
to standard anti-dilution provisions. Warrants are exercisable at any time prior to 5:00 p.m. (Toronto time) on December 21, 2009, after which time the Warrants will expire
and become null and void. Under the Warrant Indenture, we are entitled to purchase in the market, by private contract or otherwise, all or any of the Warrants then outstanding, and any Warrants so
purchased will be cancelled. 

        No
fractional Common Shares will be issuable upon the exercise of any Warrants, and no cash or other consideration will be paid in lieu of fractional shares. Holders of Warrants will not
have any voting or pre-emptive rights or any other rights that a holder of Common Shares would have. 

Rights  

        The fundamental objectives of the shareholder rights plan (the "Rights Plan"), implemented under the terms of a shareholder rights plan agreement dated as
of November 9, 2004, are to provide adequate time for our board of directors and shareholders to assess an unsolicited take-over bid for us, to provide the board of directors with
sufficient time to explore and develop alternatives for maximizing shareholder value if a take-over bid is made, and to provide shareholders with an equal opportunity to participate in a
take-over bid. 

        One
Right has been issued by us in respect of each Common Share that is currently outstanding, and one Right will be issued in respect of each Common Share issued during the balance of
the term of the Rights Plan (which term expires on November 9, 2007) prior to the Separation Time, as described below. 

        The
Rights will separate from the Common Shares and will be exercisable ten trading days (the "Separation Time") after a person has acquired, or commences a take-over
bid to acquire, 20% or more of the Common Shares, other than by an acquisition pursuant to a take-over bid permitted by the Rights Plan (a "Permitted Bid"). The acquisition by any
person (an "Acquiring Person") of 20% or more of the Common Shares, other than by way of a Permitted Bid, is referred to as a "Flip-in Event". Any Rights held by an Acquiring Person
will become void upon the occurrence of a Flip-in Event. Ten trading days after the occurrence of the Flip-in Event, each Right (other than those held by the Acquiring Person),
will permit the purchase of $180 worth of Common Shares for $90. 

        For
the purposes of the Rights Plan the requirements for a Permitted Bid include the following: 

	(a)
	the
take-over bid must be made by way of a take-over bid circular;

	(b)
	the
take-over bid must be made to all shareholders, other than the bidder;

	(c)
	the
take-over bid must be outstanding for a minimum period of 60 days and Common Shares tendered pursuant to the take-over bid may not be taken up prior
to the expiry of the 60 day period and only if at such time more than 50% of the Common Shares held by shareholders, other than the bidder, its 

36

 

affiliates
and persons acting jointly or in concert and certain other persons (the "Independent Shareholders"), have been tendered to the take-over bid and not withdrawn; 

	(d)
	if
more than 50% of the Common Shares held by Independent Shareholders are tendered to the take-over bid within the 60 day period, the bidder must make a public
announcement of that fact and the take-over bid must remain open for deposits of Common Shares for an additional ten days from the date of such public announcement;

	(e)
	the
take-over bid must permit Common Shares to be deposited pursuant to the take-over bid, unless such take-over bid is withdrawn, at any time
prior to the date Common Shares are first taken up and paid for; and

	(f)
	the
take-over bid must provide that any Common Shares deposited pursuant to the take-over bid may be withdrawn until taken up and paid for. 

        The
Rights Plan also allows for a competing Permitted Bid (a "Competing Permitted Bid") to be made while a Permitted Bid is in existence. A Competing Permitted Bid must satisfy
all the requirements of a Permitted Bid except that it may expire on the same date as the Permitted Bid, subject to the requirement that it be outstanding for a minimum period of 35 days. 

37

  

 
 

MARKET FOR SECURITIES    
    

Prior Sales  

        The following table contains details of prior sales of our securities that are currently outstanding but not listed or quoted on a marketplace, which sales were
effected during the preceding twelve month period. 

	Date of Issuance
 
	 	Number of Common Shares (Post-Consolidation)
	 	Price per Common Share (Post-Consolidation)

	November 30, 2004(1)	 	172,600	 	$	2.70
	September 2004(2)	 	810,666	 	$	1.50
	June 2004(3)	 	1,036,919	 	$	5.40

Notes: 

	(1)
	Issue
of 5,178,000 units pursuant to the exercise of the over-allotment option granted in respect of the September 2004 private placement. Each unit was
comprised of one Common Share (pre-Consolidation) and one-half of one common share purchase warrant. As of the date hereof, every 30 common share purchase warrants
entitle the holder thereof to purchase one Common Share (post-Consolidation) at a price of $3.60 per Common Share, at any time prior to November 30, 2006.

	(2)
	The
private placement that closed as September 30, 2004 originally consisted of 34,520,000 units at a price of $0.05 per unit, each such unit being comprised of one
Common Share (pre-Consolidation) and one-half of a common share purchase warrant. As at the date hereof, every 30 common share purchase warrants entitle the holder
thereof to purchase one Common Share (post-Consolidation) upon the payment of $1.80, at any time prior to September 28, 2006. On December 10, 2004 the Company repurchased and
cancelled 10,200,000 of these units (pre-Consolidation) at the original subscription price. See "Interest of Management and Others in Material Transactions".

	(3)
	Private
placement of 31,107,570 units at a price of $5.40 per unit, each unit being comprised of one Common Share (pre-Consolidation) and one-half of a
common share purchase warrant. As at the date hereof, every 30 common share purchase warrants entitle the holder thereof to purchase one Common Share (post-Consolidation) upon the
payment of $6.00, at any time prior to March 31, 2006. 

Price Range And Trading Volume  

        Our Common Shares are listed on the TSX under the symbol "HBM". The volume of trading and the closing price of our Common Shares, as adjusted for the
Consolidation, during the periods indicated are set forth in the following table. 

	Period
 
	 	High
	 	Low
	 	Volume

	 
	 	($)

	 	($)

	 	(Shares)

	2004	 	 	 	 	 	 	 	 
	January	 	$	7.80	 	$	4.50	 	257,480
	February	 	$	7.20	 	$	5.10	 	427,977
	March	 	$	6.60	 	$	4.50	 	1,284,370
	April	 	$	5.10	 	$	3.00	 	371,494
	May	 	$	4.50	 	$	2.70	 	320,328
	June	 	$	3.60	 	$	2.40	 	1,142,387
	July	 	$	3.00	 	$	1.50	 	646,391
	August	 	$	2.10	 	$	1.50	 	337,026
	September	 	$	2.10	 	$	1.50	 	192,805
	October	 	$	5.10	 	$	1.50	 	1,669,670
	November	 	$	5.10	 	$	3.30	 	877,087
	December	 	$	3.60	 	$	1.80	 	1,850,176

        On
March 29, 2005, the last day on which the Common Shares traded prior to the date of this AIF, the closing price of our Common Shares on the TSX was $3.14 per share. 

        Our
Warrants began trading on the TSX on December 24, 2004. During the five days of 2004 in which the Warrants traded the high trading price was $0.05, the low trading price was
$0.04 and total volume was 117,017,000. 

38

 

 
 

ESCROWED SECURITIES    
    

        The following table sets forth information relating to our securities held in escrow as of March 29, 2005. Equity Transfer Services Inc. is the
escrow agent in respect of all of the escrowed securities. All of the escrowed securities are eligible for release from escrow. 

	Designation of Class
 
	 	Number of

Securities Held in Escrow
	 	Percentage

of Class

	Common Shares	 	48,501	 	0.1%
	Common Shares	 	120,000	 	0.1%
	Common Shares	 	703,630	 	0.9%

 
 

DIRECTORS AND OFFICERS    
    

        The following table sets forth the name, municipality of residence, position and principal occupation of each person who currently is one of our directors and/or
executive officers. 

	Name and Municipality

of Residence
 
	 	Position with the Company
 
	 	Principal Occupation
 

	ALLEN J. PALMIERE(2)(3)(4)(5)

Toronto, Ontario	 	Chairman and director since December 21, 2004(1)	 	President, Chief Executive Officer and Director of Silk Road Resources Ltd.
	RICHARD W. BRISSENDEN(2)(5)

Toronto, Ontario	 	Director since June 13, 2003(1)	 	Chairman of Excellon Resources Inc.
	PETER JONES

Flin Flon, Manitoba	 	Director(1), President and Chief Executive Officer	 	President and Chief Executive Officer of the Company
	IAN CONN

Dallas, Texas	 	Director since December 21, 2004(1)	 	Management consultant
	NORMAN ANDERSON(3)(4)

Vancouver, British Columbia	 	Director since December 21, 2004(1)	 	President of Anderson & Associates
	JAMES W. ASHCROFT(2)(3)(4)(5)

Sudbury, Ontario	 	Director since December 21, 2004(1)	 	Mining Consultant
	H. RUSSELL ROOD

Flin Flon, Manitoba	 	President, Mining Division	 	President, Mining Division of the Company
	ALAN HAIR

Flin Flon, Manitoba	 	Vice President, Metallurgy, Safety, Health and Environment	 	Vice President, Metallurgy, Safety, Health and Environment of the Company
	JOHN KNOWLES

Winnipeg, Manitoba	 	Vice President and Chief Financial Officer	 	Vice President and Chief Financial Officer of the Company
	BRIAN GORDON

Winnipeg, Manitoba	 	Vice President and General Counsel	 	Vice President and General Counsel of the Company
	TOM GOODMAN

Flin Flon, Manitoba	 	Vice President, Technical Services and Human Resources	 	Vice President, Technical Services and Human Resources of the Company

Notes: 

	(1)
	The
term of office for each director of the Company will expire upon the completion of the next annual meeting of shareholders of the Company.

	(2)
	Member
of the Audit Committee. Mr. Palmiere is the Chair of the Committee.

	(3)
	Member
of the Compensation Committee. Mr. Palmiere is the Chair of the Committee.

	(4)
	Member
of the Corporate Governance and Nominating Committee. Mr. Palmiere is the Chair of the Committee.

	(5)
	Member
of the Environmental, Health and Safety Committee. Mr. Ashcroft is the Chair of the Committee. 

39

 

        As at March 29, 2005, our directors and executive officers, as a group, beneficially owned, directly or indirectly, or exercised control or
direction over 11,833 Common Shares, representing less than 0.1% of the total number of Common Shares outstanding. 

        Each
of the foregoing individuals has held his present principal occupation other office or position with the same firm set opposite his name for the past five years, except for:
Mr. Palmiere who, from October 1993 to May 2003, was chief financial officer of Zemex Corporation; Mr. Jones, who, from 1995 to 2002, held various positions other than
President and Chief Executive Officer with the Company and Mr. Goodman, who
managed a copper smelting and refining company for the Anglo American group in Zambia from September 2001 to February 2003. 

        The
following is a brief biography of each individual who currently is one of our directors and/or officers. 

Allen J. Palmiere — Chairman and Director. Mr. Palmiere is a Chartered Accountant,
and has served in senior management financial supervisory capacities in the mining industry most of his career. In the past, Mr. Palmiere has been Treasurer of Northgate
Exploration Ltd.; President, Chief Executive Officer and Chief Financial Officer of Breakwater Resources Ltd.; and Chief Financial Officer of Zemex Corporation. He is a member of the
board of directors of Constellation Copper Corporation and the Chair of its audit committee. He is currently the President, Chief Executive Officer and a director of Silk Road Resources Ltd. 

Richard Brissenden — Director. Mr. Brissenden is a Chartered Accountant. He has
been Chairman of Excellon Resources Inc., a mineral exploration and development company, since September 1990. Since February 1996, he has been President of Regal Consolidated
Ventures Limited, a mineral exploration and development company. Mr. Brissenden also serves as a director of several other public companies. 

Peter R. Jones, P. Eng. — President, Chief Executive Officer and Director.
Mr. Jones has been the President and Chief Executive Officer of HBMS since 2002. He joined HBMS in 1995 as Vice President Mining and has subsequently held the positions of Senior Vice President
Projects and President Metallurgical Division. As Senior Vice President Projects he was responsible for the 777 Project. Prior to joining HBMS, he held senior positions in operations and
projects with Cominco Limited, Cape Breton Development Corporation and Cominco Engineering Services. He has a broad background having worked in potash mines, coal mines, open pit and underground lead
zinc mines, gold mines and has directed extensive feasibility studies and management services for a wide range of clients throughout the world. Mr. Jones graduated from the Camborne School of
Mines, United Kingdom in 1969 and the Banff School of Advanced Management in 1984. Mr. Jones is the President of the Mining Association of Manitoba and a Director of the Mining
Association of Canada. 

Ian Conn — Director. Mr. Conn is the personal advisor of several Chief Executive
Officers in China, France and Australia. He is the former President and Chief Executive Officer of the Asian Pacific Business Unit, Thomas Group Incorporated Limited. Mr. Conn obtained a
Bachelor of Engineering from Queen's University in Kingston, Ontario. He has served as a member of a number boards of directors. 

Norman Anderson, P. Eng. — Director. Mr. Anderson has been involved in the
mining industry for over 50 years and is the former Chairman and Chief Executive Officer of Cominco Ltd. Currently, Mr. Anderson is President of the management consulting firm of
Anderson & Associates. He has been active in consulting, particularly due diligence consulting and evaluations for financial institutions and mining companies, since 1987. He holds a Bachelor
of Science in Geological Engineering from the University of Manitoba in Winnipeg, Manitoba. Mr. Anderson serves on a number of boards of directors of public companies. 

James W. Aschroft, P. Eng — Director. Mr. Ashcroft is the president of J.W.
Ashcroft & Associates, a mining consulting company. As a former President of the Ontario division of INCO Limited, he managed a vertically-integrated mining company, which during his tenure
completed a $270 million mining project, improved its safety and environment record and maintained stable labour relations. He received a national diploma in engineering at Wigan Mining College
in Lancashire, England and has completed an Executive Management Training Course at the Richard Ivey School of Business. Mr. Ashcroft serves on a number of boards of directors and, in some
cases, sits on the health and environment, audit and corporate governance committees of such boards. 

40

 

H. Russell Rood — President, Mining Division. Mr. Rood has been with HBMS for six
years, prior to which he worked for De Beers, holding various senior management positions. Mr. Rood holds a Bachelor of Civil Engineering and Bachelor of Mining Engineering degrees from the
University of Witwatersrand in South Africa. He also attended a part time management program through the School of Business Leadership in Johannesburg, South Africa. Mr. Rood is a member of the
South African Institute of Mining. 

Alan Hair — Vice President, Metallurgy, Safety, Health & Environment. Since joining
HBMS in 1996, Mr. Hair has held various operational management roles in the surface plants and was appointed the Vice-President, Metallurgy in early 2004. Prior to joining HBMS,
Mr. Hair was Smelting Manager at MIM's zinc smelter in Avonmouth, England. He graduated from the University of Leeds, England in 1983 with a Bachelor of Science Honours degree in Mineral
Engineering. 

John L. Knowles — Vice President and Chief Financial Officer. Mr. Knowles has been
involved in the natural resource industry for 20 years, holding senior positions in public and private companies in Canada and Africa. He is a Chartered Accountant and he holds an Honours
Bachelor of Commerce degree from Queen's University. 

Brian D. Gordon — Vice President and General Counsel. Mr. Gordon obtained his
Bachelor of Law degree from the University of Manitoba. Formerly a partner with a major Manitoba law firm, he joined HBMS in 1994 as director, general counsel and corporate secretary.
Mr. Gordon is a member of the Law Society of Manitoba and of the Canadian Bar Association. 

Tom A. Goodman — Vice President, Technical Services and Human Resources.
Mr. Goodman is a graduate in Chemical and Metallurgical Technology from the British Columbia Institute of Technology. He worked for Anglo American for over 26 years in a wide variety of
operational, technical, and management positions. He recently returned to us after managing a copper smelting and refining company for the Anglo American group in Zambia. 

Corporate Cease Trade Orders or Bankruptcies  

        None of our directors, officers or other members of our management is, or within the ten years prior to the date hereof has been, a director, officer, promoter or
other member of management of any other issuer that, while that person was acting in the capacity of a director, officer, promoter or other member of management of that issuer, was the subject of a
cease trade order or similar order or an order that denied the issuer access to any statutory exemptions for a period of more than 30 consecutive days or was declared bankrupt or made a
voluntary assignment in bankruptcy, made a proposal under any legislation relating to bankruptcy or insolvency or has been subject to or instituted any proceedings, arrangement or compromise with
creditors or had a receiver, receiver manager or trustee appointed to hold its assets, other than Mr. Brissenden, who is a director of Regal Consolidated Ventures Limited, which is subject to a
cease trade order issued on June 12, 2001 due to its failure to file financial statements. Mr. Brissenden was also a director of Trenton Industries Inc., which was placed in
receivership in 1995. Mr. Brissenden resigned from the board of directors of Trenton Industries Inc. immediately preceding the bankruptcy of that company. 

Penalties and Sanctions  

        None of our directors, officers or other members of management is, or within the ten years prior to the date hereof has been (i) subject to any penalties
or sanctions imposed by a court relating to Canadian securities legislation or by a Canadian securities regulatory authority or has entered into a settlement agreement with a Canadian securities
regulatory authority; or (ii) subject to any other penalties or sanctions imposed by a court or regulatory authority that would be likely to be considered important to a reasonable investor
making an investment decision. 

Conflict of Interest  

        To the best of our knowledge, and other than as disclosed herein, there are no known existing or potential conflicts of interest among us, our directors, officers
or other members of management, or persons who, as a result of their outside business interests except that certain of the directors, officers, and other members of 

41

 

management
serve as directors, officers, promoters and members of management of other public companies and therefore it is possible that a conflict may arise between their duties as a director,
officer or member of management of the Company and their duties as a director, officer, promoter or member of management of such other companies. 

        Our
directors and officers are aware of the existence of laws governing accountability of directors and officers for corporate opportunity and requiring disclosures by directors of
conflicts of interest and we will
rely upon such laws in respect of any directors' and officers' conflicts of interest or in respect of any breaches of duty by any of its directors or officers. All such conflicts will be disclosed by
such directors or officers in accordance with the Business Corporations Act (Ontario) and they will govern themselves in respect thereof to the best of
their ability in accordance with the obligations imposed upon them by law. 

Compensation of Directors  

        In 2004, we paid no fees to any of the non-executive directors for meetings attended. We reimbursed all directors for
out-of-pocket expenses reasonably incurred while performing their duties. We paid two legal firms, with which two of our former directors were associated, for legal services
provided during our most recent fiscal year. 

 
 

AUDIT COMMITTEE DISCLOSURE    
    

        The Audit Committee is responsible for monitoring our systems and procedures for financial reporting and internal control, reviewing certain public disclosure
documents and monitoring the performance and independence of our external auditors. The committee is also responsible for reviewing our annual audited financial statements, unaudited quarterly
financial statements and management's discussion and analysis of financial results of operations for both annual and interim financial statements and review of related operations prior to their
approval by the full board of directors. 

        The
Audit Committee's charter sets out its responsibilities and duties, qualifications for membership, procedures for committee member removal and appointment and reporting to our board
of directors. A copy of the charter is attached hereto as Schedule "B". 

Composition  

        The Audit Committee is comprised of three directors, all of whom are independent directors: Allen J. Palmiere (Chair), Richard W. Brissenden and James W.
Ashcroft. In addition to being independent directors as described above, all members of our Audit Committee must meet an additional "independence" test under Multilateral
Instrument 52-110, Audit Committees in that their directors' fees are the only compensation they, or their firms, receive from us and that they are not
otherwise affiliated with us. Each member of the Audit Committee is financially literate within the meaning of Multilateral Instrument 52-110. 

Relevant Educational Experience  

        Set out below is a description of the education and experience of each audit committee member that is relevant to the performance of his responsibilities as an
audit committee member. 

Allen
J. Palmiere — Mr. Palmiere is a Chartered Accountant. 

James
Ashcroft — Mr. Ashcroft is a former president of the Ontario division of INCO Limited, a vertically-integrated mining company. In addition to his
national diploma in engineering from Wigan Mining College in Lancashire, England, he has completed the Executive Management Training Course at the Richard Ivey School of Business. He serves on a
number of boards of directors and, in some cases, sits on the audit and corporate governance committees of such boards. 

Richard
W. Brissenden — Mr. Brissenden is a Chartered Accountant. 

42

 

Policy Regarding Non-Audit Services Rendered by Auditors  

        Pursuant to the audit committee charter, the audit committee is to pre-approve all non-audit services to be provided to us or any of our
subsidiaries by our independent auditor. More generally, the audit committee is to instruct the independent auditor that the board of directors, as representatives of the shareholders, is the client
of the independent auditor. The audit committee is also to review and discuss, on an annual basis, with the independent auditor all significant relationships the independent auditor has with us to
determine their independence. 

Remuneration of Auditors  

        The following tables presents, by category, the fees accrued by KPMG LLP as external auditors for the Company and Deloitte & Touch LLP as
external auditors for HBMS for the fiscal years ended December 31, 2004 and 2003. 

	 
	 	2004
	 	2003

	Category of Fees
 
	 	KPMG LLP
	 	Deloitte & Touche LLP
	 	KPMG LLP
	 	Deloitte & Touche LLP

	Audit fees	 	$	521,391	 	$	322,263	 	$	95,000	 	$	325,000
	Audit related fees	 	 	—	 	 	479,046	 	 	—	 	 	 
	Tax fees	 	 	3,200	 	 	4,533	 	 	3,200	 	 	12,000
	All other fees	 	 	—	 	 	346,387	 	 	27,097	 	 	217,000

        "Audit
related fees" include fees for financial information presentation and certification. "Tax fees" include tax compliance services and tax advisory and planning services. "All Other
Fees" include principally consultation and research services related to prospectus preparation, stock exchange listing application and acquisition activities of the Company. Management will present
regular updates to the Audit Committee of the services rendered by the auditors in response to the Committee's oversight regarding external auditor independence and pre-approved service
authorizations. 

43

  

 
 

INDEBTEDNESS OF DIRECTORS AND EXECUTIVE OFFICERS    
    

        None of the Company's directors, executive officers or senior officers, nor any associate of such director, executive officer or senior officer is indebted to us
or any of our subsidiaries. In addition, none of the indebtedness of these individuals to another entity has been the subject of a guarantee, support agreement, letter of credit or similar arrangement
or understanding with us or any of our subsidiaries. 

 
 

LEGAL PROCEEDINGS    
    

        In May 2004, a number of plaintiffs initiated an action, in the State of North Carolina, against Zochem, CMM and a number of other defendants seeking
damages in an unspecified amount and alleging that they had been injured as a result of an explosion that occurred at a pharmaceutical plant. The plaintiffs have alleged that Zochem and/or CMM
designed, manufactured, sold and supplied chemicals used in the manufacture of a rubber compound that were dangerous, defective and susceptible to causing explosions. HBMS has retained legal counsel
in North Carolina and cannot currently assess its potential liability in relation to this claim. 

        An
action has been commenced against Hudson Bay Exploration and Development Company Limited, Anglo American Exploration (Canada) Ltd. and certain employees thereof claiming a
breach of confidence relating to mining claims staked by the defendants in Northern Québec. The plaintiff has alleged that the defendants misused confidential information to its
detriment. The plaintiff is seeking, among other things, to have the claims transferred to the plaintiff, along with unspecified damages. Pursuant to an agreement dated December 21, 2004, Anglo
American Exploration (Canada) Ltd. has agreed to indemnify and save harmless Hudson Bay Exploration and Development Company Limited from and against all losses, damages, costs and liabilities
incurred under any judgment or settlement made in connection with this action. 

        In
1994, HBMS received $18.5 million pursuant to a litigation settlement agreement. The Canada Revenue Agency questioned HBMS' treatment of the receipt of these funds as
non-taxable damages and, as a result, HBMS conformed to the Canada Revenue Agency position and then filed a notice of objection. HBMS has had discussions with the Canada Revenue Agency in
this regard and has considered litigation to support its position. 

        HBMS
has been named as a co-defendant in two actions alleging various wrongful actions committed in connection with the use and operation of the Whitesand Dam and the Island
Falls Hydroelectric station in Saskatchewan. The plaintiffs have claimed for an aggregate of $1 billion in compensatory damages and in excess of $100 million in punitive damages. One of
HBMS' former subsidiaries constructed and operated the dam until it was transferred to SaskPower in 1981. The plaintiffs in both actions claim that the lands on which the hydroelectric facilities were
built are subject to aboriginal rights. No further steps have been taken by the plaintiffs to proceed with their claims since 1995. 

        A
claim has been filed against HBMS in relation to the workplace death of an employee. We understand that such a claim is statute barred pursuant to the Workers
Compensation Act. We believe that HBMS has a good defence to this claim and that HBMS should not be held liable in respect of this claim. The Chief Medical Examiner of the
Province of Manitoba has also commenced an inquest into this workplace death. The inquest is currently underway. In November 2004, the claim was denied by the Workers Compensation Board. 

        Except
as noted above, we are not aware of any litigation outstanding, threatened or pending against us as of the date hereof that would be material to our financial condition or results
of operations. 

 
 

INTEREST OF MANAGEMENT AND OTHERS IN MATERIAL TRANSACTIONS    
    

        Other than as described below or as disclosed elsewhere in this AIF, none of our directors, executive officers or principal shareholders and no associate or
affiliate of the foregoing persons has or has had any material interest, direct or indirect, in any transaction within the past three years or in any proposed transaction that has materially affected
or will materially affect us or any of our subsidiaries. 

Financial Assistance for the Balmat Acquisition  

        In connection with our purchase of the Balmat Mine, St. Lawrence Zinc Company LLP, one of our subsidiaries received assistance from Frame Mining Company
("FMC"), a company controlled by our former 

44

 

Chief
Executive Officer and a former director. FMC advanced US$1 million to our subsidiary in order for it to assume an environmental bond. Further, FMC provided security on a proposed
US$4 million project loan to our subsidiary. As security for these debts, we pledged a 51% interest in our subsidiary. Under the terms of the agreement, 26% of the ownership interest held as
security was released to us after the repayment of the US$1 million advanced by FMC and an additional payment of US$200,000. The remaining 25% ownership interest held as security was released
in 2003 upon the final payment of US$800,000 to FMC. 

Settlement of Debt  

        In 2003, we settled $362,724 of related party debts through the issuance of 100,756 Common Shares. 

Agreements with Frame Parties  

        Pursuant to an agreement dated June 17, 2004 (the "June Agreement"), Frame Mining Corporation, Curraghdale Inc. and Curraghdale Corp.
(collectively the "Frame Parties") sold to Gregory J. Peebles, who was then our Chairman and Chief Executive Officer, 666,666 Common Shares and 318,159 common share purchase warrants.
The June Agreement provided for an aggregate purchase price of $3,600,000. Of this purchase price, $15,000 was paid on June 17, 2004, $180,000 was to be payable in twelve consecutive monthly
instalments of $15,000 each with each instalment payable on the 20th day of each month, beginning on July 20, 2004 and ending on June 20, 2005 and the balance of $3,405,000 was to be
payable on July 2, 2005. The outstanding balance of the purchase price was secured by a pledge of the purchased securities and recourse of the Frame Parties was limited to the purchased
securities. If the purchased securities were sold prior to full payment therefor, for greater than the original $0.18 purchase price per share, or if on the day prior to the date the balance of the
purchase price was to be payable, the trading price of the Common Shares exceeds $0.18 or $0.20 in the case of the warrants, the Frame Parties were entitled to receive from Mr. Peebles 20% of
the excess subject to an aggregate limit of $5 million. Mr. Peebles disclosed the terms of this agreement to certain members of our board of directors on December 8, 2004. 

        On
December 8, 2004, Mr. Peebles, the Frame Parties and Mr. Clifford Frame entered into a further agreement (the "December Agreement"). Mr. Peebles
also signed the December Agreement on behalf of us although no other of our officers or directors reviewed the December Agreement prior to its execution and, accordingly, we expressed doubt concerning
the binding nature of this Agreement. The December Agreement provided that Mr. Peebles was entitled to satisfy the unpaid portion of the purchase price under the June Agreement by paying
$1,500,000 to the Frame Parties. Of this sum, $1,000,000 was paid upon the closing of the acquisition of HBMS and the balance of the amount was to be paid no later than January 17, 2005. In
addition, the December Agreement provided that we were to pay on the closing of the Acquisition $120,000 to Frame Mining Corporation and Curraghdale Inc. to settle claims made by
Curraghdale Inc. for compensation for services rendered by Mr. Clifford Frame from November 1, 2003 to April 21, 2004 in his then capacity as our Chairman and Chief
Executive and with respect to a claim by Frame Mining Corporation for repayment of a $10,000 loan. The December Agreement further provided that we were to make available to the Frame Parties for
subscription on the Acquisition up to 20,000,000 Subscription Receipts at the offering price of $0.075 each. We made the payments and issued and sold to the Frame Parties the securities as set
out in the December Agreement. Mr. Peebles joined us, as our Chairman and Chief Executive Officer, on April 21, 2004. We entered into three arrangements with certain corporations owned
or controlled by Mr. Peebles (the "Peebles Affiliates"), on April 30, 2004, which provided that such Peebles Affiliates would provide various services to us and be paid various
forms of compensation in connection therewith (the "Consulting and Services Agreements"). Upon a further review of the Consulting and Services Agreements, these agreements were deemed to be
inappropriate, and accordingly were terminated on November 9, 2004, but with effect as at April 30, 2004. We did not make any payments under the Consulting and Services Agreement and the
parties have mutually released each other from any and all claims and liabilities thereunder. 

September Private Placement  

        Mr. Peebles and Mr. Irwin, a former Corporate Secretary and a former director of the Company, purchased 333,333 units and 6,666 units,
respectively, pursuant to the private placement completed on September 30, 2004, at a price of $1.50 per unit. In the course of reviewing our preliminary prospectus dated November 10,
2004, the 

45

 

Ontario
Securities Commission raised concerns that these transactions occurred when Mr. Peebles and Mr. Irwin may have had material undisclosed information concerning the acquisition of
HBMS that had not been generally disclosed. In response to these concerns, but without admitting any impropriety or unlawful conduct, Mr. Peebles and Mr. Irwin have returned to us the
securities acquired by them in the private placement, at the original subscription price of $1.50 per unit. We have cancelled these securities. 

Resignation of Gregory J. Peebles  

        On December 10, 2004, the mutual decision was made by us and Mr. Peebles that he should resign as our Chairman, Chief Executive Officer and a
director. A severance agreement was entered into, pursuant to which we paid to Mr. Peebles the sum of $500,000 in severance and $166,666 in payment of owed employment income. 

 
 

TRANSFER AGENT AND REGISTRAR    
    

        The transfer agent, registrar for the Common Shares and warrant agent for the Warrants is Equity Transfer Services Inc. at its principal offices in
Toronto, Ontario. 

 
 

MATERIAL CONTRACTS    
    

        The only contracts material to us entered into by us since January 1, 2002, other than in the ordinary course of business, are as follows: 

	1.
	the
Balmat Acquisition Agreement referred to under the heading "General Development of the Business";

	2.
	the
Acquisition Agreement referred to under the heading "General Development of the Business — Acquisition of HBMS";

	3.
	shareholders'
rights plan between the Company and Equity Transfer Services Inc. dated November 9, 2004 and ratified by our shareholders on December 8, 2004. The
fundamental objectives of the rights plan are to provide adequate time for our board of directors and shareholders to assess an unsolicited take-over bid for us, to provide the board of
directors with sufficient time to explore and develop alternatives for maximizing shareholder value if a take-over bid is made, and to provide shareholders with an equal opportunity to
participate in a take-over bid;

	4.
	the
warrant indenture between Equity Transfer Services Inc. and us dated December 21, 2004 that governs the Warrants. The warrant indenture provides for adjustment to the
exercise price of and the kind and number of common shares to be issued upon exercise of the Warrants;

	5.
	the
Parent Guarantee referred to under the heading "General Development of the Business — Acquisition of HBMS";

	6.
	the
Note indenture among Hudson Bay Mining and Smelting Co., Limited, Hudson Bay Exploration and Development Company Limited and the Bank of New York, as trustee, dated
December 21, 2004 that governs the Notes issued by Hudson Bay Mining and Smelting Co., Limited in connection with the Acquisition; and

	7.
	the
registration rights agreement between Hudson Bay Mining and Smelting Co., Limited, Credit Suisse First Boston LLC and WestLB AG, London Branch, dated
December 21, 2004, pursuant to which HBMS must register the Notes under the United States Securities Act of 1933, as amended. 

 
 

INTEREST OF EXPERTS    
    

        None of Cassels Brock & Blackwell LLP, ACA Howe International Limited or John E. Steers, P. Eng or any director, officer, employee or partner
thereof, as applicable, received or has received a direct or indirect interest in our property or of any of our associates or affiliates. As at the date hereof, the directors, officers, employees and
partners, as applicable, of each of the aforementioned companies and partnerships beneficially own, directly or indirectly in the aggregate less than one per cent of our securities. 

46

 

        No
director, officer, employee or partner, as applicable, of the aforementioned companies or partnerships is currently expected to be elected, appointed or employed as one of our
directors, officers or employees or of any of our associates or affiliates. 

 
 

ADDITIONAL INFORMATION    
    

        Additional information, including director's and officer's remuneration and indebtedness, principal holders of our securities and securities authorized for
issuance under equity compensation plans, as applicable, is contained in our management information circular dated May 21, 2004 and in our prospectus dated December 14, 2004
(the "Prospectus"). Additional financial information is provided in our Prospectus and in our financial statements and management's discussion and analysis for the fiscal year ended
December 31, 2004. 

        Additional
information relating to the Company may be found at www.sedar.com. 

47

  

 
 

SCHEDULE "A"
  GLOSSARY OF MINING TERMS    
    

        The following is a glossary of terms used in this annual information form. 

	

 	
 	

 
	
 "basalt"	
 	

A general term for dark-colored mafic igneous rocks, commonly extrusive but locally intrusive (e.g., as dikes), composed chiefly of calcic plagioclase and clinopyroxene; the fine-grained equivalent of gabbro. Nepheline, olivine, orthopyroxene,
or quartz may be present. Adj. basaltic.
	
 "CIM"	
 	

Canadian Institute of Mining, Metallurgy and Petroleum.
	
 "concentrator"	
 	

A plant where ore is separated into values (concentrates) and rejects (tails). An appliance in such a plant, e.g., flotation cell, jig, electromagnet, shaking table. Also called mill.
	
 "double-drum hoist"	
 	

A hoist with two drums that can be driven separately or together by a clutch.
	
 "felsic"	
 	

A mnemonic adj. derived from (fe) for feldspar, (l) for lenad or feldspathoid, and (s) for silica, and applied to light-colored rocks containing an abundance of one or all of these constituents. Also applied to the minerals themselves,
the chief felsic minerals being quartz, feldspar, feldspathoid, and muscovite.
	
 "grade"	
 	

The amount of valuable metal in each tonne or ore, expressed as grams per tonne for precious metals.
	
 	
 	

Cut-off grade — is the minimum metal grade at which a tonne of rock can be processed on an economic basis.
	
 	
 	

Recovered grade — is actual metal grade realized by the metallurgical process and treatment of ore, based on actual experience or laboratory testing.
	
 "hectare"	
 	

One hectare equals 2.47 acres.
	
 "mafic"	
 	

Pertaining to or composed dominantly of the ferromagnesian rock-forming silicates; said of some igneous rocks and their constituent minerals.
	
 "metallurgy"	
 	

The science of extracting metals from ores by mechanical and chemical processes and preparing them for use.
	
 "mine"	
 	

An excavation in the earth for the purpose of extracting minerals. The excavation may be an open pit on the surface or underground workings.
	
 "mineral reserves"	
 	

That part of a measured or indicated mineral resource which could be economically mined, demonstrated by at least a preliminary feasibility study that includes adequate information on mining, processing, metallurgical, economic and other relevant
factors that demonstrate, at the time of reporting, that economic extraction can be justified. A mineral reserve includes diluting materials and allowances for losses that may occur when the material is mined. Mineral reserves are those parts of
mineral resources which, after the application of all mining factors, result in an estimated tonnage and grade which, in the opinion of the qualified person(s) making the estimates, is the basis of an economically viable project after taking
account of all relevant processing, metallurgical, economic, marketing, legal, environment, socio-economic and government factors. Mineral reserves are inclusive of diluting material that will be mined in conjunction with the mineral reserves and
delivered to the treatment plant or equivalent facility. The term "mineral reserve" need not necessarily signify that extraction facilities are in place or operative or that all governmental approvals have been received. It does signify that there
are reasonable expectations of such approvals. Mineral reserves are subdivided into proven mineral reserves and probable mineral reserves. Mineral reserves fall under the following categories:
	 	 	 

48

 

	
 "proven mineral reserves"	
 	

That part of a measured mineral resource that is the economically mineable part of a measured mineral resource, demonstrated by at least a preliminary feasibility study that includes adequate information on mining, processing, metallurgical, economic,
 and other relevant factors that demonstrate, at the time of reporting, that economic extraction is justified.
	
 "probable mineral reserves"	
 	

That part of an indicated and in some circumstances a measured mineral resource that is economically mineable demonstrated by at least a preliminary feasibility study that includes adequate information on mining, processing, metallurgical, economic,
and other relevant factors that demonstrate, at the time of reporting, that economic extraction can be justified.
	
 "mineral resources"	
 	

A concentration or occurrence of natural, solid, inorganic or fossilized organic material in or on the Earth's crust in such form and quantity and of such a grade or quality that it has reasonable prospects for economic extraction. The location,
quantity, grade, geological characteristics and continuity of a mineral resource are known, estimated or interpreted from specific geological evidence and knowledge. Mineral resources fall under the following categories:
	
 "measured mineral resource"	
 	

That part of a mineral resource for which quantity, grade or quality, densities, shape and physical characteristics are so well established that they can be estimated with confidence sufficient to allow the appropriate application of technical and
economic parameters to support production planning and evaluation of the economic viability of the deposit. The estimate is based on detailed and reliable exploration, sampling and testing information gathered through appropriate techniques from
locations such as outcrops, trenches, pits, workings and drill holes that are spaced closely enough to confirm both geological and grade continuity.
	
 "indicated mineral resource"	
 	

That part of a mineral resource for which quantity, densities, shape and physical characteristics can be estimated with a level of confidence sufficient to allow the appropriate application of technical and economic parameters and to support mine
planning and evaluation of the economic viability of the deposit. The estimate is based on detailed and reliable exploration and testing information gathered through appropriate techniques from locations such as outcrops, trenches, pits, workings and
drill holes that are spaced closely enough for geological and grade continuity to be reasonably assumed.
	
 "inferred mineral resource"	
 	

That part of a mineral resource for which quantity and grade or quality can be estimated on the basis of geological evidence and limited sampling and reasonably assumed, but not verified, geological and grade continuity. The estimate is based on
limited information and sampling gathered through appropriate techniques from locations such as outcrops, trenches, pits, workings and drill holes.
	
 "mineralization"	
 	

The process or processes by which a mineral or minerals are introduced into a rock, resulting in a valuable or potentially valuable deposit. It is a general term incorporating various types; for example, fissure filling, impregnation and
replacement.
	
 "Mm"	
 	

Millions.
	 	 	 

49

 

	
 "mm"	
 	

Millimetres (0.001 metres).
	
 "NI 43-101"	
 	

National Instrument 43-101 — Standards of Disclosure for Mineral Projects of the Canadian Securities Administrators.
	
 "ore"	
 	

A natural aggregate of one or more minerals which, at a specified time and place, may be mined and sold at a profit, or from which some part may be profitably separated.
	
 "ounce" or "oz"	
 	

Troy ounce, equal to approximately 31.103 grams.
	
 "recovery"	
 	

A term used in process metallurgy to indicate the proportion of valuable material obtained in the process. It is generally stated as a percentage of valuable metal in the processed material that is recovered compared to the total valuable metal
present.
	
 "roasting"	
 	

Heating an ore to effect some chemical change that will facilitate smelting.
	
 "stratiform"	
 	

Having the form of a layer, bed, or stratum; consisting of roughly parallel bands or sheets, such as a stratiform intrusion.
	
 "stratigraphic sequence"	
 	

A chronologic succession of sedimentary rocks from older below to younger above, essentially without interruption; e.g., a sequence of bedded rocks of interregional scope, bounded by unconformities.
	
 "stratigraphy"	
 	

The science of rock strata. It is concerned not only with the original succession and age relations of rock strata but also with their form, distribution, lithologic composition, fossil content, geophysical and geochemical properties; indeed, with
all characters and attributes of rocks as strata; and their interpretation in terms of environment or mode of origin, and geologic history.
	
 "tailings"	
 	

The gangue and other refuse material resulting from the washing, concentration, or treatment of ground ore.
	
 "ton"	
 	

An English unit of measurement 1,102 kilograms.
	
 "tonne"	
 	

A metric tonne, 1,000 kilograms or 2,204.6 pounds.

Conversion Table  

	To Convert
 
	 	To
	 	Multiply by

	Short tons	 	Tonnes	 	1.10231
	Long tons	 	Tonnes	 	0.98422
	Pounds	 	Tonnes	 	2204.62
	Ounces (troy)	 	Tonnes	 	32,150
	Ounces (troy)	 	Kilograms	 	32.150
	Ounces (troy)	 	Grams	 	0.03215
	Ounces (troy)/short ton	 	Grams/tonne	 	0.02917
	Acres	 	Hectares	 	2.47105
	Miles	 	Kilometres	 	0.62137
	Feet	 	Metres	 	3.28084

50

  

 
 

SCHEDULE "B"
  AUDIT COMMITTEE CHARTER    
    

I.     PURPOSE  

        The Audit Committee is a committee of the Board of Directors. The primary function of the Audit Committee is to assist the Board of Directors in fulfilling its
oversight responsibilities by: 

	•
	reviewing
the financial reports and other financial information provided by the Company to any governmental body or the public and other relevant documents;

	•
	recommending
the appointment and reviewing and appraising the audit efforts of the Company's independent auditor and providing an open avenue of communication among the
independent auditor, financial and senior management and the Board of Directors;

	•
	serving
as an independent and objective party to monitor the Company's financial reporting process and internal controls, the Company's processes to manage business and
financial risk, and its compliance with legal, ethical and regulatory requirements;

	•
	encouraging
continuous improvement of, and fostering adherence to, the Company's policies, procedures and practices at all levels. 

        The
Audit Committee will primarily fulfill these responsibilities by carrying out the activities enumerated in Section III of this Charter. The Audit Committee's primary function
is to assist the Board of Directors in fulfilling its responsibilities and it recognizes that the Company's management is responsible for preparing the Company's financial statements and that the
Company's independent auditors are responsible for auditing those financial statements. 

II.    COMPOSITION AND MEETINGS  

        The Audit Committee shall be comprised of a minimum of three directors as determined by the Board, all of whom shall be "independent" directors as such term is
defined in Appendix "A". All members of the Committee shall, to the satisfaction of the Board of Directors, be "financially literate" as such term is defined in Appendix "A". 

        The
members of the Committee shall be elected by the Board at the annual organizational meeting of the Board or until their successors shall be duly elected and qualified. Unless a Chair
is elected by the full Board, the members of the Committee may designate a Chair by majority vote of the full Committee membership. 

        The
Committee shall meet at least four times annually, or more frequently as circumstances require. The Committee shall meet prior to the filing of quarterly financial statements to
review and discuss the unaudited financial results for the preceding quarter and the related Management's Discussion & Analysis and shall meet prior to filing the annual audited financial
statements to review and discuss the audited financial results for the year and related Management's Discussion & Analysis. 

        As
part of its job to foster open communication, the Committee should meet at least annually with management and the independent auditor in separate executive sessions to discuss any
matters that the Committee or each of these groups believe should be discussed privately. 

        The
Committee may ask members of management or others to attend meetings and provide pertinent information as necessary. For purposes of performing their oversight related duties,
members of the Committee shall have full access to all corporate information and shall be permitted to discuss such information and any other matters relating to the financial position of the Company
with senior employees, officers and independent auditors of the Company. 

        Quorum
for the transaction of business at any meeting of the Audit Committee shall be a majority of the number of members of the Committee or such greater number as the Audit Committee
shall by resolution determine. 

        Meetings
of the Audit Committee shall be held from time to time and at such place as the Audit Committee or the Chairman of the Committee shall determine upon a 48 hours prior
notice. The notice period may be 

51

 

waived
by a quorum of the Committee. Each of the Chairman of the Committee, members of the Committee, Chairman of the Board, independent auditors, Chief Executive Officer, Chief Financial Officer or
Secretary shall be entitled to request that the Chairman of the Audit Committee call a meeting which shall be held within 48 hours of receipt of such request. 

III.  RESPONSIBILITIES AND DUTIES  

        To fulfill its responsibilities and duties the Audit Committee shall: 

	1.
	Create
an agenda for the ensuing year.

	2.
	Review
and update this Charter at least annually, as conditions dictate.

	3.
	Describe
briefly in the Company's annual report and more fully in the Company's Management Information Circular or its Annual Information Form the Committee's composition and
responsibilities and how they were discharged and otherwise assist management in providing the information required by Form 52-110F1 in the Company's Annual Information Form
or such other disclosure document required by Multilateral Instrument 52-110.

	4.
	Report
periodically to the Board of Directors. 

Documents/Reports Review  

	5.
	Review
the Company's interim and annual financial statements as well as all interim and annual Management's Discussion and Analysis and interim and annual earnings press releases prior
to their publication and/or filing with any governmental body, or the public.

	6.
	Review
policies and procedures with respect to directors' and officers' expense accounts and management perquisites and benefits, including their use of corporate assets and
expenditures related to executive travel and entertainment, and review the results of the procedures performed in these areas by the independent auditor, based on terms of reference agreed upon by the
independent auditor and the Audit Committee.

	7.
	Satisfy
itself that adequate procedures are in place for the review of the Company's public disclosure of financial information extracted or derived from the Company's financial
statements, other than the public disclosure referred to in paragraph 5, and periodically access the adequacy of such procedures. 

Independent Auditor  

	8.
	Recommend
to the Board of Directors the selection of the independent auditor, considering independence and effectiveness and approve the fees and other compensation to be paid to the
independent auditor. Instruct the independent auditor that the Board of Directors, as the shareholders' representative, is the independent auditor's client.

	9.
	Monitor
the relationship between management and the independent auditor including reviewing any management letters or other reports of the independent auditor and discussing and
resolving any material differences of opinion between management and the independent auditor.

	10.
	Review
and discuss, on an annual basis, with the independent auditor all significant relationships they have with the Company to determine their independence.

	11.
	Pre-approve
all non-audit services to be provided to the Company or its subsidiaries by the independent auditor.

	12.
	Oversee
the work and review the performance of the independent auditor and approve any proposed discharge of the independent auditor when circumstances warrant. Consider with
management and the independent auditor the rationale for employing accounting/auditing firms other than the principal independent auditor.

	13.
	Periodically
consult with the independent auditor out of the presence of management about significant risks or exposures, internal controls and other steps that management has taken
to control such risks, and the fullness and accuracy of the organization's financial statements. Particular emphasis should be given to the 

52

 

adequacy
of internal controls to expose any payments, transactions, or procedures that might be deemed illegal or otherwise improper. 

	14.
	Satisfy
itself that adequate procedures are in place to: (a) cause the independent auditor reports directly to the Audit Committee; and (b) arrange for the independent
auditor to be available to the Audit Committee and the full Board of Directors as needed.

	15.
	Review
and approve the Company's hiring policies regarding partners, employees and former partners and employees of the Company's independent auditor. 

Financial Reporting Processes  

	16.
	In
consultation with the independent auditor review the integrity of the organization's financial reporting processes, both internal and external.

	17.
	Consider
the independent auditor's judgments about the quality and appropriateness, not just the acceptability, of the Company's accounting principles and financial disclosure
practices, as applied in its financial reporting, particularly about the degree of aggressiveness or conservatism of its accounting principles and underlying estimates and whether those principles are
common practices or are minority practices.

	18.
	Consider
and approve, if appropriate, major changes to the Company's accounting principles and practices as suggested by management with the concurrence of the independent auditor and
ensure that the management's reasoning is described in determining the appropriateness of changes in accounting principles and disclosure. 

Process Improvement  

	19.
	Establish
regular and separate systems of reporting to the Audit Committee by each of management and the independent auditor regarding any significant judgments made in management's
preparation of the financial statements and the view of each as to appropriateness of such judgments.

	20.
	Review
the scope and plans of the independent auditor's audit and reviews prior to the audit and reviews being conducted. The Committee may authorize the independent auditor to
perform supplemental reviews or audits as the Committee may deem desirable.

	21.
	Following
completion of the annual audit and quarterly reviews, review separately with each of management and the independent auditor any significant changes to planned procedures,
any difficulties encountered during the course of the audit and reviews, including any restrictions on the scope of work or access to required information and the cooperation that the independent
auditor received during the course of the audit and reviews.

	22.
	Review
and resolve any significant disagreements among management and the independent auditor in connection with the preparation of the financial statements.

	23.
	Where
there are significant unsettled issues the Committee shall ensure that there is an agreed course of action for the resolution of such matters.

	24.
	Review
with the independent auditor and management significant findings during the year and the extent to which changes or improvements in financial or accounting practices, as
approved by the Audit Committee, have been implemented. This review should be conducted at an appropriate time subsequent to implementation of changes or improvements, as decided by the Committee.

	25.
	Review
activities, organizational structure, and qualifications of the chief financial officer and the staff in the financial reporting area and see to it that matters related to
succession planning within the Company are raised for consideration at the full Board of Directors. 

53

 

Ethical and Legal Compliance  

	26.
	Establish
procedures for the receipt, retention and treatment of complaints received by the Company regarding accounting internal controls or auditing matters, and the confidential,
anonymous submission by employees of concerns regarding questionable accounting or auditing matters.

	27.
	Review
and update periodically a Code of Ethical Conduct and ensure that management has established a system to enforce this Code. Review through appropriate actions taken to ensure
compliance with the Code of Ethical Conduct and to review the results of confirmations and violations of such Code.

	28.
	Review
management's monitoring of the Company's system in place to ensure that the Company's financial statements, reports and other financial information disseminated to governmental
organizations, and the public satisfy legal requirements.

	29.
	Review,
with the organization's counsel, legal and regulatory compliance matters, including corporate securities trading policies, and matters that could have a significant impact on
the organization's financial statements. 

Risk Management  

	30.
	Review
management's program of risk assessment and steps taken to address significant risks or exposures, including insurance coverage. 

General  

	31.
	Conduct
or authorize investigations into any matters within the Committee's scope of responsibilities.

	

	The
committee shall be empowered to retain and compensate independent counsel, accountants and other professionals to assist it in the performance of its duties as it
deems necessary.

	32.
	Perform
any other activities consistent with this Charter, the Company's By-laws and governing law, as the Committee or the Board deems necessary or appropriate. 

Appendix "A" to Schedule "A"  

Independence Requirement of Multilateral Instrument 52-110  

        A member of the Audit Committee shall be considered "independent", in accordance with Multilateral
Instrument 52-110 — Audit Committees ("MI 52-110"), subject to the additional requirements or exceptions
provided in MI 52-110, if that member has no
direct or indirect relationship with the Company, which could reasonably interfere with the exercise of the member's independent judgment. The following persons are considered to have a material
relationship with the Company and, as such, can not be a member of the Audit Committee: 

	(a)
	an
individual who is, or has been within the last three years, an employee or executive officer of the Company;

	(b)
	an
individual whose immediate family member is, or has been within the last three years, an executive officer of the Company;

	(c)
	an
individual who:

	(i)
	is
a partner of a firm that is the Company's internal or external auditor;

	(ii)
	is
an employee of that firm; or

	(iii)
	was
within the last three years a partner or employee of that firm and personally worked on the Company's audit within that time;

	(d)
	an
individual whose spouse, minor child or stepchild, or child or stepchild who shares a home with the individual:

	(i)
	is
a partner of a firm that is the Company's internal or external auditor; 

54

 

	(ii)
	is
an employee of that firm and participates in its audit, assurance or tax compliance (but not tax planning) practice, or

	(iii)
	was
within the last three years a partner or employee of that firm and personally worked on the Company's audit within that time;

	(e)
	an
individual who, or whose immediate family member, is or has been within the last three years, an executive officer of an entity if any of the Company's current executive officers
serves or served at the same time on the entity's compensation committee; and

	(f)
	an
individual who received, or whose immediate family member who is employed as an executive officer of the Company received, more than $75,000 in direct compensation from the Company
during any 12 month period within the last three years, other than as remuneration for acting in his or her capacity as a member of the Board of Directors or any Board committee, or the receipt
of fixed amounts of compensation under a retirement plan (including deferred compensation) for prior service for the Company if the compensation is not contingent in any way on continued service. 

        In
addition to the independence criteria discussed above, any individual who: 

	(a)
	has
a relationship with the Company pursuant to which the individual may accept, directly or indirectly, any consulting, advisory or other compensatory fee from the Company or any
subsidiary entity of the Company, other than as remuneration for acting in his or her capacity as a member of the board of directors or any board committee; or as a part-time chair or
vice-chair of the board or any board or committee, or

	(b)
	is
an affiliated entity of the Company or any of its subsidiary entities, 

        is
deemed to have a material relationship with the Company, and therefore, is deemed not to be independent. 

        The
indirect acceptance by an individual of any consulting, advisory or other fee includes acceptance of a fee by: 

	(a)
	an
individual's spouse, minor child or stepchild, or a child or stepchild who shares the individual's home; or

	(b)
	an
entity in which such individual is a partner, member, an officer such as a managing director occupying a comparable position or executive officer, or occupies a similar position
(except limited partners, non-managing members and those occupying similar positions who, in each case, have no active role in providing services to the entity) and which provides
accounting, consulting, legal, investment banking or financial advisory services to the Company or any subsidiary entity of the Company. 

Financial Literacy Under Multilateral Instrument 52-110  

        "Financially literate", in accordance with MI 52-110, means that the director has the ability to read and understand a set of financial statements
that present a breadth and level of complexity of accounting issues that are generally comparable to the breadth and complexity of the issues that can reasonably be expected to be raised by the
Company's financial statements. 

55

QuickLinks

Exhibit 4.1

TABLE OF CONTENTS

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

CURRENCY PRESENTATION AND EXCHANGE RATE DATA

DOCUMENTS INCORPORATED BY REFERENCE

GENERAL DEVELOPMENT OF THE BUSINESS

OUR BUSINESS

777/Callinan Mine Historical Statistics

Trout Lake Mine Historical Statistics

Konuto Lake Mine Historical Statistics

Chisel North Mine Historical Statistics

RISK FACTORS

INDUSTRY REGULATION

MINERAL POTENTIAL OF OUR MATERIAL PROPERTIES

DIVIDENDS

DESCRIPTION OF CAPITAL STRUCTURE

MARKET FOR SECURITIES

ESCROWED SECURITIES

DIRECTORS AND OFFICERS

AUDIT COMMITTEE DISCLOSURE

INDEBTEDNESS OF DIRECTORS AND EXECUTIVE OFFICERS

LEGAL PROCEEDINGS

INTEREST OF MANAGEMENT AND OTHERS IN MATERIAL TRANSACTIONS

TRANSFER AGENT AND REGISTRAR

MATERIAL CONTRACTS

INTEREST OF EXPERTS

ADDITIONAL INFORMATION

SCHEDULE "A" GLOSSARY OF MINING TERMS

SCHEDULE "B" AUDIT COMMITTEE CHARTERQuickLinks
 -- Click here to rapidly navigate through this document
  

Exhibit 4.2  

  
 

    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
  FINANCIAL CONDITION AND RESULTS OF OPERATIONS    
    

        You should read this discussion and analysis in conjunction with our consolidated financial statements and related notes thereto that appear elsewhere in this
offering circular. All figures are in Canadian dollars unless otherwise noted. Included herein are certain forward-looking statements that involve various risks, uncertainties and other factors. See
"Cautionary Note Regarding Forward-Looking Statements" and "Risk Factors". 

 
 

Overview    
    

Nature of Business  

        We explore for, develop, mine and process base metals and endeavor to continuously improve our cost and safety performance and environmental standards. We
undertake exploration and development activities, primarily within economic transportation distance of our metal processing complex located in Flin Flon, Manitoba, Canada. Our production facilities
consist of four operating mines, two concentrators and metallurgical facilities consisting of a zinc plant and copper smelter complex for the extraction of zinc and copper, together with gold and
silver by-products. The Trout Lake, Konuto Lake, and 777/Callinan mines are located in the Flin Flon area, and ore from these mines is processed through the Flin Flon concentrator. The
Chisel North mine and concentrator are located in the Snow Lake area. The Ruttan mine and concentrator at Leaf Rapids were closed in mid-2002 as the operation was no longer economically
viable. Our downstream operating division, Zochem, consumes on average between 25% and 30% of our zinc production to produce zinc oxide. 

        Between
1998 and 2004, we invested approximately $435 million in the 777 Project, which involved construction of the new 777 mine in Flin Flon, development of the Chisel North
mine near Snow Lake, expansion of the Flin Flon concentrator capacity from 1.81 million to 2.18 million tonnes per year, and expansion of the Flin Flon zinc plant, including construction
of a state-of-the-art electrolytic cellhouse with capacity to support annual production of 115,000 tonnes of cast zinc. 

        Also
in 1998, and in support of the 777 Project, we entered into an amending agreement in respect of certain existing collective bargaining agreements, which amending agreement prohibits
strikes and lockouts through 2012 and provides for binding arbitration in the event that negotiated contract settlements are not achieved. In late 2003, HBMS restructured its administrative and
overhead activities by building work systems around the concept of shared services. This saw previously distributed service groups such as engineering, maintenance and loss control consolidated so as
to optimize skill utilization and labor efficiency. This resulted in a permanent reduction of 120 positions. 

        The
777 Project, the labor amending agreement, closure of the Ruttan mine and the 2003 restructuring have resulted in a smaller workforce, higher labor productivity and lower unit
operating costs and improved zinc and copper grades. 

        We
endeavor to operate the zinc plant and copper smelter at full capacity at all times. Purchased concentrates are used to fill excess plant capacity not utilized in the processing of
concentrates produced from domestic mines. As such, requirements for purchased concentrates are determined by plant capacity and production capability at company owned mines. For the period
January 1, 2001 to September 30, 2004, 57% of copper production came from company owned mines, while the remaining 43% came from purchased concentrates. For the same period, company
mines contributed 89% of total zinc production with only 11% being sourced from purchased concentrate. The contribution to income earned from processing purchased concentrates is dependent upon the
treatment and refining charges (TC/RCs) defined in the purchase agreement, as well as the freight cost (net of any credit from the vendor) of transporting the concentrate to Flin Flon. TC/RCs are set
by the market on the basis of supply and demand for concentrates. Freight credits are generally set at parity with transport costs to a major world port. Fluctuations in TC/RCs and ocean freight costs
can affect the extent to which economic purchased concentrate is available to us. As well, purchased concentrate availability can also be affected by operational changes at the concentrate supplier's
mines. 

1

 

        Metal
sales volumes for any given period are affected by the volume and grade of ore mined, metal recovery through the concentrator and grade of purchased concentrate. For the
2001-2003 period, total ore volume mined declined and grade improved primarily as a result of the mid-2002 closure of the high volume, low grade Ruttan mine. In the first nine
months of 2004, both zinc and copper grades improved further as the new 777 Mine came into commercial production. 

        We
sell substantially all of our copper anode, cast zinc and zinc oxide to CMM. CMM is a wholly-owned subsidiary of Considar Metal Marketing S.A. ("CMMSA"), which is a joint
venture company that is 50% owned by us. CMM contracts with the White Pine copper refinery and other third parties to refine copper anodes into market-standard cathodes, and simultaneously to extract
the contained precious metals from the anodes. The copper cathodes and precious metals are sold at market prices. Cast zinc slabs and blocks and zinc oxide are sold by CMM to customers in Eastern
Canada and the United States. Sales of zinc oxide typically generate less than 10% of our revenues. We consolidate proportionally the results of CMMSA in our results. 

        We
require the use of specialized facilities and technology and rely on such facilities to maintain our production levels. We are highly integrated and as such do not allocate resources
to, or report individual facilities as, profit centres. 

Key Factors Affecting the Business  

        Key factors affecting our results of operations and financial condition are zinc and copper prices, the U.S. dollar/Canadian dollar exchange rate, ore
volume and grade, concentrator recoveries, treatment and refining charges for purchased concentrates, shipping costs, heavy fuel oil price, electrical power costs and the availability of, and wages
for, labor. 

        Concentrate
purchases can differ materially from year to year depending primarily upon production from the Mines and, to a lesser degree, the treatment and refining charge regime in the
concentrate market. Treatment and refining charges, together with concentrate freight costs, directly impact the profitability of processing purchased concentrate. As the margins earned from domestic
concentrate are significantly larger than those earned from purchased concentrate, we seek to optimize ore volume and grade from our own mines. However, there is limited ability to change mine plans
on short notice. As a result, concentrator recoveries are key in that metal not recovered through the concentrator will generally be replaced with less profitable purchased material. Expected declines
in the production from our Mines may result in an increase in the amount of purchased concentrate we process, thereby reducing our profitability. 

        Although
copper sales generally account for a greater portion of total revenue than zinc sales, revenue (and income) is more sensitive to zinc price fluctuations as a much larger portion
of zinc metal production comes from domestic concentrate. The U.S. dollar/Canadian dollar exchange rate is key to us in that metal is sold in U.S. dollars while the majority of costs,
with the exception of concentrate purchases and third-party refining charges, are incurred in Canadian dollars. 

        Fluctuations
in the price of heavy fuel oil, although having a noticeable impact on smelter costs, have a relatively small impact on our overall costs compared to similar fluctuations in
metal price or exchange rate. Electrical power costs are incurred primarily in the electrolytic cellhouse. On a unit basis, power costs remained unchanged for several years prior to 2004, with an
approximate 5% increase approved in 2004, and a further 5% increase expected in 2005. Labor wages remained generally stable in recent years and this is expected to continue in the near future under
the terms of the collective bargaining agreement. 

2

 
 
 

Results of Operations    
    

        The following table sets forth sales information and realized prices for the periods indicated. 

	 
	 	 
	 	 
	 	 
	 	 
	 	Nine Months Ended September 30
	 
	 
	 	 
	 	Years Ended December 31,
	 
	Sales
 
	 	 
	 
	 	 
	 	2001
	 	2002
	 	2003
	 	2003
	 	2004
	 
	Zinc	 	Tonnes	 	87,948	 	105,192	 	118,589	 	91,562	 	83,323	 
	Copper	 	Tonnes	 	79,165	 	83,452	 	80,480	 	57,396	 	53,075	 
	Gold	 	oz	 	68,972	 	59,319	 	57,636	 	40,331	 	50,175	 
	Silver	 	oz	 	1,207,879	 	1,233,602	 	1,035,553	 	724,547	 	700,855	 
	Zinc (including sales to Zochem)	 	($000)	 	122,578	 	131,945	 	140,653	 	106,191	 	115,857	 
	Less Sales to Zochem	 	 	 	(29,010	)	(28,972	)	(35,870	)	(27,725	)	(29,188	)
	Zochem Zinc Oxide Sales	 	 	 	55,442	 	46,414	 	46,111	 	35,207	 	41,255	 
	Copper	 	 	 	192,871	 	211,484	 	213,135	 	142,655	 	207,244	 
	Gold	 	 	 	31,557	 	28,874	 	27,288	 	18,810	 	26,540	 
	Silver	 	 	 	8,304	 	8,994	 	7,003	 	4,763	 	6,022	 
	Cadmium and Other	 	 	 	60	 	56	 	40	 	28	 	69	 
	 	 	 	 	
	 	
	 	
	 	
	 	
	 
	Total HBMS Sales before Adjustment	 	 	 	381,802	 	398,795	 	398,360	 	279,929	 	367,799	 
	Adjustment to Consolidate CMMSA	 	 	 	8,787	 	37,297	 	19,554	 	18,824	 	17,227	 
	 	 	 	 	
	 	
	 	
	 	
	 	
	 
	Total Consolidated HBMS Sales	 	($000)	 	390,589	 	436,092	 	417,914	 	298,753	 	385,026	 
	 	 	 	 	
	 	
	 	
	 	
	 	
	 
	Gross Realized Metal Prices:	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	Zinc	 	US$/lb	 	0.41	 	0.36	 	0.38	 	0.37	 	0.48	 
	 	Copper	 	US$/lb	 	0.71	 	0.73	 	0.86	 	0.78	 	1.33	 
	 	Gold	 	US$/oz	 	295.35	 	309.91	 	339.22	 	327.91	 	372.87	 
	 	Silver	 	US$/oz	 	4.44	 	4.64	 	4.83	 	4.60	 	6.54	 
	Average Exchange Rate for Period	 	$/US$	 	1.5491	 	1.5709	 	1.4010	 	1.4294	 	1.3282	 
	 	 	 	 	
	 	
	 	
	 	
	 	
	 

Nine Months Ended September 30, 2004 Compared to Nine Months Ended September 30, 2003  

 Revenue  

        Revenue in the nine months ended September 30, 2004 was $392.1 million compared to $299.2 million in the nine months ended
September 30, 2003, representing an increase of $92.9 million, or 31.0%. Metal prices were the largest single factor affecting sales in the first nine months of 2004. Realized copper
prices increased from US$0.78/lb in the first nine months of 2003 to US$1.33/lb in the first nine months of 2004, and realized zinc prices increased from US$0.37/lb in the first nine months of 2003 to
US$0.48/lb in the first nine months of 2004. The effect of these increased prices was partially offset by a decline in the U.S. dollar compared to the Canadian dollar, and by lower production
levels. Total metal sales in the nine months ended September 30, 2004 were 83,323 tonnes of zinc and 53,075 tonnes of copper, compared to 91,562 tonnes of zinc and 57,396 tonnes of copper in
the nine months ended September 30, 2003, or declines of 9.0% and 7.5%, respectively. Zinc sales in 2003 were augmented by approximately 4,000 tonnes of zinc cathode sold from inventory. An
unusually high ore grade ratio of copper to zinc in early 2004 negatively affected zinc recoveries in the Flin Flon concentrator and resulted in lower zinc metal production rates compared to 2003.
Copper production in the first nine months of 2004 was also affected by lower grade purchased concentrate feedstock. 

 Operating Costs  

        Operating costs in the nine months ended September 30, 2004 were $308.4 million compared to $316.2 million in the nine months ended
September 30, 2003, representing a decrease of $7.8 million, or 2.5%. Excluding purchased concentrates, operating costs in the first nine months of 2004 were $220.4 million
compared to $238.5 million in the first nine months of 2003. Incorporated in the lower 2004 costs are the effects of the restructuring program that was completed in late 2003. Contributing to
the higher cost in 2003 was a drawdown of opening inventory that increased the volume and cost of sales. Concentrate purchases were 

3

 

$88.0 million
in the first nine months of 2004 compared to $77.7 million in same period in 2003, reflecting higher metal prices which more than offset volumes that were approximately 33%
lower in the first nine months of 2004. Minimal zinc concentrate was purchased in the first nine months of 2004 due to increased concentrate production from the Mines and concentrators. During the
first seven months of 2004, unit power costs were unchanged from the same period in 2003. A power cost increase of approximately 5% took effect August 1, 2004. Heavy fuel oil cost was
$0.9 million lower in the first nine months of 2004 due to an 8% reduction in price from an average of $0.26/litre in the first nine months of 2003 compared to $0.24/litre in the first nine
months of 2004. 

 General and Administrative  

        General and administrative costs in the nine months ended September 30, 2004 were $6.1 million, which was an increase of $0.9 million over
the nine months ended September 30, 2003. The increase results from additional legal/audit fees and performance pay, offset in part by reduced consulting fees. 

 Depreciation and Amortization  

        Depreciation and amortization in the nine months ended September 30, 2004 was $39.9 million compared to $53.5 million in the nine months
ended September 30, 2003, representing a decrease of $13.6 million, or 25.4%. The impairment charge recorded at the end of 2003 reduced asset values with a corresponding reduction in
amortization and depreciation. 

 Foreign Exchange  

        We had a foreign exchange loss of $2.2 million in the first nine months of 2004 compared to a foreign exchange gain of $34.9 million in the first
nine months of 2003. The gain in 2003 was primarily the result of the retirement in 2003 of U.S. dollar denominated commercial paper instruments, following a strengthening of the Canadian
dollar against the U.S. dollar. 

 Earnings  

        As a result of the foregoing, we had earnings of $38.8 million in the first nine months of 2004 compared to a net loss of $42.9 million in the first
nine months of 2003. 

Year Ended December 31, 2003 Compared to the Year Ended December 31, 2002  

 Revenue  

        Revenue in fiscal 2003 was $418.8 million compared to $439.6 million in fiscal 2002, representing a decrease of $20.8 million or 4.7%. 

        Zinc
metal sales in fiscal 2003 were 118,589 tonnes compared to 105,192 tonnes in fiscal 2002, or an increase of 12.7%, primarily as a result of the installation of a cathode charging
system in November 2002, which corrected melting furnace inductor failures that had occurred in fiscal 2002. Realized zinc prices increased from US$0.36/lb in 2002 to US$0.38/lb in 2003 and the
U.S. dollar weakened by 11% against the Canadian dollar from 2002 to 2003. The net result was that zinc sales revenues were 7% higher in fiscal 2003 than in fiscal 2002. 

        Copper
metal sales were 80,480 tonnes in fiscal 2003 compared to 83,452 tonnes in fiscal 2002, or a decrease of 3.7%. The reduction in fiscal 2003 was due partially to a one month
vacation shutdown of the copper smelter. Realized copper prices increased from US$0.73/lb in fiscal 2002 to US$0.86/lb in fiscal 2003, though the weaker U.S. currency moderated the effect on
sales. Copper sales revenues were 0.8% higher in fiscal 2003 than in fiscal 2002. 

        With
the closure of the high volume, low grade Ruttan copper/zinc mine in mid-2002, precious metal by-product volume dropped. Gold and silver production in fiscal
2003 was 2% and 15% lower, respectively, than in 2002. Realized gold price was US$339/oz in fiscal 2003 compared to US$310/oz in fiscal 2002, and realized silver price was US$4.83/oz in fiscal 2003
compared to US$4.64/oz in fiscal 2002. The combination of the increase in prices, the decrease in volume and a weaker U.S. dollar compared to fiscal 2002 resulted in precious metal sales
revenues that were 9% lower in fiscal 2003 than in fiscal 2002. 

4

 

 Operating Costs  

        Operating costs in fiscal 2003 were $430.6 million compared to $440.4 million in fiscal 2002, representing a decrease of $9.8 million, or
2.3%. Excluding purchased concentrates, operating costs in fiscal 2003 were $34.3 million lower than in fiscal 2002, due in part to the fact that fiscal 2003 did not include operating expenses
of the high volume, low grade Ruttan mine which was closed in June 2002, partially offset by increased production from the higher grade 777/Callinan deposits. Concentrate purchases were
$24.5 million higher in fiscal 2003 compared to fiscal 2002, primarily to meet requirements to replace material from the Ruttan mine. General wages for hourly employees did not change from
fiscal 2002 to fiscal 2003. Other
significant cost elements include power rates, which remained unchanged, and heavy fuel oil, which rose to $0.255/litre in fiscal 2003 compared to $0.221/litre in fiscal 2002. The heavy fuel oil price
increase was offset by improvements in process efficiencies as total consumption decreased from 55.9 million litres in 2002 to 47.5 million litres in 2003. 

 General and Administrative  

        General and administrative costs in fiscal 2003 were $6.9 million compared to $9.6 million in fiscal 2002, representing a decrease of
$2.7 million or 28.1%. In 2003, accruals were reduced to reflect lower projected performance-related payroll costs. Included in 2002 were additional management training costs and travel, and
legal costs relating to customer credit issues. 

 Depreciation and Amortization  

        Depreciation and amortization in fiscal 2003 was $70.7 million compared to $66.4 million in fiscal 2002, representing an increase of
$4.3 million, or 6.4%, primarily as a result of depreciation associated with the newly expanded zinc plant and new cellhouse, partially offset by the decrease in depreciation resulting from the
closure of the Ruttan mine. 

 Accretion and Exploration  

        Accretion and exploration costs in fiscal 2003 were $7.6 million compared to $6.4 million in fiscal 2002, representing an increase of
$1.2 million, or 18.7%, primarily resulting from an increase in exploration activity in 2003. 

 Foreign Exchange  

        We had a foreign exchange gain of $37.3 million in fiscal 2003 compared to a foreign exchange gain of $2.0 million in fiscal 2002. The gain in
fiscal 2003 was due to the retirement of U.S. dollar denominated commercial paper instruments that had been issued in prior years when the U.S. dollar was much higher compared to the
Canadian dollar. 

 Impairment  

        During 2003, a review of the realizable value of our assets in relation to their book value resulted in the recording of an impairment charge of
$268.9 million. The impairment was determined using an estimate of future cash flows arising from estimated recoverable mine production, plant production levels, expected metal sales prices and
cash costs of production, capital and reclamation, all of which are contained in detailed engineering life-of-mine plans. As a result of a decline in the projected realized
prices of our products when converted into Canadian dollars, the carrying value of these assets was not considered to be recoverable based on future potential earnings and costs under current market
conditions and ore reserve levels. 

 Earnings  

        As a result of the foregoing, we had a net loss of $330.1 million in fiscal 2003 compared to a net loss of $83.0 million in fiscal 2002. 

5

 

Year Ended December 31, 2002 Compared to the Year Ended December 31, 2001  

 Revenue  

        Revenue in fiscal 2002 was $439.6 million compared to $409.6 million in fiscal 2001, representing an increase of $30.0 million
or 7.3%. 

        Zinc
metal sales in fiscal 2002 were 105,192 tonnes compared to 87,948 tonnes in fiscal 2001, or an increase of 19.6%, as a result of processing of additional concentrate purchased to
feed expanded capacity at the zinc plant and new electrolytic cellhouse commissioned in mid-2001. Realized zinc prices decreased from US$0.41/lb in 2001 to US$0.36/lb in 2002 and the
U.S. dollar strengthened by 1% against the Canadian
dollar from 2001 to 2002. The net result was that zinc sales revenues were 7.6% higher in fiscal 2002 than in fiscal 2001. 

        Copper
metal sales were 83,452 tonnes in fiscal 2002 compared to 79,165 tonnes in fiscal 2001, or an increase of 5.4%. Realized copper prices increased from US$0.71/lb in fiscal 2001 to
US$0.73/lb and, together with the impact of the strengthened U.S. dollar compared to the Canadian dollar, copper sales revenues were 9.7% higher in fiscal 2002 than in fiscal 2001. 

        With
the closure of the high volume, low grade Ruttan copper/zinc mine in mid-2002, gold by-product volume dropped, with 2002 gold production 14% lower than in
2001. Silver production was unchanged with the reduction from the closure of the Ruttan mine offset by additional silver in purchased concentrate. Realized gold price was US$310/oz in fiscal 2002
compared to US$295/oz in fiscal 2001, and realized silver price was US$4.64/oz in fiscal 2002 compared to US$4.44/oz in fiscal 2001. The combination of the increase in prices, the decrease in gold
volume and a stronger U.S. dollar compared to fiscal 2001 resulted in precious metal sales revenues that were 5% lower in fiscal 2002 than in fiscal 2001. 

        Revenue
for fiscal 2001 also included $17.3 million of business interruption insurance, compared to $1.7 million in fiscal 2002. The insurance settlements in both 2001 and
2002 related to a flood at the Ruttan mine and an accident in the copper smelter, both of which occurred in 2000. 

 Operating Costs  

        Operating costs in fiscal 2002 were $440.4 million compared to $417.4 million in fiscal 2001, representing an increase of $23.0 million, or
5.5%. Excluding purchased concentrates, operating costs in fiscal 2002 were $8.5 million lower than in fiscal 2001 due in part to the fact that the second half of fiscal 2002 excluded operating
expenses of the Ruttan mine, which was closed in June 2002. Concentrate purchases were $31.5 million higher in fiscal 2002 compared to fiscal 2001, primarily to fill the increased zinc
production capacity following completion of the zinc plant expansion and electrolytic cellhouse in mid 2001 and to meet requirements to replace material from the Ruttan mine. Power rates and heavy
fuel oil prices remained unchanged. Included in fiscal 2001 operating costs was a $10.0 million writedown of inventories and a provision of $5.0 million for projected costs associated
with the decision near year-end to close the Ruttan mine and concentrator in mid-2002. General wages for hourly employees in fiscal 2002 increased 1.75% from fiscal 2001 rates.
Other significant cost elements include power rates which remained constant, and heavy fuel oil, which was also constant at $0.221/litre in fiscal 2002 compared to $0.223/litre in fiscal 2001. 

 General and Administrative  

        General and administrative costs in fiscal 2002 were $9.6 million compared to $10.3 million in fiscal 2001, representing a decrease of
$0.7 million or 6.8%. This was due primarily to legal costs associated with a smelter accident that occurred in August 2000. 

 Depreciation and Amortization  

        Depreciation and amortization in fiscal 2002 was $66.4 million compared to $73.3 million in fiscal 2001, representing a decrease of
$6.9 million, or 9.4%. Accelerated depreciation and amortization of $16 million was recognized in 2001 in anticipation of the Ruttan mine closure. Offsetting this, cellhouse depreciation
began during 2002. 

6

 

 Accretion and Exploration  

        Accretion and exploration in fiscal 2002 was $6.4 million compared to $4.1 million in fiscal 2001, representing an increase of $2.3 million,
or 56.1% due primarily to increased exploration activity in 2002. 

 Foreign Exchange  

        We had a foreign exchange gain of $2.0 million in fiscal 2002 compared to a foreign exchange loss of $33.0 million in fiscal 2001. The loss in
fiscal 2001 was primarily due to the impact of the weaker Canadian dollar on U.S. dollar denominated commercial paper instruments. 

 Earnings  

        As a result of the foregoing, we had a net loss of $83.0 million in fiscal 2002 compared to a net loss of $129.7 million in fiscal 2001. 

 
 

Cash Flows, Liquidity and Capital Resources    
    

Liquidity and Capital Resources Prior to the Transactions  

        Our liquidity requirements arise primarily from the need to fund capital expenditures for the maintenance and development of our mines and facilities, to fund
working capital needs and to meet our debt service requirements. Our primary sources of liquidity are cash generated from operating activities and amounts available to us under our line of credit. In
years prior to 2004, liquidity shortfalls were met with funding from Anglo American, our parent company prior to the Acquisition. During 2004, we have generated sufficient cash flow from operations to
meet all of our operating and capital requirements. 

        We
maintain a $30 million line of credit with our bank. Our obligation under this line of credit is guaranteed by Anglo American plc. The facility is used for
short-term cash requirements and to secure letters of credit, and bears interest at the prime rate. This facility will not be continued subsequent to the Acquisition. 

        We
have an interest free loan from the Province of Manitoba that is secured by an irrevocable standby letter of credit and guaranteed by Anglo American plc. In June of each of
2002, 2003 and 2004, we made repayments of $2 million in accordance with the terms of the loan agreement. The balance at September 30, 2004 was $17.5 million. Under the terms of
the agreement with the Province, the loan is repayable in installments of $2 million in 2005, $4 million in each of 2006 and 2007 and $7.5 million in 2008. The existing terms of
this loan provide that it is repayable, together with a premium, on a change of control of HBMS. We intend to negotiate with the Province of Manitoba to continue this loan on terms comparable to the
existing loan. Among other things, we expect that the Province will require us to provide a letter of credit on our expected new credit facility or provide cash collateral in an amount equal to the
outstanding principal amount under the loan. If we are unable to re-negotiate this loan we will repay the loan, prior to completion of the Acquisition out of cash on hand. 

Cash Flow — Nine Months Ended September 30, 2004 Compared to Nine Months Ended September 30, 2003  

        Cash flow from operating activities in the first nine months of 2004 was $59.9 million, compared to $10.3 million in the first nine months of 2003,
primarily due to higher metal prices in the first nine months of 2004, partially offset by U.S. dollar weakness. 

        Total
capital expenditures in the first nine months of 2004 were $47.9 million, including $11.5 million of capital expenditures relating to completion of the 777 mine and
the Flin Flon concentrator, and the balance for capital development in the Mines. Total capital expenditures in the first nine months of 2003 were $89.3 million, which included
$43.8 million relating to the 777 Project, and the balance of $45.5 being capital development and equipment. 

7

 

        Financing
activities in the first nine months of 2004 included $14.4 million of sale leasebacks to finance mobile mine equipment and repayment of $2.0 million of the loan
from the province of Manitoba. In the first nine months of 2003, commercial paper borrowings of $479.5 million were repaid with proceeds from the issuance of preferred shares in the amount of
$575.0 million to Anglo American. The balance of funds from the equity issue was used to fund operations and capital expenditures in the first nine months of 2003. 

Cash Flow — Fiscal 2001, 2002 and 2003  

        During 2001, 2002 and 2003, we consumed significant amounts of cash resources in our operations and capital investments. Cash outflows before financing were
$504.8 million in total during the years 2001 through 2003. The major factor in this period was capital expenditures, which were $419.7 million in total during the period. Major project
costs, primarily for the 777 Project, were $247.8 million of the total capital expenditures, the balance of which was for mine development and other sustaining capital. 

        Cash
used by operating activities was $69.6 million in 2001, declining to $11.8 million in 2002 and $3.7 million in 2003. The expanded zinc plant capacity and new
zinc cellhouse, commissioned in 2001 to replace the previous facility and closure of the high volume, low margin Ruttan mine in 2002, contributed to improved cash flow from operations. 

        To
maintain liquidity during this period, commercial paper debt was issued to third parties in 2001 which, together with previously outstanding commercial paper debt, was repaid in 2002
and 2003. Our remaining net cash requirements were funded by equity injections from Anglo American. In 2003, Anglo American
contributed $601.3 million of equity to fund the full repayment of our commercial paper borrowings and its operating cash requirements for the year. 

Liquidity and Capital Resources Following the Transactions  

        In connection with the Acquisition, we have received an indicative term sheet for a senior secured revolving credit facility in the amount of $50 million
to be secured by accounts receivable and inventories. In addition, we intend to negotiate with the Province of Manitoba for the continuation of their existing loan to us. The existing loan is
repayable together with a premium on a change of control of HBMS. Among other things, we expect that the Province will require us to provide a letter of credit on our expected new credit facility or
provide cash collateral in an amount equal to the outstanding principal amount under the loan. If we are unable to renegotiate this loan, we will repay the loan prior to completion of the Acquisition
out of cash on hand. See "Description of Material Indebtedness and Other Liabilities". 

        We
have derivative contracts in place in which an affiliate of Anglo American plc is the counterparty. To the extent these derivative contracts are not left in place after
the Acquisition, we will liquidate these contracts or seek an alternative counterparty to assume these contracts. 

        We
believe that our cash and short term investments and cash flow from operations, together with borrowings under our new senior secured revolving credit facility, will be sufficient to
fund our operations and commitments for the remainder of fiscal 2004 and fiscal 2005, including the exercise of CMM's option to acquire the White Pine refinery. However, the actual amounts of future
cash flow and commitments are subject to a number of risks and uncertainties and, therefore, may vary from our projections. As a result, we cannot assure you that our sources of liquidity will be
sufficient to enable us to meet our commitments. See "Risk Factors — Risks Relating to Our Business". In addition, we cannot assure you that we will be successful
in negotiating the expected new credit facility on terms acceptable to us or at all. If we are not successful, we will need to seek other sources of liquidity which may be difficult to find. See "Risk
Factors — Risks Relating to Our Business — We may not be able to generate sufficient cash to service all of our
indebtedness, including the notes." 

8

 

 
 

Contractual Obligations    
    

        The following table summarizes, as at September 30, 2004, certain of our contractual obligations for the period specified: 

	 
	 	Payments Due by Period

	Contractual Obligations (as at September 30, 2004)
 
	 	Total
	 	Less than 1 Year
	 	1-3

Years
	 	3-5

Years
	 	After 5 Years

	 
	 	($000)

	Long-term debt obligations	 	$	17,500	 	$	2,000	 	$	15,500	 	$	—	 	$	—
	Capital lease obligations	 	 	13,584	 	 	2,747	 	 	5,959	 	 	4,878	 	 	—
	Operating lease obligations	 	 	8,620	 	 	3,753	 	 	4,070	 	 	269	 	 	528
	Purchase obligations	 	 	12,021	 	 	12,021	 	 	 	 	 	 	 	 	 
	Pension and other employee future benefits obligations	 	 	13,439	 	 	13,439	 	 	 	 	 	 	 	 	 
	Asset retirement(1)	 	 	51,100	 	 	1,043	 	 	8,062	 	 	2,000	 	 	39,995
	Other long-term liabilities and contractual obligations	 	 	1,048	 	 	1,048	 	 	—	 	 	—	 	 	—
	 	 	
	 	
	 	
	 	
	 	

	Total	 	$	117,312	 	$	36,051	 	$	33,591	 	$	7,147	 	$	40,523
	 	 	
	 	
	 	
	 	
	 	

	(1)
	In
December 2004, the Provinces of Saskatchewan and Manitoba informed us that, in their view, our current estimate for closure and related costs may be too low. See "Risk
Factors — Reclamation and mine closure costs could adversely affect our cash flow from operations" and "Description of Material Indebtedness and Other
Liabilities — Reclamation Security Agreements." 

        The following is a description of certain of the contractual obligations outlined in the above table and of certain other commitments and
obligations not included in the table: 

Purchase Obligations  

        Copper Refinery Obligation.    We have entered into a commitment to deliver 85,000 tons of copper anodes annually for refining
during the next year, with the option to extend for an additional year, each year. In the event that we are unable to meet the terms of the contract, we would be required to make a payment of US$0.04
per pound of copper anode not delivered. The approximate amount of this obligation is $9.1 million. 

        Copper Concentrate Purchase Obligation.    We have a commitment to purchase copper concentrate for payment based on a deemed
delivery rather than a required physical delivery. The contract requires delivery of 72,000 tonnes annually for years 2004 to 2008. Payment is based on the market price of contained metal during a
quotational period following delivery of the concentrate, less a fixed treatment and refining credit. If we cannot process the deemed tonnage in a timely manner, we believe that we will be able to
negotiate alternate arrangements for the sale or diversion of the tonnage. We have an annual commitment through 2008 to purchase 40,000 dry metric tonnes per year of copper concentrate from Compania
Minera Dona Ines de Collahuasi ("Collahuasi") which is a Chilean joint venture company in which Anglo American has a significant interest. Payment is made 45 days after the date of the bill of
lading, and is based on the market price of contained metal during a quotational period following delivery of the concentrate, less a treatment, refining, and freight credit. The agreement with
Collahuasi does not require Collahuasi's consent to complete the Acquisition. Collahuasi has acknowledged that its obligations under the agreement remain in place after the transaction, although it
has reserved its contractual right to renegotiate terms dealing with payment procedures after the Acquisition is completed. We intend to seek opportunities to swap the tonnage with other smelters
(where a freight advantage exists). If we cannot process the concentrate or swap tonnage in a timely manner, management believes that alternate arrangements can be negotiated for the sale or diversion
of the tonnage. No amount is included in the table due to the fact that price is dependent on future market prices. 

        Other.    The remainder of purchase obligations comprises routine orders to purchase goods and services. 

9

 

Pension and Other Employee Future Benefits Obligations  

        Pension and other employee future benefits obligations represent the various contractual funding requirements for our pension plan and other employee future
benefits in the 12 months ended September 30, 2005. The obligatory funding requirements for the pension plan and other employee future benefits are actuarily determined and are subject
to future uncertainties, including the expected rate of return on plan assets, and the discount rate on pension obligations, each of which may change over time. 

Asset Retirement Obligation  

        The amounts included in the asset retirement obligation represent the estimated fair value of our present legal obligation for closure and related costs at all of
our existing operating and non-operating mines and properties based upon the closure plans applicable to those mines and properties. We have recently been informed by the Provinces of
Saskatchewan and Manitoba that, in their view, our current estimate of reclamation costs may be too low and the security for the reclamation obligations may not be sufficient. We have had preliminary
discussions with the Provinces of Saskatchewan and Manitoba and have agreed to conduct a feasibility study to more accurately determine the estimated reclamation costs. The study is expected to be
completed in the first half of 2005. We believe that our current reclamation cost estimate of approximately $51.1 million ($32.8 million on a present value basis at
September 30, 2004) is adequate and is sufficiently secured by the existing security. However, we will provide additional security in the form of a letter of credit in the amount of
$13 million during the period of the feasibility study. After completion of the
feasibility study, the appropriate security will be determined with the Provinces. Although we believe our current estimate for our reclamation costs is sufficient, the estimate contained in the
feasibility study may be materially larger. See "Risk Factors — Reclamation and mine closure costs could adversely affect our cash flow from operations" and
"Description of Material Indebtedness and Other Liabilities — Reclamation Security Agreements." 

Other Commitments and Agreements  

        We have certain other commitments and agreements that are not included in the table above, including a profit sharing plan whereby 10% of our after tax earnings
for any given fiscal year will be distributed to all employees in the Flin Flon/Snow Lake operations, with the exception of executive officers and key management personnel. See Note 18
to our consolidated financial statements contained elsewhere in this offering circular. 

 
 

Off-Balance Sheet Arrangements    
    

        We are not involved in any off balance sheet transactions. 

 
 

Risk Profile    
    

Overview  

        We are subject to various risks in our day-to-day operations. The likelihood and severity of these risks are mitigated by application of
high standards in the planning, construction and operation of our facilities. In addition, emphasis is placed on hiring and retaining competent personnel and developing their skills through training
in safety and loss control. We have a solid track record of developing and operating base metal mines, and our safety record, as expressed by the widely-used frequency measure of lost time
accidents per 200,000 hours worked, has followed a steady improvement curve, from more than 16 in 1994 to 0.9 in the first nine months of 2004. 

        Business
risk is also mitigated through the purchase of insurance coverage, including coverage for property damage, business interruption and liability. 

10

 

Financial Risk and Financial Instruments  

        Our net income is sensitive to fluctuations in metal prices. Further, the market prices of all of our metal products are U.S. dollar based and our net
income is therefore sensitive to fluctuations in the US$/Cdn$ exchange rate. The approximate sensitivities of 2004 net income to movements in metal prices and exchange rates, using the first half of
2004 as a basis (and not assuming the effect of this offering), are shown in the following table. 

	 
	 	Change
	 	Earnings Impact

	Zinc	 	US1¢/lb	 	Cdn$	3.0 million
	Copper	 	US1¢/lb	 	Cdn$	1.3 million
	Gold	 	US$10/oz	 	Cdn$	0.9 million
	Silver	 	US$1/oz	 	Cdn$	0.8 million
	Exchange Rate	 	Cdn1¢/U.S.dollar	 	Cdn$	2.7 million

        In
order to mitigate the impact of fluctuating metal prices and exchange rates, from time to time we enter into derivative transactions pursuant to our Risk Management Policies and
Procedures. These policies prohibit the implementing of uncovered commodity and currency positions and we do not use complex derivatives to manage our exposures and do not hold commodity and currency
positions for speculative purposes. The accounting policy relating to financial instruments and commodity contracts and details of forward contracts and options held by us are set out in
Notes 2 and 14 to our consolidated financial
statements. For a further discussion of the impact of metal prices and currency exchange rates on our business, see "Risk Factors". 

Credit Risk  

        Essentially all our sales are to CMM. CMM's financial results are proportionately consolidated into our financial statements. All of our accounts receivable from
metal sales are with CMM. CMM provides credit to its customers in the normal course of its operations. It carries out, on a continuing basis, credit checks on its customers and maintains provisions
for contingent credit losses. CMM mitigates its credit risk by carrying out credit evaluations on its customers, by making a significant portion of its sales on a cash basis and by maintaining
insurance on its accounts receivable. 

        We
are exposed to credit risk in the event of non-performance by counterparties in connection with our derivative contracts. We do not obtain collateral or other security to
support financial instruments subject to credit risk but mitigate this risk by dealing only with financially sound counterparties and, accordingly, we do not anticipate loss for
non-performance. 

Operational Risk  

        The business of metal mining and processing is generally subject to certain types of risks and hazards, industrial accidents such as cave-ins, rock
bursts, rock falls and flooding, unusual or unexpected rock formations, vessel or other structural failure, changes in the regulatory environment, equipment failures and metal losses. Such occurrences
could result in damage to, or destruction of, mineral properties or production facilities, personal injury or death, environmental damage, delays in mining or processing (including partial or complete
shutdowns), monetary losses and possible legal liability. As a result we could be required to incur significant costs that could have a material adverse effect on our financial performance, liquidity
and results of operations. 

        Our
reserves are estimates and there can be no assurance that anticipated tonnage and grade can be achieved. To maintain or grow production levels over the long term we must continually
replace mineral reserves depleted by production by upgrading mineral resources to reserves, expanding known orebodies or locating new ones. Success in mineral exploration is highly uncertain and there
is a risk that future depletion of mineral reserves, through normal mining operations, will not be adequately replaced. 

11

 

Environmental Risk  

        Our activities are subject to extensive federal and local laws and regulations governing environmental protection and employee health and safety. We are required
to obtain governmental permits and to comply with applicable decommissioning and reclamation rules. Although we make provision for reclamation costs, there can be no assurance that these provisions
will be adequate to discharge the obligations associated with these regulations. Failure to comply with applicable environmental and health and safety laws can result in injunctions, damages or
revocation of permits and imposition of penalties. There can be no assurance that we have been or will be at all times in complete compliance with such laws and regulations or that the costs of
complying will not have a material adverse effect on our financial performance, liquidity and results of operations. 

 
 

Critical Accounting Estimates    
    

        The preparation of our financial statements in accordance with Canadian GAAP requires our management to make estimates and judgements that affect the reported
amounts of assets, liabilities, revenues and expenses. We evaluate the estimates periodically, including those relating to ore reserve determinations, asset impairment, in-process
inventory quantities, future income tax valuation reserves, asset retirement obligations, pension obligations and other employee future benefits. Actual results could differ from these estimates by
material amounts. 

Ore Reserves  

        Ore reserves are estimated to determine future recoverable mine production based on assessment of geological, engineering and metallurgical analyses, estimates of
future production costs, capital costs and reclamation costs as well as metal prices. The costs of mineral properties and mine development are capitalized and amortized by the
unit-of-production method based on related proven and probable ore reserves. 

Impairment  

        The carrying value of our operating mines and plant and equipment is periodically reviewed for impairment when events or changes in circumstances indicate that
the carrying amounts of related assets or groups of assets may not be recoverable. If total estimated future cash flows on an undiscounted basis are less than the carrying amount of the asset, an
impairment loss is measured and recorded to write down the asset to its fair value. During 2003 we determined that the carrying value of our property, plant and equipment and unamortized mine
development expenditures did not reflect the fair value of those assets based on future potential earnings and costs. The carrying values of these items were written down by a total of
$269 million based on the discounted cash flows forecast to be generated by our assets. 

In-Process Inventories  

        In-process concentrates and metal inventory quantities comprise the majority of our inventories by value, and represent materials that are in the
process of being converted into saleable product. Measurement of in-process inventories is based on assays of material received at our metallurgical plants and estimates of recoveries in
the production processes. Realizable value of in-process inventories is estimated at financial statement dates and inventories are carried at the lower of cost and net realizable value. 

Future Tax Assets and Liabilities  

        We use the liability method of tax allocation for accounting for income taxes. Under the liability method, future tax assets and liabilities are determined based
on differences between the financial reporting and tax bases of assets and liabilities. Future tax assets are reduced by a valuation allowance if it is more likely than not that some or all of the
future tax assets will not be realized. We evaluate the carrying value of our future tax assets periodically by assessing our valuation allowance and by adjusting the amount of such valuation
allowance, if necessary. The factors used to assess the likelihood of realization are forecasts of future taxable income and available tax planning strategies that could be implemented to realize
future tax assets. 

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Asset Retirement Obligations  

        Asset retirement obligations are estimated based on environmental plans, in compliance with current environmental and regulatory requirements. Decommissioning
costs are estimated and provided for, along with an identical decommissioning asset, when a new mine or plant is placed into commercial production. The decommissioning asset is amortized on a
straight-line basis over the life of the mine or plant. Restoration costs are estimated and accrued over the life of each operating mine. The accrued amounts are increased by an annual
interest component such that at the end of the asset life the provision is equal to the balance estimated to be paid at that date. 

        In
view of the uncertainties concerning these future obligations, the ultimate timing and cost of reclamation and mine closure may differ materially from our estimates. 

Pensions and Other Employee Future Benefits  

        Our on-going health care benefit plans comprise the majority of post-retirement obligations. The obligations relating to these plans,
together with pension plans maintained by us, are estimated based on actuarial determinations, which incorporate assumptions using management's best estimates of factors including plan performance,
salary escalation, retirement dates of employees and drug cost escalation rates. 

 
 

Changes in Accounting Policies    
    

Financial Instruments and Commodity Contracts  

        Effective January 1, 2004, the CICA issued Accounting Guideline 13 ("AcG-13") "Hedging Relationships", to clarify circumstances in which hedge
accounting is appropriate. In addition, the CICA simultaneously amended EIC 128, "Accounting for Trading, Speculative or Non Trading Derivative Financial Instruments" to require that all derivative
instruments that do not qualify as a hedge under AcG-13, or are not designated as a hedge, be recorded in the balance sheet as either an asset or a liability with the changes in fair value
recognized in earnings. 

        As
a result of this change in accounting policy, our earnings for the nine months ended September 30, 2004, increased by $4.1 million. Total assets increased by
$13.7 million and total liabilities increased by $9.6 million as at September 30, 2004 as a result of this new accounting policy. Cash flow was not affected by this change. In
accordance with the transitional provisions of AcG-13 and EIC-128, this new guideline has been applied prospectively whereby prior periods have not been restated. 

        Further
details on this change in accounting policy are set out in Note 2 to the financial statements. 

        Further
details on recent accounting pronouncements under U.S. GAAP are set out in Note 26 to the financial statements. 

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QuickLinks

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

Results of Operations

Cash Flows, Liquidity and Capital Resources

Contractual Obligations

Off-Balance Sheet Arrangements

Risk Profile

Critical Accounting Estimates

Changes in Accounting Policies

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