5N Plus Inc. — Interim / Quarterly Report 2020

Aug 5, 2020

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Management 5N plus 2109 Annual reportReport

Quarter Ended June 30, 2020

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2

Enabling Performance

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Management’s Discussion and Analysis

This Management’s Discussion and Analysis (“MD&A”) of the financial condition and results of operations is intended to assist readers in understanding 5N Plus Inc. (the “Company” or “5N Plus”), its business environment, strategies, performance and risk factors. This MD&A should be read in conjunction with the unaudited condensed interim consolidated financial statements of Q2 2020 and the audited consolidated financial statements and the accompanying notes for the year ended December 31, 2019. The unaudited condensed interim consolidated financial statements have been prepared in accordance with International Accounting Standard 34 “Interim Financial Reporting” (“IAS 34”) as issued by the International Accounting Standards Board (“IASB”). This MD&A has been prepared in accordance with the requirements of the Canadian Securities Administrators.

Information contained herein includes any significant developments to August 4, 2020, the date on which the MD&A was approved by the Company’s board of directors. Unless otherwise indicated, the terms “we”, “us” “our” and “the group” as used herein refer to the Company together with its subsidiaries.

“Q2 2020” and “Q2 2019” refer to the three‐month periods ended June 30, 2020 and 2019 respectively, and “YTD 2020” and “YTD 2019” refer to the six‐month periods ended June 30, 2020 and 2019 respectively. All amounts in this MD&A are expressed in U.S. dollars, and all amounts in the tables are in thousands of U.S. dollars, unless otherwise indicated. All quarterly information disclosed in this MD&A is based on unaudited figures.

Non‐IFRS Measures

This MD&A also includes certain figures that are not performance measures consistent with IFRS. These measures are defined at the end of this MD&A under the heading Non‐IFRS Measures.

Notice Regarding Forward‐Looking Statements

Certain statements in this MD&A may be forward‐looking within the meaning of applicable securities laws. Forward‐ looking information and statements are based on the best estimates available to the Company at the time and involve known and unknown risks, uncertainties or other factors that may cause the Company’s actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward‐looking statements. A description of the risks affecting the Company’s business and activities appears under the heading “Risk and Uncertainties” of the 5N Plus’ 2019 MD&A dated February 25, 2020 and note 10 of the unaudited condensed interim consolidated financial statements for the three and six‐month periods ended June 30, 2020 and 2019 available on www.sedar.com.

The Company is not aware of any significant changes to its risk factors previously disclosed, however since January 2020, the gradual outbreak of the novel strain of the coronavirus, COVID‐19 and its declaration as a pandemic by the World Health Organization, has resulted in governments worldwide enacting emergency measures to combat the spread of the virus. These measures have caused material disruption to businesses globally resulting in an economic slowdown. While the Company has been able to mitigate the short‐term impact from the crisis without significant loss of production capacity and customer demand, it is not possible to reliably estimate the length, severity and long‐term impact the global pandemic may have on the Company's financial results, conditions and cash flows. The outbreak of the COVID‐19 should be considered a new risk factor.

Forward‐looking statements can generally be identified by the use of terms such as “may”, “should”, “would”, “believe”, “expect”, the negative of these terms, variations of them or any similar terms. No assurance can be given that any events anticipated by the forward‐looking information in this MD&A will transpire or occur, or if any of them do so, what benefits that 5N Plus will derive therefrom. In particular, no assurance can be given as to the future financial performance of 5N Plus. The forward‐looking information contained in this MD&A is made as of the date hereof and the Company has no obligation to publicly update such forward‐looking information to reflect new information, subsequent or otherwise, unless required by applicable securities laws. The reader is warned against placing undue reliance on these forward‐ looking statements.

5N Plus ▪ Management’s Discussion and Analysis ▪ 1

Management’s Discussion and Analysis

Overview

5N Plus is a leading global producer of engineered materials and specialty chemicals with integrated recycling and refining assets to manage the sustainability of its business model. The Company is headquartered in Montreal, Québec, Canada and operates R&D, manufacturing and commercial centers in several locations in Europe, the Americas and Asia. 5N Plus deploys a range of proprietary and proven technologies to produce products which are used as enabling precursors by its customers in a number of advanced electronics, optoelectronics, pharmaceutical, health, renewable energy and industrial applications. Many of the materials produced by 5N Plus are critical for the functionality and performance of the products and systems produced by its customers, many of whom are leaders within their industry.

Reporting Segments

The Company has two reportable segments, namely Electronic Materials and Eco‐Friendly Materials. Corresponding operations and activities are managed accordingly by the Company’s key decision makers. Segmented operating, financial information and labelled key performance indicators are available and used to manage these business segments, review performance and allocate resources. Financial performance of any given segment is evaluated primarily in terms of revenues and Adjusted EBITDA[1] which is reconciled to consolidated numbers by taking into account corporate income and expenses.

The Electronic Materials segment operates in North America, Europe and Asia. The Electronic Materials segment manufactures and sells products which are used in a number of applications such as security, aerospace, sensing, imaging, renewable energy and various technical industries. Typical end markets include photovoltaics (terrestrial and spatial solar energy), advance electronics, optoelectronics, electronic packaging, medical imaging and thermoelectric. These are sold either in elemental or alloyed form as well as in the form of chemicals, compounds and wafers. Revenues and earnings associated with recycling services and activities provided to customers of the Electronic Materials segment are also included in the Electronic Materials segment.

The Eco‐Friendly Materials segment is so labelled because it is mainly associated with bismuth, one of the very few heavy metals which has no detrimental effect on either human health or in the environment. The Eco‐Friendly Materials segment operates in North America, Europe and Asia. The Eco‐Friendly Materials segment manufactures and sells products which are used in a number of applications such as pharmaceutical, healthcare, animal feed additive, catalytic and extractive, as well as various industrial materials. Main products are sold either in elemental or alloyed form but mostly in the form of specialized chemicals. Revenues and earnings associated with recycling services and activities provided to customers of the Eco‐Friendly Materials segment are also included in the Eco‐Friendly Materials segment.

Corporate expenses associated with the head office and unallocated selling, general and administrative expenses (SG&A) together with financial expenses (revenues) have been regrouped under the heading Corporate.

Vision and Strategy

As a leading global materials technology company with employees and assets throughout the world, we are determined to enable and empower our people in a manner which inspires them to perform collectively at their best and optimize resource utilization to deliver competitive financial returns.

The Company unveiled its Strategic Plan 5N21 (“5N21”) designed to enhance profitability while reducing earnings volatility on September 12, 2016. 5N21 focuses on three major pillars:

1. Extracting more value from core businesses and global assets;

2. Optimizing balance of contribution from upstream and downstream activities; and

3. Delivering quality growth from both existing growth initiatives and future M&A opportunities.

1 See Non‐IFRS Measures

2 ▪ 5N Plus ▪ Management’s Discussion and Analysis

Management’s Discussion and Analysis

Highlights of Q2 & YTD 2020

New & Higher Value‐Added Products Boost Adjusted EBITDA by over 30%

Gross Margin Reaches Record Levels – Substantial Cash Generation Yields Notable Net Debt Reduction

5N Plus posted strong results in the second quarter, the best in many quarters in terms of Adjusted EBITDA[1] and delivered record level gross margin[1] as a percentage of revenue, despite near historic lows in relevant metal notations which has resulted in sub‐optimized conditions for the Company’s upstream activities and headwinds from COVID‐19 pandemic. Given the fact that 5N Plus continued to grow the contribution from higher value‐added businesses with lower metal revenues, the Company was able to expand margins and grow earnings. During the quarter and year‐to‐ date, gross margin grew by 9% and 7% reaching record levels for the Company.

Considering the new realities created by COVID‐19 pandemic, 5N Plus was able to successfully navigate the new business environment. First and foremost, Management remained focused on employees’ health and safety while servicing market demands and protecting the interests of its stakeholders. The core business remained strong, albeit negatively impacted by slower demand from certain industries such as automotive, aircraft, coating and pigment. Also, certain growth initiatives were impeded by the pandemic due to customer’s program delays and site closures. Despite these challenges, the increased demand for products with higher value‐added activities and improved operating fundamentals enabled 5N Plus to grow earnings and expand margins. The culmination of these events resulted in significant cash generation leading to net debt reduction of $13.7 million in the quarter, while maintaining a high level of liquidity. The Company continues to further strengthen its balance sheet, keeping all options open for the future growth projects.

For the second quarter of 2020 and year‐to‐date, the Company reported the following:

• Adjusted EBITDA[1] and EBITDA[1] for the second quarter of 2020 reached $7.6 million and $6.5 million compared to $5.9 million and $5.3 million during the same quarter of 2019, favorably impacted by increased contribution from semiconductor compounds, semiconductor engineered substrates and productivity gains from the operating activities against the backdrop of a stable but low metal notations.

• Adjusted EBITDA and EBITDA for the six‐month period ended June 2020 reached $14.5 million and $12.7 million compared to $11.5 million and $9.5 million during the same period of 2019, mostly impacted by the same factors mentioned above, mitigating the shortfall in contribution from upstream activities due to low metal notations.

• Revenue for the second quarter of 2020 and the six‐month period ended June 2020 reached $41.1 million and $91.1 million compared to $50.3 million and $101.7 million during the same periods of 2019. The revenue attributed to the sale of metal in Q2 2020 was significantly lower than the same period last year driven by near historic lows in relevant metal notations. Revenue contribution from higher value‐added businesses was higher during the same period, partly mitigating lower metal revenue.

• Net earnings for the second quarter of 2020 were $1.7 million, equivalent to the same period last year and $2.3 million for the six‐month period compared to $0.6 million for the same period last year.

• Annualized Return on Capital Employed (ROCE)[1] reached 12.6% for the second quarter of 2020 as compared to 8.2% for the same period last year.

• Net debt[1] stood at $24.4 million as of June 30, 2020, down from $38.1 million as at March 31, 2020.

• From March 9, 2020 to June 30, 2020, 5N Plus purchased and cancelled 1,077,331 of the Company’s common shares under the normal course issuer bid (NCIB) plan. Under the NCIB, 5N Plus has the right to purchase for cancellation, until March 8, 2021, a maximum of 2,000,000 common shares.

1 See Non‐IFRS Measures

5N Plus ▪ Management’s Discussion and Analysis ▪ 3

Management’s Discussion and Analysis

• As of June 30, 2020, the Backlog[1] reached a level of 202 days of annualized revenue, a similar level than in Q2 2019, however higher than in Q1 2020 at 188 days. Bookings[1] in Q2 2020 reached 66 days compared to 62 days in Q1 2020 and 86 days in Q2 2019.

• On June 3, 2020, 5N Plus announced that its subsidiary, 5N Plus Semiconductors, located in St. George, Utah, signed a $12.5 million contract with the U.S. Government aimed at further advancing process and product technologies for specialty semiconductors required by U.S. satellite suppliers. As the sole domestic source of these critical products, over the next 39 months, 5N Plus Semiconductors will address future technological requirements and enhance the sustainability of critical products required in the domestic supply chain for Space.

• On July 21, 2020, 5N Plus announced that its subsidiary, 5N Plus Semiconductors, located in St. George, Utah, has successfully completed the development of a new generation of infrared detection wafers made of indium antimonide semiconductor materials. Since its launch, the breakthrough INZBE3 has not only garnered great market interest but has also seen demand for INZBE3 grow rapidly in a number of applications ranging from gas detection for increasingly regulated industrial environments to security and surveillance.

Over the recent years, Management’s key priorities have been to transform the Company away from commodity products, toward enabling products and services with higher value‐added activities resulting in earnings growth and earnings volatility reduction due to commodity prices. The performance of 5N Plus in 2020 and particularly the second quarter of the year provides a window into the progress of this initiative. During this period, increased contributions from higher value‐added products such as semiconductor compounds and engineered semiconductor substrates played a key role in posting record level gross margins of 30.6% for the quarter and 27.2% year‐to‐date.

1 See Non‐IFRS Measures

4 ▪ 5N Plus ▪ Management’s Discussion and Analysis

Management’s Discussion and Analysis

Summary of Results

Summary of Results
	Q2 2020 Q2 2019 YTD 2020 YTD 2019
Revenue Adjusted operatingexpenses1*	$ $ $ $ 41,136 50,290 91,090 101,703 (33,489) (44,428) (76,586) (90,229)
Adjusted EBITDA1 Impairment of inventory Share‐based compensation expense Foreign exchange and derivative loss	7,647 5,862 14,504 11,474 ‐ ‐ ‐ ‐ (510) (405) (680) (1,542) (631) (136) (1,080) (423)
EBITDA1 Interest on long‐term debt, imputed interest and other interest expense Depreciation and amortization	6,506 5,321 12,744 9,509 873 945 1,772 2,348 3,000 2,581 6,099 5,759
Earnings before income taxes Income tax expense (recovery) Current Deferred	2,633 1,795 4,873 1,402 953 (93) 2,290 1,147 (69) 130 242 (354)
	884 37 2,532 793
Net earnings	1,749 1,758 2,341 609
Basic earnings per share Diluted earningsper share	$0.02 $0.02 $0.03 $0.01 $0.02 $0.02 $0.03 $0.01

*Excluding impairment of inventory, share‐based compensation expense and depreciation and amortization.

Revenue by Segment and Gross Margin

	Q2 2020 Q2 2019 Change YTD 2020 YTD 2019 Change
Electronic Materials Eco‐FriendlyMaterials	$ $ $ $ 19,518 18,867 3% 39,302 39,161 ‐% 21,618 31,423 (31%) 51,788 62,542 (17%)
Total revenue	41,136 50,290 (18%) 91,090 101,703 (10%)
Cost of sales Depreciation included in cost of sales	(31,123) (41,051) (24%) (71,583) (83,851) (15%) 2,578 2,325 11% 5,263 5,247 ‐%
Gross margin1 Gross margin percentage1	12,591 11,564 9% 24,770 23,099 7% 30.6% 23.0% 27.2% 22.7%

In Q2 2020, revenue decreased by 18% compared to the same quarter of last year, while gross margin[1] reached record level of 30.6% compared to 23.0% in Q2 2019, tracking an average gross margin of 27.2%, or $24.8 million after 6 months compared to 22.7% or $23.1 million, with both periods impacted by historical low underlying metal notations, and relative metal notations stability during 2020.

1 See Non‐IFRS Measures

5N Plus ▪ Management’s Discussion and Analysis ▪ 5

Management’s Discussion and Analysis

Operating earnings, EBITDA and Adjusted EBITDA

	Q2 2020 Q2 2019 Change YTD 2020 YTD 2019 Change
Electronic Materials Eco‐Friendly Materials Corporate	$ $ $ $ 6,700 4,695 43% 12,482 8,821 42% 3,604 3,515 3% 6,726 6,656 1% (2,657) (2,348) 13% (4,704) (4,003) 18%
Adjusted EBITDA1	7,647 5,862 30% 14,504 11,474 26%
EBITDA1	6,506 5,321 22% 12,744 9,509 34%
Operating earnings	4,137 2,876 44% 7,725 4,173 85%

In Q2 2020, Adjusted EBITDA [1] was $7.6 million compared to $5.9 million in Q2 2019, positively impacted by a favorable product mix, carried by the Security, Aerospace, Sensing, and Imaging sector, relative stability of the metal notations and reduced operating expenses across the Company. In YTD 2020, Adjusted EBITDA increased by $3.0 million, from $11.5 million in YTD 2019 to $14.5 million, impacted by factors mentioned above, mitigating the contribution shortfall from upstream activities due to low metal notations.

In Q2 2020, EBITDA[1] was $6.5 million compared to $5.3 million in Q2 2019. The increase is mainly explained by the higher Adjusted EBITDA net of higher foreign exchange and derivative loss.

In YTD 2020, EBITDA was $12.7 million compared to $9.5 million in YTD 2019. The increase is mainly explained by the higher Adjusted EBITDA combined with lower share‐based compensation expense reduced by higher foreign exchange and derivative loss.

In Q2 2020, operating earnings reached $4.1 million compared to $2.9 million in Q2 2019 and $7.7 million in YTD 2020 compared to $4.2 million in YTD 2019.

Electronic Materials Segment

Adjusted EBITDA in Q2 2020 increased by $2.0 million to $6.7 million representing an Adjusted EBITDA margin[1] of 34% compared to 25% in Q2 2019. Adjusted EBITDA increased by $3.7 million to $12.5 million in YTD 2020 representing an Adjusted EBITDA margin of 32% compared to 23% in YTD 2019.

Eco‐Friendly Materials Segment

Adjusted EBITDA in Q2 2020 increased by $0.1 million to $3.6 million representing an Adjusted EBITDA margin of 17% compared to 11% in Q2 2019. Adjusted EBITDA increased by $0.1 million to $6.7 million in YTD 2020 representing an Adjusted EBITDA margin of 13% compared to 11% in YTD 2019.

Net Earnings and Adjusted Net Earnings

Net Earnings and Adjusted Net Earnings
	Q2 2020 Q2 2019 YTD 2020 YTD 2019
Net earnings Basic earnings per share	$ $ $ $ 1,749 1,758 2,341 609 $0.02 $0.02 $0.03 $0.01
Reconciling items: Share‐based compensation expense Accelerated imputed interest Income tax recovery on taxable items above	510 405 680 1,542 ‐ ‐ ‐ 267 (135) (108) (180) (483)
Adjusted net earnings1 Basic adjusted net earnings per share1	2,124 2,055 2,841 1,935 $0.03 $0.02 $0.03 $0.02

1 See Non‐IFRS Measures

6 ▪ 5N Plus ▪ Management’s Discussion and Analysis

Management’s Discussion and Analysis

Net earnings were $1.7 million or $0.02 per share in Q2 2020, similar to Q2 2019. Adjusted net earnings[1] increased by $0.1 million and were $2.1 million or $0.03 per share in Q2 2020 compared to $2.1 million or $0.02 per share in Q2 2019.

In YTD 2020, net earnings were $2.3 million or $0.03 per share compared to $0.6 million or $0.01 per share in YTD 2019. Adjusted net earnings increased by $0.9 million and were $2.8 million or $0.03 per share in YTD 2020 compared to $1.9 million or $0.02 per share in YTD 2019.

Excluding the income tax recovery, the only item reconciling the Adjusted net earnings in Q2 2020 and YTD 2020 is the share‐based compensation expense.

Backlog and Bookings

Backlog and Bookings
	BACKLOG1	BOOKINGS1
	Q2 2020 Q1 2020	Q2 2019 Q2 2020 Q1 2020 Q2 2019
Electronic Materials Eco‐Friendly Materials	$ $ 51,432 51,602 39,775 51,135	$ $ $ $ 63,802 19,348 2,498 19,939 47,142 10,258 31,296 27,488
Total	91,207 102,737	110,944 29,606 33,794 47,427
(number of days based on annualized revenues)*	BACKLOG1	BOOKINGS1
	Q2 2020 Q1 2020	Q2 2019 Q2 2020 Q1 2020 Q2 2019
Electronic Materials Eco‐Friendly Materials Weighted average	240 238 168 155 202 188	309 90 12 96 137 43 95 80 201 66 62 86

* Backlog and bookings are also presented in number of days to normalize the impact of commodity prices.

Q2 2020 vs Q1 2020

Backlog [1] as at June 30, 2020 reached a level of 202 days of annualized revenue, an increase of 14 days or 7% over the backlog as at March 31, 2020.

Backlog as at June 30, 2020 for the Electronic Materials segment represented 240 days of annualized segment revenue, a similar level to March 31, 2020. The backlog for the Eco‐Friendly Materials segment represented 168 days of annualized segment revenue, an increase of 13 days or 8% over the backlog as at March 31, 2020.

Bookings[1] for the Electronic Materials segment increased by 78 days, from 12 days in Q1 2020 to 90 days in Q2 2020, following the renewal of a long‐term contract within the Segment. Bookings for the Eco‐Friendly Materials segment decreased by 52 days, from 95 days in Q1 2020 to 43 days in Q2 2020, the renewal of long‐term contracts mostly occurring during Q4 and Q1 for this Segment.

Q2 2020 vs Q2 2019

Backlog as at June 30, 2020 for the Electronic Materials segment decreased by 69 days, the decrease mainly driven by the bankruptcy filing of one of the end‐customers resulting in retroactive adjustment during Q1 to the backlog in terms of dollar and days of sales, while the Eco‐Friendly Materials segment increased by 31 days compared to June 30, 2019, reaching 202 days on a consolidated basis compared to 201 days in Q2 2019.

Bookings for the Electronic Materials segment decreased by 6 days and by 37 days for the Eco‐Friendly Materials segment compared to the previous year quarter.

1 See Non‐IFRS Measures

5N Plus ▪ Management’s Discussion and Analysis ▪ 7

Management’s Discussion and Analysis

Expenses

Expenses
	Q2 2020 Q2 2019	YTD 2020 YTD 2019
Depreciation and amortization SG&A Share‐based compensation expense Financial expense Income taxes expense	$ $	$ $ 6,099 5,759 9,480 10,992 680 1,542 2,852 2,771 2,532 793
	3,000 2,581 4,589 5,476 510 405 1,504 1,081 884 37
Total expenses	10,487 9,580	21,643 21,857

Depreciation and Amortization

Depreciation and amortization expenses in Q2 2020 and YTD 2020 amounted to $3.0 million and $6.1 million respectively compared to $2.6 million and $5.8 million for the same periods of 2019. The increase in primarily attributable to the completion of specific capital expenditure late 2019 and early 2020.

SG&A

SG&A expenses in Q2 2020 and YTD 2020 were $4.6 million and $9.5 million respectively compared to $5.5 million and $11.0 million for the same periods of 2019. In 2020, the expenses were positively impacted by favorable exchange rates across most local currency denominated expenses when compared to 2019, as well as lower travel and consulting expenses, either avoided or delayed, due to the COVID‐19 pandemic.

Share‐Based Compensation Expense

Share‐based compensation expense in Q2 2020 and YTD 2020 amounted to $0.5 million and $0.7 million respectively compared to $0.4 million and $1.5 million for the same periods of 2019, reflecting the scheduled vesting of long‐term incentive plans and the decline in the Company’s share price initiated in 2019.

Financial Expense

Financial expense in Q2 2020 amounted to $1.5 million compared to $1.1 million in Q2 2019. The increase is mainly due to higher loss in foreign exchange and derivatives compared to the same period last year.

In YTD 2020, financial expense amounted to $2.9 million compared to $2.8 million in YTD 2019. The increase is mainly due to the same factor mentioned above mitigated by imputed interest recognized as a non‐cash expense related to the outstanding convertible debentures redeemed in March 2019.

Income Taxes

The Company reported earnings before income taxes of $2.6 million in Q2 2020 and $4.9 million in YTD 2020. Income tax expense in Q2 2020 and YTD 2020 were $0.9 million and $2.5 million respectively compared to $nil million and $0.8 million for the same periods in 2019. Both periods were impacted by deferred tax assets applicable in certain jurisdictions.

Liquidity and Capital Resources

Liquidity and Capital Resources
	Q2 2020 Q2 2019 YTD 2020 YTD 2019
Funds from operations1 Net changes in non‐cash working capital items	$ $ $ $ 5,520 4,866 10,294 7,811 10,661 (5,475) 6,545 (15,005)
Operating activities Investing activities Financing activities Effect of foreign exchange rate changes on cash and cash equivalents	16,181 (609) 16,839 (7,194) (1,889) (1,100) (4,154) (3,940) (5,760) (3,306) (1,971) 1,543 131 28 (110) 43
Net increase (decrease) in cash and cash equivalents	8,663 (4,987) 10,604 (9,548)

1 See Non‐IRFS Measures

8 ▪ 5N Plus ▪ Management’s Discussion and Analysis

Management’s Discussion and Analysis

Cash generated by operating activities amounted to $16.2 million in Q2 2020 compared to cash used in operating activities of $0.6 million in Q2 2019. In YTD 2020, cash generated by operating activities amounted to $16.8 million compared to cash used in operating activities of $7.2 million for the same period in 2019. The increase in funds from operations[1] is mainly explained by the positive change in net changes in non‐cash working capital combined with the higher EBITDA[1] . The positive change in non‐cash working capital in YTD 2020 is mainly due to a decrease in accounts receivables of $5.7 million, a decrease in inventory of $3.7 million as well as a decrease of $1.8 million in net position of income tax receivable partially impacted by a decrease of $5.6 million in trade and accrued liabilities

In Q2 2020, cash used in investing activities totaled $1.9 million compared to $1.1 million in Q2 2019, mainly attributed to timing of additions to PPE. In YTD 2020, cash used in investing activities totaled $4.2 million compared to $3.9 million in YTD 2019, mainly attributed to timing of additions to PPE, as well.

In Q2 2020, cash used in financing activities amounted to $5.8 million compared to $3.3 million in Q2 2019. The increase is mainly explained by the reimbursement this quarter of the drawdown of $5.0 million from the credit facility done last quarter. During Q2 2020, the Company repurchased and cancelled 306,131 common shares under the NCIB plan for an amount of $0.4 million compared to 1,312,354 common shares for an amount of $3.0 million during Q2 2019.

In YTD 2020, cash used in financing activities amounted to $2.0 million compared to cash from financing activities of $1.5 million in YTD 2019. The decrease is mainly explained by the new drawdown of $5.0 million from the credit facility which was reimbursed while in Q1 2019, the Company completed the new five‐year unsecured subordinated term loan of $25.0 million for which only $19.3 million were used to redeem the Company’s outstanding convertible unsecured subordinated debentures of CA$26.0 million combined with the issuance of common shares for an amount of $0.6 million. Since the beginning of 2020, the Company has repurchased and cancelled 1,077,331 common shares under the NCIB plan for an amount of $1.2 million compared to 1,696,733 common shares for an amount of $4.0 million YTD 2019.

Working Capital

Working Capital
	As at June 30, 2020 As at December 31, 2019
Inventories Other current assets Current liabilities	$ $ 79,624 83,367 63,149 61,346 (31,332) (37,016)
Working capital1	111,441 107,697
Working capital current ratio1	4.56 3.91

The increase in working capital[1] compared to December 31, 2019 was mainly attributable to lower current liabilities and higher current assets, while inventories are lower impacted by current low metal notations and upstream activities communicated in 2019.

Net Debt

Net Debt
	As at June 30, 2020 As at December 31, 2019
Bank indebtedness Long‐term debt including current portion	$ $ ‐ ‐ 55,102 55,107
Total Debt1 Cash and cash equivalents	55,102 55,107 (30,669) (20,065)
**Net Debt1 **	24,433 35,042

Total debt[1] is stable at $55.1 million when compared to December 31, 2019. The drawdown of $5.0 million on the Company’s credit facility for working capital purposes in Q1 2020 was reimbursed during Q2 2020 following the cash and cash equivalents generated during this quarter.

Net debt[1] , after considering cash and cash equivalents, decreased by $10.6 million, from $35.0 million as at December 31, 2019 to $24.4 million as at June 30, 2020.

1 See Non‐IFRS Measures

5N Plus ▪ Management’s Discussion and Analysis ▪ 9

Management’s Discussion and Analysis

Share Information

Share Information
	As at August 4, 2020 As at June 30, 2020
Issued and outstanding shares Stock options potentially issuable	82,220,408 82,324,227 704,656 704,656

On March 5, 2020, the TSX approved the Company’s NCIB plan under which, the Company has the right to purchase for cancellation, until March 8, 2021, a maximum of 2,000,000 common shares. For the six‐month period ended June 30, 2020, the Company repurchased and cancelled 1,077,331 common shares at an average price of $1.09 (CA$1.53) for a total amount of $1.2 million applied against the equity.

Off‐Balance Sheet Arrangements

The Company is exposed to currency risk on sales in Euro and other currencies as well as interest rate fluctuations on its credit facility, and therefore periodically enters into foreign currency forward contracts and interest rate or foreign currency swap contracts to protect itself against interest rate and currency fluctuations. The reader will find more details related to these contracts in Notes 16 and 24 of the audited consolidated financial statements for the year ended December 31, 2019.

Commitments

As at June 30, 2020, in the normal course of business, the Company contracted letters of credit for an amount of $0.6 million ($0.4 million as at December 31, 2019).

Contingencies

In the normal course of operations, the Company is exposed to events that could give rise to contingent liabilities or assets. As at the date of issue of the consolidated financial statements, the Company was not aware of any significant events that would have a material effect on its consolidated financial statements.

Subsequent Event

On July 30, 2020, 5N PV Malaysia Sdn Bhd, a subsidiary of 5N Plus Inc., was issued a notice by the Malaysian authorities to temporarily halt the operations of its site located in the municipality of Kulim, on the basis of a dispute between the two parties over the interpretation and application of the import license. The Company is maintaining ongoing dialogue with the authorities in order to settle the dispute. The site is part of the Company’s upstream operations and the suspension is not expected to have any adverse commercial impact to the business.

Governance

As required by Multilateral Instrument 52‐109 of the Canadian Securities Administrators («MI 52‐109 »), 5N Plus has filed certificates signed by the Chief Executive Officer and the Chief Financial Officer that, among other things, attest to the design of the disclosure controls and procedures and the design and effectiveness of internal controls over financial reporting.

Disclosure Controls and Procedures

The Chief Executive Officer and the Chief Financial Officer have designed disclosure controls and procedures, or have caused them to be designed under their supervision, in order to provide reasonable assurance that:

• material information relating to the Company has been made known to them; and

• information required to be disclosed in the Company’s filings is recorded, processed, summarized and reported within the time periods specified in securities legislation.

An evaluation was carried out, under the supervision of the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures. Based on this evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the disclosure controls and procedures are effective.

10 ▪ 5N Plus ▪ Management’s Discussion and Analysis

Management’s Discussion and Analysis

Internal Control over Financial Reporting

The Chief Executive Officer and the Chief Financial Officer have also designed internal controls over financial reporting (ICFR) or have caused them to be designed under their supervision, in order to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with IFRS.

Based on their evaluation carried out to assess the effectiveness of the Company’s ICFR, the Chief Executive Officer and the Chief Financial Officer have concluded that the ICFR were designed and operated effectively using the Internal Control – Integrated Framework (2013 Framework) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO 2013 Framework”).

In light of the COVID‐19 pandemic and in compliance with the recommendations from public health authorities, the Company implemented remote work arrangements and these new working arrangements, may have an impact on the performance of some internal controls. The Company will continually monitor and assess the effects of the COVID‐19 pandemic on its ICFR. Management has reiterated the importance of internal controls and maintained frequent communication across the organization at all levels.

Changes in Internal Control over Financial Reporting

No changes were made to our ICFR during the six‐month period ended June 30, 2020 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

Financial Instruments and Risk Management

Fair Value of financial instruments

A detailed description of the methods and assumptions used to measure the fair value of the Company financial instruments and their fair value are discussed in Note 16 – Fair Value of Financial Instruments in the 2019 audited consolidated financial statements of the Company.

Financial Risk Management

For a detailed description of the nature and extent of risks arising from financial instruments, and their related risk management, refer to Note 24 of the 2019 audited consolidated financial statements of the Company. The Company is not aware of any significant changes to its risk factors from those disclosed at that time.

Risk and Uncertainties

For a detailed description of risk factors associated with 5N Plus and its business, refer to “Risk and Uncertainties” of 5N Plus’ 2019 MD&A dated February 25, 2020. Factors of uncertainty and risk that might result in such differences include the risks associated with our growth strategy, credit, liquidity, interest rate, litigation, inventory pricing, commodity pricing, currency fluctuation, fair value, source of supply, environmental regulations, competition, dependence on key personnel, business interruptions, changes to backlog, protection of intellectual property, international operations including China, international trade regulations, collective agreements and being a public issuer as well as systems, network infrastructure and data failure, interruption and breach.

The Company is not aware of any significant changes to its risk factors previously disclosed, however since January 2020, the gradual outbreak of the novel strain of the coronavirus, COVID‐19 and its declaration as a pandemic by the World Health Organization, has resulted in governments worldwide enacting emergency measures to combat the spread of the virus. These measures have caused material disruption to businesses globally resulting in an economic slowdown. While the Company has been able to mitigate the short‐term impact from the crisis without significant loss of production capacity and customer demand, it is not possible to reliably estimate the length, severity and long‐term impact the global pandemic may have on the Company's financial results, conditions and cash flows. The outbreak of the COVID‐ 19 should be considered a new risk factor.

5N Plus ▪ Management’s Discussion and Analysis ▪ 11

Management’s Discussion and Analysis

Non‐IFRS Measures

In this Management’s Report, the Company’s management uses certain measures which are not in accordance with IFRS. Non‐IFRS measures are useful supplemental information but may not have a standardized meaning according to IFRS.

Backlog represents the expected orders we have received but have not yet executed and that are expected to translate into sales within the next twelve months expressed in number of days. Bookings represent orders received during the period considered, expressed in days, and is calculated by adding revenues to the increase or decrease in backlog for the period considered divided by annualized year revenues. We use backlog to provide an indication of expected future revenues in days, and bookings to determine our ability to sustain and increase our revenues.

EBITDA means net earnings before interest expenses, income taxes, depreciation and amortization. We use EBITDA because we believe it is a meaningful measure of the operating performance of our ongoing business without the effects of certain expenses. The definition of this non‐IFRS measure used by the Company may differ from that used by other companies.

EBITDA margin is defined as EBITDA divided by revenues.

Adjusted EBITDA means EBITDA as defined above before impairment of inventories, share‐based compensation expense, impairment of non‐current assets, litigation and restructuring costs (income), gain on disposal of property, plant and equipment, foreign exchange and derivatives loss (gain). We use adjusted EBITDA because we believe it is a meaningful measure of the operating performance of our ongoing business without the effects of certain expenses. The definition of this non‐IFRS measure used by the Company may differ from that used by other companies.

Adjusted EBITDA margin is defined as Adjusted EBITDA divided by revenues.

Adjusted operating expenses means operating charges before shared‐based compensation expense, impairment of non‐ current assets, litigation and restructuring costs (income), gain on disposal on property, plant and equipment and depreciation and amortization. We use adjusted operating expenses to calculate the Adjusted EBITDA. We believe it is a meaningful measure of the operating performance of our ongoing business. The definition of this non‐IFRS measure used by the Company may differ from that used by other companies.

Adjusted net earnings means the net earnings before the effect of charge of impairment related to inventory, PPE and intangible assets, share‐based compensation expense, litigation and restructuring costs (income), gain on disposal of property, plant and equipment net of the related income tax. We use adjusted net earnings because we believe it is a meaningful measure of the operating performance of our ongoing business without the effects of unusual inventory write‐downs and property plant and equipment, intangible asset impairment charges, share‐based compensation expense, litigation and restructuring costs (income) and gain on disposal of property, plant and equipment. The definition of this non‐IFRS measure used by the Company may differ from that used by other companies.

Basic adjusted net earnings per share means adjusted net earnings divided by the weighted average number of outstanding shares. We use basic adjusted net earnings per share because we believe it is a meaningful measure of the operating performance of our ongoing business without the effects of unusual inventory write‐downs and property plant and equipment and intangible asset impairment charges, share‐based compensation expense, litigation and restructuring costs (income) and gain on disposal of property, plant and equipment. The definition of this non‐IFRS measure used by the Company may differ from that used by other companies.

Funds (used in) from operations means the amount of cash generated from operating activities before changes in non‐ cash working capital balances related to operations. This amount appears directly in the consolidated statements of cash flows of the Company. We consider funds (used in) from operations to be a key measure as it demonstrates the Company’s ability to generate cash necessary for future growth and debt repayment.

Gross margin is a measure we use to monitor the sales contribution after paying cost of sales excluding depreciation and impairment inventory charge. We also expressed this measure in percentage of revenues by dividing the gross margin value by the total revenue.

12 ▪ 5N Plus ▪ Management’s Discussion and Analysis

Management’s Discussion and Analysis

Net debt is calculated as total debt less cash and cash equivalents. Any introduced IFRS 16 reporting measures in reference to lease liabilities are excluded from the calculation. We use this measure as an indicator of our overall financial position.

Return on Capital Employed (ROCE) is a non‐IFRS financial measure, calculated by dividing the annualized Adjusted EBIT by capital employed at the end of the period. Adjusted EBIT is calculated as the Adjusted EBITDA less depreciation of PPE and amortization of intangible assets (adjusted for accelerated depreciation charge, if any). Capital employed is the sum of the accounts receivable, the inventory, the PPE, the goodwill and intangibles less trade and accrued liabilities (adjusted for exceptional items). We use ROCE to measure the return on capital employed, whether the financing is through equity or debt. In our view, this measure provides useful information to determine if capital invested in the Company yields competitive returns. The usefulness of ROCE is limited by the fact that it is a ratio and not providing information as to the absolute amount of our net income, debt or equity. It also excludes certain items from the calculation and other companies may use a similar measure but calculate it differently.

Working capital is a measure of liquid assets that is calculated by taking current assets and subtracting current liabilities. Given that the Company is currently indebted, we use it as an indicator of our financial efficiency and aim to maintain it at the lowest possible level.

Working capital ratio is calculated by dividing current assets by current liabilities.

5N Plus ▪ Management’s Discussion and Analysis ▪ 13

Management’s Discussion and Analysis

Additional Information

Our common shares trade on the Toronto Stock Exchange (TSX) under the ticker symbol VNP. Additional information relating to the Company, including the Company’s annual information form is available under the Company’s profile on SEDAR at www.sedar.com.

Selected Quarterly Financial Information

(in thousands of United States dollars except	June 30,	March 31,	Dec. 31,	Sept. 30,	June 30,	March 31,	Dec. 31,	Sept. 30,
per share amounts)	2020	2020	2019	2019	2019	2019	2018	2018
	$	$	$	$	$	$	$	$
Revenue	41,136	49,954	44,714	49,554	50,290	51,413	47,710	53,379
EBITDA1	6,506	6,238	3,682	5,860	5,321	4,188	5,589	7,772
Adjusted EBITDA1	7,647	6,857	4,502	5,974	5,862	5,612	6,912	8,581
Net earnings (loss) attributable to equity
holders of 5N Plus	1,749	592	146	1,030	1,758	(1,149)	4,046	3,457
Basic earnings (loss) per share attributable
to equity holders of 5N Plus	$0.02	$0.01	$‐	$0.01	$0.02	($0.01)	$0.05	$0.04
Net earnings (loss)	1,749	592	146	1,030	1,758	(1,149)	4,046	3,458
Basic earnings (loss) per share	$0.02	$0.01	$‐	$0.01	$0.02	($0.01)	$0.05	$0.04
Diluted earnings (loss) per share	$0.02	$0.01	$‐	$0.01	$0.02	($0.01)	$0.05	$0.04
Adjusted net earnings1(loss)	2,124	717	480	1,460	2,055	(120)	5,407	3,919
Basic adjusted net earnings
per share1	$0.03	$0.01	$0.01	$0.02	$0.02	$‐	$0.06	$0.05
Funds from operations1	5,520	4,774	3,343	4,570	4,866	2,945	8,641	6,582
Backlog1	**202 days **	188 days	243 days	215 days	201 days	202 days	217 days	181 days

Metal Prices (in U.S. dollars per kilo)

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Bismuth
$11.24
$10.03
$7.50
$6.50
$5.51 $5.51 $5.51
DEC DEC DEC JUN DEC MAR JUN
2016 2017 2018 2019 2019 2020 2020
Selenium
$39
$29
$26
$19
$13 $13 $14
DEC DEC DEC JUN DEC MAR JUN
2016 2017 2018 2019 2019 2020 2020
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Germanium
$1,300
$1,170
$1,100
$1,030 $1,050 $1,050
$870
DEC DEC DEC JUN DEC MAR JUN
2016 2017 2018 2019 2019 2020 2020
Tellurium
$60
$51
$45 $45 $47
$38
$28
DEC DEC DEC JUN DEC MAR JUN
2016 2017 2018 2019 2019 2020 2020
----- End of picture text -----

Source : Low Metal Bulletin

1 See Non‐IFRS Measures

14 ▪ 5N Plus ▪ Management’s Discussion and Analysis