SECURITIES AND EXCHANGE COMMISSION

Form 10-K

Commission File Number 1-1143

Inco Limited

(416) 361-7511
(Telephone number)

Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934 (the “Act”):

     The Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Act during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days.

     The Registrant is an accelerated filer (as defined in Rule 12b-2 under the Act).

     As of June 30, 2004, the approximate aggregate market value, based upon the closing sale price of the Common Shares on the New York Stock Exchange, of the Registrant’s voting shares held by non-affiliates was $6,471 million. ⁽³⁾

     As of February 18, 2005, 188,169,875 Common Shares (including non-voting fractional interests aggregating 4,830 Common Shares) of the Registrant were issued and outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

     Portions of the Registrant’s proxy circular and statement dated February 18, 2005 for the 2005 Annual and Special Meeting of Shareholders of the Registrant are incorporated by reference in Part III of this Report to the extent set forth in Items 10, 11, 12 and 14 hereof.

INDEX TO INCO LIMITED
2004 ANNUAL REPORT ON FORM 10-K

UNLESS OTHERWISE STATED, ALL DOLLAR AMOUNTS IN THIS REPORT
ARE EXPRESSED IN UNITED STATES CURRENCY

Table of Contents

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PART I

Items 1. and 2. Business and Properties of Inco Limited

Introduction

     Inco Limited (“Inco”, the “Company”, “we” or “us”) was incorporated in 1916 under the laws of Canada, succeeding a business established in 1902. In 1979, Inco was continued by articles of continuance under the Canada Business Corporations Act and is governed by that Act. Our executive offices are located at 145 King Street West, Suite 1500, Toronto, Ontario, Canada M5H 4B7. Unless the context otherwise requires, all references in this Report to “Inco”, the “Company”, “we”, “our” or “us” include all of its consolidated subsidiaries, unincorporated units and divisions.

     Inco is one of the world’s premier mining and metals companies. We are a leading producer of nickel, a hard, malleable metal which, given its properties and wide range of applications, can be found in thousands of products. We are also an important producer of copper, precious metals and cobalt and a major producer of value-added specialty nickel products. We also produce sulphuric acid and liquid sulphur dioxide as by-products from our processing operations in Sudbury, Ontario. Our principal mines and processing operations are located in the Sudbury area of Ontario, the Thompson area of Manitoba and, through a subsidiary in which we have an equity interest of approximately 61 per cent, PT International Nickel Indonesia Tbk (“PT Inco”), on the Island of Sulawesi, Indonesia (see “PT International Nickel Indonesia Tbk” below). We also operate additional wholly-owned metals refineries at Port Colborne, Ontario and in the United Kingdom at Clydach, Wales and Acton, England. We also have interests in nickel refining capacity in the following Asian countries: in Japan, through Inco TNC Limited (“ITL”), in which we have an equity interest of 67 per cent; in Taiwan, through Taiwan Nickel Refining Corporation (“Taiwan Nickel”), in which we have an equity interest of 49.9 per cent; and in South Korea, through Korea Nickel Corporation (“Korea Nickel”), in which we have an equity interest of 25 per cent. Additionally, we have a 65 per cent equity interest in Jinco Nonferrous Metals Co., Ltd. (“Jinco”), a company that produces nickel salts in Kunshan City, People’s Republic of China (“China”). We have also expanded our joint venture operations in China, through the formation of a new company, Inco Advanced Technology Materials (Dalian) Co., Ltd., in which we have an equity interest of 76.7 per cent. This venture produces nickel foam products for the Asian battery market. In early March 2005, we completed the acquisition of substantially all of the assets representing the nickel foam business of Shenyang Golden Champower New Materials Corp., a leading Chinese producer of nickel foam. Pursuant to the terms of this acquisition, we will have a 77 per cent interest in the company formed to hold the acquired assets. In 2004 we also established a shearing and packaging operation in China for certain nickel products to service the specific needs of this market.

     As part of our strategy to be the world’s lowest cost and most profitable nickel producer, we are currently developing two major new or “greenfield” projects, our wholly-owned Voisey’s Bay nickel-copper-cobalt project in the Province of Newfoundland and Labrador, Canada and our Goro nickel-cobalt project in the French overseas territorial community (collectivité territoriale) of New Caledonia (“New Caledonia”) in which we currently hold approximately a 90 per cent interest following the capitalization of certain shareholder advances in late February 2005.

     As discussed under “Goro Nickel S.A.” below, in December 2002 we suspended construction of the Goro nickel-cobalt project and initiated a comprehensive review of the project following the receipt of information from the engineering firms that had been providing engineering, procurement and construction management services to the project which, if confirmed, indicated an unacceptable increase in the capital cost estimate for the project of 30 to 45 per cent above the project’s then current capital cost estimate of $1,450 million. This review evolved into two phases during 2003. Phase 1 of this review focused on an orderly suspension of work and identification of opportunities for capital cost reduction. In August 2003, the Company announced the key results of Phase 1 of the review process and that it was moving to Phase 2. Phase 2 of the review was intended to involve a structured process to (i) further develop the capital cost reduction opportunities identified in Phase 1 and (ii) establish a capital cost control estimate, an updated project schedule and an optimized and clearly defined scope and execution plan for the project. In late May 2004, we announced the key preliminary findings reached to that date as part of Phase 2 of the review. These findings included (i) an updated preliminary capital costs estimate, taking into account an expected non-cash charge, of approximately $1.85 billion for the project’s planned mine, process plant and related infrastructure, within a minus five per cent to plus 20 per cent reliability range and (ii) changes in the planned Goro project configuration, moving to direct heating of the ore feed and other changes intended to reduce the capital cost estimate and enhance the operating efficiency of the planned process plant and the process itself. As a result of such changes, capitalized expenditures incurred of $201 million were written off as of the end of the second quarter of 2004. We announced the key final results of Phase 2 of the review in October 2004. These final results included an updated

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capital cost estimate of $1.878 billion for the mine, process plant and related infrastructure, within a minus five per cent to plus 15 per cent reliability range. This estimate included about $40 million for assumed escalation in costs during the construction phase of the project, an amount that was not in previous capital costs estimates, and also reflected favourable currency hedging gains realized by Inco of about $31 million which were also not included in previous estimates. The principal reasons for the increase from the $1.85 billion estimate which had been announced in May 2004 were higher costs for a range of construction materials and labour required for construction and the incorporation of a new tailings storage area as part of the project. Having completed and achieved the key objectives of Phase 2 of the review, in October 2004 we also announced the decision to proceed with the project. It is currently expected that project execution will be based upon a phased approach, with the first phase focusing on engineering, contract development and permitting. Engineering work has progressed to date and fieldwork is currently expected to commence in the second quarter of 2005. It is currently expected that the project will commence production in the latter part of 2007. For further information on the Goro project and related matters, reference is made to “Goro Nickel S.A.” below.

     Inco holds a 100 per cent equity interest in the Voisey’s Bay nickel-copper-cobalt deposits in Labrador in the Province of Newfoundland and Labrador through its wholly-owned subsidiary, Voisey’s Bay Nickel Company Limited (“VBNC”). In 2002 we reached agreements with the other key stakeholders in the project, the Province of Newfoundland and Labrador, the Labrador Inuit Association (“LIA”) and Innu Nation, to enable the commercial development of the Voisey’s Bay deposits to proceed. In 2004, we continued to make progress on the Voisey’s Bay project towards the start-up of commercial production and, as a result, the project completion date for the initial phase, including the open pit mine, concentrator and demonstration plant to test hydrometallurgical processes, was advanced by six months from the original schedule established, with the first shipment of intermediate nickel concentrate currently planned for November 2005 and initial finished nickel production from Voisey’s Bay concentrate in early 2006. Work also advanced in 2004 to prepare our Ontario and Manitoba operations to receive and process the intermediate nickel concentrate from Voisey’s Bay. During 2004, testing of hydrometallurgical processes to treat the Voisey’s Bay ores as part of the research and development program covering those processes continued and design work on the demonstration plant to be constructed to advance the testing of those processes was completed. Site construction for the demonstration plant in Argentia in the Province of Newfoundland and Labrador began in 2004 and this facility is currently expected to be ready to receive the first nickel concentrate in late 2005. For further information on the Voisey’s Bay project and related matters, reference is made to “Voisey’s Bay Nickel Company Limited” below.

     Inco’s properties are described under “Description of Business” and “Ore Reserves and Mining Rights” below.

     The information in this Report is as of December 31, 2004 except where an earlier or later date is expressly indicated. Nothing included herein should be considered as implying that any information is correct as of any date other than December 31, 2004, except as otherwise expressly stated.

     In this Report, certain data and estimates which had been previously limited to the Western World or the Western World plus China because of limited available data from certain countries or regions have been reported on a global or worldwide basis.

Availability of Documents

     Inco files Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K with the Securities and Exchange Commission (the “SEC”). You may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549. You may obtain information on the hours of operation of the SEC’s Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site (http://www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. Such reports and all amendments to such reports regarding Inco are available free of charge on our website, www.inco.com, as soon as reasonably practicable after such reports are electronically filed with the SEC. Information contained in or otherwise accessed through our website does not form part of this Report. All such references to our website are inactive textual references only.

Cautionary Statement Regarding Forward-Looking Statements

     Certain statements contained in this Report are forward-looking statements (as defined in the U.S. Securities Exchange Act of 1934, as amended). Examples of such statements include, but are not limited to, statements concerning: (1) the price volatility for nickel and other primary metal products produced by the Company; (2) the demand for and supply of nickel, copper and other metals, both globally and for certain markets and uses, as well as the availability of, and prices for, intermediate products containing nickel purchased by the Company and/or to be produced by the Company and nickel-containing stainless steel scrap and other substitutes for primary nickel and nickel inventories; (3) the premiums realized by the Company over London Metal Exchange (“LME”) cash prices and the sensitivity of the Company’s results of operations to changes in metals prices, prices of commodities and other supplies used

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in its operations and interest and exchange rates; (4) the Company’s strategies and plans; (5) the Company’s nickel unit cash cost of sales before and after by-product credits, interest and other expenses; (6) the Company’s energy and other costs, and pension contributions and expenses and assumptions relating thereto; (7) the Company’s position as a low-cost producer of nickel; (8) the Company’s debt-equity ratio and tangible net worth; (9) the political unrest or instability in countries such as Indonesia and the impact thereof on the Company’s Indonesian subsidiary, PT Inco, and political developments in other countries in which the Company operates and elsewhere; (10) construction, commissioning, initial shipment and other schedules, capital costs and other aspects of the Goro and Voisey’s Bay projects and PT Inco’s program to increase its production, changes in the ownership of the Goro project, capital expenditures, and hydroelectric power generation at PT Inco and the effect thereon of lower water levels; (11) the necessary financing plans and arrangements for, and partner or similar investment and other agreements or arrangements associated with, the Goro project, and the timing of the start of production and the costs of construction with respect to, the issuance of the necessary permits and other authorizations required for, and engineering and construction timetables for, the Goro and Voisey’s Bay projects; (12) the Company’s estimates of the quantity and quality of its ore reserves; (13) planned capital expenditures and tax payments; (14) the Company’s costs of production and production levels, including the costs of and potential impact on operations and production of complying with existing and proposed environmental laws and regulations and net reductions in environmental emissions; (15) the impact of changes in Canadian dollar-U.S. dollar and other exchange rates on the Company’s costs and the results of its operations; (16) the Company’s sales of specialty nickel products; (17) the Company’s cost reduction and other financial and operating objectives and planned maintenance and other shutdowns; (18) the commercial viability of new production processes and process changes and processing recoveries for its development projects; (19) the Company’s productivity, exploration and research and development initiatives as well as environmental, health and safety initiatives; (20) the negotiation of collective agreements with its unionized employees; (21) the Company’s sales organization and personnel requirements; (22) business and economic conditions; (23) the extension of current mining and other leases, export licences and concessionary rights; and (24) the enforceability of certain liabilities. Inherent in forward-looking statements are risks and uncertainties well beyond the Company’s ability to predict or control. Actual results and developments are likely to differ, and may differ materially, from those expressed or implied by the forward-looking statements contained in this Report. Such statements are based on a number of assumptions which may prove to be incorrect, including, but not limited to, assumptions about: (a) business and economic conditions, including exchange rates and energy and other anticipated and unanticipated costs and pension contributions and expenses; (b) the supply and demand for, deliveries of, and the level and volatility of prices of, nickel, copper, cobalt and the Company’s other primary metals products, purchased intermediates and nickel-containing stainless steel scrap and other substitutes and competing products for the primary nickel and other metal products the Company produces; (c) the timing of the receipt of remaining regulatory and governmental approvals for the Goro and Voisey’s Bay projects and other operations; (d) the availability of financing, including through partner or other participation arrangements in the case of the Goro project, for the Company’s development projects on reasonable terms; (e) the Company’s costs of production and production and productivity levels, as well as those of the Company’s competitors; (f) engineering and construction timetables and capital and operating costs for the Goro and Voisey’s Bay projects; (g) market competition; (h) mining, processing, exploration and research and development activities; (i) the accuracy of ore reserve estimates; (j) premiums realized over LME cash and other benchmark prices; (k) tax benefits/charges; (l) the resolution of environmental and other proceedings and the impact on the Company of various environmental regulations and initiatives; (m) political instability in Indonesia and other countries or locations in which the Company operates or otherwise; and (n) the Company’s ongoing relations with its employees at its operations throughout the world. The forward-looking statements included in this Report represent the Company’s views as of the date of this Report. While the Company anticipates that subsequent events and developments may cause the Company’s views to change, the Company specifically disclaims any obligation to update these forward-looking statements. These forward-looking statements should not be relied upon as representing the Company’s views as of any date subsequent to the date of this Report.

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Description of Business

Sales

     The following table shows Inco’s net sales to customers for the three years ended December 31, 2004:

Deliveries

     The following table shows deliveries of Inco’s principal primary metals and related products for the three years ended December 31, 2004:

Prices

     Nickel

     Inco’s nickel price realizations tend to lag LME cash nickel price movements due primarily to the terms of its contractual sales arrangements with certain of its customers. The LME, a physical market where various metals, including nickel, can be bought or sold for prompt or future delivery, represents the principal terminal market for primary nickel in the world. We realize a premium over prevailing LME cash prices for our nickel powders and other value-added products, as discussed under “Inco Special Products” below.

     Our average realized price for our primary nickel products, including intermediates and purchased products, was $13,906 per tonne ($6.31 per pound) in 2004, representing an increase of 41 per cent from the average price of $9,860 per tonne ($4.47 per pound) in 2003. The 2003 average realized price was 38 per cent higher than the average price of $7,143 per tonne ($3.24 per pound) realized in 2002.

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     The price realizations for our nickel and other primary metals products generally reflect LME or other metal market prices and, over the longer term, depend principally upon the balance between demand for our products in the marketplace relative to the supply available from us and our competitors, including for this purpose similar primary metals materials in various producer, merchant and consumer inventories, inventories of secondary or scrap materials containing nickel and other metals in usable or recyclable form, and supplies of other materials which may compete as substitutes. Of particular importance is the availability of nickel-containing stainless steel scrap, which competes directly with primary nickel as a source of nickel for use in the production of stainless steel and certain other industrial applications. The stainless steel scrap ratio, or the proportion or ratio of nickel-containing stainless steel scrap relative to the total nickel (including primary nickel) consumed by stainless steel producers, was 47 per cent in 2004, compared with 44 per cent in 2003 and 45 per cent in 2002. The applications for nickel and variations in demand for and supply of nickel are discussed under “Nickel” below.

     For information on Inco’s hedging transactions relating to nickel, see “Off-Balance Sheet Arrangements and Aggregate Contractual Obligations – Derivative Instrument Positions” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under Item 7 of this Report and Notes 1, 21 and 24(h) to the financial statements under Item 8 of this Report.

     The average prices, per tonne and per pound, realized by Inco for its primary nickel products, including intermediates and purchased products, for the five years ended December 31, 2004, including by quarter for 2004, are shown in the following table:

     Copper

     Inco’s average realized price for copper was $2,916 per tonne ($1.32 per pound) in 2004, representing an increase of 59 per cent from the average price of $1,832 per tonne ($0.83 per pound) in 2003. The 2003 average realized price was 12 per cent higher than the average price of $1,629 per tonne ($0.74 per pound) realized in 2002.

     The average prices, per tonne and per pound, realized by us for copper, including purchased products, for the five years ended December 31, 2004, including by quarter for 2004, are shown in the following table:

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     Other Metals

     The average prices, per tonne or per troy ounce, realized by Inco for cobalt, the principal platinum-group metals (platinum, palladium and rhodium), gold and silver, all of which are produced primarily from our Ontario ores, for the five years ended December 31, 2004 are shown in the following table:

     For information on our hedging transactions relating to these metals, see “Off-Balance Sheet Arrangements and Aggregate Contractual Obligations – Derivative Instrument Positions” under Item 7 of this Report and Notes 1, 21 and 24(h) to the financial statements under Item 8 of this Report.

Results of Operations

     All financial statement information in this Report is based on our financial statements prepared in accordance with generally accepted accounting principles (“GAAP”) in Canada. A reconciliation of our Canadian GAAP financial statements to United States GAAP is presented in Note 24 to the financial statements under Item 8 of this Report.

Customers

     As in recent years, sales of Inco’s primary metals products in 2004 were concentrated in the United States, Europe, Japan, other countries in Asia, and Canada, with sales of nickel to customers in Asia representing about 62 per cent of its total nickel sales revenues for 2004. For further information, see “Inco’s Position in the Nickel Industry” below.

     No single non-affiliated customer of Inco accounted for more than 10 per cent of total sales in 2004, 2003 or 2002.

     See “Nickel”, “Copper” and “Other Primary Metals and Related Products” below for additional information on the Company’s customers.

Competitors

     A discussion of the competitive conditions in the nickel industry appears under “Nickel” below. Competitive conditions with respect to our other primary metals and related products are discussed under “Copper” and “Other Primary Metals and Related Products” below.

Inventories

     Inco’s general practice is to sell its principal primary metals products at the time of production and not to hold inventories except as necessary to meet its current sales requirements. Our finished nickel inventories at the end of each of the five years ended December 31, 2004 are shown in the following table:

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     Historically, we have believed that the minimum finished nickel inventories we generally need to run our business and meet our customers’ requirements should be about 26,000 tonnes, depending upon the required product mix and other factors. Finished nickel inventories were higher at year-end 2004 than at year-end 2003 due to the timing of certain shipments which were to be made in late 2004. We expect to continue to evaluate the factors to be considered in determining what our minimum inventory level should be.

Nickel Unit Cash Cost of Sales

     Since this measure captures our key costs of production and the impact of prices for our by-products, nickel unit cash cost of sales represents a key performance measurement that management uses to manage our costs and operations.

     Nickel unit cash cost of sales before by-product credits, representing a calculation equal to the total of all cash costs incurred to produce a unit of nickel before the deduction of contributions from by-products sold divided by Inco-source nickel deliveries, increased to $5,732 per tonne ($2.60 per pound) in 2004 from $4,453 per tonne ($2.02 per pound) in 2003. The 2004 increase in nickel unit cash cost of sales before by-product credits was principally due to the higher cost for, and volumes of, purchased nickel intermediates, the higher average Canadian dollar exchange rate relative to the U.S. dollar exchange rate compared with 2003, higher costs for heavy oil at PT Inco, higher spending on supplies and services primarily as a result of increased production rates and higher earnings-based compensation payments, partially offset by the absence of ramp-up costs which we incurred in the third quarter of 2003 after the end of the strike at our Ontario operations, and the cost reductions and related savings as discussed below. Nickel unit cash cost of sales before by-product credits increased in 2003 from $3,483 per tonne ($1.58 per pound) in 2002.

     Nickel unit cash cost of sales after by-product credits increased to $5,115 per tonne ($2.32 per pound) in 2004 from $4,740 per tonne ($2.15 per pound) in 2003. The increase in nickel unit cash cost of sales after by-product credits for 2004 compared with 2003 was due to higher nickel unit cash cost of sales before by-product credits, partially offset by higher by-product credits as a result of higher realized selling prices for and higher deliveries of our principal by-products. Nickel unit cash cost of sales after by-product credits increased in 2003 from $3,197 per tonne ($1.45 per pound) in 2002. The increase in nickel unit cash cost of sales both before and after by-product credits in 2003 was due to the unfavourable effect of the strengthening of the Canadian dollar relative to the U.S. dollar on our costs incurred in Canadian dollars, higher energy costs at PT Inco and our Ontario operations, higher employment and pension costs, higher costs for purchasing and processing larger volumes of purchased nickel intermediates, the ramp-up problems experienced at our Ontario operations after the three-month strike discussed above, and, in the case of nickel unit cash cost of sales after by-product credits, lower contributions from by-products primarily resulting from lower deliveries of platinum group metals.

     We use purchased nickel intermediates to increase processing capacity utilization at our Canadian operations. While the cost of purchased nickel intermediates is higher than that for processing our own mine production and such costs increase as the prevailing prices, LME cash nickel or other benchmark prices, on which basis this material is purchased by us increases, the price realizations are also higher, resulting in margins on these purchases remaining relatively unchanged.

     A reconciliation of our nickel unit cash cost of sales before and after by-product credits to cost of sales under Canadian GAAP is shown in the table entitled “Reconciliation of Nickel Unit Cash Cost of Sales Before and After By-Product Credits to Canadian GAAP Cost of Sales” under “”Non-GAAP Financial Measure” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under Item 7 of this Report.

     In 2004, Inco realized cost reductions and related savings of $59 million. We are currently targeting a further $60 million in cost reductions in 2005.

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     Inco’s nickel unit cash cost of sales, both before and after by-product credits, for the five years ended December 31, 2004 are shown in the following table:

     Based upon the average exchange rate for the year, the Canadian dollar, the currency in which a substantial portion of our operating costs are incurred, increased by 7.5 per cent relative to the U.S. dollar in 2004. In 2003, the Canadian dollar increased by 12 per cent relative to the U.S. dollar. At December 31, 2004, the value of the Canadian dollar relative to the U.S. dollar was $0.831, compared with $0.774 at December 31, 2003 and $0.633 at December 31, 2002, and was $0.831 at March 11, 2005. At December 31, 2004, we had outstanding forward currency contracts to purchase Cdn.$230 million at an average exchange rate of $0.749 during 2005. The purpose of these contracts is to eliminate the risk of exchange rate movements on a portion of the future construction costs of the planned facilities for the initial phase of the Voisey’s Bay project. We also had outstanding at December 31, 2004 forward currency contracts to purchase Cdn.$79 million at an average exchange rate of $0.840 during 2005 and 2006. The purpose of these contracts is to eliminate the risk of exchange rate movements on a portion of our future construction costs of certain capital assets at our Ontario operations. In addition, at December 31, 2004 we had outstanding forward currency contracts to purchase Cdn.$170 million at an average exchange rate of $0.808 during 2005. The purpose of these contracts is to offset the foreign exchange risk associated with a portion of our Canadian dollar denominated tax liabilities which are due in the first quarter of 2005 in respect of the 2004 calendar year. For further information on these contracts and a discussion of the sensitivity of foreign currency exchange rates on the Company’s earnings, see “Voisey’s Bay Nickel Company Limited – Project Phases” below and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under Item 7 of this Report.

     Operating costs continued to represent a major challenge for us in 2004 due to a stronger Canadian dollar, higher energy costs, increased pension expense and higher costs for purchased intermediates. It is currently expected that at least some of the principal factors which have caused increases in nickel unit cash cost of sales before and after by-product credits for 2004 will continue to adversely affect such nickel unit cash costs of sales into 2005.

     For information regarding Inco’s profit sharing and incentive arrangements and the collective agreements with our unionized employees, see “Employees” below.

Business Segment Information

     Our business operations consist of two segments, our (i) finished products segment, representing our mining and processing operations in Ontario and Manitoba, our refining operations in the United Kingdom and interests in refining operations in Japan and other Asian countries referred to above, and (ii) intermediates segment, which represents PT Inco’s mining and processing operations in Indonesia, where nickel-in-matte, an intermediate product, is produced and sold primarily into the Japanese market. In addition, as part of our strategy to be the world’s lowest cost and most profitable nickel producer, we are currently developing two major new or so called “greenfield” projects, our wholly owned Voisey’s Bay nickel-copper-cobalt project in the Province of Newfoundland and Labrador, Canada and our approximately 90 per cent owned Goro nickel-cobalt project in New Caledonia. For further information on our business segments by operating segment, including each segment’s net sales to customers, earnings and total assets, and geographic location, see Note 20 to the financial statements under Item 8 of this Report.

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Nickel

     Applications for Nickel¹

     Nickel is a hard, malleable metal with a wide range of uses. Its principal characteristics include imparting strength and corrosion resistance in alloys. The following five general categories constitute the principal applications of nickel: (i) nickel-bearing or austenitic stainless steels, (ii) low-alloy steels, (iii) non-ferrous alloys, (iv) foundry industry castings and (v) non-alloying uses. Inco’s nickel products represent what is known in the industry as “primary” nickel, a designation given to nickel produced principally from nickel ores. It is estimated that approximately 81 per cent of global primary nickel consumption relates to its end use in austenitic stainless steel production and as an alloy with other metals. The other type of nickel used in industrial applications is known as “secondary” nickel, which is also referred to as recycled or scrap nickel. Secondary nickel units are recovered largely from austenitic stainless steel manufacturing and fabricating operations and nickel-containing scrap from obsolete plant and equipment. In the recent past, secondary nickel has represented between 44 and 48 per cent of the total nickel used for austenitic stainless steels, with primary nickel accounting for between 52 and 56 per cent of such nickel use. These percentages can vary based upon relative prices, the availability of scrap and other factors.

     The nickel industry generally divides its primary nickel products into three categories: (i) charge nickel products (products of various nickel purities produced in special forms for the stainless and low-alloy steel industries), (ii) melting nickel products (relatively pure metallic products for the non-ferrous metals and foundry industries) and (iii) plating nickel products (relatively pure metallic products in special shapes or cut to special sizes for the plating industry).

     The dominant use of primary nickel in the world has continued to be in the production of nickel-bearing or austenitic stainless steels. Stainless steels, defined as iron-based alloys containing 10.5 per cent or more chromium, are typically identified by their metallurgical structure – austenitic, ferritic, martensitic, precipitation-hardening and duplex. Approximately 75 to 77 per cent of global stainless steel production in recent years has consisted of austenitic, or nickel-bearing, grades. On average, austenitic stainless steels contain approximately eight to 10 per cent nickel. Nickel-bearing stainless steels are used throughout the industrialized world in a wide variety of applications ranging from consumer products to industrial process equipment, as well as for power generation and transportation equipment, kitchen appliances and hundreds of other applications where strength and corrosion resistance are required. Nickel use in nickel-bearing or austenitic stainless steels currently accounts for about 63 per cent of annual global primary nickel consumption.

     A second, closely related, use of primary nickel is in low-alloy steels for construction and in structural, tool, high-strength and electrical steels. These steels are produced in greater volume than stainless steels but with a much lower nickel content, averaging less than one per cent nickel by weight. They account for about five per cent of annual global primary nickel demand.

     The third category of nickel use is in non-ferrous alloys which, unlike the two categories of steel alloys noted above, contain little or no iron. These alloys, which are used in industrial process plants, marine engineering, coinage, electronics, and gas turbine engine components, as well as in other diverse products, account for approximately nine per cent of annual global primary nickel demand.

     A fourth category is comprised of foundry industry castings, which consist of either iron alloys, steel alloys or non-ferrous alloys. These uses account for about four per cent of annual global primary nickel demand and represent the balance of the approximately 81 per cent of primary nickel used to make stainless steels and nickel-containing alloys.

     The fifth category consists of various non-alloying uses of primary nickel. These uses account for the remaining 19 per cent of annual global primary nickel demand, and include electroplating (representing about 10 per cent of primary nickel demand) and numerous applications of nickel powders, including Inco’s specialty nickel powder products described under “Inco Special Products” below. Many consumer durable goods, such as metal furniture, are nickel-chrome electroplated. Nickel powder applications are a relatively small but important nickel-consuming sector. Given the properties of nickel powders, applications include dissolving nickel into salts for plating and catalysts for the petrochemical industry, and use in nickel-cadmium and nickel-hydride rechargeable batteries, welding electrodes, metal sprays and specialized parts made by powder metallurgy.

     As indicated above, nickel used in stainless and low-alloy steel sectors accounts for approximately 68 per cent of annual global

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primary nickel demand. In choosing primary nickel, these two sectors can generally use either charge nickel products or melting nickel products to satisfy their nickel requirements; however, they may also use secondary nickel units such as nickel-containing stainless steel scrap or other recycled nickel-containing material, with the selection being based largely on relative prices and availability of these materials. See “Prices – Nickel” above for a discussion of the percentages of nickel consumed as stainless steel scrap by stainless steel producers.

     In early 2004, the Nickel Development Institute (“NiDI”), a non-profit association formed in 1984 to promote applications for nickel, and the Nickel Producers Environmental Research Association (“NiPERA”), an organization that Inco and other nickel producers formed in 1980 to focus on and fund scientific studies relating to environmental, health and other issues related to various forms of nickel, merged to form the Nickel Institute (“NI”). Inco had been a member of NiDI since it was founded. The NI, the membership of which represents more than 70 per cent of current world nickel production, generates and communicates information required to support the safe and sustainable production, use and re-use of nickel. It also provides a single membership and management structure for the activities previously undertaken separately by NiDI and NiPERA, such as research and development projects, including projects aimed at promoting the use of nickel-containing stainless steels, broadening markets for nickel-containing alloys resistant to extreme temperatures, high pressure and corrosion, and seeking to ensure that sound science is used as the basis for regulatory developments relating to the production and use of nickel and nickel-containing products and the recycling or disposal of nickel-containing waste materials. The NI continues the nickel use-related technical work of NiDI, but is focused more on nickel issues related to stewardship and sustainable development, including the generation and use of knowledge about the full life cycle impacts of nickel.

     Historical Review of the Nickel Industry; Recent Industry Conditions²

     The nickel market has been cyclical in nature over the past half-century given the positive correlation of nickel demand to industrial production.

     Primary nickel demand in the Western World grew significantly during the 1946-1974 period in response to postwar reconstruction, increased per capita incomes and the rapid growth of the stainless steel industry. Annual demand increased from approximately 136,100 tonnes in 1950 to a then record level of approximately 620,000 tonnes in 1974. The compound rate of annual growth in nickel demand over the 1946-1974 period was about six per cent.

     With the oil crisis in 1973, the substantial rise in energy costs resulted in a reduction in industrial production and a consequent reduction in primary nickel demand. These negative trends were repeated in the early 1980s following a second round of significant oil price increases in 1979-1980 but were reversed in the second half of the 1980s, when a period of strong industrial growth resulted in an increase in the demand for nickel.

     Record growth in stainless steel production, accompanied by a shortage of nickel production, placed significant upward pressure on LME cash nickel prices in 1988 and 1989, with these prices averaging $13,823 per tonne ($6.27 per pound) and $13,338 per tonne ($6.05 per pound), respectively, for 1988 and 1989.

     During the early 1990s, significant increases in primary and secondary nickel deliveries to the world from the Russian Federation (“Russia”) and other members of the former Commonwealth of Independent States (“CIS”), combined with economic downturns in North America, Western Europe and Japan, led to a surplus in primary nickel supply, resulting in a weakening of nickel prices. This situation was exacerbated in 1992 and 1993 by negative economic growth in Western Europe and Japan and continued exports of nickel from the CIS. From 1990 to 1993, annual average LME cash nickel prices fell from $8,885 per tonne ($4.03 per pound) to $5,291 per tonne ($2.40 per pound).

     In 1994 and 1995, a worldwide economic recovery led to strong growth in stainless steel production and nickel demand, resulting in primary nickel demand exceeding supply and a recovery in nickel prices, with the LME cash nickel price rising to an average of $8,231 per tonne ($3.73 per pound) for 1995.

     In the latter half of the 1990s, strong economic growth led to significant increases in stainless steel production and nickel demand, except that the Asian economic crisis in 1998 caused overall nickel demand to decrease slightly that year. The decrease in the demand for nickel during 1998, combined with the market’s anticipation of large supplies of low-cost nickel from three new Australian laterite

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projects, Murrin Murrin, Bulong and Cawse, resulted in the LME cash nickel price reaching a low for the decade of $3,725 per tonne ($1.69 per pound) in December 1998. Nickel prices recovered during 1999, supported by the resumption of strong economic and nickel demand growth, with the LME cash nickel price reaching $8,450 per tonne ($3.83 per pound) at the end of 1999.

     The LME cash nickel price continued to increase into 2000, reaching a peak of $10,660 per tonne ($4.84 per pound) in March 2000 but over the balance of 2000 declined to $7,190 per tonne ($3.26 per pound) by the end of the year. Solid market conditions contributed to the increase in the average LME cash nickel price to $8,641 per tonne ($3.92 per pound) in 2000. World production of stainless steel increased by 8.8 per cent in 2000 to a then record level of 19.5 million tonnes. However, the use of primary nickel in this segment registered no growth in 2000 due to the increased supply of nickel-containing stainless steel scrap. Overall world demand for primary nickel grew by 5.8 per cent in 2000 to 1,109,000 tonnes, reflecting both stock building by consumers and an estimated 12 per cent growth in consumption for primary nickel in applications other than stainless steel. In 2000, world primary nickel supply increased by an estimated 78,000 tonnes to 1,105,000 tonnes, due mainly to a rise in primary nickel production in the Western World of approximately 52,000 tonnes, reflecting mainly production from new nickel capacity and the continued commissioning of the three new laterite projects in Australia referred to above. Demand for nickel in 2000 exceeded supply by approximately 4,000 tonnes, but we believe that additional material was withheld from the market by one leading nickel producer, as reflected in nickel inventories held in LME warehouses, which fell by over 37,000 tonnes during the year.

     Market fundamentals weakened during 2001 as the world’s major economies experienced softness. This weakness in demand was primarily concentrated in the Western World where nickel demand declined significantly. While there was continued strength in nickel demand in China in 2001, Inco estimates that there was an overall decline in world nickel demand in 2001 of 2.2 per cent to approximately 1,085,000 tonnes. World primary nickel production increased by 43,000 tonnes to 1,148,000 tonnes in 2001. The largest sources of this increase in supply were the continued ramping up of the laterite projects in Australia and the commissioning of new capacity in Venezuela and Colombia. The world nickel market in 2001 shifted to a surplus position of approximately 63,000 tonnes following the deficit positions in the previous two years. Over 2001, nickel inventories held by consumers are estimated to have fallen by 13,000 tonnes while LME inventories increased by only 9,510 tonnes, ending 2001 at 19,188 tonnes. The cash nickel price on the LME opened 2001 at $6,995 per tonne ($3.17 per pound) but declined to the year’s low of $4,420 per tonne ($2.00 per pound) in late October 2001. With the aggressive reduction of interest rates in the United States and renewed prospects for an economic recovery, prices for nickel improved in the fourth quarter of 2001 and the LME cash nickel price had increased to $5,680 per tonne ($2.58 per pound) as of December 31, 2001.

     The nickel market strengthened in 2002 as world demand grew by approximately eight per cent during the year to 1,168,000 tonnes despite continued weakness in certain large segments of the global economy. The growth in nickel demand in 2002 was primarily concentrated in the stainless steel sector where the growth in nickel demand increased by almost 10 per cent, driven by an increase in stainless steel production and minimal growth in the use of nickel-containing stainless steel scrap by stainless steel producers. World stainless steel production increased by 7.9 per cent to approximately 20.3 million tonnes. This production growth was particularly strong in the United States, where production increased by 20 per cent, driven by the opening of a new 800,000 tonne-per-year stainless steel production facility in Kentucky, and in Taiwan, where production increased by 20 per cent as existing facilities operated at near-capacity levels. The growth in primary nickel supply in 2002 came principally from (i) Colombia and Venezuela, where new or “greenfield” projects were completing their ramp-up to their design capacities, (ii) Australia, where production increased from the continued ramp-up of one project and higher production from certain existing producers, and (iii) Japan, where production in the form of ferronickel rebounded to near-capacity levels. The strong growth in nickel demand largely offset the growth in nickel production in 2002, resulting in a small surplus of approximately 8,000 tonnes for the year. Inventories of nickel on the LME increased slightly during 2002, remaining at a relatively low level of 21,972 tonnes at December 31, 2002. The LME cash nickel price opened 2002 at $5,680 per tonne ($2.58 per pound) and increased during the first half of 2002 as the economies of certain industrialized countries began to recover, ending the first half of the year at $7,080 per tonne ($3.21 per pound). Prices declined through the third quarter, reaching a low of $6,305 per tonne ($2.86 per pound) in September 2002 as concern over the pace of economic recovery and uncertainty about a potential war with Iraq adversely affected the nickel markets. The LME cash nickel price recovered in the fourth quarter, underpinned by improving fundamentals for nickel, ending 2002 at $7,100 per tonne ($3.22 per pound).

     The world nickel market strengthened in 2003 as demand grew by approximately seven per cent during the year to 1,244,000 tonnes despite continued weakness in certain large segments of the global economy. During 2003, growth in industrial production continued in China and was positive in the United States and Japan for the first time in three years, while economic recovery in Europe continued to struggle to take hold.

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     The growth in nickel demand in 2003 was concentrated in the stainless steel sector, the largest end use of primary nickel. Nickel demand growth in this sector increased by almost eight per cent in 2003, driven by a significant increase in stainless steel production and a decline in the stainless steel scrap-ratio. The world production of stainless steel increased by nine per cent to approximately 22 million tonnes in 2003. Stainless steel production expanded in all major industrial regions and was particularly strong in China and South Korea where new production facilities were commissioned during the year. Nickel demand growth in non-stainless steel applications was relatively weak in 2003, as one important end-use market, high nickel alloys for the aerospace industry, continued to struggle with new aircraft orders remaining at relatively depressed levels. However, demand for nickel in plating applications was relatively strong, led by growth in these applications in China, slightly offset by reduced demand for these applications in Europe and the United States.

     The growth in world production of primary nickel in 2003 could not keep pace with the demand growth experienced that year. Production of primary nickel in 2003 was adversely affected by the labour disruption at our Ontario operations during a three-month period beginning June 1, 2003 which resulted in effectively no production from these operations which would normally produce about 9,000 tonnes (20 million pounds) of primary nickel per month. We believe that several other major producers failed to reach their 2003 projected production targets due to unexpected maintenance or operational problems. The shortfall in production was partially offset by the release of approximately 60,000 tonnes into the market during 2003, which nickel had been used as collateral for a loan to one nickel producer. In addition, production of ferronickel in Australia, New Caledonia, Colombia and the Dominican Republic increased in 2003. As a result, world primary nickel production increased by 28,000 tonnes to 1,204,000 tonnes in 2003. World primary nickel supply increased to 1,264,000 tonnes taking into account the release into the market of the 60,000 tonne loan collateral discussed below.

     The significant growth in nickel demand during 2003, coupled with the limited supply growth, created an underlying deficit between supply and demand in 2003 of approximately 40,000 tonnes. With the release in 2003 of 60,000 tonnes of nickel that one producer had pledged as collateral for a loan, we believe there was a small surplus in the global nickel market of approximately 20,000 tonnes in 2003. Inventories of nickel on the LME increased slightly during 2003 by 2,100 tonnes, remaining at a relatively low level of 24,072 tonnes at December 31, 2003.

     For a discussion of the LME cash nickel price during 2003, see “Overview – Key Factors Affecting our Business – 2003 Highlights” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under Item 7 of this Report.

     The year 2004 was one characterized by high nickel prices which we believe were due principally to broad-based growth in underlying global demand for nickel and nickel-containing materials, in particular in the United States, China and certain European countries. The increase in demand is attributed to a recovery in non-stainless steel applications for nickel, in particular for high nickel alloys and battery materials. While primary nickel demand in stainless steel applications experienced virtually no growth in 2004, global stainless steel production did increase, but primary nickel demand was negatively affected in this key application by the relatively large increase in nickel-containing scrap consumption and substitution for nickel in certain stainless steel applications. We believe that relatively low physical inventories, high prices and the active trading of hedge or similar funds which purchase and sell or otherwise trade in metals for profit (“Metals Trading Funds”) contributed to the volatile price conditions experienced in 2004, volatility that the nickel markets had not experienced in over 13 years. The difference between the high and low LME cash nickel prices for 2004 was $7,240 per tonne ($3.28 per pound). As discussed below, the global nickel market experienced a small deficit for 2004 given that the level of demand exceeded the level of supply. We believe that the level of demand was, however, restrained by the amount of supply available, thereby limiting the demand growth rate and the size of the actual demand-supply deficit.

     The global nickel market reflected favourable fundamentals for primary nickel producers such as ourselves in 2004 as demand increased, although we estimate that underlying world demand would have grown by approximately seven per cent from 2003 levels if adequate nickel had been available to meet consumption. Underlying demand growth was driven by the strongest global industrial production growth in 10 years, led by continued economic growth in China, as well as growth in South Korea, Taiwan and Japan. The industrial economies of the United States and Europe also exhibited growth above the levels seen in the 2000-2003 period.

     The growth in primary nickel demand in 2004 was concentrated in the non-stainless steel sector, as demand from the stainless steel sector was adversely affected by several factors as discussed below. Nickel demand growth in the non-stainless steel sector increased by seven per cent in 2004, as demand for nickel for the production of high nickel alloys improved as a result of the recovery of the aerospace industry as well as due to growth in electronics and battery applications for nickel. Nickel demand from battery applications improved in 2004, in part due to the increased production of hybrid electric vehicles that contain nickel in their battery systems. However, high nickel prices and the effect of substitution of other materials for nickel adversely affected demand for nickel

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in plating applications. World production of stainless steel increased by seven per cent to approximately 23.5 million tonnes in 2004. This growth was due, in part, to increased capacity utilization at several large-scale stainless steel manufacturing facilities which had been commissioned during 2002 and 2003. Stainless steel production expanded in all major industrial regions and was particularly strong in South Korea where new production facilities were operating at capacity during the year. However, primary nickel demand growth in the stainless steel sector was adversely affected, as noted above, by a large increase in secondary nickel stainless steel scrap consumption, as well as an increase in the production of stainless steels containing relatively low amounts or grades of nickel (one to four per cent) and grades containing no nickel compared with higher nickel (eight to 10 per cent) containing stainless steel grades.

     The growth in the world supply of primary nickel in 2004 could not keep pace with the underlying demand growth and world supply for 2004 was lower than world nickel supply in 2003, taking into account the 60,000 tonnes of nickel that had been pledged as loan collateral by one producer and was subsequently released into the market in 2003, although production of primary nickel increased by four per cent in 2004. Approximately 50 per cent of global nickel production growth was the result of our recovery from our strike-affected levels experienced in 2003. In addition, domestic production of nickel in China and Ukraine increased in 2004 from 2003 levels. As a result, world primary nickel production increased by 54,000 tonnes to 1,258,000 tonnes in 2004. However, world primary nickel supply of 1,258,000 tonnes decreased from 1,264,000 tonnes in 2003, taking into account the release into the market in 2003 of the 60,000 tonnes of nickel referred to above.

     The growth in nickel demand during 2004, coupled with the overall decline in supply for 2004 taking into account the 60,000 tonnes representing collateral for a loan which were released into the market in 2003, as discussed above, created a deficit between supply and demand of approximately 6,000 tonnes. Inventories of nickel on the LME, decreased during 2004 by 3,174 tonnes to a relatively low level of 20,898 tonnes at December 31, 2004. LME nickel inventories have declined by 11,610 tonnes in 2005, with such inventories totalling 9,288 tonnes as of March 10, 2005.

     For a discussion of the LME cash nickel price during 2004, see “Overview – Key Factors Affecting our Business – 2004 Highlights” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under Item 7 of this Report.

     An uncertain global economic environment would be expected to have a significant adverse effect on Inco’s business and financial results given the historical positive correlation between industrial production and demand for primary nickel and our other products. There can be no assurance that the over supply situations which have existed historically in the nickel markets could not reoccur in the future. Any such conditions would have an adverse effect on the prices realized by us for our nickel products. Other international economic trends, expectations of inflation and political events in major nickel producing and consuming countries can also adversely affect nickel prices and the prices of other metals produced by us. These factors are beyond our control and have resulted, and are expected to continue to result, in a high degree of price volatility for nickel and other primary metals produced by us. There can be no assurance that the price for nickel or other metals produced by us will not decline. A return to the nickel price realizations for us reasonably near to the LME cash nickel price which prevailed through most of 1998 and into the first half of 1999 and during a portion of the second half of 2001 would have a material adverse effect on our results of operations, financial condition, cash flows and liquidity.

     World primary nickel demand has increased at an average compound annual rate of approximately six per cent over the last ten years. As noted under “Applications for Nickel” above, about two-thirds of world primary nickel demand is associated with the production of austenitic stainless steels. The following table shows the relationship between our most recent estimates of world primary nickel demand and stainless steel production for the five years ended December 31, 2004:

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     The following table shows Inco’s most recent estimates of world primary nickel demand, world primary nickel supply, year-end combined Western World producers’ and LME inventories of primary nickel, year-end LME nickel inventories and the average annual LME cash nickel prices for the five years ended December 31, 2004:

     Future nickel consumption and nickel prices could be adversely affected by a number of factors, including the development of new nickel capacity, such as the new capacity described below under “Participants in the Nickel Industry”; new processing technologies which have made, and are expected to continue to make, the development of relatively low-grade lateritic nickel deposits economically viable; decreases in the general level of economic and business activity in industrial economies which, in turn, could lead to reduced production of stainless steel; levels of nickel-containing stainless steel scrap and other sources of secondary nickel; increased environmental restrictions affecting the production and use of nickel and nickel-containing products; recommissioning of any currently remaining shutdown nickel capacity; and, in the longer term, increased use of substitutes, including plastics and ceramics, for nickel-containing materials. In addition, the future levels of production and consumption of nickel in Russia are expected to continue to have significant, but unpredictable, effects on world nickel prices.

     Participants in the Nickel Industry

     The seven largest suppliers in the nickel industry, each having its own integrated facilities, including nickel mining, processing, refining and marketing operations, are MMC Norilsk Nickel (“Norilsk”), Inco, Falconbridge Limited (“Falconbridge”), BHP Billiton plc (“BHP Billiton”), Jinchuan Nonferrous Metals Corporation (“Jinchuan”), WMC Resources Ltd. (“WMC”) and Eramet and its subsidiary, Le Nickel-SLN (collectively, “Eramet”). If BHP Billiton is successful in acquiring WMC, based upon its announcement in early March 2005, we believe that BHP Billiton would become the third largest supplier in the nickel industry. Inco estimates that these seven producers accounted for about 62 per cent of the total world primary nickel production in 2004. In addition to these seven principal industry participants, there are approximately 25 other producers in numerous other countries around the world that participate in the nickel industry. Operations of the seven largest producers are located in several countries. Inco, as noted on page 1 of this Report, has operations in Canada, the United Kingdom, Indonesia, Japan and China and in other parts of Asia through two companies, Taiwan Nickel and Korea Nickel, in whose refining capacity Inco has interests, but less than majority ownership. Norilsk has operations in Russia; WMC has operations in Australia; Falconbridge has operations in Canada, Norway and the Dominican Republic; Jinchuan has operations in China; BHP Billiton has operations in Australia and Colombia; and Eramet has operations in France and New Caledonia.

     Norilsk has integrated facilities at Norilsk in Siberia and at Pechenga and Severonickel on the Kola Peninsula of Russia. For 2004, Norilsk reported production of approximately 243,000 tonnes of nickel from all of its facilities, compared with 239,000 tonnes in 2003 and 218,000 tonnes in 2002. Nickel exports from Russia were 251,000 tonnes in 2004, compared with 238,000 tonnes in 2003 and 208,000 tonnes in 2002.

     Inco’s Position in the Nickel Industry

     Inco is a leading producer of nickel. Our nickel deliveries in 2004 represented an estimated 20 per cent of the total world demand for primary nickel, compared with 17 per cent in 2003 and 20 per cent in 2002.

     Our total deliveries of nickel in 2004 were 251,882 tonnes, representing an increase of 18 per cent from total deliveries of 213,890 tonnes in 2003. Deliveries of Inco-source nickel were 235,185 tonnes in 2004, representing an increase of 28 per cent from deliveries of 184,110 tonnes in 2003. The increase was primarily due to increased production at our Canadian and U.K. operations as well as at

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PT Inco. Production for all metals for 2003 was adversely affected by a three-month strike at our Ontario operations that began on June 1, 2003.

     In 2003, our total deliveries of nickel represented a decrease of eight per cent from total deliveries of 231,590 tonnes in 2002. Deliveries in 2003 of nickel produced at our own facilities represented a decrease of 13 per cent from deliveries of 212,247 tonnes in 2002. The decrease in deliveries was primarily due to lower production at our Ontario operations as a result of the three-month strike and was partially offset by higher nickel deliveries from PT Inco and our Manitoba operations and an increase in the deliveries of purchased finished nickel. Deliveries of finished nickel purchased from external sources, which we use to supplement Inco-source production as required, increased by 54 per cent in 2003 as a result of the three-month strike at our Ontario operations.

     We believe that one of the key strengths of our position in the highly-competitive global nickel industry is the broad geographic distribution of our customers. In 2004, we continued to supply our customers worldwide from our operations in Canada, the United Kingdom and Asia. In 2004, reflecting our global market presence, 25 per cent of our total primary nickel deliveries were to customers in the United States and Canada, 23 per cent to customers in Japan, 11 per cent to customers in Europe, and 41 per cent to customers in other countries, primarily in Asia, compared with 21 per cent to customers in the United States and Canada, 25 per cent to customers in Japan, 12 per cent to customers in Europe, and 42 per cent to customers in other countries, primarily in Asia, in 2003. In 2004, sales to customers in Asia, including Japan, represented 62 per cent of our total nickel deliveries for the year, compared with 66 per cent in 2003.

     In 2004, we continued to implement marketing strategies aimed at providing consistent long-term demand for our products. At year-end 2004, we had fixed-volume contracts with customers for a substantial portion of our expected annual nickel sales. These contracts, combined with the requirements of our affiliated refineries in Asia and our sales of proprietary nickel products, have continued to provide stable demand for a significant portion of our annual production.

     The following table shows, for the five years ended December 31, 2004, our most recent estimates of total world primary nickel demand, our total nickel deliveries, our deliveries of purchased nickel, our estimated share of world demand based on our total nickel deliveries, the LME average cash and three-month nickel prices and our average realized price for our primary nickel products:

Inco Special Products

     Inco is a world leader in the development, production and sale of value-added or specialty nickel products, including powders, foams, flakes, oxides and nickel-coated graphite. These products are used for such applications as consumer electronics, rechargeable batteries for consumer and hybrid vehicle use, fuel cells, powder metallurgy, automotive parts, electromagnetic interference shielding for computers and cellular telephones, special catalysts and salts, metal injection moulding, and hard metal binders.

     Inco Special Products, an unincorporated business unit, has responsibility for all business activities related to our value-added or specialty nickel products. Our value-added or specialty nickel products are developed at our research laboratory at Mississauga, Ontario and are manufactured, using our proprietary gas decomposition technology, at our refineries in Sudbury, Ontario and Clydach, Wales; and certain value-added or specialty products are also manufactured at Novamet³ Specialty Products Corporation (“Novamet”), a wholly-owned subsidiary of Inco Limited located in Wyckoff, New Jersey. Inco Special Products expects to continue to work closely with customers to develop advanced nickel products to meet their needs. Accounting for approximately eight per cent of

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Inco’s nickel sales revenue in 2004, compared with nine per cent in 2003 and 12 per cent in 2002, value-added or specialty nickel products are sold at premium prices. These premiums are affected by fluctuations in the LME cash nickel price and how we price certain of our value-added or specialty nickel products.

Copper

     We produce copper at our Ontario operations which we recover, in conjunction with nickel, principally from the sulphide ores mined in the Sudbury area of Ontario. In 2004, our copper production was 124,456 tonnes, representing an increase of 37 per cent from 91,134 tonnes in 2003 and reflecting a return to normal production levels following the three-month strike and ramp-up problems associated with the restart of operations after the strike at our Ontario operations in 2003. Copper production in 2003 was down 18 per cent from 111,787 tonnes in 2002 due to these factors.

     Our copper is sold to industrial users under the trademark ORC⁴. In 2004, all of our copper production was sold in North America at prices based on quotations on the COMEX Division of the New York Mercantile Exchange. Copper accounted for $364 million, or nine per cent, of our net sales to customers in 2004, compared with $171 million, or seven per cent, in 2003 and $184 million, or nine per cent, in 2002.

     Our sales and deliveries (including purchased copper) for the past three years and our average realized prices for copper for the past five years are shown in the tables under “Sales”, “Deliveries” and “Prices – Copper” above, respectively.

     World refined copper production is currently estimated to have been approximately 15.7 million tonnes in 2004, compared with 15.2 million tonnes in 2003 and 15.3 million tonnes in 2002.

     Like nickel prices, copper prices have been in recent years, and are expected to continue to be, subject to significant price volatility. In 2003, strong economic growth in Asia, in particular China, combined with a number of production cutbacks and the actions of one leading copper producer which we understand stockpiled material, led to accelerating declines in reported stocks throughout 2003. By the end of 2003, reported copper stocks on the COMEX and the LME had declined by over 40 per cent to 711,100 tonnes. The COMEX first position price averaged $1,787 per tonne ($0.81 per pound) in 2003, a 13 per cent increase from $1,580 per tonne ($0.72 per pound) in 2002. In 2004, continued economic growth in Asia, combined with the relatively strong economic recovery in the United States, led to an increase in global copper demand. Global copper production was, however, negatively impacted in 2004 by an open-pit mine collapse at one leading copper producer as well as labour disruptions at various other copper production facilities. By the end of 2004, combined reported copper stocks on the COMEX and the LME had declined from year-end 2003 levels by over 86 per cent to 97,100 tonnes in total. The COMEX first position price averaged $2,848 per tonne ($1.29 per pound) in 2004, a 59 per cent increase over the average price for 2003, and was $3,265 per tonne ($1.48 per pound) on March 11, 2005.

Other Primary Metals and Related Products

     Other primary metals and related products accounted for 10 per cent of our total net sales to customers in 2004, compared with eight per cent in 2003 and 15 per cent in 2002. These products include cobalt, platinum-group metals (platinum, palladium, rhodium, ruthenium and iridium), gold, silver, sulphuric acid, liquid sulphur dioxide and some modest quantities of selenium and tellurium, as well as certain price adjustments. For 2004, based upon production principally from our Ontario ores, we accounted for approximately three per cent of the world’s supply of platinum-group metals. Platinum-group metals are utilized primarily for catalysts, electronic components and jewellery. In addition to refining our own ores to obtain platinum-group metals, we process substantial volumes of spent automotive catalytic converters and other material containing these metals at our Sudbury, Ontario and Acton, England refineries. In 2004, such other material, which was principally toll-refined, accounted for about 64 per cent of all platinum-group metals refined by us, compared with 76 per cent in 2003 and 60 per cent in 2002. Deliveries of toll-refined material, however, are not included in our deliveries of precious metals shown in the table under “Deliveries” above since we do not take ownership of these materials. Sales of platinum-group metals accounted for approximately five per cent of our net sales to customers in 2004, compared with four per cent in 2003 and 11 per cent in 2002.

     Approximately 85 per cent of Inco’s cobalt production, which is derived from its Canadian ores and purchased feedstock material, is sold as metal, with the balance being sold as a cobalt intermediate product. The intermediate product is used by chemical producers

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to make cobalt-based chemicals. Cobalt metal is used in the production of various alloys, particularly for aerospace applications, as well as the manufacture of cobalt-based chemicals.

     Copper and nickel producers supply a majority of the world’s cobalt production as a by-product of their copper and nickel operations, which has resulted in the supply of cobalt being largely driven by the demand for copper and nickel rather than the demand for cobalt. As a result, there has been a significant increase in the supply of cobalt in the last decade. Demand for cobalt from the aerospace and land-based gas turbine sectors, which together currently represent about 23 per cent of world cobalt consumption, improved in 2004 compared with 2003, but still did not reach the level of demand that existed prior to September 11, 2001. In 2004, the total demand for cobalt increased as a result of the growth of applications for cobalt in the battery and catalyst market sectors. The increase in cobalt demand as a result of these applications, together with certain supply disruptions, resulted in the market that reportedly moved to a deficit position in the first half of 2004. In the second half of 2004, we believe that weaker market conditions prevailed as a result of consumers in Japan and China, having built up inventories, then scaled back purchases in the second half of the year and an increased supply of intermediate cobalt products from Africa. The Metal Bulletin 99.8 average reference price for cobalt, the most commonly used benchmark price for cobalt pricing, averaged $53,117 per tonne ($24.09 per pound) for the year, compared with $23,951 per tonne ($10.86 per pound) in 2003 and $15,660 per tonne ($7.11 per pound) in 2002. On March 9, 2005, the Metal Bulletin 99.8 average reference price for cobalt was $35,825 per tonne ($16.25 per pound).

     As indicated in the table of Inco’s price realizations under “Prices – Other Metals” above, Inco’s average realized price for its cobalt deliveries was $46,442 per tonne ($21.07 per pound) in 2004, compared with $18,846 per tonne ($8.55 per pound) in 2003 and $15,124 per tonne ($6.86 per pound) in 2002. Our Goro and Voisey’s Bay projects, in addition to the quantities of nickel projected to be produced by them, are also expected to produce significant quantities of cobalt given the currently estimated quantities of cobalt in the mineral deposits to be mined as part of these projects. With significant increases in the global supply of cobalt and changes in demand, the price of cobalt has fluctuated significantly over the past several years. The financial analyses undertaken by Inco in 2004 in support of the substantial planned investment to be made with respect to the Goro project have been based upon a long-term price of cobalt of $19.85 per kilogram ($9.00 per pound). If realized cobalt prices, as well as realized prices for the other metals to be produced by these two projects, were to be below the long-term prices assumed by us, the expected financial returns from, and expected cash and other unit costs of production after by-product credits for, these projects would be adversely affected.

     Inco also produces sulphuric acid and liquid sulphur dioxide from the sulphur dioxide gases captured as part of its sulphur dioxide (SO₂) abatement program at the Ontario operations. We produced a total of 676,000 tonnes of sulphuric acid and liquid sulphur dioxide in 2004, compared with 473,805 tonnes in 2003 and 673,995 tonnes in 2002. Most of our sulphuric acid production and all of our liquid sulphur dioxide production are sold to Chemtrade Logistics Inc., an unaffiliated customer, under long-term contractual arrangements at prices based on prevailing market prices for these products. These products are included in the table of product deliveries under “Deliveries” above.

     Tables showing the Company’s sales, deliveries and average net realized prices of these other primary metals and related products are shown under “Sales”, “Deliveries” and “Prices – Other Metals” above.

Mining and Production

     General

     Based on publicly available information and our own studies and analysis, we believe that, relative to other nickel producers, we are a low-cost producer of nickel. Since low-cost operations are essential in the highly competitive global nickel business, one of our key strategic objectives is to become the world’s lowest-cost and most profitable producer of nickel. A number of favourable factors, as described below, generally contribute to our current cost structure, with the contribution of each factor varying from year to year. A number of other nickel producers experienced some of the same cost pressures we did in 2004, including higher energy costs and the impact of the strengthening of the Canadian dollar and certain other currencies in which some or all of their costs of production are incurred relative to the U.S. dollar, the currency in which at least some of their revenue is received.

     Our estimated ore reserves include both sulphide and laterite nickel deposits which are the two main types of nickel deposits found in the world. Sulphide deposits currently account for about 30 per cent of the world’s nickel resources and are found in bedrock, often deep below the surface, which generally makes them more costly to mine than laterite deposits. Sulphide deposits commonly contain copper, precious metals and cobalt in addition to nickel. Laterite deposits, which currently account for the remaining 70 per cent of the world’s nickel resources, occur as either “wet” laterites or “dry” laterites. Wet laterites are found in tropical areas where heavy rainfall combined with suitable landforms have resulted in the concentration of nickel through a process of surface weathering and

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leaching action. Currently, wet laterites may be processed by using either smelting or acid leaching technology, depending on the characteristics of the particular deposit. Dry laterites, such as those found in Australia, may be processed only by using acid leaching technology due to their mineralogy and their generally lower nickel content compared with wet laterites. Laterite deposits are found at or near the surface and are therefore usually amenable to low-cost surface mining. Cobalt is also usually present in these deposits.

     We have large sulphide orebodies with satisfactory ore grades and metallurgical properties principally at our operations at Sudbury, Ontario and certain sulphide orebodies with generally declining ore grades at our Thompson, Manitoba operations, and large lateritic orebodies with satisfactory ore grades and metallurgical properties at our operations in Indonesia. In addition to nickel, we recover significant quantities of copper, precious metals and cobalt from our Ontario ores. The relative economic advantages of our Canadian sulphide ores are offset, to some degree, by the higher mining costs for sulphide ores relative to lateritic ores and by higher costs of doing business in Canada relative to some other nickel-producing countries. Our unit costs of production also benefit from economies of scale attributable to our large, integrated mining and processing facilities and from the use of bulk mining methods and automated mining equipment and other productivity improvements implemented in recent years in all areas of our business.

     Energy costs are a significant component of production costs in the nickel industry since nickel production is very energy- intensive, especially with respect to costs of processing lateritic ores such as those processed at our PT Inco operations. We enjoy relatively low energy costs because of substantial production from our Canadian sulphide ores, which generally consume only about one-fifth of the energy required to process lateritic ores. In addition, low-cost energy is available from our hydroelectric facilities in Ontario and at PT Inco’s lateritic mining operations in Indonesia, and from purchased hydroelectric power at our Manitoba operations.

     In 2004, our hydroelectric facilities in Ontario generated approximately 19 per cent of our Ontario operations’ electricity requirements, and PT Inco’s 165-megawatt hydroelectric generating facility at Larona together with its 93-megawatt hydroelectric generating facility at Balambano generated virtually all of PT Inco’s 2004 electricity requirements. The Balambano facility has been able to generate power consistently above its design capacity due to improved water management practices and higher reservoir levels and other related factors than were assumed in developing its original design capacity. In 2004, energy costs at our Ontario and Manitoba operations were approximately 12 per cent of total cash production costs, compared with 34 per cent for PT Inco. The availability of captive hydroelectric power decreased cash energy costs at PT Inco by about 53 per cent in 2004, 51 per cent in 2003 and 47 per cent in 2002 relative to the energy costs that would have been incurred by PT Inco if its operations were dependent on fuel oil as the sole source to meet its energy requirements.

     Our Ontario operations benefit significantly, and our Manitoba operations benefit to a minor extent, from the copper, precious metals and cobalt produced in association with nickel. In 2004, our Ontario ores accounted for approximately 92 per cent of our copper production, 88 per cent of our by-product platinum-group metals (“PGMs”) production and 48 per cent of our by-product cobalt production, with two per cent of our copper production, eight per cent of our by-product platinum-group metals production and 32 per cent of our cobalt by-product production derived from our Manitoba ores. We also produce nickel, copper, cobalt and precious metals from purchased materials. Precious metals have relatively high selling values compared with our processing costs for these metals. Inco’s accounting and financial reporting practice is to include revenues from deliveries of copper, precious metals and cobalt in net sales and to include costs of recovering such metals in cost of sales. Copper is considered to be a joint product with nickel and, as such, its production costs include an allocation of mining costs plus its identifiable concentrating, smelting and refining costs; precious metals and cobalt are considered to be by-products and, as such, their production costs include no allocation of mining, concentrating and smelting costs, but do include their identifiable upgrading and refining costs.

     Our nickel production increased by 27 per cent to 236,817 tonnes in 2004, compared with 2003, our highest annual production ever, exceeding our previous record of 231,332 tonnes (510 million pounds) in 1974, primarily reflecting higher production at our Canadian and U.K. operations compared with 2003 when the three-month strike at our Ontario operations that began on June 1, 2003 and a difficult ramp-up of operations in September 2003 following the strike negatively affected production. In 2003, our nickel production decreased by 11 per cent to 187,173 tonnes, compared with 209,728 tonnes in 2002, reflecting lower production at our Ontario operations due to the three-month strike and the ramp-up problems noted above, partially offset by higher production at our Manitoba operations, the processing of higher volumes of purchased nickel intermediates at both the Ontario and Manitoba operations and higher ore grades and higher production levels at PT Inco. Production of finished nickel from Canadian ores and purchased material processed in Canada totalled 161,730 tonnes in 2004, compared with 120,479 tonnes in 2003 and 146,620 tonnes in 2002. Additional nickel and copper production statistics for our primary metals operations are shown in the tables under “Concentrating, Smelting and Refining” below. For a discussion of PT Inco’s operating rates and estimated ore reserves, see “PT International Nickel Indonesia Tbk – Operations” below.

     Inco’s 2005 nickel production is currently expected to be in the range of 222,000 to 227,000 tonnes, down from the 236,817 tonnes

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produced in 2004. We did not have a scheduled maintenance shutdown at our Ontario operations in 2004, but consistent with our current plan to have such a shutdown at these operations every 18 months, we are planning a one-month maintenance shutdown in the second quarter of 2005. Such a shutdown would be expected to reduce our annual nickel production by about 7,000 tonnes, our copper production by about 11,000 tonnes and our PGMs production by about 35,000 troy ounces from levels at these operations if there were no shutdown. An annual four-week shutdown is also planned at our Manitoba operations in 2005 and will also include a planned 10-week furnace rebuild. We expect our purchases of nickel intermediates to increase by over 13 per cent from 2004 levels to approximately 35,380 tonnes in 2005. This external feed source is expected to represent the source of about 16 per cent of planned 2005 finished nickel production, up from 31,300 tonnes or 13 per cent in 2004. We continue to use purchased nickel intermediates to increase the processing capacity utilization of our Ontario and Manitoba operations, as discussed under “Risks and Uncertainties – Other Risks and Uncertainties” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under Item 7 of this Report, and to maintain nickel production at our Manitoba operations at or near its 45,000-tonne annual capacity. While such use is profitable, it does increase our costs, particularly at higher nickel prices since the cost of purchased intermediates is based on prevailing LME cash nickel or other benchmark prices. Copper production for 2005 is currently expected to be approximately 113,400 tonnes, down nine per cent from the 124,456 tonnes produced in 2004. Total production of PGMs is expected to decrease to 370,000 troy ounces in 2005 from the 2004 level of 422,000 troy ounces.

     While we have certain potential new mine development projects at our existing operations in Canada, if sufficient new low-cost sources of nickel such as the Voisey’s Bay and Goro projects are not developed on a timely basis, our overall nickel production, particularly at our Manitoba operations, could decline beginning as early as 2006, and our unit costs of production could increase significantly with any material decline in mine production from our Canadian operations if such operations were not significantly restructured. These developments could materially adversely impact our results of operations, financial condition, profitability and cash flows.

     During 2002, as mine production at our Manitoba operations transitioned from Thompson Mine to the lower grade Birchtree Mine, we experienced lower mine production. We continued to experience such lower mine production in 2004 and, as this transition continues to move forward, we currently expect to see a continuing decline in mine production in Manitoba in 2005 and expect to see further declines in future years. We have recently been relying, and expect that we will continue to rely at least for 2005, on an increasing basis, upon the availability of purchased nickel intermediates to maintain Manitoba’s nickel production at around the 45,000 tonne annual level. We currently expect that, with the planned availability of Voisey’s Bay intermediate nickel concentrate for processing at our Manitoba operations beginning by late 2005 or early 2006, these operations are expected to produce finished nickel products at or above the 45,000 tonne annual level over at least the 2006 – 2011 period, after which we currently expect to see, absent the availability of other cost-effective sources of intermediate nickel product for processing, a decline in annual production at our Manitoba operations beginning as early as 2012.

     We have relied upon two Australian suppliers of purchased nickel intermediates to maintain production at or near capacity principally at our Manitoba operations and, to a lesser extent, at our Ontario operations. Under these arrangements, these producers are currently expected to provide an aggregate of 85,000 tonnes of nickel in concentrate over the 2005 – 2009 period for further processing by our Ontario and Manitoba operations. If these suppliers experienced problems in producing or shipping to Canada their intermediate products, these events would have an adverse effect on our ability to produce and sell the nickel products we plan to produce in 2005 and would adversely affect our results of operations, financial condition, profitability and cash flows. Extended strikes, such as the one we experienced at our Ontario operations in 2003, other labour disruptions and unforeseen events could also adversely affect our production plans and costs and these developments could also adversely affect our results of operations, financial condition and cash flows.

     We continue to explore our options to fully utilize our existing Canadian facilities, including the purchase of intermediates and additional external feedstocks from existing or new suppliers and additional mine development. In addition, we are seeking to develop new mines principally at our Ontario operations to help sustain our production capacity at those operations and reduce costs. Further information on these projects is set out under “Exploration and Mine Development” below.

     Capital Expenditures

     The primary focus of Inco’s capital expenditures is to provide its operations with appropriate production capacity for its nickel and other primary metals products and to develop new projects, including the Voisey’s Bay and Goro projects. Capital expenditures were $876 million in 2004, compared with $591 million in 2003 and $600 million in 2002.

     Capital expenditures for the Goro project, including capitalized interest, totalled $138 million in 2004, compared with $249 million

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in 2003 and $353 million in 2002, and for the Voisey’s Bay project, including capitalized interest, totalled $447 million in 2004, compared with $138 million in 2003 and $73 million in 2002. The balance of capital expenditures in each of the three years was directed primarily to the development, maintenance and improvement of new and existing mining operations in Canada and productivity improvements and to meet environmental regulations and similar requirements. We currently estimate that our existing operations require, on an annual basis, on average approximately $250 million of capital expenditures to sustain their operations and to meet current environmental regulations and similar requirements at our currently planned production and/or utilization levels for these operations.

     Our total capital expenditures are currently projected to be $1,450 million in 2005, before any funding that may be provided by new shareholders in Goro Nickel and certain previously announced government assistance relating to our development projects. This estimate includes approximately $410 million for the Voisey’s Bay project, including capitalized interest and $50 million to be spent at the Ontario and Manitoba operations for facilities to handle Voisey’s Bay concentrate, approximately $560 million, including capitalized interest, for the Goro project, $70 million for the program to increase production at PT Inco, approximately $320 million in sustaining capital expenditures for existing operations and approximately $90 million for environmental measures. Total depreciation, depletion and amortization expenses are currently projected to be $275 million in 2005, including an estimated $29 million in respect of the Voisey’s Bay project given that it is expected to commence operation in the later part of 2005. Depreciation, depletion and amortization expenses for the Voisey’s Bay operations are currently expected to increase from the $29 million level for 2005 to about $270 million for 2006, reflecting depreciation of the facilities and equipment, depletion and amortization of the acquisition cost of the Voisey’s Bay deposits for the full year. The total capital expenditures for the Voisey’s Bay and Goro projects will depend on a number of factors, including receipt of all necessary construction and other permits and the continued availability of certain tax-advantaged financing from the French government. For a discussion of the Voisey’s Bay project, see “Voisey’s Bay Nickel Company Limited – Project Phases” below and for the Goro project, see “Goro Nickel S.A.” below.

     Mining

     At December 31, 2004, Inco had the following mines in operation in Canada:

     All of the mines listed above are underground mines except for Gertrude Mine which is an open pit mine. In addition to these operating mines, our Ontario operations include several non-operating mines or mines on standby which contain estimated ore reserves as indicated in the tables “Total Estimated Ore Reserves as of December 31, 2004” and “Total Estimated Ore Reserves as of December 31, 2003” under “Ore Reserves and Mining Rights” below.

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     The following maps show the location of the operating mines, non-operating mines, currently undeveloped properties and processing and other facilities at our Ontario and Manitoba operations.

Ontario Operations
Location of Operating Mines, Non-Operating Mines, Undeveloped Properties and
Processing and Other Facilities

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Manitoba Operations
Location of Operating Mines, Non-Operating Mines and Processing and Other Facilities

     For further information on the development projects or undeveloped properties at our Ontario and Manitoba operations, see “Exploration and Mine Development” below.

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     The tables below set forth our annual mine production in thousands of tonnes by operating mine (or on an aggregate basis for PT Inco since it has mining areas rather than mines) and the average percentage grades of certain metals (nickel and copper), for our Ontario operations, our Manitoba operations and PT Inco for 2004, 2003 and 2002. For our Manitoba and Ontario operations, the production and average grades represent the mine product delivered to those operations’ respective processing plants and do not include adjustments due to beneficiation, smelting or refining. The mine production at PT Inco represents the product from PT Inco’s dryer kilns (“Dry Kiln Product”) delivered to PT Inco’s smelting operations and does not include nickel losses due to smelting.

Annual Mine Production
(in thousands of tonnes, except percentages)

     Concentrating, Smelting and Refining

     The conversion of nickel ore mined from Inco’s sulphide deposits in Canada into commercially marketable products requires various processing and refining steps undertaken at concentrators, smelters and refineries. The ore is first crushed and ground, the sulphides are separated into concentrates, and the concentrates are then smelted to produce nickel matte, an intermediate product

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containing approximately 75 per cent nickel plus copper. The matte is then refined to produce primary nickel and copper products.

     Inco’s processing facilities in operation during 2004 in the Sudbury area included a concentrator, a combined nickel and copper smelter, matte processing facilities, a nickel refinery, a copper refinery, a silver refinery, a sulphuric acid plant and a sulphur dioxide liquefaction plant. Nickel matte produced in Sudbury is refined in Sudbury and other locations into nickel pellets, nickel powders, UTILITY⁵ nickel, nickel discs and Nickel Oxide Sinter 75⁶, a product containing approximately 75 per cent nickel. In Thompson, Manitoba, we have a concentrator, a nickel smelter and an electrolytic nickel refinery. Certain nickel products produced in Sudbury and Thompson are finished at Port Colborne, Ontario.

     Finished nickel is also produced at our refinery at Clydach, Wales. The Clydach refinery processes material supplied from our operations in Canada. At Port Colborne, we also operate an electrocobalt refinery and a precious metals upgrading facility. The majority of our silver production is refined at Copper Cliff, Ontario and our gold production is refined in Canada under a tolling arrangement with the Royal Canadian Mint. This by-product production is reflected in the tables under “Sales” and “Deliveries” above. Our refinery at Acton, England produces PGMs from upgraded concentrates from our operations in Canada and from the recovery, through toll-refining, of materials containing PGMs supplied by unaffiliated customers.

     Inco’s Ontario operations, Manitoba operations and operations in the United Kingdom form a business unit known as our Canadian and UK Operations. This organization, which was implemented in 2001, facilitates the sharing of knowledge and helps to optimize the use of certain of our facilities and resources.

     The following table shows our total production of finished nickel and copper from our primary metals facilities for the five years ended December 31, 2004:

     See “Mining and Production – General” above for information regarding Inco’s expected nickel and copper production for 2005.

     Of the amounts reported in the table above as finished nickel production, the following table shows the amounts of such total finished nickel production from nickel-in-matte produced by PT Inco for the five years ended December 31, 2004:

     Inco’s worldwide nickel processing capacity, including capacity at our majority-owned subsidiaries, is adequate to refine the production from our mines at current rates of mine production. We also have contractual nickel refining arrangements with nickel refiners in Asia in which we have minority equity interests. These include an arrangement with Taiwan Nickel for the supply of intermediate products produced by Inco for Taiwan Nickel’s refining operations, and a joint venture, also involving the supply of intermediate products produced by Inco, with Korea Nickel which, in turn, produces UTILITY nickel. The other shareholders of Taiwan Nickel are a number of Taiwanese investors and the other shareholders of Korea Nickel are Korea Zinc Company, Ltd. (“Korea Zinc”), a number of individuals associated with Korea Zinc and entities associated with Pohang Iron and Steel Co., Ltd.

     All production facilities at our operations in Ontario, Manitoba, Clydach and Acton are owned by us and are located on property which we own or with respect to which we have contractual rights to acquire ownership.

     Permission from the Ontario government is required for the export of intermediate products derived from Ontario ores. Our practice is to meet with government officials prior to the expiration of each of the required export licences to discuss relevant aspects of the export procedure. In December 1995, the Ontario government granted permission for us to export nickel oxide sinter and nickel sulphide matte, as well as nickel sulphate residue, to Clydach until December 31, 2005. During 2004, we refined about 16 per cent of

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our primary nickel production at our refinery in Clydach from intermediate products derived from our Ontario ores. The Ontario government also granted us permission to export semi-refined PGMs concentrate to our Acton refinery until December 31, 2005. We currently anticipate that we will be granted permission to continue to export these materials for additional years after the expiry of these current permits. The Province of Manitoba currently does not restrict the export of products from our Thompson mines. As discussed under “Ore Reserves and Mining Rights” and “Voisey’s Bay Nickel Company Limited – Negotiations with the Provincial Government” below, there are certain restrictions and limitations relating to the export of intermediate products from the Province of Newfoundland and Labrador.

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Ore Reserves and Mining Rights

     Ore Reserves

     The following tables show, as of December 31, 2004 and 2003, our estimates of our (i) proven ore reserves, (ii) probable ore reserves, and (iii) the aggregate of proven and probable ore reserves at our operating mines, non-operating mines, undeveloped properties and development projects at our Ontario operations, our Manitoba operations, the Voisey’s Bay project in the Province of Newfoundland and Labrador, PT Inco in Indonesia and the Goro project in New Caledonia and the estimated respective average nickel, copper, cobalt, platinum, palladium and gold metal grades, where significant, of each such total amount as of the end of the periods indicated. Ore reserve estimates referred to under “Exploration and Mine Development” below or elsewhere in this Report are included in these tables.

Total Estimated Ore Reserves as of December 31, 2004
(in millions of tonnes (Mt) except as indicated) ^(1)(2)(3)(7)

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Total Estimated Ore Reserves as of December 31, 2003
(in millions of tonnes (Mt) except as indicated) ^(1)(2)(3)(7)

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     At our Ontario operations, the estimated combined proven and probable ore reserves declined from 2003 to 2004 by 10 million tonnes, from 187 million tonnes to 177 million tonnes. The decrease was primarily due to mining (8 million tonnes).

     At our Manitoba operations, the estimated combined proven and probable ore reserves declined from 2003 to 2004 by 7 million tonnes, from 34 million tonnes to 27 million tonnes. This reduction was primarily due to mining (2 million tonnes) and the removal from the production schedule of a portion of the estimated ore reserves contained in pillars and remnant areas.

     At Voisey’s Bay, the estimated combined proven and probable ore reserves increased by 2 million tonnes from 2003 to 2004, as a result of incorporating additional drilling information and minor revisions to the planned open pit mine.

     At PT Inco, the estimated combined proven and probable ore reserves did not change to any significant degree between 2003 and 2004 and the year-end 2004 estimate reflected a slightly higher nickel grade after accounting for mining removal and new drilling information. In 2003, the estimated combined probable ore reserves were increased by 16 million tonnes as a result of ongoing exploration at PT Inco’s Petea mining area.

     At Goro, the estimated combined proven and probable ore reserves increased by 38 million tonnes from 2003 to 2004 due to additional drilling completed in 2004. The proven and probable ore grade increased slightly from 1.52 per cent to 1.53 per cent.

     At Inco, the economic test used in establishing ore reserves is performed using a financial model encompassing all operating processes necessary to produce a “saleable product or products”. For all the operations and projects, this economic model is a cash flow evaluation based on the production plan, which demonstrates our “intent to mine”. The production schedule is determined based on a variable cut-off grade and a number of other factors including the nature of deposit mineralization, plant capacities and optimizing the benefit of the capital investment. The economic viability of the ore reserve estimates is based on mining plans for the operating business units and full feasibility studies for development projects.

     At the Ontario and Manitoba operations, all costs are based upon Inco’s applicable annual operating plan. Processing costs include operating, depreciation and sustaining capital costs and are updated annually to reflect the assumptions for such costs included in Inco’s current annual or longer term (usually five-year) operating plans. Plant overhead costs are also updated annually with plant throughput assumed to remain constant. Corporate costs include selling, general and administration costs, charges for stand-by mines

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and demolition expenses. Mining costs include operating and mine overhead, capital and transportation. For our Ontario and Manitoba operations, metal recoveries are calculated from models based on process plant recoveries developed as part of our annual operating plans and the models are updated annually.

     Block modelling and geostatistical interpolation methods are used to derive the ore reserve estimates for over 90 per cent of the ore reserves at our Ontario operations. Conventional (polygonal) methods are used primarily to estimate the ore reserves remaining in pillars for secondary mining assessments. At our Manitoba operations, block models are used and geostatistical interpolation methods are used at our Manitoba operations’ Birchtree Mine and portions of Thompson Mine. Conventional estimation methods are used for about 40 per cent of the ore reserve estimates at our Manitoba operations. The mining methods used are generally non-selective and the internal dilution is included in the mining blocks evaluated in developing the estimates.

     For the block models, an estimation method, which we believe represents an appropriate geostatistical approach for the data, is selected and technical checks are incorporated into the modelling process. Back analysis studies of mined out areas are completed to verify the appropriateness of polygonal and geostatistical estimation methods and the block models are verified internally. External auditors have been used to critique our geostatistical techniques utilized. Standard procedures are used for the polygonal estimation techniques. Sections and plans employing standardized grading and interpretation procedures are used to select the mining method and assign mining lines. Mineral tonnages and metal grades are then determined and appropriate mineability and dilution rates are applied. As noted above, mining costs represent the cut-off values used to selectively report what mining blocks would be included in our ore reserve estimates.

     For the Voisey’s Bay project, the geological interpretation of the Voisey’s Bay Ovoid zone has been based on the modelling of the troctolite unit hosting the mineral. Within this model, two domains of massive sulphide and disseminated mineralization were further defined. The block dimensions used in the block model are 10 metres by 10 metres by 5 metres vertical. Geotechnical data derived from core holes drilled in the pit walls were used to design the open pit to mine this zone. Economic evaluations are based on metal recoveries determined from extensive metallurgical testing and operating costs estimated in the Voisey’s Bay project’s March 2003 feasibility study.

     Due to the different economic contributions from each metal, block net smelter royalty (“BNSR”) values have been used instead of a single metal cut-off grade for the open pit definition, production planning and ore reserve calculations. The BNSR calculations assume constant concentrate grades with which to calculate smelting, refining and freight charges. Charges in the BNSR calculation, in addition to smelting, refining, and concentrate shipping charges, include, for the Voisey’s Bay project, a three per cent royalty originally held by Archean Resources Ltd., which royalty interest was transferred in 2003 to a limited partnership created to hold such royalty interest and is currently held by two entities, as discussed under “Mining and Other Rights” below, and an assumed technical/management fee payable to Inco. The life-of-mine schedule uses a cut-off value corresponding to the expected milling costs. All blocks with BNSR values less than the cut-off value were considered as waste. There are no plans for a low-grade stockpile for the Voisey’s Bay project, and, accordingly, no part of the Voisey’s Bay estimated ore reserve is considered stockpile ore.

     At PT Inco, the assumed nickel price used is discounted for the nickel-in-matte product produced by PT Inco (representing the selling price received by PT Inco for its nickel-in-matte product equivalent to a percentage of the LME cash nickel price). Costs are based on annual plant operating costs (including selling, general and administration costs), and current depreciation and amortization expenses (adjusted for any future changes). For 2004, operating and fixed costs were based on PT Inco’s 2005 annual budget, after normalizing certain costs for long-term usage and removing certain unusual costs for one-time events (additional pre-stripping, delineation drilling and equipment rentals) and an adjustment for oil prices to a ten-year average. PT Inco’s process plant nickel recovery factor is also based on its annual operating plan and is adjusted each year. Given the nature of PT Inco’s laterite deposits and how they are mined, PT Inco does not have specific operating mines but rather has mining areas. PT Inco from time to time has, however, referred to its Sorowako West Block and East Block areas (shown on the map below under “PT International Nickel Indonesia Tbk”) collectively as its Sorowako mine.

     The ore reserves for PT Inco are estimated using block modelling techniques and geostatistical interpolation methods. Standard block sizes are used with different parameters applied to each deposit and in each of the limonite and saprolite layers. Mining volumes were estimated using a minimum ore thickness of two metres and material below cut-off grade was classified as internal waste if it was equal to or less than two metres thick. A minimum of 25 metres by 25 metres lateral extent criteria was used to classify the ore. The mineral volumes were converted to tonnages using appropriate wet tonnage factors. Screening recovery factors based on actual production are applied to convert the run of mine product to equivalent Dry Kiln Product. Mining recovery and dilution were included in the estimation of the ore reserves.

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     For the Goro project, the ore reserves were estimated using block modelling based on a 30-metre by 30-metre by one-metre block size. The nickel and cobalt grades, the chemical components and screen recoveries were interpolated for each block for each of the laterite layers using recognized mining industry methods. The specific gravity, moisture content and screen size recoveries of the laterite layers were determined based on data collected during geological and geotechnical drilling campaigns. Grade simulation models, developed from close-spaced drilling, were used to simulate variability in the layers’ thickness and chemistry, that are expected to be encountered during mining, to estimate the ore loss due to mining and mining dilution. A 1.20 per cent nickel cut-off grade was used to estimate the ore reserves. The cut-off grade provides a plant feed that meets the required chemistry of the blended material delivered to the process plant to provide the planned nickel and cobalt production. The 1.20 per cent nickel cut-off grade was applied in the limonitic layer only and all material located below that cut-off horizon are planned to be mined in bulk, without mining selectivity applied, until bedrock is reached.

     The key processes for developing Inco’s ore reserve estimates have been enhanced to include more formalized senior management review and approval of such processes and the preparation of such estimates. These processes involve, as discussed in Note 3 to the tables entitled “Total Estimated Ore Reserves as of December 31, 2004” and “Total Estimated Ore Reserves as of December 31, 2003” above, key technical personnel at each of the principal operating units or locations, our corporate technical group, including our corporate exploration personnel, as well as senior management’s involvement, and have been enhanced as part of the objective of recognizing ore reserve estimating as a core business process. In addition to internal audits of the processes utilized and the estimates themselves, we have also retained external auditing firms to review such processes and estimates. In 2004, external audits were conducted on the ore reserve estimates at Creighton Mine in Ontario and Birchtree Mine in Manitoba. These audits found no material issues with respect to the audited ore reserve estimates.

     Mining and Other Rights

     The following discussion reflects a summary of the property rights, mining rights, licences, leases or other concessionary rights to mine for or extract metals and other associated minerals from the areas that we currently mine or expect to mine as part of our long-term mine plans in Canada, Indonesia and New Caledonia. With respect to those properties which are not currently owned but are subject to leases or licenses with finite terms that are not perpetual or cannot be automatically renewed or extended and on which estimated ore reserves are located and/or are covered by our current long-term mine plans, we currently believe that we will be able to obtain renewals or extensions of such leases or licenses, if required as part of our long-term mine plans on a timely basis.

     Ontario Operations

     All operating mines, non-operating mines and undeveloped properties which contain estimated proven and probable ore reserves for our Ontario operations are on lands owned by us, with the exception of a portion of Copper Cliff South Mine (known as Kelly Lake) and a portion of the Victor non-operating mine. These portions of the Copper Cliff South and Victor mines are located on lands with respect to which we currently hold a licence of occupation. We have applied for a 21-year lease for each of these two areas and believe that these leases will be granted on a timely basis.

     In Ontario, we also hold mining rights, surface rights, licences of occupation and mining claims granted to us by the Province of Ontario. Mining rights are rights to exploit and extract minerals on, in or under the land, and surface rights are rights to use the surface of the land. These rights remain in effect so long as we own the land to which these rights apply. We also own a combination of mining and surface rights covering land leased from the Province of Ontario. These leased lands, which include a combination of mining and surface rights, are leased for either 10 or 21 years. Annual rentals are paid to the Province to keep the leases in good standing. One of the 21-year leases that was due to expire in November 2003 was renewed for a further 21-year term prior to its expiry. Three of the 10-year leases that expired in 2004 were also renewed in March 2004 for further 10-year terms. The next lease that comes up for renewal is in 2008. Inco currently holds 165 licences of occupation for mining, hydro electric installations and various other industrial purposes in Ontario. These licences of occupation allow Inco to use the land in the manner specified in each license, including the right to dig, excavate and remove ores and minerals from and under the land. Inco currently also has a number of mining claims in Ontario. Mining claims represent rights to explore the land covered by the claim. In early March 2001, a party purported to stake mining claims and then initiated an administrative appeal in the Province of Ontario effectively contesting the validity of a licence of occupation originally granted to Inco more than 50 years ago covering a portion of our Kelly Lake deposit which was identified in 1997. The actions taken by this party alleged that our rights under the licence had been lost because we had not made timely payments in accordance with the then applicable requirements for the periodic payment of the rent required to be paid to the province to maintain the licence. All of the appeals initiated by this party contesting the license were dismissed during 2001 and 2002. As a result of the dismissal of the appeals and the enactment of new legislation in Ontario in 2002, we do not anticipate any future challenges to the validity of such licences on the grounds alleged by this party.

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     Manitoba Operations

     Inco’s landholdings or mining rights in Manitoba consist of order-in-council leases (“OIC Leases”), mineral leases and mining claims. OIC Leases were negotiated as part of an agreement between Inco and the Province of Manitoba entered into in 1956 covering the development of the Thompson, Manitoba nickel deposits by Inco. OIC Leases entitle the lessee to explore for, and mine, all minerals in the subsurface (except hydrocarbons, industrial minerals and surficial deposits that are not incidental to the mining, milling, smelting and refining processes). OIC Leases also provide the lessee with the right to erect buildings and structures necessary for its operations and provide for a right of access over and upon the lands. OIC Leases provide for an initial 21-year term and two subsequent guaranteed renewals of 21 years each, for a total guaranteed lease period of 63 years. Subsequent lease renewals beyond the three guaranteed 21-year terms can be granted at the discretion of the Province of Manitoba. Inco’s OIC Leases were initially surveyed and made effective over a six-year period from 1957 to 1962. All of our current OIC Leases, including certain leases that were renewed in September 2004, have now been renewed twice (each is in its third guaranteed 21-year term) and remain in effect through the 2020-2025 period. These include the OIC Leases that cover the current area of Thompson Mine which were renewed in 2001 and the OIC Leases that cover the eastern and depth extensions of Thompson Mine which were renewed in September 2004. Mineral leases are 21-year leases that are renewable at the discretion of the Province of Manitoba. Inco holds seven mineral leases in the Thompson, Manitoba nickel belt. These mineral leases, which convey to Inco the exclusive right to the minerals (other than quarry minerals) that occur on or under the land covered by these leases and access rights to erect buildings and structures (including shafts) to mine within the limits of the leases, remain in effect until April 1, 2013. Inco also holds mining claims, a right issued by the Province of Manitoba under provincial legislation which conveys to the holder the exclusive right to the minerals (other than quarry minerals) that occur on or under the land covered by the claim and access rights to explore for and develop minerals owned by the Province. A mining claim does not, however, entitle the holder to extract minerals from the land covered by the claim. In order to extract minerals from the land covered by a mining claim, the holder must obtain a mineral lease from the Province of Manitoba.

     All of our Manitoba operations’ operating mines and all of the mineral rights for all of their mines which contain estimated proven and probable ore reserves are on properties covered by OIC Leases and mineral leases. Thompson Mine is located on land covered by OIC Leases that are due for renewal in 2022 and the eastern and depth extensions of Thompson Mine are covered by OIC Leases that are due for renewal in 2025. Birchtree Mine is located on land covered by both OIC Leases which are due for renewal in 2022 and three mineral leases which are in good standing until April 1, 2013. Since the renewal of these OIC Leases would be beyond the three guaranteed 21-year terms, renewals can be applied for and obtained, at the discretion of the Province of Manitoba, prior to their current expiry dates. We currently believe that the renewal of these OIC Leases and mineral leases will be granted before they expire.

     Voisey’s Bay Project

     The Voisey’s Bay project company, VBNC, holds mineral claims (which have been grouped into mineral licences), a mining lease and surface rights in the Province of Newfoundland and Labrador. A mineral claim (generally covering a 500-metre by 500-metre parcel of land), issued by the Province of Newfoundland and Labrador under provincial legislation, gives its holder the exclusive right to explore for minerals in, on or under the area of land described in the licence, and obligates the holder to conduct a minimum amount of assessment work (measured by the amount of money spent) on the land covered by the licence. Up to 256 mineral claims can be grouped together into one mineral licence. Grouping mineral claims into a single mineral licence allows the holder to better manage the assessment work required to be done on the land that is the subject of the claims. Mineral claims and mineral licences are issued for a period of five years and may be extended for three additional five-year renewal periods, for a total of 20 years. A mineral licence does not entitle its holder to extract any minerals from the land described in the licence. All of the Voisey’s Bay project’s current estimated ore reserves are located on lands covered by the 25-year mining lease referred to below.

     In order to extract minerals from the land covered by a mineral licence, the holder of a mineral licence must obtain a mining lease issued by the province under provincial legislation for the land covered by such mineral licence. VBNC obtained a mining lease, effective September 30, 2002, for a period of 25 years granting VBNC the exclusive right to extract minerals and carry out mineral exploration, mining operations or mining processing and development in, on or under the lands, or part of the lands, covered by the lease so long as VBNC and Inco continue to meet the terms and conditions of the development agreement, as discussed under Voisey’s Bay Nickel Company Limited” below, entered into in October 2002 between VBNC, Inco and Her Majesty the Queen in right of Newfoundland and Labrador. This mining lease can be renewed for further 10-year terms so long as VBNC has been in compliance with the terms of the lease and has applied for such renewal at least three months prior to the expiration of the then current lease. Under the terms of the mining lease, production is not to exceed on average 2.2 million tonnes of ore annually for the first 10 years of mining operations and on average 5.5 million tonnes of ore annually thereafter. The current areas to be mined as part of the Voisey’s Bay project and all of the estimated proven and probable ore reserves for the Voisey’s Bay project are held under this mining

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lease. We are not aware of any information or other factors at this time which would indicate that we could not reach agreement with the Province on a new mining lease or an extension when the current mining lease expires in September 2027. In conjunction with the mining lease, VBNC received a surface lease entitling it to use certain lands necessary for its mining operations. Like the mining lease, the surface lease was effective September 30, 2002 for a period of 25 years, and may be renewed for further 10-year terms.

     VBNC also holds nine mineral licences, all of which expire over the March-November 2014 period, covering the main claim block of the Voisey’s Bay project. These mineral licences have not been legally surveyed. Geographic coordinates define their locations. To date, sufficient assessment work has been completed to maintain these mineral licences at least until 2008 so long as the required renewal fees (currently being approximately Cdn.$100,000 and payable every five years, subject to increases in such fees based on subsequent renewals) are paid. Additional assessment work will be required to hold the mineral licences in good standing through 2014.

     Pursuant to the terms of an option agreement originally entered into in 1993 (the “Option Agreement”), Diamond Fields Resources Inc. (“Diamond Fields”) acquired, upon the exercise of the option thereunder, all of the mineral claims of Archean Resources Ltd. (“Archean”) in Labrador and Archean was granted a royalty, payable quarterly, equal to three per cent of net smelter returns from mining production from VBNC’s Labrador properties, including the Voisey’s Bay deposit (the “Royalty”), and a three per cent gross royalty (also payable quarterly) on the gross value of raw diamonds and/or gemstones recovered from these properties. The Option Agreement was assigned to VBNC by Diamond Fields in 1995. The Royalty is secured by a mortgage on VBNC’s Labrador properties in the maximum aggregate principal amount of $100 million. The mortgage is expressly subordinated to any mine development financing that might be obtained in the future. In 2003, Archean transferred the Royalty to a limited partnership controlled by Archean’s principal shareholders and effectively sold up to a 10 per cent interest in the Royalty to a third party. In late February 2005, the remaining 90 per cent interest in the Royalty then held by Archean’s principal shareholders was, through the sale of Archean, acquired by another third party.

     The Voisey’s Bay deposit is within a geographical area that has been the subject of land claims negotiations between certain aboriginal groups and the Governments of Canada and the Province of Newfoundland and Labrador. Aboriginal groups asserting land claims in the area include the LIA and Innu Nation. For further information, see “Voisey’s Bay Nickel Company Limited – Negotiations with Aboriginal Groups” below.

     PT Inco

     Under the original Contract of Work or concessionary agreement between the Republic of Indonesia and Inco entered into in 1968, and the agreement modifying and extending that Contract of Work entered into in January 1996 and which sets forth certain provisions which will apply once the terms of the original Contract of Work expire on March 1, 2008 and through December 28, 2025, PT Inco, as the sole contractor of the Government of Indonesia in the areas covered by the Contract of Work, has been granted exclusive rights in these specified areas on the Island of Sulawesi to mine, process, store, transport and sell all nickel and nickel-containing minerals in any form and all minerals (except for radioactive materials) found in association with nickel in the areas. The Contract of Work also grants PT Inco all necessary licences and permits to conduct its operations, including certain expansions of its operations, as provided for in the Contract of Work. All of PT Inco’s mining areas currently containing estimated proven and probable ore reserves are within PT Inco’s Contract of Work. Reference is made to “PT International Nickel Indonesia Tbk” below for a discussion of certain recent legislative and regulatory developments in Indonesia. Under the terms of the agreement of modification and extension of PT Inco’s original Contract of Work entered into in 1996, the Government of Indonesia has agreed to give sympathetic consideration to a further renewal or extension of the Contract of Work, upon the request of PT Inco based upon one or more developments, including a proposal to make a substantial new investment in PT Inco, or the demonstration by PT Inco of the positive economic and other benefits to Indonesia provided by PT Inco. We are not aware of any information or other factors at this time that would indicate that we would not be able to reach agreement on a further extension of PT Inco’s Contract of Work before it expires at the end of 2025.

     Goro Project

     The Goro project company, Goro Nickel S.A. (“Goro Nickel”), currently holds 69 mining concessions in the Massif du Sud (part of the south province of New Caledonia) covering 20,600 hectares authorizing the mining of nickel, cobalt, chrome, iron and manganese, and approximately 26 surface rights. An additional 12 mining concessions are held by Tiebaghi Nickel S.A.S. outside the Goro project area in a mining domain called Tiebaghi, located in the north province of New Caledonia. Of the 69 concessions held by Goro Nickel, the Goro project covers 6,042 hectares within seven mining concessions, of which four are perpetual in term, two are renewable prior to their expiry dates in 2016 and one is renewable prior to its expiry date in 2051. Goro Nickel has the right to renew these three renewable concessions for an additional 25-year period when their initial terms expire, provided a satisfactory technical report is delivered to the authorities five years before the expiry date. Concessions

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generally represent long term permits (mostly 75 year terms, with some having a term up to perpetuity) granted for mining large deposits which entitle the holder the exclusive right to exploit, extract and mine. A concession applies to one or several minerals defined by the granting decision along with its geographical location. The granting of a concession is based on the delineation of an exploitable orebody made during exploration activities conducted pursuant to permits called “permis de recherches” then “permis d’exploitation". Surface rights can be granted independently of mineral rights. Goro Nickel holds surface rights, known as “occupation des sols", which are rights to use surfaces on or outside mining permits for mining-related activities, including surfaces of other owners. All of the present estimated proven and probable ore reserves for the Goro project as at December 31, 2004 are within the mining rights held as concessions.

     Reference is made to “Goro Nickel S.A. – Prony West Deposit” below for a discussion of our rights to the Prony West area.

PT International Nickel Indonesia Tbk

     General

     In March 2004, Inco acquired approximately 5.2 million shares in PT Inco from another PT Inco shareholder. As a result of this acquisition, our ownership of the equity of PT Inco increased from approximately 59 per cent to approximately 61 per cent. Sumitomo Metal Mining Co., Ltd. (“SMM”) of Japan holds slightly more than 20 per cent and public shareholders hold a total of slightly more than 18 per cent of the equity of PT Inco. PT Inco’s shares are traded on the Jakarta Stock Exchange. Our investment in PT Inco at book value was approximately $392 million at December 31, 2004, compared with $364 million at December 31, 2003 and 2002. At December 31, 2004, PT Inco’s outstanding indebtedness to third party lenders was $115 million, compared with $192 million at December 31, 2003 and $269 million at December 31, 2002. This indebtedness was incurred primarily to finance the expansion project completed in 1999 referred to below under “Contract of Work Extension and 1999 Expansion of Facilities”.

     In view of its remote location, PT Inco’s production facilities are almost completely self-contained. They consist of an open-cast laterite mine, a processing plant with four electric furnace smelting lines (including a fourth line constructed as part of the PT Inco expansion project referred to below), thermal and hydroelectric power generating facilities and ancillary infrastructure, including a townsite, roads, an airport and port facilities.

     Since 1998, Indonesia has been experiencing economic and political turmoil, some of which has been compounded by a downturn in the global economy. Indonesia’s return to economic and political stability will be dependent to a large extent on the effectiveness of measures taken by the democratically-elected Government of Indonesia to restore business and confidence, decisions of international financial institutions, including the World Bank and the International Monetary Fund, regarding the availability of continued financing to Indonesia and companies operating in Indonesia, global economic conditions, and a number of other factors, including regulatory and political developments within Indonesia, which are beyond Inco’s control or ability to predict.

     In the Indonesian mining sector, mining companies have been facing several challenges stemming from the problems being experienced by Indonesia. These challenges include regulatory uncertainty under regional autonomy legislation which has sought to transfer governmental power in a number of areas, including taxation and mining regulation, from the central government to regional governments; overlapping and unclear tax and environmental legislation enacted by central, provincial and local government authorities; weakness in the banking sector; illegal mining activities; increasingly militant actions of non-governmental organizations and labour unions; and continued disputes between mining companies and local communities who are making increasing demands on mining companies operating in their communities. These other challenges may, in time, affect PT Inco’s operations and have, to the extent possible, been taken into account by PT Inco’s management in evaluating PT Inco’s current and future activities in Indonesia.

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     The map below indicates the mining areas, the East Block, the West Block and the Petea areas, where PT Inco’s estimated proven and probable ore reserves were located for 2004 and 2003, as well as the location of PT Inco’s processing plant and hydroelectric facilities and the boundary of the other properties containing additional mineralized nickel laterite deposits (referred to as “Other Concessions” on the map) within the area covered by PT Inco’s Contract of Work:

     Contract of Work Extension and 1999 Expansion of Facilities

     As discussed under “Ore Resources and Mining Rights” above, PT Inco’s operations are conducted pursuant to a Contract of Work with the Government of Indonesia under which PT Inco is the “sole contractor” of the Indonesian government for the production and marketing of nickel and associated minerals (other than hydrocarbons and radioactive materials) mined in specified areas on the Island of Sulawesi. The original Contract of Work was signed in 1968 and in January 1996 PT Inco signed an agreement with the Government of Indonesia to modify and extend the Contract of Work to the year 2025, subject to further extensions with the consent of the Government of Indonesia, from its original expiry date in 2008. The Contract of Work confers upon PT Inco all authorizations necessary for the development and operation of its nickel project.

     In late 1999, PT Inco completed a major expansion project that increased its production capacity by 50 per cent to 68,000 tonnes of nickel-in-matte per year. The expansion involved improvements to the three existing smelting lines and the construction of a fourth electric furnace smelting line together with the construction of 93 megawatts of additional low-cost hydroelectric generating capacity at Balambano, approximately 25 kilometres from PT Inco’s production facilities at Sorowako. Since it began operation, the Balambano facility has been able to generate power consistently above its design capacity due to improved water management practices and higher reservoir levels and other related factors than were assumed in developing its original design capacity.

     Financing for the expansion project was provided by a group of international lenders in the total principal amount of $340 million for this expansion project and an additional $81 million to refinance then existing PT Inco debt. The remainder of the original estimated cost of $580 million for this project had been expected to be provided by PT Inco’s available cash balances plus cash generated by existing operations during the construction period. However, as a result of lower production levels caused by limited rainfall and its adverse effect on hydroelectric power generation in 1998 and 1997, low nickel prices and increased costs due to construction delays associated with its new hydroelectric facilities, PT Inco’s ability to generate cash was significantly reduced and, as a result, Inco Limited agreed in May 1999 to provide PT Inco with a loan facility under which $88 million was advanced. These advances were effectively repaid to Inco Limited in 2002.

     PT Inco’s existing hydroelectric facilities were constructed and are currently operated pursuant to a 1975 decree of the Indonesian

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government. This decree, which effectively also covers the Balambano generating capacity which was part of the expansion project, vests an Indonesian ministry with the right, upon two years’ prior written notice to PT Inco, to acquire the hydroelectric facilities. No such notice has been given. If such right were exercised, the decree also provides that the hydroelectric facilities would be acquired at their depreciated value subject to the ministry providing PT Inco with sufficient power to meet its operating requirements, at a rate based on costs plus a normal profit margin, for the remaining term of the Contract of Work. The new hydroelectric dam referred to under “Operations” below to be constructed by PT Inco will also be subject to this decree.

     PT Inco’s estimated ore reserves and other deposits at Sorowako on the Island of Sulawesi are sufficient to support its operations for more than 19 years, and have the potential to continue to supply PT Inco’s operations for a number of additional years. Future expansions are possible, as warranted by market conditions, by developing the extensive laterite nickel deposits within PT Inco’s Contract of Work area in the Sorowako outer area and at Bahodopi and Pomalaa, located approximately 80 kilometres and 200 kilometres, respectively, from PT Inco’s operations at Sorowako. Reference is made to "Operations" below for a discussion of certain recent legislative and regulatory developments in Indonesia.

     When PT Inco’s Contract of Work was extended in 1996, PT Inco agreed to several undertakings with regard to future expansions of its operations. Under one such undertaking, PT Inco agreed, subject to economic and technical feasibility, to construct production plants at Pomalaa in Southeast Sulawesi and Bahodopi in Central Sulawesi. The Contract of Work indicated that the first plant could be in operation by 2005 and the second by 2010, but did not specify which plant was to be constructed first. As indicated below, this initial expansion has been deemed to be satisfied through 2008 under the arrangements with PT Aneka Tambang.

     In February 2003, PT Inco signed a Cooperative Resources Agreement (the “CRA”) with PT Aneka Tambang Tbk (“PT Antam”), an Indonesian government-controlled diversified mining company and producer of ferronickel whose nickel operations are located near PT Inco’s Pomalaa deposits within its Contract of Work area. Under the CRA, PT Inco agreed to supply saprolite, a relatively high grade of lateritic ore, to PT Antam from certain designated portions of PT Inco’s contract area in Pomalaa at prices based on an agreed upon pricing formula. The initial term of the CRA is 36 months starting from the initial delivery of ore by PT Inco to PT Antam. Due to certain delays experienced by PT Antam in completing the expansion of its facilities that will process this ore, the initial ore deliveries by PT Inco are now expected to be made to PT Antam in the second quarter of 2005. The CRA can be extended for one or more additional terms of 12 months each provided PT Antam has fulfilled its obligations under the CRA. PT Inco has certain unilateral termination rights under the CRA.

     In conjunction with the CRA, PT Inco obtained the approval of the Indonesian Minister of Energy and Mineral Resources with respect to PT Inco meeting certain of its undertakings covering future mining and processing activities, as noted above, under its Contract of Work by virtue of entering into the CRA. That approval indicated that PT Inco will be deemed to have satisfied its obligation to build a commercial plant at Pomalaa until the later of December 31, 2008 or the termination of the CRA, following which PT Inco will be obligated to deliver a report evaluating the technical and economic feasibility of constructing such a plant to the Government of Indonesia. PT Inco’s obligation under its Contract of Work concerning the construction of a commercial plant at Bahodopi by 2010, subject to economic and technical feasibility, remains in effect.

     PT Inco believes that the CRA provides a number of benefits to PT Inco, including (i) enabling PT Inco’s saprolite mineral deposits at Pomalaa to be developed on a basis that should provide PT Inco with a reasonable return, (ii) satisfying certain of PT Inco’s undertakings under its Contract of Work, (iii) evidencing, in addition to PT Inco’s Sorowako expansion in 1999, Inco’s continuing commitment to the Indonesian mining sector, and (iv) satisfying certain concerns relating to regional development expressed by the provincial and regional governments in Southeast Sulawesi which have assumed a greater role in the development of regional natural resources under Indonesia’s regional autonomy program.

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     Operations

     Production of nickel-in-matte at PT Inco increased by three per cent to a record level of 72,200 tonnes in 2004 compared with 2003. Production in 2003 was 70,200 tonnes, up 18 per cent over the 2002 level of 59,500 tonnes, reflecting the processing of higher grade ore and higher overall production levels in 2003 compared with 2002. Nickel-in-matte, an intermediate product, is sold by PT Inco primarily into the Japanese market. Approximately 95 per cent of PT Inco’s electric power requirements are supplied by its 165-megawatt hydroelectric generating facilities on the Larona River and its newer 93-megawatt facilities at Balambano which began operation in 2000. As noted above, the Balambano facility has been able to generate power consistently above its design capacity due to improved water management practices and higher reservoir levels and other related factors than were assumed in developing its original design capacity. PT Inco announced plans in 2004 to construct a third dam on the Larona River at a cost of approximately $150 million. The new dam is the first stage of a four-year $250 million capital program aimed at raising PT Inco’s annual production by 25 per cent to about 200 million pounds of nickel-in-matte by 2009. The new dam is expected to increase its hydroelectric generating capacity by 33 per cent, or 90 megawatts, annually. PT Inco also required approximately 447,000 tonnes of fuel oil to operate its dryers, kilns and other oil-fired facilities in 2004.

     Largely as a result of improved nickel prices, partially offset by increased costs, PT Inco’s net earnings were significantly higher in 2004 than in 2003 and 2002. PT Inco’s net realized price for nickel-in-matte in 2004 averaged $10,766 per tonne ($4.88 per pound), compared with $7,117 per tonne ($3.23 per pound) in 2003 and $5,114 per tonne ($2.32 per pound) in 2002. Under PT Inco’s long-term sales contracts, the selling price of PT Inco’s nickel-in-matte is determined by a formula which is based upon the LME cash price for nickel.

     The following table shows PT Inco’s production, together with deliveries by Inco of finished nickel refined from PT Inco’s matte, for the five years ended December 31, 2004:

     As indicated in the tables on estimated ore reserves on a Company-wide basis above under “Ore Reserves and Mining Rights”, PT Inco’s estimated ore reserves at the end of 2004 were 88 million tonnes of proven reserves grading 1.84 per cent nickel and 20 million tonnes of probable reserves grading 1.81 per cent nickel compared with an estimated 62 million tonnes of proven reserves grading 1.81 per cent nickel and 45 million tonnes of probable reserves grading 1.80 per cent nickel at the end of 2003⁷.

     In 1999, the Indonesian government passed legislation which had the effect of restricting open pit mining and certain other activities in areas designated as “protected forests”. A significant portion of the areas PT Inco is authorized to mine under its Contract of Work with the Indonesian government would be “protected forests” under this legislation. After this legislation was enacted, PT Inco and a number of other mining companies argued that this legislation should not affect their rights to mine areas expressly authorized under their Contracts of Work. The Indonesian government indicated that it would effectively exempt PT Inco and these other mining companies from this legislation. An Indonesian government regulation was finally issued in March 2004 authorizing such an exemption and this regulation was confirmed by a law passed in July 2004 (the “Exemption Law”). An Indonesian presidential decree was issued in March 2004 which (i) provided the exemption to PT Inco and certain other mining companies with respect to the legislation passed in 1999 and (ii) vested the Indonesian Ministry of Forestry with the power to issue regulations on activities conducted in “protected forests”. In the fall of 2004, this Ministry issued regulations restricting mining in protected forests,

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including requiring the receipt of licences and other approvals in order to conduct such activities. In January 2005, certain parties initiated a process to have the legality of the Exemption Law reviewed by the Indonesian constitutional court, a process that could result in a decision whereby the 1999 legislation would apply to PT Inco and certain mining companies, and this court is currently considering whether to proceed with such a review. While PT Inco continues to believe that the terms of its Contract of Work provide it with all authorizations to conduct mining activities in the areas covered by such contract and any disputes relating to its Contract of Work are subject to arbitration under international conventions, if the recently issued regulations and court review referred to above restricted PT Inco’s ability to mine in certain areas, it could reduce PT Inco’s estimated ore reserves and adversely affect PT Inco’s long-term mining plan.

     Sales

     All of PT Inco’s production of nickel-in-matte is sold in U.S. dollars under long-term contracts to Inco and SMM which, by their terms, continue until the expiration of the Contract of Work. These contracts provide that if the Contract of Work is extended or renewed the contracts will be extended for the period of such extension or renewal. Under these contracts, about 20 per cent of PT Inco’s production is sold to SMM and the balance to Inco.

     PT Inco’s deliveries of nickel-in-matte were 72,500 tonnes in 2004, compared with 70,500 tonnes in 2003 and 61,900 tonnes in 2002. The Japanese nickel market continues to be particularly important to PT Inco since PT Inco’s operations were conceived, in part, as a stable source of feed material to Japanese nickel refiners in the form of a processed intermediate nickel product which could be imported free of existing Japanese tariffs levied on refined nickel metal and other finished forms of nickel.

     Inco owns a 67 per cent interest in ITL which processes nickel-in-matte from PT Inco to produce finished products for the stainless steel industry in Japan.

Goro Nickel S.A.

     Goro Deposit

     Goro Nickel holds a number of claims covering nickel-cobalt properties in New Caledonia, located about 1,500 kilometres east of Australia. These properties have an extensive laterite resource base, including, as reflected in the tables above covering estimated ore reserves on a Company-wide basis under “Ore Reserves and Mining Rights”, an initial mining zone with, as of December 31, 2004, an estimated 73 million tonnes of proven ore reserves grading 1.39 per cent nickel and 0.13 per cent cobalt and 22 million tonnes of probable ore reserves grading 2.01 per cent nickel and 0.09 per cent cobalt which has been outlined as an initial source of feed for a commercial plant⁸. Given the completion of the comprehensive review of the Goro project referred to below, the capital cost estimate used for this estimate of ore reserves as at year-end 2004 was based on the updated capital cost estimate announced in October 2004. This estimated ore reserve base can be mined using low-cost open pit methods, which, when combined with Inco’s proprietary pressure-acid leaching and solvent extraction (PAL-SX) technology, gives the project the potential to have one of the lowest cash costs of nickel production in the world.

     Ownership of Goro Nickel

     Inco currently owns approximately a 90 per cent interest in Goro Nickel following the capitalization of certain shareholder advances in late February 2005.

     On February 18, 2005, a company formed by the three provinces of New Caledonia, Société de Participation Minière du Sud Calédonien SAS (“SPMSC”), acquired all of the shares of Goro Nickel held by a subsidiary of Bureau des Recherches Géologiques et Minières (“BRGM”). These shares represented, after the capitalization by Goro Nickel of certain shareholder advances as of February 18, 2005, approximately a 9.71 per cent interest in Goro Nickel. At the same time, Inco sold shares in Goro Nickel to SPMSC representing approximately a 0.29 per cent interest such that SPMSC would own, as of February 18, 2005, approximately a 10 per cent interest in Goro Nickel. SPMSC also entered into a shareholders agreement with Inco on February 18, 2005 setting forth its rights and obligations as a shareholder in Goro Nickel. Under the terms of that agreement, SPMSC will have a right to nominate and elect one director to the board of directors of Goro Nickel so long as it holds at least a five per cent interest in Goro Nickel. SPMSC

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will also have the right, but not the obligation, to make capital contributions on a pro rata basis as required to meet the funding requirements of Goro Nickel until such time as the Goro project meets certain minimum commercial production and related performance tests (the “Threshold Performance Tests”). If SPMSC does not make such capital contributions, then Inco has agreed to provide such capital contributions in addition to its own pro rata contributions, subject to certain limitations, and SPMSC would, accordingly, suffer dilution of its ownership interest, with the dilution formula to be subject to a penalty if SPMSC’s interest by virtue of dilution were to fall below five per cent. If the capital cost of the Goro project exceeds a threshold above the current capital cost estimate prior to when the Threshold Performance Tests are met, then SPMSC will not have any right or obligation to provide capital contributions to meet the Goro project’s funding requirements and Inco would be required to provide certain funding to meet such requirements, up to a specified level, in the form of interest-bearing debt repayable by Goro Nickel, and SPMSC would also be required to provide its pro rata share of certain administrative and related costs incurred by Goro Nickel up to a specified limit. Once the Threshold Performance Tests are met, to the extent that SPMSC has elected not to make its pro rata capital contributions and, accordingly, has suffered dilution of its interest in Goro Nickel, SPMSC has agreed to purchase from Inco, based upon the price paid by Inco for such shares plus interest thereon based upon a formula tied to Inco’s then applicable long-term weighted average cost of capital, a sufficient number of shares such that SPMSC will then hold a 10 per cent interest in Goro Nickel. Our planned capital expenditures for the Goro project do not assume that SPMSC will make its pro rata capital contributions.

     SPMSC will also have the right to participate in any future expansion of the Goro project. In the event that the Goro project were effectively abandoned on a permanent basis or did not meet the Threshold Performance Tests within seven years after the Goro project’s process plant had been constructed and was ready to receive feed for processing, SPMSC would have the right to receive a preferential payment ahead of Goro Nickel’s other shareholders out of the proceeds received from the sale of Goro Nickel’s assets after the discharge of all of Goro Nickel’s liabilities to third parties based upon SPMSC’s total capital contributions in, and purchase of shares of, Goro Nickel subject to a ceiling. Inco has agreed to provide, subject to certain terms and conditions, a letter of credit in the future in favour of SPMSC to secure this preferential payment.

     Goro Project

     In 1999, we completed the construction of an integrated pilot plant in New Caledonia capable of processing 12 tonnes of ore per day to continue with the development of the PAL-SX technology required for commercialization. The pilot plant operated successfully for over two years, both in further proving the PAL-SX technology and in training the core workforce for a future commercial plant.

     In April 2001, following completion of a bankable feasibility study, Inco announced that it planned to proceed with the construction of a commercial nickel-cobalt project at Goro.

     During 2002, Inco proceeded with the commercial development of the Goro project. In early September 2002, the project experienced labour disruptions by personnel associated with certain project construction subcontractors. As a result of these disruptions, a decision was made to curtail certain activities at the project site to enable Goro Nickel, contractors, subcontractors and other interested parties to develop procedures to avoid future disruptions. Over the September to November 2002 period, a number of procedures were put in place as part of a phased resumption of certain of the project activities that had been curtailed. At the same time that the labour disruptions referred to above occurred, Inco began updating the status of certain key aspects of the project, including the necessary permitting, capital cost estimate, project schedule and organization. Work on certain critical parts of the project, including engineering, continued during this update process.

     Project Review Process

     On December 5, 2002, Inco announced that it would be undertaking a comprehensive review of all key aspects of the Goro project. This action was based upon information received by Inco from the engineering, construction and procurement firms acting as the prime construction contractors for the project which, if confirmed, indicated an increase in the capital cost estimate for the project in the range of 30 to 45 per cent above the then current capital cost estimate of $1,450 million. The objective of the comprehensive review was to assess all information on the Goro project, including the various cost estimates and trends, and determine what changes in the capital cost estimate and the project could be made to maintain the project’s economic feasibility. As a result of the temporary suspension of certain development activities and other actions which had been taken by year-end 2002 during this review process, we recorded a pre-tax charge of $25 million in the fourth quarter of 2002. This charge was comprised of pre-tax expenses of $62 million relating to the cancellation or termination of certain outstanding contractual obligations, to accrue for demobilization costs and to reduce the carrying value of certain assets relating to the project, partially offset by currency gains of $37 million as a result of the ineffectiveness of certain forward currency contracts that had been entered into for hedging purposes. As part of the comprehensive

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review, we also evaluated various contractual and other arrangements covering construction and other work relating to the Goro project and implemented certain actions to suspend or terminate certain of those contractual arrangements.

     This review, as discussed above, evolved into two phases during 2003. Phase 1 of the review focused on an orderly suspension of work and identification of opportunities for capital cost reduction. In August 2003, we announced the key results of Phase 1 of the review process and that we were moving to a second phase, or Phase 2, of the review which would involve a structured process intended to (i) further develop the capital cost reduction opportunities identified in Phase 1 and (ii) establish a capital cost control estimate, an updated project schedule and an optimized and clearly defined scope and execution plan for the project.

     In late May 2004, we announced the key preliminary findings reached to that date as part of Phase 2 of the review. These findings included (i) an updated preliminary capital costs estimate, taking into account an expected non-cash charge, of approximately $1.85 billion for the mine, process plant and related infrastructure, within a minus five per cent to plus 20 per cent reliability range and (ii) in changes in the planned Goro project configuration, moving to direct heating of the ore feed and other changes intended to reduce the capital cost estimate and enhance the operating efficiency of the planned process plant and the process itself. As a result of such changes, capitalized expenditures incurred of $201 million were written off as of the end of the second quarter of 2004. These changes related to certain expenditures, principally engineering and related work associated with the original project configuration and equipment purchased for the indirect heating of ore feed, that no longer would have any value for the project or otherwise. We announced the key final results of Phase 2 of the review in October 2004. These final results included an updated capital cost estimate of $1.878 billion for the mine, process plant and related infrastructure, within a minus five per cent to plus 15 per cent reliability range. This estimate included about $40 million for assumed escalation in costs during the construction phase of the project, an amount that was not in previous capital costs estimates, and also reflected favourable currency hedging gains realized by Inco of about $31 million which were also not included in previous estimates. The principal reasons for the increase from the $1.85 billion estimate which had been announced in May 2004 were higher costs for a range of construction materials and labour required for construction and the incorporation of a new tailings storage area as part of the project. The results of Phase 2 of the review also established an expected annual capacity for the project of 60,000 tonnes of nickel and a current range for cobalt capacity of 4,300 to 5,000 tonnes per year to take into account the optimized mine plan for the project. Having completed and achieved the key objectives of Phase 2 of the review, in October 2004 we also announced the decision to proceed with the project. It is currently expected that the project execution will be based upon a phased approach, with the first phase focusing on engineering, contract development and permitting. Engineering work has progressed to date and fieldwork is currently expected to commence in the second quarter of 2005. It is currently expected that the project will commence production in the latter part of 2007.

     Fiscal Regime

     The New Caledonian authorities enacted a fiscal regime in 2001 which provides a nominal 15-year tax holiday plus an additional five years at tax rates that are 50 per cent of the prevailing tax rates for qualifying metallurgical companies. If the project achieves an internal rate of return in excess of a cumulative threshold rate during this 20-year period, the applicable tax rates or levels for the project would then be adjusted prospectively to be equivalent to the general rates or levels then in effect for mining and processing companies.

     Girardin Act Financing

     On December 30, 2004, we entered into agreements for the Goro project covering the Girardin Act tax-advantaged lease financing program (“Girardin Financing”) sponsored by the French Government. The Girardin Financing is subject to a ruling issued by the French Minister of Economy, Finance and Industry (the “Ruling”). The Ruling provides that certain investors who are French qualified investors under the Girardin Financing (“Tax Investors”) may utilize certain tax deductions in connection with assets representing a portion of the Goro project’s processing plant which are financed by the Girardin Financing (“Girardin Assets”). The Ruling requires that Goro Nickel and Inco satisfy certain conditions, including operating the Goro project for a minimum of five years.

     As part of the Girardin Financing, a special purpose entity (“SPE”), a variable interest entity, was formed by the Tax Investors to finance the purchase, construction and installation of the Girardin Assets. As we are the primary beneficiary of the SPE, our consolidated accounts include the accounts of the SPE. The purchase, construction and installation of the Girardin Assets by the SPE is funded by a combination of (i) non-refundable loans (“Tax Advances”) provided by the Tax Investors pursuant to a tax loan agreement (the “Tax Loan Agreement”) between the Tax Investors and the SPE, and (ii) loans provided to the SPE by a subsidiary of Inco pursuant to a loan agreement (the “Loan Agreement”).

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     Under a construction agreement between the SPE and Goro (the “Construction Agreement”), Goro has been appointed the construction agent on behalf of the SPE and is responsible for the purchase, construction, installation and commissioning of the Girardin Assets. The costs for the construction, installation and commissioning of the Girardin Assets total approximately $500 million and are payable in three instalments. In the event of a cost overrun, a fourth instalment would be made to Goro Nickel with the additional funds provided pursuant to the Loan Agreement. Goro Nickel is required to give notice of substantial completion of the Girardin Assets to the SPE by December 31, 2008 or such later date as may be approved by the French tax authorities. Upon such substantial completion, the SPE will lease the Girardin Assets to Goro Nickel under an agreement between the SPE and Goro Nickel (the “Lease Agreement”). While the term of the Lease Agreement is 12 years, the related agreements covering the Girardin Financing extend certain call and put options to Goro Nickel and the SPE, respectively, covering both the Girardin Assets and the ownership interests in the SPE whereby, assuming no default by Goro Nickel under the arrangements covering the Girardin Financing, one of these options will be exercised after five years, resulting in the termination of the Lease Agreement and the ownership of the Girardin Assets reverting to Goro Nickel.

     The Construction Agreement and the Lease Agreement contain certain events of default and termination rights for the benefit of the SPE, including the failure of Goro Nickel to meet certain terms and conditions of the Ruling. Following any termination of the Lease Agreement, (1) certain termination compensation could be payable by Goro Nickel to the Tax Investors pursuant to the Add-Back Indemnity (as defined below) and (2) Goro Nickel would be required to either (a) repay the entire then outstanding amount drawn under the Loan Agreement or (b) assume all of the SPE’s obligations under the Loan Agreement. Upon the occurrence of such events, Goro Nickel would continue to have the right to use the Girardin Assets, with the SPE retaining ownership thereof until all termination payments due by Goro Nickel under the Lease Agreement were paid. In addition, each of the Lease Agreement and the Construction Agreement provides that Goro Nickel must indemnify the SPE and the Tax Investors with respect to (1) the Add-Back Indemnity (as defined below), (2) increased taxes incurred by the SPE or Tax Investors in respect of certain changes in tax laws or the imposition of certain unanticipated taxes in New Caledonia and (3) certain operational losses incurred by the SPE or Tax Investors arising out of third party claims in their capacity as owners of the Girardin Assets. In the event of a termination of the Construction Agreement or the Lease Agreement or in the event that the Tax Investors exercise their put option upon the occurrence of certain material adverse environmental events relating to Goro Nickel prior to the fifth anniversary of substantial completion of the Goro project, it is possible that the Tax Investors could lose their tax deductions in respect of the Girardin Assets, thereby triggering an indemnity whereby Goro Nickel would be required to reimburse the Tax Investors for the denial or reversal of their tax deductions under the Girardin Financing by the French tax authorities and for any interest and penalties levied thereon by such authorities (the “Add-Back Indemnity”). In connection with any termination event, the Tax Investors will receive certain priorities relating to Goro’s assets over other creditors.

     As at December 31, 2004, the Tax Investors had provided $41 million in Tax Advances which were recorded on our balance sheet as a deferred credit since these advances represent government assistance in the form of a forgivable loan. The SPE expects to receive the balance of the Tax Advances in December 2005 and 2006 pursuant to the terms of the Tax Loan Agreement. It is currently estimated that such Tax Advances will total $148 million, before fees to be paid to the Tax Investors, with the balance of the Girardin Financing to be provided under the Loan Agreement. Of the remaining Tax Advances to be made in 2005 and 2006, approximately 65 per cent of these amounts have been committed by the Tax Investors, with the balance expected to be placed with additional investors.

     In connection with the Girardin Financing, Inco Limited provided certain guarantees on behalf of Goro Nickel covering payments due from Goro Nickel of up to a maximum amount of $100 million (the “Maximum Amount”) in connection with the Add-Back Indemnity. Inco Limited also provided an additional guarantee covering the payments due from Goro Nickel of (a) amounts exceeding the Maximum Amount in connection with the Add-Back Indemnity and (b) certain other amounts payable by Goro Nickel under the Girardin Financing relating to certain possible operational or other developments applicable to the Goro project.

     New Caledonia

     New Caledonia is currently an overseas territorial community (collectivité territoriale) of France having special legal status under the French constitution, including significant autonomy except in foreign relations, defence, justice, currency and certain other related areas. As part of the objective of increasing New Caledonia’s autonomy from France and to implement arrangements to address political and other issues that New Caledonia had experienced, in 1998 the French government, the New Caledonian government and two New Caledonian political movements representing the native population entered into the Noumea accord. This accord sets forth a process and timetable for increasing the autonomy of New Caledonia over the coming years, culminating in a referendum to be held by 2018 on whether New Caledonia would become fully independent from France. As part of the initial phase of the accord, steps have been taken, and will be taken over the next few years, to develop the form of provincial governments to be part of the New

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Caledonian government structure and to pass local legislation, including the enactment of a new mining law, that will provide for the transfer of certain authority in a number of areas still maintained by France to the New Caledonian government. We do not believe that these developments will have an adverse effect on the Goro project but there can be no assurances in this regard. Provincial elections were held in May 2004 for the election of members of the three provincial assemblies in New Caledonia. Each assembly will elect its president who will be part of the province’s executive board. The members of the newly elected provincial assemblies will also serve as members of the Congress of New Caledonia. This Congress is responsible for the selection of the President of New Caledonia.

     Prony West Deposit

     In September 2001, Goro Nickel applied for an exploration permit for an area next to the Goro deposit known as Prony West. Several other companies applied for the same exploration permit. After an assessment of the various applications, the government of the South Province of New Caledonia determined that Goro Nickel’s application was the best technically and offered the greatest financial commitment. The South Province’s recommendation to accept Goro Nickel’s application was discussed at a government mining committee (Comité Consultatif des Mines) level in April 2002 and the recommendation to accept Goro Nickel’s application was subsequently approved by the provincial mining council (Conseil des Mines). In July 2002, after a public debate on the awarding of this exploration permit, the legislative assembly of the South Province voted to award the Prony West exploration permit to Goro Nickel. As soon as this decision was made, several companies challenged the South Province’s decision. The administrative tribunal which considered this challenge released its decision on December 24, 2003. The administrative tribunal decided that the legislative assembly of the South Province did not have the authority to make the award as this authority had been previously delegated to the Executive Committee of the South Province and that the delegation had not been withdrawn. As a result of this decision, the exploration permit previously awarded to Goro Nickel was cancelled. However, after the cancellation of this permit, on December 27, 2003, the Executive Committee of the South Province met and re-awarded the exploration permit to Goro Nickel. This decision to re-award the permit to Goro Nickel was open to challenges until late April 2004. A number of challenges were filed by several different parties and those challenges are currently being reviewed by the relevant governmental bodies. We cannot currently predict what effect, if any, that these challenges could have on the December 2003 re-award.

Voisey’s Bay Nickel Company Limited

     Voisey’s Bay Deposits

     The Voisey’s Bay deposits consist of four main mineral deposits: the Ovoid, the Eastern Deeps and related deposits, the Reid Brook deposit and the Discovery Hill deposit. As of December 31, 2004, as reflected in the table “Total Estimated Ore Reserves as of December 31, 2004” under “Ore Reserve and Mining Rights” above, proven ore reserves of 29 million tonnes grading 3.05 per cent nickel, 1.77 per cent copper and 0.15 per cent cobalt and probable ore reserves of three million tonnes grading 0.76 per cent nickel, 0.45 per cent copper and 0.04 per cent cobalt were estimated for the Ovoid. Reference is made to the notes to such table for information on how these reserves were estimated and how Inco meets certain Canadian securities regulatory requirements for the purpose of any ore reserve estimates it might prepare.

     VBNC’s exploration expenditures in Labrador were $3 million in 2004, compared with $2 million in 2003 and $0.2 million in 2002. In 2004, in-fill exploration drilling from surface was carried out at the Reid Brook, Discovery Hill and Eastern Deeps deposits. At Reid Brook, 24 holes totalling 9,800 metres were drilled in 2004, resulting in the addition of high-grade massive sulphide mineralization to this deposit. Massive sulphides occur primarily as flat-lying bands and lenses within the wall rocks adjacent to the troctolite dyke that hosts much of the mineralization and we currently believe that there is potential to add additional massive sulphide mineralization to this deposit with further drilling. A total of 11 holes were drilled at the Discovery Hill deposit in 2004. This drilling added additional mineralized material to the deposit. Geotechnical data were collected and core specimens were examined to determine their mineralization. The resource block model was updated and a scoping-stage feasibility assessment was completed based on the sub-level cave mining method. Two boreholes were drilled at the Eastern Deeps deposit to test the variability of the massive sulphide contacts. The drilling confirmed the interpretation of the massive sulphide. Geophysical surveys, exploration drilling and feasibility assessments will continue on these zones in 2005.