Directors’ Report to the Shareholders

FINANCIAL

Fibre production and sales were adversely affected in 1976 by a strike in July
and August at the Cassiar mine in northern British Columbia. The disruptive effect of
the strike and a reduced demand for textile grade fibres were responsible for a 12%
reduction in sales volume compared to 1975. Increases of 8% and 15% in the
selling price of asbestos became effective January 1, 1976, and December 1, 1976,
respectively. These increases offset the reduction in tons of fibre sold.

The net income for the Company in 1976 was $11,839,556 or $2.15 per share
compared with $8,289,836 or $1.51 per share in 1975. The net income takes into
account $5,155,864 for payment of taxes and royalties.

Capital and Deferred Expenditures for the year are summarized as follows:

Cassiar Clinton Vancouver & Whitehorse
Plant and Equipment .. $10,855,000 $ 135,000 ($118,000)
Waste Removal ...... 19,271,000 897,000
Development......... 246,000
$30,372,000 $1,032,000 ($118,000)

Major capital expenditures in 1976 were $2,252,000 on Townsite, Cafeteria
and Hospital improvements; $1,309,000 on an Employee Change House and
$3,776,000 on the New Mill Air System.

The Company's total bank indebtedness at year end was $20,017,110.

During the past three years, cash flow, from which dividends are paid, has been
adversely influenced by the need to accelerate the waste removal program at
Cassiar, the construction of a new tramline and concentrating plant, and improve-
ment and modernization of other plant facilities and the townsite. In addition, major
capital expenditure commitments have been undertaken to meet the new and more
stringent environmental standards with respect to asbestos.

Together, these programs have imposed a heavy drain on the annual cash flow
and only a portion of the cost incurred in any year is applied in calculating net profit.
In addition, year end inventories at cost were $9,000,000 higher than at the end of
1975.

The following table summarizes the relationship between net profit, cash
generated, money spent and bank indebtedness.

(In millions of dollars) 1972 1973 1974 1975 1976
Net Profit: 4.1 2.9 As 8.3 11.8
Cash Flow:

Cash Generated From Sales 43.1 51.3 51.6 84.9 8257,
Cash Required for:
(i) Capital Expenditure

and Waste Removal .... 12.0 13.2 21.6 29.0 SHO)
(ii) Operating and Other .... 31.8 SiO} 7/ 38.2 51.8 58.7
Total Cash Required ....... 43.8 46.9 59.8 80.8 89.7
Bank Indebtedness ........ 13.3 8.9 Zou 13.0 20.0

*Before extraordinary adjustment.