SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

þ		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended: December 31, 2005

Inco Limited

Canada		98-0000676
(Jurisdiction of incorporation)		(I.R.S. Employer Identification No.)
145 King Street West, Suite 1500		M5H 4B7
Toronto, Ontario, Canada		(Postal code)
(Address of principal executive offices)

(416) 361-7511
(Telephone number)

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

Title of Each Class		Name of Each Exchange on Which Registered
Common Shares		New York Stock Exchange (1)
Stock Purchase Rights		New York Stock Exchange (2)
Common Share Purchase Warrants		New York Stock Exchange (2)

     Indicate by check mark if the registrant is a well-known seasoned issuer (as defined in Rule 405 of the Securities Act).

		þ Yes           o No

     Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934.

		o Yes           þ No

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days.

		þ Yes           o No

     Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.           þ

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934).

Large accelerated filer      þ           Accelerated filer      o           Non-accelerated filer      o

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934).

		oYes           þ No

     As of June 30, 2005, 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 $7,125 million.⁽³⁾

     As of February 17, 2006, 192,769,128 Common Shares of the registrant were issued and outstanding.

     Portions of the Registrant’s proxy circular and statement dated February 17, 2006 for the 2006 Annual 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
2005 ANNUAL REPORT ON FORM 10-K

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

Items 1. and 2. Business and Properties of Inco Limited			1
Introduction			1
Availability of Documents			2
Cautionary Statement Regarding Forward-Looking Statements and Forward-Looking Information			2
Material Assumptions			4
Description of Business			4
Sales			4
Deliveries			5
Prices			5
Nickel			5
Copper			6
Other Metals			6
Results of Operations			7
Customers			7
Competitors			7
Inventories			7
Nickel Unit Cash Cost of Sales			7
Business Segment Information			9
Nickel			9
Applications for Nickel			9
Historical Review of the Nickel Industry; Recent Industry Conditions			10
Participants in the Nickel Industry			15
Inco’s Position in the Nickel Industry			16
Inco Special Products			16
Copper			17
Other Primary Metals and Related Products			18
Mining and Production			19
General			19
Capital Expenditures			21
Mining and Mine Production			21
Concentrating, Smelting and Refining			26
Ore Reserves and Mining Rights			27
Ore Reserves			27
Mineral Resources			33
Mining and Other Rights			37
PT International Nickel Indonesia Tbk			40
General			40
Contract of Work Extension and 1999 Expansion of Facilities			43
Operations			44
Sales			45
Voisey’s Bay Nickel Company Limited			45
Voisey’s Bay Deposits			45
Environmental Review Process			46
Arrangements with Aboriginal Groups			46
Arrangements with the Provincial Government			47
Project Phases			48
Goro Nickel S.A.S.			48
Goro Deposits			48
Ownership of Goro Nickel			50
Goro Project			51
Project Review Process			51

Fiscal Regime			52
Girardin Act Financing			52
New Caledonia			54
Prony West Deposit			54
Exploration and Mine Development			54
Research and Development			59
Metals Recycling			60
Environment, Health and Safety			61
Environmental and Health and Safety Management Systems			61
Environment, Health and Safety Audits			61
SO2 Emissions			62
Port Colborne and Sudbury Soils			63
Decommissioning and Reclamation			67
Re-vegetation Programs			67
PT Inco			68
Future Removal and Site Restoration; Closure and Post-Closure Plans			68
Health and Safety			70
Regulation of Nickel and Other Nonferrous Metals			73
Other Environmental Control Regulations			80
Employees			80
Exmibal			81
Miscellaneous Investments			82
Other Information			82
Shareholder Rights Plan			82
Proposed Acquisition of Falconbridge Limited			83
Items 1A. Risk Factors			85
Items 1B. Unresolved Staff Comments			85
Item 3. Legal Proceedings			85
Item 4. Submission of Matters to a Vote of Security Holders			85
Item 5. Markets for Inco Limited’s Common Shares, Related Shareholder Matters and Inco Limited’s Issuances or Purchases of Equity Securities			86
Common Shares			86
Market Information			86
Issuance of Unregistered Securities			86
Holders of Common Shares			86
Dividends			86
Common Share Purchase Warrants			87
Other Information			87
Class VBN Shares			88
Preferred Shares			88
Certain Provisions of the Preferred Shares as a Class			88
Securities Authorized for Issuance Under Equity Compensation Plans			89
Other Information			89
Item 6. Selected Financial Data			91
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations			93
Overview			93
Nature of our Business			93
Key Factors Affecting our Business			94
2005 Nickel Market Highlights			96
2004 Nickel Market Highlights			98
Results of Operations			99
2005 Compared with 2004			99
Earnings Summary			99
Nickel Production			99
Copper Production			100
Commencement of Voisey’s Bay Operations			100

Net Sales			100
Realized Prices			101
Costs and Expenses/Other Income			101
Cost of Sales and Other Expenses			102
Selling, General and Administrative			102
Currency Translation Adjustments			102
Interest Expense			102
Asset Impairment Charges			102
Other Income, Net			102
Income and Mining Taxes			102
Minority Interest			103
Nickel Unit Cash Cost of Sales			103
Energy Costs and Relative Advantages			104
Intermediates Segment			104
Development Projects Segment			105
2004 Compared with 2003			106
Earnings Summary			106
Nickel Production			106
Copper Production			106
Net Sales			106
Cost of Sale and Other Expenses			107
Selling, General and Administrative			107
Currency Translation Adjustments			107
Interest Expense			107
Asset Impairment Charges			107
Other Income, Net			107
Income and Mining Taxes			108
Minority Interest			108
Nickel Unit Cash Cost of Sales			108
Energy Costs and Relative Advantages			108
Intermediates Segment			108
Cash Flows, Liquidity and Capital Resources			110
2005 Compared with 2004			110
Operating Activities			110
Investing Activities			111
Financing Activities			111
Reinstatement of Common Shares Dividend			113
2004 Compared with 2003			113
Operating Activities			113
Investing Activities			114
Financing Activities			114
Off-Balance Sheet Arrangements and Aggregate Contractual Obligations			114
Contractual Obligations			114
Contingencies and Guarantees			115
Derivative Instrument Positions			116
Other Off-Balance Sheet Arrangements			119
Risks and Uncertainties			119
Market Risk			119
Metals and Commodities Risk			121
Foreign Exchange Risk			122
Interest Rate Risk			123
Counterparty Risk			123
Environment Risk			123
Other Risks and Uncertainties			127
PT Inco			127
Risks Associated with, and Importance of, Future Low-Cost Nickel Projects			127

Uncertainty of Production and Capital and Other Cost Estimates			128
Goro			128
Operations			129
Construction Risks and Technological Risks			129
Governmental Regulations			130
Capital Requirements and Operating Risks			130
Labour Relations			131
Uncertainty of Ore/Mineral Reserve Estimates			131
The Falconbridge Transaction			132
Sensitivities			132
Critical Accounting Policies and Estimates			134
Depreciation and Depletion			134
Impairment			135
Asset Retirement Obligations			135
Future Employee Benefits and Costs			136
Income and Mining Taxes			137
Accounting Changes			137
Outlook			138
Nickel Market Conditions			138
Operations			138
2006 Planned Capital Expenditures			139
Pending Acquisition of Falconbridge			139
Non-GAAP Financial Measure			139
Other Information			140
Item 7A. Quantitative and Qualitative Disclosures About Market Risk			141
Item 8. Financial Statements and Supplementary Data			142
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure			187
Item 9A. Controls and Procedures			187
Item 9B. Other Information			187
Item 10. Directors and Executive Officers of Inco Limited			188
Directors			188
Executive Officers			188
Code of Ethics			189
Item 11. Executive Compensation			189
Item 12. Security Ownership of Certain Beneficial Owners and Management			189
Security Ownership of Certain Beneficial Owners and Management			189
Changes in Control			189
Item 13. Certain Relationships and Related Transactions			190
Item 14. Principal Accountant Fees and Services			190
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K			191
Signatures			194
Consent of Independent Auditors			196

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, Voisey’s Bay in Newfoundland and Labrador, 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. In addition, we have a 65 per cent equity interest in Jinco Nonferrous Metals Co., Ltd., a company that produces nickel salts in Kunshan City, People’s Republic of China (“China”). We also have joint venture operations in China, through Inco Advanced Technology Materials (Dalian) Co., Ltd. (“Dalian”), in which we have a total direct and indirect equity interest of 81.6 per cent, and Inco Advanced Technology Materials (Shenyang) Co., Ltd. (“Shenyang”), in which we have a total direct and indirect equity interest of 82 per cent. In March 2005, Shenyang acquired substantially all of the assets which represented the nickel foam business of Shenyang Golden Champower New Materials Corp., a leading Chinese producer of nickel foam. These two ventures in China produce nickel foam products for the Asian battery market. We also have a shearing and packaging operation in China for certain nickel products to meet the specific needs of this geographic market.

     The first nickel concentrates were produced in September 2005 at our wholly-owned Voisey’s Bay nickel-copper-cobalt project in the Province of Newfoundland and Labrador, Canada. The first shipments of nickel concentrates from the Voisey’s Bay project were made to Inco’s operations in Sudbury, Ontario and Thompson, Manitoba in November 2005 and the first production of finished nickel from these concentrates occurred in January 2006. In October 2005, Inco’s demonstration plant, part of the initial phase of this project, was completed and began operations at Argentia in the Province of Newfoundland and Labrador. This facility is being used to test proprietary hydrometallurgical processing technologies to treat Voisey’s Bay nickel concentrates as part of our research and development program covering those processes, a program which is scheduled to run until late 2007. For further information on the Voisey’s Bay project and related matters, see “Voisey’s Bay Nickel Company Limited” below.

     Inco is also currently developing another major new “greenfield” project, the Goro nickel-cobalt project in the French overseas territorial community (collectivité territoriale) of New Caledonia (“New Caledonia”). We currently hold a 71 per cent interest in the project company, Goro Nickel S.A.S. (“Goro Nickel”), following the capitalization of certain shareholder advances in late February 2005, the sale of shares representing a 21 per cent interest in Goro Nickel to a joint venture between Sumitomo Metal Mining Co., Ltd. and Mitsui & Co., Ltd. of Japan on April 8, 2005 and, taking into account the additional capital contribution we have made to Goro Nickel as a result of the election by Société de Participation Minière du Sud Calédonien SAS (“SPMSC”), a company formed by the three provinces of New Caledonia which acquired an initial 10 per cent interest in Goro Nickel in February 2005, not to make certain pro-rata capital contributions to the project since it became a shareholder in Goro Nickel in February 2005. Having announced our decision to proceed with the project in October 2004 after the completion of our comprehensive review of the project, we have moved the project forward on a phased approach, with the first phase focusing on engineering, contract development and permitting. Engineering was about 70 per cent complete as of year-end 2005 and approximately 900 construction personnel were on site, initially focusing on earthworks for the process plant, the residue storage facility and road realignment. We are also building some 400 process plant modules and pre-finished units for the process plant in the Philippines which are expected to be delivered to the Goro site beginning in April 2006. We expect to have a definitive capital cost estimate by the second quarter of 2006 when engineering is

expected to be at least 80 per cent complete and all major contracts are expected to have been awarded. The expected initial start-up of the project remains in late 2007. For further information on the Goro project and related matters, see “Goro Nickel S.A.S.” below.

     On October 11, 2005, Inco and Falconbridge Limited (“Falconbridge”) announced that their respective Boards of Directors had approved the acquisition by Inco of all of the outstanding common shares of Falconbridge by way of a friendly take-over bid. The combined organization which would be created by the pending transaction would be one of the world’s premier mining and metals companies in both nickel and copper, with one of the mining industry’s most attractive portfolios of low-cost, profitable growth projects. Our offer, which was mailed to Falconbridge common shareholders on October 24, 2005 (the “Offer”), is conditional upon at least 66 2/3 per cent of the common shares of Falconbridge being tendered, the receipt of all necessary regulatory clearances and certain other conditions. The Offer was initially open for acceptance until December 23, 2005 but has been extended on three occasions in order to provide additional time to obtain the required regulatory clearances. It is currently open for acceptance by Falconbridge common shareholders until June 30, 2006. We currently expect to take up and pay for the Falconbridge common shares tendered to the Offer prior to this date or shortly thereafter. For further information on this transaction, see “Proposed Acquisition of Falconbridge 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, 2005 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, 2005, 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 100 F Street, N.E., 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 or any other website does not form part of this Report. All such references to websites are inactive textual references only.

     Cautionary Statement Regarding Forward-Looking Statements and Forward-Looking Information

     Certain statements contained in this Report are forward-looking statements (as defined in the U.S. Securities Exchange Act of 1934) or contain forward-looking information (as defined in the Ontario Securities Act). 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, and the Company’s requirements 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 in its operations, interest and exchange rates, and our common share price; (4) the Company’s strategies and plans and level of capital expenditures and contributions thereto from third parties; (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) in which the Company and its subsidiaries (such as PT Inco) operate and the impact thereof on the Company; (10) construction, commissioning, initial start-ups, shipments and other schedules, capital costs and other aspects of the Goro and Voisey’s Bay projects and PT Inco’s latest program start-ups 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) receipt of funds under 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 project and the additional phases of the Voisey’s Bay project; (12) the Company’s estimates of the quantity and quality of its ore/mineral reserves and mineral resources, exploration and drilling schedules and the timing of completion of feasibility assessments of the Company’s reserves; (13) planned capital expenditures and tax payments; (14) the Company’s costs of production, deliveries of products, and production levels for 2006 and beyond, 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; (24) third party tolling, smelting and refining arrangements; and (25) factors relating to the Offer made by the Company to the common shareholders of Falconbridge to purchase all of the outstanding common shares of Falconbridge and the results expected to be achieved from the successful completion of the Offer and the combination of the Company and Falconbridge, including the timing and conditions to receipt of required regulatory clearances, the synergies and cost savings expected to be achieved and the timing thereof; the increased market capitalization, share price multiple and improved liquidity of the Company’s shares; the improved cash flow and earnings of the Company; statements regarding strategies, objectives, goals and targets; and the financial position and international presence that would permit the combined company to better compete against global mining companies. Inherent in forward-looking statements and forward-looking information are risks and uncertainties that are 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 and forward-looking information contained in this Report.

     Such forward-looking statements and forward-looking information are based on a number of assumptions which may prove to be incorrect, including, but not limited to, assumptions about: business and economic conditions generally; exchange rates, availability and cost of energy and other anticipated and unanticipated costs and pension contributions and expenses; the supply and demand for, deliveries of, and the level and volatility of prices of, nickel, copper, cobalt, aluminum, zinc and 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; the timing and quantities of available Voisey’s Bay intermediate nickel and copper concentrates and the feasibility and timing of the development of the hydrometallurgical process at Voisey’s Bay; the timing of the receipt of remaining regulatory and governmental approvals for the Goro project and other operations; the continued availability of financing on appropriate terms, including through partner or other participation arrangements in the case of the Goro project, for the Company’s development projects; the Company’s costs of production and production and productivity levels, as well as those of the Company’s competitors; our ability to continue to pay quarterly cash dividends in amounts as our Board of Directors may determine in light of other uses for such funds; metal recovery rates and ore recovery and dilution factors; engineering and construction timetables and capital and operating costs for the Goro and Voisey’s Bay projects and PT Inco’s latest expansion program; market competition; mining, processing, exploration and research and development activities and methods; the accuracy of ore/mineral reserve and mineral resource estimates; premiums realized over LME cash and other benchmark prices; tax benefits/charges; the resolution of environmental reviews and environmental and other proceedings and the impact on the Company of various environmental regulations and initiatives; the ability to obtain or renew permits, licences, leases and concessions; assumptions concerning political and economic stability and expectations of inflation in Indonesia and other countries or locations in which the Company operates or otherwise; and the Company’s ongoing relations with its employees at its operations throughout the world. In addition to the foregoing, forward-looking statements and forward-looking information relating to the Offer, its completion and the consequences thereof are based on a number of assumptions which may prove to be incorrect, including, but not limited to, assumptions respecting Falconbridge and its operations and plans, the ability of the Company to successfully compete against global metals and mining and exploration companies by creating through the combination of the Company and Falconbridge an enterprise of increased scale; continued strong demand for nickel, copper and other metals in emerging markets such as China; the level of pre-tax operating and other synergies and cost savings, and other benefits to be realized based on the achievement of operational efficiencies from restructuring, integration and other initiatives relating to the combination; the approvals or clearances required to be obtained by the Company and Falconbridge from regulatory and other agencies and bodies being obtained in a timely manner; divestitures required by regulatory agencies being acceptable and completed in a timely manner; there being limited costs, difficulties or delays relating to the integration of Falconbridge’s operations with those of the Company; and the timely completion of the steps required to be taken for the eventual combination and integration of the two companies.

     The forward-looking statements and forward-looking information 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 and forward-looking information. These forward-looking statements and forward-looking information should not be relied upon as representing the Company’s views as of any date subsequent to the date of this Report. Although the Company has attempted to identify important factors or assumptions that could cause actual actions, events or results to differ materially from those described in forward-looking statements and forward-looking information, there may be other factors that cause actions, events or results not to be as anticipated, estimated or intended. There can be no assurance that forward-looking statements and forward-looking information will prove to be accurate, as actual results and future events could differ materially from those anticipated in such statements. Accordingly, readers of this Report should not place undue reliance on forward-looking statements and forward-looking information. These factors are not intended to represent a complete list of the factors that could affect the Company. Additional factors are noted elsewhere in this Report.

     Material Assumptions

     A number of assumptions were made by Inco in connection with certain forward-looking statements and forward-looking information for 2006 and beyond included in this Report and in connection with our pending acquisition of Falconbridge. These assumptions include estimates on the U.S. dollar-Canadian dollar exchange rate for 2006, global industrial production and in key geographic markets, interest rates, global nickel and other metals demand and supply and in key geographical markets, growth in the key end-use markets for the metals produced by the Company, that we would not have any labour, equipment or other disruptions at any of our operations of any significance in 2006 other than any planned maintenance or similar shutdowns and that any third parties which we are relying on to supply purchased intermediates or provide toll smelting or other processing do not experience any unplanned disruptions. Some of the material assumptions made by us involve confidential or particularly sensitive information and, accordingly, we do not believe it is appropriate to disclose such assumptions for competitive or other business reasons. Forward-looking statements and forward-looking information for time periods subsequent to 2006 involve longer term assumptions and estimates than forward-looking statements and forward-looking information for 2006 and are consequently subject to greater uncertainty. Therefore, the reader is especially cautioned not to place undue reliance on such long-term forward-looking statements and forward-looking information.

     Description of Business

     Sales

     The following table shows Inco’s net sales to customers for the three years ended December 31, 2005:

		2005				2004				2003
		(in millions)
Primary nickel		$	3,655			$	3,503			$	2,109
Copper			463				364				171
Precious metals (1)			267				246				114
Cobalt			57				72				17
Other (2)			76				93				63
Net sales to customers		$	4,518			$	4,278			$	2,474

     (1) Excludes toll-refined materials.

     (2) Representing principally sales of sulphuric acid, liquid sulphur dioxide, miscellaneous primary metals products, reprocessed waste materials and certain price adjustments.

     Deliveries

     The following table shows deliveries of Inco’s principal primary metals and related products for the three years ended December 31, 2005:

		2005				2004				2003
Nickel, including intermediates(1) (tonnes)(2)			246,282				251,882				213,890
Copper(3) (tonnes)			120,543				124,884				93,335
Cobalt (tonnes)			1,694				1,542				903
Platinum(4) (troy ounces, in thousands)			172				183				83
Palladium(4) (troy ounces, in thousands)			220				221				101
Rhodium(4) (troy ounces, in thousands)			16				9				17
Ruthenium(4) (troy ounces, in thousands)			2				3				2
Iridium(4) (troy ounces, in thousands)			5				4				6
Gold(4) (troy ounces, in thousands)			76				80				50
Silver(4) (troy ounces, in thousands)			1,429				1,990				1,435
Sulphuric acid and liquid sulphur dioxide (tonnes)			695,000				747,000				548,000

     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 many of our finished nickel products, including certain of our nickel powders and other value-added products discussed under “Inco Special Products” below.

     Our average realized price for our primary nickel products, including intermediates and purchased products, was $14,842 per tonne ($6.73 per pound) in 2005, representing an increase of seven per cent from the average price of $13,906 per tonne ($6.31 per pound) in 2004 and an all-time record average realized nickel price for Inco. The 2004 average realized price was 41 per cent higher than the average price of $9,860 per tonne ($4.47 per pound) in 2003.

     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 49 per cent in 2005, compared with 47 per cent in 2004 and 44 per cent in 2003. 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, 19 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, 2005, including by quarter for 2005, are shown in the following table:

Year		Nickel
		($ per tonne)				($ per pound)
2001			6,468				2.93
2002			7,143				3.24
2003			9,860				4.47
2004			13,906				6.31
2005
First Quarter			15,312				6.95
Second Quarter			16,578				7.52
Third Quarter			14,857				6.74
Fourth Quarter			12,780				5.80
Year			14,842				6.73

Copper

     Inco’s average realized price for copper was $3,839 per tonne ($1.74 per pound) in 2005, representing an increase of 32 per cent from the average realized price of $2,916 per tonne ($1.32 per pound) in 2004. The 2004 average realized price was 59 per cent higher than the average realized price of $1,832 per tonne ($0.83 per pound) in 2003.

     The average prices, per tonne and per pound, realized by us for copper, including purchased products, for the five years ended December 31, 2005, including by quarter for 2005, are shown in the following table:

Year		Copper
		($ per tonne)				($ per pound)
2001			1,668				0.76
2002			1,629				0.74
2003			1,832				0.83
2004			2,916				1.32
2005
First Quarter			3,365				1.53
Second Quarter			3,427				1.56
Third Quarter			3,921				1.78
Fourth Quarter			4,528				2.05
Year			3,839				1.74

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, 2005 are shown in the following table:

Year		Cobalt				Platinum				Palladium				Rhodium				Gold				Silver
		($ per tonne)								($ per troy ounce)
2001			23,216				541.27				711.32				1,475.85				270.50				4.40
2002			15,124				545.92				419.70				804.59				309.17				4.58
2003			18,846				588.96				297.36				530.66				367.72				4.86
2004			46,442				762.73				225.56				1,166.85				398.68				6.73
2005			32,828				841.27				209.46				2,055.55				423.21				7.06

     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, 19 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 2005 were concentrated in the United States, Europe, Japan, other countries in Asia, and Canada, with sales of nickel to customers in Asia representing about 60 per cent of its total nickel sales revenues for 2005. 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 2005, 2004 or 2003.

     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, 2005 are shown in the following table:

		Inco’s Finished
Year-end		Nickel
		(in tonnes)
2001			26,517
2002			23,126
2003			25,604
2004			27,334
2005			23,444

     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. 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 cost measure captures our key costs of production and the effect of prices for our by-products, nickel unit cash cost of sales after by-product credits 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 $6,702 per tonne ($3.04 per pound) in 2005 from $5,732 per tonne ($2.60 per pound) in 2004. For 2005, the increase in nickel unit cash cost of sales before by-product credits was principally due to (i) the higher average Canadian — U.S. dollar exchange rate which adversely affected our costs incurred in Canadian dollars, (ii) higher costs for heavy fuel oil and diesel fuel at PT Inco, (iii) higher electricity and natural gas prices at our Ontario operations, (iv) higher spending on supplies and services, and (v) lower nickel production, partially offset by approximately $40 million of net cost reductions and related savings achieved in 2005. In addition, we experienced lower costs for purchased intermediates due to lower volumes processed at our Canadian operations in 2005 partially offset by higher benchmark prices upon which such purchases are made. In 2004, nickel unit cash cost of sales before by-

product credits of $5,732 per tonne ($2.60 per pound) increased from $4,453 per tonne ($2.02 per pound) in 2003. For 2004, the increase in nickel unit cash cost of sales before by-product credits was principally due to (i) the higher cost for, and volumes of, purchased nickel intermediates, (ii) the higher average Canadian dollar-U.S. dollar exchange rate compared with 2003, (iii) higher costs for heavy oil at PT Inco, (iv) higher spending on supplies and services primarily as a result of increased production rates, and (v) 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 a strike at our Ontario operations, and the cost reductions and related savings as discussed below.

     Nickel unit cash cost of sales after by-product credits increased to $5,842 per tonne ($2.65 per pound) in 2005 from $5,115 per tonne ($2.32 per pound) in 2004. For 2005, the increase in nickel unit cash cost of sales after by-product credits was due to higher unit cash cost of sales before by-product credits, partially offset by an increase in by-product credits. The increase in by-product credits was primarily due to higher realized prices for copper and certain PGMs partially offset by higher production costs for copper and lower deliveries of certain PGMs. In 2004, nickel unit cash cost of sales after by-product credits of $5,115 per tonne ($2.32 per pound) increased from $4,740 per tonne ($2.15 per pound) in 2003. For 2004, the increase in nickel unit cash cost of sales after by-product credits 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.

     We have used, and expect to continue to use, at least in 2006, purchased nickel intermediates to increase processing capacity utilization at our Ontario and Manitoba 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 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 for the periods indicated 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 2005, Inco realized net cost reductions and related savings of $40 million, which was below our target of $60 million for the year. In 2004, we realized cost reductions and related savings of $59 million.

     Inco’s nickel unit cash cost of sales, both before and after by-product credits, for the five years ended December 31, 2005 are shown in the following table:

		Nickel Unit Cash				Nickel Unit Cash
		Cost of Sales				Cost of Sales
		Before By-				After By-
Year		Product Credits				Product Credits
		($ per pound)
2001			1.56				1.35
2002			1.58				1.45
2003			2.02				2.15
2004			2.60				2.32
2005			3.04				2.65

     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 7.2 per cent relative to the U.S. dollar in 2005. In 2004, the Canadian dollar increased by 7.5 per cent relative to the U.S. dollar. At December 31, 2005, the value of the Canadian dollar relative to the U.S. dollar was $0.858, compared with $0.831 at December 31, 2004 and $0.774 at December 31, 2003, and was $0.861 at March 13, 2006. At December 31, 2005, we had outstanding forward currency contracts to purchase Cdn.$21 million at an average exchange rate of $0.845 during 2006. The purpose of these contracts is to eliminate the risk of exchange rate movements on a portion of the future construction costs of certain capital projects at our Ontario operations. For further information on these contracts and a discussion of the sensitivity of foreign currency exchange rates on the Company’s earnings, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under Item 7 of this Report.

     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, Manitoba and Newfoundland and Labrador, 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 the fourth quarter of 2005, production of nickel and copper concentrates at the initial phase, representing an open-pit mine and concentrator and related facilities, of our Voisey’s Bay project, operated by our wholly-owned subsidiary, Voisey’s Bay Nickel Company Limited (“VBNC”), started and, accordingly, the assets relating to the initial phase of this project were reclassified from the development projects segment to the finished products segment. Voisey’s Bay produces nickel concentrates for processing by our Ontario and Manitoba operations, as well as copper concentrate for sale to third parties.

     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 18 to the financial statements under Item 8 of this Report.

     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 79 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 49 per cent of the total nickel used for austenitic stainless steels, with primary nickel accounting for between 51 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 nickel products in certain shapes or cut to certain sizes for the plating industry).

     The largest 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 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 60 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 primarily in industrial process plants, marine engineering applications, coinage, electronics, and gas turbine engine components, as well as in other diverse products, account for approximately 10 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 79 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 21 per cent of annual global primary nickel demand, and includes electroplating (representing about 11 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, lithium ion batteries, welding electrodes, metal sprays and specialized parts made by powder metallurgy.

     As indicated above, primary nickel used in stainless and low-alloy steel sectors accounts for approximately 65 per cent of annual global primary nickel demand. In choosing to use 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 decision of using primary or secondary nickel 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 has continued the nickel use-related technical work of NiDI, but has focused more on nickel issues related to stewardship and sustainable development, including the generation and use of knowledge about the full life cycle effects 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 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 that year. Favourable 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 with world primary nickel production increasing 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 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 demand in this use 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 20.8 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 involving 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. The growth in nickel demand in 2003 was concentrated in the stainless steel sector. 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. 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, resulting in effectively no production from these operations for this period where they 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 tonnes used as 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. The LME cash nickel price averaged $9,860 per tonne ($4.47 per pound) in 2003. At the end of 2003, the LME cash nickel price was $16,650 per tonne ($7.55 per pound), an increase of 135 per cent compared with $7,100 per tonne ($3.22 per pound) at the end of 2002.

     The year 2004 was one characterized by high nickel prices, which we believe were due principally to broad-based growth in global demand for nickel. The increase in demand was attributed to a recovery in non-stainless steel applications for nickel. Primary nickel demand in stainless steel applications experienced virtually no growth in 2004, despite strong global stainless steel production growth, due to a large increase in nickel-containing scrap consumption and substitution for nickel in certain stainless steel applications. The increase in nickel demand was driven by the strongest global industrial production growth in 10 years, led by continued economic growth in China, as well as economic growth in South Korea, Taiwan and Japan. The economies of the United States and Europe also exhibited growth above the levels seen in the recent 2000-2003 period. The global nickel market was in deficit for 2004 as the level of demand exceeded the level of supply. We believe that relatively low physical inventories, high prices and the active trading in nickel by investment, hedge or similar funds which purchase and sell or otherwise trade in metals for profit (“Metals Trading Funds”) contributed to volatile price conditions in 2004.

     The growth in primary nickel demand in 2004 was concentrated in the non-stainless steel sector, which increased by seven per cent, as demand for nickel for the production of high nickel alloys improved as the recovery of the aerospace industry continued. World production of stainless steel increased by eight per cent to approximately 24.6 million tonnes. Stainless steel production expanded in all major industrialized geographic regions and was particularly strong in South Korea where new production facilities operated at capacity during the year. However, primary nickel demand growth in the stainless steel sector was adversely affected by a

large increase in 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 nickel) and grades containing no nickel compared with higher nickel containing stainless steel grades (eight to 10 per cent nickel).

     World supply of primary nickel in 2004 was lower than world nickel supply in 2003, although production of primary nickel increased by four per cent in 2004, due to the relatively large stockpile releases in 2003. World primary nickel production in 2004 totalled 1,255,000 tonnes, an increase of 51,000 tonnes, of which approximately 50 per cent was the result of our recovery from our strike-impacted levels experienced in 2003. However, world primary nickel supply of 1,255,000 tonnes decreased from 1,264,000 tonnes in 2003, taking into account the release into the market in 2003 of 60,000 tonnes initially pledged by one producer as collateral for a loan.

     The growth in nickel demand during 2004, coupled with the overall decline in supply for 2004, created a deficit between supply and demand of approximately 7,000 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.

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

     The year 2005 represented a year of two very distinct periods for the nickel industry. We believe that the first half of the year reflected relatively strong demand for nickel, relatively tight supplies of nickel, nickel buying activity from Metals Trading Funds, falling LME nickel inventories and relatively strong nickel prices. However, by the start of the third quarter a significant negative shift began in the supply-demand fundamentals of the nickel market, as we believe demand weakened, Metals Trading Funds sold the nickel positions they had acquired, LME inventories increased and prices fell. The significant deterioration in market conditions was, we believe, the result of a large reduction in global stainless steel production in the second half of the year, as discussed below. For 2005 as a whole, nickel demand grew by less than one per cent from 2004 levels. The non-stainless steel uses for nickel, in particular for high nickel alloys, plating and battery materials, were the only end uses for primary nickel to experience demand growth in 2005. Primary nickel demand in stainless steel applications experienced a sharp contraction in 2005, with global stainless steel production falling by one per cent in 2005 from 2004 levels, and primary nickel demand for this application declining by about six per cent compared with 2004. Demand was also negatively affected in this key application by substitution of other metals or other materials for nickel in certain stainless steel applications and a higher relative usage of secondary, or scrap, nickel.

     We believe that relatively low inventories of nickel, high prices and the active trading of Metals Trading Funds, factors which were also prevalent and, accordingly, affected the nickel markets in 2004, contributed to the continued volatile price conditions experienced in 2005. The difference between the high and low daily LME cash nickel prices for 2005 was $6,250 per tonne ($2.83 per pound). We estimate that the global nickel market was in a slight surplus for 2005 as the level of demand was more than covered by the level of supply. However, we believe that the level of demand was restrained by the relatively high nickel prices in at least the first half of 2005, and that demand would have been significantly stronger had prices been closer to historic averages.

     The modest growth in primary nickel demand in 2005 was, as noted above, due to the strength in non-stainless steel uses for nickel, as demand from the stainless steel sector, the largest end use of primary nickel, was adversely affected by several factors as discussed below. Nickel demand growth for non-stainless steel uses increased by eight per cent in 2005, as demand for nickel for the production of high nickel alloys improved as a result of the continued strength in demand for high nickel alloys used in the aerospace industry and for land-based gas turbines, as well as growth in the oil and gas, liquid natural gas and battery applications for nickel. Nickel demand from battery applications improved in 2005, in part due to the increased production of hybrid electric vehicles.

     World production of stainless steel increased by approximately seven per cent during the first half of 2005, consistent with the relatively strong production growth rates seen in this area for 2003 and 2004. This growth was due, in part, to increased capacity utilization at several large-scale stainless steel manufacturing facilities, as well as new production capacity coming on stream, particularly in China. The strong stainless steel production growth in the first half of 2005, combined with strength in the non-stainless steel market, led to nickel demand growth of approximately six per cent in the first half of the year. However, end-use consumption of stainless steel did not keep pace with stainless steel production and global inventories increased during the first half of the year. We believe that the increase in global stainless steel inventories was a sign of an oversupplied market that, in turn, triggered sharply falling stainless steel prices beginning in July 2005. At the beginning of the third quarter of 2005, almost all major stainless steel producers had begun to reduce production levels in an effort to reduce the relatively high global inventory levels of stainless steel and, through such supply reductions, correct this oversupply situation. Most of these production cuts were maintained through the end

of 2005. We estimate that stainless steel production curtailments in the second half of the year led to an overall production decline in stainless steel production in the second half of 2005 of nine per cent compared with the second half of 2004. This sharp reduction in stainless steel production, in turn, led to a significant reduction in demand for primary nickel used in stainless steel. The global stainless steel market also used relatively high amounts of secondary or scrap nickel in 2005 compared with prior years, as well as increasing 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 stainless steels with higher nickel grades (eight to ten per cent nickel).

     The growth in the world supply of primary nickel in 2005 was adversely affected by several unexpected disruptions. While domestic production by certain producers did increase in certain countries or territories, including China, New Caledonia and Norway, these increases were largely offset by reductions in output or lower than planned increases by producers in other countries. Overall production of primary nickel increased by approximately 2.4 per cent in 2005, about half of the long-term average production growth rate of four per cent. Several producers experienced production problems as labour disruptions or shortages, feed material shortages, inclement weather, technological challenges and extended maintenance shutdowns curtailed output below originally announced planned levels for 2005. Approximately two thirds of global nickel production growth was the result of a ramp-up in Chinese nickel production, in an effort to reduce that country’s nickel import requirements. World primary nickel supply increased by 30,000 tonnes to 1,285,000 tonnes in 2005. We believe that no stockpiles of nickel were released into the market in 2005 or 2004, in contrast to what occurred in 2003.

     The slower than average growth in nickel demand for 2005, coupled with a relatively modest amount of growth in nickel supply for the year, created a surplus for the year that we estimate to have been approximately 15,000 tonnes. However, as discussed above, the supply-demand relationship was in a deficit in the first half of the year and moved to a surplus in the second half of the year. Inventories of nickel on the LME decreased during the first half of 2005 to a low of 4,926 tonnes. However, the decline in demand in the second half of the year led to a steady increase in LME inventories during this period to a level of 36,042 tonnes at December 31, 2005. LME nickel inventories have decreased in the first 10 weeks of 2006, with such inventories totalling 34,266 tonnes as of March 13, 2006.

     For a discussion of the LME cash nickel price during 2005, see “Overview – Key Factors Affecting our Business – 2005 Nickel Market 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 four 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, 2005:

		World				World
		Primary Nickel				Stainless Steel
Year		Demand(1)				Production
		(in tonnes)				(in millions of tonnes)
2001			1,085,000				19.0
2002			1,168,000				20.8
2003			1,244,000				22.7
2004			1,262,000				24.6
2005(2)			1,270,000				24.3

     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, 2005:

										Year-End
		World				World				Combined Western								Average
		Primary				Primary				World Producers’				Year-End				Annual LME
		Nickel				Nickel				and				LME				Cash Nickel
Year		Demand				Supply				LME Inventories(2)				Inventories				Prices
						(in tonnes)												($ per tonne)
2001			1,085,000				1,148,000				106,000				19,188			$	5,948
2002			1,168,000				1,176,000				100,000				21,972				6,772
2003			1,244,000				1,264,000				104,000				24,072				9,640
2004			1,262,000				1,255,000				111,000				20,898				13,852
2005			1,270,000	(1)			1,285,000	(1)			127,000	(1)			36,042				14,733

     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 five 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, BHP Billiton plc (“BHP Billiton”), Falconbridge and Jinchuan Nonferrous Metals Corporation (“Jinchuan”). Inco estimates that these five producers accounted for about 62 per cent of the total world primary nickel production in 2005. In addition to these five 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 five largest producers are located in several countries. Norilsk has operations in Russia. 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. BHP Billiton has operations in

Australia and Colombia; Falconbridge has operations in Canada, Norway and the Dominican Republic; and Jinchuan has operations in China.

     Norilsk has integrated facilities at Norilsk in Siberia and at Pechenga and Severonickel on the Kola Peninsula of Russia. For 2005, Norilsk reported production of approximately 243,000 tonnes of nickel from all of its facilities, compared with 243,000 tonnes in 2004 and 239,000 tonnes in 2003. Nickel exports from Russia were 262,000 tonnes in 2005, compared with 251,000 tonnes in 2004 and 238,000 tonnes in 2003.

          Inco’s Position in the Nickel Industry

     Inco is a leading producer of nickel. Our nickel deliveries in 2005 represented an estimated 19 per cent of the total world demand for primary nickel, compared with 20 per cent in 2004 and 17 per cent in 2003.

     Our total deliveries of nickel in 2005 were 246,282 tonnes, representing a decrease of two per cent from total deliveries of 251,882 tonnes in 2004. Deliveries of Inco-source nickel were 223,811 tonnes in 2005, representing a decrease of five per cent from deliveries of 235,185 tonnes in 2004, primarily due to decreased production at our Ontario and Manitoba operations in 2005 as a result of scheduled major maintenance shutdowns and slower than planned ramp-ups after such shutdowns, as discussed below. In 2004, our deliveries of Inco-source nickel represented an increase of 28 per cent from deliveries of 184,110 tonnes in 2003. This increase was primarily due to increased production at our Canadian and U.K. operations as well as at PT Inco.

     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 2005, we continued to supply our customers worldwide from our operations in Canada, the United Kingdom and Asia. In 2005, reflecting our global market presence, 27 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 39 per cent to customers in other countries, primarily in Asia, compared with 25 per cent 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, in 2004. In 2005, sales to customers in Asia, including Japan, represented 60 per cent of our total nickel deliveries for the year, compared with 62 per cent in 2004.

     We have 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, 2005, 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:

																		LME				LME				Inco
										Inco				Inco				Average				Average				Average
										Deliveries of				Share of				Cash				3-Month				Realized
		World Primary				Total Inco				Purchased				World				Nickel				Nickel				Nickel
Year		Nickel Demand				Deliveries(1)				Nickel				Demand				Price				Price				Price(1)
						(in tonnes)								(%)								($ per tonne)
2001			1,085,000				230,049				22,978				21				5,948				5,877				6,468
2002			1,168,000				231,590				19,343				20				6,772				6,755				7,143
2003			1,244,000				213,890				29,780				17				9,640				9,610				9,860
2004			1,262,000				251,882				16,697				20				13,852				13,765				13,906
2005			1,270,000	(2)			246,282				22,471				19	(2)			14,733				14,551				14,842

          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. These products, most of which are developed at our research laboratory at Mississauga, Ontario, are manufactured at our refineries in Sudbury, Ontario and Clydach, Wales, using our proprietary gas decomposition technology, and at Novamet³ Specialty Products Corporation, a wholly-owned subsidiary of Inco Limited located in Wyckoff, New Jersey, and our Dalian and Shenyang joint ventures in China. Inco Special Products expects to continue to work closely with customers to develop advanced nickel products to meet their needs. Accounting for approximately nine per cent of Inco’s nickel sales revenue in 2005, compared with eight per cent in 2004 and nine per cent in 2003, 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 2005, our finished copper production, including anodes production, was 125,595 tonnes, representing an increase of one per cent from 124,456 tonnes in 2004. In addition, production of copper in concentrates from our Voisey’s Bay operations was 4,406 tonnes in 2005. In 2004, copper production increased by 37 per cent from 91,134 tonnes in 2003, reflecting a return to normal production levels following a three-month strike and ramp-up problems associated with the restart of operations after the strike at our Ontario operations in 2003.

     In May 2005, our Ontario operations announced that it would be closing its copper refinery in Sudbury as a result of a number of factors, including the size of the refinery and its cost structure relative to the leading copper refineries in the world. The closure of this facility resulted in an after-tax asset impairment charge of $14 million in the second quarter. In late June 2005, we announced that we had entered into a long-term agreement with Noranda Inc. (now Falconbridge, following the combination of Noranda Inc. and the company then known as Falconbridge at the end of June 2005) under which Inco agreed to sell all of its copper production from its Ontario operations in anode form to Falconbridge. This agreement, which covers a period of 10 years beginning January 1, 2006 and is subject to extension, also provides for the recovery by Falconbridge at its Montreal, Quebec copper refinery of all other metals in the copper anodes, with Inco receiving back the nickel and PGMs recovered from the anodes subject to certain treatment charges and Falconbridge purchasing and paying Inco for all of the gold and silver recovered. It is currently estimated that between approximately 104,000 and 126,000 tonnes annually of contained copper in anode form will be purchased and processed by Falconbridge under this agreement. The actual volume of copper in anode form to be purchased and processed by Falconbridge under the agreement will depend upon a number of factors, including the timing of certain capital expenditures and related changes to Falconbridge’s Montreal-based copper refinery to enhance the recovery of nickel and certain of the other metals contained in the anodes.

     Copper accounted for $463 million, or 10 per cent, of our net sales to customers in 2005, compared with $364 million, or nine per cent, in 2004.

     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 16.3 million tonnes in 2005, compared with 15.8 million tonnes in 2004 and 15.2 million tonnes in 2003.

     Like nickel prices, copper prices have been in recent years, and are expected to continue to be, subject to significant price volatility. In 2004, strong economic growth in Asia, in particular China, 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 Division of the New York Mercantile Exchange and the LME had declined from year-end 2003 levels by over 86 per cent to 97,100 tonnes in total. The LME cash copper price averaged $2,868 per tonne ($1.30 per pound) in 2004, a 61 per cent increase over the average price of $1,780 per tonne ($0.81 per pound) in 2003. In 2005, continued economic growth in Asia, combined with a number of supply disruptions at various copper mining and refining operations, resulted in a tightly balanced market for copper. Inventory of reported copper stocks on the COMEX and the LME at year-end were 98,407 tonnes, basically unchanged from year-end 2004. The LME cash copper price averaged $3,684 per tonne ($1.67 per pound) in 2005, representing a 28 per cent increase from the average price in 2004. For the fourth quarter of 2005, the LME cash

copper price averaged $4,297 per tonne ($1.95 per pound), compared with a third quarter 2005 average of $3,759 per tonne ($1.70 per pound). For the month of December 2005, the LME cash copper price averaged $4,577 per tonne ($2.08 per pound). The LME cash copper price reached a new record of $5,145 per tonne ($2.33 per pound) on February 7, 2006 and has remained above $4,405 per tonne ($2.00 per pound) through to mid-March 2006. The LME cash copper price was $4,946 ($2.24 per pound) on March 13, 2006.

     Other Primary Metals and Related Products

     Other primary metals and related products accounted for nine per cent of our total net sales to customers in 2005, compared with 10 per cent in 2004 and eight per cent in 2003. These products include cobalt, platinum-group metals or PGMs (platinum, palladium, rhodium, ruthenium and iridium) (“PGMs”), gold, silver, sulphuric acid, liquid sulphur dioxide and some modest quantities of selenium and tellurium. For 2005, based upon production principally from our Ontario ores, we accounted for approximately three per cent of the world’s supply of PGMs. PGMs are utilized primarily for catalysts, electronic components and jewellery. In addition to refining our own ores to obtain PGMs, we process substantial volumes of spent automotive catalytic converters and other material containing these metals at our Sudbury, Ontario and Acton, England refineries. In 2005, such other material, which was principally toll-refined, accounted for about 64 per cent of all PGMs refined by us, compared with 64 per cent in 2004 and 76 per cent in 2003. 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 PGMs accounted for approximately five per cent of our net sales to customers in 2005, compared with five per cent in 2004 and four per cent in 2003.

     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 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 22 per cent of world cobalt consumption, was strong in 2005, returning to the levels of demand that existed prior to September 11, 2001. The total demand for cobalt also increased in 2005 as a result of the growth of applications for cobalt in the battery and catalyst market sectors. The supply and demand fundamentals for the cobalt market were, we believe, in balance during 2005. No significant new supply came onto the market from the traditional copper- and nickel-based sources; however, additional supplies came from the Democratic Republic of Congo. The Metal Bulletin 99.8 average cobalt reference price, the most commonly used benchmark price for the pricing of high grade cobalt, averaged $34,863 per tonne ($15.81 per pound) for 2005, compared with $53,177 per tonne ($24.12 per pound) in 2004 and $23,951 per tonne ($10.86 per pound) in 2003, while the Metal Bulletin 99.3 average cobalt reference price, the most commonly used benchmark price for the pricing of lower grade cobalt, averaged $32,084 per tonne ($14.55 per pound) for the year, compared with $50,215 per tonne ($22.78 per pound) in 2004 and $21,564 per tonne ($9.78 per pound) in 2003. On March 10, 2006, the Metal Bulletin 99.8 and 99.3 average cobalt reference prices were $30,049 per tonne ($13.63 per pound) and $27,514 per tonne ($12.48 per pound), respectively.

     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 $32,828 per tonne ($14.89 per pound) in 2005, compared with $46,442 per tonne ($21.07 per pound) in 2004 and $18,846 per tonne ($8.55 per pound) in 2003. 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 that are present in the mineral deposits to be mined as part of these projects. We currently estimate that we will produce about 1,100 tonnes of cobalt from Voisey’s Bay nickel concentrates in 2006. 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 were 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 626,000 tonnes of sulphuric acid and liquid sulphur dioxide in 2005, compared with in 676,000 tonnes in 2004 and 473,805 tonnes in 2003. Most of our sulphuric acid production and all of our liquid sulphur dioxide production are sold to Chemtrade Logistics Income Fund, 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. We and a number of other nickel producers continued in 2005 to experience 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 estimated 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 approximately 70 per cent of the world’s estimated 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 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 Ontario operations and at the Voisey’s Bay project and certain sulphide orebodies with generally declining ore grades at our 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 precious metals from our Ontario ores and significant quantities of copper and cobalt from our Ontario ores and, beginning in 2006, from our Voisey’s Bay 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 generally 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. Energy requirements for production from our Canadian sulphide ores are generally 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 2005, our hydroelectric facilities in Ontario generated approximately 14 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 2005 electricity requirements. The Balambano facility continued 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 2005, energy costs at our Ontario and Manitoba operations were approximately 14 per cent of their total cash production costs, compared with 43 per cent for PT Inco. The availability of captive hydroelectric power decreased cash energy costs at PT Inco by about 47 per cent in 2005, 53 per cent in 2004 and 51 per cent in 2003 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 2005, our Ontario ores accounted for approximately 92 per cent of our copper production, 90 per cent of our by-product PGMs production and 57 per cent of our by-product cobalt production, with one per cent of our copper production, five per cent of our by-product platinum-group metals production and 19 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.

     Inco’s nickel production decreased by seven per cent to 220,727 tonnes in 2005, compared with 236,817 tonnes in 2004, the year in which we experienced the highest annual production in our history. The decrease in nickel production was primarily due to a longer than planned major maintenance shutdown at our Ontario operations and a slower ramp-up after that shutdown caused, in turn, by a number of factors. These factors included labour productivity problems involving one contractor on the work undertaken during the shutdown, an increase in the scope of certain work undertaken as a result of the shutdown, the need to repair unanticipated leaks relating to the expansion of the acid plant at these operations and a fire in one of the dust capture bag houses. In addition, we had a longer than usual major maintenance shutdown at our Manitoba operations during the third quarter which was necessary to prepare those operations for the arrival of Voisey’s Bay nickel concentrates late in the fourth quarter of 2005 and the processing of the additional cobalt contained in such concentrates and to have the ability to operate with a single furnace. In 2004, nickel production increased by 27 per cent, compared with 187,173 tonnes in 2003, 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. Production of finished nickel from Canadian ores and purchased material processed in Canada totalled 145,036 tonnes in 2005, compared with 161,730 tonnes in 2004 and 120,479 tonnes in 2003. 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.

     Our 2006 nickel production, including material toll smelted and refined by third parties, is currently expected to be approximately 256,000 tonnes, up from the 220,727 tonnes level in 2005. The increase in production is primarily due to finished nickel products produced from our Voisey’s Bay nickel concentrates at our Canadian operations and to the toll smelting and refining arrangements covering purchased intermediates with certain third parties as noted below. We expect our purchases of nickel intermediates processed through our Canadian operations to decrease by 45 per cent from 2005 levels to approximately 15,400 tonnes in 2006. Finished copper production for 2006, including anodes production, is currently expected to be approximately 124,700 tonnes compared to 125,595 tonnes in 2005. Production of copper in concentrate at Voisey’s Bay is currently expected to be approximately 29,500 tonnes compared with 4,406 tonnes of copper in concentrate in 2005. Total production of PGMs is expected to be 400,000 troy ounces for 2006.

     Since 2002, as mine production at our Manitoba operations transitioned from Thompson Mine to the lower-grade Birchtree Mine, we have experienced lower mine production. We have relied upon the availability of purchased nickel intermediates to maintain Manitoba’s nickel production at around the 45,000 tonne annual level. With the availability of Voisey’s Bay nickel concentrates for processing at our Manitoba operations, 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. In August 2005, we announced plans to develop the 1D Lower orebody at Thompson Mine. Work has commenced on the development of the 1D Lower orebody, which would increase the availability of local concentrates and, assuming the current diamond drilling program covering this orebody for lateral and deeper extensions is successful, would provide a platform for ongoing production once Voisey’s Bay concentrates are no longer supplied to Manitoba. The cost to develop the 1D Lower orebody is approximately $34 million and production is expected to begin in 2008.

     Starting in early 2006, we will be relying on our Voisey’s Bay nickel concentrates to maintain production at or near capacity at our Manitoba and Ontario operations. If our Voisey’s Bay operations experience problems in producing or shipping to Sudbury or Thompson its nickel concentrates, these events would have an adverse effect on our ability to produce and sell the nickel products we plan to produce in 2006 and would adversely affect our results of operations, financial condition, profitability and cash flows.

     We have contracts with two Australian suppliers of purchased nickel intermediates which we have been using to maintain production 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 about 53,000 tonnes of nickel in concentrate over the 2006 – 2009 period. In late 2005 and early 2006 we entered into contracts with subsidiaries of Boliden AB and OM Group, Inc. to toll smelt and refine some of these quantities of concentrates at their respective smelting and refining operations in Finland for three-year terms expiring in mid-2009. The purpose of these arrangements is to enable us to increase production from our own Canadian ores.

          Capital Expenditures

     The primary focus of Inco’s capital expenditure programs 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 totalled $1,168 million in 2005, compared with $876 million in 2004 and $591 million in 2003.

     Cash spent for the Goro project, including capitalized interest, totalled $344 million in 2005, compared with $138 million in 2004 and $249 million in 2003, and for the Voisey’s Bay project, including capitalized interest, totalled $353 million in 2005, compared with $447 million in 2004 and $138 million in 2003. 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 $230 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 2006 capital expenditures for our existing operations and development projects are currently expected to total $1,820 million and, taking into account contributions to be made by the other shareholders in Goro Nickel and receipt of certain government assistance under programs relating to our development projects, we expect our share of this total to be $1,340 million. This estimate includes approximately $1,140 million, including capitalized interest, for the Goro project, $55 million for the Voisey’s Bay project, $60 million for the program to increase production at PT Inco and approximately $80 million for mines development, approximately $120 million for environmental measures, $50 million for discretionary expenditures and approximately $315 million for sustaining capital. Total depreciation, depletion and amortization expenses for our existing operations are currently projected to be $455 million in 2006, including an estimated $175 million in respect of the Voisey’s Bay project. The total capital expenditures for the Goro project 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 Goro project, see “Goro Nickel S.A.S.” below.

          Mining and Mine Production

     At December 31, 2005, Inco had the following mines in operation in Canada:

Ontario		Manitoba		Voisey’s Bay
Copper Cliff North		Birchtree		Ovoid
Copper Cliff South		Thompson
Creighton (1)
Garson
Gertrude
McCreedy East/Coleman
Stobie

     All of the mines listed above are underground mines except for Gertrude Mine and the Ovoid which are open pit mines. 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, 2005” and “Total Estimated Ore Reserves as of December 31, 2004” under “Ore Reserves and Mining Rights” below.

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

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

Manitoba Operations
Location of Operating Mines, Non-Operating Mines and 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.

Voisey’s Bay Project (Initial Phase)
Location of Operating Mines, Concentrator and Other Facilities

     At PT Inco, mining operations were being conducted at the Sorowako and Pomalaa-Antam mining areas at December 31, 2005. For further information, see “PT International Nickel Tbk – General” below.

     The tables below set forth our annual mine production in thousands of tonnes by operating mine (or on an aggregate basis for PT Inco area 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, our Voisey’s Bay project and PT Inco for 2005, 2004 and 2003. For our Manitoba and Ontario operations and our Voisey’s Bay project, 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)

				2005				2004				2003
Ontario Operations Operating Mines
Copper Cliff North Mine		Mine production			1,261				1,085				701
		Copper (per cent)			1.32				1.07				1.16
		Nickel (per cent)			1.09				1.04				1.21
Copper Cliff South Mine		Mine production			890				838				769
		Copper (per cent)			1.84				2.45				2.50
		Nickel (per cent)			1.36				1.92				1.80
Creighton Mine		Mine production			988				968				713
		Copper (per cent)			1.62				1.48				1.53
		Nickel (per cent)			2.09				2.06				2.10
Stobie Mine		Mine production			3,018				3,005				2,222
		Copper (per cent)			0.79				0.83				0.83
		Nickel (per cent)			0.86				0.88				0.90
Garson Mine		Mine production			721				610				434
		Copper (per cent)			1.09				1.04				1.10
		Nickel (per cent)			1.67				1.74				1.87
McCreedy East/Coleman Mine		Mine production			1,401				1,210				870
		Copper (per cent)			2.78				3.05				3.57
		Nickel (per cent)			1.68				1.69				1.78
Gertrude Mine		Mine production			474				504				453
		Copper (per cent)			0.31				0.33				0.36
		Nickel (per cent)			0.80				0.95				1.01
Total Ontario Operations		Mine production			8,753				8,220				6,162
		Copper (per cent)			1.38				1.41				1.53
		Nickel (per cent)			1.28				1.33				1.39
Manitoba Operations Operating Mines
Thompson Mine		Mine production			1,323				1,377				1,393
		Nickel (per cent)			2.01				2.10				2.21
Birchtree Mine		Mine production			1,121				962				640
		Nickel (per cent)			1.54				1.64				1.83
Total Manitoba Operations		Mine production			2,444				2,339				2,033
		Nickel (per cent)			1.80				1.91				2.09
Voisey’s Bay Project		Mine production			351				–				–
		Copper (per cent)			1.78				–				–
		Nickel (per cent)			3.44				–				–

				2005				2004				2003
PT Inco Operating Mining Areas
Sorowako Mining Area		Mine production			4,689				4,350				3,891
		Nickel (per cent)			1.84				1.85				1.91
Pomalaa-Antam Mining Area		Mine production			370				–				–
		Nickel (per cent)			2.30				–				–
Total PT Inco		Mine production			5,059				4,350				3,891
		Nickel (per cent)			1.87				1.85				1.91

          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 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 2005 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, UTILITY⁴ nickel, nickel discs and Nickel Oxide Sinter 75⁵, 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.

     In May 2005, as discussed above, we announced the closure of our copper refinery in Sudbury based upon a number of factors. Given this decision, all of our copper production in Ontario will be processed into copper anodes beginning in 2006.

     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 created in 2001, facilitates the sharing of knowledge and helps to optimize the use of certain of our facilities and resources.

     The conversion of nickel ore mined from PT Inco’s laterite deposits in Indonesia into nickel-in-matte requires various processing steps. The ore is first screened at one of five screening stations to reject barren or low-grade boulders. Ore-grade boulders are crushed and added to the screening station product. Large wet ore storage inventories are maintained to feed the processing plant. The ore in storage has a moisture content of between 25 and 35 per cent. In PT Inco’s processing plant, the ore is dried in one of three dryers to reduce the moisture content to about 20 per cent, heated (using a process called calcining) in one of five reduction kilns and smelted in one of four electric furnaces to produce furnace matte containing about 25 to 28 per cent nickel, 8 to 10 per cent sulphur and 60 per cent iron. The molten furnace matte is then charged to one of three batch-refining vessels called Pierce Smith Converters to produce a saleable nickel-in-matte product containing approximately 78 percent nickel, 1.0 to 1.5 per cent cobalt, 18 to 22 per cent sulphur and a maximum of 0.7 per cent iron.

     The following table shows our total production of finished nickel and copper from our primary metals facilities for the five years ended December 31, 2005:

		Finished Nickel and Copper Production
		2005				2004				2003				2002				2001
										(in tonnes)
Nickel			220,727				236,817				187,173				209,728				207,077
Copper			125,595				124,456				91,134				111,787				116,255

     See “Mining and Production – General” above for information regarding Inco’s expected nickel and copper production for 2006.

     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, 2005:

		Finished Nickel from PT Inco Matte
		2005				2004				2003				2002				2001
										(in tonnes)
Nickel			73,965				75,087				65,704				61,692				61,856

     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, Newfoundland and Labrador, 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 or, in the case of the Voisey’s Bay project, are covered by the surface lease referred to under “Our Resources and Mining Rights — Mining and Other Rights — Voisey’s Bay Project” below.

     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 2005, the Ontario government granted permission for us to continue to export nickel oxide sinter and nickel sulphide matte, as well as nickel sulphate residue, to Clydach until December 31, 2015. During 2005, we refined about 17 per cent of our primary nickel production at our refinery in Clydach from intermediate products derived from our Ontario ores. The Ontario government also granted us permission in December 2005 to continue to export semi-refined PGMs concentrate to our Acton refinery until December 31, 2015. 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 of Ontario on extending these permits for additional periods upon their expiry. 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 – Arrangements 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.

     Ore Reserves and Mining Rights

          Ore Reserves

     The following tables show, as of December 31, 2005 and 2004, 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, our Voisey’s Bay project in the Province of Newfoundland and Labrador which began commercial production in 2005, PT Inco in Indonesia and our 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, 2005
(in millions of tonnes (Mt) except as indicated) ^{(1)(2)(3)(7)(8)}

																				Platinum				Palladium				Gold
				Quantity				Nickel				Copper				Cobalt				(grams/				(grams/				(grams/
		Class		(Mt)				(per cent)				(per cent)				(per cent)				tonne)				tonne)				tonne)
ONTARIO OPERATIONS(4)(6)
Operating Mines		Proven			69				1.22				1.32				0.04				0.6				0.7				0.2
		Probable			42				1.30				1.71				0.03				1.1				1.1				0.4
		Total/Average			111				1.25				1.47				0.04				0.8				0.8				0.3
Non-Operating Mines		Proven			–				–				–				–				–				–				–
		Probable			48				1.13				0.98				0.04				0.7				0.8				0.3
		Total/Average			48				1.12				0.98				0.04				0.7				0.8				0.3
Undeveloped Properties		Proven			1				1.09				0.50				0.03				0.1				0.1				–
		Probable			3				1.41				0.97				0.05				0.5				0.3				0.1
		Total/Average			4				1.38				0.93				0.05				0.4				0.3				0.1
Total		Proven			69				1.22				1.32				0.04				0.6				0.7				0.2
		Probable			94				1.22				1.31				0.04				0.9				0.9				0.3
		Total/Average			163				1.22				1.31				0.04				0.8				0.8				0.3
MANITOBA OPERATIONS(4)(6)
Operating Mines		Proven			14				1.94				0.13				–				–				–				–
		Probable			11				1.86				0.12				–				–				–				–
		Total/Average			25				1.90				0.13				–				–				–				–
PT INCO(5)(6)
Mining Areas		Proven			59				1.80				–				–				–				–				–
		Probable			88				1.81				–				–				–				–				–
		Total/Average			147				1.80				–				–				–				–				–
VOISEY’S BAY PROJECT(4)(6)
Operating Mine		Proven			29				2.99				1.73				0.15				–				–				–
		Probable			3				0.64				0.37				0.03				–				–				–
		Total/Average			32				2.75				1.59				0.14				–				–				–
GORO PROJECT(5)(6)
Development Property		Proven			96				1.34				–				0.12				–				–				–
		Probable			24				2.01				–				0.09				–				–				–
		Total/Average			120				1.48				–				0.11				–				–				–

Total Estimated Ore Reserves as of December 31, 2004
(in millions of tonnes (Mt) except as indicated) ^{(1)(2)(3)(7)(8)}

																				Platinum				Palladium				Gold
				Quantity				Nickel				Copper				Cobalt				(grams/				(grams/				(grams/
		Class		(Mt)				(per cent)				(per cent)				(per cent)				tonne)				tonne)				tonne)
ONTARIO OPERATIONS (4)(6)
Operating Mines		Proven			70				1.24				1.34				0.04				0.65				0.71				0.24
		Probable			59				1.35				1.59				0.03				1.02				1.13				0.39
		Total/Average			129				1.29				1.46				0.04				0.82				0.91				0.32
Non-Operating Mines		Proven			–				–				–				–				–				–				–
		Probable			44				1.09				0.87				0.04				0.52				0.52				0.20
		Total/Average			44				1.09				0.87				0.04				0.52				0.52				0.20
Undeveloped Properties		Proven			1				1.09				0.50				0.03				0.10				0.10				0.03
		Probable			3				1.41				0.97				0.05				0.45				0.34				0.07
		Total/Average			4				1.38				0.93				0.05				0.41				0.32				0.07
Total		Proven			71				1.24				1.34				0.04				0.65				0.72				0.24
		Probable			106				1.24				1.28				0.04				0.79				0.86				0.31
		Total/Average			177				1.24				1.30				0.04				0.72				0.79				0.27
MANITOBA OPERATIONS (4)(6)
Operating Mines		Proven			14				2.08				0.14				–				–				–				–
		Probable			13				2.13				0.14				–				–				–				–
		Total/Average			27				2.10				0.14				–				–				–				–
PT INCO (5)(6)
Mining Areas		Proven			88				1.84				–				–				–				–				–
		Probable			20				1.81				–				–				–				–				–
		Total/Average			108				1.83				–				–				–				–				–
VOISEY’S BAY PROJECT (4)(6)
Development Property		Proven			29				3.05				1.77				0.15				–				–				–
		Probable			3				0.76				0.45				0.04				–				–				–
		Total/Average			32				2.82				1.54				0.14				–				–				–
GORO PROJECT (5)(6)
Development Property		Proven			73				1.39				–				0.13				–				–				–
		Probable			22				2.01				–				0.09				–				–				–
		Total/Average			95				1.53				–				0.12				–				–				–

     At our Ontario operations, the estimated combined proven and probable ore reserves declined from 2004 to 2005 by 14 million tonnes, from 177 million tonnes to 163 million tonnes. The decrease was primarily due to mining (8.7 million tonnes) and the reclassification of certain estimated ore reserves to mineral resources at the Victor project and Stobie Mine.

     At our Manitoba operations, the estimated combined proven and probable ore reserves declined from 2004 to 2005 by two million tonnes, from 27 million tonnes to 25 million tonnes, and the nickel grade declined. These reductions were primarily due to mining (2.4 million tonnes) and certain re-evaluations undertaken at each mine. These changes included a decrease in the cut-off grade at Birchtree Mine and the re-evaluation of remnants areas together with revisions to the mineral deposit models at Thompson Mine.

     At Voisey’s Bay, the estimated combined proven and probable ore reserves remained unchanged from 2004 to 2005 with a slight decrease in nickel grade. The reduction in grade was due to mining in 2005 and an increase in the mining dilution as a result of a change to a larger block size for mining assessments resulting in reduced selectivity.

     At PT Inco, the estimated combined proven and probable ore reserves increased from 2004 to 2005 by 39 million tonnes, from 108 million tonnes to 147 million tonnes after adjustments for mining estimated at approximately five million tonnes. The additions were from the West Block deposits, based on recent additional core drilling required to meet processing feed plant chemistry constraints, allowing for additional estimated ore reserves to be added from the Petea deposit and additional limonite material from the East Block required for blending. Ore reserves were also added at the Pomalaa mining area as a result of drilling in 2005.

     At Goro, the estimated combined proven and probable ore reserves increased by 25 million tonnes from 2004 to 2005 due to the inclusion of the East Kwe Basin in the mining plan and the addition of medium-grade limonite to meet processing feed plant chemistry constraints. As a result of the addition of more limonite, the ore reserve grade decreased slightly.

     The economic test that we use in establishing ore reserves is performed using a financial model encompassing all operating processes necessary to produce a “saleable product or products” at each operation or project. For all the operations and projects, this economic model represents 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 or feasibility studies for the operating business units and full feasibility studies for development projects.

     At our 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 and demolition expenses. Mining costs include operating and mine overhead, capital and transportation expenditures. 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 modeling 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 Birchtree Mine and portions of Thompson Mine. Conventional estimation methods are used for about 15 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 modeling process. Reconciliation studies of mined out areas are completed to verify the appropriateness of the estimation methods and the block models are verified and peer reviewed. External auditors have been periodically used to critique the geostatistical techniques we utilize. 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 estimated and appropriate mineability and dilution rates are applied.

     For the Voisey’s Bay project, the geological interpretation of the Ovoid zone is based on the block modeling of the troctolite unit hosting the mineral. Within this modelling process, two domains of massive sulphide and disseminated mineralization were further defined. The block dimensions used in the block model in 2005 are 10 metres by 10 metres by 7.5 metres vertical. The vertical dimension was increased from five metres in 2005. 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 estimates. 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 2005, operating and fixed costs were based on PT Inco’s 2006 annual budget plan, 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, collectively referred to its Sorowako West Block and East Block areas and the Petea area (shown on the maps under “PT International Nickel Indonesia Tbk” below) as its Sorowako mining area.

     The ore reserves for PT Inco are estimated using block modeling 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.

     For the Goro project, the ore reserves were estimated using block modeling 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 variable nickel cut-off grade was used to estimate the ore reserves. These variable cut-off grades replaced the cut-off grade of 1.20 per cent nickel used prior to 2005 to accommodate variations in the chemical composition of the feed material for the processing plant. 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 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. Both low-grade limonite stockpiles and high-grade saprolite stockpiles are planned.

     The key processes for developing Inco’s ore reserve estimates have since 2003 been enhanced to include more formalized senior management review and approval of such processes and the preparation of such estimates. These processes have involved, as discussed in Note 3 to the tables entitled “Total Estimated Ore Reserves as of December 31, 2005” and “Total Estimated Ore Reserves as of December 31, 2004” 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, 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 2005, an external audit was conducted on the ore reserve estimates at PT Inco’s Sorowako mining area. This audit resulted in the reclassification of certain proven ore reserves as probable ore reserves. In 2004, external audits were conducted on the ore reserve estimates at Creighton Mine in Ontario and Birchtree Mine in Manitoba. None of these audits found any material issues with respect to the audited ore reserve estimates.

          Mineral Resources

     As indicated below, we are including estimated mineral resources as of December 31, 2005 and 2004 in this Report. Historically, we have not included mineral resources information in our Annual Report on Form 10-K, but we have elected to do so in this Report based on the principles of the multi-jurisdictional disclosure system between Canada and the United States. As indicated, we have used certain terms, such as “mineral resources” and “measured”, “indicated”, and “inferred” “mineral resources”, that SEC guidelines normally strictly prohibit U.S. registered companies from including in their filings with the SEC. These terms are defined in Note (1) to the tables below. Mineral resource estimates as reported are determined in accordance with applicable Canadian requirements and are in addition to the estimated ore reserves and do not include diluting material and allowances for losses that may occur when the material is mined. Cut-off values or grades and other shape and physical criteria, as applicable, for such estimated mineral resources are based upon cost estimates appropriate to the proposed mining and processing methods. Costs are derived on the same basis as those used to determine the cut-off values or grades and other criteria as applicable for the ore reserve estimates at each operation or development project except for mine capital costs. The cut-off values or grades and other criteria, as applicable, may change with additional data and economic evaluations.

     Cautionary note to U.S. investors – We use the terms “mineral resources” and “measured” and “indicated” “mineral resources”. U.S. investors should be aware that, while these terms are recognized under applicable Canadian regulations, the SEC does not recognize them. U.S. investors are cautioned not to assume that any part or all of the mineral deposits in these categories will ever be converted into reserves. We also use the term “inferred mineral resources”. U.S. investors should be aware that, while this term is also recognized under applicable Canadian regulations, the SEC does not recognize it. Inferred mineral resources have a greater amount of uncertainty as to their existence, and great uncertainty with respect to their economic feasibility. It should not be assumed that all or any part of an inferred mineral resource will ever be upgraded to a higher category. While the SEC generally permits registered U.S. mining companies, in their filings with the SEC, to disclose only those mineral deposits that a company can economically and legally extract or produce, it does permit companies subject to the multi-jurisdictional disclosure system between Canada and the United States, such as Inco to disclose, on a voluntary basis, in their Form 10-K or other Annual Reports filed with the SEC, their estimated mineral resources.

     The following tables show, as of December 31, 2005 and 2004, our estimates of our (i) measured mineral resources, (ii) indicated mineral resources, (iii) the aggregate of measured and indicated mineral resources and (iv) inferred mineral resources 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.

Total Estimated Mineral Resources⁽¹⁾⁽³⁾ as of December 31, 2005
(in millions of tonnes (Mt) except as indicated)

																				Platinum				Palladium				Gold
				Quantity				Nickel				Copper				Cobalt				(grams/				(grams/				(grams/
		Class		(Mt)				(per cent)				(per cent)				(per cent)				tonne)				tonne)				tonne)
ONTARIO OPERATIONS
Operating Mines		Measured			11				1.20				1.09				0.05				0.6				0.7				0.3
		Indicated			18				1.42				1.63				0.05				0.9				1.1				0.4
		Total/Average			29				1.34				1.43				0.05				0.8				1.0				0.3
		Inferred(2)			23				1.9				1.8				0.04				1.2				1.4				0.5
Non-Operating Mines		Measured			–				–				–				–				–				–				–
		Indicated			13				1.45				0.54				0.05				0.2				0.2				–
		Total/Average			13				1.45				0.54				0.05				0.2				0.2				–
		Inferred(2)			13				1.6				3.2				0.03				1.5				1.5				0.5
Undeveloped Properties		Measured			0.4				1.03				0.35				0.05				–				–				–
		Indicated			4.3				1.16				0.89				0.05				0.6				1.2				0.2
		Total/Average			5				1.15				0.85				0.05				0.5				1.1				0.2
		Inferred(2)			12				1.6				0.9				0.02				0.5				0.7				0.1
Total		Measured			11				1.19				1.07				0.05				0.7				0.7				0.2
		Indicated			36				1.40				1.14				0.05				0.6				0.8				0.2
		Total/Average			47				1.36				1.12				0.05				0.6				0.8				0.2
MANITOBA OPERATIONS
Operating Mines		Measured			1				1.94				0.12				–				–				–				–
		Indicated			3				2.56				0.15				–				–				–				–
		Total/Average			4				2.41				0.14				–				–				–				–
		Inferred(2)			6				1.8				0.1				–				–				–				–
Non-Operating Mines		Measured			–				–				–				–				–				–				–
		Indicated			–				–				–				–				–				–				–
		Total/Average			–				–				–				–				–				–				–
		Inferred(2)			24				0.8				0.1				–				–				–				–
Total		Measured			1				1.94				0.12				–				–				–				–
		Indicated			3				2.56				0.15				–				–				–				–
		Total/Average			4				2.41				0.14				–				–				–				–
PT INCO
Mining Areas		Measured			0.4				1.85				–				–				–				–				–
		Indicated			0.5				1.7				–				–				–				–				–
		Total/Average			1				1.8				–				–				–				–				–
		Inferred(2)			2				1.9				–				–				–				–				–
Undeveloped Properties		Measured			–				–				–				–				–				–				–
		Indicated			27				1.67				–				–				–				–				–
		Total/Average			27				1.67				–				–				–				–				–
		Inferred(2)			319				1.7				–				–				–				–				–
Total		Measured			0.4				1.85				–				–				–				–				–
		Indicated			28				1.67				–				–				–				–				–
		Total/Average			28				1.65				–				–				–				–				–