Factors that could cause our actual results to differ materially from those described in the forward-looking statements contained in this Annual Report and other documents we file with the Securities and Exchange Commission include the risks described below. You should also refer to the other information in this Annual Report, including the financial statements and accompanying notes thereto.

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RISKS RELATING TO OUR BUSINESS

We may experience delays, higher than expected costs, difficulties in obtaining environmental permits and other obstacles when implementing our common sharescapital expenditure projects.

We are investing heavily in various facets of our NorthMet Project. Our project is speculative and subject to a number of risks. Only those persons who can bear the risk of the entire loss of their investment should participate. An investor should carefully consider the risks described below and the other information that we file with the SEC and with Canadian securities regulators before investing in our common shares. The risks described below are not the only ones faced. Additional risks that we are aware of or that we currently believe are immaterial may become important factors that affect our business in the future. If any of the following risks occur, or if others occur, our business, operating results, and financial condition could be seriously harmed and our investors may lose all of their investment.

• we may run out of money,encounter delays or higher than expected costs in which case we will haveobtaining the necessary equipment or services to suspend or cease operations which could result in the loss of your investment.

We, like other pre-feasibilitydevelopment stage companies doing business in the United States and Canada, are subject to a variety of federal, provincial, state and local statutes, rules and regulations designed:

• protect the environment, including the quality of the air and water in the vicinity of exploration, development, and mining operations;

• remediate the environmental impacts of those exploration, development, and mining operations;

• protect and preserve wetlands and endangered species, and

• mitigate negative impacts on certain archeological and cultural sites.

We are required to obtain various governmental permits to conduct exploration, development, construction and mining activities at our properties. Obtaining the necessary governmental permits is often a complex and time-consuming process involving numerous U.S. or Canadian federal, provincial, state, and local agencies. The duration and success of each permitting effort is contingent upon many variables not within our control. In the context of obtaining permits or approvals, we must comply with known standards, existing laws, and regulations that may entail greater or lesser costs and delays depending on the nature of the activity to be permitted and the interpretation of the laws and regulations implemented by the permitting authority. The failure to obtain certain permits or the adoption of more stringent permitting requirements could have a material adverse effect on our business, operations, and properties and we may be unable to proceed with our exploration and development programs which will result in the loss of your investment.

Federal legislation and implementing regulations adopted and administered by the U.S. Environmental Protection Agency, Forest Service, Bureau of Land Management, Fish and Wildlife Service, Mine Safety and Health Administration, and other federal agencies, and legislation such as the Federal Clean Water Act, Clean Air Act, National Environmental Policy Act, Endangered Species Act, and Comprehensive Environmental Response, Compensation, and Liability Act, have a direct bearing on U.S. exploration, development and mining operations. Due to the uncertainties inherent in the permitting process, we cannot be certain that we will be able to obtain required approvals for proposed activities at any of our properties in a timely manner, or that our proposed activities will be allowed at all.

The process inof obtaining federal and local regulatory approvals is increasingly cumbersome, time-consuming, and expensive, and the cost and uncertainty associated with the permitting process could have a material adverse effect on exploring, developing or mining our properties. Moreover, compliance with statutory environmental quality requirements described above may require significant capital outlays, significantly affect our earning power, or cause material changes in our intended activities. Environmental

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standards imposed by federal, state, or local governments may be changed or become more stringent in the future, which could materially and adversely affect our proposed activities. As a result of these matters, our operations could be suspended or cease entirely, in which case you could lose your investment.

Prices of metals are determined by some of the following factors:

• expectations for inflation;

• the strength of the United States dollar;

• global and regional supply and demand, and

• political and economic conditions and production costs in major metals producing regions of the world.

The aggregate effect of these factors on metals prices is impossible for us to predict. In addition, the prices of metals are sometimes subject to rapid short-term and/or prolonged changes because of speculative activities. The current demand for and supply of various metals affect the prices of copper, nickel, cobalt, platinum, palladium and gold, but not necessarily in the same manner as current supply and demand affect the prices of other commodities. The supply of these metals primarily consists of new production from mining. If the prices of copper, nickel, cobalt, platinum, palladium and gold are, for a substantial period, below our foreseeable costs of production, we could cease operations.

We are dependent on our key personnel

Our success depends on key members of our management. The loss of the services of one or more of such key management personnel could have a material adverse effect us. Our ability to manage exploration and development activities, and hence our success, will depend in large part on the efforts of these individuals. We face intense competition for qualified personnel, and we cannot be certain that we will be able to attract and retain such personnel.

We may not be able to raise the funds necessary to develop our mineral properties. If we are unable to raise such additional funds, we will have to suspend or cease operations.

We will need to seek additional financing to complete our development and construction of the NorthMet Project. Sources of such external financing include future equity offerings, advance payments by potential customers to secure long-term supply contracts, grants and low-cost debt from certain state financial institutions, and commercial debt secured by the NorthMet Project. The failure to obtain such additional financing could have a material adverse effect on our results of operations and youfinancial condition. We may not be able to secure the financing necessary to sustain exploration and development activities in the future. If we cannot raise the money necessary to continue to explore and develop our property, we will have to suspend or cease operations.

Our metals exploration and development efforts are highly speculative in nature and may be unsuccessful.

As a development stage company, our work is speculative and involves unique and greater risks than are generally associated with other businesses.

The development of mineral deposits involves uncertainties, which careful evaluation, experience, and knowledge cannot eliminate. Although the discovery of an ore body may result in substantial rewards, few properties explored are ultimately developed into producing mines. It is impossible to ensure that the current development program we have planned will result in a profitable commercial mining operation. Significant capital investment is required to achieve commercial production from successful exploration efforts.

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We are subject to all of the risks inherent in the mining industry, including, without limitation, the following:

• Success in discovering and developing commercially viable quantities of minerals is the result of a number of factors, including the quality of management, the interpretation of geological data, the level of geological and technical expertise and the quality of land available for exploration;

• Exploration for minerals is highly speculative and involves substantial risks, even when conducted on properties known to contain significant quantities of mineralization, and most exploration projects do not result in the discovery of commercially mineable deposits of ore;

• Operations are subject to a variety of existing laws and regulations relating to exploration and development, permitting procedures, safety precautions, property reclamation, employee health and safety, air and water quality standards, pollution and other environmental protection controls, all of which are subject to change and are becoming more stringent and costly to comply with;

• A large number of factors beyond our control, including fluctuations in metal prices and production costs, inflation, the proximity and liquidity of precious metals and energy fuels markets and processing equipment, government regulations, including regulations relating to prices, taxes, royalties, land tenure, land use, importing and exporting of minerals and environmental protection, and other economic conditions, will affect the economic feasibility of mining;

• Substantial expenditures are required to construct mining and processing facilities;

• Title to mining properties may be subject to other claims, and

• In the development stage of a mining operation, our mining activities could lose your entire investment.

Our businesses are generally subject to a number of risks and hazards, including:

• industrial accidents;

• railroad accidents;

• labor disputes;

• environmental hazards;

• electricity stoppages;

• equipment failure, and

• severe weather and other natural phenomena.

These occurrences could result in damage to, or destruction of, mineral properties, production facilities, transportation facilities, or equipment. They could also result in personal injury or death, environmental damage, waste of resources or intermediate products, delays or interruption in mining, production or transportation activities, monetary losses and possible legal liability. The insurance we maintain against risks that are typical in our business may not provide adequate coverage. Insurance against some risks (including liabilities for environmental pollution or certain hazards or interruption of certain business activities) may not be available at a reasonable cost or at all. As a result, accidents or other negative developments involving our mining, production or transportation facilities could have a material adverse effect on our operations.

We face intense competition from other mining and producing companies. In recent years, the mining industry has experienced significant consolidation among some of our competitors, as a result these

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companies may be more diversified than us. We cannot assure you that the result of current or further consolidation in the industry will not adversely affect us.

In addition, because mines have limited lives we must periodically seek to replace and expand our reserves by acquiring new properties. Significant competition exists to acquire properties producing or capable of producing copper, nickel and other metals.

If we are unable to successfully manage these risks, our growth prospects and profitability may suffer.

Our common shares are listed for trading on the TSX VentureToronto Stock Exchange and since June 26, 2006, on the American Stock Exchange. Our shareholders may be unable to sell significant quantities of the common shares into the public trading markets without a significant reduction in the price of the shares, if at all. The market price of our common shares may be affected significantly by factors such as changes in our operating results, the availability of funds, fluctuations in the price of metals, the interest of investors, traders and others in small pre-feasibilitydevelopment stage public companies such as us and general market conditions. In recent years the securities markets have experienced a high level of price and volume volatility, and the market price of securities of many companies, particularly small capitalization pre-feasibilitydevelopment companies similar to us, have experienced wide fluctuations, which have not necessarily been related to the operating performances, underlying asset values, or the future prospects of such companies. There can be no assurance that future fluctuations in the price of our shares will not occur.

Our shares that are eligible for future sale may have an adverse effect on the price of our stock. As of January 31, 20062008 there were 100,173,173 shares136,991,075 of our common stockshares outstanding. The average trading volume for the three months prior to January 31, 20062008 was less than 100,000approximately 85,000 shares per day.day on the Toronto Stock Exchange and 212,000 shares per day on the American Stock Exchange. Sales of substantial amounts of our common stock,shares, or a perception that such sales could occur, and the existence of options or warrants to purchase shares of common stockshares at prices that may be below the then current market price of theour common stock,shares, could adversely affect the market price of our common stockshares and could impair our ability to raise capital through the sale of our equity securities.

We have issued common stockshares and options, and warrants to purchase our common stockshares to satisfy our obligations and fund our operations (see Item 5.A). In the future, becauseSince we currently do not have a source of revenue, we will likely issue additional shares of common stock,shares, options, warrants, preferred stock or other securities exercisable for or convertible into our common stockshares to raise money for our continued operations or as non-cash incentives to our own and our subsidiaries' directors, officers, insiders, and key employees. If additional sales of equity occur, your ownership interest and voting power in us will be diluted and the market price of our common stockshares may decrease.

Under our “rolling” Stock Option2007 Omnibus Share Compensation Plan (the “Plan”) which was adopted on October 3, 2003,May 25, 2007, and approved by our shareholders on May 28, 2004, and accepted byJune 27, 2007, the TSX-Venture Exchange on June 29, 2004, optionsaggregate number of Common Shares that may be granted equal in numberissuable pursuant to the Plan may not at any time exceed the greater of (i) 10% of theour issued and outstanding capitalcommon shares and (ii)18,592,888 common shares, representing 13.62% of the Companyour outstanding common shares at the time of grantthe approval of the stock option.Plan, of which 5,940,000 common shares are reserved for issuance as awards other than options. As of January 31, 2006 we could issue options2008 the aggregate number of Common

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Shares issuable pursuant to purchase up to 10,017,317the Plan was 13,655,887 shares. Under ourOur bonus share incentive plan (the “Bonus Plan”) was established for our directors and key employees and was approved by the disinterested shareholders at the Company’s shareholders’ meeting held on May 28, 20042004. Under the Bonus Plan we may issue an addition 6,890,000additional 4,940,000 shares upon achieving certain milestones. On November 4, 2004, the Company adopted, and the shareholders approved, a revised Bonus Plan limiting the aggregate shares that may be issued under the Bonus Plan and the Company’s Amended Stock Option plan to not more than 20% of the Company’s issued and outstanding capital at the time of the issuance of options and bonus shares.

Upon any issuances or exercise of options issued, the ownership interests and voting power of existing shareholders may be further diluted.

An updated Shareholders Rights Plan between us and shareholders effective as of December 3, 2003June 27, 2007 and certain employment and management agreements contain provisions that could discourage an acquisition or change of control without our board of directors’ approval. Under the ShareholdersShareholders’ Rights Plan, if a shareholder individually or in concert with other shareholders acquires 20% or more of our common shares outstanding without complying with the ShareholderShareholders’ Rights Plan or without the approval of our Boardboard of Directors,directors, all holders of record will have a right to one common share for each share owned. Each right entitles the holder to a certain number of shares, as calculated under the Rights Plan. We have also entered into agreements with certain key employees and officers that contain severance provisions in the event of a take-over bid. The Shareholders’ Rights Plan and the preceding agreements may make it more difficult for a third party to acquire control of us, even if such a change of control is more beneficial to shareholders.

Because we believe that we will be classified as a passive foreign investment company (a PFIC), U.S. holders of our common stockshares may be subject to United States federal income tax consequences that are worse than those that would apply if we were not a PFIC, such as ordinary income treatment plus a charge in lieu of interest upon a sale or disposition of shares of our common stockshares even if the shares were held as a capital asset. See “Certain United States Federal Income Tax Consequences.”

PolyMet Mining Corp. was incorporated under the British Columbia Companies Act and continued under theBusiness Corporations Act(British Columbia) in British Columbia, Canada on March 4, 1981, under the name Fleck Resources Ltd., which we changed to PolyMet Mining Corp. on June 10, 1998.

Our headprincipal executive office is situated at Suite 2350 -11771003 – 1177 West Hastings Street, Vancouver, B.C. V6E 2K3. Our phone number is (604) 669-4701. Our registered and records office is located at our legal counsel’s offices situated at 1040 - 9992500 – 700 West HastingsGeorgia Street, Vancouver, B.C. V6C 2W2.V7Y 1B3, CANADA. Our agent in the U.S. is Poly Met Mining, Inc. whose office isoperational headquarters are located at P.O. Box 475, 6500 County Road 666,Hoyt Lakes, Minnesota 55750-0475.

We are a reporting issuer in the following Canadian provinces: Alberta, British Columbia, and Ontario. Our common shares have been listed on the Toronto Stock Exchange (TSX) since February 1, 2007 and, formerly, on the TSX Venture Exchange (TSX V)(TSX-V) (formerly the Vancouver Stock Exchange) sincefrom April 13, 1984 to January 31, 2007 under the symbol "POM" and also trade on the Over the Counter Bulletin Board (“OTCBB”) under the symbol “POMGF” in the United States. Sincesince June 26, 2006 our common shares have been listed on the American Stock Exchange (AMEX) under the symbol “PLM”.

Our registrar and transfer agent is Computershare Investor Services Inc. of 9th Floor, 100 University Avenue, Toronto, Ontario M5J 2Y1, CANADA.

During the years ended January 31, 2006, 2005,2008, 2007, and 20042006 we spent $11.120$21.161 million, $1.623$13.015 million and $0.091$12.130 million, respectively to acquire property, and perform pre-feasibility work primarilyand perform work following completion of our Definitive Feasibility Study on our NorthMet Project located in Minnesota, USA. In addition, during the years ended January 31, 20062008, 2007, and 2005,2006 we issued shares valued at $7.564$nil, $6.160 million and $0.229$7.564 million, respectively, in optioning and purchasing a nearby crushing and grinding plant and associated infrastructure (the Erie Plant). We did not issue any shares during 2004 in connection with the acquisition of the Erie Plant.

All of these expenses were incurred at our NorthMet Project located in the State of Minnesota and were funded from the proceeds of equity financings. WithUntil the completion of Definitive Feasibility Study in September 2006, these expenditures were expensed with the exception of the Erie Plant acquisition, untilacquisition. Expenditures after October 1, 2006, the completion of the Definitive Feasibility Study, , we will expense all expenditures.

We are a pre-feasibilitydevelopment stage company engaged in the exploration and future development of natural resource properties. Our primaryCurrently our sole mineral property is the NorthMet Project, a polymetallic projectdeposit located in northeastern Minnesota, USA.

In the years ended January 31, 2006, 20052008, 2007 and 2004,2006, we conducted exploration, development and acquisition activities only and did not conduct any operations that generated revenues. Thus, we rely principally on equity financings to fund outour projects and expenditures.

Since 2003, we have focused on commencing commercial production on our NorthMet Project. OurWe have focused our efforts have been on four main areas:

We have also continued to strengthen our management team at both the corporate level and at our facilities in Minnesota. During the period ended January 31, 2006,2008, we appointed Douglas NewbyJoseph Scipioni as our Chief FinancialOperating Officer and also retained a part-time financial controller for our Minnesota operations.

Our primary mineral property is the NorthMet Project, a polymetallic project located in northeastern Minnesota, USA. Our Erie Plant comprises a large crushing, grinding and milling facility that was built by LTV Steel in the mid-1950s and processed low grade iron ore known as taconite that was transported to the facility by railroad from local mines. Since the mid-1960s the plant was operated by Cliffs on behalf of LTV Steel and processed approximately 100,000 tons per day of taconite ore. The plant was shut down in 2000 when LTV Steel filed for bankruptcy protection since when it has been maintained initially by Cliffs and, since November 15, 2005, by us. The plant did not operate during the period ended January 31, 2006. The plant is located approximately six miles west of ourthe NorthMet deposit, about five miles north-northwest ofore body.

In the town of Hoyt Lakes, itself located about fifteen miles west of Virginia, Minnesota. The plant covers approximately 6,400 acres, or approximately 10.0 square miles.

The NorthMet Project is located immediately south of the historic Mesabi Iron Range in northeastern Minnesota. Mining in the Iron Range dates back to the 1850’s1880’s when high grade iron ore known as hematite was first mined commercially. During the 1940s and 50s, with reserves of hematite dwindling, the iron industry began to focus on taconite, a lower-grade iron ore. SixEight large crushing, grinding, milling facilities were built by various iron and steel companies to process the taconite, including the Erie Plant that we acquired in November 2005.

In the discovery of1940s, copper and nickel in the 1940s,were discovered nearby, following which, in the 1960s, United States Steel Corporation (“US Steel”) staked ground atdrilled what was then called Dunka Road,is now called NorthMet. At that time, the market did not recognize platinum group metals (PGMs) or gold and the market for PGMs was small because there was no reliable method to assay low grades of these metals.our NorthMet property. US Steel investigated the deposit as a high-grade, underground copper-nickel resource, but considered it to be uneconomic based on its inability to produce separate, clean nickel and copper concentrates with the metallurgical processes available at that time.

In 1987, the Minnesota Natural Resources Research Institute (“NRRI”) published data suggesting thatthe possibility of a large resource of platinum group minerals or PGM’s may bePGMs in the base of the Duluth Complex. In 1989, we acquired a 20-year renewable mining lease over the property from US Steel Corporation and commenced an investigation into the potential for mining and recovery of copper, nickel, and PGM’s.PGMs. We conducted a program to re-assayre-assayed pulps and rejects from the previous drill core for PGM’s. WeUS Steel drilling to obtain data on the PGMs. Sequentially we entered into joint venture agreements with Nerco and Argosy Mining, which assisted in identifying and quantifying potential PGM

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values. However, the challenge of producing separate concentrates of saleable copper and nickel remained.

In the mid-90’s, we began investigating the use of hydrometallurgicalalternative metallurgical processes, including bio-leaching and pressure oxidation. In 1998 we focused on a hydrometallurgical extractive technology which led to the development of the PlatSol™ Process. This processthat uses autoclaves, which are vessels operating at high temperature, high pressure, oxygen enriched vessels,and in an oxygen-enriched environment, to oxidize the sulfidic ores and leach the metals therein. This technology has been used commercially in the copper, nickel, cobalt, and precious metals industries since the 1980s.

In July 2000, we entered into a joint venture arrangement with North Limited (“North”), a major Australian mining company, to advance the NorthMet Project to commercial production. Under the joint venture arrangement, North had the opportunity to earn an 87.5% interest in the PolyMetNorthMet Project by producing a feasibility study and funding 100% of the total capital costs to develop the project.

In August 2000, Rio Tinto Limited (“Rio Tinto”) completed an on-market takeover of North. Subsequently, Rio Tinto decided not to proceed with the NorthMet projectProject and we exercised our 30-day pre-emptive right, under a “change of control” clause, to terminate the joint venture arrangement. Consequently,As a result, we regained a 100% interest in the NorthMet Project.

Following completion of the metallurgical pilot plant work in November 2000, we commissioned a pre-feasibility study on the project that was completed in April 2001. The pre-feasibility study included a 50,000 metric tonne per daytonne-per-day (55,000 short tpd) operation and assumedanticipated the construction of a new, stand-alone processing plant including metal smelters to produce copper, nickel and cobalt metals on site. The study found the economics of the NorthMet Project were unacceptably low owing to the capital cost of building a new plant facility combined with low metal prices prevailing at that time. No further work was done until March 2004,2003, when a new management team took over our company and commenced a detailed review of the project.

The new management team believed that acquisition of the Erie Plant had the potential to substantially reduce the capital cost and to simplify the permitting process which could improve the project economics.

By a Memorandum of Understanding dated December 5, 2003 and an option agreement dated February 14, 2004, we obtained an option (the “Cliffs Option”) to acquire certain property, plant, and equipment (“Cliffs Assets”) from Cliffs Erie LLC, a wholly owned subsidiary of Cliffs, located near our NorthMet Project. As consideration for the Cliffs Option, we paid $500,000 prior to January 31, 2004 and issued to Cliffs 1,000,000 shares of our common stock on March 30, 2004, valued at $229,320 to maintain our exclusive rights until June 30, 2006. On September 15, 2005 we reached an agreement with Cliffs on the terms for the early exercise of our option to acquire 100% ownership of large portions of the former LTV Steel Mining Company ore processing plant in northeastern Minnesota (the “Asset Purchase Agreement”). Under this agreement we agreed to pay Cliffs $1 million in cash, 6.2 million of our shares, and make quarterly payments of $250,000 starting on March 31, 2006 for a total of $2.4 million plus interest at 4% per annum on the outstanding balance. As of March 31, 2008 the remaining balance was $150,000.

On November 15, 2005, we consummated the Asset Purchase Agreement and completed the acquisition thereunder. The property, plant, and equipment assets we now own includes land, crushing and milling capacity, extensive spare parts, plant site buildings, real estate, tailings impoundments and workshops, as well as access to extensive mining infrastructure.

On September 14, 2006, we entered into an agreement with Cliffs whereby we would acquire property and associated rights (“Cliffs II.”) We closed the transaction on December 20, 2006. The transaction provides us with a railroad connection linking the mine development site and the Erie Plant as well as a 120-railcar fleet, locomotive fueling and maintenance facilities, water rights and pipelines, large administrative offices on site and approximately 6,000 acres to the east and west of and contiguous to our existing tailings facilities.

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The purchase price for this additional infrastructure consisted of 2 million of our common shares and US$15 million in cash to be issued and paid in four tranches:

• 2 million of our common shares;

• $1 million in cash was paid at closing;

• $7 million in cash is payable in quarterly installments of $250,000 commencing December 31, 2006 with the balance payable upon receipt of commercial financing. Interest on the outstanding amount be payable quarterly from December 31, 2006 at theWall Street JournalPrime Rate. As of March 31, 2008 the remaining balance was $5.5 million; and

• $7 million in cash is payable in quarterly installments of $250,000 commencing on December 31, 2009. Interest will begin to accrue on the outstanding amount beginning on December 31, 2009 after which it will be payable quarterly at theWall Street JournalPrime Rate.

PolyMet also assumed certain liabilities associated with the property.

As of January 31, 2006,2008, we have expended $14.225$65.0 million primarily on the acquisition of the Erie Plant. Plant and related infrastructure. Under the Asset Purchase Agreement we have paid $3.0 million plus interest and owe Cliffs $0.4 million. Under Cliffs II we have paid $2.25 million plus interest and owe $12.75 million.

During the twothree years ended January 31, 20062008 we expended andan additional $12.743$20.0 million on pre-feasibilityfeasibility work at the deposit and plant. Since inception, we have a cumulative deficit of $34.067$56.3 million, mostmuch of which has been incurred directly and indirectly in connection with our NorthMet Project. These expenditures supported drilling, sampling, assaying, environmental, metallurgical testing, and the pre-feasibility studies.

The following diagram illustrates the location of the NorthMet Project.

The NorthMetPolyMet Project land position covers a total of 10,56016,600 acres or 16.525.9 square miles comprising two areas: the NorthMet mine site totaling 4,1604,200 acres or 6.5 square miles of patentedleased mineral rights and the Erie plant site totaling 6,40012,400 acres or 10.0 square miles of freehold land located approximately six miles west of the mine site. The property is located in St. Louis County in the Mesabi Range District about 60 miles north of Duluth, Minnesota. The Project is easily accessible via state and county roads. The surfaced Hoyt RoadCounty Highway 666 links the plant to the town of Hoyt Lakes, itself approximately fifteen25 miles east of Virginia, Minnesota which is located on State Highway 53. The mine site is accessible by an all-season gravel road from the plant site and a private railroad crosses the property immediately south of the deposit and runs to the plant site. ThereThe plant site is serviced by commercial railroad which connects into the US national and Trans-Canadian railroad systems, as well as a private railroad providing access to port facilities located on Lake Superior. Three high-voltage power linelines supplied by Minnesota Power that suppliessupply the plant site and there is ready access to industrial electric power at the mine site. Two other railway lines are located within ten miles and connect with three ports on Lake Superior and into the US national and Trans-Canadian railroad system.

              (i)               NorthMet Lease

Pursuant to an agreement dated January 4, 1989, subsequently amended and assigned, we lease certain lands in covering 4,162 acres or 6.5 square miles located in St. Louis County, Minnesota, known as the NorthMet Project, from RGGS Land & Minerals Ltd., L.P.L.P (“RGGS”). During the year ended January 31, 2005, US Steel assigned the lease to RGGS Land & Minerals Ltd., L.P.RGGS. The current term of the renewable lease is 20 years and calls for future annual lease payments of $150,000 in January 2007 through 2009.

We can, at our option, terminate the lease at any time by providing written notice to the lessorRGGS at least 90 days prior to the effective termination date or can indefinitely extend the 20 year term by continuing to making the annual lease payment of $150,000 on each successive anniversary date.

The lease payments are considered advance royalty payments and will be deducted from future production royalties payable to the lessor,RGGS, which range from 3% to 5% based on the net smelter return that we receive. Our recovery of the advance royalty payments is subject to the lessor receiving an amount not less than the amount of the annual lease payment due for that year.

As set forth under the Asset Purchase Agreement, we have assumed certain ongoing site-related environmental and reclamation obligations of Cliffs in connection with the Erie Plant. Once we obtain our permit to mine and Cliffs is released from its obligations by certain state agencies, we will be directly obligated to comply with applicable environmental and reclamation obligations. Prior to Cliffs acquisition of the plant from LTV Steel and prior to our acquisition of the plant from Cliffs, both Cliffs and we undertook environmental assessments and concluded that there were no material liabilities other than the ultimate closure and reclamation of the site. Until operating permits are granted to us, Cliffs remains the named party of record for such obligations although, as part of the Asset Purchase Agreement, we have indemnified Cliffs for such costs. As of January 31, 20062008 we estimate that liability to be approximately $12.445$23.5 million and, based on the expected timing of such payments, our cost of capital, and anticipated inflation rates, we made a provision of $2.511$3.4 million in our financial statements forat that date.

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Under the terms of the agreement Cliffs will havehas the right to participate pro-rata on a pro-rata based on theirits ownership of 6.2%6.7% of our outstanding common shares in future cash equity financings.

The Erie Plant comprises a large crushing, grinding and millionmilling facility that was built by LTV Steela consortium of steel companies in the mid-1950s and processed low grade iron ore known as taconite that was transported to the facility by railroad from localnearby mines. SinceIn the mid-1960smid-1980’s, the plantconsortium was consolidated into a single owner – LTV Steel. Pickands-Mather and its successor Cliffs operated by Cliffsthe plant on behalf of LTV Steel and processedthe owners, processing approximately 100,000 tons per day of taconite ore. The plant was shut down in 20002001 when LTV Steel filed for bankruptcy protection since whenprotection. Since then it has been maintained initially by Cliffs and, since November 15, 2005, by us. The plant did not operate during the period ended January 31, 2006.

The plant is located approximately six miles west of our NorthMet deposit,ore body, about five miles north-northwest of the town of Hoyt Lakes, itself located about fifteen25 miles west of Virginia, Minnesota. The plant site covers approximately 6,40012,400 acres, or approximately 10.019.4 square miles, and is powered by electricity from local power lines.

The total plant facilities include two rail dump pockets, each with atwo primary 60” gyratory crusher, 3 xcrushers, four secondary seven-foot standard cone crushers, 6 xseven tertiary seven-foot standard cone crushers, 14 seven-foot short-head crushers, 30 mill circuits each comprising one 12’x 14' rod mill and one 12’x 14' ball mill, 3 xthree 12'x 24' regrind mills, flotation cells, maintenance facilities and spare parts, extensive conveyors, feeders, bins, auxiliary facilities and offices, established infrastructure including a 250225 MVA high voltage electrical substation, water supply, roads, tailings basins and rail facilities.

With the completion of Cliffs II, we also own a 120-railcar fleet, locomotive fueling and maintenance facilities, water rights and pipelines, and large administrative offices on site.

Until the plant was closed in 2000,2001, Cliffs had undertaken numerous programs to update and modernize control systems. The plant is generally in good physical condition and was operating at or near full capacity prior to its closure. We are not yet utilizing the Erie Plant but we have examined the plant in detail and have restarted certain pieces of equipment and believe it to be serviceable.

We plan to use less than one thirdapproximately one-third of the historic productive capacity to crush and grind material that we expect to mine from the NorthMet deposit. We intend to construct new facilities to recover copper metal, nickel and cobalt concentrates,hydroxides, and precious metal precipitates. These new facilities replace the equivalent facilities used historically to recover iron from the taconite, which are not applicable to our anticipated metal products.

The environmental review process in the State of Minnesota is reasonably well-defined. VariousAn Environmental Impact Statement will be required and various permits from state and federal authorities will be necessary. Annecessary before we can commence construction.

On January 11, 2005, we submitted initial documentation to the MDNR, the USFS, and the USACE. These documents and data provided the information required for preparation of a Draft Scoping Environmental Impact StatementAssessment Worksheet (the “EAW”).

On March 14, 2005, we reached an agreement with the MDNR, USFS and USACE to cooperate in preparing a EIS under state guidelines issued by the MDNR.

On October 25, 2005, the MDNR issued the Final Scoping EAW and related Final Scoping Decision after a period of public review and comment. These documents defined the scope of the EIS and were used to develop a request for proposal (the “RFP”) for third-party preparation of an EIS that will involve public

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participation. On April 3, 2006 the Minnesota DNR selected the independent EIS contractor which is preparing the EIS.

The MDNR has taken longer than it originally expected to complete its review of the environmental testing and analysis that supports the EIS. Most recently, in February 2008 the MDNR informed us that, in order to make the draft EIS as thorough and complete as possible, extra time is being taken by the MDNR to validate and verify sampling, monitoring, and modeling data. The MDNR anticipates the validation and drafting of the draft EIS will be completed before the end of the second quarter of 2008.

Once the draft EIS is published, non-government organizations, government agencies and the public will have an opportunity to comment. The final EIS will incorporate analysis and appropriate responses to comments, a process that can take several months. Once the EIS receives a declaration of “adequacy” the various permits required withfor construction can be issued. It should be noted that the Minnesota Department of National Resources asgovernment agencies that are preparing the lead agency.

We commenced the permitting process in early 2004. As of January 31, 2006,2008, we had spent approximately $3.146$14.581 million on environmental and permitting activities and we anticipate spending an additional $5.0$4.0 million to complete this work.

Prospectors first discovered copper and nickel near Ely, Minnesota about 20 miles north of NorthMet in the 1940’s.1940s. Subsequently, the Bear Creek Mining Company conducted a regional exploration program resulting in the discovery of the Babbitt deposit (northeast of NorthMet). US Steel stakedbegan an exploration program in the Duluth Complex in the late 1960’s and over the next few years drilled 112114 core holes into the NorthMet property (then called Dunka Road).

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