First Nickel Annual Report - 2010

ANNUALREPORT2010

FIRSTNICKELINC.

First Nickel Inc.120 Front Street EastSuite 206Toronto, OntarioM5A 4L9

CONTENTS

1 Highlights of 2010 and 2011 Objectives

2 Message to Shareholders

4 Production at Lockerby Mine

10 Exploration

12 Environment, Health and Safety

13 Management’s Discussion and Analysis

33 Management’s Responsibility for Financial Reporting

33 Independent Auditors’ Report

34 Balance Sheets

35 Statements of Operations and Comprehensive Loss

36 Statements of Changes in Shareholders’ Equity

37 Statements of Cash Flows

38 Notes to the Financial Statements

52 Glossary of Terms

53 Corporate Information

FORWARD-LOOKING STATEMENT

Corporate Information

DIRECTORS

Thomas J. Pugsley (2, 3, 4)

C. David A. Comba (2, 4)

Lyle R.Hepburn (1, 3)

William J. Anderson (4)

Richard S.Hallisey (1, 4)

Robert F. Whittall (1, 3)

Russell L. Cranswick (2, 4)

(1) Audit Committee

(2) Compensation Committee

(3) Corporate Governance Committee

(4) Technical Advisory Committee

OFFICERS

William J. AndersonPresident & Chief Executive Officer

Joseph Del Campo, CMAChief Financial Officer

Gerry BilodeauChief Operating Officer

Paul Davis, P.Geo.,M.Sc.Vice President Exploration

HEAD OFFICE

120 Front Street East

Suite 206

Toronto, Ontario

M5A 4L9

Phone 416-362-7050

Fax 416-362-9050

Stock Exchange Listing

Toronto Stock Exchange

Symbol: FNI

Legal Counsel

Fasken Martineau DuMoulin LLP

333 Bay Street

Suite 2400

Bay Adelaide Centre

Toronto, Ontario

M5H 2T6

Auditors

KPMG LLP

Bay Adelaide Centre

Suite 4600

333 Bay Street

Toronto, Ontario

M5H 2S5

REGISTRAR AND TRANSFER AGENT

Equity Transfer Services Inc.

200 University Avenue

Suite 400

Toronto, Ontario

M5H 4H1

Investor Relations Website

www.firstnickel.com

Annual General Meeting

Thursday, June 16, 2011 at 10 a.m. ET

TSX Broadcast Centre – Gallery

The Exchange Tower

130 King Street West

Toronto, Ontario

M5X 1J2

This annual report may containforward-looking statements, which aresubject to certain risks, uncertaintiesand assumptions. A number of factorscould cause actual results to differmaterially from the results discussedin such statements, and there is noassurance that actual results will beconsistent with them. Such forward-looking statements are made as atthe date of this annual report, andthe Company assumes no obligationto update or revise it, either publiclyor otherwise, to reflect new events,information or circumstances.

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INC.ANNUALREPORT2010

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• Engagement letter signedwith two major internationalbanks to arrange a $30 milliondebt facility

HIGHLIGHTS OF 2010

2011OBJECTIVES

• $33 million raised througha prospectus offering

• Recommissioningphase of the LockerbyDepth DevelopmentProject initiated in Q4

• Finalize the projectdebt facility

• Launch the LockerbyDepth DevelopmentProject, targetinginitial ore deliveryin Q3

• Continue to source newadvanced projects

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During 2010 we achievedmajor progress in structuringthe financial package neededto fund the capital plan atLockerby Mine that will returnthe operation to productionat levels that ensure robustmargins and solid cash flow.

MESSAGE TO SHAREHOLDERS

William J. AndersonPresident & CEO

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In the summer of 2010 we acceptedan engagement letter from twolarge international banks toarrange a $30 million debt facility.In the fall of 2010 we secured aUS$5 million bridge loan from ourlargest shareholder, which allowedus to begin the Recommissioningphase of the Lockerby Depthproject. This initiative was followedin November with a further$28 million in funding throughan equity offering.

As we begin 2011, we are in a solidfinancial position, enjoying thestrong support of two largeinstitutional shareholders, andare well-advanced in the lengthyand involved process of providingthe documentation needed forthe $30 million loan facility. Inthe second half of 2010 prices ofour two main metals, nickel andcopper have displayed promisingpositive trajectories, and with theexpectation that demand forthese metals will remain strongover the next few years, the outlookfor First Nickel is very promising.

I have remarked before thatthrough the past couple of verydifficult years, our key operatingand management staff has stayedon board and undertaken a greatdeal of hard work keeping themine site in readiness, as wellas preparing the plans for a well-designed and tightly budgetedcapital plan. On behalf of thedirectors, I’d like to expressour thanks for all this effortand dedication.

As a team, our immediate priority isto execute the plan we’ve built anddeliver against the milestones wehave set. I am confident that bythe second half of 2011 we willbe shipping ore to Xstrata’s mill.I also want to emphasize to ourshareholders that with the strengthand experience of our operatingand exploration teams, we have theskills to develop and manage muchmore than Lockerby, and growth ofthe Company beyond the Lockerbyoperation will be a key focus as wemove forward.

William J. Anderson President & CEO

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Lockerby’s No. 2 Headframeand mine complex buildinghave been readied for thetransition back to commercialproduction. First Nickel’semployees and equipmentare delivered to the minevia the No. 2 Shaft.

Preparing the Lockerby Mine for a returnto production was the priority of FirstNickel in 2010. The Company madesignificant strides during the yearincluding the initiation of detailedengineering designs, rehabilitationwork on critical conveyances and mobileequipment, securing of a new mobilefleet, signing new collective agreementswith both the United Steelworkers andCAW unions for three year terms,and sourcing financing to fund thedevelopment program.

Both financing and project schedules areon track for commencement of productionin the third quarter of 2011 and a ramp-upto full annualized production of 10 millionpounds of nickel and 7 million pounds ofcopper by mid 2012.

Another important milestone forthe Company was the engagementof J.S. Redpath Limited as the miningcontractor to execute the Company’scapital development program to the7000 Level. The work will involve theextension of the ramp, as well as lateraland vertical development on the LockerbyDepth project. J.S. Redpath Limited isan internationally recognized miningcontractor known for its focus on safety,project execution and attention to budgetsand costing.

During 2010, the mine staff and skeletoncrew worked diligently at keeping theLockerby Mine on care and maintenance,maintaining attention to safety and a highenvironmental standard while focusedon minimizing costs and advancingengineering and planning activities.

The engineering and planning studieshave focused on reducing the capitaland operational costs and increasingproductivity and efficiency. Opportunitieshave been identified in terms of minedevelopment performance, a reductionin the mine infrastructure required toaccess the ore body, and streamliningthe process to move ore to surface.

LOCKERBYMINE

This figure represents the3-Dimensional representation ofthe Lockerby Depth developmentand mining project. The ramp isidentified in yellow, access driftsin green, primary stopes inred/dark blue, secondarystopes in orange/light blue andventilation raises in light blue.

P R O D U C T I O N

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As activity increases on theLockerby Depth developmentprogram, ore trucks similarto the one pictured above willtransport the ore from theLockerby Mine Site toXstrata’s Strathcona MillFacility for milling.

First Nickel believes that the LockerbyMine represents one of the best high-grade nickel deposits positionedfor development during this periodof strong metal markets that isanticipated to continue into theforeseeable future.

A feasibility study on the developmentand mining of the Lockerby Depth orebody was updated by GENIVAR LimitedPartnership, a consulting engineeringfirm based in Quebec City, Quebec,in 2010.

The study derived a Probable MineralReserve of 1.44 million tonnes grading2.23% nickel, 1.36% copper and 0.083%cobalt. Reserves were estimated usinga 20% dilution, a 90% overall miningrecovery and a 1.5% nickel equivalentcut-off grade. The Probable MineralReserve was derived from an estimatedIndicated Mineral Resource of 1.42 milliontonnes grading 2.58% nickel, 1.60% copperand 0.098% cobalt at a 1.5% nickelequivalent cut-off grade.

The Lockerby Depth Mine Plan scheduleextracts the Probable Mineral Reserveover a 6.5-year period including a 1-yearperiod of pre-production and 5.5 yearsof development and production at a fullproduction rate of 800 tonnes per dayor 280,000 tonnes per year. The criticalcomponents of the capital plan that willultimately increase productivity and reduceunit costs include advancing developmentahead of production, acquiring new mobileequipment and improving ore/wastehandling and ventilation.

Significant upside potential remains atthe Lockerby Mine. The current mine plandoes not incorporate any ore sourced fromresources outside of the Lockerby Depthincluding the Lockerby East and UpperWest zones. There exists untestedexploration potential for footwall, hangingwall and contact zones. The mineralizationis open at depth below the 70 Level on theLockerby Depth Zone and opportunitiesexist to further expand the Depth Zoneand sustain levels of production at greaterthan 800 tonnes per day beyond thecurrent mine plan.

LOCKERBYMINE

Pictured below is high grade,massive sulphide nickel orecharacteristic of the LockerbyDepth contact ore deposit. TheLockerby Depth deposit will bemined using a transverse miningmethod comprised of primaryand secondary stopes.

P R O D U C T I O N

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Lockerby’s mobile fleethas been refurbished andnew equipment is beingbrought in to expandthe fleet and replaceolder, less efficient units.

The upper limit of the Depth Zonelies at 1,924 metres below surface(or approximately 6,300 feet). TheDepth Zone consists of two lenses inclose proximity to each other. They areidentified as the Contact Zone and theHanging Wall Zone. The Contact Zone isthe main mineralized area and contains85 stopes totalling 1,252,800 tonnes ofore at 2.34% Ni, 1.38% Cu and 0.088%Co. The Hanging Wall Zone contains16 stopes totalling 183,400 tonnes ofore at 1.46% Ni, 1.20% Cu and 0.053%Co. The Contact Zone will be accessedthrough the Hanging Wall Zone.

The current plan to mine the LockerbyDepth Zone is a transverse accessedblasthole stope design. Mining will becarried out along 231 vertical metres onseven 33 metre high sublevels from thefloor of 65-3 Level down to the floor of70 Level. The orebody will be accessedvia a ramp and level crosscuts to mainhaulage drifts.

The Contact Zone and Hanging Wall Zonehave been subdivided into Primary andSecondary stopes. A sublevel longholestoping method will be applied usingdownhole drilling.

The 45 primary stopes of the Contact Zonewill be mined top down (i.e. from the floorof the existing 65-3 Level downwards tothe 70 Level), while the main ramp isdeepened allowing access to main leveldevelopment. Excavation of the rampwill be done concurrently to mining of theprimary stopes of the Contact Zone. Oncethe ramp is developed and the primarystopes are mined out, the remaining 40secondary stopes of the Contact Zonewill be mined bottom-up.

This mining approach will support steadystate mining and extraction of ore fromstopes on multiple areas as well asaccelerate the start of production.

The mine is being developed to minimizethe build-up of stresses in the rock massinherent to mining in deeper zones. Thisprocess, when combined with consolidatedbackfill, was deemed the safest scenario tomaintain stability of underground openingsand will result in improved economics andproductivity during the life of the project.

A dedicated ventilation network to thenew working areas will be connectedto the existing ventilation network of theunderground mine. A new cooling strategyemploying a compressed air network anda spray chamber will be used to lower theambient air temperature in deeper levelsduring the summer period. The proposedventilation network of the Depth Zone willroute cool air to work areas.

LOCKERBYMINE

Minimizing the impact onthe environment is a corecorporate responsibilityand First Nickel uses theore storage shed above tolimit the exposure of thesulphides to rain and snow.

P R O D U C T I O N

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Special attention is paid toFirst Nickel’s explorationfootprint, limiting theclearing of vegetationand replanting with nativespecies to accelerate there-growth of any drill padsand access roads.

First Nickel will continue to build a pipelineof grass roots to advanced projects throughexploration, discovery and acquisition.

As the Company’s Sudbury explorationproperties matured, our explorationprograms began to expand outside ofthe Sudbury Basin. Exploration continuedon the Company’s large land package inSoutheastern Ontario, exploring for nickel-copper-platinum group element depositsin an underexplored area with knownoccurrences of nickel and copper.

An exploration strategy that utilizes thelatest technologies is employed to rankour exploration targets. A systematicapproach that aims to maximize ourexploration dollars is employed at allphases of exploration from grass rootsprospecting to deposit definition. Thisapproach has reduced our explorationcosts and resulted in an ability tocomplete more exploration workwithout an increase in budget.

First Nickel has a dedicated andexperienced exploration team thatmanages and directs all of the Company’sexploration programs. All programs arecompleted under the direction of aQualified Person as defined by NI 43-101and who is a member of the Associationof Professional Geoscientists of Ontario(“APGO”). The Company follows a rigorousquality control and quality assurance(“QAQC”) program that ensures thatthe exploration work completed meetsor exceeds industry standards.

Exploration work in 2010 was composedprimarily of surface mapping and samplingin Southeastern Ontario to maintain thestaked mining claims in good standing, anda 500 metre diamond drill program on theHenderson Property to earn the Company’s50% interest in the property. Explorationexpenditures were tightly controlled tomaximize the limited exploration budgetduring this period while the Companyfocused on its Lockerby Operations.

The Lockerby Mine represents anarea for further exploration opportunity.Targets have been identified in theLockerby Depth, Lockerby East andLockerby Main areas with knownnickel and copper mineralizationthat will require significant explorationprograms to define their potential.Exploration programs have beendesigned to test these areas andare integrated into the long-termmine plan.

First Nickel continuously searchesfor quality exploration opportunitiesthroughout the world. The Companyreviews numerous projects submitted byindividuals and companies, and assessesthe exploration potential to determineif the project represents an opportunityto add value to our group of explorationproperties. A strategy of identifyingundervalued and overlooked areaswith open ground for staking hasproven successful for the Company.

First Nickel is proactive in itsapproach to minimizing the impactto the local environment as a resultof our exploration activities. Allexploration tasks either completedby the Company or a contractoradhere to industry best practices.Re-contouring and re-seedingof drill pads and access roadsis part of the Company’s standardoperating procedure.

As the Company returns to being aproducer, the importance of sourcing newassets or projects for development will beemphasized as part of its growth strategy.

EXPLORATION

First Nickel’s explorationteams are highly trainedand experienced in the latestexploration techniques andour exploration programs arecompleted year round, testinghigh priority targets for thepresence of nickel, copperand platinum group elements.

E X P L O R A T I O N

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ENVIRONMENT /HEALTHANDSAFETYAt First Nickel, minimizing the impact on the environment isintegrated into all of our operations and is a core corporateresponsibility. We monitor our performance through ongoingtesting and are always looking for ways to reduce ourenvironmental footprint. Our Lockerby Mine has a formalenvironmental management system that is appropriatelystaffed and funded and we strive to exceed the legislatedenvironmental standards.

The health and safety of our employees and the public are apriority. Our entire team is dedicated to making safety an integralpart of every workday by identifying concerns and implementingimprovements to all processes. First Nickel has developed andcommunicated procedures that will ensure a safe and healthyworking environment for all of our employees and contractors.

Our guiding principles include a commitment to:

• No task being so important that time cannot be takento complete it safely

• Providing a safe and healthy workplace for all of our people

• Training and motivating all of our people to work ina safe and responsible manner

• Integrating of health and safety into planning and decision-making processes through the lifecycle of operations

• Applying “best practices” to ensure excellence in ourhealth and safety performance

• Compliance with relevant legislation

• Striving for continual improvement in our safetyand health performance

• Having all of our people accountable for health and safety

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MANAGEMENT’S DISCUSSION AND ANALYSIS

The following Management’s Discussion and Analysis (MD&A”) regarding the results of the operations of First Nickel Inc. (“FirstNickel” or the “Company”) constitutes management’s review of the Company’s financial and operating performance for the yearended December 31, 2010, and the Company’s financial status and future prospects. It should be read in conjunction with theCompany’s audited financial statements and related notes for the year ended December 31, 2010. The audited financial statementshave been prepared in accordance with Canadian generally accepted accounting principles (“GAAP”).

Additional Company information can be accessed through the System for Electronic Document Analysis and Retrieval (“SEDAR”)website at www.sedar.com and the Company’s website at www.firstnickel.com.

All dollar amounts are expressed in Canadian currency unless otherwise stated.

This information is provided as at March 23, 2011.

This MD&A contains forward-looking statements. For example, statements with respect to planned or expected development andproduction are all forward-looking statements. As well, statements about the adequacy of the Company’s cash resources or theneed for future financing are also forward-looking statements. All forward-looking statements, including forward-lookingstatements not specifically identified in this paragraph, are made subject to the cautionary language at the end of this document,and readers are directed to refer to that cautionary language when reading any forward-looking statements.

COMPANY OVERVIEW

First Nickel is a Canadian mining and exploration company, whose principal asset is the Lockerby Mine near Sudbury, Ontario.When operating, the mine produces nickel-copper ore which is sold to Xstrata Nickel (a business unit of Xstrata CanadaCorporation) (“Xstrata”) under a life of mine ore sale and processing agreement (the “Xstrata Off-take Agreement”). In October2008, in response to declining metal prices, operations were suspended and the mine was placed on care and maintenance.

In February 2009, the Company received an independent feasibility study on the Depth Zone at Lockerby Mine prepared by GENIVARLimited Partnership, and a subsequent update in October 2009 which demonstrates that the existing well-defined high gradereserve can support a financial case for development that will extend mine life by more than five years.

In October 2010, after receiving a bridge loan facility of US$5 million from Resource Capital Fund IV L.P., the Company began are-commissioning program in anticipation of launching a capital development project on its Lockerby Depth Orebody in 2011, whichwould lead to resumption of production later in 2011. An equity offering in November raised $28.7 million. By year end the Companyhad made significant progress in sourcing the funds for a re-start in 2011.

In addition to its Lockerby Mine, the Company has a portfolio of exploration projects in the Sudbury district, and elsewhere inOntario.

HIGHLIGHTS / SUMMARY

• A net loss of $9.1 million was recorded in 2010. This compares to a net loss of $7.5 million recorded in 2009.

• At December 31, 2010 the Company had a cash balance of $29.2 million.

• During 2010, major progress was achieved toward becoming fully funded for capital and corporate needs and the Company is ontrack for first production in Q3 of 2011 and to produce at an annualized rate of 10 million pounds of nickel, and 7 million poundsof copper by mid-2012.

• On September 1, 2010, the Company received a bridge loan of US$5 million from Resource Capital Fund IV L.P.

• In October 2010, the Company launched its re-commissioning capital program at the Lockerby Mine.

• On November 12, 2010, the Company completed an equity issue for gross proceeds of $28.7 million.

• In March 2011 the Company received the Commitment Letter from two banks for a $30 million secured project debt facility.

• Ramping back to full production is expected to start in Q3 of 2011.

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LOCKERBY DEPTH ZONE DEVELOPMENT FINANCING

The Company achieved great progress during 2010 and early 2011 toward securing full financing of its Lockerby Depth DevelopmentProject. The series of transactions as described below has positioned the Company for a full launch of the development program in2011. The combination of the cash in hand plus the debt facility when completed, will be sufficient to cover the initial capital coststo start of production of approximately $34 million and ongoing capital and working capital requirements through to full productionof 10 million pounds of nickel, and 7 million pounds of copper in 2012.

Bridge Loan – US$5 million

On September 1, 2010, the Company completed a financing with Resource Capital Fund IV L.P. (“RCF IV”) for a US$5 million bridgeloan that had a maturity date of December 31, 2013 (the “Bridge Loan”). The full amount was advanced on September 1, 2010 andwas used to initiate re-commissioning activities and detailed engineering studies at the Lockerby Mine. The Bridge Loan bore aninterest rate of 15% per annum, which was paid quarterly in common shares of the Company (“Common Shares”) valued at themarket price which equaled the 5-day weighted average trading price of the Common Shares. The Bridge Loan was providedpursuant to the terms of a convertible loan agreement between the Company and RCF IV dated July 23, 2009, as amended andrestated as of September 1, 2010 (the “Restated Loan Agreement”), which also provides for the ongoing respective rights andobligations of the Company and RCF IV in respect of the US$10 million convertible loan advanced to the Company on July 24, 2009(the “Convertible Loan”).

As part of the Equity Financing (described below), RCF IV exchanged $3,375,910 (US$3,171,059) of the US$5,000,000 Bridge Loanfor 28,132,580 Units based on an exchange rate of C$1.0646/US$1.00 and a price of $0.12 per Unit in connection with the Offering.The remaining $1,947,090 (US$1,828,940) of the Bridge Loan was exchanged in January 2011 for 16,225,753 Units, after receivingshareholder approval to convert the balance.

Proposed Senior Debt Facility – $30 million

On August 25, 2010, the Company entered into an engagement letter to appoint Société Générale (Canada Branch) (“SocGen”) andCommonwealth Bank of Australia (“CBA”) (together the “Lead Arrangers”) to act as exclusive lead arrangers for a senior securedproject loan facility up to $30 million (the “Facility”).

On March 1, 2011, the Company received and accepted commitments from the Lead Arrangers for a senior debt facility totalling $30million. The proceeds from this facility when closed will be used to partially fund the development and working capital costs at theCompany’s Depth Project at the Lockerby Mine in Sudbury. In connection with receiving the commitments, the Company agreed toissue 6,155,986 common share purchase warrants to the Lead Arrangers as part of the arrangement fee. The warrants areexercisable at $0.12 per share and expire March 31, 2015.

Drawdown of the Facility will be subject to a number of conditions precedent, including completion of satisfactory legaldocumentation, implementation of a hedging program and expenditure by the Company of its required equity contribution. Underthe Facility documents, the Company will be required to enter into direct agreements with several stakeholders to establishsatisfactory collateral arrangements covering the Company’s assets.

The Commitment to underwrite the Facility follows extensive due diligence review by both the Lead Arrangers and theirIndependent Engineer, Roscoe Postle Associates Inc. (RPA).

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Equity Financing – $28.7 million

On November 12, 2010 the Company completed an equity offering of 239,582,948 units (“Units”) of the Company at a price of $0.12per Unit for total gross proceeds of $28,749,953 (the “Offering”). Each Unit is comprised of one Common Share and one-half of oneCommon Share purchase warrant (each whole warrant, a “Warrant”). Each Warrant entitles the holder thereof to acquire oneCommon Share at a price of $0.17 until November 12, 2012.

Purchasers under the Offering included West Face Long Term Opportunities Global Master L.P., which purchased 91,000,000 Unitsfor proceeds of $10,920,000, and Resource Capital Fund V L.P. which purchased 41,666,666 Units for proceeds of $5,000,000.

LOCKERBY MINE

The mine staff and a skeleton crew worked diligently during 2010 at maintaining the Lockerby Mine on care and maintenance atminimal cost, and while also advancing engineering and planning activities. Both financing and project schedules are currently ontrack for commencement of production in the third quarter of 2011 and a ramp-up to full annualized production of 10 million poundsof nickel and 7 million pounds of copper, per year by mid-2012.

In October 2010, the Company launched its re-commissioning capital program at the Lockerby Mine after receiving a bridge facilityof US$5 million from RCF IV. Following completion of the $28.7 million equity financing in November 2010, site work wasaccelerated and the following activities are underway or completed by early 2011:

• Detailed engineering began in November 2010.

• Rehabilitation work on various conveyances and mobile equipment is well-advanced and on target.

• The supplier for the mobile equipment lease has been chosen, and delivery of the first 42T truck has been made.

• The Company anticipates selecting the mining contractor for the ramp development program in March.

• A number of unionized employees have been recalled as the Company prepares for the full launch of the Development Program.

On April 27, 2010 the Company signed a new collective agreement with the United Steelworkers who represent OCT (Office, Clericaland Technical) employees, and on July 23, 2010 an agreement was reached with the CAW for the P&M (Production and Maintenance)workers. Both of these agreements have three year terms to 2013.

EXPLORATION

West Graham Property

The Company has satisfied the option payments and exploration expenditures required to earn a 70% interest in the West GrahamProperty pursuant to the option agreement entered into between the Company and Landore Resources Canada Inc. (“Landore”)dated November 21, 2005. Landore has opted not to initiate a joint venture to the extent of its 30% working interest so the Companyhas the option to increase its interest to 85% by completing a bankable feasibility study by October 12, 2012.

Southeastern Ontario Claims

Exploration efforts during 2010 focused on the completion and submission of assessment reports to maintain priority claim blockson the Southeastern Ontario projects. Exploration programs consisted of surface mapping and prospecting, geophysical surveysand diamond drilling designed to test priority targets on the Raglan Hills and Belmont projects in Southeastern Ontario.

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Henderson Property

A diamond drill rig was mobilized onto the Henderson Property located in Raglan Township and completed a 500 metre drillprogram testing 3 conductive bodies defined by the surface TEM geophysical survey. Borehole TEM was completed on all threediamond drill holes. No significant mineralization was identified by the diamond drill program. The Company has satisfied theexploration expenditures of at least $60,000 required to earn a 50% interest in the Henderson Property pursuant to the optionagreement entered into between the Company and Melkior Resources Inc. dated July 31, 2010.

Belmont Property

Surface prospecting and sampling has been completed on the selected claims within the Belmont project to satisfy minimum workrequirements to maintain the priority claims in good standing for an additional year. Claims identified as having limited explorationpotential have been allowed to lapse.

Raglan Hills Joint Venture with Pacific Northwest Capital Corp.

On October 31, 2007, the Company entered into a then 50% – 50% joint venture agreement with Pacific Northwest Capital Corp.(“PFN”), (the “Joint Venture Agreement”) whereby both companies agreed to bear all expenditures and participate in a singlepurpose unincorporated joint venture for the purpose of carrying out mineral exploration on the Raglan Hills project located north-east of Bancroft, Ontario. PFN’s ownership interest in the property has been diluted according to the formula defined in the JointVenture Agreement below 10% and converted to a 1.5% net smelter royalty.

New Exploration Opportunities

The Company continues to actively source additional high quality exploration properties and reviews property submissions fromindividuals and corporations.

SELECTED ANNUAL INFORMATION

The following table sets out selected financial information relating to the Company’s most recently completed financial years.

Year ended Year ended Year endedDecember 31, December 31, December 31,

2010 2009 2008

Sales revenues $ Nil $ 4,483,662 $ 48,185,519

Net loss $ (9,096,076) $ (7,518,262) $ (24,208,062)

Net loss per share – basic and diluted $ (0.05) $ (0.05) $ (0.17)

Total assets $ 84,261,529 $ 61,714,203 $ 62,120,667

Working capital $ 28,278,092 $ 6,451,341 $ 8,377,065

Convertible loan $ 7,928,034 $ 7,849,236 $ Nil

Capital stock $ 99,106,416 $ 72,655,804 $ 73,727,356

Shareholders’ equity $ 67,593,169 $ 45,301,925 $ 50,924,120

Number of common shares issued and outstanding 437,188,897 159,110,632 155,548,098

No dividends have been declared or paid by the Company in any of the periods presented above. The Company does not anticipatedeclaring or paying any dividends on its Common Shares in the foreseeable future.

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RESULTS OF OPERATIONS

The following table presents a summary of the results of operations for the year ended December 31, 2010 and 2009:

December 31, December 31,2010 2009

Sales Revenue $ – $ 4,483,662

Operating costs excluding amortization – 4,173,121

Care and maintenance costs 5,138,684 4,772,855

Amortization of mining properties and equipment – 719,631

Accretion of asset retirement obligations 199,200 193,400

5,337,884 9,859,007

Operating loss from mining operations (5,337,884) (5,375,345)

General and administrative 2,364,192 2,289,477

Stock-based compensation 173,596 538,742

Foreign exchange gain (394,619) (273,222)

Depreciation and amortization 17,040 17,436

Interest on convertible loan 942,080 413,468

Accretion on convertible loan 535,046 218,987

Interest on bridge loan 198,632 –

Interest and other expenses 17,718 181,156

Realized loss on sale of marketable securities – 21,429

Interest and other income (78,563) (97,787)

3,775,122 3,309,686

Loss before taxes (9,113,006) (8,685,031)

Recovery of income and mining taxes (16,930) (1,166,769)

Net loss for the year $ (9,096,076) $ (7,518,262)

Loss per share – basic and diluted $ (0.05) $ (0.05)

Weighted average number of Common Shares outstanding 173,298,556 156,235,601

For the year ended December 31, 2010 the Company recorded a net loss of $9,096,076, or $0.05 per share, compared to a net lossof $7,518,262, or $0.05 per share, recorded for the year ended December 31, 2009. The Company has recorded a full valuationallowance against any future income tax assets for the year ended December 31, 2010.

No sales revenue was recorded in 2010. The year ended December 31, 2009, includes only one month of sales revenue as theCompany suspended mining operations at the Lockerby Mine in October 2008, and therefore only had one month of productionavailable for settlement in 2009.

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The following table sets out selected sales information for the periods indicated:

Total Total2010 2009 (i)

Sales by Payable Metal

Nickel – pounds – 486,849

Copper – pounds – 287,827

Cobalt – pounds – 9,096

Average Price Received – US$/lb

Nickel – $ 5.76

Copper – $ 1.58

Cobalt – $ 13.83

Average Exchange Rate Realized

US $ 1 = Canadian $ – $ 1.2280

(i) only includes one month of sales

Care and maintenance costs of $5,138,684 recorded in 2010 include ongoing costs of the staff retained at the Lockerby Mine site,energy, taxes, insurance, equipment rentals and materials required to maintain the mine.

General and administrative expenses recorded in 2010 totalled $2,364,192. This is $74,715 (3%) higher than the $2,289,477expenditures recorded in 2009. The increase is mostly attributable to higher consulting, legal and transfer agent fees.

Stock-based compensation costs for 2010 amounted to $173,596. In December of 2010, 6,800,000 stock options were granted todirectors, officers and employees at an exercise price of $0.12. The fair value of the options granted was estimated at the grant dateto be $468,155. Of this amount, $167,596 was expensed in 2010, with the balance amortized over the vesting period of the options.The Company uses the Black-Scholes pricing model in the valuations of the options.

An increase in the value of the Canadian dollar relative to the U.S. dollar during 2010 resulted in a foreign exchange gain of $394,619being recorded in 2010. Exchange gains or losses arise from the revaluation of the US dollar cash balances, and the US dollarConvertible Loan account.

The interest on the loan facilities with RCF IV for the year ended December 31, 2010 amounted to $1,140,712 ($942,080 on theConvertible Loan and $198,632 on the Bridge Loan). RCF IV notified the Company of its option to receive Common Shares in paymentof this interest. A total of 9,751,174 (6,691,693 in 2010 and 3,059,481 in 2011) Common Shares were issued to RCF IV in fullsatisfaction of this liability.

Interest and other expenses of $17,718 recorded in 2010 include costs incurred on mineral properties that were previously writtenoff, offset by a refund of interest on the flow-through funds (Part XII.6 tax).

Interest and other income is mostly made up of interest earned on cash balances, and on short term deposits. The lower interestincome in 2010, compared to 2009, mainly reflects lower interest rates.

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SUMMARY OF QUARTERLY RESULTS

The following table sets out selected financial information derived from the Company’s financial statements for each of the eightmost recently completed quarters:

Net loss pershare – basic

Sales revenues Net loss and diluted

December 31, 2010 $ Nil $ (2,943,097) $ (0.01)

September 30, 2010 $ Nil $ (1,532,483) $ (0.01)

June 30, 2010 $ Nil $ (2,602,100) $ (0.02)

March 31, 2010 $ Nil $ (2,018,396) $ (0.01)

December 31, 2009 $ Nil $ (1,410,820) $ (0.01)

September 30, 2009 $ Nil $ (1,554,114) $ (0.01)

June 30, 2009 $ Nil $ (2,013,697) $ (0.01)

March 31, 2009 $ 4,483,662 $ (2,539,631) $ (0.02)

The first, second, third and fourth quarters of 2010 include care and maintenance costs of $1,343,900, $1,218,702, $1,078,515 and$1,497,567, respectively, on the Lockerby Mine.

The first, second, third and fourth quarters of 2009 include care and maintenance costs of $1,430,234, $1,128,708, $935,230 and$1,278,683, respectively, on the Lockerby Mine.

LIQUIDITY AND CAPITAL RESOURCES

Working capital at December 31, 2010 was $28,278,092, an increase of $21,826,751 since December 31, 2009.

As at December 31, 2010, the Company had $29,154,731 in unrestricted cash and cash equivalents, a net increase of $21,860,473since December 31, 2009. The net increase reflects net proceeds of $26,636,696 from the equity financing and the $5,332,500 BridgeLoan from RCF IV, offset by a net cash usage in operations of $7,489,432, deferred financing costs of $740,133, development costsat the Lockerby Mine of $896,038 and expenditures of $983,120 on exploration properties.

The initial capital costs to start of production for the Lockerby Depth Development Project of approximately $34 million, and ongoingcapital and working capital requirements through to full production in 2012, will be financed by the combination of the cash inhand plus the debt facility when completed. See “Lockerby Depth Zone Development Financing” section of this MD&A for currentfinancing arrangements.

The Company has restricted cash resources which have been pledged as security for certain obligations with respect to theLockerby Mine. As part of the acquisition of the Lockerby Mine, the Company posted an irrevocable letter of credit issued by a seniorCanadian bank in the amount of $5,900,000 in favour of the Ontario Ministry of Northern Development, Mines and Forestry to act asfinancial assurance for the Company’s Mine Closure Plan-related liabilities and obligations in respect of the Lockerby Mine. Inaddition, a letter of credit in the amount of $310,000 has been posted in favour of the Independent Electricity System Operator asfinancial assurance for the ongoing energy consumption at the Lockerby Mine. These two amounts, totalling $6,210,000, are beingshown as restricted investments in term deposits on the balance sheet.

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The following table sets out, as at December 31, 2010, information with respect to the Company’s known contractual obligations andthe estimated time horizon for their repayment:

Payments due by period

Less than More thanContractual Obligations Total 1 year 1–3 year 3–5 years 5 years

Office Lease Obligations $ 30,561 $ 30,561 Nil Nil Nil

Convertible Loan (i) $ 9,946,000 Nil $ 9,946,000 Nil Nil

Asset retirement obligations (ii) $ 4,600,289 Nil Nil Nil $ 4,600,289

Total $ 14,576,850 $ 30,561 $ 9,946,000 $ Nil $ 4,600,289

(i) The Convertible Loan is denominated in US dollars and is due on December 31, 2013. The loan has been converted for this purpose at theexchange rate of US$1 = C$0.9946, being the closing exchange rate on December 31, 2010.

(ii) The Company has posted an irrevocable letter of credit issued by a major Canadian bank in the amount of $5,900,000 in favour of the OntarioMinistry of Northern Development, Mines and Forestry to act as financial assurance for the Company’s Mine Closure Plan-related liabilities andobligations in respect of the Lockerby Mine.

TREND INFORMATION

There are no major trends which are anticipated to have a material effect on the Company’s financial condition and results ofoperations in the near future.

OFF-BALANCE SHEET ARRANGEMENTS

The Company has no off-balance sheet arrangements.

TRANSACTIONS WITH RELATED PARTIES

There were no transactions with related parties during the year ended December 31, 2010.

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FOURTH QUARTER

Results for the fourth quarter of 2010 along with prior 2010 quarters is presented below:

2010 2010 2010 2010 2010Q 1 Q 2 Q 3 Q 4 Total

Sales Revenue $ – $ – $ – $ – $ –

Care and maintenance costs 1,343,900 1,218,702 1,078,515 1,497,567 5,138,684

Accretion of asset retirement obligations 49,800 49,800 49,800 49,800 199,200

1,393,700 1,268,502 1,128,315 1,547,367 5,337,884

Operating loss from mining operations (1,393,700) (1,268,502) (1,128,315) (1,547,367) (5,337,884)

General and administrative 534,320 570,066 367,950 891,856 2,364,192

Stock-based compensation 1,500 1,500 1,500 169,096 173,596

Foreign exchange loss (gain) (275,392) 387,081 (404,081) (102,227) (394,619)

Depreciation and amortization 4,260 4,260 4,260 4,260 17,040

Interest on convertible loan 235,520 235,520 235,520 235,520 942,080

Interest on bridge loan – – 66,538 132,094 198,632

Accretion on convertible loan 126,800 135,706 136,081 136,459 535,046

Interest and other expenses 8,585 6,546 5,297 (2,710) 17,718

Interest and other income (10,897) (7,081) (8,897) (51,688) (78,563)

624,696 1,333,598 404,168 1,412,660 3,775,122

Loss before taxes (2,018,396) (2,602,100) (1,532,483) (2,960,027) (9,113,006)

Recovery of income & mining taxes – – – (16,930) (16,930)

Net loss for the period (2,018,396) (2,602,100) (1,532,483) (2,943,097) (9,096,076)

Net loss per share – basic and diluted $ (0.01) $ (0.02) $ (0.01) $ (0.01) $ (0.05)

The Company recorded a net loss of $2,943,097, or $0.01 per share, in the fourth quarter of 2010. The Lockerby Mine continued tobe on care and maintenance, however, in October 2010, the Company launched its re-commissioning capital program at theLockerby Mine after receiving the bridge facility of US$5 million from RCF IV. Following completion of the $28.7 million equityfinancing in November 2010, the program was accelerated.

NON-GAAP PERFORMANCE MEASURES

Operating cost per tonne of ore, cash operating margin per tonne milled, net cash cost per pound of nickel produced, net cash costper pound of nickel sold, average price realized per pound of nickel and per pound of copper are included in this MD&A becausethese statistics are key performance measures that management uses to monitor performance. Management uses these statisticsto assess how well the Company is performing compared to plan and to assess the overall effectiveness and efficiency of miningoperations. These performance measures do not have a meaning within GAAP and, therefore, amounts presented may not becomparable to similar data presented by other mining companies. The data is intended to provide additional information and shouldnot be considered in isolation or as a substitute for measures of performance prepared in accordance with GAAP.

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CRITICAL ACCOUNTING ESTIMATES

In preparing financial statements, management has to make estimates and assumptions that affect the reported amounts of assets,liabilities, revenue and expenses. The most significant accounting estimates are the policy of capitalizing exploration costs on itsmineral properties and the valuation of such properties, asset retirement obligations, and stock-based compensation.

The Company reviews its portfolio of mineral properties on an annual basis to determine whether a write-down of the capitalizedcost of any property is required. The recoverability of the amounts shown for mineral properties and deferred exploration costs isdependent on the existence of economically recoverable reserves, the ability to obtain financing to complete the development ofsuch reserves, and meet its obligations under various agreements.

Estimates of asset retirement obligations are the costs associated with respect to the mine closure plan at Lockerby Mine. Theseamounts are estimates of expenditures that are not due until future years.

The Company uses a Black-Scholes model to determine the fair value of options and warrants. The main factor affecting theestimates of stock-based compensation is the stock price volatility used. The Company uses historical price data and comparablesin the estimate of future volatilities.

FUTURE ACCOUNTING CHANGES

Adoption of International Accounting Standards

In February 2008, the CICA announced that Canadian generally accepted accounting principles for publicly accountable enterpriseswill be replaced by International Financial Reporting Standards (“IFRS”) for fiscal years beginning on or after January 1, 2011.Companies will be required to provide IFRS comparative information for the previous fiscal year. Accordingly, the conversion fromCanadian GAAP to IFRS will be applicable to the Company’s reporting for the first quarter of 2011 for which the current andcomparative information will be prepared under IFRS. The Company is required to apply all of those IFRS standards which areeffective for fiscal year ending December 31, 2011 and apply them to its opening January 1, 2010 balance sheet.

The Company’s IFRS implementation project consists of three primary phases which will be completed by a combination of in-houseresources and external consultants.

• Initial diagnostic phase (“Phase I”) – Involves preparing a preliminary impact assessment to identify key areas that may be impactedby the transition to IFRS. Each potential impact identified during this phase is ranked as having a high, moderate or low impact onour financial reporting and the overall difficulty of the conversion effort.

• Impact analysis, evaluation and solution development phase (“Phase II”) – Involves the selection of IFRS accounting policies by seniormanagement and the review by the audit committee, the quantification of the impact of changes on our existing accounting policieson the opening IFRS balance sheet and the development of draft IFRS financial statements.

• Implementation and review phase (“Phase III”) – Involves training key finance and other personnel and implementation of therequired changes to our information systems and business policies and procedures. It will enable the Company to collect the financialinformation necessary to prepare IFRS financial statements and obtain audit committee approval of IFRS financial statements.

The table below summarizes the expected timing of activities related to the Company’s transition to IFRS.

Initial analysis of key areas for which changes to accounting policiesmay be required Completed

Detailed analysis of all relevant IFRS requirements and identificationof areas requiring accounting policy changes or those withaccounting policy alternatives Completed

Assessment of first-time adoption (IFRS 1) requirements and alternatives Completed

Final determination of changes to accounting policies and choices to be madewith respect to first-time adoption alternatives Completed

Resolution of the accounting policy change implications on informationtechnology, internal controls and contractual arrangements Substantially completed with

continuing review throughout 2011

Management and employee education and training Completed

Quantification of the Financial Statement impact of changes in accounting policies Substantially completed

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Financial reporting expertise and communication to stakeholders

The Company has retained external consultants to establish appropriate IFRS financial reporting expertise at all levels of thebusiness. The external consultants began to train key finance and operational staff during the second quarter of 2010. Informationregarding IFRS implications will be communicated in the normal course of the Company’s continuous disclosure filings. TheCompany also held an IFRS information session with the Audit Committee during March 2010. During this session, managementand external consultants provided a review of the timeline for implementation, the implications of IFRS standards to the businessand an overview of the impact to the financial statements. The Audit Committee will continue to receive periodic presentationsand project status updates from management. The Company will also ensure that its key stakeholders are informed about theanticipated effects of the IFRS transition.

The Company has substantially completed Phase I and Phase II and will continue to finalize the differences in connection with theMarch 31, 2011 interim financial statements.

The differences that have been identified in Phases I and II are summarized below.

a) Transitional Impact on Financial statement presentation and classification

The Company’s financial statements will have a different format upon transition to IFRS.

The components of a complete set of IFRS financial statements are: statement of financial position (balance sheet), statement ofcomprehensive income, statement of changes in equity, statement of cash flows, and notes including accounting policies. Anincome statement will be presented as a component of the statement of comprehensive income. The balance sheet may bepresented in ascending or descending order of liquidity. The income statement is classified by each major functional area –marketing, distribution, etc.

Impact on the Company: The Company will reformat the financial statements in compliance with IAS 1.

b) IFRS-1 Transitional policy choices and exceptions for retrospective application

IFRS-1 contains the following policy choices with respect to first-time adoption that are applicable to the Company.

Property, plant & equipment:

IFRS 1 provides a choice between measuring property, plant and equipment at its fair value at the date of transition and using thoseamounts as deemed cost or using the historical cost basis assuming that IFRS has been applied since inception.

Impact on the Company: The Company estimates that there is no material impact at transition date.

c) Mandatorily applicable standards with retrospective application (i.e., not specifically exempt under IFRS – 1)

Deferred mineral exploration costs

Upon adoption of IFRS, the Company will have a choice between retaining its existing policy of capitalizing all pre-feasibilityevaluation and exploration expenditures and electing to change its policy retrospectively to expense some or all pre-feasibility costs.

Impact on the Company: The Company has decided to retain its policy of capitalizing its E & E expenditures and further determined that

the adoption of the provisions of IFRS 6 Exploration for and Evaluation of Mineral Resources will not result in any transitional impact at

January 1, 2010.

Property, plant and equipment – cost

IFRS: IAS 16 contains more extensive guidance with respect to components within PP&E. When an item of property, plant andequipment comprises individual components for which different depreciation methods or rates are appropriate, each componentis accounted for separately (component accounting). Canadian GAAP: Section 3061 essentially contains similar guidance but isless extensive.

Impact on the Company: The Company has determined that there is no impact upon transition as at January 1, 2010.

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Property, plant and equipment – impairment

IFRS: Under IAS 36 an asset is impaired if the recoverable amount is lower than the asset’s carrying amount. The recoverableamount is defined as the higher of the asset’s fair value less cost to sell and its value-in-use. The value-in-use calculation involvesdiscounting the expected future cash flows to be generated by the asset to their net present value. Canadian companies should(i) determine the existence of any impairment loss, and (ii) measure and recognize such impairment, if any at January 1, 2010.Canadian GAAP: A two-step approach is used to measure impairment. In step 1, a recoverability test is performed by comparing theexpected undiscounted future cash flows to be derived from the asset with its carrying amount. If the asset fails the recoverabilitytest, step 2 is triggered, and the entity must record an impairment loss calculated as the excess of the asset’s carrying amount overits fair value.

Impact on the Company: The Company has applied the IAS 36 methodology to the carrying values of mineral assets and property, plantand equipment and determined that there was no impairment at January 1, 2010.

Convertible debt – Transaction costs

The Company has certain convertible debt denominated in U.S. dollars.

IFRS: IAS 39 does not allow a choice of accounting policy for transaction costs – thus must be recognized as part of the financialliabilities. Canadian GAAP: Permits a choice with respect to either expensing the costs as incurred or deferring the costs as partof the related financial liability.

Impact on the Company: The Company does not expect any transitional impact as it has recognized all direct costs as part of theconvertible debt.

Convertible debt – valuation methodology

IFRS: Under IAS 32 the liability component of a compound instrument is measured on initial recognition by measuring any financialasset or financial liability components at fair value and applying the residual amount to equity. Canadian GAAP: Section 3863permits an additional “relative fair value” method.

Impact on the Company: At initial recognition, the Company measured the liability component of the convertible loan at fair value andapplied the residual amount to equity in accordance with the methodology prescribed by IFRS 7.

Convertible debt – foreign exchange impact

The Company’s functional currency is Canadian dollars whereas the debt is denominated in U.S. dollars. IFRS: The conversionfeature in the Convertible Loan is classified as a liability. Canadian GAAP: The equity conversion option is classified as a separatecomponent of shareholders’ equity. The effects of this transitional change are estimated as follows:

a) January 1, 2010: Retrospectively reclassify the equity component as a liability by reducing other reserves and increasingconvertible loan by $2,372,000.

b) January 1, 2010: Retrospectively decrease the convertible loan and deficit by $244,000 to adjust amortization of costs andrelated foreign exchange effects.

Future income taxes recognized in connection with Flow-through shares

The Company has periodically financed its exploration activities by the issuance of flow-through shares. Income tax creditsassociated with these flow-through shares have all been renounced and all qualifying expenditures had been incurred prior toJanuary 1, 2010.

IFRS: There is no specific standard under IFRS that directly deals with flow-through shares. Canadian GAAP: The Company reducesthe net proceeds of the flow through share issuance by the future tax liability of the Company resulting from the renunciation of theexploration and development expenditures in favor of the flow though share subscribers. Future income tax assets (loss carryforwards and/or deductible temporary differences) not previously recognized as a result of applying the “more likely than not” testare recognized as a reduction of the future income tax liability through a credit in the income statement.

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Impact on the Company: The Company has applied the United States Financial Accounting Standards Board (FASB) to determine

transitional adjustments as at January 1, 2010. Under the FASB model, the proceeds from issuance of these shares are allocated between

the offering of shares and the sale of tax benefits. The allocation is made based on the difference between the quoted price of the existing

shares and the amount the investor pays for the shares. A liability is recognized for this difference. The liability is reversed when tax

benefits are renounced and a deferred tax liability is recognized at that time. Income tax expense is the difference between the amount

of a deferred tax liability and the liability recognized on issuance. Based on the foregoing, the Company estimates that the following

changes will be recorded to its transition date balance sheet at January 1, 2010:

a) January 1, 2010: retrospectively decrease deficit and decrease share capital by $2,725,000 to recognize premium on flow-through shares

b) January 1, 2010: retrospectively increase share capital and increase deficit by $6,746,000 to reclassify the amount originally deductedfrom share capital upon renouncement of the tax credits.

Provision for environmental rehabilitation

IFRS – IFRS 37 applies to a constructive obligation, where the event creates valid expectations that the entity will discharge theobligation, as well as a legal obligation. The amount recognized should be the best estimate of the expenditure required to settlethe obligation at the balance sheet date. Present value should be used where the effect of the time value of money is material.Canadian GAAP: Section 3110, applies to legal obligations associated with the retirement of a tangible long-lived asset. Such anobligation is to be initially measured at fair value in the period in which the obligation is incurred, unless it cannot be reliablymeasured at that date.

Impact on the Company: The asset retirement obligation with respect to the Lockerby Mine represents a legal and constructive obligation

under both section 3110 and IAS 37. Both standards require the obligation to be recognized initially at fair value. The Company has

determined that the amount recognized as a liability at transition date is not materially different under IFRS.

Functional currency

The Company uses the Canadian $ as both its functional and reporting currency. IAS 21 contains a more comprehensive frameworkfor the determination of functional currency.

Impact on the Company: The Company has followed the guidance in IAS 21 and determined that there is no impact on its transitionalbalance sheet at January 1, 2010.

Share based compensation

IFRS: Under IFRS 2, graded vesting awards must be accounted for as though each instalment is a separate award. IFRS does notprovide for an election to treat the instruments as a pool and recognize expense on a straight line basis. Canadian GAAP: Straightline basis is permissible under Canadian GAAP.

Impact on the Company: The Company has determined that there is no transitional impact at January 1, 2010.

Impact on information systems and processes and controls

Based on work completed so far the Company has determined that adoption of IFRS does not have a pervasive impact on its presentsystems and processes. The Company expects to implement certain minor changes to the general ledger account descriptions aswell as the calculation methodologies currently in use for certain specific financial statement areas such as asset impairment,share based compensation etc. The certifying officers are currently evaluating the effectiveness of, any significant changes tocontrols if any, to prepare for certification under IFRS in 2011.

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Business Combinations

In January 2009, the CICA issued the new handbook Section 1582, “Business Combinations”, effective for fiscal years beginning onor after January 1, 2011. This pronouncement further aligns Canadian GAAP with IFRS and changes the accounting for businesscombinations in a number of areas. It establishes principles and requirements governing how an acquiring company recognizes andmeasures in its financial statements identifiable assets acquired, liabilities assumed, any non-controlling interest in the acquiree,and goodwill acquired. The section also establishes disclosure requirements that will enable users of the acquiring company’sfinancial statements to evaluate the nature and financial effects of its business combinations. Although the Company is consideringthe impact of adopting this pronouncement on the financial statements, it will be required for future acquisitions beginning in fiscal2011, or if the Company elects to apply to any future acquisition prior to fiscal 2011.

Consolidated Financial Statements and Non-Controlling Interests

In January 2009, the CICA issued the new handbook Section 1601, “Consolidated Financial Statements”, and Section 1602, “Non-Controlling Interests”, effective for fiscal years beginning on or after January 1, 2011. These pronouncements further alignCanadian GAAP with US GAAP and IFRS. Sections 1601 and 1602 change the accounting and reporting for ownership interests insubsidiaries held by parties other than the parent. Non-controlling interests are to be presented in the consolidated statement offinancial position within equity but separate from the parent’s equity. The amount of consolidated net income attributable to theparent and to the non-controlling interest is to be clearly identified and presented on the face of the consolidated statement ofincome. In addition, these pronouncements establish standards for a change in a parent’s ownership interest in a subsidiary andthe valuation of retained non-controlling equity investments when a subsidiary is deconsolidated. They also establish reportingrequirements for providing sufficient disclosures that clearly identify and distinguish between the interests of the parent andthe interests of the non-controlling owners. The adoption of this standard is not expected to have an impact on the Company’sfinancial statements.

FINANCIAL INSTRUMENTS

(a) Credit risk

The Company is exposed to credit risk on the cash held with its bank and on the accounts receivable from its customer.

The Companymitigates credit risk by investing its cash, restricted cash, and cash equivalents with Schedule I banks. Schedule I banksare domestic banks and are authorized under the Bank Act to accept deposits, which may be eligible for deposit insurance providedby the Canadian Deposit Insurance Corporation. The Company does not hold any non-bank asset backed commercial paper.

Pursuant to the Xstrata Off-take Agreement dated May 31, 2005, as amended, the Company agreed that all ore produced using anyinfrastructure or assets comprising the Lockerby Mine shall be processed at Xstrata’s Strathcona Mill located near Onaping,Ontario. Accordingly, the Company has only one customer and is unable to reduce its concentration of credit risk over multiplecounterparties. Should Xstrata enter into financial difficulty, the Company would be exposed to material losses on its accountsreceivable and future revenues. There was no allowance for doubtful accounts and no amounts for bad debt written off during theyear ended December 31, 2010.

(b) Liquidity risk

The Company has in place a planning and budgeting process to help determine the funds required to support the Company’s normaloperating requirements on an ongoing basis and its capital, development and exploration expenditures. The Company ensures thatthere are sufficient funds to meet its short-term requirements, taking into account its anticipated cash flows from operations andits holdings of cash and cash equivalents.

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As of December 31, 2010, the Company had a cash balance of $29,154,731 (December 31, 2009 – $7,294,258) to settle currentaccounts payable and accrued liabilities of $1,423,716 (December 31, 2008 – $1,198,085).

(c) Market risk

The most significant factor affecting the Company’s earnings is the price of the metals contained in the ore sale to Xstrata. Nickel,copper and cobalt prices are affected by factors beyond the Company’s control andmainly by the fundamentals of supply and demand.

The Company’s contract with Xstrata also includes a price participation clause where Xstrata participates to some extent in theupward and downward movement in metal prices.

(d) Foreign exchange risk

The Company is exposed to foreign exchange risk as a result of its sales transactions being conducted in currencies other than itsfunctional currency, the Canadian dollar. All of the revenues and portions of expenses are denominated in U.S. dollars. AtDecember 31, 2010, the Company had monetary assets and liabilities denominated in U.S. dollars as follows:

Cash US$ 22,490

Convertible Loan US$ 8,280,066

Sensitivity to a plus or minus 5% change in the foreign exchange rate would have affected the net loss by approximately $411,000in 2010.

(e) Interest rate risk

The Company’s cash, restricted cash and cash equivalents bear interest at fixed rates, and have maturities of 90 days or less. Therisk of investing cash equivalents into fixed interest rate investments is mitigated by the short terms in which the investmentsmature. This way, the Company can adapt its investment strategy in the event of any large fluctuations in the prevailing marketrates. A sensitivity analysis has determined that an interest rate fluctuation of 1% would have resulted in a $114,000 fluctuation inthe interest income during the year.

(f) Fair value

The book values of the cash, accounts receivable, accounts payable and accrued liabilities, and interest on convertible loanapproximate their respective fair values due to the short term nature of these instruments.

The book value of the long-term convertible loan obligations approximates its fair value because management estimates that theloan represent rates currently available to the Company on loans with similar terms and maturity.

CAPITAL MANAGEMENT

The Company’s objectives in managing capital are to safeguard its ability to operate as a going concern. The Company considersits capital structure to consist of capital stock, convertible loan, bridge loan and contributed surplus. The Company managesits capital structure and makes adjustments to it, in order to have the funds available to support its exploration, developmentand operations activities.

Management reviews its capital management approach on an ongoing basis. There were no changes in the Company’s approachto capital management during the year ended December 31, 2010. The Company is not subject to externally imposedcapital requirements.

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OUTSTANDING SHARE DATA

Details about the Company’s outstanding Common Shares as at March 23, 2011 are as follows:

Common Shares issued and outstanding

Balance at December 31, 2010 437,188,897

Issued to RCF IV in January 2011 – exchange of bridge loan 16,225,753

Issued to RCF IV in January 2011 – interest payment 3,168,672

456,583,322

Potential issuance of Common Shares:

Purchase warrants 148,385,617

Warrants – commitment fees for project loan facility 6,155,986

Stock options issued to directors, employees and consultants 14,093,858

Fully diluted (Note) 625,218,783

Note: In addition, RCF IV, at its discretion, has the right to convert all or any portion of the US$10 million convertible loan, whether

outstanding or previously repaid, at any time prior to December 31, 2013, into Common Shares at a conversion price of $0.11. The loan,

if converted in full would represent issuance of an additional 107,054,546 Common Shares. RCF IV also has the option to receive the

interest payable on the loan in cash or in Common Shares. If all future interest is paid in Common Shares, the Company could, at present

share prices, issue an additional 20,000,000 Common Shares.

DISCLOSURE CONTROLS AND PROCEDURES

Management has designed disclosure controls and procedures (“DC&P”) to provide a reasonable assurance that (i) materialinformation relating to the Company is made known to them by others, particularly during the period in which the annual filings arebeing prepared and (ii) information required to be disclosed by the Company in its annual filings, interim filings or other reports filedor submitted by it under securities legislation is recorded, processed, summarized and reported within the time periods specified insecurities legislation.

INTERNAL CONTROL OVER FINANCIAL REPORTING

Management has designed internal control over financial reporting (“ICFR”) to provide reasonable assurance regardingthe reliability of financial reporting and the preparation of financial statements for external purposes in accordance withCanadian GAAP.

EVALUATION OF DC&P AND ICFR

The Company’s Chief Executive Officer and Chief Financial Officer have evaluated, or caused to be evaluated under their supervision,the effectiveness of the Company’s DC&P and ICFR at the financial year end and have concluded that the Company’s DC&P and ICFRwere effective at the financial year end based on that evaluation.

No Changes in ICFR in Fourth Quarter

There were no changes in the Company’s policies and procedures and other processes that comprise its ICFR during the periodbeginning on October 1, 2010 and ended on December 31, 2010, that have materially affected, or are reasonably likely to materiallyaffect, the Company’s ICFR.


RISKS AND UNCERTAINTIES

Mining Industry

The exploration for and development of mineral deposits involves significant risks which even a combination of careful evaluation,experience and knowledge may not eliminate. While the discovery of an ore body may result in substantial rewards, few propertieswhich are explored are ultimately developed into producing mines. Major expenses may be required to establish ore reserves, todevelop metallurgical processes and to construct mining and processing facilities at a particular site. It is impossible to ensure thatthe current exploration programs planned by the Company will result in a profitable commercial mining operation.

Whether a mineral deposit will be commercially viable depends on a number of factors, some of which are the particular attributesof the deposit, such as size, grade and proximity to infrastructure, as well as metal prices which are highly cyclical and governmentregulations, including regulations relating to prices, taxes, royalties, land tenure, land use, importing and exporting of minerals andenvironmental protection. The exact effect of these factors cannot be accurately predicted, but the combination of these factors mayresult in the Company not receiving an adequate return on invested capital. Mining operations generally involve a high degree ofrisk. The Company’s operations are subject to most of the hazards and risks normally encountered in the exploration, developmentand production of ore, including unusual and unexpected geology formations, rock bursts, cave-ins, flooding and other conditionsinvolved in the drilling and removal of material, any of which could result in damage to, or destruction of, mines and other producingfacilities, damage to life or property, environmental damage and possible legal liability.

The Company’s activities are directed towards the search, evaluation and development of mineral deposits. Some of the mineralproperties in which the Company has an interest contain no known body of commercial ore and any exploration programs thereonare exploratory searches for ore, while other properties in which the Company has an interest are subject to preliminary stages ofexploration and development programs only. There is no certainty that the expenditures to be made by the Company as describedherein will result in discoveries of commercial quantities of ore. There is aggressive competition within the mining industry for thediscovery and acquisition of properties considered to have commercial potential. The Company will compete with other entities,many of which have greater financial resources than the Company for the opportunity to participate in promising projects.Significant capital investment is required to achieve commercial production from successful exploration efforts.

Ore Processing

The Company does not own the facilities used to process the ore mined. Although access to the facilities is regulated by contract,there is no guarantee that future access will be available to the Company.

Government Regulation

The exploration activities of the Company are subject to various federal, provincial and local laws governing prospecting,development, production, taxes, labour standards and occupational health, mine safety, toxic substance and other matters.Exploration activities are also subject to various federal, provincial and local laws and regulations relating to the protection of theenvironment. These laws mandate, among other things, the maintenance of air and water quality standards, and land reclamation.These laws also set forth limitations on the generation, transportation, storage and disposal of solid and hazardous waste. Althoughthe Company’s exploration activities are currently carried out in accordance with all applicable rules and regulations, no assurancecan be given that new rules and regulations will not be enacted or that existing rules and regulations will not be applied in a mannerwhich could limit or curtail production or development. Amendments to current laws and regulations governing operations andactivities of exploration, mining and milling or more stringent implementation thereof could have a substantial adverse impact onthe Company.

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Government approvals and permits are currently, and may in the future be, required in connection with the Company’s operations.To the extent such approvals are required and not obtained, the Company may be curtailed or prohibited from proceeding withplanned exploration or development of mineral properties.

Failure to comply with applicable laws, regulations and permitting requirements may result in enforcement actions there under,including orders issued by regulatory or judicial authorities causing operations to cease or be curtailed, and may include correctivemeasures requiring capital expenditures, installation of additional equipment, or remedial actions. Parties engaged in miningoperations may be required to compensate those suffering loss or damage by reason of the mining activities and may have civil orcriminal fines or penalties imposed for violations of applicable laws or regulations. Amendments to current laws, regulations andpermits governing operations and activities of mining companies, or more stringent implementation thereof, could have a materialadverse impact on the Company and cause increases in exploration expenses, capital expenditures or production costs or reductionin levels of production at producing properties or require abandonment or delays in development of new mining properties.

Environmental Risks and Hazards

All phases of the Company’s operations are subject to environmental regulation in the various jurisdictions in which it operates.Environmental legislation is evolving in a manner which will require stricter standards and enforcement, increased fines andpenalties for non-compliance, more stringent environmental assessments of proposed projects and heightened degree ofresponsibility for companies and their officers, directors and employees. There is no assurance that future changes inenvironmental regulation, if any, will not adversely affect the Company’s operations. Environmental hazards may exist on theproperties on which the Company holds interests which are unknown to the Company at present which have been caused byprevious or existing owners or operators of the properties. The Company may become liable for such environmental hazards causedby previous owners and operators of the properties even where it has attempted to contractually limit its liability.

Production from mineral properties may involve the use of dangerous and hazardous substances. While all steps will be taken toprevent discharges of pollutants into the ground water the environment, the Company may become subject to liability for hazardsthat cannot be insured against.

Commodity Prices

The profitability of the Company will be significantly affected by changes in market price for nickel and by changes in theUS/Canadian exchange rate.

The level of interest rates, the rate of inflation, world supply and demand of base metals and precious metals and stability ofexchange rates can all cause significant fluctuations in base metal and precious metal prices. Such external economic factors arein turn influenced by changes in international investment patterns and monetary systems and political developments. The price ofbase metals and precious metals has fluctuated widely in recent years, and future serious price declines could cause continuedcommercial production to be uneconomic. Depending on the price of base metals and precious metals, cash flow from miningoperations may not be sufficient to cover operating costs. Any figures for reserves presented by the Company will be estimates andno assurance can be given that the anticipated tonnages and grades will be achieved or that the indicated level of recovery will berealized. Market fluctuations and the price of base metals and precious metals may render reserves uneconomical. Moreover, shortterm operating factors relating to the reserves, such as the need for orderly development of the ore bodies or the processing of newor different grades of ore, may cause a mining operation to be unprofitable in any particular accounting period.

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Uninsured Risks

The Company carries insurance to protect against certain risks in such amounts as it considers adequate. Risks not insured againstinclude environmental pollution or other hazards against which the Company cannot insure or against which the Company electsnot to insure.

Conflicts of Interest

Certain of the directors of the Company also serve as directors of other companies involved in natural resource exploration anddevelopment and consequently there exists the possibility for such directors to be in a position of conflict. Any decision made bysuch directors involving the Company will be made in accordance with their duties and obligations to deal fairly and in good faithwith the Company and such other companies. In addition, such directors will declare, and refrain from voting on, any matter in whichsuch directors may have a conflict of interest.

Land Title

Although title to its various mining properties has been reviewed by or on behalf of the Company, no assurances can be given thatthere are no title defects affecting same. Title insurance generally is not available for mining claims in Canada, and the Company’sability to ensure that it has obtained secure claim to individual mineral properties or mining concessions may be severelyconstrained. The Company has not conducted surveys of the claims in which it holds direct or indirect interests; therefore, theprecise area and location of such claims may be in doubt. Accordingly, the Company’s mining properties may be subject to priorunregistered liens, agreements, transfers or claims, including native land claims, and title may be affected by, among other things,unknown defects. In addition, the Company may be unable to operate its mining properties as permitted or to enforce its rights withrespect to such properties.

QUALIFIED PERSON

The foregoing scientific and technical information has been prepared or reviewed by Paul C. Davis, P.Geo., Vice-PresidentExploration of the Company. Mr. Davis is a “qualified person” within the meaning of National Instrument 43-101 – Standards ofDisclosure for Mineral Projects (“NI 43-101”).

The Company follows rigorous quality control practices and procedures in full compliance of NI 43-101, and these are described onthe Company’s website and in all technical press releases.

CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS

This MD&A contains forward-looking statements and forward-looking information (collectively referred to herein as, “forward-looking information”) within the meaning of securities laws. Such forward-looking information may relate to management’sfuture outlook and anticipated events or results, and include statements or information regarding the future plans, intentions,beliefs and prospects of the Company, including, but not limited to, the resumption of operations at the Company’s LockerbyMine and the timing thereof, successful completion of debt or additional equity financing, continuation of exploration activities,and reserve and resource estimates, statements about drill results, commodity prices and drill widths, in that they constituteestimates, based on certain assumptions of mineralization that may be encountered if a deposit were to be mined. In some cases,forward-looking information can be identified by the use of words or phrases such as “expects” or “does not expect”, “is expected”,“anticipates” or “does not anticipate”, “plans”, “envisions”, “estimates” or “intends”, “strategies”, “targets”, “goals”, “forecasts”,“objectives”, “schedules”, “budgets”, or “potential” or stating that certain actions, events or results “may”, “could”, “would”,“might”, or “will be taken”, “occur” or “be achieved” or other variations of these words or phrases, or other comparable wordsor phrases.

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By its nature, forward-looking information is based on certain factors and assumptions which involve known and unknown risks,uncertainties and other factors which may cause the actual results, realization of mineral resources, performance or achievementsof the Company, financial position or industry results, to be materially different from any future results, performance orachievements expressed or implied by such forward-looking information. Such factors include, among others, the following:

• risks and uncertainties relating to the interpretation of drill results, the geology, grade and continuity of mineral deposits andconclusions of economic evaluations;

• results of initial feasibility, pre-feasibility and feasibility studies, and the possibility that future exploration, development or miningresults will not be consistent with the Company’s expectations;

• risks relating to possible variations in reserves, grade, planned mining dilution and ore loss, or recovery rates and changes in projectparameters as plans continue to be refined;

• mining and development risks, including risks related to accidents, equipment breakdowns, labour disputes (including workstoppages and strikes) or other unanticipated difficulties with or interruptions in exploration and development;

• the potential for delays in exploration or development activities or the completion of feasibility studies;

• risks related to the inherent uncertainty of production and cost estimates and the potential for unexpected costs and expenses;

• risks related to commodity price and foreign exchange rate fluctuations;

• risks relating to current global financial conditions;

• the uncertainty of profitability based upon the cyclical nature of the industry in which the Company operates;

• risks related to failure to obtain adequate financing on a timely basis and on acceptable terms;

• risks related to delays in obtaining governmental approvals or in the completion of development or construction activities;

• risks related to environmental regulation and liability;

• inherent risks associated with deep underground mining operations;

• risks relating to the acquisition of the necessary licenses and permits;

• risks related to joint ventures, title to properties, property interests and First Nations title claims and rights;

• loss of key personnel, conflict of interest and dependence on management;

• changes in mining legislation adversely affecting operations; and

• political and regulatory risks associated with mining and exploration.

A discussion of these and other factors that may affect the Company’s actual results, performance, achievements or financialposition is contained under the heading “Risk Factors” in the Company’s most recently filed annual information form. This list is notexhaustive of the factors that may affect the forward-looking information. These and other factors should be considered carefullyby readers, who should not place undue reliance on such forward-looking information.

The Company has made several assumptions that it believes appropriate, and these include but are not limited to:

• feasibility study capital and operating estimates will be achieved when development is completed;

• metal markets and foreign exchange rates will remain favourable;

• mill head grades will be met when the mine re-starts; and

• the Company will be able to secure financing on reasonable terms for the capital plan at its Lockerby Mine.

Forward-looking information is provided based upon management’s beliefs, estimates and opinions on the date the information isgiven, which management believes are reasonable, and the Company undertakes no obligation to update forward-lookinginformation if these beliefs, estimates and opinions or other circumstances should change, except as otherwise required byapplicable law.

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MANAGEMENT’S RESPONSIBILITY FOR FINANCIAL REPORTING

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The accompanying financial statements of First Nickel Inc. have been prepared by management in accordance with Canadian generallyaccepted accounting principles and reflects management’s best current estimates.

Management has developed and maintains systems of internal control to provide reasonable assurance that the Company’s assets areproperly safeguarded from loss or improper use, transactions are authorized and properly recorded and financial records are reliable.

The Board of Directors is responsible for ensuring that management fulfills its responsibilities for financial reporting and is ultimatelyresponsible for reviewing and approving the financial statements. The Board of Directors carries out this responsibility principallythrough its Audit Committee.

The Audit Committee is appointed by the Board of Directors and all its members are independent directors. The Audit Committee meetsperiodically with management and the auditors to review the financial statements and the results of audit examinations.

KPMG LLP, Chartered Accountants, have audited the financial statements and their report outlines the scope of their examination andgives their opinion on the financial statements.

William J. Anderson Joseph Del Campo, CMA

President and Chief Executive Officer Chief Financial Officer

INDEPENDENT AUDITORS’ REPORT

We have audited the accompanying financial statements of First Nickel Inc., which comprise the balance sheets as at December 31,2010 and December 31, 2009, the statements of operations and comprehensive loss, changes in shareholders equity and cash flows forthe years then ended, and notes, comprising a summary of significant accounting policies and other explanatory information.

Management’s Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of these financial statements in accordance with Canadiangenerally accepted accounting principles, and for such internal control as management determines is necessary to enable thepreparation of financial statements that are free from material misstatement, whether due to fraud or error.

Auditors’ Responsibility

Our Responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordancewith Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan andperform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. Theprocedures selected depend on our judgment, including the assessment of the risks of material misstatement of the financialstatements, whether due to the fraud or error. In making those risk assessments, we consider internal control relevant to the entity’spreparation and fair presentation for the financial statements in order to design audit procedures that are appropriate in thecircumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit alsoincludes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made bymanagement, as well as evaluating the overall presentation of the financial statements.

We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion.

Opinion

In our opinion, the financial statements present fairly, in all material respects, the financial position of First Nickel Inc. as at December 31,2010 and December 31, 2009, and its results of operations and its cash flows for the years then ended in accordance with Canadiangenerally accepted accounting principles.

Chartered Accountants, Licensed Public Accountant

Toronto, CanadaMarch 29, 2011

BALANCE SHEETS(Canadian $)

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As at As atDecember 31, December 31,

Assets 2010 2009

Current assets

Cash and cash equivalents $ 29,154,731 $ 7,294,258

Amounts receivable 805,189 490,924

Prepaid expenses and other assets 109,502 99,764

30,069,422 7,884,946

Deferred financing costs 740,133 –

Restricted investments in term deposits (note 4) 6,210,000 6,210,000

Mineral properties and deferred exploration costs (note 5) 13,662,299 12,679,179

Property, plant and equipment (note 6) 33,579,675 34,940,078

$ 84,261,529 $ 61,714,203

Liabilities & Shareholders’ Equity

Current liabilities

Accounts payable and accrued liabilities $ 1,423,716 $ 1,198,085

Interest on convertible loan (notes 8(a) and 17(a)) 235,520 235,520

Interest on bridge loan (notes 8(b) and 17(b)) 132,094 –

1,791,330 1,433,605

Asset retirement obligations (note 7) 4,600,289 6,640,490

Convertible loan (note 8(a)) 7,928,034 7,849,236

Bridge loan (notes 8(b) and 17(c)(i)) 1,876,690 –

Future income and mining taxes (note 13) 472,017 488,947

16,668,360 16,412,278

Shareholders’ Equity

Capital stock (note 10) 99,106,416 72,655,804

Warrants (note 10) 4,763,112 –

Contributed surplus (note 11) 5,899,160 5,725,564

Equity component of convertible loan (note 8(a)) 2,372,091 2,372,091

Deficit (44,547,610) (35,451,534)

67,593,169 45,301,925

$ 84,261,529 $ 61,714,203

Commitments and contingencies (notes 9 and 16)

Subsequent events (note 17)

Approved on behalf of the board:

“William J. Anderson” “Robert F. Whittall”Director Director

See accompanying notes to the financial statements

STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS(Canadian $)

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Year ended Year endedDecember 31, December 31,

2010 2009

Sales Revenue $ – $ 4,483,662

Operating costs excluding amortization – 4,173,121

Care and maintenance costs 5,138,684 4,772,855

Amortization of mining properties and equipment – 719,631


5,337,884 9,859,007

Operating loss from mining operations (5,337,884) (5,375,345)

General and administrative 2,364,192 2,289,477


Foreign exchange gain (394,619) (273,222)

Depreciation and amortization 17,040 17,436

Interest on convertible loan 942,080 413,468


Interest on bridge loan 198,632 –

Interest and other expenses 17,718 181,156

Realized loss on sale of marketable securities – 21,429

Interest and other income (78,563) (97,787)

3,775,122 3,309,686

Loss before taxes (9,113,006) (8,685,031)

Recovery of income and mining taxes (16,930) (1,166,769)


Other comprehensive income – unrealized income on marketable securities – 56,786

Comprehensive loss for the year $ (9,096,076) $ (7,461,476)

Loss per share – basic and diluted $ (0.05) $ (0.05)

Weighted average number of common shares outstanding 173,298,556 156,235,601


STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY(Canadian $)

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Equity AccumulatedCapital stock component Other

Number Contributed of convertible comprehensive Totalof shares Amount Warrants surplus loan loss Deficit equity

Balance,December 31, 2008 155,548,098 $ 73,727,356 $ – $ 5,186,822 $ – $ (56,786) $ (27,933,272) $ 50,924,120

Convertible loanestablishment fee 2,150,000 258,000 – – – – – 258,000

Interest payments onloan facilities 1,412,534 177,948 – – – – – 177,948

Tax effect of renunciationon flow–through shares – (1,507,500) – – – – – (1,507,500)

Stock based compensation – – – 538,742 – – – 538,742

Unrealized income onmarketable securities – – – – – 56,786 – 56,786

Equity componentof convertible loan – – – – 2,372,091 – – 2,372,091

Net loss – – – – – (7,518,262) (7,518,262)

Balance,December 31, 2009 159,110,632 72,655,804 – 5,725,564 2,372,091 – (35,451,534) 45,301,925

Bridge loanestablishment fee 1,750,000 192,500 – – – – – 192,500

Interest paymentson loan facilities 8,612,737 1,008,618 – – – – – 1,008,618

Equity financing 239,582,948 28,749,953 – – – – – 28,749,953

Stock based compensation – – – 173,596 – – – 173,596

Warrants valuation – (5,141,000) 5,141,000 – – – – –

Partial settlementof bridge loan 28,132,580 3,375,910 – – – – – 3,375,910

Share issuance costs – (1,735,369) (377,888) – – – – (2,113,257)

Net loss – – – – – (9,096,076) (9,096,076)

BalanceDecember 31, 2010 437,188,897 $ 99,106,416 $ 4,763,112 $ 5,899,160 $ 2,372,091 $ – $ (44,547,610) $ 67,593,169


STATEMENTS OF CASH FLOWS(Canadian $)

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Year ended Year endedDecember 31, December 31,

2010 2009

Cash provided by (used in) the following activities

Operating activities


Add items not requiring an outlay of cash:

Amortization 17,040 737,067


Convertible and bridge loan interest paid in common shares 1,008,618 177,948

Amortization of deferred issuance costs 122,100 –

Recovery of future income and mining taxes (16,930) (1,166,769)


Unrealized foreign exchange gain (465,748) (274,446)

Loss on sale of marketable securities – 21,429


(7,523,154) (7,071,904)

Changes in non-cash working capital balances

Decrease in ore in process – 2,642,733

(Increase) decrease in amounts receivable (314,265) 418,999

(Increase) decrease in prepaid and other assets (9,738) 622,076

Decrease in deferred revenue – (1,106,964)

Proceeds from sale of marketable securities – 53,571

Interest payable 132,094 235,520

Decrease in accounts payable 225,631 (1,674,200)

(7,489,432) (5,880,169)

Financing activities

Proceeds from convertible loan, net of costs – 10,534,786

Proceeds from equity financing, net of issuance costs 26,636,696 –

Proceeds from bridge loan 5,332,500 –

Deferred financing costs (740,133) –

Decrease in obligations under capital leases – (621,992)

31,229,063 9,912,794

Investing activities

Mineral properties and deferred exploration costs (983,120) (3,898,180)

Equipment and deferred development costs, net (896,038) (600,278)

(1,879,158) (4,498,458)

Net increase (decrease) in cash and cash equivalents 21,860,473 (465,833)

Cash and cash equivalents, beginning of year 7,294,258 7,760,091

Cash and cash equivalents, end of year $ 29,154,731 $ 7,294,258

Cash and cash equivalents consist of:

Cash $ 4,154,731 $ 1,295,038

Short term deposits 25,000,000 5,999,220

$ 29,154,731 $ 7,294,258


NOTES TO THE FINANCIAL STATEMENTS

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NOTES TO THE FINANCIAL STATEMENTSFor The Years Ended December 31, 2010 And 2009

First Nickel Inc. (the “Company”) was incorporated originally as 2035666 Ontario Inc. under the laws of Ontario on November 12,2003. On February 5, 2004, the Company filed articles of amendment changing its name to First Nickel Inc.

The Company is a mining, exploration and development company, and is engaged in the acquisition, exploration and developmentof mineral resource prospects in Canada.

On May 31, 2005, the Company purchased all of the property and assets comprising the “Lockerby” nickel mine (the “LockerbyMine”), located near Sudbury, Ontario, from Falconbridge Limited (now known as Xstrata Canada Corporation, “Xstrata”). TheLockerby Mine had ceased production and was placed on care and maintenance in September 2004. Believing that significantexploration possibilities remained on the Lockerby property, the Company took possession of the Lockerby Mine in June 2005,a rehabilitation period followed, and commercial operations, along with a major diamond drilling program, commenced inJanuary 2006. Operations continued until October 2008, when due to low metal prices, the Lockerby Mine was placed on careand maintenance.

1. Basis of Presentation

The business of mining and exploring for minerals involves a high degree of risk and there can be no assurance that currentexploration programs will result in profitable mining operations. The recoverability of the carrying value of mineral properties anddeferred exploration costs and property, plant and equipment is dependent upon the discovery of economically recoverablereserves, the ability of the Company to raise financing, the achievement of profitable operations or, alternatively, upon theCompany’s ability to dispose of its interests on an advantageous basis. Changes in future conditions could require material write-downs of the carrying values.

These financial statements have been prepared on a basis which contemplates that the Company will continue in operation for theforeseeable future and will be able to realize its assets and discharge its liabilities in the normal course of business. The Company’sability to continue to do so is dependent on the ability of the Company to raise equity financing and the attainment of profitableoperations. There are no assurances that the Company will be successful in achieving these goals. These financial statements donot give effect to adjustments that would be necessary to the carrying values and classification of assets and liabilities should theCompany be unable to continue as a going concern.

2. Measurement Uncertainty

The preparation of financial statements in conformity with Canadian generally accepted accounting principles requiresmanagement to make estimates and assumptions that affect the reported amount of assets and liabilities, the disclosure ofcontingent assets and liabilities at the date of financial statements and the reported expenses during the reporting period.Accounts which require management to make material estimates and significant assumptions in determining amounts recordedinclude amortization, mineral properties and deferred exploration costs, property, plant, and equipment, inventory, ore in process,asset retirement obligations, stock-based compensation, accrued liabilities, future income taxes and contingencies. Theassessment of recoverability of property, plant and equipment is based on significant assumptions which include a future averagenickel price of US$7 per pound, and the Company being able to obtain further capital investment financing, and to complete thiscapital investment program as budgeted. Actual results may differ from those estimates.

3. Significant Accounting Policies

Revenue recognition

Under an ore sale agreement with Xstrata, production from the Lockerby Mine is shipped to Xstrata’s Strathcona Mill (the “Mill”) forprocessing. Revenue is recognized when the metal content of the ore sold to the Mill, and the pricing of the metals contained thereinare determined. Production delivered to the Mill for treatment, refining and awaiting pricing is accounted for as ore in process.Interest bearing advances received from the Mill subject to final adjustment are not recognized as revenue until such time as thepricing has been determined in accordance with the terms of the ore sale agreement. For nickel, the most significant componentof the revenue, the final settlement is determined three months following the month of mine production.


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Ore in Process

Ore in process represents ore delivered to for which title has been transferred to the Mill but which has not yet been priced inaccordance with the terms of the ore sale contract. Ore in process is valued at the lesser of cost, calculated on a first in, first outbasis, and estimated net realizable value. Included in ore in process are all direct costs of production in connection with mining,crushing and transporting ore to the Mill, including the amortization of mining related assets.

Inventory

Inventory represents ore mined and not shipped, and is valued at the lesser of cost, calculated on a first in, first out basis, andestimated net realizable value. Included in inventory are all direct costs of production in connection with mining and crushingincluding the amortization of mining related assets.

Mineral resource properties and deferred exploration costs

Mineral resource properties are carried at cost. The Company considers exploration and development costs and expenditures tohave the characteristics of property, plant and equipment and, as such, the Company capitalizes all exploration costs, includingacquisition costs, field exploration and field supervisory costs relating to specific properties as incurred, until those properties aredetermined to be economically viable for mineral production. After the determination of economic feasibility and at thecommencement of pre-production activities these deferred exploration costs will be transferred to mining properties and amortizedthrough charges against income derived from mining operations. Amortization charges will be calculated on a unit-of-productionbasis, using proven and probable reserves, or until the properties are abandoned, sold or considered to be impaired in value, atwhich time an appropriate charge will be made.

The actual recovery value of capitalized expenditures for mineral properties and deferred exploration costs will be contingent uponthe discovery of economically viable reserves and the Company’s financial ability at that time to fully exploit these properties ordetermine a suitable plan of disposition.

Impairment

The Company reviews and evaluates its mineral resource properties and property, plant and equipment, for impairment whenevents or changes in circumstances indicate the recoverable value may be less than the carrying amount. The net recoverableamount is based on estimates of undiscounted future net cash flows expected to be recovered from specific assets or groups ofassets through use or future disposition.

Asset retirement obligations

Future obligations to retire an asset, including dismantling, remediation and ongoing treatment and monitoring of the site areinitially recognized and recorded as a liability at fair value, based on estimated future cash flows, the Company’s credit adjusted riskfree discount rate at the time the liability is originally incurred and an estimated inflation factor. The liability is adjusted for changesin the expected amounts and timing of cash flows required to discharge the liability and accreted to full value over time throughperiodic charges to earnings. For operating properties, the amount of the asset retirement liability initially recognized and anysubsequent adjustments are capitalized as part of the asset’s carrying value and amortized over the asset’s estimated useful life,unless the property has been abandoned in which case any additional liabilities are expensed immediately.

Cash and cash equivalents

Cash and cash equivalents consist of cash deposits in banks, certificates of deposit and short-term investments with remainingmaturities of three months or less at time of acquisition. The Company does not hold any asset backed commercial paper.


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Flow through shares

The Company reduces the net proceeds of the flow through share issuance by the future tax liability of the Company resulting fromthe renunciation of the exploration and development expenditures in favour of the flow though share subscribers, in the period inwhich the renunciation is made.

Stock-based compensation

The Company uses the fair value method of accounting for all stock-based compensation arrangements. The fair value of eachoption granted during the period is charged as an expense over the vesting period of the option using the Black-Scholes optionpricing model on the date of the grant, with the related increase to contributed surplus.

Income and mining taxes

The Company uses the liability method of tax allocation for future income taxes. Under this method of tax allocation, future incomeand mining tax bases of assets and liabilities are measured using the enacted or substantively enacted tax rates and laws expectedto be in effect when the differences are expected to reverse. Future tax assets are reduced by a valuation allowance if it is morelikely than not that some or all of the future tax asset will not be realized. The Company evaluates the carrying value of the futuretax assets by assessing its valuation allowance and by adjusting the amount of such allowance if necessary. Factors used to assessthe likelihood of the realization of amounts forecasted also include an evaluation of tax filing positions taken and the likelihood ofsuccess after a review by the relevant taxation authorities.

Amortization

The Company provides for amortization of its property and equipment at the following annual rate:

Computer equipment -30% declining balance basisOffice furniture and leaseholds -20% declining balance basis

Mining properties are carried at cost and include the acquisition and pre-production costs related to the properties includingexploration costs and all production related assets. Amortization charges are calculated on a unit-of-production basis over theestimated life of the mine, as determined by using measured and indicated resources.

Financial Instruments – Recognition and Measurement

All financial assets and financial liabilities are measured at fair value on initial recognition and their subsequent measurement isdetermined by the classification of each financial asset and liability. Financial assets and financial liabilities held for trading aremeasured at fair value with the changes in fair value reported in earnings. Financial assets held to maturity, loans and receivablesand financial liabilities other than those held for trading are measured at amortized cost. Available-for-sale financial assets aremeasured at fair value with changes in fair value reported in other comprehensive income until the financial asset is disposed of,or becomes impaired.

The Company has classified its financial instruments as follows:

Cash and cash equivalents Held for tradingAmounts receivable Loans and receivablesRestricted investments in term deposits Held to maturityAccounts payable and accrued liabilities Other liabilitiesConvertible loan Other liabilitiesBridge loan Other liabilities


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Future Accounting Changes

Adoption of International Financial Reporting Standards

In February 2008, the CICA announced that Canadian generally accepted accounting principles for publicly accountable enterpriseswill be replaced by International Financial Reporting Standards (“IFRS”) for fiscal years beginning on or after January 1, 2011.Companies will be required to provide IFRS comparative information for the previous fiscal year. Accordingly, the conversion fromCanadian GAAP to IFRS will be applicable to the Company’s reporting for the first quarter of 2011 for which the current andcomparative information will be prepared under IFRS. The Company is required to apply all of those IFRS standards which areeffective for fiscal year ending December 31, 2011 and apply them to its opening January 1, 2010 balance sheet.

Recently issued but not adopted accounting pronouncements

In January 2009, the CICA issued the new Handbook Section 1582, “Business Combinations”. This pronouncement further alignsCanadian GAAP with IFRS and changes the accounting for business combinations in a number of areas. It establishes principles andrequirements governing how an acquiring company recognizes and measures in its financial statements identifiable assetsacquired, liabilities assumed, any non-controlling interest in the acquire, and goodwill acquired. The section also establishesdisclosure requirements that will enable users of the acquiring company’s financial statements to evaluate the nature and financialeffects of its business combinations. Concurrently, the CICA issued Handbook Sections 1601 “Consolidated Financial Statements”,and 1602, “Non-Controlling Interests” which replace the existing standards. These sections establish the standards for thepreparation of, and accounting for a non-controlling interest in a subsidiary in, consolidated financial statements. Each of thesethree sections is effective for fiscal years beginning on or after January 1, 2011. Early adoption is permitted, however would requireconcurrent adoption of all three section, as applicable.

4. Restricted investments in term deposits

The Company has purchased certain term deposits with a major Canadian bank to be held as security for the following outstandingletters of credit:

(a) $5,900,000 in favour of the Ontario Ministry of Northern Development, Mines and Forestry with respect to the mine closureplan liabilities assumed on the acquisition of the Lockerby Mine (note 7).

(b) $310,000 in favour of the Independent Electricity System Operator as financial assurance for the ongoing electrical energyconsumption at the Lockerby Mine.

Due to the restrictions on the Company’s ability to liquidate these deposits, they have been recorded as investments which will beheld to maturity and are recorded at amortized cost.

5. Mineral properties and deferred exploration costs

Balance Balance BalanceDecember 31, 2009 December 31, 2010 December 31,

2008 Additions Recoveries 2009 Additions 2010

West Graham (a) $ 4,364,046 $ 1,835,460 $ – $ 6,199,506 $ 462,076 $ 6,661,582

Lockerby South 99,662 395,666 – 495,328 102 495,430

Belmont Project 934,052 651,079 (202,255) 1,382,876 250,178 1,633,054

Lockerby Main 3,358,999 181,656 – 3,540,655 127,760 3,668,415

Raglan Hills (b) 24,240 1,036,574 – 1,060,814 143,004 1,203,818

$ 8,780,999 $ 4,100,435 $ (202,255) $ 12,679,179 $ 983,120 $ 13,662,299


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(a) West Graham Property

The Company has satisfied the option payments and exploration expenditures required to earn a 70% interest in the West GrahamProperty pursuant to the option agreement entered into between the Company and Landore Resources Canada Inc. (“Landore”)dated November 21, 2005. Landore has opted not to initiate a joint venture to the extent of its 30% working interest so the Companyhas the option to increase its interest to 85% by completing a bankable feasibility study by October 12, 2012.

(b) Raglan Hills

In 2007, the Company entered into a then 50% – 50% Joint Venture Agreement with Pacific Northwest Capital Corp. (“PFN”),whereby both companies agreed to bear all expenditures and participate in a single purpose unincorporated Joint Venture for thepurpose of carrying out mineral exploration on the Raglan Hills project located north-east of Bancroft, Ontario. PFN’s ownershipinterest in the property has been diluted according to the formula defined in the Joint Venture Agreement below 10% and convertedto a 1.5% net smelter royalty.

The Company has satisfied the exploration expenditures required to earn a 50% interest in the Henderson Property pursuant to theoption agreement entered into between the Company and Melkior Resources Inc. dated July 31, 2010.

6. Property, plant and equipment:

AccumulatedDecember 31, 2010 Cost amortization Net book value

Mining properties

Property and development $ 36,459,845 $ 10,057,833 $ 26,402,012

Plant and equipment 9,555,442 2,422,816 7,132,626

46,015,287 12,480,649 33,534,638

Corporate equipment & leaseholds 196,447 151,410 45,037

$ 46,211,734 $ 12,632,059 $ 33,579,675

AccumulatedDecember 31, 2009 Cost amortization Net book value

Mining properties

Property and development $ 38,537,092 $ 10,057,833 $ 28,479,259

Plant and equipment 8,821,558 2,422,816 6,398,742

47,358,650 12,480,649 34,878,001

Corporate equipment & leaseholds 196,447 134,370 62,077

$ 47,555,097 $ 12,615,019 $ 34,940,078

On May 31, 2005, the Company purchased the Lockerby Mine from Xstrata for the aggregate cost of $8,622,403. Property anddevelopment relates to the costs of acquisition as well as the costs incurred to bring the operations from care and maintenance tothe required standards for full operations. Under the terms of the asset purchase agreement, the Company has granted Xstrata anoption to reacquire a 51% interest in the Lockerby Mine, under certain conditions, should any newly discovered mineral resourceson the property contain greater than 150 million pounds of nickel equivalent.


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7. Asset Retirement Obligations

As part of the acquisition of the Lockerby Mine, the Company assumed certain liabilities totalling $5,900,000 related to the MineClosure Plan approved by the Ontario Ministry of Northern Development, Mines and Forestry. The liability for retirement andreclamation on an undiscounted basis before an inflation factor of 3% is estimated to be approximately $8.2 million. The estimatedcosts of reclamation are based on current regulatory requirements and the estimated reclamation costs at the date of purchase. Futurechanges to those regulations and standards, as well as changes resulting from operations may result in actual reclamation costsdiffering from the estimate. The Company has posted an irrevocable letter of credit in the amount of $5,900,000 in favour of the OntarioMinistry of Northern Development, Mines and Forestry as security for the Company’s obligations under the Mine Closure Plan.

As at December 31, 2010 and 2009, the asset retirement obligations are as follows:

2010 2009

Opening balance $ 6,640,490 $ 6,447,090

Accretion expense 199,200 193,400

Change in estimated timing of reclamation expenditures (2,239,401) –

Closing balance $ 4,600,289 $ 6,640,490

8. Loan Facilities

(a) Convertible Loan

On July 23, 2009, the Company completed a US$10,000,000 financing with Resource Capital Fund IV L.P. (“RCF IV”). The financingwas structured as a US$10,000,000 convertible loan (the “Loan”) maturing on December 31, 2013. The Loan bears interest at a rateof 8% per annum, paid quarterly in cash or, at RCF IV’s option, in common shares of the Company valued at the market price. Themarket price is determined by the volume weighted average trading price of the common shares over the 20 trading days prior tothe interest calculation date. The Loan is secured by a charge on all the assets of the Company. In consideration of securing thisLoan, the Company paid RCF IV an establishment fee of 2,150,000 common shares of the Company.

RCF IV, at its discretion, has the right to convert all or any portion of the Loan, whether outstanding or previously repaid, at any timeprior to the expiry date, into common shares of the Company at a conversion price of $0.11. The Loan, if converted in full wouldrepresent 107,054,546 common shares of the Company. For the purpose of calculating the number of shares to be issued upon thepayment of interest and the conversion of principal, RCF IV and the Company have fixed the C$/US$ exchange rate of 1.1776.

At initial recognition, the Company measured the debt component of the Loan at fair value of $8,357,137 (US$7,691,797) and appliedthe residual amount of $2,507,863 (US$2,308,203) to equity in accordance with the methodology prescribed by CICA HandbookSection 3861, Financial Instruments – Disclosure and Presentation. Transaction costs in the amount of $588,214 directly related tothe issuance of the Loan were allocated pro-rata between the debt and the equity components in the amounts of $452,442 and$135,772, respectively. The debt portion of the loan is measured at amortized cost using the effective interest rate method (15.25%).The carrying value of the Loan will be accreted up to its face value over the term to maturity. All exchange gains and losses relatingto the debt portion of the Loan are recognized immediately in income.


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(b) Bridge Loan

On September 1, 2010, the Company completed a US$5,000,000 financing with RCF IV. The financing was structured as aUS$5,000,000 Bridge Loan facility maturing on December 31, 2013. The Bridge Loan bears interest at a rate of 15% per annum, paidquarterly in cash or, at RCF IV’s option, in common shares of the Company valued at the market price. The market price isdetermined by the volume weighted average trading price of the common shares over the five trading days prior to the interestcalculation date. In consideration of securing this Bridge Loan, the Company paid RCF IV an establishment fee of 1,750,000 commonshares of the Company.

On November 12, 2010 the Company completed an equity offering of 239,582,948 units (“Units”) at a price of $0.12 per Unit for totalgross proceeds of $28,749,953 (the “Offering”). In connection with the Offering, RCF IV exchanged $3,375,910 (US$3,171,059) of theUS$5,000,000 Bridge Loan for 28,132,580 Units based on an exchange rate of C$1.0646/US$1.00. The remaining $1,947,090(US$1,828,940) of the Bridge Loan was exchanged in January 2011 (see note 17(c)(i)).

9. Commitments and contingencies

(a) Lockerby Mine

Pursuant to an ore sale and processing agreement dated May 31, 2005, the Company granted Xstrata the right of first refusal for allore produced using the infrastructure and assets comprising the Lockerby Mine.

Both the asset purchase agreement and the aforesaid processing agreement provide that the Company execute and deliver acollateral charge on the property in favour of Xstrata as security for the obligation of the Company set out in the asset purchaseagreement and the processing agreement. The secured amount is $10,000,000, and is due and payable, together with interest at therate of 4% per annum, only in the event of a default by the Company.

(b) Premises rentals

The Company is committed to minimum rental payments on its premises as follows:

January 1, 2011 – June 30, 2011 $ 30,561

(c) Tax assessment

The Company has received a tax assessment for the tax year ended December 31, 2007 in the amount of $738,510. The Companybelieves that the assessment is without merit and has filed a notice of objection. No amounts have been accrued for this taxassessment as at December 31, 2010.

(d) Project Debt Facility

On August 25, 2010, the Company entered into an engagement letter to appoint two exclusive lead arrangers for a senior securedproject loan facility for the development of the Lockerby Mine of up to $30 million. In consideration of the agreement of the leadarrangers to arrange the facility, the Company shall pay to the lead arrangers an arrangement fee of $750,000 payable in threeinstallments as follows:

(i) an initial installment of $150,000 (which has been paid) upon receipt and acceptance by the Company of the engagementletter;

(ii) a second installment of $150,000 upon acceptance by the Company of a commitment letter (see note 17(e)); and(iii) a third and final installment of $450,000 upon execution of the credit agreement evidencing the facility.


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10. Capital Stock

Authorized – unlimited number of common shares without par value

Issued – 437,188,897 common shares

Common Shares

Number of Shares Amount

Balance at December 31, 2008 155,548,098 $ 73,727,356

Establishment fee to Resource Capital Fund IV L.P. (“RCF IV”) (note 8(a)) 2,150,000 258,000

Interest payment to RCF IV (note 8(a)) 1,412,534 177,948

Less: provision for future income taxes resulting from the renunciationof Canadian exploration and development expenditures – (1,507,500)


Establishment fee to RCF IV on Bridge Loan (note 8(b)) 1,750,000 192,500

Issued on short form prospectus offering (i) 239,582,948 28,749,953

Warrants valuation – (5,141,000)

Partial settlement of RCF IV Bridge Loan 28,132,580 3,375,910

Interest payment to RCF IV 8,612,737 1,008,618

Less: issuance costs related to share issues – (1,735,369)


(i) On November 12, 2010 the Company completed an equity offering of 239,582,948 units (“Units”) of the Company at a price of $0.12 per Unit fortotal gross proceeds of $28,749,953 (the “Offering”). Each Unit is comprised of one common share in the capital of the Company (a “CommonShare”) and one-half of one Common Share purchase warrant (each whole warrant, a “Warrant”). Each Warrant entitles the holder thereof toacquire one Common Share at a price of $0.17 until November 12, 2012. The gross proceeds have been prorated to Common Shares andWarrants based on the relative fair value of each component, as follows: Common Shares – $23,608,953; Warrants – $5,141,000. The Black-Scholes option pricing model was used to determine the fair value of the Warrants using the following assumptions: expected dividend yield –nil; expected volatility – 91.62%; risk free interest rate – 1.58%; and an expected life of two years.

In addition, Resource Capital Fund IV L.P. exchanged $3,375,910 (US$3,171,059) of the US$5,000,000 Bridge Loan for 28,132,580 Units based onan exchange rate of C$1.0646/US$1.00 and a price of $0.12 per Unit in connection with the Offering. The remaining $1,947,090 (US$1,828,940)of the Bridge Loan was exchanged in January 2011 (see note 17(c)(i)).

Common Share Purchase Warrants

The following common share purchase warrants are outstanding at December 31, 2010:

Number of ExerciseWarrants Price Expiry Date

Purchase Warrants

Issued on short form prospectus 133,857,764 $0.17 November 12, 2012

Agents’ Compensation Warrants

Issued on short form prospectus 6,414,977 $0.12 November 12, 2012

140,272,741


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A summary of warrants outstanding as at December 31, 2010 and changes during the year is presented below:

WeightedAverage

Number of Exercise FairWarrants Price Value

Outstanding beginning of year – $ –

Issued 140,272,741 $0.17 5,141,000

Less: issue costs – (377,888)

Outstanding end of year 140,272,741 $0.17 $ 4,763,112

Common Share Purchase Options

The Company has a stock option plan (the “Plan”) available to its employees, officers, directors and service providers which wasapproved by the shareholders on June 17, 2010. The number of common shares reserved for the purpose of the plan at December 31,2010 is 15,000,000. Subsequent to December 31, 2010, the Plan was amended to a limit of 10% of the Company’s issued andoutstanding shares (see note 17(c)).

The exercise price of options granted in accordance with the plan must not be lower than the closing price for such shares as quotedon the Toronto Stock Exchange (“TSX”) on the last business day prior to the date of the grant. The period for exercising an optionshall not extend beyond a period of ten years following the date the option is granted. The total number of options held by insidersof the Company must not exceed 10% of the total number of shares issued and outstanding, unless approved by a majority ofdisinterested shareholders votes cast at a shareholders meeting.

Certain of the options vest immediately and are exercisable at the date of grant and others vest over a two year period, of which 33%vest immediately.

During the year ended December 31, 2010 and 2009, the following stock options were granted to officers, directors andconsultants. The fair value of the options granted was estimated based on the Black-Scholes option pricing model, using thefollowing assumptions:

Grant Date December 13, 2010 November 23, 2009 March 18, 2009

Number of options granted 6,800,000 2,675,000 390,000

Exercise price $0.12 $0.12 $0.15

Risk-free interest rate 2.49% 2.24% 1.43%

Expected life 5 years 5 years 5 years

Expected volatility 90.7% 87.6% 84.2%

Dividend yield nil nil nil

Grant date fair value per option $0.076 $0.068 $0.046


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The fair value of each option is accounted for in the Statement of Operations, over the vesting period of the options, and the relatedcredit is included in the contributed surplus.

During the year ended December 31, 2010, the Company recorded stock-based compensation expense of $173,596 (2009 –$538,742).

A summary of the status of the Plan as at December 31, 2010 and as at December 31, 2009, and changes during the period endedon those dates is presented below:

December 31, 2010 December 31,2009

Weighted WeightedNumber of Average Number of Average

Options Exercise Price Options Exercise Price

Outstanding, beginning of year 8,153,858 $0.67 5,988,858 $0.97

Granted 6,800,000 $0.12 3,065,000 $0.12

Expired (860,000) $0.62 (900,000) $0.80

Outstanding, end of year 14,093,858 $0.41 8,153,858 $0.67

As at December 31, 2010, the Company had stock options outstanding as follows:

Number of ExerciseDate of Grant Options Exercisable Price Expiry Date

October 17, 2006 1,215,000 1,215,000 $0.40 October 17, 2011

May 11, 2007 298,858 298,858 $1.70 May 11, 2012

June 20, 2007 2,750,000 2,750,000 $1.29 June 20, 2012

June 19, 2008 250,000 250,000 $0.30 June 19, 2013

March 18, 2009 230,000 153,333 $0.15 March 18, 2014

November 23, 2009 2,550,000 2,550,000 $0.12 November 23, 2014

December 13, 2010 6,800,000 2,266,667 $0.12 December 13, 2015

14,093,858 9,483,858

11. Contributed Surplus

As at As atDecember 31, December 31,

2010 2009

Balance, at beginning of year $ 5,725,564 $ 5,186,822

Stock-based compensation, for the current year 173,596 538,742

Balance, at end of year $ 5,899,160 $ 5,725,564

12. Earnings (Loss) Per Share

Basic earnings (loss) per share have been calculated by dividing the net earnings (loss) per the financial statements by the weightedaverage number of shares outstanding during the period. The fully diluted earnings per share is calculated using the common sharebalance increased by the number of common shares that could be issued under outstanding in the money warrants and options ofthe Company. For periods in which the Company is in a net loss position, no dilutive effect has been included.


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2010 2009


Weighted average number of common shares outstanding:

– basic and diluted 173,298,556 156,235,601

Net loss per share – basic and diluted $ (0.05) $ (0.05)

13. Income and Mining Taxes

2010 2009

Current provision (recovery)

Federal and provincial income taxes $ – $ –

Provincial mining taxes – –

– –

Future provision (recovery)

Canadian federal and provincial income taxes – (1,125,000)

Valuation allowance – –

Provincial mining taxes (16,930) (41,769)

Total combined income and mining tax provision (recovery) $ (16,930) $ (1,166,769)

Ontario mining taxes are assessed at a rate of 8.5% on income frommining operations after certain allowances. Income fromminingoperations is calculated as revenue from the sale of mined metals less production costs directly attributable to mining. Income frommining operations is also reduced for depreciation allowances on mine construction and development, certain exploration costs andprocessing allowances in excess of exemption amounts. Mining taxes are paid to the province which grants the mining lease and/orconcession required to extract ore from the particular jurisdiction.

A reconciliation of income and mining taxes is different from the amount that would have been computed by applying the statutoryincome tax rate as a result of the following permanent differences as follows:

2009 2008

Combined federal and provincial income tax rate: 29.0% 31.0%

Net loss before provision (recovery) of taxes $ (9,113,006) $ (8,685,031)

Expected tax provision (recovery) at statutory rates $ (2,642,772) $ (2,692,360)

Increase (decrease) in taxes resulting from:

Change in valuation allowance 2,666,869 1,939,033

Stock based compensation not deductible for income tax 50,344 167,010

Financing fees charged to capital (730,914) (33,943)

Deductible mining taxes 2,540 (51,110)

Rate difference 348,078 522,773

Harmonization Ontario taxes 165,311 89,014

Other non-deductible permanent item 68,865 16,473

Expiry of loss 103,130 –

Other (31,451) 43,110

Provision (recovery) of future income taxes – –

Add: Future mining taxes (16,930) (41,769)

Future income tax provision (recovery) – (1,125,000)

Total tax provision (recovery) per financial statements $ (16,930) $ (1,166,769)


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The Company has non-capital loss carry forwards of approximately $26,447,369 that may be used to reduce taxable income which expireat various dates which may be used for taxation years up to 2030 as follows:

2015 $ 2,906,452

2027 42,257

2028 5,689,573

2029 7,948,831

2030 9,860,256

$ 26,447,369

The Company has cumulative Canadian Exploration Expense and cumulative Canadian Development Expense of $17,575,312 and$22,481,834 respectively which may be used to reduce future taxable income.

The main components that give rise to the Company’s future income and mining tax assets and liabilities are as follows:

2010 2009

Non-current income tax assets

Net operating losses $ 6,613,842 $ 4,249,933

Plant and equipment 643,557 639,297

Canadian exploration and development costs (2,036,642) (2,036,642)

Harmonization Ontario taxes 190,745 356,056

Financing charges charged to capital 682,221 247,617

Crown charges 70,803 73,342

Asset retirement obligations 1,709,923 1,660,123

Other (49,328) (31,474)

7,825,121 5,158,252

Valuation allowance (7,825,121) (5,158,252)

$ – $ –

Non-current mining tax assets

Asset retirement obligations $ 544,781 $ 527,850

Plant and equipment 14,180 14,180

Non-current mining tax liabilities (1,030,978) (1,030,977)

(472,017) (488,947)

Deferred taxes $ (472,017) $ (488,947)

14. Financial Instruments

(a) Credit risk

The Company is exposed to credit risk on the cash held with its bank and on the accounts receivable from its customer.

The Company mitigates credit risk by investing its cash, restricted cash, and cash equivalents with Schedule I banks. Schedule Ibanks are domestic banks and are authorized under the Bank Act to accept deposits, which may be eligible for deposit insuranceprovided by the Canadian Deposit Insurance Corporation. The Company does not hold any asset backed commercial paper.

Pursuant to the ore sale and processing agreement dated May 31, 2005, the Company agreed that all ore produced using anyinfrastructure or assets comprising the Lockerby Mine shall be processed at Xstrata’s Strathcona Mill. Accordingly the Companyhas only one customer and is unable to reduce its concentration of credit risk over multiple counterparties. Should Xstrata enterinto financial difficulty, the Company would be exposed to material losses on its accounts receivable and future revenues. There wasno allowance for doubtful accounts and no amounts for bad debt written off during the year ended December 31, 2010.


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(b) Liquidity risk

The Company has in place a planning and budgeting process to help determine the funds required to support the Company’s normaloperating requirements on an ongoing basis and its capital, development and exploration expenditures. The Company ensures thatthere are sufficient funds to meet its short-term requirements, taking into account its anticipated cash flows from operations andits holdings of cash and cash equivalents.

As of December 31, 2010, the Company had a cash balance of $29,154,731 (December 31, 2009 – $7,294,258) to settle currentaccounts payable and accrued liabilities of $1,423,716 (December 31, 2009 – $1,198,085).

(c) Market risk

The most significant factor affecting the Company’s earnings is the price of the metals contained in the ore sale to Xstrata. Nickel,copper and cobalt prices are affected by factors beyond the Company’s control and mainly by the fundamentals of supplyand demand.

The Company’s contract with Xstrata also includes a price participation clause where Xstrata participates to some extent in theupward and downward movement in metal prices.

(d) Foreign exchange risk

The Company is exposed to foreign exchange risk as a result of its sales transactions being conducted in currencies other than itsfunctional currency, the Canadian dollar. All of the revenues and portions of expenses are denominated in U.S. dollars. At December 31,2010, the Company had monetary assets and liabilities denominated in U.S. dollars as follows:

Cash US$ 22,490

Convertible loan US$ 8,280,066

Sensitivity to a plus or minus 5% change in the foreign exchange rate would have affected the net loss by approximately $411,000in 2010.

(e) Interest rate risk

The Company’s cash, restricted cash and cash equivalents bear interest at fixed rates and have maturities of 90 days or less. Therisk of investing cash equivalents into fixed interest rate investments is mitigated by the short terms in which the investmentsmature. This way, the Company can adapt its investment strategy in the event of any large fluctuations in the prevailing marketrates. A sensitivity analysis has determined that an interest rate fluctuation of 1% would have resulted in a $114,000 fluctuation inthe interest income during the year.

(f) Fair value

The book values of the cash, accounts receivable, accounts payable and accrued liabilities, and interest on convertible loanapproximate their respective fair values due to the short term nature of these instruments.

The book value of the long-term convertible loan obligations approximates their fair value because management estimates that theloan represent rates currently available to the Company on loans with similar terms and maturity.

15. Capital Management

The Company’s objectives in managing capital are to safeguard its ability to operate as a going concern. The Company considersits capital structure to consist of capital stock, convertible loan, bridge loan and contributed surplus. The Company manages itscapital structure and makes adjustments to it, in order to have the funds available to support its exploration, development andoperations activities.

Management reviews its capital management approach on an ongoing basis. There were no changes in the Company’s approach tocapital management during the year ended December 31, 2010. The Company is not subject to externally imposed capitalrequirements.


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16. Economic Dependence

As disclosed in note 11 (a) Xstrata has been granted the right of first refusal to purchase all ore produced at the Lockerby Minefacility. The Company generated all of its production revenues from sales to Xstrata during the year ended December 31, 2009.

17. Subsequent Events

(a) On January 6, 2011, RCF IV notified the Company of their option to receive in payment of the $235,520 in interest payable toRCF IV on the convertible loan in common shares of the Company. A total of 1,992,636 common shares were issued to RCF IVin full satisfaction of this liability (see Note 8 (a)).

(b) On January 6, 2011, RCF IV notified the Company of their option to receive in payment of the $132,094 in interest payable toRCF IV on the bridge loan in common shares of the Company. A total of 1,066,845 common shares were issued to RCF IV in fullsatisfaction of this liability (see Note 8 (b)).

(c) On January 6, 2011, at a special meeting of shareholders of the Company, the shareholders approved the following:

(i) The issuance by the Company of 16,225,753 units of the Company (“Units”) to RCF IV at a price of $0.12 per Unit assettlement for the $1,947,090 of the outstanding amount of the bridge loan advanced to the Company by RCF IV onSeptember 1, 2010. Each Unit is comprised of one common share (a “Common Share”) and one-half of one Common Sharepurchase warrant (each whole warrant, a “Warrant”). Each Warrant entitles RCF IV to acquire one Common Share at aprice of $0.17 until November 12, 2012. The Units were issued to RCF IV on January 20, 2011, and the bridge loan has nowbeen repaid in full.

(ii) The amendment to the Stock Option Plan of the Company to increase the number of common shares of the Companyreserved for issuance under the Stock Option Plan from 15,000,000 under a fixed number plan to a number equal to 10%of the issued and outstanding common shares of the Company.

(d) On January 24, 2011, RCF IV notified the Company of their option to receive in payment of the $16,226 in interest payable toRCF IV on the bridge loan in common shares of the Company. A total of 109,191 common shares were issued to RCF IV in fullsatisfaction of this liability (see Note 8 (b)).

(e) On March 1, 2011, the Company received and accepted commitments from Société Générale (Administrative and TechnicalAgent) and Commonwealth Bank of Australia (Documentation Agent) (collectively, the “Lenders”) for a senior debtfacility totalling $30 million. In connection with receiving the commitments, the Company issued 6,155,986 common sharepurchase warrants to the Lenders as part of the arrangement fee. The warrants are exercisable at $0.12 per share and expireMarch 31, 2015.

Drawdown of the Facility will be subject to a number of conditions precedent, including completion of satisfactory legaldocumentation, implementation of a hedging program and expenditure by the Company of its required equity contribution.Under the Facility documents, the Company will be required to enter into direct agreements with several stakeholders toestablish satisfactory collateral arrangements covering the Company’s assets.

GLOSSARY OF TERMS

Assay An analysis that determines the presence, absence, andquantity of one or more metallic components.

Breccia A rock composed of angular fragments within a finer-grained matrix.

Chalcopyrite A common ore mineral of copper, composed ofcopper, iron and sulphur.

Co Cobalt

Concentrate A metal-rich product resulting from a mineralenrichment process, such as gravity concentration of flotation, inwhich most of the desired mineral has been separated from thewaste material in the ore.

Cu Copper

Deposit Amineralized body which has been physically delineatedby sufficient drilling, trenching, and/or underground work, andfound to contain a sufficient average grade of metal or metals towarrant further exploration and/or development expenditures; adeposit does not qualify as a commercially mineable ore body or ascontaining mineral reserves until certain legal, technical andeconomic factors have been resolved.

Development The preparation of a known commerciallymineable deposit for mining.

DiamondDrill A type of rotary drill in which the cutting is done byabrasion rather than by percussion. The drill cuts a core of rockwhich is recovered in long cylindrical sections.

Fe Iron

Geophysical Survey A study conducted to measure the physicalcharacteristics of a certain area.

Grade The measure of concentration of a metal withinmineralized rock.

Host Rock A body of rock in which mineralization of economicinterest occurs.

Igneous A body of rock formed by the cooling or solidification ofmolten material.

Intrusives A body of igneous rock formed below the surface.

Lens A body of ore or rock that is thick in the middle andconverges toward the edges, resembling a convex lens.

Mt Tonnes in millions

Metallurgical Scoping Study A techno-economic evaluation of aproject, carried out by an engineering firm to an accuracy level of+50%/-30%, to determine whether the project merits furtherdevelopment.

Milling The process in which ore is crushed and ground andsubjected to physical or chemical treatment to extract the valuemetals to a concentrate or finished product.

Mineral Deposit An identified in situ mineral occurrence fromwhich valuable or useful minerals may be recovered; mineraldeposit estimates are not precise calculations, being dependenton the interpretation of limited information on the location,shape and continuity of the occurrence of mineralization and onthe available sampling results.

Mineralization Material containing minerals of value.

Mineral Reserve The part of a Mineral Resource which can beextracted legally and at a profit, under economic conditions thatare specified and generally accepted as reasonable by themining industry, and which is demonstrated by a preliminaryfeasibility study or feasibility study.

Mineral Resource A concentration or occurrence of natural,solid, inorganic or fossilized organic material in or on the earth’scrust in such form and quantity and of such a grade or qualitythat it has reasonable prospects for economic extraction. Thelocation, quantity, grade, geological characteristics andcontinuity of a Mineral Resource are known, estimated, orinterpreted from specific geological evidence and knowledge.

Ni Nickel

Ore A natural aggregate of one or more minerals which, at aspecified time and place, may be mined and sold, or from whichsome part may be separated.

PGEs Platinum group elements, namely, platinum (Pt),palladium (Pd), rhodium (Rh), iridium (Ir), ruthenium (Ru) andosmium (Os).

Prophyry A common igneous rock type that contains relativelylarge crystals in a fine-grained ground mass.

Pre-feasibility Study A techno-economic evaluation of aproject carried out by an engineering firm to an accuracy levelof +25%/-15%, to determine whether the project merits furtherdevelopment to full feasibility.

Pyrrhotite A common sulphide mineral composed of ironand sulphur.

Quartz A mineral, the composition of which is silicon dioxide; acrystalline form of silica that frequently occurs in veins.

Sedimentary A rock formed from cemented or compactedsediments.

Strike The direction or trend of a geological structure.

Sulfide or Sulphide A mineral compound characterized by thelinking of sulphur with metal.

Ton A short ton (2,000 lbs.)

Tonne A metric tonne, being 1,000 kg (2,204 lbs.)

Zn ZincFIRST

NICKEL


52

CONTENTS

1 Highlights of 2010 and 2011 Objectives

2 Message to Shareholders

4 Production at Lockerby Mine

10 Exploration

12 Environment, Health and Safety

13 Management’s Discussion and Analysis

33 Management’s Responsibility for Financial Reporting

33 Independent Auditors’ Report

34 Balance Sheets

35 Statements of Operations and Comprehensive Loss

36 Statements of Changes in Shareholders’ Equity

37 Statements of Cash Flows

38 Notes to the Financial Statements

52 Glossary of Terms

53 Corporate Information

FORWARD-LOOKING STATEMENT

Corporate Information

DIRECTORS

Thomas J. Pugsley (2, 3, 4)

C. David A. Comba (2, 4)

Lyle R.Hepburn (1, 3)

William J. Anderson (4)

Richard S.Hallisey (1, 4)

Robert F. Whittall (1, 3)

Russell L. Cranswick (2, 4)

(1) Audit Committee

(2) Compensation Committee

(3) Corporate Governance Committee

(4) Technical Advisory Committee

OFFICERS

William J. AndersonPresident & Chief Executive Officer

Joseph Del Campo, CMAChief Financial Officer

Gerry BilodeauChief Operating Officer

Paul Davis, P.Geo.,M.Sc.Vice President Exploration

HEAD OFFICE

120 Front Street East

Suite 206

Toronto, Ontario

M5A 4L9

Phone 416-362-7050

Fax 416-362-9050

Stock Exchange Listing

Toronto Stock Exchange

Symbol: FNI

Legal Counsel

Fasken Martineau DuMoulin LLP

333 Bay Street

Suite 2400

Bay Adelaide Centre

Toronto, Ontario

M5H 2T6

Auditors

KPMG LLP

Bay Adelaide Centre

Suite 4600

333 Bay Street

Toronto, Ontario

M5H 2S5

REGISTRAR AND TRANSFER AGENT

Equity Transfer Services Inc.

200 University Avenue

Suite 400

Toronto, Ontario

M5H 4H1

Investor Relations Website

www.firstnickel.com

Annual General Meeting

Thursday, June 16, 2011 at 10 a.m. ET

TSX Broadcast Centre – Gallery

The Exchange Tower

130 King Street West

Toronto, Ontario

M5X 1J2

This annual report may containforward-looking statements, which aresubject to certain risks, uncertaintiesand assumptions. A number of factorscould cause actual results to differmaterially from the results discussedin such statements, and there is noassurance that actual results will beconsistent with them. Such forward-looking statements are made as atthe date of this annual report, andthe Company assumes no obligationto update or revise it, either publiclyor otherwise, to reflect new events,information or circumstances.

FIRST

NICKEL


53

ANNUALREPORT2010

FIRSTNICKELINC.

First Nickel Inc.120 Front Street EastSuite 206Toronto, OntarioM5A 4L9

First Nickel Annual Report - 2010

Business

nickel andcopper

returnfirst nickel

annualreport2010first

lockerby mineassurance

statements of operations

statements of changes

anderson president ceo

statements of cash flowsor