EX-99.2 3 exhibit99-2.htm MANAGEMENT DISCUSSION AND ANALYSIS FOR THE PERIOD ENDED OCTOBER 31, 2010 PolyMet Mining Corp.: Exhibit 99.2 - Filed by newsfilecorp.com

POLYMET MINING CORP.
MANAGEMENT DISCUSSION AND ANALYSIS
FORM 51-102F1
For the period ended 31 October 2010
US Funds

General

The following information, prepared as at 12 January 2011, should be read in conjunction with the unaudited interim consolidated financial statements of PolyMet Mining Corp. (the “Company” or “PolyMet”) for the period ended 31 October 2010 and related notes attached thereto, which are prepared in accordance with Canadian generally accepted accounting principles (“GAAP”). All amounts are expressed in United States dollars unless otherwise indicated.

The Audit Committee of the Board of Directors of the Company, consisting of three directors, has reviewed this document pursuant to its mandate and charter.

Forward Looking Statements

This Management Discussion and Analysis (“MD&A”) contains certain forward-looking statements concerning anticipated developments in PolyMet’s operations in the future. These forward-looking statements appear in a number of different places in this MD&A and can frequently, but not always, be identified by words such as “expects”, “anticipates”, “believes”, “intends”, “estimates”, “potential”, “possible”, “projects”, “plans” and similar expressions, or statements that events, conditions or results “will”, “may”, “could” or “should” occur or be achieved or their negatives or other comparable words. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause PolyMet’s actual results, performance or achievements to be materially different from any future results, performance or achievements that may be expressed or implied by such forward-looking statements. Forward-looking statements include statements regarding the outlook for the Company’s future operations, plans and timing for PolyMet’s exploration and development programs, statements about future market conditions, supply and demand conditions, forecasts of future costs and expenditures, the outcome of legal proceedings, and other expectations, intentions and plans that are not historical fact. The Company’s actual results may differ materially from those in the forward-looking statements due to risks facing PolyMet or due to actual facts differing from the assumptions underlying the Company’s predictions. Some of these risks and assumptions include: general economic and business conditions, including changes in interest rates; prices of natural resources, costs associated with mineral exploration and development, and other economic conditions; natural phenomena; actions by governments and authorities including changes in government regulation; uncertainties associated with legal proceedings; changes in the resource market; future decisions by management in response to changing conditions; future decisions by management in response to changing conditions; the Company’s ability to execute prospective business plans, and misjudgments in the course of preparing forward-looking statements.

The Company advises you that these cautionary remarks expressly qualify in their entirety all forward-looking statements attributable to PolyMet or persons acting on it’s behalf. The Company expressly disclaims any obligation to update publicly, or otherwise, these statements, whether as a result of new information, future events or otherwise except to the extent required by law. Readers should carefully review the cautionary statements and risk factors contained in this and all other documents that the Company files from time to time with regulatory authorities.

Cautionary note to U.S. investors: the terms “measured and indicated mineral resource”, “mineral resource”, and “inferred mineral resource” used in this Management Discussion and Analysis are Canadian geological and mining terms as defined in accordance with National Instrument 43-101, Standards of Disclosure for Mineral Projects (“NI 43-101”) under the guidelines set out in the Canadian Institute of Mining, Metallurgy and Petroleum (the “CIM”) Standards on Mineral Resources and Mineral Reserves. U.S. investors are advised that while such terms are recognized and required under Canadian regulations, the SEC does not recognize these terms. Mineral Resources do not have demonstrated economic viability. It cannot be assumed that all or any part of a Mineral Resource will ever be upgraded to Mineral Reserves. Under Canadian rules, estimates of inferred mineral resources may not form the basis of or be included in feasibility or other studies. U.S. investors are cautioned not to assume that any part of an inferred mineral resource exists, or is economically or legally mineable.

Specific reference is made to PolyMet’s most recent Form 20-F/Annual Information Form on file with the SEC and Canadian securities authorities for a discussion of some of the factors underlying forward-looking statements.

1


POLYMET MINING CORP.
MANAGEMENT DISCUSSION AND ANALYSIS
FORM 51-102F1
For the period ended 31 October 2010
US Funds

Description of Business and Summary of Recent Events

PolyMet is a Toronto Stock Exchange and NYSE Amex listed Issuer engaged in the exploration and development, when warranted, of natural resource properties. The Company’s primary mineral property and principal focus is the commercial development of its NorthMet Project, a polymetallic project in northeastern Minnesota, USA which hosts copper, nickel, cobalt and platinum group metal mineralization.

Asset Acquisitions

On 15 November 2005 the Company, through its Minnesota subsidiary (Poly Met Mining, Inc.), completed the early exercise of PolyMet’s option with Cliffs Natural Resources, Inc. (formerly Cleveland Cliffs, Inc.) (NYSE:CLF) (“Cliffs”) to acquire the Erie Plant, which is located 10 kilometers (6 miles) west of PolyMet’s NorthMet deposit. The plant was operated by Cliffs for many years and was acquired by Cliffs in early 2001 from LTV Steel Mining Company after that company’s bankruptcy at which time the plant was placed on care-and-maintenance with a view to a potential restart. With minor modification, the crushing and milling circuits can be used for the NorthMet ore. The plant assets now owned by PolyMet include crushing and milling equipment, comprehensive spare parts, plant site buildings, real estate, tailings impoundments and mine workshops, as well as access to extensive mining infrastructure including roads, rail, water, and power. A new hydrometallurgical plant is planned to be installed adjacent to the existing mill on surplus land.

PolyMet plans to refurbish and reactivate the crushing, concentrating and tailings facilities at the Erie Plant to produce concentrates containing copper, nickel, cobalt and precious metals. The concentrates are planned to be sold prior to completion of construction and commissioning of the new hydrometallurgical metal recovery processing facilities. Once completed, the new hydrometallurgical plant will produce copper metal, nickel-cobalt hydroxide and a precious metals precipitate.

On 20 December 2006 the Company acquired from Cliffs, property and associated rights sufficient to provide it with a railroad connection linking the mine development site and the Erie Plant. This transaction also included 120 railcars, locomotive fueling and maintenance facilities, water rights and pipelines, large administrative offices on site and an additional 6,000 acres of land to the east and west of and contiguous to its existing tailing facilities.

PolyMet has indemnified Cliffs for ongoing reclamation and remediation associated with the property under both transactions.

Feasibility Study, Mineral Resources and Mineral Reserves

With publication of the Definitive Feasibility Study (“DFS”) in September 2006, summarized in a Technical Report under National Instrument 43-101 (“NI 43-101”), PolyMet established SEC-standard mineral reserves. Proven and probable mineral reserves were estimated at 181.7 million short tons grading 0.31% copper, 0.09% nickel and 0.01 ounces per ton ("opt") of precious metals. In September 2007, PolyMet reported an expansion in these proven and probable mineral reserves to 274.7 million short tons grading 0.28% copper, 0.08% nickel and 0.01 opt of precious metals (palladium, platinum and gold).

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POLYMET MINING CORP.
MANAGEMENT DISCUSSION AND ANALYSIS
FORM 51-102F1
For the period ended 31 October 2010
US Funds

These reserves are based on copper at $1.25 per pound, nickel at $5.60 per pound, and precious metal prices of $210, $800, and $400 per ounce respectively for palladium, platinum and gold.

The reserves lie within measured and indicated mineral resources that were expanded to 638.2 million tons grading 0.27% copper, 0.08% nickel and 0.01 opt of precious metals (palladium, platinum and gold). In addition, inferred mineral resources total 251.6 million tons grading 0.28% copper, 0.08% nickel and 0.01 opt of precious metals.

PolyMet has transitioned into detailed engineering in preparation for the start of construction. This includes detailed planning for the construction phase, commencement of detailed design work, and scheduling long lead-time equipment. As a result of continuing economic and financial market instability which started in mid 2008, and until there is greater certainty on the timeline to complete permitting, the Company has scaled back detailed engineering and design work that is not needed for permitting and has deferred placing orders for equipment.

DFS Update

On 20 May 2008 PolyMet reported revised plans and cost estimates for construction and operating costs. The revised plans include:

  • the sale of concentrate during the construction and commissioning of new metallurgical facilities resulting in a shorter pre-production construction period (12-15 months) and reduced capital costs prior to first revenues ($312 million versus $380 million);
  • the new metallurgical facilities to be constructed during initial production and sales of concentrate. PolyMet anticipates that much of the additional $290 million of capital costs, including $20 million of additional environmental measures, will be funded from cash flow from initial operations;
  • mine plans (based on copper at $1.25 per pound) reflect the increase in reserves and decrease in stripping ratio reported on 26 September 2007, the use of 240-ton trucks, and owner versus contract mine operations, and
  • $77 million of mining equipment, which was assumed to be provided by a mining contractor in the DFS has been incorporated as an operating lease in updated operating costs.

Environmental Review

In October 2005, the Minnesota Department of Natural Resources (MDNR) published its Environmental Assessment Worksheet Decision Document establishing the MDNR as the lead state agency and the US Army Corps of Engineers (“USACE) as the lead federal agency (together the “Lead Agencies”) for preparation of an Environmental Impact Statement (“EIS”) for the project. In 2006 these Lead Agencies selected an independent environmental contractor (“the EIS Contractor”) to prepare the EIS. The EIS Contractor is Environmental Resources Management, a leading global provider of environmental, health and safety, risk, and social consulting services. The EIS Contractor team included members with expertise and experience in mining sulfidic ores. Several other government agencies (including the US Forest Service, the Bois Forte Band of Chippewa and the Fond Du Lac Band of Lake Superior Chippewa) joined the EIS preparation team as Cooperating Agencies which brought their special expertise to the process.

In January 2007, the Company submitted a Detailed Project Description (“DPD”) to state and federal regulators. The DPD lays out the Company’s development plans and proposed environmental safeguards including a mine plan, a wetland mitigation plan, air and water quality monitoring plans and a closure plan with closure estimate. Since then, the Company has submitted a supplemental DPD as well as more than 100 supporting research studies, including comprehensive mine waste characterization studies, water quality modeling and air quality modeling.

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POLYMET MINING CORP.
MANAGEMENT DISCUSSION AND ANALYSIS
FORM 51-102F1
For the period ended 31 October 2010
US Funds

Under state and federal guidelines and regulations, a Draft EIS (“DEIS”) identifies the environmental impact of a proposed project as well as evaluating alternatives and ways to mitigate potential impacts. PolyMet was involved in the process of alternative/mitigation development and had input into the technical and economical feasibility of potential alternatives and mitigations. The EIS Contractor prepared a series of preliminary versions of the DEIS that were reviewed and commented on by the Lead Agencies, other governmental agencies, and PolyMet.

In October 2009, the Lead Agencies published the PolyMet DEIS with formal notification of publication in the Minnesota Environmental Quality Board (“EQB”) Monitor and the Federal Register on 2 November and 6 November 2009, respectively. The formal notification of publication started a 90-day period for public review and comment, which ended on 3 February 2010. During this period, the lead Agencies held two public meetings – one in the town of Aurora, MN near the project location and one in Blaine, MN in the metropolitan Minneapolis-St. Paul area.

The Lead Agencies received more than 3,700 submissions containing approximately 22,000 separate comments, including an extensive comment letter from the US Environmental Protection Agency (“EPA”) in its role as reviewer of projects that could impact the environment. Many of the comments related to alternative plans that the Company and the Lead Agencies had already recognized would not be incorporated into the final “preferred” alternative. In general, the preferred alternative would be a combination of PolyMet proposals, alternatives and mitigations that meet the purpose and need of the project, are technically and economically feasible, and provide the best environmental outcomes.

On 25 June 2010 the Lead Agencies announced that they intend to complete the EIS process by preparing a Supplemental Draft EIS that incorporates the proposed US Forest Service (USFS) land exchange and expands government agency cooperation. The USFS will join the US Army Corps of Engineers (USACE) as a federal co-lead agency through the completion of the EIS process. In addition, the U.S. Environmental Protection Agency (EPA) will join the effort as a cooperating agency. The MDNR remains the state co-lead agency.

On 13 October 2010 the USACE and the USFS published a Notice of Intent to complete the Supplemental Draft EIS, which will:

  • Supplement and supersede the Draft EIS and respond to concerns identified by the US Environmental Protection Agency ("EPA") and other comments on the Draft EIS.
  • Incorporate potential effects from the proposed land exchange between the USFS Superior National Forest and PolyMet.

Public review of the scope of the land exchange ended on 29 November 2010. The USACE and the USFS stated that they expect to complete the Supplemental Draft EIS in the summer of 2011, with the final EIS anticipated six to nine months later.

The Notice of Intent stated that the proposed land exchange would eliminate conflicts between the United States and private mineral ownership and consolidate land ownership to improve Superior National Forest management effectiveness and public access to federal lands. The proposed exchange is in accordance with Forest Service Strategic Plan Goals to provide and sustain long-term socioeconomic benefits to the American people, conserve open space, and sustain and enhance outdoor recreation activities.

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POLYMET MINING CORP.
MANAGEMENT DISCUSSION AND ANALYSIS
FORM 51-102F1
For the period ended 31 October 2010
US Funds

The NorthMet mine site encompasses approximately 2,840 of the 6,650 acres of land proposed for exchange to private ownership; the remaining federal property would improve intermingled and inefficient ownership patterns and eliminate conflicts if minerals development were to expand in the future.

The lands that would be received by the Superior National Forest consist of forest and wetland habitat as well as lake frontage. These lands would enhance public recreation opportunities and complement existing federal ownership by eliminating or reducing private holdings surrounded by Superior National Forest land.

Once the Supplemental Draft EIS is completed, it will be made available for public review prior to preparation of the final EIS. Completion of the final EIS and a subsequent Adequacy Decision by the DNR and Record of Decision by the federal agencies are necessary before the land exchange can occur and various permits required to construct and operate the project can be issued.

Prior to receipt of the permits, the Company intends to secure construction financing that would be available upon receipt of key permits, with construction slated to start upon availability of construction finance.

Construction of NorthMet is expected to be made up of four major components:

  1.

Implementation of environmental safeguards;

  2.

Construction of the mine and reactivation of some existing mine infrastructure;

  3.

Refurbishment of the existing Erie Plant facilities and construction of new flotation facilities, and

  4.

Construction of a new hydrometallurgical plant.

Key Developments

In April 2010, Cliffs entered into a consent decree with the Minnesota Pollution Control Agency (“MPCA”) relating to alleged violations on the Cliffs Erie Property. This consent decree required submission of Field Study Plan Outlines, which have been approved by the MPCA, and Short Term Mitigation Plans, which have not yet been formally approved. As part of its prior transactions with Cliffs, PolyMet has agreed to indemnify Cliffs for certain on-going site environmental liabilities.

At the annual shareholders' meeting on 7 July 2010, Messrs. Corneliuson and Swearingen did not stand for re-election to the Company’s Board of Directors owing to other personal commitments. The Board thanked them for their contributions to the Company during their tenure.

On 31 October 2010, 1,100,000 warrants to purchase shares of PolyMet common stock at $4.00 per share that had been issued to BNP Paribas Loan Services (“BNPP”) expired.

On 12 November 2010, PolyMet announced that Glencore AG ("Glencore") had agreed to purchase 15 million shares of PolyMet common stock at $2.00 per share in three tranches over the next two years. In addition, Glencore has agreed to extend the maturity date of the $25 million (initial principal) debentures issued to Glencore under the 2008 financing to 30 September 2012 and has cancelled the final $25 million debenture financing commitment and the 6.25 million share purchase warrants issued as part of the 2008 financing. PolyMet has issued warrants to purchase 3 million shares at $2 per share at any time until December 31, 2015 as compensation for the other changes.

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POLYMET MINING CORP.
MANAGEMENT DISCUSSION AND ANALYSIS
FORM 51-102F1
For the period ended 31 October 2010
US Funds

On 16 December 2010 the Board of the Iron Range Resources (“IRR”) approved, on the commissioner’s recommendation, a secured loan to Poly Met Mining, Inc. of up to $4 million. The IRR board is composed of five members of the Minnesota Senate, five members of the Minnesota House, and three citizen members. The loan is awaiting approval from the Governor of the State of Minnesota. Proceeds from the loan will be used to purchase forest land, wetlands, and lakes with high recreational value that would become available for public use and enjoyment. These properties, which PolyMet currently has under purchase option, would be purchased for future use as part of a proposed land exchange for surface rights at the proposed NorthMet mine site currently controlled by the U.S. Forest Service.

The loan will be secured by the land to be acquired from proceeds of the loan, carry a fixed interest rate of 5% per annum, and will be repayable on 31 December 2015. Subject to regulatory approval, the Company has also agreed to issue warrants giving the IRR the right to purchase up to 400,000 shares of PolyMet common stock at US$2.50 per share at any time until the earlier of 31 December 2015 and one year after PolyMet receives permits.

With effect from 31 December 2010, William Murray stepped down as Executive Chairman and George Molyviatis resigned his board membership. Mr. Murray will continue to serve as a non-management director of the Company. Ian Forrest and Frank Sims, both independent directors, will serve as independent co-Chairmen. Mr. Forrest will continue as Chair of the Audit Committee and Mr. Sims will continue as Chair of the Corporate Governance Committee.

On 31 December 2010, warrants to purchase 3,674,092 shares of PolyMet common stock at $3.00 per share, which had been issued in connection with the April 2007 financing, expired.

6


POLYMET MINING CORP.
MANAGEMENT DISCUSSION AND ANALYSIS
FORM 51-102F1
For the period ended 31 October 2010
US Funds

Results of Operations

For the three months ended 31 October 2010 (the “2011 third quarter”) compared to the three months ended 31 October 2009 (the “2010 third quarter”)

a) Loss for the Period:

During the three months ended 31 October 2010, the Company incurred a loss of $210,000 ($0.00 loss per share) compared to a loss of $841,000 ($0.01 loss per share) in the fiscal 2010 third quarter. The decrease in the net loss for the period was primarily attributable to a general reduction in costs, the fact that the prior period included $150,000 of expenses related to filing an F-3 registration statement, to the non-cash reversal of previously recorded stock-based compensation costs relating to board and other management changes of $212,000 (31 October 2009 – nil) and a non-cash future income tax recovery related to expiration of stock purchase warrants previously issued of $171,000 (31 October 2009 – nil).

b) Cash Flows:

Cash used in operating activities in the three months ended 31 October 2010 was $675,000 compared to cash used in the three months ended 31 October 2009 of $390,000. The variance in cash is primarily due to changes in non-cash working capital balances and the above mentioned F-3 registration statement costs.

Cash used in financing activities for the three months ended 31 October 2010 was $179,000 (prior year period cash provided by - $4,514,000). The 2011 third quarter activity was primarily due to the scheduled repayment of $500,000 of debt (prior year period - $250,000) and the issuance of share capital on the exercise of stock options for $321,000 (prior year period - $nil). Cash provided for the three month period ended 31 October 2009 included a net of $4.988 million from the issuance of convertible debentures (current year period - $nil) and $224,000 in deferred financing costs (current year period - $nil).

Cash used in investing activities for the three months ended 31 October 2010 was $3.771 million compared with $4.450 million in the three months ended 31 October 2009, with the decrease being primarily the result of slightly reduced environmental related spending in the current year period.

In summary, total cash for the three months ended 31 October 2010 decreased by $4.625 million for a balance of $4.994 million compared to the three months ended 31 October 2009 where cash decreased $326,000 to a balance of $2.926 million.

c) Capital Expenditures:

During the three months ended 31 October 2010 the Company capitalized $3.030 million (2009 - $6.425 million) of costs primarily directly related to site activity, the draft EIS and permitting as well as engineering and project planning costs.

For the nine months ended 31 October 2010 compared to the nine months ended 31 October 2009

a) Loss for the Period:

During the nine months ended 31 October 2010, the Company incurred a loss of $3.563 million ($0.02) loss per share) compared to a loss of $2.858 million ($0.02 loss per share) in the prior year period. The increase in the net loss for the period was primarily attributable to the Company’s decision to review alternatives for construction financing and not to renew its agreement with BNP Paribas Loan Services, to advise and assist PolyMet in all aspects of preparation for construction finance, which expired on 31 July 2010. As such, the $1.830 million, $1.197 million of which was non-cash related to the fair value of warrants issued, recorded as a deferred financing cost asset was written off to the consolidated statement of loss in the second quarter of the current year. During the current year period the Company expensed exploration costs of $193,000 (31 October 2009 - $nil). The above items were offset by a non-cash reversal of previously recorded stock-based compensation costs relating to board and other management changes of $169,000 (31 October 2009 – expense of $882,000) and a non-cash future income tax recovery related to expiration of stock purchase warrants previously issued of $171,000 (31 October 2009 – nil).

7


POLYMET MINING CORP.
MANAGEMENT DISCUSSION AND ANALYSIS
FORM 51-102F1
For the period ended 31 October 2010
US Funds

b) Cash Flows:

Cash used in operating activities in the nine months ended 31 October 2010 was $2.534 million compared to cash used in the nine months ended 31 October 2009 of $1.051 million. The variance in cash is primarily due to changes in non-cash working capital balances and the above noted exploration expense.

Cash used in financing activities for nine months ended 31 October 2010 was $1.020 million (prior year period cash provided by - $9.176 million). The current period activity was primarily due to the scheduled repayment of $1.500 million of debt (prior year period - $750,000) and the issuance of share capital on the exercise of stock options for $516,000 (prior year period - $231,000). Cash provided for the period ended 31 October 2009 included a net of $9.944 million from the issuance of convertible debentures (current year period - $nil) and deferred financing costs of $249,000 (current year period - $36,000).

Cash used in investing activities for the nine months ended 31 October 2010 was $12.734 million compared with $12.553 million in the nine months ended 31 October 2009.

In summary, total cash for the nine months ended 31 October 2010 decreased by $16.288 million for a balance of $4.994 million compared to the period ended 31 October 2009 where cash decreased $4.428 million to a balance of $2.926 million.

c) Capital Expenditures:

During the nine months ended 31 October 2010 the Company capitalized $13.161 million (2009 - $18.160 million) of costs primarily directly related to site activity, definition drilling, the draft EIS and permitting as well as engineering and project planning costs.

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POLYMET MINING CORP.
MANAGEMENT DISCUSSION AND ANALYSIS
FORM 51-102F1
For the period ended 31 October 2010
US Funds

Summary of Quarterly Results
(All figures in Thousands of U.S. dollars except Loss per share)

Three Months
Ended
Oct. 31
2010
$ 		July 31
2010
$ 		Apr 30
2010
$ 		Jan 31
2010
$ 		Oct. 31
2009
$ 		July 31
2009
$ 		Apr. 30
2009
$ 		Jan. 31
2009
$
Total Revenues - - - - - - - -
General and Administrative (378) (2,563) (942) (5,172) (883) (1,089) (1,009) (894)
Other Income (Expenses) 168 69 83 12 42 54 27 (7)
Net Loss (210) (2,494) (859) (5,160) (841) (1,035) (982) (901)
Loss per share (0.00) (0.02) (0.01) (0.03) (0.01) (0.01) (0.01) (0.01)

Significant items to report for the quarterly results are as follows:

A recovery of previously expensed stock based compensation costs of $212,000 due to the forfeiture of unvested stock options was recorded in the quarter ended 31 October 2010. There were no similar stock based compensation recoveries recorded in the other quarters.

The Company recorded a future income tax recovery as the expiration of warrants triggered a capital gain for tax purposes which was offset by the application of tax losses carried forward resulting in a credit of $171,000 in the quarter ended 31 October 2010. There were no similar tax recoveries recorded in the other quarters.

A financing cost write-off of $1.830 million was recorded in the quarter ended 31 July 2010. There were no similar financing cost write-offs recorded in the other quarters.

Exploration expense of $193,000 was recorded in the quarter ended 30 April 2010. There were no exploration expenses recorded in the other quarters.

Investment losses of $93,000 were recorded in the quarter ended 31 January 2009. There were no investment losses recorded in the other quarters.

Warrant amendment expenses of $3.757 million and $1.005 million were recorded in the quarters ended 31 January 2010 and 31 October 2009, respectively. There were no warrant amendment expenses recorded in the other quarters.

The net loss included stock based compensation expense (recovery) for the quarters ended:

  1.

31 October 2010 - $(203,000)

  2.

31 July 2010 - $24,000

  3.

30 April 2010 - $10,000

  4.

31 January 2010 - $31,000

  5.

31 October 2009 - $97,000

  6.

31 July 2009 - $332,000

  7.

30 April 2009 - $453,000

  8.

31 January 2009 - $73,000

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POLYMET MINING CORP.
MANAGEMENT DISCUSSION AND ANALYSIS
FORM 51-102F1
For the period ended 31 October 2010
US Funds

Financing Activities

During the nine months ended 31 October 2010 the Company issued 545,000 shares (prior year period – 475,000) upon exercise of options for proceeds of $516,000 (prior year period - $231,000).

Liquidity and Capital Resources

As at 31 October 2010 the Company had working capital of $1.056 million compared with working capital of $16.313 million at 31 January 2010 consisting primarily of cash of $4.994 million (31 January 2010 - $21.282 million), prepaid expenses of $746,000 (31 January 2010 - $512,000), accounts payable and accrued liabilities of $1.876 million (31 January 2010 - $2.953 million), the current portion of the notes to Cliffs of $2.000 million (31 January 2010 - $2.000 million) and the current portion of asset retirement obligations of $992,000 (31 January 2010 - $756,000). The Company expects to pay the remaining balance of $7.050 million (31 January 2010 - $8.529 million) long term notes to Cliffs and the convertible debt principal balance of $25 million plus capitalized interest from working capital, additional financing and funds from operations once commercial production has commenced. The Company’s cash is primarily held in deposits and bearer deposits of a major Canadian bank and does not include any exposure to asset-backed commercial paper.

As at 31 October 2010 the Company, in addition to its obligation to Cliffs and Glencore as described herein, has obligations to issue shares under the Company’s Bonus Share Plan. The Company has received shareholder approval for the Bonus Shares of Milestones 1 – 4 and regulatory approval for Milestones 1, 2 and 3. Milestone 4 is subject to regulatory approval. To 31 October 2010, 5,240,000 shares have been issued for the achievement of Milestones 1, 2 and 3. The bonus shares allocated for Milestones 1 through 3 are valued using the Company’s closing trading price on 28 May 2004 of CDN$0.75 per share, the date of the approval of the bonus plan by the disinterested shareholders. The bonus shares allocated for Milestone 4 are valued using the Company’s closing trading price on 17 June 2008 of US$3.80 per share, the date of the approval of the bonus plan by the disinterested shareholders. The Company also has outstanding firm commitments of approximately $1,100,000.

These interim unaudited consolidated financial statements have been prepared on a going concern basis which contemplates the realization of assets and the settlement of liabilities in the normal course of operations. Liquidity risk is the risk that the Company will be unable to meet its financial obligations as they fall due.

In the past the Company has taken steps to fund its operations through the issuance of equity and debt. It plans to meet its ongoing financial obligations to the point at which all regulatory approvals for its NorthMet project have been obtained and which will allow the Company to raise additional capital to construct its mine and commence commercial production. In the event that currently available resources are not sufficient to meet these obligations, the Company may be forced to curtail or delay expenditures, sell assets or seek additional financing sources. All of these circumstances may delay the progress of or affect the ultimate success of the Company’s plans.

Subsequent to the end of the quarter, the Company entered into an agreement with Glencore AG ("Glencore") whereby Glencore will purchase $30 million of the Company's common stock in three tranches, the exact timing to reflect the Company's funding requirements under a budget that has yet to be finalized. Glencore has previously invested $50 million into PolyMet in the form of equity and debt in a total of six separate tranches.

10


POLYMET MINING CORP.
MANAGEMENT DISCUSSION AND ANALYSIS
FORM 51-102F1
For the period ended 31 October 2010
US Funds

Should the Company wish to continue to further advance the NorthMet Project to commercial production PolyMet would require additional funding. As the Company has no operating revenues, the only source of liquidity consists primarily of cash from proceeds of project debt, other debt and equity financing.

Shareholder Rights Plan

Effective 25 May 2007, the Company adopted an updated Shareholder Rights Plan (“Rights Plan”), which was approved by the Company’s shareholders on 27 June 2007 and modified by the Company’s shareholders on 17 June 2008. Under the Rights Plan, the Company has issued one right for no consideration in respect of each outstanding common share of the Company to all holders of record of common shares on 4 December 2003. All common shares subsequently issued by the Company during the term of the Rights Plan will have one right represented for each common share held by the shareholder of the Company. The term of the Rights Plan is 10 years, unless the rights are earlier redeemed or exchanged. The Rights issued under the Rights Plan become exercisable only if a party acquires 20% or more of the Company's common shares without complying with the Rights Plan or without the approval of the Board of Directors of the Company.

Each Right entitles the registered holder thereof to purchase from the Company on the occurrence of certain events, one common share of the Company at the price of CDN$50 per share, subject to adjustment (the “Exercise Price”). However, if a Flip-in Event (as defined in the Rights Plan) occurs, each Right would then entitle the registered holder to receive, upon payment of the Exercise Price, that number of common shares that have a market value at the date of that occurrence equal to twice the Exercise Price. The Rights are not exercisable until the Separation Time as defined in the Rights Plan.

Off Balance-Sheet Arrangements

The Company does not utilize off-balance sheet arrangements.

11


POLYMET MINING CORP.
MANAGEMENT DISCUSSION AND ANALYSIS
FORM 51-102F1
For the period ended 31 October 2010
US Funds

Related Party Transactions

During the nine months ended 31 October 2010, the Company paid $48,000 (31 October 2009 - $36,000) to Dr. Dreisinger, a Director of PolyMet, for consulting fees primarily in connection with activities related to the processing / technical side of the NorthMet project and related expenses (the latter were supported by invoices and receipts). The consulting fees were based on a monthly fee of Canadian $5,500 plus general sales tax. Throughout the term of his engagement, Dr. Dreisinger has conducted in-person and telephonic meetings with Mr. William Murray, the Company’s Executive Chairman, and other members of management at which he provided both verbal and written updates on the status of test work and made recommendations for future activities. These meetings occurred approximately every two to three weeks for the past five years.

The agreement with Dr. Dreisinger was entered into at a time when the Company’s current business plans were being formulated and it was month to month and oral in nature. The agreement was approved by Mr. William Murray. It was discussed with the Company’s board of directors who did not consider that a formal approval and written contract was necessary at that time. The Company believes that the contract was at terms at least as good as could be obtained from third parties.

Proposed Transactions

There are no proposed transactions that will materially affect the performance of the Company.

Subsequent Events

On 12 November 2010, the Company announced that it had renegotiated its debenture financing from Glencore. The agreed amendments to the debenture financing are as follows:

  • The maturity date of the Tranche A-D Debentures has been extended from September 30, 2011 to September 30, 2012. The Issued Debentures were issued in four tranches between October 2008 and September 2009. The total initial principal of the Debentures is US$25 million with US$2.334 million of accrued interest as of October 31, 2010. The Issued Debentures continue to be exchangeable into common shares of PolyMet at US$4.00 per share, as agreed to in 2008.
  • Cancellation of Glencore’s commitment to purchase, and the Company’s commitment to issue, US$25 million of Tranche E Debentures which were to be issued upon publication of the Final Environmental Impact Statement, receipt of a term sheet for construction financing, and other customary conditions.
  • Cancellation of warrants to purchase 6.25 million common shares of PolyMet at US$3.00 at any time until September 30, 2011 issued to Glencore in connection with Debentures.
  • Issuance of warrants to purchase 3 million common shares of PolyMet at US$2.00 at any time until December 31, 2015, issued to Glencore in consideration of the amendments listed above.

12


POLYMET MINING CORP.
MANAGEMENT DISCUSSION AND ANALYSIS
FORM 51-102F1
For the period ended 31 October 2010
US Funds

Separately, on 12 November 2010, the Company announced that it had entered into a definitive agreement with Glencore to sell in a private placement 15 million common shares at US$2.00 per share for gross proceeds of US$30 million, before deducting estimated offering expenses. Consummation of the sale of the New Shares and funding are expected to occur in the following three tranches subject, in each case, to certain closing conditions:

  • Tranche 1 of US$10 million is expected to close no later than January 17th, 2011;
  • Tranche 2 of US$10 million is expected to close no later than October 17th, 2011; and
  • Tranche 3 of US$10 million is expected to close on the earlier of a) within ten business days following receipt by PolyMet of key permits, in a form reasonably acceptable to Glencore, that will enable the start of construction of the Project, and b) October 15th, 2012.

As part of this agreement, Glencore has, for a period of five business days following notification of a financing offer, the right of first refusal to provide all material financings of PolyMet that occur at any time when Glencore is the beneficial owner of 10% or more of the issued and outstanding Common Shares of PolyMet. Glencore also has the right to participate in all sales by PolyMet the Company of its equity securities or any securities convertible into or exchangeable or exercisable for such securities in a capital raising transaction, that occur at any time when Glencore or any of its affiliates are the beneficial owner of 5% or more of the issued and outstanding Common Shares of PolyMet. Under this participation right, Glencore can maintain its beneficial ownership of PolyMet allowing for exercise of warrants and exchange of debt into Common Shares of PolyMet. The Company and Glencore have agreed certain provisions in the case of either a Canadian bought deal financing or an underwritten public offering.

The off take and marketing agreements whereby Glencore will market all of PolyMet's products for a minimum of five years from the start of commercial production at NorthMet are unaffected by the amendments to the financing agreements.

On December 16, 2010 the Board of the IRR approved, on the commissioner’s recommendation, a secured loan to Poly Met Mining, Inc. of up to $4 million. The IRR board is composed of five members of the Minnesota Senate, five members of the Minnesota House, and three citizen members. The loan is awaiting approval from the Governor of the State of Minnesota. PolyMet plans to use proceeds from the loan to purchase forest land, wetlands, and lakes as part of a proposed land exchange for surface rights at the proposed NorthMet mine site currently controlled by the U.S. Forest Service.

The loan will be secured by the land to be acquired from proceeds of the loan, carry a fixed interest rate of 5% per annum, and will be repayable on December 31, 2015. Subject to regulatory approval, the Company has also agreed to issue warrants giving the IRR the right to purchase up to 400,000 shares of PolyMet common stock at US$2.50 per share at any time until the earlier of December 31, 2015 and one year after PolyMet receives permits.

With effect from 31 December 2010, William Murray stepped down as Executive Chairman and George Molyviatis resigned his board membership. Mr. Murray will continue to serve as a non-management director of the Company. Ian Forrest and Frank Sims, both independent directors, will serve as independent co-Chairmen. Mr. Forrest will continue as Chair of the Audit Committee and Mr. Sims will continue as Chair of the Corporate Governance Committee.

On 31 December 2010, warrants to purchase 3,674,092 shares of PolyMet common stock at $3.00 per share, which had been issued in connection with the April 2007 financing, expired.

13


POLYMET MINING CORP.
MANAGEMENT DISCUSSION AND ANALYSIS
FORM 51-102F1
For the period ended 31 October 2010
US Funds

Changes in Accounting Policies Including Initial Adoption

There were no new accounting standards issued during the period that are expected to impact the Company.

International Financial Reporting Standards ("IFRS") and update on plan to transition to IFRS

In 2006, the Canadian Accounting Standards Board (“AcSB”) published a new strategic plan that will significantly affect financial reporting requirements for Canadian companies. The AcSB strategic plan outlines the convergence of Canadian GAAP with IFRS over an expected five year transitional period. In February 2008 the AcSB announced that 2011 is the changeover date for publicly-listed companies to use IFRS, replacing Canada’s own GAAP. Since the Company is required to present full comparative financial information under IFRS for the year ended 31 January 2012, the transition date to IFRS will effectively be February 1, 2010. The transition will require the restatement of the opening balance sheet at the transition date, as well as the results reported under Canadian GAAP for the year ended 31 January 2011.

Management is in the process of assessing the implications of IFRS transitions. This includes the completion of a high level diagnostic review, identifying significant GAAP differences that will impact the Company’s financial statements.

Management is adding to its IFRS resources in order to position it to carry out the IFRS transition.

Management is performing detailed component evaluations for the balances and totals that existed at 31 January 2010. On a preliminary basis, management has identified the following potential areas of major differences between the Company’s current accounting policies and those that the Company expects to apply in preparing IFRS financial statements:

  • Impairment of Assets – Under IFRS the Company is to compare the carrying value of assets to the present value of the recoverable amount to determine whether any impairments are required. Impairments may be reversed in subsequent periods.
  • Convertible Debt – Under IFRS, the Company would use the residual method to allocate proceeds to the various elements of its convertible debt transactions and expense the portion relating to warrants.
  • Asset Retirement Obligations – IFRS requires estimates of provisions to be revisited at every reporting date. This includes re-assessing the appropriateness of assumptions used in estimating the carrying value of the provisions. The Company expects that the estimate of asset retirement obligations will have to be updated at every reporting date, including updates to the discount rate used in determining the present value of the obligations.

Management expects to complete the detailed component evaluations in the first few months of calendar 2011. This process will allow it to determine the major differences between IFRS and the Company’s current accounting policies and quantify said differences.

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POLYMET MINING CORP.
MANAGEMENT DISCUSSION AND ANALYSIS
FORM 51-102F1
For the period ended 31 October 2010
US Funds

IFRS 1 contains various elective exemptions which are intended to provide relief from fully retrospective application of specific IFRS standards. Not all of the available exemptions currently apply to the Company, however, management is evaluating the following elections with regards to the applicable exemptions:

Share based payments – a first-time adopter is not required to apply IFRS 2 to equity instruments that were granted after 7 November 2002 and vested before the date of transition to IFRS.

Fair valuation of property plant and equipment at deemed cost – an entity may elect to measure an item of property, plant and equipment at the date of transition to IFRS at is fair value and use that fair value as its deemed cost at that date. The Company does not expect to make use of this exemption.

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POLYMET MINING CORP.
MANAGEMENT DISCUSSION AND ANALYSIS
FORM 51-102F1
For the period ended 31 October 2010
US Funds

Other MD&A Requirements

Outstanding Share Data

Authorized Capital: Unlimited common shares without par value.

Issued and outstanding: As at 12 January 2011, 149,525,791 common shares were issued and outstanding.

Outstanding options, warrants and convertible securities as at 12 January, 2011:

Type of Security
Number
Exercise Price
(US$) 		Expiry Date
Common share warrants 4,010,000 (Note 1) August 31, 2011
Stock options 800,000 0.66 05 July 2011
Stock options 50,000 0.80 18 October 2011
Stock options 85,000 0.65 30 March 2012
Stock options 350,000 0.86 1 May 2012
Stock options 40,000 0.95 15 June 2012
Stock options 1,390,000 1.37 19 September 2012
Stock options 200,000 1.21 24 October 2012
Stock options 200,000 1.16 5 December 2012
Stock options 2,650,000 2.78 20 March 2013
Stock options 325,000 2.99 19 June 2013
Stock options 300,000 3.85 1 September 2013
Stock options 75,000 3.54 22 September 2013
Stock options 525,000 3.32 5 January 2014
Stock options 1,250,000 2.99 13 February 2014
Stock options 250,000 2.92 12 March 2014
Stock options 50,000 2.89 23 March 2014
Stock options 360,000 3.00 4 September 2014
Stock options 205,000 3.05 12 December 2014
Stock options 70,000 3.03 11 January 2015
Stock options 100,000 2.87 31 January 2015
Stock options 500,000 2.72 15 February 2015
Stock options 100,000 3.92 2 June 2015
Stock options 175,000 3.22 30 July 2015
Common share warrants 3,000,000 (Note 2) 2.00 31 December 2015
Stock options 595,000 0.82 30 January 2016
Stock options 1,060,000 0.82 17 February 2016
Stock options 115,000 2.67 15 October 2016
Stock options 60,000 3.54 8 January 2017

Note 1:   Each warrant entitles the holder to purchase one share of PolyMet common stock at US$5.00 if exercised before the NorthMet Project has produced a cumulative total of 20,000 metric tonnes of concentrate, or US$6.00 thereafter and prior to August 31, 2011. PolyMet can accelerate the expiration of the warrants if PolyMet’s volume- weighted 20-day average stock price trades at a 50% premium to the exercise price applicable at any time.

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POLYMET MINING CORP.
MANAGEMENT DISCUSSION AND ANALYSIS
FORM 51-102F1
For the period ended 31 October 2010
US Funds

Note 2:   Each warrant entitles the holder to purchase one common share of PolyMet at US$2.00 and expire on 31 December 2011.

Effective 25 May 2007, the Company adopted a new Omnibus Share Compensation Plan (“Stock Option Plan”), which was approved by the Company’s shareholders’ on 27 June 2007 (re-approved on 7 July 2010). The Stock Option Plan covers the Company’s employees, directors, officers and consultants. The options are granted for varying terms ranging from two to five years. The maximum number of common shares under the stock option plan shall not exceed (i) 10% of the outstanding common shares of the Company at the time of granting of the options and (ii) 18,592,888 common shares of the Company, of which 3,640,000 common shares are reserved for issuance as awards other than options.

Risks and Uncertainties

An investment in the Company’s common shares is highly speculative and subject to a number of risks and uncertainties. Only those persons who can bear the risk of the entire loss of their investment should participate. An investor should carefully consider the risks described in PolyMet’s Form 20-F/Annual Information Form for the year ended 31 January 2010 on file with the SEC and Canadian securities regulators and other information filed with the Canadian and United States securities regulators before investing in the Company’s common shares. The risks described in PolyMet’s Form 20-F/Annual Information Form are not the only ones faced. Additional risks that the Company currently believes are immaterial may become important factors that affect the Company’s business. If any of the risks described in PolyMet’s Form 20-F/Annual Information Form for the year ended 31 January 2010 occur, the Company’s business, operating results and financial condition could be seriously harmed and investors could lose all of their investment.

Management’s Responsibility for Financial Statements

The information provided in this report including the financial statements, is the responsibility of management. In the preparation of these statements, estimates are sometimes necessary to make a determination of future values for certain assets or liabilities. Management believes such estimates have been based on careful judgments and have been properly reflected in the accompanying financial statements.

Management maintains a system of internal controls to provide reasonable assurances that the Company’s assets are safeguarded and to facilitate the preparation of relevant and timely information.

Management’s Report on Internal Control over Financial Reporting

The Company’s management is responsible for establishing and maintaining adequate internal controls over financial reporting. Any system of internal control over financial reporting, no matter how well designed, has inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

17


POLYMET MINING CORP.
MANAGEMENT DISCUSSION AND ANALYSIS
FORM 51-102F1
For the period ended 31 October 2010
US Funds

During the quarter ended 31 October 2010, the Company experienced difficulties moving to a new accounting and financial reporting system. These difficulties were primarily in the input and review of transactions and in particular concerned the accurate recording of foreign exchange and intercompany transactions. As a result of experiencing these difficulties the Company was unable to meet its filing deadline to provide consolidated financial statements, management’s discussion and analysis and CEO and CFO certifications for its quarter ended October 31, 2010. As a result of these difficulties, management of the Company undertook a rigorous process to ensure that all transactions were recorded completely and accurately in the accounting records. Management is committed to implementing changes to the Company’s internal control over financial reporting to enhance internal controls relating to the input and review of all transactions, including those relating to foreign exchange and intercompany transactions, as well as segregation of duties. Furthermore management is committed to ensuring the timely provision of financial information to its shareholders in future in accordance with the filing deadlines established by regulators.

Additional Information

Additional information related to the Company is available for view on SEDAR and EDGAR, respectively, at www.sedar.com and at www.sec.gov, and at the Company’s website www.polymetmining.com.

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