News release via Canada NewsWire, Toronto 416-863-9350
Attention Business/Financial Editors:
Breakwater Reports financial and operating results for the interim
periods ended June 30, 2006 and 2005
TORONTO, Aug. 1 /CNW/ - (TSX-BWR) Breakwater Resources Ltd. is pleased to
provide management's discussion and analysis of the financial condition and
results of operations for the interim periods ended June 30, 2006 and 2005.
This Management's Discussion and Analysis (the "MD&A") of Breakwater
Resources Ltd. ("Breakwater" or the "Company") should be read in conjunction
with the Company's unaudited consolidated financial statements for the three
and six months ended June 30, 2006, and related notes thereto which have been
prepared in accordance with Canadian generally accepted accounting principles.
This should also be read in conjunction with the audited consolidated
financial statements for the year ended December 31, 2005, related annual
Management's Discussion and Analysis, and the Annual Information Form 40-F on
file with the Canadian provincial securities regulatory authorities and the
U.S. Securities and Exchange Commission. This Management's Discussion and
Analysis has been prepared as of August 1, 2006.
Breakwater is an exploration, development and mining company with
operations in Canada, Honduras and Chile. The Company produces and sells zinc,
copper, lead and gold concentrates to customers around the world. The
Company's revenues are earned in US dollars, but are reported in Canadian
dollars for accounting purposes.
<<
Second Quarter 2006 Highlights
- Net earnings increased to $29.5 million.
- Gross sales revenue increased by 10 percent to $101.2 million despite
a drop in tonnes of concentrate sold.
- Contribution from mining activities set a record high by increasing
to $37.3 million.
- Basic earnings per share improved to $0.08.
- Revised production forecast for Langlois for 2006 of 10.6 million
pounds of payable zinc, 0.5 million pounds of payable copper and
29,600 ounces of payable silver. Based on the addition of Grevet B
and much more robust forecasted metal prices of US $0.80 per pound of
zinc, US$2.06 per pound of copper, a silver price of US$7.00 per
ounce and an exchange rate of US$0.85 per C$1.00 the net cash flow
before taxes increases from $41.6 million to in excess of
$200 million over the life of the mine.
- Breakwater has completed the sale of the Caribou and Restigouche
mines to Blue Note Metals Inc.
>>
Outlook
Robust metal prices for all commodities persisted in the second quarter
of 2006. Inventories of zinc in LME warehouses continued to be drawn down as
forecasted with the inventories, effective August 1, 2006, standing at 184,350
tonnes, below the 200,000 tonne level for the first time since late 2000,
early 2001. The fundamentals for zinc support strong prices for the remainder
of the year and into 2007.
The strong commodity prices resulted in significantly higher gross and
net sales revenues and net earnings in the second quarter of 2006 than during
the comparable period a year earlier. We expect these improvements in results
to continue for the remainder of the year.
We remain focused in the execution of our business plan. Growing our
reserves and resources is the first step in stabilizing our operations and to
that end we have engaged Western Mining Services LLC ("WMS")to assist us in
this task. The results of WMS' review has been very encouraging with the
identification of several targets with the potential of adding significant
resources within the infrastructure at Myra Falls, a new zone at El Toqui in
the Porvenir deposit and the identification of new anomalies on the Langlois
property.
El Toqui and El Mochito are operating well and we have advanced our
production targets for Langlois as noted above. We now expect to mine 100,000
tonnes at Langlois from both zones 3 and 4 and through the development of
Grevet B. Our investment in Myra Falls continues to demonstrate returns as
indicated by the improvement in mill recoveries. We are on track with the ramp
development and the upgrade to the tailings dam facility. We are behind in
building the infrastructure in the mine, primarily ventilation raises and
waste development, which has had a direct effect on our production year to
date. We expect to have a revised mine plan developed in the third quarter of
2006 which should include production from the Lynx pit and underground and the
Price deposit.
Our financial position improved yet again in the second quarter of 2006
and we expect this performance to continue during the remainder of the year.
Statement of Operations Review - Three and Six Months 2006 and 2005
The closure of Bouchard-Hebert in February and Bougrine in September of
2005 affect all aspects of the Company's financial results, which makes
comparisons between quarters difficult.
Gross Sales Revenue
Gross sales revenues on the sale of zinc, copper, lead and gold
concentrates for the three month period ended June 30, 2006 (the "second
quarter of 2006") increased $8.8 million (10%) to $101.2 million compared with
the three month period ended June 30, 2005 (the "second quarter of 2005").
Higher metal prices accounted for the increase partially offset by decreased
concentrate sales, 59,779 tonnes in the second quarter of 2006 compared with
118,033 tonnes in the second quarter of 2005, a stronger Canadian dollar and
losses on hedging positions of $0.5 million. The lower concentrate tonnage
sold in the second quarter of 2006 was primarily due to the closure of the
Bouchard-Hebert and Bourgine mines in 2005 and lower concentrate sales from
Myra Falls and El Mochito.
Gross sales revenues for the six month period ended June 30, 2006 (the
"first six months of 2006") decreased $1.8 million (1%) to $181.9 million
compared with the six month period ended June 30, 2005 (the "first six months
of 2005"). The decrease in gross sales revenues was primarily due to decreased
concentrate sales, 127,133 tonnes in the first six months of 2006 compared to
226,540 tonnes in the first six months of 2005, a stronger Canadian dollar and
losses on hedging positions of $4.4 million partially offset by higher metal
prices. The lower concentrate tonnage sold in the first six months of 2006
compared with the first six months of 2005 were due to the same factors noted
above for the quarter.
<<
-------------------------------------------------------------------------
($000s)
-------------------------------------------------------------------------
Gross Sales Revenue
by Operation Second Quarter Change First Six Months Change
-------------------------------------------------------------------------
2006 2005 % 2006 2005 %
-------------------------------------------------------------------------
Myra Falls 51,392 29,521 74 92,528 65,191 42
El Mochito 21,699 28,210 (23) 51,921 45,821 13
El Toqui 28,568 11,459 149 41,846 22,280 88
Bougrine 0 16,238 (100) (52) 25,261 (100)
Bouchard-Hebert 0 6,953 (100) 0 25,129 (100)
Corporate and Other (457) 0 n/a (4,383) 0 n/a
-------------------------------------------------------------------------
101,202 92,381 10 181,860 183,682 (1)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Gross Sales Revenue
by Metal
-------------------------------------------------------------------------
Zinc (US) 48,973 56,593 (13) 111,365 98,112 14
Lead (US) 3,326 5,642 (41) 6,016 10,896 (45)
Copper (US) 21,355 3,933 443 21,355 20,576 4
Gold (US) 6,838 4,384 56 10,495 9,956 5
Silver (US) 5,965 3,775 58 8,399 9,152 (8)
Hedging mark-to-
market and
revaluation 3,591 7 51,200 2,209 28 7,789
-------------------------------------------------------------------------
Total Gross Sales
Revenue (US) 90,048 74,334 21 159,839 148,720 7
-------------------------------------------------------------------------
Realized exchange
rate (C$/US$)
yearly average 1.1239 1.2429 (9) 1.1378 1.2351 (8)
-------------------------------------------------------------------------
Total Gross Sales
Revenue (C$) 101,202 92,381 10 181,860 183,682 (1)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Sales by Concentrate (tonnes) Second Quarter First Six Months
-------------------------------------------------------------------------
2006 2005 2006 2005
-------------------------------------------------------------------------
Zinc 39,705 102,492 103,276 177,187
Lead 5,025 8,998 8,325 18,135
Copper 14,482 6,532 14,482 31,208
Gold 567 11 1,050 10
-------------------------------------------------------------------------
Total Sales 59,779 118,033 127,133 226,540
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Sales by Payable Metal Second Quarter First Six Months
-------------------------------------------------------------------------
2006 2005 2006 2005
-------------------------------------------------------------------------
Zinc - tonnes 16,916 45,205 45,009 78,272
Lead - tonnes 3,182 5,697 5,288 11,120
Copper - tonnes 3,107 1,198 3,107 6,282
Gold - ounces 13,833 10,256 23,253 23,121
Silver - ounces 717,572 535,994 1,046,661 1,301,774
-------------------------------------------------------------------------
Realized Prices Second Quarter First Six Months
-------------------------------------------------------------------------
2006 2005 2006 2005
-------------------------------------------------------------------------
Zinc (US$/tonne) 2,895 1,252 2,474 1,253
Lead (US$/tonne) 1,045 990 1,138 980
Copper (US$/tonne) 6,872 3,284 6,872 3,275
Gold (US$/oz) 494 427 451 431
Silver (US$/oz) 8.31 7.04 8.02 7.03
-------------------------------------------------------------------------
Average LME Metal Prices
& Foreign Exchange Second Quarter First Six Months
-------------------------------------------------------------------------
2006 2005 2006 2005
-------------------------------------------------------------------------
Zinc (US$/tonne) 3,301 1,274 2,767 1,295
Lead (US$/tonne) 1,095 987 1,169 983
Copper (US$/tonne) 7,251 3,394 6,070 3,333
Gold (US$/oz) 627 427 590 427
Silver (US$/oz) 12.25 7.16 10.96 7.06
Exchange rate (US$1.00/C$) 1.122 1.244 1.138 1.235
>>
The Company periodically hedges against fluctuations in metal prices and
foreign exchange with the use of forward sales or options. The Company does
not apply hedge accounting. Realized and mark-to-market gains or losses on
hedging for payable metals are included in gross sales revenue at the end of
each period.
Outstanding gold positions at the end of the second quarter were as
follows:
<<
-------------------------------------------------------------------------
Position Quantity (ounces) Strike Price (US$) Strike Date
-------------------------------------------------------------------------
Call Options 10,000 $455 Oct to Dec 2006
Forward Sale 3,200 $571 Sep & Oct 2006
Forward Sale 6,800 $605 Dec 2006
Forward Sale 5,000 $740 Dec 2006
Net Revenue
For the second quarter of 2006, net revenue, the value of concentrates
sold after deducting treatment and marketing costs, was $75.7 million compared
with $57.6 million in the second quarter of 2005. Total treatment and
marketing costs, consisting of the amount paid to smelters for refining
concentrates to produce metal, freight, shipping and marketing costs,
decreased to $25.5 million in the second quarter of 2006 compared with
$34.8 million in the corresponding period in 2005 reflecting fewer tonnes
sold. Per tonne sold, total treatment and marketing costs increased to $427 in
the second quarter of 2006 from $295 in the corresponding period in 2005 as
higher metal prices triggered price escalators in the treatment charges.
For the six months of 2006, net revenue increased 11% to $131.5 million
compared with the first six months of 2005. Significantly higher metal prices,
partially offset by higher unit treatment charges and freight costs, more than
offset the lower tonnes of concentrate sold. Treatment charges and marketing
costs per tonne of concentrate sold increased to $396 from $286 due to the
impact of price escalators triggered by higher metal prices and higher freight
costs.
Direct Operating Costs
Direct operating costs were $34.2 million ($572 per tonne of concentrate
sold) for the second quarter of 2006 compared with $41.6 million ($353 per
tonne of concentrate sold) in the same period in 2005. For the six months
ended June 30, 2006, direct operating costs were $63.0 million compared with
$86.4 million for the first six months of 2005, the average cost per tonne of
concentrate sold increased to $495 from $381. These total dollar decreases
occurred because fewer tonnes of concentrate were sold in 2006. The average
operating cost per tonne of concentrate was higher in 2006 due higher costs at
Myra Falls mine and the closure of two lower cost mines in 2005 - Bourgine and
Bouchard-Hebert.
-------------------------------------------------------------------------
Direct
Operating
Costs Second Quarter 2006 Second Quarter 2005
-------------------------------------------------------------------------
Concentrate Cost Per Concentrate Cost Per
Aggregate Sold Tonne Aggregate Sold Tonne
($000s) (tonnes) ($) ($000s) (tonnes) ($)
-------------------------------------------------------------------------
Myra Falls 23,018 25,850 890 15,504 33,994 456
El Mochito 5,261 16,287 323 10,540 35,732 295
El Toqui 5,899 17,642 334 5,674 17,855 318
Bougrine 0 0 0 6,987 22,730 307
Bouchard-Hebert 0 0 0 2,912 7,722 377
-------------------------------------------------------------------------
Total 34,178 59,779 572 41,617 118,033 353
-------------------------------------------------------------------------
Direct
Operating
Costs First Six Months 2006 First Six Months 2005
-------------------------------------------------------------------------
Concentrate Cost Per Concentrate Cost Per
Aggregate Sold Tonne Aggregate Sold Tonne
($000s) (tonnes) ($) ($000s) (tonnes) ($)
-------------------------------------------------------------------------
Myra Falls 40,922 59,206 691 35,720 70,643 506
El Mochito 13,126 40,867 321 17,319 57,515 301
El Toqui 8,943 27,060 330 12,360 32,875 376
Bougrine 0 0 0 10,685 34,694 308
Bouchard-Hebert 0 0 0 10,335 30,813 335
-------------------------------------------------------------------------
Total 62,991 127,133 495 86,419 226,540 381
-------------------------------------------------------------------------
>>
The total cash cost per pound of payable zinc sold, which includes direct
operating costs and treatment and marketing costs, net of by-product credits,
was US$0.32 in the second quarter of 2006 compared with US$0.44 in 2005 (see
non-GAAP reconciliation below for details). The lower total cash cost per
pound of zinc sold in the second quarter of 2006 is a result of higher
by-product credits because of the recognition of certain sales of copper
concentrates in the quarter.
Depreciation and Depletion
Total depreciation and depletion expenses were significantly lower in
both the second quarter and the first six months of 2006 due to the closures
of Bouchard-Hebert and Bougrine mines in 2005. On a per tonne of concentrate
sold basis, depreciation and depletion expenses in the second quarter and
first six months of 2006 were $ 53 (2005 - $53) and $67 (2005 - $60)
respectively.
Reclamation and Closure Costs
The reclamation and closure costs accrual is accreted over time
increasing to the expected future costs of reclaiming the Company's mine
sites. Reclamation and closure costs were lower in both the second quarter and
first six months of 2006 compared with the corresponding periods in 2005 by
$2.2 million and $2.5 million respectively due an adjustment in 2005 of
$2.1 million relating to a change in cashflow estimate for projected
reclamation costs of Nanisivik.
Other Expenses (Income)
Other expenses (income) in the second quarter and the first six months of
2006 increased by $1.0 million and $4.5 million respectively. Increased other
expenses (income) for the second quarter of 2006 were primarily due to:
increased general and administrative; stock-based compensation; and, interest
and financing expenses partially offset by increased investment and other
income. The increase for the six month period ended June 30, 2006 compared
with the same period in 2005 was primarily due to the above noted items plus a
loss on the gold loan.
General and administrative expenses increased in the second quarter and
first six months of 2006 compared with the comparable periods in 2005,
primarily due to audit fees associated with compliance with Sarbanes-Oxley,
salaries and bonuses, increased costs for insurance, recruitment, corporate
development, and consulting fees.
Higher interest and financing expenses and investment and other income
for the second quarter and the first six months of 2006 compared with the
corresponding periods in 2005 were primarily due to the impact of a royalty
agreement entered into in December 2005.
The loss on gold loan for the first six months of 2006 compared with 2005
was due to the impact of gold price fluctuations on the fair market value of
the gold loan completed in August 2005 and related foreign exchange losses.
Other Non-producing Property Costs
Other non-producing property costs for the second quarter and the first
six months of 2006 decreased by $2.0 million and $2.8 million respectively.
Other non-producing property costs include care and maintenance costs, holding
costs, settlement costs and other costs associated with non-producing
properties net of proceeds received from those properties related to property
options sold and assets sold.
The decrease in other non-producing property costs for the second quarter
2006 compared with the second quarter 2005 was primarily due to lower costs
related to the Bouchard-Hebert and Nanisivik properties. For the six months
ended June 30, 2006, the decrease from the corresponding period in 2005 was
primarily due to the above noted properties partially offset by increased
costs at the Bougrine property and the settlement of a legal action associated
with the Caribou property.
Income and Mining Taxes (Recovery) Provision
Income and mining taxes provision increased $3.1 million in the second
quarter 2006 compared with the second quarter 2005 primarily due to tax
provisions required for El Mochito and adjustments to the Myra Falls future
tax asset.
For the first six months of 2006, income and mining tax recovery
increased by $22.5 million primarily due to a net future tax asset of
$25.5 million related to the Myra Falls mine.
Cash Provided from Operating Activities (before changes in non-cash
working capital items)
Cash from operating activities (before changes in non-cash working
capital items) was $32.2 million in the second quarter of 2006 compared with
$3.8 million in the same period in 2005. For the first six months of 2006,
cash provided from operating activities (before changes in non-cash working
capital items) increased by 278% to $53.3 million. The increases for the
second quarter and the first six months of 2006 compared with the comparable
2005 periods were primarily due to selling fewer tonnes of concentrate at
significantly higher metal prices.
<<
-------------------------------------------------------------------------
($ millions) Second Quarter First Six Months
-------------------------------------------------------------------------
2006 2005 2006 2005
-------------------------------------------------------------------------
Contribution from
mining activities 37.3 6.5 58.1 14.5
Other income expenses (2.8) (1.8) (7.5) (2.9)
Exploration costs (1.7) 0.0 (2.5) 0.0
Other non-producing
property costs (0.5) (2.5) (2.7) (5.5)
Income and mining taxes
(provision) recovery (2.8) 0.2 22.9 0.4
-------------------------------------------------------------------------
Net earnings 29.5 2.4 68.3 6.5
Closure costs and employee
future benefits (2.8) (8.7) (5.2) (11.1)
Non-cash items 5.5 10.1 (9.8) 18.7
-------------------------------------------------------------------------
Cash provided from operating
activities (before changes in
non-cash working capital items) 32.2 3.8 53.3 14.1
-------------------------------------------------------------------------
(See non-GAAP reconciliation below)
Liquidity and Financial Position Review
Working Capital
Working capital at the end of June 30, 2006 was $78.5 million compared
with $44.4 million at December 31, 2005, an increase of $34.1 million.
Current Assets
Total current assets increased by $53.7 million to $170.6 million at June
30, 2006 compared with December 31, 2005. The main components of current asset
changes were as follows:
- Cash and cash equivalents increased by $21.6 million reflecting
improved operating cash flow generated by stronger metal prices.
- Short-term investments increased by $3.3 million primarily due to the
reclassification of the Taseko debenture ($5.6 million) from long-
term investment, partially offset by the delivery in January 2006 of
gold held at the end of the year for an instalment payment on the
gold loan.
- Future income tax assets increased by $22.3 million reflecting the
setup of a net $25.5 million future income tax asset for the Myra
Falls mine offset by the drawdown of a previously set-up future
income tax asset for the El Mochito mine at the end of 2005.
Current Liabilities
Current liabilities increased by $19.6 million to $92.2 million at
June 30, 2006 compared with December 31, 2005. The main changes in the
components of current liabilities were as follows:
- Provisional payments for concentrate inventory shipped and not priced
represent payments received for concentrate shipments that were not
recognized as revenue. The balance as at June 30, 2006 of
$44.0 million comprised payments for zinc concentrate shipments for
the El Mochito mine of $9.7 million, for the El Toqui mine of
$8.7 million and for the Myra Falls mine of $15.3 million and for
copper concentrate shipments of $10.3 million for the Myra Falls
mine. The December 2005 balance of $14.8 million was for payments for
zinc concentrate shipments from the Myra Falls mine. The estimated
net revenue for concentrate shipments that were not recognized as
revenue is approximately $57.9 million as at June 30, 2006.
- Short-term debt decreased by $7.1 million primarily due to
accelerated repayment of the $1.5 million concentrate payment
agreement and scheduled repayments of the gold loan partially offset
by a new $3.3 million loan facility established in 2006.
>>
Restricted Cash and Reclamation Deposits
At June 30, 2006, Breakwater had restricted cash of $4.2 million and
reclamation deposits of $19.5 million.
Restricted cash included $2.2 million held by the Province of Quebec and
represents funds that will be returned to Breakwater over the next 12 months
as the reclamation work at Bouchard-Hebert is completed; $1.7 million held by
Natexis Banques Populaires as a cash reserve against the outstanding gold loan
(this amount will be returned upon the final gold loan payment scheduled at
the end of August 2006) and $0.3 million related to a letter of credit issued
to the Nunavut government in connection with the operating permit for the
Nanisivik mine.
The $19.5 million of reclamation deposits represents $6.0 million held by
the Province of New Brunswick as reclamation security for the Caribou mine and
$13.5 million held under a safe keeping agreement for the benefit of the
British Columbia government in support of reclamation requirements at Myra
Falls.
Restricted Promissory Note
The Company held two restricted promissory notes at the end of June 30,
2006 for a total of $62.3 million related to the 2004 and 2005 Red Mile
transactions.
Deferred Income
Deferred income was $6.6 million at June 30, 2006 compared with
$6.9 million at the end of 2005. At June 30, 2006, $5.2 million relates to the
indemnity agreement fees and interest that the Company received as part of the
Red Mile transactions in 2004 and 2005; these amounts will be brought into
income over the expected ten year lives of the two agreements. The balance is
the advance of a non-refundable royalty payment (US$1.0 million) received on
the sale of the Lapa properties in June 2003. In accordance with the original
agreement, this amount will be included in income only when the Lapa
properties are put into production.
Royalty Obligation
The Royalty Obligation of $62.5 million relates to the royalty amounts
received from the 2004 and 2005 Red Mile transactions.
Debt
Total debt was $8.0 million at June 30, 2006, compared with $18.7 million
at the end of 2005.
In the first quarter of 2006, the Company obtained a prepayment facility
of US$1.4 million to buy back calls on 10,000 ounces of gold. The prepayment
facility will be repaid in principal instalments of US$0.7 million each, from
the proceeds of the delivery of the gold forward sales in September and
October 2006. In the second quarter of 2006, the company entered into a
supplementary repayment facility with the same lender of US$1.5 million which
is secured by a promissory note due December 2006.
In August 2005, the Company completed a Gold Based Pre-production Advance
Facility. Under the terms of this facility, the Company received
US$10.0 million gold equivalent (sufficient gold was borrowed and then sold at
the prevailing spot price of $431 per ounce to provide the dollar value of the
facility). The term of this facility is 13 months with six principal payments
commencing October 2005 and ending August 2006. The repayments will be in the
form of gold. As at June 30, 2006, five of the six repayments had been made
leaving a balance outstanding of 3,867 ounces of gold having a fair value of
US$2.3 million. These gold ounces are expected to be fully repaid by the end
of August 2006.
The Company entered into a concentrate prepayment contract with a
customer in May 2005 whereby the customer advanced the Company US$5.0 million
against future deliveries of zinc concentrate. This prepayment facility was
fully repaid in May 2006 because of increased cashflow.
In the first quarter of 2006, the Company entered into a short-term loan
facility with a customer whereby the customer advanced the Company
US$12.0 million against future deliveries of concentrates. This prepayment
facility was fully repaid in the second quarter of 2006.
Reclamation and Closure Cost Accrual
Reclamation and closure costs represent the Company's obligation for
future reclamation and severance costs accrued for its mine sites. At June 30,
2006, total accrued reclamation and closure costs were $48.1 million compared
with $50.3 million at December 31, 2005.
<<
Reclamation and Closure Cost Accrual at June 30, 2006
-------------------------------------------------------------------------
($ millions) Current Long-term Total
-------------------------------------------------------------------------
Myra Falls 2.0 25.1 27.1
El Mochito 0.0 1.3 1.3
El Toqui 0.0 4.0 4.0
Langlois 0.0 1.3 1.3
Bouchard-Hebert 1.9 2.3 4.2
Caribou 0.0 5.3 5.3
Nanisivik 2.6 0.4 3.0
Bougrine 1.5 0.4 1.9
-------------------------------------------------------------------------
Total 8.0 40.1 48.1
-------------------------------------------------------------------------
>>
Equity
At the annual and special meeting held on June 8, 2006, the shareholders
approved a special resolution to reduce the stated capital of the Company by
an amount of $172.9 million, which is equal to the accumulated deficit as at
December 31, 2005. The capital stock was reduced by $169.6 million,
contributed surplus was reduced by $3.3 million and the deficit was reduced by
$172.9 million.
During the second quarter of 2006, the Company issued 419,736 Common
Shares for net proceeds of $0.3 million. Of the shares issued for cash,
377,733 were issued following the exercise of employee share options and
42,003 were issued pursuant to the Company's employee share purchase plan. In
addition, 750,000 were issued in settlement of an outstanding lawsuit.
Shareholders' equity at June 30, 2006 was $226.6 million compared with
$162.7 million at December 31, 2005, an increase of $63.9 million. This
increase reflects net earnings of $68.3 million, $2.3 million for issuance of
Common Shares, $0.6 million related to stock-based compensation less a
$2.3 million charge against capital stock related to the tax value of the
exploration expenses renounced to investors of flow-through common shares
issued in 2005 and an increase in cumulative translation adjustments of
$5.0 million.
Capital Expenditures
The Company invested $19.3 million in mineral properties and fixed assets
in the second quarter of 2006. The majority of the capital was spent as
follows:
<<
- Myra Falls - $4.9 million; $3.3 million on mine development and the
new surface ramp and $1.6 million on mill improvements including the
new lead circuit.
- El Mochito - $3.0 million; $1.4 million on the tailing facilities,
$0.4 million for mine development, $0.2 million on camp facilities,
$0.5 million on mobile equipment and $0.5 million on exploration.
- El Toqui - $5.0 million; $3.1 million on mine development including
the initial development of the Concordia mine, $0.7 million on
equipment replacement and $1.2 million on exploration.
- Langlois - $6.3 million; $3.6 million on mine development and
$2.7 million on exploration.
- Bougrine - $0.1 million on exploration.
>>
Financial Capability
With the existing working capital, the current metal prices and current
US$/C$ exchange rate, the Company is well positioned to carry out its
operating, capital, exploration and environmental programs in 2006, as
presently contemplated.
The Company's financial capability is sensitive to metal prices and the
US$/C$ exchange rate (please see page 9 of the Company's 2005 annual report).
<<
Operating Review for the Three Months ended June 30, 2006
-------------------------------------------------------------------------
Contribution
(Loss)
From Mining Non-cash Capital
Net Revenue Activities(1) Costs(2) Expenditures
-------------------------------------------------------------------------
($ millions) 2006 2005 2006 2005 2006 2005 2006 2005
-------------------------------------------------------------------------
Myra Falls 39.6 18.8 15.2 0.3 1.4 3.0 4.9 4.0
El Mochito 17.8 17.5 11.4 5.4 1.1 1.6 3.0 2.3
El Toqui 18.7 6.1 11.6 (1.0) 1.2 1.4 5.0 2.4
Bougrine 0.0 10.1 (0.1) 2.2 0.1 0.9 0.1 0.0
Bouchard-Hebert 0.0 5.1 (0.1) 2.0 0.1 0.2 0.0 0.3
Langlois 0.0 0.0 0.0 0.0 0.0 0.0 6.3 1.6
Other (0.4)(3) 0.0(3) (0.6) (2.4) 0.2 2.3 0.0 0.0
-------------------------------------------------------------------------
Total 75.7 57.6 37.4 6.5 4.1 9.4 19.3 10.6
-------------------------------------------------------------------------
(1) After non-cash costs.
(2) Depreciation, depletion and reclamation and closure costs.
(3) Net realized from metal hedging activities.
Operating Review for the Six Months ended June 30, 2006
-------------------------------------------------------------------------
Contribution
(Loss)
From Mining Non-cash Capital
Net Revenue Activities(1) Costs(2) Expenditures
-------------------------------------------------------------------------
($ millions) 2006 2005 2006 2005 2006 2005 2006 2005
-------------------------------------------------------------------------
Myra Falls 67.9 43.6 22.3 1.6 4.6 6.2 8.6 7.7
El Mochito 39.2 29.3 23.2 8.9 2.9 3.1 5.2 4.1
El Toqui 28.7 12.2 17.7 (2.7) 2.1 2.6 6.6 4.2
Bougrine 0.0 15.5 (0.1) 2.9 0.1 2.0 0.4 0.1
Bouchard-Hebert 0.0 18.3 (0.2) 6.5 0.2 1.4 0.0 0.7
Langlois 0.0 0.0 0.0 0.0 0.1 0.0 8.5 2.7
Other (4.3)(3) 0.0 (4.8) (2.7) 0.4 2.7 0.1 0.1
-------------------------------------------------------------------------
Total 131.5 118.9 58.1 14.5 10.4 18.0 29.4 19.6
-------------------------------------------------------------------------
(1) After non-cash costs.
(2) Depreciation, depletion and reclamation and closure costs.
(3) Net realized from metal hedging activities.
Production Results
Consolidated production is set forth in the following table.
-------------------------------------------------------------------------
All Mines Second Quarter First Six Months
--------------------------------------------
2006 2005 2006 2005
-------------------------------------------------------------------------
Ore Milled (tonnes) 492,395 617,163 1,019,975 1,359,542
-------------------------------------------------------------------------
Zinc (%) 5.8 6.9 5.9 6.7
-------------------------------------------------------------------------
Concentrate Production (tonnes)
-------------------------------------------------------------------------
Zinc 49,159 71,232 103,036 153,038
Copper 5,720 7,530 13,063 21,860
Lead 4,049 9,140 7,772 15,519
Gold 978 880 2,164 1,624
-------------------------------------------------------------------------
Total 59,906 88,782 126,034 192,041
-------------------------------------------------------------------------
Metal in Concentrates
-------------------------------------------------------------------------
Zinc (tonnes) 25,254 37,658 53,132 80,803
Copper (tonnes) 1,357 6,111 3,108 4,979
Lead (tonnes) 2,753 1,868 5,289 10,415
Silver (ounces) 678,906 775,133 1,348,887 1,606,757
Gold (ounces) 14,327 20,099 31,602 40,590
-------------------------------------------------------------------------
Total Cash Costs
-------------------------------------------------------------------------
Per lb. payable zinc (US$) 0.55 0.36 0.51 0.38
-------------------------------------------------------------------------
>>
Aggregate production of zinc in concentrate in the second quarter of 2006
was 55.7 million pounds compared with 82.9 million pounds in the second
quarter of 2005, a 33% reduction. The reduced zinc production during the
quarter reflects lower zinc head grades at Myra Falls and Mochito, lower
milled tonnes at Myra Falls, and the end of production at the now closed
Bougrine mine.
The following table sets forth zinc production at each site for the
second quarter together with the change from the prior period.
<<
-------------------------------------------------------------------------
Zinc Production Second Quarter First Six Months
(million pounds -----------------------------------------------------
of zinc contained
in concentrate) 2006 2005 % 2006 2005 %
-------------------------------------------------------------------------
Myra Falls 19.2 31.9 (39.8) 42.0 62.3 (32.6)
Bouchard-Hebert - - - - 13.9 -
Bougrine - 11.8 - - 25.6 -
El Mochito 20.5 24.2 (15.3) 43.6 46.2 (5.6)
El Toqui 16.0 15.0 6.7 31.5 30.2 4.3
-------------------------------------------------------------------------
Total zinc production 55.7 82.9 (32.8) 117.1 178.2 (34.3)
-------------------------------------------------------------------------
Production of copper in concentrate decreased 27% in the second quarter of
2006 from the same period in 2005 due to lower milled tonnes and lower copper
grades at Myra Falls.
-------------------------------------------------------------------------
Copper Production
(million pounds Second Quarter First Six Months
of copper -----------------------------------------------------
contained in
concentrate) 2006 2005 % 2006 2005 %
-------------------------------------------------------------------------
Myra Falls 3.0 4.1 (27.2) 8.0 9.9 (19.0)
Bouchard-Hebert - - - - 1.0 -
-------------------------------------------------------------------------
Total copper
production 3.0 4.1 (27.2) 8.0 10.9 (26.7)
-------------------------------------------------------------------------
Despite higher lead production at El Mochito, production of lead in
concentrate decreased 55% during the second quarter of 2006 due to the closure
of Bougrine.
-------------------------------------------------------------------------
Lead Production Second Quarter First Six Months
(million pounds -----------------------------------------------------
of lead contained
in concentrate) 2006 2005 % 2006 2005 %
-------------------------------------------------------------------------
El Mochito 6.1 6.0 2.2 11.6 11.2 3.6
Bougrine - 7.5 - - 11.8 -
-------------------------------------------------------------------------
Total lead
production 6.1 13.5 (54.7) 11.6 23.0 (49.6)
-------------------------------------------------------------------------
Gold in concentrate decreased 29% in the second quarter of 2006 from the
same period in 2005 due to lower milled tonnes at Myra Falls and less gold
production from El Toqui.
-------------------------------------------------------------------------
Gold Production Second Quarter First Six Months
(ounces of gold -----------------------------------------------------
contained in
concentrate) 2006 2005 % 2006 2005 %
-------------------------------------------------------------------------
Myra Falls 5,569 8,905 (37.5) 11,546 18,212 (36.6)
El Toqui 8,758 11,194 (21.8) 20,056 19,794 1.3
Bouchard-Hebert - - - - 2,644 -
-------------------------------------------------------------------------
Total gold
production 14,327 20,099 (28.7) 31,602 40,650 (22.3)
-------------------------------------------------------------------------
Silver in concentrate decreased 12%, quarter over quarter due to lower
tonnes milled and silver grades from Myra Falls and lower silver production at
El Toqui.
-------------------------------------------------------------------------
Silver Production Second Quarter First Six Months
(ounces of silver -----------------------------------------------------
contained in
concentrate) 2006 2005 % 2006 2005 %
-------------------------------------------------------------------------
Myra Falls 222,501 303,809 (26.8) 447,726 700,751 (36.1)
El Mochito 436,351 438,886 (0.6) 865,563 793,714 9.1
El Toqui 20,054 32,438 (38.2) 35,598 72,279 (50.7)
Bouchard-Hebert - - - - 40,013 -
-------------------------------------------------------------------------
Total silver
production 678,906 775,133 (12.4) 1,348,887 1,606,757 (16.0)
-------------------------------------------------------------------------
Myra Falls Production
---------------------
The following table sets forth Myra Falls' production for the periods
presented.
-------------------------------------------------------------------------
Second Quarter First Six Months
---------------------------------------------
2006 2005 2006 2005
-------------------------------------------------------------------------
Ore Milled (tonnes) 188,098 233,707 396,417 498,183
-------------------------------------------------------------------------
Zinc (%) 5.3 7.0 5.6 6.5
-------------------------------------------------------------------------
Copper (%) 0.9 1.2 1.0 1.3
-------------------------------------------------------------------------
Silver (g/t) 47 51 45 53
-------------------------------------------------------------------------
Gold (g/t) 1.5 1.8 1.6 1.8
-------------------------------------------------------------------------
Concentrate Production
-------------------------------------------------------------------------
Zinc (tonnes) 17,005 26,664 36,579 52,904
-------------------------------------------------------------------------
Recovery (%) 87.1 88.9 85.5 87.3
-------------------------------------------------------------------------
Grade (%) 51.3 54.3 52.1 53.4
-------------------------------------------------------------------------
Copper (tonnes) 5,720 7,530 13,063 18,832
-------------------------------------------------------------------------
Recovery (%) 76.3 67.5 75.3 70.9
-------------------------------------------------------------------------
Grade (%) 23.7 24.8 23.8 23.9
-------------------------------------------------------------------------
Gold (tonnes) 1.6 9.7 11.4 17.9
-------------------------------------------------------------------------
Recovery (%) 9.0 20.1 11.8 20.5
-------------------------------------------------------------------------
Grade (g/t) 18,477 8,888 6,515 10,047
-------------------------------------------------------------------------
Metal in Concentrates
-------------------------------------------------------------------------
Zinc (tonnes) 8,730 14,471 19,065 28,265
-------------------------------------------------------------------------
Copper (tonnes) 1,357 1,868 3,108 4,509
-------------------------------------------------------------------------
Silver (ounces) 222,501 303,809 447,726 700,751
-------------------------------------------------------------------------
Gold (ounces) 5,569 8,905 11,546 18,212
-------------------------------------------------------------------------
Total Cash Costs
-------------------------------------------------------------------------
Per lb. payable zinc (US$) 0.76 0.46 0.69 0.45
-------------------------------------------------------------------------
>>
Zinc head grades were lower in the second quarter of 2006 from the same
period in 2005 due to increased mining in the lower grade HW Zone. Milled
tonnage decreased during the second quarter of 2006 compared with the same
period in 2005. Production was hindered during the quarter due to the lack of
working areas underground, delays in improving the Battle Gap underground
infrastructure and problems with underground equipment availability. However,
with new management structure in place and the operating problems being
addressed we expect production to gradually improve throughout the remainder
of the year.
Myra Falls Outlook
Based on metallurgical test work completed during 2005, the Myra Falls
flotation plant is currently being modified to enhance selective copper
flotation and to produce a separate lead concentrate. The test work indicated
that this would increase copper recoveries from the current 70% range to a
range of 85-90%. In turn, these modifications will enable better overall zinc
recoveries in the zinc circuit and allow for production of higher grade
concentrate.
Work continued during the second quarter of 2006 with the existing
circuit being rearranged to accommodate construction activities without
interference to current production. Construction and installation are
progressing well and are on schedule for completion in the third quarter of
2006. Preliminary trials of the new selective copper and lead circuits were
conducted during the second quarter of 2006. Initial work with selective
copper circuit reagents indicate that the predicted improvements can be
achieved.
Installation of the shaking table during the first quarter of 2006
resulted in overall improvements to gold recoveries in both gravity gold and
copper concentrates. Commissioning of the table circuit began in April and
improved gold recoveries were realized in the second quarter of 2006.
El Mochito Production
---------------------
The following table sets forth El Mochito's production for the periods
presented.
<<
-------------------------------------------------------------------------
Second Quarter First Six Months
---------------------------------------------
2006 2005 2006 2005
-------------------------------------------------------------------------
Ore Milled (tonnes) 168,722 171,464 352,151 331,405
-------------------------------------------------------------------------
Zinc (%) 6.1 7.0 6.2 6.9
-------------------------------------------------------------------------
Lead (%) 2.1 1.9 1.9 1.9
-------------------------------------------------------------------------
Silver (g/t) 92 90 88 84
-------------------------------------------------------------------------
Concentrate Production
-------------------------------------------------------------------------
Zinc (tonnes) 17,633 21,099 37,832 40,020
-------------------------------------------------------------------------
Recovery (%) 90.2 91.9 90.8 91.9
-------------------------------------------------------------------------
Grade (%) 52.7 52.3 52.3 52.3
-------------------------------------------------------------------------
Lead (tonnes) 4,049 3,979 7,772 7,396
-------------------------------------------------------------------------
Recovery (%) 80.6 81.0 80.6 81.2
-------------------------------------------------------------------------
Grade (%) 68.0 68.1 68.0 68.5
-------------------------------------------------------------------------
Metal in Concentrates
-------------------------------------------------------------------------
Zinc (tonnes) 9,286 11,035 19,786 20,950
-------------------------------------------------------------------------
Lead (tonnes) 2,753 2,708 5,289 5,068
-------------------------------------------------------------------------
Silver (ounces) 436,351 438,886 865,563 793,714
-------------------------------------------------------------------------
Total Cash Costs
-------------------------------------------------------------------------
Per lb. payable zinc (US$) 0.34 0.27 0.37 0.35
-------------------------------------------------------------------------
>>
Zinc head grades were lower in the second quarter of 2006 from the same
period in 2005 due to mining in lower grade skarn areas such as Salva Vida and
La Leona versus higher grade zones such as Yojoa, Nacional and Barbasco in
2005. Milled tonnage decreased during the second quarter of 2006 compared with
the same period in 2005 due to the Easter shutdown occurring in the second
quarter in 2006 versus the first quarter in 2005.
El Mochito Outlook
The exploration plan at El Mochito for 2006 includes approximately 40,000
metres of underground in-fill and extensional drilling and 6,700 metres of
surface drilling aimed at detecting new ore bodies or systems. In addition,
400 metres of underground development is scheduled to facilitate the
extensional drilling. During the second quarter of 2006, the Company continued
to explore, develop and delineate new mineral resources and reserves along
extensions of the productive Salva Vida and Santo Nino trends. The work to
date is on track with our plan.
During the quarter, construction continued on the new Soledad tailings
storage facility. Work was nearly complete by the end the second quarter of
2006. Some delays were experienced due to heavy rains. All dam work is
complete and the liner has been installed. Remaining work includes pump
installation and piping. Once Soledad is ready to accept tailings, Pozo Azul,
the current tailings impoundment facility, will be phased out and reclaimed as
part of the Company's progressive reclamation efforts.
El Toqui Production
-------------------
The following table sets forth El Toqui's production for the periods
presented.
<<
-------------------------------------------------------------------------
Second Quarter First Six Months
---------------------------------------------
2006 2005 2006 2005
-------------------------------------------------------------------------
Ore Milled (tonnes) 135,575 129,477 271,407 257,399
-------------------------------------------------------------------------
Zinc (%) 5.9 5.8 5.8 5.9
-------------------------------------------------------------------------
Gold (g/t) 2.3 3.1 2.6 2.9
-------------------------------------------------------------------------
Concentrate Production
-------------------------------------------------------------------------
Zinc (tonnes) 14,521 13,702 28,625 27,341
-------------------------------------------------------------------------
Recovery (%) 90.4 90.4 90.5 90.2
-------------------------------------------------------------------------
Grade (%) 49.9 49.8 49.9 50.1
-------------------------------------------------------------------------
Gold (tonnes) 976 870 2,152 1,606
-------------------------------------------------------------------------
Recovery (%) 69.6 37.1 68.8 48.9
-------------------------------------------------------------------------
Grade (g/t) 197.7 157.9 209.2 268.6
-------------------------------------------------------------------------
Metal in Concentrates
-------------------------------------------------------------------------
Zinc (tonnes) 7,238 6,818 14,281 13,696
-------------------------------------------------------------------------
Gold (ounces) 8,758 11,194 20,056 19,794
-------------------------------------------------------------------------
Silver (ounces) 20,054 32,438 35,598 72,279
-------------------------------------------------------------------------
Total Cash Costs
-------------------------------------------------------------------------
Per lb. payable zinc (US$) 0.56 0.32 0.46 0.36
-------------------------------------------------------------------------
>>
The milled tonnage at El Toqui increased in the second quarter of 2006
compared with the same period in 2005. The increase in production was due to
better mill availability which resulted in higher throughput.
El Toqui Outlook
The Porvenir deposit, located 400 metres south of the Aserradero deposit,
is a new discovery resulting from the Company's 2005-2006 field program. The
Porvenir area has been traced at depth along strike for approximately 500
metres. The sediment hosted mineralized horizon remains open towards the
northwest and southeast. Further drilling will be required to assess the
extent and grade of resources in this newly discovered extension of the El
Toqui system. The deposit will be the focus of exploration during the
remainder of 2006. The discovery of the Porvenir deposit indicates a potential
repetition of zinc deposits along northwest mineralized corridors towards the
southern part of the El Toqui district.
The Company is in the process of exploring the extensions of the
Aserradero deposit to the south and southeast. During the quarter, a total of
2,670 metres were drilled in nine holes. It has been determined that the
mineralized system does continue to the southeast, however, it has been
dropped down by 50 to 60 metres by the Fortuna Fault. This south-east block is
showing important differences in relation to the main Aserradero area. The
manto thickness is increasing; copper, silver and lead values are increasing;
iron content is increasing; arsenopyrite content is decreasing and gold
content is erratic.
An in-fill diamond drill program at Concordia was initiated during
February 2006 with the objective of upgrading the current resources to
reserves and to continue metallurgical testing to determine the best way to
process Concordia material in the existing mill. During the second quarter of
2006, a total of 1,716 metres were drilled in nine holes. Construction of an
access road and preparation of the portal area are now complete. During the
quarter, ramp development to access the Concordia deposit, was commenced with
production expected from Concordia by mid-2007.
During the fourth quarter of 2005, metallurgical testing was completed at
El Toqui which examined the feasibility of treating the gold concentrate
onsite with the goal of producing dore bars. Flotation concentrate samples
were leached under intensive cyanidation conditions using the Gekko Mini
Inline Leach Reactor ("ILR"). The procedure used mimics the conditions in a
full sized batch ILR unit. Test results indicated that gold recoveries could
reach 88-90%. Engineering work was completed during the first quarter of 2006
on a full size batch ILR unit. The Company has placed an order for a complete
gold recovery plant and delivery and installation is expected during the third
quarter of 2006. This process could provide significant cost savings over
third party treatment of the concentrate and provide a more stable cash flow
from the mine. In 2005, over 29,000 ounces of gold were contained in the gold
concentrate produced.
Langlois
--------
Langlois, which is situated in north-western Quebec approximately 213
kilometres north of Val-d'Or, is currently being developed to reach commercial
production in mid-2007.
The development capital, including inventory build up, is forecast to be
$23.1 million during 2006. The majority of the capital requirements is related
to underground development, with the mill accounting for less than $1.0
million of the total. Preparation work for the mill re-opening is currently
underway and is proceeding on schedule. Development drifts are currently being
driven between Zones 3 and 4 and Zone 97 to the east on Levels 4, 9 and 13.
During the second quarter, mine plans were reviewed to determine if
production in Zones 3 and 4 could be accelerated. It was determined that there
are a number of stoping blocks which are readily available and production in
these zones commenced in the second half of 2006. It is estimated that a total
of 85,000 tonnes of material from Zones 3 and 4 will be mined during the
second half of 2006, with a total of 50,000 tonnes being milled.
During the first quarter, a surface infill diamond drill program was
carried out on the Grevet B deposit, located three kilometres south-east of
the Langlois mine. This deposit, first discovered in the 1970's, is at a
relatively shallow depth, with the top of the deposit located 50 metres below
surface. The Company has received all required governmental approvals to take
a bulk sample. The access road and power line are complete and ramp collaring
has begun. We expect to mine and mill 15,000 tonnes in the fourth quarter of
2006. Capital and operating costs for the bulk sample are estimated to total
$5.5 million.
Due to the developments mentioned above, the Company is pleased to issue
a newly revised production forecast for Langlois for 2006 of 10.6 million
pounds of payable zinc, 0.5 million pounds of payable copper and 29,600 ounces
of payable silver. As well, should the results of the Grevet B bulk sample
prove successful, production at Langlois will be increased during 2007 and
2008.
The Company has updated the 2005 Breakwater review which was detailed in
our press release of January 30, 2006. Based on the addition of Grevet B and
much more robust forecasted metal prices of US$0.80 per pound of zinc, US$2.06
per pound of copper, a silver price of US$7.00 per ounce and an exchange rate
of US$0.85 per C$1.00 the net cash flow before taxes increases from
$41.6 million to in excess of $200 million.
The Company currently has two diamond drills operating on the property.
The focus of the exploration program is to investigate geophysical, geological
and geochemical anomalies.
Bougrine
--------
In accordance with the life-of-mine plan, the Bougrine mine closed
permanently on September 10, 2005, due to exhaustion of the known mineral
reserves.
The Company is presently investigating other uses for the Bougrine
infrastructure. Reclamation of the Bougrine mine has commenced and is expected
to be 90% completed in 2006. The mill building will be kept in place pending
the results of an exploration program on a lead/zinc prospect 170 kilometres
to the north-west of the Bougrine mine site. Exploration of this prospect is
budgeted at $0.5 million and consists of a micro-gravimetry survey, electrical
tomography and a 1,500 metre drilling program which is currently underway. To
the end of the second quarter of 2006, a total of 1,000 metres had been
drilled in five holes. Assay results are pending. The exploration program
should be complete by the end of the third quarter of 2006.
Bouchard-Hebert
---------------
The Bouchard-Hebert mine closed permanently on February 20, 2005.
Reclamation work, consisting of rock removal and covering the tailings
disposal area, continued during the second quarter.
The Company will continue to explore for mineral deposits on the 7,982
hectares of exploration claims surrounding the mining leases. The concentrator
building and equipment will be left intact pending any success in discovering
economic mineralization in the near term. Exploration commenced in August 2005
to test targets outside the current mine area. The program, which is to test
multiple targets, will continue throughout 2006.
The Company currently has three diamond drills operating on the
Bouchard-Hebert property. The focus of the exploration program is to
investigate geophysical, geological and geochemical anomalies, as well as to
perform deep exploration on certain areas with good potential to host
mineralization.
Nanisivik
---------
The reclamation and closure cost accrual for Nanisivik at June 30, 2006
was $3.0 million with $2.6 million being the current portion which is expected
to be spent this year. Wolfden Resources Inc. is responsible for completing
the remaining reclamation work in exchange for certain goods and services
either provided already or to be provided during the coming season. Wolfden's
representatives have remained on-site to complete Wolfden's own work,
comprising the dismantling of the mill complex and the concentrate storage
facilities. Wolfden will use the Nanisivik fleet of equipment to finish
reclamation of the site which includes the demolition of the surface
infrastructure and removal of any remaining contaminated soil. Two adits in
the mine remain open for backhauling demolition debris during 2006. We expect
this will be completed in 2007 and all remaining salvageable equipment will be
shipped off site at that time for sale on the open market or transfer to other
Breakwater properties. The $0.4 million long-term portion of the accrual is
the amount expected to be spent on long-term monitoring activities.
Caribou
-------
Breakwater and its wholly-owned subsidiary, CanZinco Ltd., have completed
the sale of CanZinco's Caribou and Restigouche mines to Blue Note Metals Inc.
Under the terms of the agreement, Blue Note Metals Inc. has acquired the
Caribou and Restigouche mines by replacing Breakwater's reclamation deposits
of approximately $5.9 million with the Government of New Brunswick for
environmental rehabilitation and by issuing to Breakwater a C$15 million
unsecured subordinated convertible debenture with a maturity of five years.
Breakwater has the right to convert the debenture into a direct 20% property
interest following commencement of commercial production and the expenditure
by Blue Note of at least $1.5 million of exploration on the properties.
Breakwater will receive a one to two percent net smelter return royalty on
zinc metal production provided the price of zinc is above US$0.65 per pound as
determined by the London Metal Exchange.
<<
Non-GAAP Reconciliations
-------------------------------------------------------------------------
Non-GAAP Reconciliation of Cash Provided from Operating Activities
(before changes in non-cash working capital items) to Consolidated
Financial Statements
-------------------------------------------------------------------------
Second Quarter First Six Months
---------------------------------------------
($ millions) 2006 2005 2006 2005
-------------------------------------------------------------------------
Net Cash Provided By
Operations Activities
per Consolidated
Statements of Cash Flows 43.4 10.6 75.6 22.1
Less changes in non-cash
working capital 11.2 6.8 22.3 8.0
-------------------------------------------------------------------------
Cash Provided from Operating
Activities (before changes
in non-cash working
capital items) 32.2 3.8 53.3 14.1
-------------------------------------------------------------------------
>>
Cash Provided from Operating Activities (before changes in non-cash
working capital items) is furnished to provide additional information and is
not a Canadian generally accepted accounting principles ("GAAP") measure. This
measure should not be considered in isolation as a substitute for measures of
performance prepared in accordance with GAAP and is not necessarily indicative
of cash provided from operating activities as determined under GAAP. This
measure is intended to provide investors with information about the cash
generating capabilities of the Company's operating activities in a given
period which is the same purpose that the Company uses this information for.
Mining operations are capital intensive, however, this measure excludes
financing activities, investing activities and changes in non-cash working
capital. These items are discussed throughout the MD&A and the consolidated
financial statements.
<<
-------------------------------------------------------------------------
Non-GAAP Reconciliation of Total Cash Cost per Pound of Payable Zinc Sold
to Consolidated Financial Statements
-------------------------------------------------------------------------
Second Quarter First Six Months
---------------------------------------------
2006 2005 2006 2005
-------------------------------------------------------------------------
By-Product Credit
($ millions)
-------------------------------------------------------------------------
Gross sales revenue per
financial statements 101.2 92.4 181.9 183.7
-------------------------------------------------------------------------
Less zinc sales revenue (54.6) (70.2) (126.7) (121.2)
-------------------------------------------------------------------------
46.6 22.2 55.2 62.5
-------------------------------------------------------------------------
Treatment Charges ($ millions)
-------------------------------------------------------------------------
Per financial statements 25.5 34.8 50.4 64.7
-------------------------------------------------------------------------
Direct operating costs
($ millions)
-------------------------------------------------------------------------
Per financial statements 34.2 41.6 63.0 86.4
-------------------------------------------------------------------------
Total cash costs - Canadian
($ millions) 13.1 54.2 58.2 88.6
-------------------------------------------------------------------------
Exchange rate C$/US$ 1.11 1.24 1.15 1.24
-------------------------------------------------------------------------
Total cash costs - US
($ millions) 11.8 43.7 50.8 71.8
-------------------------------------------------------------------------
Zinc pounds sold (millions) 37.3 99.7 99.2 172.6
-------------------------------------------------------------------------
Total cash cost per pound of
payable zinc sold (US$)
-------------------------------------------------------------------------
By-Product Credit (1.13) (0.18) (0.49) (0.29)
-------------------------------------------------------------------------
Treatment and marketing costs 0.61 0.28 0.44 0.30
-------------------------------------------------------------------------
Direct operating costs 0.83 0.34 0.55 0.41
-------------------------------------------------------------------------
Total 0.32 0.44 0.51 0.42
-------------------------------------------------------------------------
>>
Total cash cost per pound of payable zinc sold is furnished to provide
additional information and is a non-GAAP measure. This measure should not be
considered in isolation as a substitute for measures of performance prepared
in accordance with GAAP and is not necessarily indicative of operating
expenses as determined under GAAP. This measure is intended to provide
investors with information about the cash generating capabilities of the
Company's operating activities in a given period which is the same purpose
that the Company uses this information for. Mining operations are capital
intensive, however, this measure excludes financing activities, investing
activities and changes in non-cash working capital. These items are discussed
throughout the MD&A and the consolidated financial statements.
<<
Summary of Quarterly Results
-------------------------------------------------------------------------
2004 2005
-------------------------------------------------------------------------
Q3 Q4 Q1 Q2 Q3 Q4
-------------------------------------------------------------------------
Gross Sales Revenue
($ millions) 66.1 61.5 91.3 92.4 71.9 57.4
-------------------------------------------------------------------------
Net Earnings (Loss)
($ millions) 2.4 (6.3) 4.1 2.4 (1.6) 9.8
-------------------------------------------------------------------------
Basic Earnings
per Share $0.01 ($0.02) $0.01 $0.01 $0.00 $0.03
-------------------------------------------------------------------------
Weighted-average
Number of Common
Shares Outstanding
(millions) 362.7 363.0 365.7 367.4 369.5 374.2
-------------------------------------------------------------------------
Basic Earnings Per
Share Fully Diluted $0.00 ($0.02) $0.01 $0.01 $0.00 $0.02
-------------------------------------------------------------------------
Realized Exchange
Rate C$/US$ 1.3127 1.2290 1.2274 1.2429 1.2019 1.1744
-------------------------------------------------------------------------
Average Realized
Zinc Price (US$/t) 988 1,095 1,256 1,252 1,296 1,502
-------------------------------------------------------------------------
Average Realized
Zinc Price (C$/t) 1,297 1,345 1,542 1,556 1,558 1,764
-------------------------------------------------------------------------
Concentrate Tonnes
Sold 94,957 79,854 108,507 118,022 80,196 60,391
-------------------------------------------------------------------------
Concentrate Tonnes
Produced 111,790 106,241 103,259 88,782 76,014 68,841
-------------------------------------------------------------------------
-------------------------------------
2006
-------------------------------------
Q1 Q2
-------------------------------------
Gross Sales Revenue
($ millions) 80.7 101.2
-------------------------------------
Net Earnings (Loss)
($ millions) 38.9 29.5
-------------------------------------
Basic Earnings
per Share $0.10 $0.08
-------------------------------------
Weighted-average
Number of Common
Shares Outstanding
(millions) 382.0 383.8
-------------------------------------
Basic Earnings Per
Share Fully Diluted $0.09 $0.07
-------------------------------------
Realized Exchange
Rate C$/US$ 1.1559 1.1239
-------------------------------------
Average Realized
Zinc Price (US$/t) 2,221 2,895
-------------------------------------
Average Realized
Zinc Price (C$/t) 2,567 2,895
-------------------------------------
Concentrate Tonnes
Sold 67,355 59,779
-------------------------------------
Concentrate Tonnes
Produced 66,129 59,906
-------------------------------------
>>
The quantity and mix of the concentrates sold directly affects gross
sales revenue. The recognition of revenue from the sale of concentrates can
vary from quarter to quarter based on customer agreements, the availability of
ships and compliance with the Company's revenue recognition policy. As all
sales are based in US dollars, the impact of the US dollar weakening against
the Canadian dollar over the past eight quarters has reduced the realized
Canadian dollar gross sales revenue.
Critical Accounting Estimates
Asset Impairment
The carrying values of producing mineral properties, including properties
placed on care and maintenance and related deferred expenditures, are reviewed
regularly and, where necessary, are written down to the estimated net
recoverable amounts. Estimated future net cash flows, on an undiscounted
basis, are calculated for each property using: estimated recoverable reserves,
on the basis of current proven and probable reserves, except for Langlois mine
where the conversion of resources was considered, taking into account the cost
of conversion; estimated future metal price realization (considering
historical and current prices, price trends and related factors); and
estimated operating and capital cash flows. Estimates of future cash flows are
subject to risks and uncertainties. It is possible that changes could occur
that may affect the recoverability of the carrying value of mineral
properties. No write downs were required in 2005.
Reserves
Every year the Company estimates its proven and probable mineral reserves
(the "Reserves") in accordance with National Policy 43-101 ("NI 43-101"), a
rule adopted by Canadian securities administrators as the standard of
disclosure for mineral projects. This estimate is used to determine mine
viability, mine life and amortization rates. The estimation of Reserves is
based on drill hole information, historical mining results, historical
metallurgical results, estimated future operating costs and estimated future
metal prices. A "Qualified Person", as defined by NI 43-101, performs the
Reserves estimate. As all of the Company's operations have had significant
operating history therefore the factor that could have the greatest impact on
the Reserves estimate is future metal prices.
Amortization
The Company uses the units of production method for amortization of
Mineral Properties and some of its Fixed Assets based on the Reserves. Any
significant changes in the Reserves could impact the amount of annual
amortization.
Inventory
The Company values its concentrate inventories at the lower of cost or
realizable value at the end of the reporting period. Costs represent the
average cost, and include direct labour and materials costs, mine site
overhead and depreciation and amortization. Realizable value includes metal
prices, net of treatment charges and freight. Metal prices can be subject to
significant change from period to period.
Future Tax Assets and Liabilities
Future tax assets and liabilities are calculated using the asset and
liability method. Under the asset and liability method, future tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases. Future tax assets and
liabilities are measured using current tax rates. The effect on future tax
assets and liabilities of a change in tax rates is recognized in income in the
period the change is known. To the extent that the Company considers it to be
more likely than not that a future tax asset will be recovered, a tax asset
will be setup, otherwise it provides a valuation allowance against the excess.
It is possible that changes could occur in the future that may affect the
recoverability of the carrying value of future tax assets and a write-down may
be required.
Reclamation
The Company provides for the fair value of liabilities and capitalized
costs for asset retirement obligations in the period in which they are
incurred. Over time, the liability is accreted to its present value and the
capitalized cost is amortized over the useful life of the related asset. Asset
retirement obligations are obligations of the Company that arise as a result
of an existing law, regulation or contract related to asset retirements.
Estimates of the liability associated with the retirement of an asset are
based on current laws and regulations and the expected resulting costs, all of
which are subject to change. If actual costs of reclamation exceed the
recorded amount, Breakwater will record a loss. Alternatively, if reclamation
costs incurred are less than those recorded, the Company will record a gain.
Currently, the Company is not able to setup a liability for reclamation at El
Mochito as there is no law, regulation or contract related to this asset's
retirement.
Outstanding Share Data and Full Dilution Calculation
The Company is authorized to issue an unlimited number of Common Shares
and 200,000,000 preferred shares, issueable in series; there are no preferred
shares outstanding. Each Common Share entitles the holder of record thereof to
one vote at all meetings of shareholders of the Company, except at meetings at
which only holders of another class or series of shares of the Company are
entitled to vote. The table set forth below summarizes the Capital Stock. For
a more complete description of certain elements please refer to note 12 to the
consolidated interim financial statements of the Company for the periods ended
June 30, 2006.
<<
-------------------------------------------------------------------------
Common Shares or Securities Convertible
into Common Shares August 1, 2006
-------------------------------------------------------------------------
Issued and Outstanding Common Shares 384,360,245
-------------------------------------------------------------------------
Share Option Plan - Option Weighted average
exercise price $0.95 10,791,933
-------------------------------------------------------------------------
Warrants granted at $0.20, 15,400,705 each expiring
on March 2, 2007 and May 2, 2007 30,801,410
-------------------------------------------------------------------------
Warrants granted at $1.00, expiring January 28, 2009 -
traded on TSX 33,571,429
-------------------------------------------------------------------------
Fully Diluted 459,525,017
-------------------------------------------------------------------------
>>
Other Information
Additional information regarding the Company is included in the Company's
Annual Information Form filed with the Canadian securities regulators and the
United States Securities and Exchange Commission, a copy of which is posted on
the SEDAR website at www.sedar.com.
Cautionary Note on Forward-Looking Statements
Certain statements included in this interim MD&A include forward-looking
statements, which are made pursuant to the "safe harbour" provisions of the
United States Private Securities Litigation Reform Act of 1995. They include
estimates and statements that describe the Company's future plans, objectives
and goals, including words to the effect that the Company or management
expects a stated condition or result to occur. When used herein, words such as
"forecast", "estimate", "expect", "believe", "intend", "will", "eventual",
"ongoing", "anticipated", explore", "projected", "could", "continue",
"likely", "budget", "plan", "projection", "can", "may" and other similar
expressions are intended to identify forward-looking statements. In
particular, statements relating to the estimated future metal prices, cash
flows, expenses, capital costs, ore production, mine life, financing,
development of mines and exploration are forward-looking statements. Such
forward-looking statements involve inherent risks and uncertainties and
subject to other factors, many of which are beyond our control, that may cause
the actual results or performance to differ materially from those expressed or
implied by such forward-looking statements. Such factors include, among
others, asset impairment, metal price volatility, fluctuations in foreign
exchange rates, economic and political events affecting metal supply and
demand, fluctuations in ore grade or ore tonnes milled, geological, operating
and environmental risks, problems during the development, construction and
start-up phases of an underground mine and inadequacy of environmental
insurance. For a more comprehensive review of risk factors, please refer to
the Company's most recent annual report under "Management's Discussion and
Analysis of Financial Results", Annual Information Form and Form 40-F under
"Risk Factors" on file with the U.S. Securities and Exchange Commission and
Canadian provincial securities regulatory authorities filed on SEDAR at
www.sedar.com. The Company is under no obligation and it expressly disclaims
any such obligation to update or alter any forward-looking statements whether
as a result of new information, events or otherwise. Readers are cautioned not
to put undue reliance on these forward-looking statements.
<<
Breakwater Resources Ltd.
Consolidated Balance Sheets
As at June 30, 2006 and December 31, 2005
(expressed in thousands of Canadian dollars)
(unaudited)
-------------------------------------------------------------------------
June 30, December 31,
2006 2005
-------------------------------------------------------------------------
Assets
Current Assets
Cash and cash equivalents $ 40,355 $ 18,749
Restricted cash 4,152 3,929
Short-term investments 5,833 2,523
Accounts receivable - concentrate 7,585 3,027
Other receivables 13,720 9,369
Concentrate inventory 44,241 47,501
Materials and supplies inventory 20,477 21,388
Prepaid expenses and other current assets 5,441 3,934
Future income tax assets 28,858 6,517
-------------------------------------------------------------------------
170,662 116,937
Deferred Financing Fees 61 344
Reclamation Deposits 19,487 6,808
Mineral Properties and Fixed Assets 183,323 165,168
Long-term Investment - 5,615
Restricted Promissory Note 62,285 62,285
-------------------------------------------------------------------------
$ 435,818 $ 357,157
-------------------------------------------------------------------------
Liabilities
Current Liabilities
Accounts payable and accrued liabilities $ 32,232 $ 32,797
Provisional payments for concentrate
inventory shipped and not priced 44,043 14,807
Short-term debt including current portion
of long-term debt 7,506 14,585
Income and mining taxes payable 345 164
Current portion of reclamation, closure cost
accruals and other environmental obligations 8,037 10,165
-------------------------------------------------------------------------
92,163 72,518
Deferred Income 6,582 6,888
Long-term Lease Obligations 736 984
Royalty Obligation 62,479 62,479
Long-term Debt 500 4,143
Reclamation, Closure Cost Accruals and Other
Environmental Obligations 40,049 40,099
Employee Future Benefits 4,776 5,379
Future Income Tax Liabilities 1,921 1,921
-------------------------------------------------------------------------
209,206 194,411
-------------------------------------------------------------------------
Shareholders' Equity
Capital stock 165,776 335,512
Warrants 8,561 8,561
Contributed surplus 619 3,300
Retained earnings (deficit) 68,322 (172,928)
Cumulative translation adjustments (16,666) (11,699)
-------------------------------------------------------------------------
226,612 162,746
-------------------------------------------------------------------------
$ 435,818 $ 357,157
-------------------------------------------------------------------------
Breakwater Resources Ltd.
Consolidated Statements of Operations and Retained Earnings (Deficit)
For the Periods Ended June 30, 2006 and 2005
(expressed in thousands of Canadian dollars except share and per share
amounts)
(unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
2006 2005 2006 2005
-------------------------------------------------------------------------
Gross sales revenue $ 101,202 $ 92,381 $ 181,860 $ 183,682
Treatment and
marketing costs 25,540 34,809 50,389 64,734
-------------------------------------------------------------------------
Net revenue 75,662 57,572 131,471 118,948
-------------------------------------------------------------------------
Operating Costs
Direct operating costs 34,178 41,617 62,991 86,419
Depreciation and
depletion 3,194 6,314 8,535 13,587
Reclamation and closure
costs 943 3,127 1,885 4,407
-------------------------------------------------------------------------
38,315 51,058 73,411 104,413
-------------------------------------------------------------------------
Contribution from
Mining Activities 37,347 6,514 58,060 14,535
-------------------------------------------------------------------------
Other Expenses (Income)
General and
administrative 3,053 1,998 6,198 4,004
Stock-based compensation 623 219 1,019 445
Interest and financing 1,525 273 2,938 504
Investment and other
income (1,716) (547) (3,303) (1,908)
(Gain) loss on gold loan (20) - 1,076 -
Foreign exchange gain on
US dollar denominated
debt (429) (213) (311) (213)
Other foreign exchange
(gain) loss (206) 94 (165) 94
-------------------------------------------------------------------------
2,830 1,824 7,452 2,926
-------------------------------------------------------------------------
Earnings Before the
Following: 34,517 4,690 50,608 11,609
-------------------------------------------------------------------------
Exploration costs 1,694 - 2,494 -
Other non-producing
property costs 551 2,523 2,667 5,479
Income and mining tax
provision (recovery) 2,817 (273) (22,875) (377)
-------------------------------------------------------------------------
5,062 2,250 (17,714) 5,102
-------------------------------------------------------------------------
Net Earnings 29,455 2,440 68,322 6,507
Deficit - Beginning
of Period (134,061) (183,600) (172,928) (187,667)
Reduction in Stated
Share Capital and
Contributed Surplus 172,928 - 172,928 -
-------------------------------------------------------------------------
Retained Earnings
(Deficit) - End of
Period $ 68,322 $ (181,160) $ 68,322 $ (181,160)
-------------------------------------------------------------------------
Basic Earnings per
Share $ 0.08 $ 0.01 $ 0.18 $ 0.02
-------------------------------------------------------------------------
Diluted Earnings per
Common Share $ 0.07 $ 0.01 $ 0.16 $ 0.02
-------------------------------------------------------------------------
Basic Weighted-Average
Number of Common
Shares Outstanding 383,772,000 367,414,000 382,901,000 366,546,000
-------------------------------------------------------------------------
Breakwater Resources Ltd.
Consolidated Statements of Cash Flows
For the Periods Ended June 30, 2006 and 2005
(expressed in thousands of Canadian dollars)
(unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
2006 2005 2006 2005
-------------------------------------------------------------------------
Cash Provided by
(Used in) Operating
Activities
Net earnings $ 29,455 $ 2,440 $ 68,322 $ 6,507
-------------------------------------------------------------------------
Non-cash items:
Depreciation and
depletion 3,194 6,314 8,535 13,587
Gain on sale of
investment - (21) - (851)
Unrealized (gain)
loss on gold loan (692) - 276 -
Foreign exchange
gain on US dollar
denominated loans (313) (213) (70) (213)
Other non-cash items 192 347 309 337
Stock-based compensation 623 219 1,019 445
Deferred income (153) (4) (306) (19)
Future income taxes 1,305 (64) (22,341) 136
Reclamation, closure
cost accruals and
other environmental
obligations 943 3,127 1,885 4,407
Employee future benefits 444 421 887 842
-------------------------------------------------------------------------
5,543 10,126 (9,806) 18,671
-------------------------------------------------------------------------
Payment of reclamation,
closure costs accruals
and other environmental
obligations (2,039) (8,181) (3,721) (10,002)
Payment of employee
future benefits (743) (557) (1,490) (1,125)
Changes in non-cash
working capital items 11,162 6,819 22,263 8,063
-------------------------------------------------------------------------
Net cash provided by
operating activities 43,378 10,647 75,568 22,114
-------------------------------------------------------------------------
Financing Activities
Increase in
restricted cash (626) (3,271) (223) (2,926)
Issue of common shares
for cash 268 255 990 1,206
Issue of common shares
to settle liability 848 - 848 -
Renunciation of
flow-through share
value - - (2,345) -
Deferred financing fees - - (223) -
Decrease in long-term
lease obligations (124) - (248) -
(Decrease) increase in
short-term debt (13,772) 1,957 (10,925) 1,844
Increase in long-term
debt - 4,756 - 4,757
-------------------------------------------------------------------------
Net cash provided by
(used in) financing
activities (13,406) 3,697 (12,126) 4,881
-------------------------------------------------------------------------
Investing Activities
Decrease (increase)
in reclamation
deposits 883 (5,491) (12,679) (7,445)
Mineral properties and
fixed assets (19,317) (10,591) (29,365) (19,609)
Proceeds from sale of
fixed assets and
property 208 46 208 46
-------------------------------------------------------------------------
Net cash provided by
investing activities (18,226) (16,036) (41,836) (27,008)
-------------------------------------------------------------------------
Increase (Decrease) in
Cash 11,746 (1,692) 21,606 (13)
Cash and Cash
Equivalents - Beginning
of Period 28,609 14,346 18,749 12,667
-------------------------------------------------------------------------
Cash and Cash
Equivalents - End of
Period $ 40,355 $ 12,654 $ 40,355 $ 12,654
-------------------------------------------------------------------------
Supplemental Disclosure
of Cash Flow
Information
Cash paid for:
Interest $ 365 $ 34 $ 583 $ 88
Income and mining
taxes $ 162 $ 57 $ 343 $ 402
>>
%CIK: 0000782875
/For further information: Dave Langille, Vice President, Finance and
Chief Financial Officer, (416) 363-4798 Ext. 236; Ann Wilkinson, Vice
President, Investor Relations, (416) 357-5511/
(BWR.)
CO: Breakwater Resources Ltd.
CNW 12:18e 04-AUG-06
