News release via Canada NewsWire, Toronto 416-863-9350
Attention Business/Financial Editors:
Breakwater reports financial and operating results for the interim
periods ended September 30, 2006 and 2005
TORONTO, November 1, 2006 /CNW/ - Breakwater Resources Ltd. (TSX -
BWR)... 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 nine months ended September 30, 2006, and related notes thereto which have
been prepared in accordance with Canadian generally accepted accounting
principles ("GAAP"). 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. Unless
otherwise indicated, this Management's Discussion and Analysis has been
prepared as of November 1, 2006.
Breakwater is a mining, exploration and development 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.
<<
Third Quarter 2006 Highlights
- Net earnings increased to $40.7 million or $0.11 basic earnings per
common share.
- The Caribou property was sold for a gain of $13.8 million or $0.04
basic earnings per common share.
- Gross sales revenue increased by 56% to $112.0 million despite a drop
in tonnes of concentrate sold.
- Cash and cash equivalents increased by $23.1 million to $63.4 million.
- Total debt decreased by $3.3 million to $6.0 million.
- Contribution from mining activities set a record high by increasing to
$43.1 million.
- Drilling on the Porvenir deposit at El Toqui continued.
Outlook
- Metal prices continue to support strong operating results into the
fourth quarter.
- El Mochito and El Toqui future profits to be taxed at approximately
30% and 17% respectively.
- The Langlois mine development remains on time and on budget and is
expected to achieve full commercial production in mid-2007.
>>
Statement of Operations Review - Three and Nine Months Ended
September 30, 2006 and 2005
The closure of Bouchard-Hbert 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 September 30, 2006 (the "third
quarter of 2006") increased $40.1 million (56%) to $112.0 million compared
with the three month period ended September 30, 2005 (the "third quarter of
2005"). Higher metal prices and a hedging gain of $0.6 million accounted for
the increase partially offset by decreased concentrate sales - 61,385 tonnes
in the third quarter of 2006 compared with 80,206 tonnes in the third quarter
of 2005 - and a stronger Canadian dollar. The lower concentrate tonnage sold
in the third quarter of 2006 was primarily due to the closure of the Bougrine
mine in 2005 as well as reductions in concentrate tonnage sold at the El
Mochito and El Toqui mines in the third quarter of 2006 compared with the
third quarter of 2005.
Gross sales revenues for the nine month period ended September 30, 2006
(the "first nine months of 2006") increased $38.3 million (15%) to $293.9
million compared with the nine month period ended September 30, 2005 (the
"first nine months of 2005"). The increase in gross sales revenues was
primarily due to higher metal prices partially offset by decreased concentrate
sales - 188,518 tonnes in the first nine months of 2006 compared with 306,749
tonnes in the first nine months of 2005 - a stronger Canadian dollar and
losses on hedging positions of $3.8 million. The lower concentrate tonnage
sold in the first nine months of 2006 compared with the first nine months of
2005 were primarily due to the same factors noted above for the quarter as
well as the closure of the Bouchard-Hbert mine in 2005.
<<
($000s) Third Quarter Change First Nine Months Change
-------------------------------------------------------------------------
Gross Sales Revenue
by Operation 2006 2005 % 2006 2005 %
-------------------------------------------------------------------------
Myra Falls 60,832 31,146 95 153,360 96,336 59
El Mochito 37,174 18,158 105 89,096 63,979 39
El Toqui 13,432 12,550 7 55,277 34,830 59
Bougrine 0 10,659 (100) (52) 35,921 (100)
Bouchard-Hbert 0 0 0 0 25,129 (100)
Corporate and Other 599 (580) n/a (3,784) (580) n/a
-------------------------------------------------------------------------
112,037 71,933 56 293,897 255,615 15
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Gross Sales
Revenue by Metal
-------------------------------------------------------------------------
Zinc (US$) 68,019 32,735 108 179,384 130,847 37
Copper (US$) 17,949 11,778 52 39,304 32,354 21
Lead (US$) 2,497 4,427 (44) 8,513 15,322 (44)
Gold (US$) 5,137 7,288 (30) 15,633 17,245 (9)
Silver (US$) 6,326 4,150 52 14,122 13,302 6
Hedging mark-to-market
and revaluation 222 (531) n/a 2,431 (503) n/a
-------------------------------------------------------------------------
Total Gross Sales
Revenue (US$) 100,150 59,847 67 259,387 208,567 24
-------------------------------------------------------------------------
Realized exchange
rate (C$/US$)
period average 1.1187 1.2019 (7) 1.1330 1.2256 (8)
-------------------------------------------------------------------------
Total Gross Sales
Revenue (C$) 112,037 71,933 56 293,897 255,615 15
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Sales by Concentrate
(tonnes) Third Quarter First Nine Months
-------------------------------------------------------------------------
2006 2005 2006 2005
-------------------------------------------------------------------------
Zinc 47,198 57,130 150,474 234,317
Copper 10,638 14,326 25,120 45,533
Lead 3,310 8,250 11,635 26,384
Gold 239 500 1,289 515
-------------------------------------------------------------------------
Total Sales 61,385 80,206 188,518 306,749
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Sales by Payable Metal Third Quarter First Nine Months
-------------------------------------------------------------------------
2006 2005 2006 2005
-------------------------------------------------------------------------
Zinc - tonnes 20,259 25,258 65,268 103,530
Copper - tonnes 2,339 3,179 5,446 9,461
Lead - tonnes 2,140 5,029 7,429 16,148
Gold - ounces 8,354 16,494 31,607 39,615
Silver - ounces 548,325 583,219 1,594,987 1,884,993
-------------------------------------------------------------------------
Realized Prices Third Quarter First Nine Months
-------------------------------------------------------------------------
2006 2005 2006 2005
-------------------------------------------------------------------------
Zinc (US$/tonne) 3,357 1,296 2,748 1,264
Copper (US$/tonne) 7,675 3,705 7,217 3,420
Lead (US$/tonne) 1,166 880 1,146 949
Gold (US$/oz) 615 442 495 435
Silver (US$/oz) 11.54 7.12 8.85 7.06
-------------------------------------------------------------------------
Average LME Metal Prices &
Foreign Exchange Third Quarter First Nine Months
-------------------------------------------------------------------------
2006 2005 2006 2005
-------------------------------------------------------------------------
Zinc (US$/tonne) 3,363 1,297 2,966 1,295
Copper (US$/tonne) 7,667 3,755 6,604 3,470
Lead (US$/tonne) 1,188 890 1,176 952
Gold (US$/oz) 622 439 602 432
Silver (US$/oz) 11.70 7.07 11.22 7.07
Exchange rate (US$1.00/C$) 1.1213 1.2017 1.1326 1.2238
The Company has a relatively conservative revenue recognition policy
which, among other things, requires final pricing of concentrate inventories
prior to recognition of revenue. Using commodity prices and exchanges rates
prevailing at September 30, 2006, the following schedule provides details
regarding inventories shipped but not recognized for revenue purposes and the
related provisional payments.
Concentrate Net Inventory Earnings Provisional Weighted
(DMT) Smelter Value Before Payments Average
Return ($000s) Taxes ($000s) Months to
($000s) ($000s) Settlement
--------------------------------------------------------------------
Zinc 32,933 35,397 16,213 19,184 24,455 2.1
Lead 2,860 4,494 1,344 3,150 - 2.1
Gold 1,334 4,169 1,599 2,570 1,615 1.6
---------------------------------------------------------
37,127 44,060 19,156 24,904 26,070 -
---------------------------------------------------------
---------------------------------------------------------
>>
At June 30, 2006, the Company estimated that inventories shipped but not
recognized for revenue purposes had earnings before taxes of $33.0 million
consisting of $57.9 million of net smelter return less $24.9 million of
inventory valuation.
The Company periodically hedges against fluctuations in metal prices and
foreign exchange with the use of forward sales or options.
Net Revenue
For the third quarter of 2006, net revenue, the value of concentrates
sold after deducting treatment and marketing costs, was $82.7 million compared
with $48.9 million in the third 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, increased to $29.4
million in the third quarter of 2006 compared with $23.0 million in the
corresponding period in 2005 reflecting higher unit treatment charges and
freight costs which more than offset the lower tonnes of concentrate sold. Per
tonne sold, total treatment and marketing costs increased to $479 in the third
quarter of 2006 from $287 in the corresponding period in 2005 as higher metal
prices triggered higher costs associated with price escalator provisions in
treatment charges.
For the first nine months of 2006, net revenue increased 28% to $214.1
million compared with the first nine months of 2005. Total treatment and
marketing costs decreased to $79.8 million in the first nine months of 2006
compared with $87.8 million in the first nine months of 2005. The decreased
treatment and marketing costs in the first nine months of 2006 was primarily
due to the closure of the Bougrine and Bouchard-Hbert mines in 2005 and fewer
tonnes of concentrate sold, partially offset by higher unit treatment charges
and freight costs. Treatment charges and marketing costs per tonne of
concentrate sold increased to $423 for the first nine months of 2006 from $286
for the first nine months of 2005 due to the impact of higher costs associated
with price escalators triggered by higher metal prices and higher freight
costs.
Direct Operating Costs
Direct operating costs were $34.9 million ($568 per tonne of concentrate
sold) for the third quarter of 2006 compared with $33.4 million ($416 per
tonne of concentrate sold) in the same period in 2005. For the nine months
ended September 30, 2006, direct operating costs were $97.9 million compared
with $119.8 million for the first nine months of 2005, the average cost per
tonne of concentrate sold increased to $519 from $390. The average operating
cost per tonne of concentrate sold was higher in both the third quarter and
the first nine months of 2006 primarily due to higher costs at the Myra Falls
and El Mochito mines and the closure of two lower cost mines in 2005 -
Bougrine and Bouchard-Hbert.
<<
Direct Operating Costs
-------------------------------------------------------------------------
Third Quarter 2006 Third Quarter 2005
-------------------------------------------------------------------------
Concentrate Cost Per Concentrate Cost Per
Aggregate Sold Tonne Aggregate Sold Tonne
($000s) (tonnes) ($) ($000s) (tonnes) ($)
-------------------------------------------------------------------------
Myra Falls 25,098 31,651 793 20,921 28,784 727
El Mochito 7,434 21,750 342 6,411 23,718 270
El Toqui 2,362 7,984 296 3,782 12,347 306
Bougrine 0 0 0 2,244 15,357 146
-------------------------------------------------------------------------
Total 34,894 61,385 568 33,358 80,206 416
-------------------------------------------------------------------------
Direct Operating Costs
-------------------------------------------------------------------------
First Nine Months 2006 First Nine Months 2005
-------------------------------------------------------------------------
Concentrate Cost Per Concentrate Cost Per
Aggregate Sold Tonne Aggregate Sold Tonne
($000s) (tonnes) ($) ($000s) (tonnes) ($)
-------------------------------------------------------------------------
Myra Falls 66,019 90,856 727 56,641 99,430 570
El Mochito 20,561 62,618 328 23,730 81,232 292
El Toqui 11,305 35,044 323 16,141 45,222 357
Bougrine 0 0 0 12,931 50,051 258
Bouchard-Hbert 0 0 0 10,334 30,814 335
-------------------------------------------------------------------------
Total 97,885 188,518 519 119,777 306,749 390
-------------------------------------------------------------------------
>>
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$0.57 in the third quarter of 2006 compared with US$0.36 in the third
quarter of 2005 (see non-GAAP reconciliation for details). The higher total
cash cost per pound of zinc sold in the third quarter of 2006 is a result of
lower zinc concentrate sales and higher cash per pound of zinc sold partially
offset by higher by-product credits.
Depreciation and Depletion
Total depreciation and depletion expenses were significantly lower in
both the third quarter and the first nine months of 2006 primarily due to the
closures of Bouchard-Hbert and Bougrine mines in 2005. On a per tonne of
concentrate sold basis, depreciation and depletion expenses in the third
quarter and first nine months of 2006 were $61 (2005 - $64) and $65 (2005 -
$61) 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 third quarter and
the first nine months of 2006 compared with the corresponding periods in 2005
by $6.2 million and $8.8 million respectively due to upward adjustments in the
cash flow estimate for projected reclamation costs of Nanisivik in 2005 of
$6.0 million and $8.1 million respectively.
Other Expenses (Income)
Other expenses (income) in the third quarter of 2006 decreased by $0.3
million while, for the first nine months of 2006, other expense (income)
increased by $4.2 million. Decreased other expenses (income) for the third
quarter of 2006 were primarily due to: increased investment and other income;
a foreign exchange gain; and a lower loss on gold loan, partially offset by
increased general and administrative and interest and financing expenses. The
increase in other expense (income) for the nine month period ended
September 30, 2006 compared with the same period in 2005 was primarily due to:
increased general and administrative; interest and financing; and, stock-based
compensation expenses; partially offset by increased investment and other
income and a foreign exchange gain.
General and administrative expenses increased in the third quarter and
first nine months of 2006 compared with the corresponding periods in 2005,
primarily due to increases in: accrued bonuses and salaries; consulting and
audit fees associated with Sarbanes-Oxley compliance; and, insurance costs.
Higher interest and financing expenses and investment and other income
for the third quarter and the first nine 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 and interest earned on bank deposits
in 2006.
Exploration Costs
Exploration costs in the third quarter and the first nine months of 2006
increased by $0.4 million and $2.9 million respectively primarily due to
additional exploration costs being expensed at Bouchard-Hbert and Myra Falls
mines.
Other Non-producing Property (Income) Costs
Other non-producing property (income) 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.
Other non-producing property costs for the third quarter and the first
nine months of 2006 decreased by $14.7 million and $17.5 million respectively.
The decreased other non-producing property costs for both periods were
primarily due to the gain on sale of the Caribou property of $13.8 million,
reduced costs at the Nanisivik and Bouchard-Hbert properties partially offset
by the settlement of a legal action associated with the Caribou property.
Income and Mining Taxes Provision (Recovery)
Income and mining taxes provision increased $12.7 million in the third
quarter 2006 compared with the third quarter 2005 primarily due to increased
tax provisions required for the Langlois, El Mochito and El Toqui mines as
well as for adjustments to the Myra Falls mine future tax asset.
For the first nine months of 2006, income and mining tax recovery
increased by $9.8 million primarily due to a net future tax asset of $23.7
million related to the Myra Falls mine partially offset by the items noted
above and a reversal of a future tax asset at El Mochito.
Cash Provided from Operating Activities (before changes in non-cash
working capital items)
Cash provided from operating activities (before changes in non-cash
working capital items) was $38.0 million in the third quarter of 2006 compared
with $1.6 million in the same period in 2005. For the first nine months of
2006, cash provided from operating activities (before changes in non-cash
working capital items) increased by $75.7 million to $91.4 million. The
increases for the third quarter and the first nine months of 2006 compared
with the corresponding 2005 periods were primarily due to significantly higher
metal prices despite selling fewer tonnes of concentrate.
<<
-------------------------------------------------------------------------
($ millions) Third Quarter First Nine Months
-------------------------------------------------------------------------
2006 2005 2006 2005
-------------------------------------------------------------------------
Contribution from mining
activities 43.1 3.3 101.2 17.9
Other expenses (income) (2.1) (2.4) (9.6) (5.3)
Exploration costs (0.7) (0.3) (3.1) (0.3)
Write-down of mineral
properties and fixed assets 0.0 (0.7) 0.0 (0.7)
Other non-producing property
(income) costs 12.9 (1.8) 10.2 (7.3)
Income and mining tax
(provision) recovery (12.5) 0.3 10.4 0.6
-------------------------------------------------------------------------
Net earnings 40.7 (1.6) 109.1 4.9
Closure costs and employee
future benefits (2.9) (10.5) (8.1) (21.6)
Non-cash items 0.2 13.7 (9.6) 32.4
-------------------------------------------------------------------------
Cash provided from operating
activities (before changes
in non-cash working capital
items) 38.0 1.6 91.4 15.7
-------------------------------------------------------------------------
(See non-GAAP reconciliation below)
Liquidity and Financial Position Review
Working Capital
Working capital as at September 30, 2006 was $95.1 million compared with
$44.4 million at December 31, 2005, an increase of $50.7 million.
Current Assets
Total current assets increased by $58.1 million to $175.0 million at
September 30, 2006 compared with December 31, 2005. The main components of
current asset changes were as follows:
- Cash and cash equivalents increased by $44.7 million reflecting
improved operating cash flow generated by stronger metal prices.
- Short-term investments increased by $5.7 million primarily due to the
reclassification of the Taseko debenture from long-term investment
partially offset by the delivery in January 2006 of gold held at
December 31, 2005 for an instalment payment on the gold loan.
- Accounts receivable - concentrate decreased by $2.0 million primarily
due to a decrease in the El Toqui mine receivables and the closure of
the Bougrine mine.
- Concentrate inventory decreased by $5.7 million primarily due to a
reduction of concentrate inventories at Myra Falls partially offset by
an increase at Toqui.
- Future income tax assets increased by $17.8 million reflecting the
setup of a net $23.7 million future income tax asset for the Myra
Falls mine offset by a $5.5 million future tax asset drawdown at El
Mochito and other drawdowns of $0.5 million.
Current Liabilities
Current liabilities increased by $7.4 million to $79.9 million at
September 30, 2006 compared with December 31, 2005. The main components of the
current liabilities change 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 September 30, 2006 was
$26.1 million. Please refer to the table in Gross Sales Revenue
section of this MD&A for additional details. The December 2005 balance
of $14.8 million was for payments for zinc concentrate shipments from
the Myra Falls mine.
- Short-term debt decreased by $9.8 million primarily due to accelerated
repayment of the $1.5 million prepayment facility and repayment of the
gold loan partially offset by a new loan facility established in 2006
of which $2.5 million was outstanding at September 30, 2006.
- Income and mining taxes payable increased by $4.4 million primarily
due to full utilization of loss carry forwards at El Mochito mine
resulting in a tax provision being required in the third quarter of
2006.
Restricted Cash and Reclamation Deposits
At September 30, 2006, the Company had restricted cash of $1.7 million, a
decrease of $2.3 million from December 31, 2005. The reduction in restricted
cash was primarily due to the receipt of $1.3 million from the gold loan
collateral funds and receipt of $1.1 million held by the Province of Qubec.
At September 30, 2006, the Company had reclamation deposits of $13.5
million, an increase of $6.7 million from December 31, 2005. The increase was
primarily due to $13.4 million of reclamation deposits held under a safe
keeping agreement for the benefit of the British Columbia government in
support of reclamation requirements at Myra Falls entered into in the first
quarter of 2006 partially offset by reimbursement of $5.9 million for
reclamation deposits previously held by the Province of New Brunswick as
reclamation security on sale of the Caribou property in August 2006.
Long-term Investment
At September 30, 2006, long-term investment increased by $3.5 million to
$9.1 million from $5.6 million at December 31, 2005. As part of the
consideration received on the sale of the Caribou property on August 1, 2006,
the Company received a convertible debenture in Blue Note Metals Inc. in the
amount of $15.0 million which the Company valued at $9.1 million. At
December 31, 2005, long-term investment consisted of a $5.6 million
convertible debenture of Taseko. In the first quarter of 2006, this investment
was reclassified to short term investments.
Restricted Promissory Note
The Company held two restricted promissory notes at the end of
September 30, 2006 and December 31, 2005 for a total of $62.3 million related
to the 2004 and 2005 Red Mile transactions.
Deferred Income
Deferred income was $6.4 million at September 30, 2006 compared with
$6.9 million at the end of 2005. At September 30, 2006, $5.1 million related
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 a US$1.0 million advance of a non-refundable royalty payment
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 at September 30, 2006 was $5.3 million, a reduction of $13.4
million 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 has scheduled principal repayments of US$0.7 million from the
proceeds of the delivery of the gold forward sales in each of September and
October 2006. The initial repayment for September 2006 was made. 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 US$431 per ounce to provide the dollar value of the
facility). The term of this facility was 13 months with six principal payments
commencing October 2005 and ending August 2006. The repayments were in the
form of gold and as at September 30, 2006, this loan had been repaid in full.
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. Given the Company's strong cash flow,
it elected to fully repay this prepayment facility in May 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
September 30, 2006, total accrued reclamation and closure costs were $41.3
million compared with $50.3 million at December 31, 2005.
Reclamation and Closure Cost Accrual at September 30, 2006
-------------------------------------------------------------------------
($ 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 3.9 3.9
Langlois 0.0 1.3 1.3
Bougrine 1.8 0.4 2.2
Bouchard-Hbert 2.6 0.1 2.7
Nanisivik 2.4 0.4 2.8
-------------------------------------------------------------------------
Total 8.8 32.5 41.3
-------------------------------------------------------------------------
>>
Future Income Tax Liabilities
At September 30, 2006, future income tax liabilities were $7.1 million,
an increase of $5.2 million from December 31, 2005. The increase in future tax
liabilities was primarily due to setting up Quebec mining duties related to
the Langlois mine.
Equity
Shareholders' equity at September 30, 2006 was $267.7 million compared
with $162.7 million at December 31, 2005, an increase of $105.0 million
primarily due to net earnings of $109.1 million in the period.
<<
----------------------
Shareholders' Equity
-------------------------------------------------------------------------
($000s) Cumulative Total
Contri- Retained Trans- Share-
Capital buted Earnings lation holders'
Stock Warrants Surplus (Deficit) Account Equity
-------------------------------------------------------------------------
As at December 31,
2005 335,512 8,561 3,300 (172,928) (11,699) 162,746
Reduction of
stated capital (169,628) - (3,300) 172,928 - -
Value ascribed to
options exercised
under stock-based
compensation 400 - (400) - - -
Employee share
option plan -
proceeds of
options exercised 766 - - - - 766
Employee share
purchase plan 108 - - - - 108
Exercise of warrants 190 - - - - 190
Settlement of liability 848 - - - - 848
Renunciation of
flow-through
share value (2,345) - - - - (2,345)
Stock-based
compensation - - 1,201 - - 1,201
Net earnings - - - 109,069 - 109,069
Cumulative translation
adjustments - - - - (4,884) (4,884)
-------------------------------------------------------------------------
As at September 30,
2006 165,851 8,561 801 109,069 (16,583) 267,699
-------------------------------------------------------------------------
>>
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.
For the first nine months of 2006, the Company issued the following
Common Shares: 1,541,067 following the exercise of employee share options;
131,221 pursuant to the Company's employee share purchase plan; 1,000,000
pursuant to warrants exercised; and, 750,000 in settlement of an outstanding
lawsuit.
Capital Expenditures
The Company invested $22.9 million in mineral properties and fixed assets
in the third quarter of 2006. The majority of the capital was spent as
follows:
<<
- Myra Falls - $4.7 million; $2.8 million on mine development and the
new surface ramp and $1.0 million on mill improvements including the
new lead circuit and $0.9 million on a surface project.
- El Mochito - $3.0 million; $0.8 million on the tailing facilities,
$1.2 million for mine development, $0.1 million on mobile equipment
and $0.9 million on exploration.
- El Toqui - $3.0 million; $1.8 million on mine development including
the initial development of the Concordia mine, ($0.4) million on
equipment disposal and $1.6 million on exploration.
- Langlois - $11.0 million; $7.0 million on mine development and
$4.0 million on exploration.
- Bougrine - $0.3 million on exploration.
- Other projects - $0.9 million on exploration expenses.
>>
Financial Capability
With the existing working capital, the current metal prices and current
US$/C$ exchange rate, the Company is well positioned to carry out its
operating, capital, exploration and environmental programs as presently
contemplated for the balance of 2006.
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 September 30, 2006
-------------------------------------------------------------------------
Contribution
(Loss) From Non-cash Capital
Net Revenue Mining Costs(2) Expenditures
Activities(1)
-------------------------------------------------------------------------
($ millions) 2006 2005 2006 2005 2006 2005 2006 2005
-------------------------------------------------------------------------
Myra Falls 44.1 23.0 16.5 0.2 2.5 1.9 4.7 4.4
El Mochito 29.5 11.7 20.7 4.1 1.3 1.2 3.0 1.7
El Toqui 8.5 8.1 5.6 3.5 0.5 0.7 3.1 1.0
Langlois 0.0 0.0 0.0 0.0 0.0 0.0 10.6 1.7
Bougrine 0.0 6.7 0.0 2.6 0.1 2.0 0.3 0.0
Bouchard-Hbert 0.0 0.0 (0.1) (0.2) 0.1 0.2 0.0 (0.1)
Nanisivik 0.0 0.0 (0.1) (6.1) 0.1 6.1 0.0 0.0
Other 0.6(3) (0.6)(3) 0.5 (0.8) 0.0 0.1 1.2 0.0
-------------------------------------------------------------------------
Total 82.7 48.9 43.1 3.3 4.6 12.2 22.9 8.7
-------------------------------------------------------------------------
(1) After non-cash costs.
(2) Depreciation, depletion and reclamation and closure costs.
(3) Net realized from metal hedging activities.
Operating Review for the Nine Months Ended September 30, 2006
-------------------------------------------------------------------------
Contribution
(Loss) From Non-cash Capital
Net Revenue Mining Costs(2) Expenditures
Activities(1)
-------------------------------------------------------------------------
($ millions) 2006 2005 2006 2005 2006 2005 2006 2005
-------------------------------------------------------------------------
Myra Falls 112.0 66.6 38.8 1.8 7.1 8.1 13.2 12.1
El Mochito 68.7 41.0 43.9 13.0 4.3 4.3 8.3 5.9
El Toqui 37.2 20.3 23.3 0.8 2.6 3.3 9.7 5.3
Langlois 0.0 0.0 (0.1) (0.1) 0.1 0.1 19.0 4.4
Bougrine 0.0 22.3 (0.1) 5.4 0.1 3.9 0.7 0.1
Bouchard-Hbert 0.0 18.3 (0.3) 6.4 0.3 1.6 0.0 0.6
Nanisivik 0.0 0.0 (0.2) (8.4) 0.2 8.5 0.0 0.0
Other (3.8)(3) (0.6)(3) (4.1) (1.0) 0.3 0.4 1.4 0.0
-------------------------------------------------------------------------
Total 214.1 167.9 101.2 17.9 15.0 30.2 52.3 28.4
-------------------------------------------------------------------------
(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 Third Quarter First Nine Months
---------------------------------------------
2006 2005 2006 2005
-------------------------------------------------------------------------
Ore Milled (tonnes) 455,650 568,074 1,475,625 1,927,616
Zinc (%) 6.3 6.3 6.0 6.6
Concentrate Production
(tonnes)
Zinc 50,241 59,074 153,277 212,112
Copper 4,156 6,091 17,219 27,951
Lead 4,252 9,442 12,024 24,961
Gold 771 1,407 2,935 3,031
Total 59,420 76,014 185,455 268,055
Metal in Concentrates
Zinc (tonnes) 25,752 30,983 78,884 111,786
Copper (tonnes) 958 1,433 4,066 6,412
Lead (tonnes) 2,922 6,202 8,211 16,617
Gold (ounces) 12,160 17,822 43,762 58,472
Silver (ounces) 674,161 695,149 2,023,048 2,301,906
Total Cash Costs
Per lb. payable zinc
produced (US$) 0.74 0.39 0.60 0.39
>>
Aggregate production of zinc in concentrate in the third quarter of 2006
was 56.8 million pounds compared with 68.3 million pounds in the third quarter
of 2005, a 17% 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.
Total cash costs per pound of payable zinc produced ("TCC") increased by
$0.35 and $0.21 per pound in the third quarter and first nine months of 2006
respectively. Total aggregate cost of zinc production increased primarily due
to higher aggregate direct operating costs in general and the impact of higher
commodity prices increasing treatment costs associated with price escalator
provisions in smelter contracts and higher Toqui net smelter return royalties
partially offset by higher by-product credits. The TCCs increased
significantly in the third quarter and the first nine months of 2006 as the
higher aggregate costs of zinc production noted above were incurred over a
lower production level relative to the comparable periods in 2005.
The following table sets forth zinc production at each site for the third
quarter and the first nine months of 2006 together with the change from the
prior period.
<<
-------------------------------------------------------------------------
Zinc Production
(million pounds
of zinc Third Quarter First Nine Months
contained in ---------------------------------------------------------
concentrate) 2006 2005 % 2006 2005 %
-------------------------------------------------------------------------
Myra Falls 17.6 20.3 (13.3) 59.6 82.7 (27.9)
El Mochito 18.3 23.4 (21.8) 61.9 69.6 (11.1)
El Toqui 20.9 15.1 38.4 52.4 45.3 15.7
Bougrine - 9.5 - - 35.0 -
Bouchard-Hbert - - - - 13.9 -
-------------------------------------------------------------------------
Total zinc
production 56.8 68.3 (16.8) 173.9 246.5 (29.5)
-------------------------------------------------------------------------
Production of copper in concentrate decreased 34% in the third 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
of copper Third Quarter First Nine Months
contained in ---------------------------------------------------------
concentrate) 2006 2005 % 2006 2005 %
-------------------------------------------------------------------------
Myra Falls 2.1 3.2 (34.4) 10.1 13.1 (22.9)
Bouchard-Hbert - - - - 1.0 -
-------------------------------------------------------------------------
Total copper
production 2.1 3.2 (34.4) 10.1 14.1 (28.4)
-------------------------------------------------------------------------
Despite higher lead production at El Mochito, production of lead in
concentrate decreased 53% during the third quarter of 2006 due to the closure
of Bougrine.
-------------------------------------------------------------------------
Lead Production
(million pounds
of lead Third Quarter First Nine Months
contained in ---------------------------------------------------------
concentrate) 2006 2005 % 2006 2005 %
-------------------------------------------------------------------------
El Mochito 6.4 6.3 1.6 18.0 17.4 3.4
Bougrine - 7.4 - - 19.2 -
-------------------------------------------------------------------------
Total lead
production 6.4 13.7 (53.3) 18.0 36.6 (50.8)
-------------------------------------------------------------------------
Gold in concentrate decreased 40% in the third 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
(ounces of gold Third Quarter First Nine Months
contained in ---------------------------------------------------------
concentrate) 2006 2005 % 2006 2005 %
-------------------------------------------------------------------------
Myra Falls 3,736 5,278 (29.2) 15,282 23,490 (34.9)
El Toqui 6,929 12,544 (44.8) 26,985 32,338 (16.6)
Bouchard-Hbert - - - - 2,644 -
-------------------------------------------------------------------------
Total gold
production 10,665 17,822 (40.2) 42,267 58,472 (27.7)
-------------------------------------------------------------------------
Silver in concentrate decreased 3% quarter-over-quarter due to lower
tonnes milled and lower silver grades from Mochito and lower silver production
at El Toqui.
-------------------------------------------------------------------------
Silver Production
(ounces of silver Third Quarter First Nine Months
contained in -------------------------------------------------------
concentrate) 2006 2005 % 2006 2005 %
-------------------------------------------------------------------------
Myra Falls 237,348 177,751 33.5 685,074 878,502 (22.0)
El Mochito 421,510 483,666 (12.9) 1,287,073 1,277,380 0.8
El Toqui 15,303 33,732 (54.6) 50,901 106,011 (52.0)
Bouchard-Hbert - - - - 40,013 -
-------------------------------------------------------------------------
Total silver
production 674,161 695,149 (3.0) 2,023,048 2,301,906 (12.1)
-------------------------------------------------------------------------
Myra Falls Production
---------------------
The following table sets forth Myra Falls' production for the periods
presented.
-------------------------------------------------------------------------
Third Quarter First Nine Months
---------------------------------------------
2006 2005 2006 2005
-------------------------------------------------------------------------
Ore Milled (tonnes) 151,838 187,511 548,255 685,694
-------------------------------------------------------------------------
Zinc (%) 6.0 5.8 5.7 6.3
-------------------------------------------------------------------------
Copper (%) 0.9 1.2 1.0 1.3
-------------------------------------------------------------------------
Silver (g/t) 61 48 50 52
-------------------------------------------------------------------------
Gold (g/t) 1.5 1.8 1.6 1.8
-------------------------------------------------------------------------
Concentrate Production
-------------------------------------------------------------------------
Zinc (tonnes) 15,373 17,241 51,952 70,145
-------------------------------------------------------------------------
Recovery (%) 87.5 85.4 86.1 86.8
-------------------------------------------------------------------------
Grade (%) 52.0 53.5 52.1 53.5
-------------------------------------------------------------------------
Copper (tonnes) 4,156 6,091 17,219 24,923
-------------------------------------------------------------------------
Recovery (%) 67.6 63.2 73.4 69.0
-------------------------------------------------------------------------
Grade (%) 23.0 23.5 23.6 23.8
-------------------------------------------------------------------------
Gold (tonnes) 1.3 6.9 12.7 24.8
-------------------------------------------------------------------------
Recovery (%) 10.4 17.1 10.9 19.5
-------------------------------------------------------------------------
Grade (g/t) 10,629 8,010 9,534 9,480
-------------------------------------------------------------------------
Metal in Concentrates
-------------------------------------------------------------------------
Zinc (tonnes) 7,992 9,228 27,057 37,493
-------------------------------------------------------------------------
Copper (tonnes) 958 1,433 4,066 5,942
-------------------------------------------------------------------------
Silver (ounces) 237,348 177,751 685,074 878,502
-------------------------------------------------------------------------
Gold (ounces) 5,231 5,278 16,777 23,490
-------------------------------------------------------------------------
Total Cash Costs
-------------------------------------------------------------------------
Per lb. payable zinc
produced (US$) 0.88 0.63 0.75 0.49
-------------------------------------------------------------------------
>>
Zinc head grades were higher in the third quarter of 2006 from the same
period in 2005 due to increased mining in the higher grade Battle/Gap Zone.
Milled tonnage decreased during the third 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.
Myra Falls Outlook
Principally, ventilation requirements in the western extensions of the
mine has slowed, and will continue to slow, production improvements in the
short term. The surface ramp continues on plan and the breakthrough into the
mine ventilation system is anticipated in early November.
The mill upgrades are on schedule and on budget. The new copper and zinc
circuits have been commissioned resulting in improved recoveries for copper
and zinc.
The development out to the Marshal zone continues on the 24 level.
Diamond drilling began with one Company owned drill during the third quarter.
An additional contract diamond drill will begin drilling in the fourth
quarter.
El Mochito Production
---------------------
The following table sets forth El Mochito's production for the periods
presented.
<<
-------------------------------------------------------------------------
Third Quarter First Nine Months
---------------------------------------------
2006 2005 2006 2005
-------------------------------------------------------------------------
Ore Milled (tonnes) 166,723 183,188 518,874 514,593
-------------------------------------------------------------------------
Zinc (%) 5.5 6.4 6.0 6.7
-------------------------------------------------------------------------
Lead (%) 2.1 1.9 2.0 1.9
-------------------------------------------------------------------------
Silver (g/t) 90 94 89 88
-------------------------------------------------------------------------
Concentrate Production
-------------------------------------------------------------------------
Zinc (tonnes) 15,855 20,134 53,687 60,154
-------------------------------------------------------------------------
Recovery (%) 90.1 91.1 90.6 91.6
-------------------------------------------------------------------------
Grade (%) 52.2 52.7 52.3 52.5
-------------------------------------------------------------------------
Lead (tonnes) 4,252 4,192 12,024 11,588
-------------------------------------------------------------------------
Recovery (%) 81.7 81.1 81.0 81.2
-------------------------------------------------------------------------
Grade (%) 68.7 67.8 68.3 68.3
-------------------------------------------------------------------------
Metal in Concentrates
-------------------------------------------------------------------------
Zinc (tonnes) 8,282 10,601 28,068 31,551
-------------------------------------------------------------------------
Lead (tonnes) 2,922 2,841 8,211 7,909
-------------------------------------------------------------------------
Silver (ounces) 421,510 483,666 1,287,073 1,277,380
-------------------------------------------------------------------------
Total Cash Costs
-------------------------------------------------------------------------
Per lb. payable zinc
produced (US$) 0.55 0.32 0.43 0.34
-------------------------------------------------------------------------
>>
Zinc head grades were lower in the third quarter of 2006 from the same
period in 2005 due to optimising the recovery of mineral reserves in the lower
grade skarn areas such as Salva Vida and La Leona which are economic at
current metal prices. The lower tonnage mined and milled was mainly a result
of delays in sand filling several important zones during the quarter. Early in
the quarter, the main line supplying sandfill into the mine was plugged for
several days resulting in the sand fill schedule to the higher grade mining
areas being delayed. This situation impacted tonnage mined and zinc head
grades well into August.
During the third quarter of 2006, the Company experienced a delay in
commissioning the new tailings facility. Storm damage necessitated a repair to
the geomembrane liner which delayed commissioning of the facility into 2007.
No production delays were experienced and none are anticipated.
El Mochito Outlook
During the third 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. Drilling at Barbasco
continues to show a possible connection with the Imperial zone to the north.
During the quarter, a decision was made to access the north eastern side of
the past producing San Juan deposit to explore for material left behind from
the old longhole stopes between levels 2350 and 2550. Exploration and
delineation drilling of the La Leona deposit also continued to show promising
results with increases expected in resources and reserves in this area.
During the third quarter of 2006, the Company continued its surface
exploration program at El Mochito. Diamond drilling commenced on a second
surface target near the San Juan called Bonanza. The first hole at Bonanza
intersected the Mochito shales where it encountered the presence of skarn
alteration, however, no economic mineralization was found. A second diamond
drill hole on the Bonanza target intersected mineralization grading 2.2% lead,
6.0% zinc and 95 g/t silver over 4.6 metres. This target will be investigated
further from underground. Surface diamond drilling at Caliche continued during
the quarter with two holes completed. Both holes intersected unmineralized
limestone without reaching the Mochito shales. Collection of geochemical soil
samples over the Santa Barbara mountain continued during the quarter. As well,
samples were also collected over two new targets, ML2 and ML3, which will be
diamond drilled. These target areas are located at the projected intersections
of fault zones located to the north of the current underground workings.
El Toqui Production
-------------------
The following table sets forth El Toqui's production for the periods
presented.
<<
-------------------------------------------------------------------------
Third Quarter First Nine Months
---------------------------------------------
2006 2005 2006 2005
-------------------------------------------------------------------------
Ore Milled (tonnes) 137,089 134,174 408,496 391,573
-------------------------------------------------------------------------
Zinc (%) 7.6 5.7 6.4 5.8
-------------------------------------------------------------------------
Gold (g/t) 1.8 3.3 2.3 3.0
-------------------------------------------------------------------------
Concentrate Production
-------------------------------------------------------------------------
Zinc (tonnes) 19,013 13,761 47,638 41,102
-------------------------------------------------------------------------
Recovery (%) 91.0 90.4 90.7 90.3
-------------------------------------------------------------------------
Grade (%) 49.9 49.7 49.9 50.0
-------------------------------------------------------------------------
Gold (tonnes) 770 1,400 2,922 3,006
-------------------------------------------------------------------------
Recovery (%) 71.4 55.6 69.5 52.0
-------------------------------------------------------------------------
Grade (g/t) 198.1 199.7 206.3 236.5
-------------------------------------------------------------------------
Metal in Concentrates
-------------------------------------------------------------------------
Zinc (tonnes) 9,478 6,865 23,759 20,561
-------------------------------------------------------------------------
Gold (ounces) 6,929 12,544 26,985 32,338
-------------------------------------------------------------------------
Silver (ounces) 15,303 33,732 50,901 106,011
-------------------------------------------------------------------------
Total Cash Costs
-------------------------------------------------------------------------
Per lb. payable zinc
produced (US$) 0.79 0.28 0.64 0.34
-------------------------------------------------------------------------
>>
The milled tonnage and zinc grades at El Toqui increased in the third
quarter of 2006 compared with the same period in 2005. The increase in
production was due to a higher number of available working areas and higher
zinc head grades at the Estatuas and Dona Rosa deposits. The decrease in the
milled gold grade is due to a decision to stockpile Aserradero material until
commissioning of the Gekko Intense Leach Reactor commences at the end of the
fourth quarter. The Aserradero deposit has high gold grades with the mill
producing a gold concentrate as well as a zinc concentrate.
El Toqui Outlook
During the third quarter of 2006, ramp development to access the
Concordia deposit continued with a total of 343 metres of development
completed. The Concordia project is on schedule with production expected by
mid-2007.
During the third quarter of 2006, drilling continued on the Porvenir
deposit. The Company expects to release updated exploration results in the
fourth quarter of 2006.
Langlois
--------
Langlois, which is situated in north-western Qubec approximately 213
kilometres north of Val-d'Or, is currently being developed to reach commercial
production in mid-2007.
Production has commenced in Zones 3 and 4. To October 19, 2006,
approximately 25,000 tonnes of material had been broken of which 20,000 tonnes
had been hoisted to surface and stockpiled pending commissioning of the mill.
It is estimated that a total of 66,500 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 third quarter, development continued on the Grevet B deposit,
located three kilometres south-east of the Langlois mine. The access road and
power line are complete and the ramp has advanced a total of 174 metres. 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 $6.2 million.
During the third quarter, the Company issued an improved 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. Langlois
continues to be on track to achieve full commercial production in mid-2007.
The Company continues to conduct its exploration program on the property.
Other
-----
The reclamation work is largely complete at the Bouchard-Hbert, Bougrine
and Nanisivik properties, with Nanisivik to be fully reclaimed in 2007. The
mills at Bouchard-Hbert and Bougrine remain intact pending exploration
results.
Non-GAAP Reconciliations
Cash provided from operating activities (before changes in non-cash
working capital items) and total cash cost per pound of payable zinc sold are
furnished to provide additional information and are non-GAAP measures. These
measures should not be considered in isolation as a substitute for measures of
performance prepared in accordance with GAAP and are not necessarily
indicative of cash provided from operating activities and operating expenses
respectively as determined under GAAP. These measures are 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 and the cash provided from operating activities (before changes in
non-cash working capital items) measure excludes financing activities,
investing activities and changes in non-cash working capital. Similarly, the
total cash cost per pound of payable zinc sold measure excludes capital
expenditures. The MD&A and the consolidated financial statements discuss the
components not included in these non-GAAP measures.
<<
-------------------------------------------------------------------------
Non-GAAP Reconciliation of Cash Provided from Operating Activities
(before changes in non-cash working capital items) to Consolidated
Financial Statements
-------------------------------------------------------------------------
Third Quarter First Nine Months
------------------------------------------
($ millions) 2006 2005 2006 2005
-------------------------------------------------------------------------
Net Cash Provided by Operating
Activities per Consolidated
Statements of Cash Flows 39.9 4.3 115.4 26.4
Less changes in non-cash
working capital 1.9 2.7 24.0 10.7
-------------------------------------------------------------------------
Cash Provided from Operating
Activities (before changes
in non-cash working
capital items) 38.0 1.6 91.4 15.7
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Non-GAAP Reconciliation of Total Cash Cost per Pound of Payable Zinc Sold
to Consolidated Financial Statements
-------------------------------------------------------------------------
Third Quarter First Nine Months
-------------------------------------------------------------------------
2006 2005 2006 2005
-------------------------------------------------------------------------
By-Product Credit ($ millions)
------------------------------
Gross sales revenue per
financial statements (112.0) (71.9) (293.9) (255.6)
Less zinc sales revenue 76.5 39.1 203.2 160.3
-------------------------------------------------------------------------
(35.5) (32.8) (90.6) (95.3)
Treatment Charges ($ millions)
per financial statements 29.4 23.0 79.8 87.8
Direct operating costs
($ millions) per financial
statements 34.9 33.4 97.8 119.8
-------------------------------------------------------------------------
Total cash costs - Canadian
($ millions) 28.8 23.7 87.0 112.3
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Exchange rate C$/US$ 1.1230 1.1820 1.1390 1.2230
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Total cash costs -
US ($ millions) 25.6 20.0 76.4 91.8
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Zinc pounds sold (millions) 44.7 55.7 143.9 228.2
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Total cash cost per pound
of payable zinc sold (US$)
-------------------------------------------------------------------------
By-Product Credit (0.70) (0.50) (0.56) (0.34)
-------------------------------------------------------------------------
Treatment and marketing costs 0.58 0.35 0.49 0.31
-------------------------------------------------------------------------
Direct operating costs 0.69 0.51 0.60 0.43
-------------------------------------------------------------------------
Total 0.57 0.36 0.53 0.40
-------------------------------------------------------------------------
Summary of Quarterly Results
-------------------------------------------------------------------------
2004 2005
-------------------------------------------------------------------------
Q4 Q1 Q2 Q3 Q4
-------------------------------------------------------------------------
Gross Sales Revenue
($ millions) 61.5 91.3 92.4 71.9 57.4
-------------------------------------------------------------------------
Net Earnings (Loss)
($ millions) (6.3) 4.1 2.4 (1.6) 9.8
-------------------------------------------------------------------------
Basic Earnings
per Share ($0.02) $0.01 $0.01 $0.00 $0.03
-------------------------------------------------------------------------
Weighted-average
Number of Common
Shares Outstanding
(millions) 363.0 365.7 367.4 369.5 374.2
-------------------------------------------------------------------------
Basic Earnings Per
Share Fully Diluted ($0.02) $0.01 $0.01 $0.00 $0.02
-------------------------------------------------------------------------
Realized Exchange
Rate C$/US$ 1.2290 1.2274 1.2429 1.2019 1.1744
-------------------------------------------------------------------------
Average Realized
Zinc Price (US$/t) 1,095 1,256 1,252 1,296 1,502
-------------------------------------------------------------------------
Average Realized
Zinc Price (C$/t) 1,345 1,542 1,556 1,558 1,764
-------------------------------------------------------------------------
Concentrate Tonnes
Sold 79,854 108,507 118,022 80,196 60,391
-------------------------------------------------------------------------
Concentrate Tonnes
Produced 106,241 103,259 88,782 76,014 68,841
-------------------------------------------------------------------------
---------------------------------------------------
2006
---------------------------------------------------
Q1 Q2 Q3
---------------------------------------------------
Gross Sales Revenue
($ millions) 80.7 101.2 112.0
---------------------------------------------------
Net Earnings (Loss)
($ millions) 38.9 29.5 40.7
---------------------------------------------------
Basic Earnings
per Share $0.10 $0.08 $0.11
---------------------------------------------------
Weighted-average
Number of Common
Shares Outstanding
(millions) 382.0 383.8 384.3
---------------------------------------------------
Basic Earnings Per
Share Fully Diluted $0.09 $0.07 $0.10
---------------------------------------------------
Realized Exchange
Rate C$/US$ 1.1559 1.1239 1.1187
---------------------------------------------------
Average Realized
Zinc Price (US$/t) 2,221 2,895 3,363
---------------------------------------------------
Average Realized
Zinc Price (C$/t) 2,567 3,226 3,762
---------------------------------------------------
Concentrate Tonnes
Sold 67,355 59,779 61,385
---------------------------------------------------
Concentrate Tonnes
Produced 66,129 59,906 59,420
---------------------------------------------------
>>
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 the 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 or during 2006.
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, 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
September 30, 2006.
<<
-------------------------------------------------------------------------
Common Shares or Securities Convertible
into Common Shares October 31, 2006
-------------------------------------------------------------------------
Issued and Outstanding Common Shares 384,690,712
-------------------------------------------------------------------------
Share Option Plan - Option Weighted average
exercise price $0.93 9,918,933
-------------------------------------------------------------------------
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 458,982,484
-------------------------------------------------------------------------
>>
Risks, Uncertainties and Other Information
Exploration for, and development and mining of, metals involve numerous
inherent risks. Such risks include, but are not limited to: fluctuations in
the currency markets; fluctuations in commodity prices; risks arising from
holding derivative instruments (such as credit risk, market liquidity risk and
mark to market risk); changes in national and local government legislation,
taxation, controls, regulations and political or economic developments in
Canada, Chile, Honduras (further described below), Tunisia or other countries
in which we do or may carry on business in the future; business opportunities
that may be presented to, or pursued by, us; our ability to successfully
integrate acquisitions; operating or technical difficulties in connection with
mining or development activities; employee relations; the speculative nature
of exploration and development, including the risks of obtaining necessary
licences and permits; diminishing quantities or grades of reserves; adverse
changes in our credit rating; and contests over title to properties,
particularly title to undeveloped properties. In addition, there are risks and
hazards associated with the business of exploration, development and mining,
including environmental hazards, industrial accidents, unusual or unexpected
formations, pressures, cave-ins, flooding (and the risk of inadequate
insurance, or inability to obtain insurance, to cover these risks).
There have been recent political and legislative developments that may
affect mining in Honduras. The principal legislation governing mining in
Honduras is the General Mining Act (the "Mining Act") which was approved by
the National Congress in 1998. Subsequently, a Commission for the Reform of
the General Mining Act was appointed by the National Congress and in 2005
congressional debates, focused primarily on environmental and fiscal and
taxation provisions, were held. No amendments were passed. In early
October 2006, in response to a petition by private parties, the Honduran
Supreme Court of Justice ruled that certain articles of the Mining Act were
unconstitutional and suggested several guidelines to be followed in any reform
of the legislation. The articles that were ruled unconstitutional include,
amongst others, provisions on environmental, fiscal and taxation, registration
and transferability of mining concessions, and surface rights. In accordance
with Honduran law and procedure, the Supreme Court decision is not effective
against third parties until it is published by the National Congress in La
Gaceta, the official government bulletin. As at October 30, 2006, the decision
has not been published and the National Congress has not taken any legislative
action regarding reforms. It is not clear if and when amendments to the Mining
Law will be proposed in the National Congress and if so, when any such
proposals will become effective. At present therefore, the financial
implications and market-related risks, if any, that may be brought about by
Mining Law reform in Honduras cannot be accurately predicted or assessed. The
Company continues to monitor the situation closely.
Readers are encouraged to read and consider the risk factors, and
additional information regarding the Company, included in its most recent
Annual Report and Form 40-F/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 Statement on Forward-Looking Information
Certain information contained in or incorporated by reference in this
third quarter report, including any information as to our future financial or
operating performance and other statements that express management's
expectation or estimates of future performance, constitute "forward-looking
statements". All statements, other than statements of historical fact, are
forward-looking statements. The words "believe", "expect", "anticipate",
"contemplate", "target", "plan", "intends", "continue", 'budget", "estimate",
"may", "will", "schedule" and similar expressions identify forward-looking
statements. Forward-looking statements are necessarily based upon a number of
estimates and assumptions that, while considered reasonable by us, are
inherently subject to significant business, economic and competitive
uncertainties and contingencies. Known and unknown factors could cause actual
results to differ materially from those projected in the forward-looking
statements. Such factors include, but are not limited to: fluctuations in the
currency markets; fluctuations in commodity prices; risks arising from holding
derivative instruments (such as credit risk, market liquidity risk and mark to
market risk); changes in national and local government legislation, taxation,
controls, regulations and political or economic developments in Canada, Chile,
Honduras, Tunisia or other countries in which we do or may carry on business
in the future; business opportunities that may be presented to, or pursued by,
us; our ability to successfully integrate acquisitions; operating or technical
difficulties in connection with mining or development activities; employee
relations; the speculative nature of exploration and development, including
the risks of obtaining necessary licences and permits; diminishing quantities
or grades of reserves; adverse changes in our credit rating; and contests over
title to properties, particularly title to undeveloped properties. In
addition, there are risks and hazards associated with the business of
exploration, development and mining, including environmental hazards,
industrial accidents, unusual or unexpected formations, pressures, cave-ins,
flooding (and the risk of inadequate insurance, or inability to obtain
insurance, to cover these risks). Many of these uncertainties and
contingencies can affect our actual results and could cause actual results to
differ materially from those expressed or implied in any forward-looking
statements made by, or on behalf of, us. Readers are cautioned that
forward-looking statements are not guarantees of future performance. All of
the forward-looking statements made in this third quarter report are qualified
by these cautionary statements. Specific reference is made to the Company's
most recent Form 40F/Annual Information Form on file with the SEC and Canadian
provincial securities regulatory authorities for a discussion of some of the
factors underlying forward-looking statements. We disclaim any intention or
obligation to update or revise any forward-looking statements whether as a
result of new information, future events or otherwise, except to the extent
required by applicable laws.
<<
Breakwater Resources Ltd.
Consolidated Balance Sheets
As at September 30, 2006 and December 31, 2005
(expressed in thousands of Canadian dollars)
(unaudited)
-------------------------------------------------------------------------
September 30, December 31,
2006 2005
-------------------------------------------------------------------------
Assets
Current Assets
Cash and cash equivalents $ 63,433 $ 18,749
Restricted cash 1,678 3,929
Short-term investments 8,174 2,523
Accounts receivable - concentrate 981 3,027
Other receivables 10,065 9,369
Concentrate inventory 41,805 47,501
Materials and supplies inventory 20,623 21,388
Prepaid expenses and other current assets 3,954 3,934
Future income tax assets 24,306 6,517
-------------------------------------------------------------------------
175,019 116,937
Deferred Financing Fees - 344
Reclamation Deposits 13,535 6,808
Mineral Properties and Fixed Assets 202,030 165,168
Long-term Investment 9,089 5,615
Restricted Promissory Note 62,285 62,285
-------------------------------------------------------------------------
$ 461,958 $ 357,157
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Liabilities
Current Liabilities
Accounts payable and accrued liabilities $ 35,646 $ 32,797
Provisional payments for concentrate
inventory shipped and not priced 26,070 14,807
Short-term debt including current portion of
long-term debt 4,765 14,585
Income and mining taxes payable 4,566 164
Current portion of reclamation, closure cost
accruals and other environmental obligations 8,843 10,165
-------------------------------------------------------------------------
79,890 72,518
Deferred Income 6,430 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 32,487 40,099
Employee Future Benefits 4,648 5,379
Future Income Tax Liabilities 7,089 1,921
-------------------------------------------------------------------------
194,259 194,411
-------------------------------------------------------------------------
Shareholders' Equity
Capital stock 165,851 335,512
Warrants 8,561 8,561
Contributed surplus 801 3,300
Retained earnings (deficit) 109,069 (172,928)
Cumulative translation adjustments (16,583) (11,699)
-------------------------------------------------------------------------
267,699 162,746
-------------------------------------------------------------------------
$ 461,958 $ 357,157
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Breakwater Resources Ltd.
Consolidated Statements of Operations
and Retained Earnings (Deficit)
For the Periods Ended
September 30, 2006 and 2005
(expressed in thousands of Canadian dollars except
share and per share amounts)
(unaudited)
-------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
2006 2005 2006 2005
-------------------------------------------------------------------------
Gross sales revenue $ 112,037 $ 71,933 $ 293,897 $ 255,615
Treatment and
marketing costs 29,380 23,022 79,769 87,756
-------------------------------------------------------------------------
Net revenue 82,657 48,911 214,128 167,859
-------------------------------------------------------------------------
Operating Costs
Direct operating costs 34,894 33,358 97,885 119,777
Depreciation and
depletion 3,754 5,113 12,289 18,700
Reclamation and
closure costs 866 7,095 2,751 11,502
-------------------------------------------------------------------------
39,514 45,566 112,925 149,979
-------------------------------------------------------------------------
Contribution from
Mining Activities 43,143 3,345 101,203 17,880
-------------------------------------------------------------------------
Other Expenses (Income)
General and
administrative 3,021 1,913 9,219 5,917
Stock-based
compensation 182 205 1,201 650
Interest and financing 1,071 291 4,009 795
Investment and other
income (1,933) (835) (5,236) (2,743)
Loss on gold loan 55 863 1,131 863
Foreign exchange gain
on US dollar
denominated debt (19) (322) (330) (535)
Other foreign exchange
(gain) loss (233) 307 (398) 401
-------------------------------------------------------------------------
2,144 2,422 9,596 5,348
-------------------------------------------------------------------------
Earnings Before the
Following: 40,999 923 91,607 12,532
-------------------------------------------------------------------------
Exploration costs 651 272 3,145 272
Write-down of mineral
properties and fixed
assets - 692 - 692
Other non-producing
property (income)
costs (12,867) 1,807 (10,200) 7,286
Income and mining tax
provision (recovery) 12,468 (269) (10,407) (646)
-------------------------------------------------------------------------
252 2,502 (17,462) 7,604
-------------------------------------------------------------------------
Net Earnings (Loss) 40,747 (1,579) 109,069 4,928
Retained Earnings
(Deficit) - Beginning
of Period 68,322 (181,160) (172,928) (187,667)
Reduction in Stated
Share Capital and
Contributed Surplus - - 172,928 -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Retained Earnings
(Deficit) - End of
Period $ 109,069 $ (182,739) $ 109,069 $ (182,739)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Basic Earnings per
Common Share $ 0.11 $ (0.00) $ 0.28 $ 0.01
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Diluted Earnings per
Common Share $ 0.10 $ (0.00) $ 0.26 $ 0.01
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Basic Weighted-Average
Number of Common
Shares Outstanding 384,335,000 369,513,000 383,323,000 367,535,000
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Breakwater Resources Ltd.
Consolidated Statements of Cash Flows
For the Periods Ended September 30, 2006 and 2005
(expressed in thousands of Canadian dollars)
(unaudited)
-------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
2006 2005 2006 2005
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Cash Provided by
(Used in) Operating
Activities
Net earnings (loss) $ 40,747 $ (1,579) $ 109,069 $ 4,928
-------------------------------------------------------------------------
Non-cash items:
Depreciation and
depletion 3,754 5,113 12,289 18,700
Gain on sale of
investment - - - (851)
Unrealized (gain)
loss on gold loan (276) 863 - 863
Foreign exchange loss
(gain) on US dollar
denominated loans 37 (322) (33) (535)
Other non-cash items (751) (362) (442) (25)
Stock-based
compensation 182 205 1,201 650
Deferred income (152) 19 (458) -
Future income taxes 9,720 (41) (12,621) 95
Reclamation, closure
cost accruals and
other environmental
obligations 866 7,095 2,751 11,502
Employee future
benefits 636 421 1,523 1,263
Gain on sale of
Caribou and
Restigouche mines (13,818) - (13,818) -
Write-down of mineral
properties and fixed
assets - 692 - 692
-------------------------------------------------------------------------
198 13,683 (9,608) 32,354
-------------------------------------------------------------------------
Payment of reclamation,
closure costs accruals
and other environmental
obligations (2,137) (9,922) (5,858) (19,924)
Payment of employee
future benefits (764) (582) (2,254) (1,707)
Changes in non-cash
working capital items 1,832 2,649 24,095 10,712
-------------------------------------------------------------------------
Net cash provided by
operating activities 39,876 4,249 115,444 26,363
-------------------------------------------------------------------------
Financing Activities
Decrease in restricted
cash 2,474 3,383 2,251 457
Issue of common shares
for cash 75 1,419 1,065 2,625
Issue of common shares
to settle liability - - 848 -
Renunciation of flow-
through share value - - (2,345) -
Deferred financing
fees - (422) (223) (422)
Decrease in long-term
lease obligations - - (248) -
(Decrease) increase
in short-term debt (2,492) 12,161 (13,417) 14,005
Increase in long-term
debt - - - 4,757
-------------------------------------------------------------------------
Net cash provided by
(used in) financing
activities 57 16,541 (12,069) 21,422
-------------------------------------------------------------------------
Investing Activities
Reclamation deposits 5,952 (288) (6,727) (7,733)
Mineral properties
and fixed assets (22,893) (8,749) (52,258) (28,358)
Proceeds from sale of
fixed assets and
mineral properties 86 54 294 100
-------------------------------------------------------------------------
Net cash provided by
(used in) investing
activities (16,855) (8,983) (58,691) (35,991)
-------------------------------------------------------------------------
Increase in Cash 23,078 11,807 44,684 11,794
Cash and Cash
Equivalents - Beginning
of Period 40,355 12,654 18,749 12,667
-------------------------------------------------------------------------
Cash and Cash
Equivalents - End of
Period $ 63,433 $ 24,461 $ 63,433 $ 24,461
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Supplemental Disclosure
of Cash Flow
Information
Cash paid for:
Interest $ 47 $ 41 $ 630 $ 129
Income and mining
taxes $ 82 $ 50 $ 425 $ 452
>>
%CIK: 0000782875
/For further information: E. Ann Wilkinson, Vice President, Investor
Relations, (416) 363-4798 Ext. 277, awilkinson(at)breakwater.ca/
(BWR.)
CO: Breakwater Resources Ltd.
CNW 13:51e 02-NOV-06
