2
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F
(Mark One)
( ) REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES
EXCHANGE ACT OF 1934
OR
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended DECEMBER 31, 2002
--------------------------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________________ to ________________
Commission file number 782875
-------------------
BREAKWATER RESOURCES LTD.
(Exact name of Registrant as specified in its charter)
Not Applicable
(Translation of Registrant's name into English)
Canada
(Jurisdiction of incorporation or organization)
Suite 2000
95 Wellington Street West
Toronto, Ontario
M5J 2N7
Canada
(Address of principal executive offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act.
Title of each class Name of each exchange on which registered
Not Applicable Not Applicable
1
Securities registered or to be registered pursuant to Section 12(g) of the Act.
Common Shares
-----------------------------------------------------------------------
(Title of Class)
Not Applicable
-----------------------------------------------------------------------
(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act.
Common Shares
-----------------------------------------------------------------------
(Title of Class)
Indicate the number of outstanding shares of each of the issuer's classes of
capital or common stock as of the close of the period covered
by the annual report.
193,280,535 as at December 31, 2002
-----------------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes (X) No ( )
Indicate by check mark which financial statement item the registrant
has elected to follow.
Item 17 (X) Item 18 ( )
2
GLOSSARY OF TERMS 5
FORWARD-LOOKING STATEMENTS 7
PART I 8
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS............8
A. DIRECTORS AND SENIOR MANAGEMENT.....................................8
B. ADVISORS............................................................8
C. AUDITORS............................................................8
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE..........................8
A. OFFER STATISTICS....................................................8
B. METHOD AND EXPECTED TIMETABLE.......................................8
ITEM 3. KEY INFORMATION..................................................8
A. SELECTED FINANCIAL DATA.............................................8
B. CAPITALIZATION AND INDEBTEDNESS....................................10
C. REASONS FOR THE OFFER AND USE OF PROCEEDS..........................10
D. RISK FACTORS.......................................................10
ITEM 4. INFORMATION ON THE COMPANY......................................14
A. HISTORY AND DEVELOPMENT OF THE COMPANY.............................14
B. BUSINESS OVERVIEW..................................................22
C. ORGANIZATIONAL STRUCTURE...........................................23
D. PROPERTY, PLANTS AND EQUIPMENT.....................................24
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS....................77
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES......................99
A. DIRECTORS AND SENIOR MANAGEMENT....................................99
B. COMPENSATION......................................................101
C. BOARD PRACTICES...................................................103
D. EMPLOYEES.........................................................106
E. SHARE OWNERSHIP...................................................107
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS..............111
A. MAJOR SHAREHOLDERS................................................111
B. RELATED PARTY TRANSACTIONS........................................111
C. INTERESTS OF EXPERTS AND COUNSEL..................................112
ITEM 8. FINANCIAL INFORMATION..........................................113
ITEM 9. THE OFFER AND LISTING..........................................113
A. OFFER AND LISTING DETAILS.........................................113
B. PLAN OF DISTRIBUTION..............................................115
C. MARKETS...........................................................115
D. SELLING SHAREHOLDERS..............................................115
E. DILUTION..........................................................115
F. EXPENSES OF THE ISSUE.............................................115
ITEM 10. ADDITIONAL INFORMATION.........................................115
A. SHARE CAPITAL.....................................................115
B. MEMORANDUM AND ARTICLES OF ASSOCIATION............................115
C. MATERIAL CONTRACTS................................................118
D. EXCHANGE CONTROLS.................................................118
E. TAXATION..........................................................120
F. DIVIDENDS AND PAYING AGENTS.......................................120
G. STATEMENT BY EXPERTS..............................................120
H. DOCUMENTS ON DISPLAY..............................................121
I. SUBSIDIARY INFORMATION............................................121
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.....121
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES.........121
PART II 121
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES................121
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ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND
USE OF PROCEEDS................................................121
ITEM 15. CONTROLS AND PROCEDURES........................................121
ITEM 16. [RESERVED].....................................................122
PART III 122
ITEM 17. FINANCIAL STATEMENTS...........................................122
ITEM 18. FINANCIAL STATEMENTS...........................................159
ITEM 19. EXHIBITS.......................................................159
4
GLOSSARY OF TERMS
The following is a glossary of certain terms used in this document.
"COMMON SHARES " means the common shares of Breakwater Resources Ltd.
"COMPANY" means Breakwater Resources Ltd., organized under the laws of Canada.
"INDICATED RESOURCE" means that part of a mineral resource for which quantity,
grade or quality, densities, shape and physical characteristics, can be
estimated with a level of confidence sufficient to allow the appropriate
application of technical and economic parameters, to support mine planning and
evaluation of the economic viability of the deposit. The estimate is based on
detailed and reliable exploration and testing information gathered through
appropriate techniques from locations such as outcrops, trenches, pits, workings
and drill holes that are spaced closely enough for geological and grade
continuity to be reasonably assumed. See ( Mineral Reserve and Resource
Estimates ).
"INFERRED RESOURCE" means that part of a mineral resource for which quantity and
grade or quality can be estimated on the basis of geological evidence and
limited sampling and reasonably assumed, but not verified, geological and grade
continuity. The estimate is based on limited information and sampling gathered
through appropriate techniques from locations such as outcrops, trenches, pits,
workings and drill holes. See (Mineral Reserve and Resource Estimates).
"MEASURED RESOURCE" means that part of a mineral resource for which quantity,
grade or quality, densities, shape, physical characteristics are so well
established that they can be estimated with confidence sufficient to allow the
appropriate application of technical and economic parameters, to support
production planning and evaluation of the economic viability of the deposit. The
estimate is based on detailed and reliable exploration, sampling and testing
information gathered through appropriate techniques from locations such as
outcrops, trenches, pits, workings and drill holes that are spaced closely
enough to confirm both geological and grade continuity. See ( Mineral Reserve
and Resource Estimates ).
"MINERAL RESERVE" means the economically mineable part of a measured or
indicated resource demonstrated by at least a preliminary feasibility study.
This study must include adequate information on mining, processing,
metallurgical, economic and other relevant factors that demonstrate, at the time
of reporting, that economic extraction can be justified. A mineral reserve
includes diluting materials and allowances for losses that may occur when the
material is mined. See (Mineral Reserve and Resource Estimates).
"MINERAL RESOURCE" means a concentration or occurrence of natural, solid,
inorganic or fossilized organic material in or on the Earth's crust in such form
and quantity and of such a grade or quality that it has reasonable prospects for
economic extraction. The location, quantity, grade, geological characteristics
and continuity of a mineral resource are known, estimated or interpreted from
specific geological evidence and knowledge. See ( Mineral Reserve and Resource
Estimates ).
"NET SMELTER ROYALTY" or "NSR" means a royalty based on the gross proceeds
received from the sale of minerals less the cost of smelting, refining, freight
and other related costs.
"OUNCE" OR "OZ." means a troy ounce or 20 pennyweights or 480 grains or 31.103
grams.
"PROVEN MINERAL RESERVE" means the economically mineable part of a measured
resource demonstrated by at least a preliminary feasibility study. This study
must include adequate information on mining,
5
processing, metallurgical, economic, and other relevant factors that
demonstrate, at the time of reporting, that economic extraction is justified.
See ( Mineral Reserve and Resource Estimates ).
"PROBABLE MINERAL RESERVE" means the economically mineable part of an indicated,
and in some circumstances a measured resource demonstrated by at least a
preliminary feasibility study. This study must include adequate information on
mining, processing, metallurgical, economic, and other relevant factors that
demonstrate, at the time of reporting, that economic extraction can be
justified. See ( Mineral Reserve and Resource Estimates ).
"PROFESSIONAL ASSOCIATION", for the purposes of the definition of a Qualified
Person below, means a self-regulatory organization of engineers, geoscientists
or both engineers and geoscientists that
a) has been given authority or recognition by statute;
b) admits members primarily on the basis of their academic qualifications and
experience;
c) requires compliance with the professional standards of competence and
ethics established by the organization; and
d) has disciplinary powers, including the power to suspend or expel a member;
and until February 1, 2002 includes an association of geoscientists in Ontario
and until February 1, 2003 includes an association of geoscientists in a
Canadian jurisdiction other than Ontario that does not have a statutorily
recognized self-regulatory association.
"QUALIFIED PERSON" means an individual who
a) is an engineer or geoscientist with at least five years of experience in
mineral exploration, mine development or operation or mineral project
assessment, or any combination of these;
b) has experience relevant to the subject matter of the mineral project and
the technical report; and
c) is a member in good standing of a professional association.
"TON" means a short ton, equivalent to 2,000 pounds.
"TONNE" means a metric measure consisting of 2,204.6 pounds or 1,000 kilograms.
"TOTAL CASH COSTS" means all cash costs incurred and expensed at the minesite,
plus treatment charges, shipping and marketing costs, net of by-product credits.
For ease of reference, the following factors for converting imperial
measurements into metric equivalents are provided:
- ------------------------- ------------------------------------- ---------------
TO CONVERT IMPERIAL
MEASUREMENTS UNITS TO METRIC MEASUREMENT UNITS MULTIPLY BY
- ------------------------- ------------------------------------- ---------------
Acres Hectares 0.404686
- ------------------------- ------------------------------------- ---------------
Feet Metres 0.30480
- ------------------------- ------------------------------------- ---------------
Miles Kilometres 1.609344
- ------------------------- ------------------------------------- ---------------
Ounces (troy) Grams 31.1035
- ------------------------- ------------------------------------- ---------------
Short tons Tonnes 0.907185
- ------------------------- ------------------------------------- ---------------
Troy ounces per ton Grams per tonne 34.2857
- ------------------------- ------------------------------------- ---------------
6
MINERAL RESERVE AND RESOURCE ESTIMATE
The Company is required under Canadian law (National Instrument 43-101 Standards
Of Disclosure For Mineral Projects) to calculate and categorize mineral reserves
and resources under the Canadian Institute of Mining Metallurgy and Petroleum
("CIM") Standards on Mineral Resources and Reserves - Definitions and Guidelines
adopted by the CIM in August 2000. These guidelines establish definitions and
guidelines for the reporting of exploration information, mineral resources and
mineral reserves in Canada. These definitions have not been adopted for use in
the United States by the Securities and Exchange Commission.
The CIM definitions of proven and probable mineral reserves are substantially in
accordance with the definitions of proven and probable reserves as set out in
Industry Guide No. 7 of the US Securities Act of 1933, as amended. In addition,
Canadian law requires disclosure of mineral resources that equate to measured,
indicated and inferred resources, if such resources are material to the company.
The mineral reserve and resource estimates, set forth in this Form 20-F, have
been prepared in accordance with applicable Canadian requirements. Please note
that mineral resources that are not mineral reserves do not have demonstrated
economic viability.
FORWARD-LOOKING STATEMENTS
This Form 20-F of the Company for the financial year ended December 31, 2002,
contains forward-looking statements within the meaning of the United States
Private Securities Reform Act of 1995. When used in this Form 20-F, the words
"anticipate", "believe", "intend", "estimate", "plans", "projects", "expect",
"will", "budget", "could", "may", and similar expressions are intended to
identify forward-looking statements, but the fact that any of these words does
not appear does not mean that the statement is not forward-looking. To the
extent that this Form 20-F contains forwarding-looking statements regarding the
financial condition, operating results, business prospects or any other aspect
of the Company, please be advised that the actual financial conditions,
operating results and business performance of the Company may differ materially
from that anticipated, projected or estimated in such forward-looking
statements. Forward-looking statements are subject to a variety of risks and
uncertainties that could cause actual events or results to differ from those
reflected in the forward-looking statements. These include, without limitation,
o risks and uncertainties relating to the interpretation of drill results,
o the geology, grade and continuity of mineral deposits, and the possibility
that future exploration, development or mining results will not be
consistent with the expectations of the Company,
o accidents,
o equipment breakdowns,
o labour disputes or other unanticipated difficulties with, or interruptions
in, production,
o the potential for delays in exploration or development activities or the
completion of feasibility studies,
o political risks involving the operations of the Company in Honduras, Chile
and Tunisia and the policies of other nations towards companies doing
business in these jurisdictions,
o the inherent uncertainty of production and cost estimates and the potential
for unexpected costs and expenses,
o metal prices fluctuations,
o failure to obtain adequate financing on a timely basis,
o possible fluctuation and volatility of operating results and financial
condition,
o inability to carry out exploration and production plans,
o loss of key executives,
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o changes in interest rates,
o inflationary factors,
o competitive factors and pricing pressures,
o changes in both foreign and domestic legal and regulatory requirements,
o technological change or difficulties,
o commercialization and trade difficulties,
o inadequate capital,
o the imposition of new, or the increase of existing, tariffs,
o lower than forecasted revenues,
o the possible acquisition of new businesses that do not perform as expected,
and
o general economic conditions,
in addition to the risks referred to in "Risk Factors" under Item 3.D
below.
PART I
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
A. DIRECTORS AND SENIOR MANAGEMENT.
This Form 20-F is being filed as an annual report under the Exchange Act, and
accordingly, the information called for in Item 1.A is not required.
B. ADVISORS.
This Form 20-F is being filed as an annual report under the Exchange Act, and
accordingly, the information called for in Item 1.B is not required.
C. AUDITORS.
This Form 20-F is being filed as an annual report under the Exchange Act, and
accordingly, the information called for in Item 1.C is not required.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
A. OFFER STATISTICS.
This Form 20-F is being filed as an annual report under the Exchange Act, and
accordingly, the information called for in Item 2.A is not required.
B. METHOD AND EXPECTED TIMETABLE.
This Form 20-F is being filed as an annual report under the Exchange Act, and
accordingly, the information called for in Item 2.B is not required.
ITEM 3. KEY INFORMATION
A. SELECTED FINANCIAL DATA.
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The following financial information with respect to the five years ended
December 31, 2002 and as of December 31, 2002, 2001, 2000, 1999, and 1998 has
been derived from the Company's audited consolidated financial statements
prepared in accordance with Canadian generally accepted accounting principles
("Cdn. GAAP"). A reconciliation of certain material variations in the financial
information from that which would be provided if the financial statements were
prepared in accordance with United States generally accepted accounting
principles ("U.S. GAAP") is provided in Item 17 Financial Statements, Note 16 to
the Financial Statements. The following should be read in conjunction with Item
5 - "Operating and Financial Review and Prospects".
- ---------------------------------------- ------------- ------------- -------------- ------------- -------------
($000's except for per share numbers 2002 2001 2000 1999 1998
and ratio) (1)
- ---------------------------------------- ------------- ------------- -------------- ------------- -------------
Gross Revenue 305,354 301,760 301,850 236,135 172,153
- ---------------------------------------- ------------- ------------- -------------- ------------- -------------
Treatment and Marketing Costs 136,738 139,959 135,262 105,440 82,120
- ---------------------------------------- ------------- ------------- -------------- ------------- -------------
Net Revenue 168,616 161,801 166,588 130,695 90,033
- ---------------------------------------- ------------- ------------- -------------- ------------- -------------
Direct Costs 147,653 185,293 129,808 107,814 98,653
- ---------------------------------------- ------------- ------------- -------------- ------------- -------------
(Loss) Contribution from
Mining Activities ------------- ------------- -------------- ------------- -------------
(9,496) (23,492) 36,780 22,881 (8,620)
- ---------------------------------------- ------------- ------------- -------------- ------------- -------------
Net (Loss) Earnings (19,887) (111,058) (8,749) 12,917 (51,144)
- ---------------------------------------- ------------- ------------- -------------- ------------- -------------
Net (Loss) Earnings per share (0.12) (0.92) (0.08) 0.17 (0.73)
- ---------------------------------------- ------------- ------------- -------------- ------------- -------------
Diluted Earnings per Share N/A N/A N/A 0.16 N/A
- ---------------------------------------- ------------- ------------- -------------- ------------- -------------
Cash Provided From (Used For)
Operating Activities(2) ------------- ------------- -------------- ------------- -------------
8,647 (9,361) 37,720 30,058 (3,854)
- ---------------------------------------- ------------- ------------- -------------- ------------- -------------
Capital Expenditures 10,971 21,662 34,619 17,546 46,921
- ---------------------------------------- ------------- ------------- -------------- ------------- -------------
Weighted Number of Common
Shares Outstanding ------------- ------------- -------------- ------------- -------------
169,675 92,560 83,985 77,691 69,602
- ---------------------------------------- ------------- ------------- -------------- ------------- -------------
Diluted Number of Common
Shares Outstanding ------------- ------------- -------------- ------------- -------------
N/A N/A N/A 78,689 N/A
- ---------------------------------------- ------------- ------------- -------------- ------------- -------------
Number of Common
Shares Outstanding ------------- ------------- -------------- ------------- -------------
193,280 93,848 92,039 82,301 69,144
- ---------------------------------------- ------------- ------------- -------------- ------------- -------------
Working Capital 22,284 5,048 23,881 40,054 14,091
- ---------------------------------------- ------------- ------------- -------------- ------------- -------------
Total Assets 223,380 251,569 360,453 261,020 266,128
- ---------------------------------------- ------------- ------------- -------------- ------------- -------------
Total Debt 78,665 80,406 90,280 16,700 39,177
- ---------------------------------------- ------------- ------------- -------------- ------------- -------------
Shareholders' Equity (Net assets) 95,596 98,576 201,859 190,015 164,291
- ---------------------------------------- ------------- ------------- -------------- ------------- -------------
Net Debt to Net Debt plus Equity 43% 44% 30% 6% 17%
- ---------------------------------------- ------------- ------------- -------------- ------------- -------------
Book Value per Share 0.49 1.05 2.19 2.31 2.38
- ---------------------------------------- ------------- ------------- -------------- ------------- -------------
Capital Stock 257,759 239,214 238,312 221,446 200,054
- ---------------------------------------- ------------- ------------- -------------- ------------- -------------
Dividends Declared NIL Nil Nil Nil Nil
- ---------------------------------------- ------------- ------------- -------------- ------------- -------------
(1) For U.S. GAAP equivalent figures refer to Item 17 - Financial Statements, Note 16.
(2) Before changes in non-cash working capital items.
On May 6, 2003, the Bank of Canada mid-market rate for the conversion of United
States dollars into Canadian dollars was $1.3923.
The following table reflects the monthly high and low exchange rates for
U.S.$1.00 to the Canadian dollar for the following periods.
Month Year High Low
- --------------------------------------------------------
November 2002 1.5748 1.5686
December 2002 1.5620 1.5559
January 2003 1.5442 1.5371
February 2003 1.5161 1.5092
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March 2003 1.4801 1.4714
April 2003 1.4639 1.4543
The following table lists the average exchange rate for U.S. $1.00 to the
Canadian dollar for the last five years based on the average month-end exchange
rates.
Year Rate
- --------------------------
1998 1.4884
1999 1.4826
2000 1.4868
2001 1.5513
2002 1.5699
B. CAPITALIZATION AND INDEBTEDNESS.
This Form 20-F is being filed as an annual report under the Exchange Act, and
accordingly, the information called for in this Item 3.B is not required.
C. REASONS FOR THE OFFER AND USE OF PROCEEDS.
This Form 20-F is being filed as an annual report under the Exchange Act, and
accordingly, the information called for in Item 3.C is not required.
D. RISK FACTORS.
The risks and uncertainties described below should be considered in conjunction
with the information set forth in Item 5. Operating and Financial Review and
Prospects which includes "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the section thereof entitled "Risks and
Uncertainties".
These risks and uncertainties are not the only ones facing the Company.
Additional risks and uncertainties not presently known to the Company or that
the Company currently believes to be immaterial may also impact the business
operations of the Company. If any of the following risks actually occurs, the
Company's business, financial condition and operating results could be
materially harmed. In such case, the trading price of the Common Shares would
likely decline and a holder of Common Shares could lose all or part of his or
her investment.
ZINC PRICES The profitability of any mining operation in which the Company has
an interest is significantly affected by the market price of zinc. A US$0.01 per
pound change in the average price of zinc is expected to affect the Company's
earnings and cash flow during 2003 by approximately $4.2 million. Recent
declines in the price of zinc have had, and any further declines in the price of
zinc will have, a serious impact on the Company. Depending on the price of zinc,
cash flow from mining operations may not be sufficient to meet all cash
requirements including such things as operating costs, capital expenditures,
interest payments and debt repayments. If, as a result of declines in zinc
prices, revenues from metal sales were to fall below cash operating costs,
continued commercial production at the Company's mines may become impractical
and could be discontinued.
The Company is, and will continue to be, affected by fluctuations in the price
of zinc. The price of zinc fluctuates on a daily basis and is affected by
numerous factors beyond the control of the Company. Interest rates, inflation,
exchange rates and world supply of and demand for zinc can all cause significant
fluctuations in zinc prices. Such external economic factors are in turn
influenced by changes in
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international economic growth patterns and political developments. The price of
zinc has fluctuated widely and may continue to do so.
LIQUIDITY The price of zinc is currently at a 15 year low, in absolute and in
real terms, the lowest levels since the 1930s. The price of zinc has declined
steadily to this level since the latter months of 2000. After reaching a 14 year
low of US$732.50 per tonne in the fourth quarter of 2001 and averaging US$886
per tonne for 2001, the price of zinc reached a new low of US$725.50 per tonne
in August 2002 and averaged US$777 per tonne in 2002. The Company is unable to
withstand low metal prices for an extended period of time without the ability to
source cash required from sources other than operating cash flow. Recent debt
financing (referred to hereafter as the Syndicated Credit Facility) combined
with the proceeds from the Rights Offering (as hereinafter defined) provided the
working capital requirements for the period ended December 31, 2002. Going
forward into 2003, a zinc price in excess of US$800 per tonne is required to
support the operations to the end of the year. In the event that the price of
zinc does not exceed this level, the Company will be required to find an
alternative source of financing. There is no certainty that an alternative
source of financing will be available to the Company. In addition, events can
occur at any time which could result in default of provisions under the
Syndicated Credit Facility.
The Syndicated Credit Facility is required to be repaid or restructured by
January 2, 2004. Management of the Company believes that the Company will not be
able to repay its debt under the Syndicated Credit Facility on maturity on
January 2, 2004. Accordingly, management of the Company believes that it will be
necessary to negotiate the extension or restructuring or replacement of the
Syndicated Credit Facility prior to maturity on January 2, 2004. The Lenders (as
hereinafter defined) have given no assurance that they will enter into any such
negotiations or agree to any such extension or restructuring and there is no
certainty that the Company will be successful in extending or restructuring the
Syndicated Credit Facility.
World events, including the threat of war and bankruptcies of several major
companies have put serious stress on the ability of insurers to continue to
provide support as they have in the past. The surety market is shrinking and, as
a result, availability of environmental bonding is being threatened. It is not
unlikely that some or all of the Company's environmental bonds, which amount to
approximately $13.0 million, may be withdrawn or that the Company may be
required to provide security in the form of cash or letters of credit which
would use a significant portion of available sources of credit. Provision for
such an event has not been included in the forecast for the year. In the event
that the bonds are cancelled and the Company is unable to provide adequate
security, the Company could be in default under its Syndicated Credit Facility.
The Syndicated Credit Facility is secured by all of the assets of the Company
and, in the event of default, the Lenders could realize on their security.
Management is pursuing alternative solutions to protect the assets in the event
that the bonds are cancelled. At this time there is no assurance that such
alternatives will be available.
ENVIRONMENTAL RISKS The Company's mining and processing operations and
exploration activities are subject to various laws and regulations governing the
protection of the environment, exploration, development, production, exports,
taxes, labour standards, occupational health, waste disposal, toxic substances,
mine safety and other matters. New laws and regulations, amendments to existing
laws and regulations or more stringent implementation of existing laws and
regulations could have a material adverse impact on the Company, increase costs,
cause a reduction in levels of production and/or delay or prevent the
development of new mining properties. The Company believes it is currently in
compliance in all material respects with all applicable environmental laws and
regulations. Such compliance requires significant expenditures and increases
mine development and operating costs.
In all jurisdictions, licenses and permits from various governmental authorities
are necessary in order to engage in mining operations. Such permits relate to
many aspects of mining operations, including maintenance of air, water and soil
quality standards. In most jurisdictions, the requisite permits cannot be
11
obtained prior to completion of an environmental impact statement and, in some
cases, public consultation. The Company is generally required to submit for
government approval a reclamation plan and, in certain cases, to pay for the
reclamation of the mine site upon the completion of mining activities. In some
cases, the Company is required to provide security in advance of the closure of
a mine based upon estimates in the reclamation plan for the mine. The security
is usually in the form of cash, letters of credit or security bonds.
Mining is subject to potential risks and liabilities associated with pollution
of the environment and the disposal of waste products occurring as a result of
mineral exploration and production. Environmental liability may result from
mining activities conducted by others prior to the Company's ownership of a
property. To the extent the Company is subject to uninsured environmental
liabilities, the payment of such liabilities would reduce funds otherwise
available and could have a material adverse effect on the Company. Should the
Company be unable to fund fully the cost of remedying an environmental problem,
it might be required to suspend operations or enter into interim compliance
measures pending completion of the required remedy, which could have a material
adverse effect on the Company.
NATURE OF MINERAL EXPLORATION AND MINING The exploration and development of
mineral deposits involves significant financial risks over a significant period
of time which even a combination of careful evaluation, experience and knowledge
may not eliminate. While discovery of a mineral-bearing structure may result in
substantial rewards, few properties that are explored are ultimately developed
into producing mines. Major expenses may be required to establish mineral
reserves by drilling and to construct mining and processing facilities at a
site. It is impossible to ensure that the current or proposed exploration
programs on properties in which the Company has interests will result in
profitable commercial mining operations.
The Company's operations are subject to the hazards and risks normally incident
to exploration, development and production of mineral deposits, any of which
could result in damage to life or property, environmental damage and possible
legal liability for such damage. The activities of the Company may be subject to
prolonged disruptions due to weather conditions depending on the location of
operations in which the Company has interests. Hazards, such as unusual or
unexpected formations, rock bursts, pressures, cave-ins, flooding or other
conditions may be encountered in the drilling and removal of material. While the
Company may obtain insurance against certain risks, the nature of these risks
are such that liabilities could exceed policy limits or could be excluded from
coverage. There are also risks against which the Company cannot insure or
against which it may elect not to insure. The potential costs which could be
associated with any liabilities not covered by insurance or in excess of
insurance coverage or compliance with applicable laws and regulations may cause
substantial delays and require significant capital outlays, adversely affecting
the future earnings and competitive position of the Company and, potentially,
its financial position.
Whether a mineral deposit will be commercially viable depends on a number of
factors, some of which are the particular attributes of the deposit, such as its
size and grade, proximity to infrastructure, financing costs and governmental
regulations, including regulations relating to prices, taxes, royalties,
infrastructure, land use, importing and exporting of minerals and environmental
protection. The effect of these factors cannot be accurately predicted, but the
combination of these factors may result in the Company not receiving an adequate
return on invested capital.
MINERAL RESERVE ESTIMATES Where used by the Company, figures for mineral
reserves are estimates and no assurance can be given that the anticipated
tonnages and grades will be achieved or that the indicated level of recovery
will be realized. Market fluctuations in the price of zinc and other metals may
render certain mineral reserves uneconomical and prolonged declines in the
market price of zinc may render mineral reserves containing relatively lower
grades of zinc mineralization uneconomic to exploit (unless
12
the use of forward sales or other hedging techniques is sufficient to offset
such declines). Such price fluctuations could reduce materially the Company's
reported mineral reserves. Should such reductions occur, material write-downs of
its investment in mining properties or the discontinuation of development or
production might be required, and there could be material delays in the
development of new projects, increased net losses and reduced cash flow.
Moreover, short-term operating factors relating to mineral reserves, such as the
need for orderly development of the mineral deposit or the processing of new or
different mineral grades, may cause a mining operation to be unprofitable in any
particular accounting period.
COMPETITION The mineral exploration and mining business is competitive in all of
its phases. The Company competes with numerous other companies and individuals,
including competitors with greater financial, technical and other resources than
the Company, in the search for and the acquisition of attractive mineral
properties. The ability of the Company to acquire properties in the future will
depend not only on its ability to develop its present properties, but also on
its ability to select and acquire suitable producing properties or prospects for
mineral exploration. There is no assurance that the Company will continue to be
able to compete successfully with its competitors in acquiring such properties
or prospects.
CREDIT RISK The Company is subject to credit risk through trade receivables. The
Company manages this risk through evaluation and monitoring processes. Although
the Company has a number of significant customers, the Company believes them to
be established and creditworthy customers. Credit risk is further mitigated
through the use of provisional payment arrangements and the use of letters of
credit where appropriate. Credit risk also relates to derivative contracts
arising from the possibility that a counterparty to an instrument in which the
Company has an unrealized gain fails to perform. The Company transacts only with
counterparties it considers to be highly-rated. The Company does not consider
the credit risk associated with these financial instruments to be significant.
Nonetheless there can be no guarantee that a significant customer of the Company
will be able to fulfill its obligations, which could have an adverse effect on
the Company.
FOREIGN EXCHANGE RISK The Company operates using both the Canadian dollar and
the US dollar as well as several other currencies, and as such may be negatively
affected by fluctuations in foreign exchange rates. The Company manages this
risk by minimizing the number of transactions that result in the settlement
currency differing from the currency of the initial transaction. Currency
fluctuations may affect the revenues which the Company realizes from its
operations, as concentrates are sold in the world market in United States
dollars while a significant percentage of its expenses are denominated in non-US
dollars. This exposes the Company to increased volatility in earnings due to
fluctuations in foreign exchange rates. The Company is also exposed to foreign
exchange rate risk through its long and short-term debt. While foreign
currencies are generally convertible into Canadian and United States dollars,
there is no guarantee that they will continue to be so convertible or that
fluctuations in the value of such currencies will not have an adverse effect on
the Company.
POLITICAL RISK / FOREIGN OPERATIONS The Company has mining operations in Canada,
Tunisia, Honduras and Chile. The Company believes that the governments of
Tunisia, Honduras and Chile support the development of their natural resources
by foreign operators. There is no assurance that future political and economic
conditions in these countries will not result in their governments adopting
different policies respecting foreign development and ownership of mineral
resources. Any such changes in policy may result in changes in laws affecting
ownership of assets, taxation, rates of exchange, concentrate sales,
environmental protection, labour relations, repatriation of income and return of
capital, which may affect both the ability of the Company to undertake
exploration and development activities in respect of future properties in the
manner currently contemplated, as well as its ability to continue to explore,
develop and operate those properties in respect of which the Company has
obtained exploration, development and
13
operating rights to date. The possibility that a future government of Tunisia,
Honduras or Chile may adopt substantially different policies, which might extend
to expropriation of assets, cannot be ruled out.
In addition, the economies of the countries of Tunisia, Honduras and Chile
differ significantly from the economy of Canada in such respects as structure,
level of development, gross national product, growth rate, capital reinvestment,
resource allocation, self sufficiency, rate of inflation and balance of payments
position, among others. Growth rates, inflation rates and interest rates of
developing nations have been and are expected to be more volatile than those of
western industrial countries.
HEDGING AND COMMODITY PRICES The profitability of the Company is directly
related to the market price of metals produced. The Company reduces price risk
by using hedging tools for a portion of its production. The main hedging tools
available to protect against price risk are forward contracts and put and call
options. Various strategies are available using these tools. The Company
periodically enters into forward sales to effectively provide a minimum price
for a portion of inventories and future production. There can be no assurance
that the Company will continue to use the hedging tools successfully, or any
other hedging techniques, or that, if they are continued, the Company will be
able to achieve realized prices for metals in excess of average London Metal
Exchange prices as a result of its hedging activities.
INTEREST RATE RISK The Company currently has various operating lines of credit
that tie interest payments to the bank prime or LIBOR lending rates. The Company
is, therefore, exposed to interest rate risk through fluctuations in these
interest rates. Furthermore, the Company is also exposed to interest rate risk
as a result of its long-term debt.
LICENSES AND PERMITS The Company's operations require licenses and permits from
various governmental authorities. The Company believes it holds all material
licenses and permits required under applicable laws and regulations and believes
it is presently complying in all material respects with the terms of such
licenses and permits. However, such licenses and permits are subject to change
in various circumstances. There can be no guarantee that the Company will be
able to obtain or maintain all necessary licenses and permits that may be
required to explore and develop its properties, commence construction or
operation of mining facilities and properties under exploration or development
or to maintain continued operations that economically justify the cost.
ROYALTIES The Company's mining properties are subject to various royalty and
land payment agreements. Failure by the Company to meet its payment obligations
under these agreements could result in the loss by the Company of its related
property interests.
TITLE TO PROPERTIES The validity of the mining claims that constitute most of
the Company's property holdings may, in certain cases, be uncertain and is
subject to being contested. Although the Company has attempted to acquire
satisfactory title to its properties, some risk exists that such titles,
particularly title to undeveloped properties, may be defective.
ITEM 4. INFORMATION ON THE COMPANY
A. HISTORY AND DEVELOPMENT OF THE COMPANY.
The Company was incorporated under the laws of the Province of British Columbia
under the name "Gambier Exploration Ltd." on October 15, 1979. Effective June
23, 1981, the name of the Company was changed to "Breakwater Resources Ltd.".
The Company was continued under the CANADA BUSINESS CORPORATIONS ACT effective
May 11, 1992. By articles of amendment dated June 8, 1995, the then outstanding
Common Shares were consolidated on a 1-for-400 basis and then immediately
subdivided on a 20-for-1 basis (being an effective 1-for-20 consolidation).
Except as otherwise expressly stated, all
14
references in this Form 20-F to numbers and prices of Common Shares are after
giving effect to the foregoing articles of amendment.
The registered and principal office of the Company is situated at Suite 2000, 95
Wellington Street West, Toronto, Ontario M5J 2N7, Canada. The telephone number
is (416) 363-4798 and the fax number is (416) 363-1315.
RECENT DEVELOPMENTS
ZINC PRICES
The principal product of the Company is zinc concentrate, which is sold by the
Company directly to smelters and to trading companies which then resell the
concentrate to smelters. The price of zinc which is used for any particular sale
transaction is generally established with reference to prices for zinc announced
daily by the London Metals Exchange (the "LME"). The LME operates as an
international trading market for zinc and other non-ferrous metals. During the
period from January 1, 2000 to date, the LME zinc price has deteriorated
significantly, declining from US$0.55 per pound at the beginning of 2000 to
US$0.46 per pound at the end of 2000 to a low of US$0.329 per pound in August,
2002, representing a decline for such period of 40 percent. The LME zinc price
on April 17, 2003 was US$0.347 per pound.
The Company's financial results are highly sensitive to the market price of zinc
and the deterioration in the market price of zinc has had a significant adverse
impact upon the financial position of the Company. The sustained weakening in
the market price of zinc negatively affected the gross revenues, earnings and
cash flow of the Company throughout 2002. The Company estimates that each
US$0.01 per pound change in the average price of zinc in 2003 will affect the
Company's earnings and cash flow in 2003 by $4.2 million.
Total cash operating costs to produce one pound of zinc for the year ended
December 31, 2002 were US$0.32 per pound of payable zinc produced compared with
US$0.36 per pound of payable zinc in 2001. Total cash operating costs include
all costs incurred and expensed at the mine site plus the cost of shipping and
treating concentrates and do not include the additional costs for
administration, financing and capital expenditures.
FINANCING ARRANGEMENTS
In May 2000, the Company obtained a credit facility (the "Syndicated Credit
Facility") from a syndicate of banks (the "Lenders"), which Syndicated Credit
Facility consists of:
1. a four-year US$31.5 million term credit facility (the "Term Credit
Facility");
2. a one-year US$15 million bridge credit facility (the "Bridge"); and
3. a one-year US$45 million revolving credit facility (the "Revolver")
with advances subject to an inventory and receivable borrowing base
calculation.
The terms of the Syndicated Credit Facility are set out in an amended and
restated credit agreement dated as of April 20, 2000 (the "Credit Agreement").
The Syndicated Credit Facility is secured by a pledge of the shares in the
operating subsidiaries of the Company, through guarantees by such subsidiaries
and through first charges on the concentrate inventory and receivables of the
Company and on the majority of the mining assets of the Company.
15
On May 17, 2001, the Company made the final payment required to be made in
respect of the Bridge.
On May 18, 2001, the Company and the Lenders agreed to an amendment to the
Credit Agreement (the "May Amendment") pursuant to which the Revolver was
renewed and three quarterly payments due July 1, 2001, October 1, 2001 and
January 1, 2002 under the Term Credit Facility were deferred.
On August 14, 2001, the Company and the Lenders agreed to an amendment to the
Credit Agreement (the "August Amendment") pursuant to which the Lenders provided
a waiver of a default of a financial covenant by the Company under the Credit
Agreement and the Company agreed to raise $16 million for working capital
purposes by September 30, 2001, which date was later extended to October 31,
2001.
Of the $16 million required to be raised by the Company pursuant to the August
Amendment, $6 million was raised through a customer's prepayment for a portion
of the value of zinc concentrate to be shipped in 2002 through to 2004. In order
to raise the remaining $10 million, the Company proposed to complete an offering
of rights to purchase an aggregate of approximately 23 million Common Shares in
the fall of 2001. At that time, it was anticipated that the subscription price
for each Common Share under the rights offering would be $0.50. However, soon
thereafter the trading price of the Common Shares on the Toronto Stock Exchange
(( TSX )) declined significantly, reaching a low of $0.14 per Common Share on
September 27, 2001.
Continued low base metal prices resulted in the Company being in default of
certain financial covenants contained in the Credit Agreement. In order to
address such default and the reduced liquidity of the Company, the Company, the
Lenders and Dundee Bancorp Inc. ("Dundee") entered into an agreement dated as of
November 13, 2001 (the "Credit Agreement Amendment") further amending the Credit
Agreement to provide for, among other things, (i) the provision by the Lenders
of a new supplemental non-revolving term credit facility in the amount of US$6.5
million (the "Supplemental Term Facility") in favour of the Company to be used
for general corporate purposes, and (ii) a bridge facility in the principal
amount of Cdn$5.0 million (the "Dundee Bridge Facility") to be advanced by
Dundee at its sole discretion pending completion of a rights offering, which
offering entailed the issue to the holders of Common Shares of record as at the
close of business on April 5, 2002 of rights to subscribe for Common Shares at a
price per share of $0.20 (the "Rights Offering"), and to be used for short-term
working capital by the Company pending completion of the Rights Offering. In
satisfaction of a condition to the Credit Agreement Amendment, Dundee obtained
an irrevocable standby letter of credit in favour of the Lenders in the amount
of US$6.5 million (the "Letter of Credit"). The Letter of Credit may be drawn
upon by the Lenders only upon the occurrence of an event of default under the
Credit Agreement. Pursuant to a security sharing and participation agreement
between Dundee and the Lenders, the proceeds of any draw under the Letter of
Credit will be used to fund the mandatory purchase by Dundee of participation
interests in the Supplemental Term Facility and, to the extent that the amount
drawn under the Supplemental Term Facility is less than the amount of such
proceeds, in the Term Credit Facility.
The Credit Agreement Amendment removed the existing financial covenants
contained in the Credit Agreement and cancels scheduled repayments under the
Term Credit Facility. Pursuant to the Credit Agreement Amendment, the proceeds
of future equity issues by the Company, with certain exceptions, are required to
be used to repay the Syndicated Credit Facility.
As required pursuant to the Credit Agreement Amendment, Dundee confirmed in
writing that it would subscribe for at least one-third of the number of Common
Shares subscribed for in connection with the Rights Offering (to the extent
available, in the case of its subscription for Common Shares which exceeds the
PRO RATA entitlement of Dundee under the Rights Offering), up to a maximum
subscription amount of
16
$5 million. Dundee was not entitled to receive any consideration as a
consequence of its agreement to subscribe for Common Shares in connection with
the Rights Offering.
In May 2002, the Rights Offering was completed for 94,455,000 Common Shares at
$0.20 per share to raise $17.6 million net of issue costs. Dundee acquired
25,000,000 Common Shares under the Rights Offering. The Dundee Bridge Facility
was not advanced to the Company.
The purpose of the Supplemental Term Facility and the Rights Offering was to
provide the Company with sufficient working capital to continue its operations
and to allow the Company to participate in a recovery of the zinc market. The
Company was able to meet its operating and capital requirements for the year
2002, however, prices failed to recover.
The Company agreed to pay the Lenders certain fees in connection with the Credit
Agreement Amendment including:
o a cash fee in the aggregate amount of US$600,000 to be paid by the
Company to the Lenders by January 2, 2003;
o the amendment to the terms of outstanding warrants issued to the
Lenders on May 18, 2001 to purchase an aggregate of 300,000 Common
Shares at a price of $1.57 per Common Share until November 29, 2002 to
(i) change the exercise price of such warrants to $0.21 per share and
(ii) change the expiry date of such warrants to the earlier of May 8,
2005 and the date which is 30 days following any continuous period of
10 trading days during which the weighted average trading price of the
Common Shares on the TSX exceeds a threshold amount determined with
reference to the exercise price of the warrants which will not exceed
133 1/3 percent of the exercise price of the warrants; and
o the issue to the Lenders of warrants to purchase an aggregate of
1,000,000 Common Shares having an exercise price per Common Share of
$0.21 and expiring May 8, 2005.
The Company also indemnified each of the Lenders and their respective
affiliates, directors, officers, agents and employees in connection with the
transactions contemplated by the Credit Agreement Amendment.
In connection with the Credit Agreement Amendment, the Company entered into an
agreement with Dundee (as amended, the "Dundee Bancorp Agreement") pursuant to
which, as consideration for providing the Letter of Credit to the Lenders, the
Company agreed to issue the following warrants to Dundee (the "Bancorp
Warrants"):
o a warrant to purchase up to 15,400,705 Common Shares, which warrant was
issued to Dundee on March 1, 2002; and
o following the completion of the Rights Offering, a further warrant to
the extent required in order to ensure that Dundee holds warrants to
purchase up to the number of Common Shares such that, in the event that
the Bancorp Warrants were exercised in full, the percentage ownership
interest of Dundee in the Company would increase to approximately 38.5
percent on a partially diluted basis (based upon the current ownership
interest of Dundee in the Company), provided that the number of Common
Shares which may be purchased by Dundee pursuant to such further
warrant may not exceed 15,400,705 Common Shares.
The exercise price of each of the Bancorp Warrants is $0.20 per Common Share and
each of the Bancorp Warrants will expire five years from the date of issue
thereof.
17
Pursuant to the Dundee Bancorp Agreement, the Company is required to deliver to
Dundee an annual operating plan and budget each satisfactory to Dundee. The
Company is also required to deliver to Dundee, among other things, a copy of
certain financial reports and other documents delivered by the Company to the
Lenders and their advisors and certain monthly financial information regarding
the Company. In addition, the Company has, among other things, covenanted to not
request, consent to or cause the granting of any time, renewal, extension,
compromise, concession, waiver, release, discharge or other indulgence by the
Lenders to the Company, the amendment, variation, modification, supplement or
replacement to or of any of the documents relating to the credit arrangements of
the Company with the Lenders and any material change to the control, name,
business, assets, capital structure or constitution of the Company and a
subsidiary thereof, in each case without the written consent of Dundee. The
Company has also covenanted to not enter into any agreement, dispose of any
asset, merge, amalgamate or engage in any business activity which is outside the
ordinary course of the business of the Company without the written consent of
Dundee.
The continued low zinc prices in 2002 put severe pressure on the liquidity of
the Company necessitating a restructuring of the Syndicated Credit Facility
which was due January 2, 2003. In December 2002, the Company, the Lenders and
Dundee entered into a term sheet (the "Term Sheet") to further amend the Credit
Agreement Amendment. The amended terms included the extension of the maturity
date to January 2, 2004 and the payment of a US$600,000 fee due to be paid to
the Lenders on January 2, 2003 is postponed to December 31, 2003. The interest
rate on the Term Facility was increased from LIBOR 2.375% to LIBOR plus 2.75%.
Interest on the Supplemental Term Facility is unchanged at LIBOR plus 2.375%.
The maximum amount available under the Revolver was reduced from US$45 million
to US$30 million; with the closure of the Nanisivik mine in September 2002, this
amount is considered adequate to meet the Company's future requirements.
Dundee agreed to extend its US$6.5 million letter of credit supporting the
Supplemental Term Facility and to postpone to December 31, 2003, payment in cash
of fees due to Dundee Securities Company ("DSC"). Dundee also agreed to a
restructuring of the application of repayment of principal (the "Priority of
Repayment"). The first US$5 million shall be applied to the Term Facility, then
repayments shall be applied to the Term Facility and the Supplemental Term
Facility, pro rata and pari passu, until satisfied in full and then repayments
shall be applied to the Revolving Facility.
The Company and the Lenders entered into an amended and restated credit
agreement (the "Second Credit Agreement Amendment") in March 2003, incorporating
the amendments set in the Term Sheet.
Management of the Company believes that the Company will not be able to repay
its debt under the Syndicated Credit Facility on maturity on January 2, 2004.
Accordingly, management of the Company believes that it will be necessary to
negotiate the extension or restructuring of the Syndicated Credit Facilities
prior to their maturity on January 2, 2004. The Lenders have given no assurance
that they will enter into any such negotiations or agree to any such extension
or restructuring. See Item 3.D - RISK FACTORS.
Until January 2, 2004, the events of default under the Second Credit Agreement
Amendment are limited to interest payment defaults and specified events relating
to the insolvency of the Company, its default under certain obligations to other
creditors and the commencement of enforcement or realization proceeding by other
creditors above specified threshold amounts. The Company is also required to use
its best good faith efforts to maintain its performance in accordance with a
budget prepared by management of the Company. The Company is required to provide
the Lenders with monthly reports measuring actual performance to that presented
in the budget, as well as other information relating to its financial affairs.
In addition, the Company has consented to the engagement by the Lenders of
PricewaterhouseCoopers LLP as financial advisor to the Lenders in connection
with the credit arrangements of the Company with
18
the Lenders and has agreed to the payment of the fees and expenses of
PricerwaterhouseCoopers LLP in connection with such engagement.
The Lenders are entitled to a fee in connection with the Second Credit Agreement
Amendment in the form of warrants to purchase an aggregate of 2,000,000 Common
Shares having an exercise price per Common Share equal to the weighted average
trading price of the Common Shares on the TSX during the five trading days
following the date the Second Credit Agreement Amendment becomes effective (the
"Effective Date"). The Effective Date of the Second Credit Agreement Amendment
was March 19, 2003. The exercise price per Common Share is $0.19 and expiry date
of the warrants is March 27, 2006.
The Company also indemnified each of the Lenders and their respective
affiliates, directors, officers, agents and employees in connection with the
transactions contemplated by the Second Credit Agreement Amendment.
Dundee is entitled to a fee, in consideration for continuing to provide the
Letter of Credit, postponing payments of fees due to DSC and agreeing to the
Priority of Repayment, in the form of warrants to purchase an aggregate of
1,000,000 Common Shares on the same terms as the warrants issued to the Lenders
in connection with the Second Credit Agreement Amendment.
All of the costs and expenses of the Second Credit Agreement Amendment and the
transactions contemplated thereby, including all of the legal costs and expenses
of the Company, the Lenders and Dundee are payable by the Company.
CLOSURE OF NANSIVIK MINE
The Nanisivik mine was permanently closed in September 2002. Reclamation
activities at Nanisivik commenced during 2002 and are ongoing, with further
technical studies and reports to be completed and filed throughout 2003,
culminating in the final closure plan for Nanisivik, which is due on December
15, 2003. The Nunavut Water Board (NWB) issued a renewal water license on
October 10, 2002 to cover the period October 1, 2002 to May 1, 2008, during
which period all reclamation work and post-closure monitoring would be
completed. Although the form of the financial security is currently under
discussion, the water license requires that CanZinco Ltd., a wholly-owned
subsidiary of the Company and owner of the Nanisivik mine, post total financial
security in the amount of $17.6 million. The amount of financial security
required by the NWB is a reflection of the submissions made to them by the
Department of Indian Affairs and Northern Development (( DIAND )) and others on
this topic and is significantly at odds with the Company's estimate of closure
costs which is approximately $9.2 million. The Company continues to strongly
defend its estimate of closure costs as being more realistic and indicative of
the amount and nature of work to be completed. Of that amount, $6.0 million has
previously been posted pursuant to the expired water license. These amounts do
not take into consideration the salvage value of the assets remaining at
Nanisivik, all of which are being reviewed for possible sale. As well, these
amounts do not take into consideration the value of equipment and supplies that
were purchased and are currently located at Nanisivik, earmarked for reclamation
activities, and the considerable amount of reclamation work that was completed
prior to and immediately following the closure of the mine. In addition,
discussions with the Government of Nunavut have been ongoing for some time
regarding the infrastructure at Nanisivik, with the greatest level of interest
currently being demonstrated for the fuel tank farm located near the deep sea
port and the use of town facilities and a portion of the plant for trades
training programs.
Following the issuance of the renewal water license, Canzinco requested
that the Minister of DIAND consider the process by which the amount of financial
security was determined and the amount of the financial security itself. The
Minister on behalf of himself and DIAND declined to do so, stating that the
19
Minister and DIAND could not consider the matter. In May 2003, Canzinco filed
with the federal court an application for judicial review of the Minister's
decision.
CAPITAL EXPENDITURES AND DIVESTITURES
The following table sets forth the capital expenditures for the past
three years together with the forecast capital expenditures for 2003. Capital
expenditures are financed by cash flows from operations.
- ----------------------------------------------------------------------------
BOUCHARD-HEBERT(1)
- ----------------------------------------------------------------------------
BUDGET
2002 2001 2000 2003
- ----------------------------------------------------------------------------
Development 1,530 1,121 1,068 -
- ----------------------------------------------------------------------------
Exploration 22 82 212 -
- ----------------------------------------------------------------------------
Equipment 124 409 712 -
- ----------------------------------------------------------------------------
Other - - - -
- ----------------------------------------------------------------------------
Total 1,676 1,701 1,992 -
- ----------------------------------------------------------------------------
(1) 1)The Company acquired the Bouchard-Hebert mine effective May 1, 2000.
- ----------------------------------------------------------------------------
NANISIVIK(1)-
- ----------------------------------------------------------------------------
BUDGET
2002 2001 2000 2003
- ----------------------------------------------------------------------------
Development - - - -
- ----------------------------------------------------------------------------
Exploration - (468) 1,116 -
- ----------------------------------------------------------------------------
Equipment 17 4,400 2,095 -
- ----------------------------------------------------------------------------
Other - - 5,024 -
- ----------------------------------------------------------------------------
Total 17 3,932 8,235 -
- ----------------------------------------------------------------------------
(1) 1)The Nanisivik mine closed effective September 1, 2002.
- ----------------------------------------------------------------------------
BOUGRINE
- -----------------------------------------------------------------------------
BUDGET
2002 2001 2000 2003
- ----------------------------------------------------------------------------
Development 786 864 1,637 320
- ----------------------------------------------------------------------------
Exploration 112 375 425 156
- ----------------------------------------------------------------------------
Equipment 1,068 1,776 4,231 312
- ----------------------------------------------------------------------------
Other - - 72 412
- ----------------------------------------------------------------------------
Total 1,966 3,015 6,365 1,209
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
EL MOCHITO
- ----------------------------------------------------------------------------
BUDGET
2002 2001 2000 2003
- ----------------------------------------------------------------------------
Development 542 929 1,379 476
- ----------------------------------------------------------------------------
Exploration 78 546 784 213
- ----------------------------------------------------------------------------
Equipment 654 603 3,396 203
- ----------------------------------------------------------------------------
Other 1,074 364 586 1,909
- ----------------------------------------------------------------------------
Total 2,348 2,442 6,145 2,801
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
EL TOQUI
- ----------------------------------------------------------------------------
BUDGET
2002 2001 2000 2003
- ----------------------------------------------------------------------------
Development - 1,201 693 1,119
- ----------------------------------------------------------------------------
Exploration 416 2,970 7,609 681
- ----------------------------------------------------------------------------
Equipment 2,443 1,300 1,805 4,917
- ----------------------------------------------------------------------------
20
- ----------------------------------------------------------------------------
Other - - - 356
- ----------------------------------------------------------------------------
Total 2,859 5,471 10,108 7,073
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
LANGLOIS(1)
- ----------------------------------------------------------------------------
BUDGET
2002 2001 2000 2003
- ----------------------------------------------------------------------------
Development 1,626 4,090 2,473 -
- ----------------------------------------------------------------------------
- (328) 516 89
- ----------------------------------------------------------------------------
Equipment (25) (2) 150 -
- ----------------------------------------------------------------------------
Other - 381 508 1,779
- ----------------------------------------------------------------------------
Total 1,601 4,141 3,647 1,868
- ----------------------------------------------------------------------------
(1) (1)The Company acquired the Langlois mine effective May 1, 2000.
- ----------------------------------------------------------------------------
CARIBOU(1)
- ----------------------------------------------------------------------------
BUDGET
2002 2001 2000 2003
- ----------------------------------------------------------------------------
Development - - - -
- ----------------------------------------------------------------------------
Exploration - - - -
- ----------------------------------------------------------------------------
Equipment - (585) (36) -
- ----------------------------------------------------------------------------
Other - 41 786 -
- ----------------------------------------------------------------------------
Total - (544) 750 -
- ----------------------------------------------------------------------------
(1) (1)The Caribou mine is on care and maintenance.
- ----------------------------------------------------------------------------
TOTAL CONSOLIDATED
- ----------------------------------------------------------------------------
BUDGET
2002 2001 2000 2003
- ----------------------------------------------------------------------------
Development 4,484 8,205 7,250 1,915
- ----------------------------------------------------------------------------
Exploration 628 3,171 10,662 1,139
- ----------------------------------------------------------------------------
Equipment 4,281 7,990 12,353 5,432
- ----------------------------------------------------------------------------
Other 1,074 786 6,976 4,465
- ----------------------------------------------------------------------------
Total 10,467 20,158 37,242 12,951
- ----------------------------------------------------------------------------
21
B. BUSINESS OVERVIEW.
The Company is a mineral resource company engaged in the acquisition,
exploration, development and mining of base metal deposits in the Americas and
North Africa. The Company's principal product is zinc concentrate which, as well
as lead and copper concentrates, is sold by the Company to smelters located in
Canada, South America, Europe and Asia and to trading companies which then
resell the concentrate to smelters throughout the world. The Company's
production is currently derived from four mines, one of which is located in
Canada and one of which is located in each of Tunisia, Honduras and Chile. The
Company owns two additional mines in Canada, both of which are being held by the
Company on a care and maintenance basis. The Nanisivik mine in Nunavut, Canada,
was closed in September 2003 and reclamation activities are ongoing. The Company
also owns base metal and gold exploration properties in Canada, Honduras,
Tunisia and Chile. In 2002, the Company's mines produced 477.7 million pounds of
zinc, 28 million pounds of lead, 13.3 million pounds of copper, 2.96 million
ounces of silver and 24,804 ounces of gold.
The following table summarizes production information for the mines of the
Company on an aggregate basis for the periods indicated.
- ------------------------------------------------------- -----------------------------------------------------
Year ended December 31,
-----------------------------------------------------
2002 2001 2000
- ------------------------------------------------------- ----------------- ----------------- -----------------
Milled (tonnes) 3,077,811 3,311,290 3,028,922
- ------------------------------------------------------- ----------------- ----------------- -----------------
Zinc (%) 7.8 7.2 7.7
- ------------------------------------------------------- ----------------- ----------------- -----------------
Concentrate Production
- ------------------------------------------------------- ----------------- ----------------- -----------------
Zinc (tonnes) 403,661 394,982 392,655
- ------------------------------------------------------- ----------------- ----------------- -----------------
Lead (tonnes) 37,680 19,799 16,755
- ------------------------------------------------------- ----------------- ----------------- -----------------
Copper (tonnes) 18,747 42,138 26,351
- ------------------------------------------------------- ----------------- ----------------- -----------------
Gold (tonnes) 5,424 3,389 3,010
- ------------------------------------------------------- ----------------- ----------------- -----------------
Metal in Concentrates
- ------------------------------------------------------- ----------------- ----------------- -----------------
Zinc (tonnes) 216,663 211,544 208,996
- ------------------------------------------------------- ----------------- ----------------- -----------------
Lead (tonnes) 12,693 13,174 11,021
- ------------------------------------------------------- ----------------- ----------------- -----------------
Copper (tonnes) 6,055 6,932 4,532
- ------------------------------------------------------- ----------------- ----------------- -----------------
Silver (ounces) 2,957,221 2,940,360 2,790,137
- ------------------------------------------------------- ----------------- ----------------- -----------------
Gold (ounces) 24,804 38,500 20,289
- ------------------------------------------------------- ----------------- ----------------- -----------------
Minesite Operating Costs
- ------------------------------------------------------- ----------------- ----------------- -----------------
Per tonne milled (US$) 27.18 27.26 27.63
- ------------------------------------------------------- ----------------- ----------------- -----------------
Total Cash Costs
- ------------------------------------------------------- ----------------- ----------------- -----------------
Per pound payable zinc (US$) 0.32 0.36 0.40
- ------------------------------------------------------- ----------------- ----------------- -----------------
The majority of the concentrates produced by the Company are sold by the Company
under long-term supply agreements with commercial terms negotiated annually. The
balance of the Company's concentrates are sold by tender and into the spot
market.
The Company also owns base and precious metal exploration properties in Quebec,
Ontario, New Brunswick, Manitoba, the Northwest Territories, British Columbia,
Nunavut, Honduras, Chile and Tunisia. See Item 4.D - PROPERTIES, PLANT AND
EQUIPMENT - EXPLORATION PROPERTIES.
The Company's mining and processing operations and exploration activities are
subject to various laws and regulations governing the protection of the
environment, exploration, development, production, exports, taxes, labour
standards, occupational health, waste disposal, toxic substances, mine safety
and other matters. In all jurisdictions, licenses and permits from various
governmental authorities are necessary in order to engage in mining operations.
Further, the Company is generally required to submit for government approval a
reclamation plan and, in certain cases, to pay for the reclamation of mine sites
22
upon the completion of mining activities. In some cases, the Company is required
to provide security in advance of the closure of a mine based upon estimates in
the reclamation plan for the mine. The security is usually in the form of cash,
letters of credit or security bonds.
C. ORGANIZATIONAL STRUCTURE.
The following table sets forth the name of the principal subsidiaries of the
Company and the jurisdiction of incorporation and the direct or indirect
percentage ownership by the Company of each such subsidiary.
Name of Subsidiary Jurisdiction of Percentage
Incorporation Ownership
- ---------------------------------------------------------------------------------------------------------------------
Breakwater Tunisia S.A. Tunisia 100%
CanZinco Ltd. (formerly East West Caribou Mining Limited) Canada 100%
Consell Marketing Inc. Barbados 100%
American Pacific Honduras S.A. de C.V. Honduras 100%
Sociedad Contractual Minera El Toqui Chile 100%
3064077 Canada Inc. Canada 99%
Jascan U.S.A. Inc. Delaware 100%
Set forth below are the principal mining properties owned by the Company. The
Company's interest in the properties varies and may be subject to royalty or
other obligations to third parties as discussed in greater detail in Item 4.D
below.
The Company owns and operates the Bouchard-Hebert zinc/copper mine located near
Rouyn-Noranda, Quebec, Canada. See Item 4.D - PROPERTIES, PLANT AND EQUIPMENT -
THE BOUCHARD-HEBERT MINE.
The Company, through CanZinco Ltd. ("CanZinco"), owns the Nanisivik zinc/silver
mine located on Strathcona Sound, Baffin Island, Nunavut, Canada. Operations at
the Nanisivik mine ceased in September 2002. See Item 4.D - PROPERTIES, PLANT
AND EQUIPMENT - THE NANISIVIK MINE.
The Company, through Breakwater Tunisia S.A., owns and operates the Bougrine
zinc/lead mine that commenced production in May 1998 and is located in Tunisia.
See Item 4.D - PROPERTIES, PLANT AND EQUIPMENT - THE BOUGRINE MINE.
The Company, through American Pacific Honduras S.A. de C.V., owns and operates
the El Mochito zinc/lead/silver mine located in Honduras that, except for a
short period of time in 1987, has been in production since 1948. See Item 4.D -
PROPERTIES, PLANT AND EQUIPMENT - THE EL MOCHITO MINE.
The Company, through Sociedad Contractual Minera El Toqui, owns and operates the
El Toqui zinc/gold mine that, except for a brief time in 1998, has been in
production since 1989 and is located in Chile. See Item 4.D - PROPERTIES, PLANT
AND EQUIPMENT - THE EL TOQUI MINE.
The Company acquired the Langlois zinc/copper mine located near
Lebel-Sur-Quevillon, Quebec, Canada effective May 1, 2000. The Langlois mine is
temporarily on care and maintenance pending an improvement in the price of zinc
and arranging financing. See Item 4.D - PROPERTIES, PLANT AND EQUIPMENT - THE
LANGLOIS MINE.
The Company, through CanZinco, also owns the Caribou zinc/lead/silver mine
located in New Brunswick, Canada which has been placed on care and maintenance
for an indefinite period of time. See Item 4.D - PROPERTIES, PLANT AND EQUIPMENT
- - THE CARIBOU MINE.
23
D. PROPERTY, PLANTS AND EQUIPMENT.
The Bouchard-Hebert Mine
The Company owns and operates the Bouchard-Hebert zinc/copper/gold/silver mine
located near Rouyn-Noranda, Quebec. Effective May 1, 2000, the Company acquired
the Bouchard-Hebert mine and the Langlois zinc/copper mine from Cambior Inc.
("Cambior") for US$40.3 million (Cdn$63.5 million). The purchase price allocated
to the Bouchard-Hebert mine was US$20.5 million (Cdn$32.2 million) which
included approximately US$1.1 million (Cdn$1.7 million) of working capital. The
Company owns 100 percent of the Bouchard-Hebert mine, subject to a minor net
operating profit royalty.
LOCATION AND ACCESS
The Bouchard-Hebert mine is located 30 kilometres northeast of Rouyn-Noranda in
Dufresnoy Township, Quebec. The property is accessible by a gravel road that
links the mine with regional highway number 101.
DESCRIPTION
The Bouchard-Hebert mine facilities include an underground mine, a conventional
mill and a concentrator which produces separate copper and zinc concentrates.
Other facilities include a headframe and hoist building, which houses the
compressors that provides compressed air for underground activities and
ancillary functions, a paste backfill plant and a concentrate loadout facility.
Hydro Quebec provides electrical power.
Access to the Bouchard-Hebert mine is by a 747 metre deep, three-compartment
production/service shaft.
The immediate mine property covers 107 hectares including two mining leases, one
granted until 2007 and the other until 2015. In addition, surrounding the mining
leases are 214 claims covering 7,944 hectares. The leases, upon expiry, may be
renewed by formal application to the applicable governmental authorities.
HISTORY
In 1955, Rio Algom conducted initial exploration on the Bouchard-Hebert
property, which led to the discovery of the "Main Lens" of the Mobrun deposit
(previously known as the Mobrun mine, until Cambior renamed it the
Bouchard-Hebert mine in 1995). In 1984, Falconbridge Copper Corporation
("Falconbridge Copper") acquired the property subject to a net profit interest
retained by Mobrun Copper, a wholly-owned subsidiary of Rio Algom, and
subsequently signed an option agreement with Audrey Resources Inc. ("Audrey
Resources") in 1985. The option agreement allowed Audrey Resources the right to
acquire a 70 percent interest in the property and become the project operator.
Open pit mining began in 1987 at a rate of 1,000 tonnes per day and the material
was treated at Falconbridge Copper's Norbec mill. In 1987, Falconbridge Copper
was restructured and renamed Minnova Inc.
In 1988, the "1100 Lens" was discovered at depth and 250 metres southeast of the
Main Lens. As a result of the new discovery, Audrey Resources constructed a
1,100 tonne per day mill at the mine site.
24
Mining operations were interrupted in 1992 due to reserve depletion. In total,
over 1.5 million tonnes grading 2.42 percent zinc, 0.85 percent copper, 27.1
grams of silver per tonne and 2.4 grams of gold per tonne were mined from the
Main Lens.
In September 1992, Cambior acquired 65 percent of Audrey Resources. In November
1992, an exploration and delineation program was initiated to delineate reserves
for the 1100 Lens. In 1993, Metall Mining Corporation ("Metall") acquired
Minnova and, in 1994, Metall converted its remaining interest in the property to
a four percent net smelter returns royalty, leaving Audrey Resources as the sole
owner of the property. Metall was renamed Inmet Mining Corporation ("Inmet") in
1995. Cambior later purchased the four percent net smelter return royalty from
Inmet and commercial production from the 1100 Lens started in January 1995.
In June 1995, Cambior acquired the remaining 35 percent of Audrey Resources and
the Mobrun mine was renamed the Bouchard-Hebert mine. Until December 31, 1998,
the mine was 100 percent owned by Audrey Resources, a wholly-owned subsidiary of
Cambior. In January 1999, Audrey Resources was wound up into Cambior.
The Company signed an agreement to purchase the Bouchard-Hebert and Langlois
mines from Cambior on March 14, 2000 and acquired both such mines from Cambior
effective May 1, 2000. On March 31, 2000, Cambior encountered unforeseen
mechanical problems with the semi-autogenous grinding ("SAG") mill at the
Bouchard-Hebert mine which resulted in a temporary shut-down of the mill. The
required corrective action was determined and the repair work was initiated
immediately. In the interim period, a temporary crushing plant was installed in
order to maintain production while the SAG mill was being repaired. The
temporary system allowed for milling operations at approximately 68 percent of
the normal capacity during May and June 2000 and 80 percent of capacity until
the SAG mill was put back into service on October 5, 2000. The lost production
and property damage were covered by insurance and the Company has received its
portion of the claim.
GEOLOGY
The Bouchard-Hebert mine is situated within a succession of rhyolitic flows and
felsic pyroclastic rocks comprised in the uppermost member of the Noranda
Subgroup, in the Blake River Group. The Blake River Group consists of Archean
felsic to mafic volcanic rocks in the southern part of the Abitibi Greenstone
Belt in the Superior Province. The Blake River Group is bordered to the north
and south by sedimentary rocks of the Kewagama and the Cadillac groups,
respectively. Contacts between the Blake River Group and the adjacent
sedimentary groups are characterized by large deformation zones.
Structural analysis of the Blake River Group volcanic rocks have revealed large
"Z" structures resulting from the combination of two former fold systems
striking east/southeast to west/northwest and east to west. The whole domain is
transected by two major fault zones: the Porcupine-Destor fault to the north and
the Cadillac-Larder Lake fault to the south.
Two volcanogenic massive sulfide ("VMS") deposits have been identified to date
including the Upper Zone (Mobrun mine), which has been completely mined-out, and
the 1100 Lens, which is currently being mined. These two zones are approximately
250 metres across strike from each other. The upper part of the 1100 Lens is 300
metres below the surface.
The 1100 Lens is parallel to the regional foliation, and strikes at 110 degrees
to 120 degrees, while the dip varies from vertical to steeply dipping to the
south. The 1100 Lens consists of one sub-vertical massive sulfide lens that
plunges steeply to the southeast and consists of 85 percent pyrite, five to 15
percent sphalerite and one to five percent chalcopyrite. The western and upper
portions of the deposit have
25
relatively elevated concentrations of zinc, gold and silver and are often
narrower, while the eastern portion of the lens is generally thicker but
contains lower grades of zinc, possibly due to a wider dispersion of the
mineralizing fluids.
In the upper portions of the deposit (i.e. above level 5), the mineralized zone
outlines typically mimic the boundaries of the massive sulfide zone, while in
the deeper portion of the deposit, wider sections of massive sulfide
mineralization typically host several parallel zones of zinc mineralization.
Typical of most VMS deposits, a copper-rich zone of mineralization occurs along
the footwall of the deposit. The continuity of grade and geometry of this
copper-rich zone is less continuous compared to the more zinc-rich
mineralization within the massive sulfide zone.
RESERVES AND RESOURCES
The Company utilizes two different methodologies to calculate the resources and
reserves, a two-dimensional, polygonal methodology in areas of dense drill data
and underground workings, and ordinary kriging in areas where the density of
data is much less, below and above level 4, respectively.
MINERAL RESOURCE ESTIMATION
The Bouchard-Hebert mineral resource was calculated using polygonal blocks on
vertical cross-sections at 20 metre intervals. The polygonal blocks were drawn
to define regular shapes of higher-grade zinc mineralization as defined by
diamond drilling and face mapping of the adjacent underground workings. The
polygons were drawn mid-point between two intersections. The grade of the
polygon was calculated using the composited grade over the length that each
drill hole occurred within the polygon.
Above level 4, the mineral resources were calculated within the boundaries of
the mineralized zone as defined in the geological model using ordinary kriging
into five metre by five metre by three metre blocks. Kriging was utilized in
this area because the drill hole spacing is typically in the range of 40 to 50
metres. Kriging provides a better estimate of global grade in this area
considering both the data density and its spatial distribution.
CONVERSION OF MINERAL RESOURCES TO MINERAL RESERVES
The indicated or measured mineral resources were converted to mineral reserves
by the application of a minimum mining width of three metres and a net smelter
return cutoff value of $30 per tonne. The reserves so determined consist of
contiguous zones of mineralization delineated in the geological model, while
isolated areas are not included.
Dilution and Mining Recovery
Ground conditions are very good at the Bouchard-Hebert Mine, allowing large
stopes to be developed with minimal over-break beyond the limits of the known
reserves, thus minimizing dilution and maximizing recovery.
Primary stopes generally use an estimated mining dilution of four percent (by
volume) with a recovery of 100 percent. For secondary stopes, a dilution of 12
percent was used with a recovery of 90 percent. The above parameters have been
established from very detailed volumetric examinations of the mined-out stopes,
reconciled to the reserve estimates.
26
MINERAL RESOURCE AND MINERAL RESERVE CLASSIFICATION
A large portion (approximately 98 percent) of the current mineral reserves for
the Bouchard-Hebert mine are classified as proven. These reserves are located
below level 2. Of these proven reserves, approximately two-thirds are located in
secondary stopes where mining has already exposed the mineralization on four
sides. The remaining proven reserves are located between level 3 and level 6,
where definition drilling on a 15 to 20 metre spacing covers the ground between
the underground workings on these two levels. The remaining reserves are
classified as probable, above level 2, where the drill spacing is typically 40
to 50 metres.
MINERAL RESOURCE aND MINERAL RESERVE STATEMENT
The table below sets forth the estimated mineral resources and mineral reserves
for the Bouchard-Hebert mine as at December 31, 2002, as estimated by a
Qualified Person.
BOUCHARD-HEBERT MINE, SUMMARY OF MINERAL RESOURCES AND MINERAL RESERVES
- ---------------------------- ------------------------------------------- --------------------------------------------
December 31, 2002 November 30, 2001
- ---------------------------- ------------------------------------------- --------------------------------------------
Tonnes Zinc Copper Gold Silver Tonnes Zinc Copper Gold Silver
(000) (%) (%) (g/t) (g/t) (000) (%) (%) (g/t) (g/t)
- ---------------------------- --------- ------ --------- ------- -------- --------- ------ --------- ------- ---------
Proven and Probable 2,143 6.0 0.4 1.0 31 3,219 4.9 0.6 1.0 33
Reserves
- ---------------------------- --------- ------ --------- ------- -------- --------- ------ --------- ------- ---------
Measured and Indicated 2,296 6.8 0.4 1.1 34 3,402 4.9 0.6 1.0 33
Resources(1)
- ---------------------------- --------- ------ --------- ------- -------- --------- ------ --------- ------- ---------
Inferred Resources - - - - - - - - - -
- ---------------------------- --------- ------ --------- ------- -------- --------- ------ --------- ------- ---------
(1) Measured and Indicated Resources include Proven and Probable Reserves.
No inferred mineral resources have been identified at the Bouchard-Hebert mine
due primarily to the well-defined deposit that is not currently known to extend
beyond its limits.
Mining
At Bouchard-Hebert, a mechanized longhole stope mining method is used with the
sequence mining of primary and secondary stopes. Paste backfill is used to fill
the voids. Production drilling uses 165 millimetre diameter blast holes and the
stope heights are 45 to 60 metres. Drilling is done on a 3.2 metre by 3.45 metre
pattern. Blasted material is removed using Toro 450 scooptrams with remote
control.
The ore-pass system is used to direct the hauled mineralization from the stopes
to the underground crusher on level 9. A 519-metre inclined conveyor transports
the crushed material to a 3,000 tonne capacity bin ahead of the shaft loading
pockets.
Access to the Bouchard-Hebert mine is by a 747 metre deep, three-compartment
production/service shaft. A single hoist is used for both production and service
hoisting. The skips used to hoist the crushed material to surface are 11-tonne
capacity, bottom-dump units. A 15-man capacity cage is located below the skip to
transport personnel and materials underground.
Stope preparation involves silling out the drilling and mucking levels over the
whole width of the mineralized body, rockbolting and cabling the back and
securing the walls. A 1.07 metre bored raise serves as a slot raise. The primary
stopes are 15 metres wide by the thickness of the mineralized body and are mined
vertically, two stopes at a time, for two levels, and backfilled before the
secondary stopes between the primary stopes are mined. The secondary stopes are
20 metres wide. All the levels are
27
accessible from level 8 with a ramp access into the 1100 Lens. Remote scoops are
used to remove the broken mineralization from drawpoints at the bottom of the
stopes. Single drawpoints are used in the primary and the secondary stopes. An
assay cutoff and/or a change in lithology determines stope limits.
All blasting is done using an ANFO blasting agent. Central blasting is used.
Blasting is done in 15 metre slices, with the stopes kept as full as possible in
order to reduce the wall dilution. When a sufficient void exists, the next cut
is removed. The reamed slot hole is in the centre of the stope in order to avoid
blast damage to any of the walls. The core of the stope is blasted and then the
walls are blasted in a subsequent blast. The slot is not taken through to the
level above. The sill and the slot are blasted in a 15 metre cut. Blasts up to
50,000 tonnes in size have been made successfully.
Development at the Bouchard-Hebert mine is carried out by electric-hydraulic
drill jumbos and scooptrams. The average drift size is 3.7 metres by 4.3 metres.
The mine infrastructure consists of seven mining levels spaced at 45 to 60
metres. The maintenance garage, pumping station, fuel and oil storages and main
explosives magazine are located on the main mine level 8 with a secondary
explosive magazine at level 6.
The ventilation network consists of four 400 hp fans on surface, a three metre
diameter fresh air raise at the eastern end of the mine, and a 2.4 metre exhaust
raise at the west end. Part of the fresh air raise serves as an emergency manway
from level 10 to the upper part of the 1100 Lens. From there, the main zone
ventilation raise is used to access surface. Two fans are used in winter to
supply 285,000 cubic feet per minute, and all four fans are used during the
summer to supply 330,000 cubic feet per minute.
The paste backfill plant was designed to meet the mine's backfill requirements.
It uses a backfill preparation process which involves thickening the flotation
circuit tailings and storing them in a tank that feeds disk filters. The
filtered tailings are stored in a hopper, then sent to a high-intensity mixer
where cement, fly ash and water are added to produce a homogenous paste
containing over 80 percent solids. The paste backfill is fed underground by
gravity.
METALLURGICAL PROCESSING
The Bouchard-Hebert mill processes mineralized material at a rate of 2,900
tonnes per day using conventional grinding and flotation to produce separate
zinc and copper concentrates.
The primary crushing takes place underground utilizing a jaw crusher, which
reduces the material to minus 100 millimetre particle size. Primary grinding is
done in a SAG mill operating in open circuit. Classification of the SAG mill
discharge and flash cell tailings is by cyclones with the underflow feeding two
ball mills in parallel. The ball mill discharges are combined and pumped to a
flash flotation cell, while the cyclone overflow reports to the third stage of
grinding to produce a final ground product of 80 percent passing 38 microns.
Copper flotation commences in a flash flotation cell that recovers 45 percent of
the total copper at a grade of 14 to 18 percent copper with 40 grams of gold per
tonne. The flash flotation cell maximizes the overall gold recovery and produces
a final copper concentrate grade. The flash flotation cell tailings are returned
to the primary cyclone feed.
The ground product of the third ball mill circuit is pumped to a conventional
copper rougher and cleaner circuit (four stages) to recover and upgrade the
remaining recoverable copper mineral in the mill feed. All copper flotation is
done in an alkaline circuit.
28
The copper first stage cleaner tailings and copper rougher tailings are combined
to form the zinc circuit feed. The zinc circuit uses conventional flotation
cells to float a zinc rougher concentrate, which is upgraded in three stages of
cleaning. Zinc flotation is done in a more alkaline circuit than the copper
circuit. The zinc rougher tailings and zinc first cleaner tailings are pumped to
the paste backfill plant.
Copper and zinc concentrates are pumped to their respective high capacity
thickeners followed by filtering in pressure filters to obtain the final
moisture content in the respective concentrates that are less than their
transportable moisture limits.
Tailings not used for underground paste backfilling are disposed of in the
tailings pond. Tailings pond effluent is treated with lime to maintain a pH
greater than 9.5 at the treatment plant discharge and the settling pond and 8.5
in the polishing ponds. Approximately 70 percent of the mill process water is
recycled water from the backfill thickener overflow, and the remaining mill
process water requirement comes from site surface pumping.
An Outokumpu Courier 30 on-stream analyzer continually analyzes 17 streams for
copper, zinc and iron mineral slurry. An Autometrics Multipoint PSM-400
(particle size monitor) has been installed to monitor the grinding circuit
operation.
The zinc concentrate typically has a grade of 54.0 to 54.5 percent zinc at 85.5
percent recovery. The copper concentrate typically has a grade of 16.0 to 17.0
percent copper at 85.0 percent recovery. The copper concentrate contains 53 to
54 percent of the gold and 33 to 40 percent of the silver in the mill feed.
The zinc concentrate is sent by truck approximately 35 kilometres to a railway
loading station in Rouyn-Noranda where it is transferred into railcars and sent
to either CEZinc Refinery in Valleyfield, Quebec owned by Noranda Inc.
("Noranda"). The copper concentrate is sent by truck approximately 30 kilometres
to Noranda's Horne Smelter in Rouyn-Noranda, Quebec.
29
PRODUCTION
The following table summarizes production information from the Bouchard-Hebert
mine for the periods indicated.
- ------------------------------------- -------------------------- ------------------------------
Year ended Year ended
December 31, 2002 December 31, 2001
- ------------------------------------- -------------------------- ------------------------------
Milled (tonnes) 1,050,009 1,045,435
- ------------------------------------- -------------------------- ------------------------------
Zinc (%) 5.6 4.5
- ------------------------------------- -------------------------- ------------------------------
Copper (%) 0.7 0.8
- ------------------------------------- -------------------------- ------------------------------
Gold (grams/tonne) 1.2 1.5
- ------------------------------------- -------------------------- ------------------------------
Silver (grams/tonne) 39 46
- ------------------------------------- -------------------------- ------------------------------
Concentrate Production
- ------------------------------------- -------------------------- ------------------------------
Zinc (tonnes) 94,914 75,741
- ------------------------------------- -------------------------- ------------------------------
Copper (tonnes) 37,680 42,138
- ------------------------------------- -------------------------- ------------------------------
Metal in Concentrates
- ------------------------------------- -------------------------- ------------------------------
Zinc (tonnes) 51,197 41,150
- ------------------------------------- -------------------------- ------------------------------
Copper (tonnes) 6,055 6,932
- ------------------------------------- -------------------------- ------------------------------
Gold (ounces) 20,122 28,477
- ------------------------------------- -------------------------- ------------------------------
Silver (ounces) 446,755 562,093
- ------------------------------------- -------------------------- ------------------------------
Minesite Operating Costs
- ------------------------------------- -------------------------- ------------------------------
Per tonne milled (Cdn$) 34.99 33.46
- ------------------------------------- -------------------------- ------------------------------
Total Cash Costs
- ------------------------------------- -------------------------- ------------------------------
Per pound payable zinc (US$) 0.28 0.29
- ------------------------------------- -------------------------- ------------------------------
HUMAN RESOURCES
Bouchard-Hebert currently employs 153 people, of which 96 are hourly employees.
In addition to the mine's personnel, there are also 40 contractors. The hourly
employees had previously elected to be unionized, and the United Steelworkers of
America (the "USWA") was certified as the bargaining agent of the employees.
When the requisite period, as prescribed by the Quebec Labour Code, had passed
and no collective agreement between the parties had been signed, the employees
took the necessary steps to decertify their union representatives and they are
now without representation.
ENVIRONMENTAL MANAGEMENT AND PERMITTING
The Bouchard-Hebert mine operates under required Certificates of Authorization
issued by the Quebec Ministry of Environment under the Loi sur la qualite de
l'environnement (L.R.Q., chapter Q-2). In addition, all approvals/leases
required for land use (tailings pond, quarries and pits) have been issued by the
Quebec Ministry of Natural Resources in conformity with the Loi sur les mines
(L.R.Q., chapter M-13.1).
Currently, mill tailings not used for backfill in the mine (approximately 35
percent of the total tailings) are deposited in the tailings pond as a
conventional slurry. The tailings pond covers an area of approximately 70
hectares. Effluent from the tailings pond is sent to a retaining pond and then
pumped to a treatment facility prior to seasonal discharge via a polishing pond,
into the environment. The tailings dam was raised in 2001 to provide additional
storage capacity. The current facility has sufficient capacity to meet life of
mine storage requirements. Dam design and geotechnical evaluations are
contracted to an independent consulting firm. Based upon the 2002 inspection
report prepared by such firm, there are no significant stability issues with the
dams on site.
30
A closure plan is registered with the Quebec Ministry of Environment. Key
elements of the closure plan include:
o All buildings and infrastructure will be decommissioned, piping will be
removed and all mine openings secured. All recyclable materials will be
recycled while non-recyclable materials will be accumulated in
excavations left by the foundations, and then buried with benign
covering materials. Hazardous waste removal will be contracted to
specialists in this field.
o Non-acid generating waste rock dumps will be sloped at 25% to provide
permanent stability. Acid generating waste material will be excavated
(stripped) and dumped into the open pit. The pit will subsequently be
flooded to eliminate further oxidation and release of metals.
o The tailings deposit will be contoured as a "hill" to facilitate runoff
with a 2% slope on the south face and a 10% slope on the north face.
The entire area will then be covered with an oxygen diffusion barrier
to prevent the occurrence of acid mine drainage. The exact nature
(composition) of the barrier has not yet been determined.
o The water holding ponds (BASSIN DES EAUX PULPES, BASIN DE
SEDIMENTATION, BASIN POLISSAGE) will be dredged of solids and spillways
will be modified to permit drainage. Dykes will be contoured and the
entire area will be revegetated.
The work planned to restore the affected areas is scheduled over an 18-month
period. A five-year post closure monitoring period is included in the Plan.
The closure plan was approved by the Quebec government in March 1996. It was
subsequently modified and approved in May 1999. In July 2002 the closure plan
was updated to reflect progressive reclamation activities at the site, and a
conceptual closure proposal for the surface tailings impoundment was prepared.
The plan is being reviewed by the Quebec Ministry of Natural Resources. Closure
costs have been estimated to be approximately $9.4 million.
EXPLORATION
The Company's land holding in the area includes a number of mining exploration
properties that cover the same stratigraphic rock sequence that hosts the
Bouchard-Hebert massive sulfide deposit. Extensive historical surface
exploration work and diamond drilling have resulted in the outline of several
targets, but have failed to locate other massive sulfide horizons of economic
merit.
The 1100 Lens, which is well defined by underground openings and drilling,
accounts for all of the quantified reserves of the Bouchard-Hebert mine. No
additional inferred mineral resources were outlined within the mine working
area.
Potential exists to expand the resource and reserve base within the mine working
area include the east and west perimeters of the 1100 Lens from levels 5 and 6
and a large Pulse-EM off-hole and anomaly to the west of the shaft.
The Nanisivik Mine
The Company, through CanZinco Ltd. ("CanZinco"), owns the Nanisivik zinc/silver
mine located on Strathcona Sound, Baffin Island, Nunavut. In July 1996 the
Company acquired Nanisivik Mines Ltd. from AEC West Limited for $44.2 million.
The purchase price included working capital of $39.4 million,
31
comprised principally of zinc concentrate. In 1997, the mine was sold to
CanZinco Ltd., a wholly-owned subsidiary of the Company.
The Company, due to continued depressed metal prices, closed the Nanisivik mine
in September 2002.
LOCATION AND ACCESS
The Nanisivik mine is located in Nunavut on northern Baffin Island on the
southern shore of Strathcona Sound, approximately 750 kilometres north of the
Arctic Circle. Access to the property is by air or by ship. The Nanisivik/Arctic
Bay airport is serviced by commercial carriers, which provide regular flights to
Ottawa, Ontario. Heavier equipment and nonperishable foodstuffs are brought in
by ship. Road access exists to the Inuit settlement of Arctic Bay, 40 kilometres
to the west.
The climate at the mine is semi-arid arctic. Precipitation is low with a total
of approximately 125 millimetres per year. The normal maximum temperature in
summer is 15(degree)C and winter temperatures typically range from -20(degree)C
to -40(degree)C. Shipping is possible from June to October when concentrate
carriers with ice-breaking capabilities are used.
Climatically, the mine is different from many others in the world because of the
presence of significant permafrost to below any potential mining depth.
Description
Although mining and milling operations were terminated in 2002, all site
infrastructure remains in place while potential transfer of ownership
discussions continue with the Government of Nunavut. Existing infrastructure
consists of an underground mine, a 2,200 tonne per day concentrator, a power
plant, a townsite, recreational facilities, a concentrate storage facility and a
ship loader. The Nanisivik mine operates an 9.2 megawatt diesel-electric
generating plant to meet all power requirements.
The townsite facilities include a cafeteria, offices, school and daycare,
recreation centre, swimming pool, gymnasium, ice hockey arena, Royal Canadian
Mounted Police station, fire hall, nursing station, store, library and church.
The Nanisivik mine has accommodation ranging from bunkhouses to four bedroom
detached houses. The harbour and port facilities are owned by the Federal
Government of Canada and administered by the Canadian Coast Guard.
Mineral title to the Nanisivik mine is held under mineral leases. Mineral leases
are issued for 21-year periods with rights of renewal. Annual rentals are $1.00
per acre for the original period and $2.00 per acre for renewals. The leases
have historically been renewed as required with the next renewal date being in
2009.
In addition to the mineral title requirements, surface title is also required
for certain operations. Essentially all of the surface title in the Nanisivik
mine area is controlled by the Federal Government of Canada. However, at mine
start-up, the surface rights to one block of ground, called the Block Transfer,
were transferred to the Government of Nunavut (formerly the Government of the
Northwest Territories). Within the Block Transfer, the mine negotiates land
matters with the Government of Nunavut, while outside that area, such
negotiations are with the Federal Government of Canada.
The operation of the Nanisivik mine is governed by an agreement signed June 18,
1974 (the "Master Agreement") between Nanisivik Mines Ltd. (as assignee of
Mineral Resources International Limited ("MRI")) and the Department of Indian
Affairs and Northern Development ("DIAND") which provided for the development
and bringing into production of the Nanisivik mine and, based upon the original
32
mineral reserves and initial design capacity of the mine and concentrator,
contemplated a mine life of 12 years.
HISTORY
The area around the Nanisivik mine was mapped for the Geological Survey of
Canada ("GSC") in 1954 and the occurrence of galena and sphalerite in pyrite
zones was noted. Based upon the work of GSC, Texasgulf Inc. ("Texasgulf")
commenced work in 1957 and staked much of the present mine property that year.
Texasgulf carried out a significant amount of diamond drilling over the next 10
years, but the work slowed down in the mid-1960s because of ongoing work on the
Kidd Creek deposit. In 1969, Texasgulf refocused its efforts at Nanisivik, with
the driving of a 650 metre adit into the east end of the main mineralized body.
A 50-ton sample was shipped to Timmins, Ontario for metallurgical testing in
1970. In 1972, Texasgulf was approached by MRI and an agreement was concluded
pursuant to which ownership of the Nanisivik deposit passed to MRI. MRI
completed a feasibility study on the project that yielded positive economic
projections. Based upon this study, Nanisivik Mines Ltd. ("Nanisivik") was
formed and ultimately became a wholly-owned subsidiary of AEC West Limited
("AEC"), formerly Conwest Exploration Company Limited.
GEOLOGY
The Nanisivik sulfide deposits are hosted in carbonate rocks within a
Proterozoic sedimentary sequence. This sequence developed as a Neohelikian
intracratonic basin, the Borden Basin, on a peneplaned gneiss complex of
Archean-Aphebian age. The Borden Basin is one of a number of similar,
penecontemporaneous, temporarily connected basins that developed by rifting
along the northwest edge of the Canadian-Greenlandic Shield.
In the mine area, dips are usually quite shallow and the main structure is
faulting, much of it of the horst and graben type. Major structures that are
recognized in the mine include the South Boundary Fault, which marks the
southern margin of sulfide mineralization, and the Keystone Graben Fault, which
defines the southern margin of the Main Zone horst.
The various massive sulfide deposits aggregate more than 50 million tonnes of
which barren massive pyrite bodies are, by area, the most extensive, and contain
the largest sulfide tonnages. Zones carrying sphalerite are present within the
massive pyrite bodies, but are more restricted in area and are also confined to
a restricted vertical interval. All of the known significant sphalerite deposits
are in horsts adjacent to the Keystone Graben.
The Main Zone deposit (considered to be Mississippi Valley Type) is
approximately three kilometres long. It is oriented east-west, although it is
sinuous in plan. The deposit is broadly 'T' shaped, with a flat-topped upper
section that is typically about 100 metres wide and 20 metres high. A remarkable
feature of this deposit is the constant elevation of the top of the deposit over
its entire length. The keel section of the deposit extends to about 80 metres
below the upper section. In places, flat-lying "wings" of sulfides extend out
laterally from the keel zone.
Internal structures in the ore zones tend to be complex, and range from massive
and banded to chaotic or brecciated. Banding tends to be subhorizontal in both
the upper section of the Main Zone and the keel section of the deposit, but it
may be parallel to dipping dolostone contacts in some areas. As well, the
mineralization is porous in places and large irregular zones of ice are present
in some faces underground.
33
RESERVES AND RESOURCES
The Nanisivik mine is closed and reclamation activities are ongoing.
MINE PLAN
The mine plan for 2002 included mining of 516,544 tonnes grading 10.0 percent
zinc and 42 grams of silver per tonne. The objective of the plan was to maximize
the cash flow at the Nanisivik mine and to cease mining in 2002 as a result of
falling zinc prices. The decision to close the Nanisivik mine in September 2002
was largely based upon the prevailing market price for zinc. The termination
date of the operation was based upon the shipping season constraint of the site
and the substantial lead-time required to secure supplies. The necessity to
change the mine plan and accelerate mining of the pillars resulted in the
permanent elimination of access to various mining blocks, thereby revising some
of the previously defined reserves to resources and shortening the overall mine
life.
The focus of the residual mining activity was the mining of the remaining
pillars as well as all higher-grade areas. A minimal amount of development was
planned, as the focus was on retreat mining and scavenging. The mining
activities were focused on the mining of 122 pillars, which account for 47
percent of the tonnage and 65 percent of the contained metal.
MINING
Mining at the Nanisivik mine ceased in September 2002.
METALLURGICAL PROCESSING
Milling at the Nanisivik mine ceased in September 2002.
PRODUCTION
The Nanisivik mine was in production from October 1976 to September 30, 2002,
with the exception of a brief closure in 1980 when an ice wedge below the mill
melted, requiring major repairs. To September 30, 2002, 17.3 million tonnes have
been processed. The following table summarizes production information from the
Nanisivik mine for the years indicated:
- ------------------------------------- ----------------------------------------------------------------------
Year ended December 31,
--------------- ----------------- ------------------ -----------------
2002 2001 2000 1999
- ------------------------------------- --------------- ----------------- ------------------ -----------------
Milled (tonnes) 516,544 774,920 811,283 802,806
- ------------------------------------- --------------- ----------------- ------------------ -----------------
Zinc (%) 10.0 6.9 7.6 7.5
- ------------------------------------- --------------- ----------------- ------------------ -----------------
Silver (grams/tonne) 42 30 30 27
- ------------------------------------- --------------- ----------------- ------------------ -----------------
Concentrate Production
- ------------------------------------- --------------- ----------------- ------------------ -----------------
Zinc (tonnes) 87,644 90,979 102,762 101,313
- ------------------------------------- --------------- ----------------- ------------------ -----------------
Metal in Concentrates
- ------------------------------------- --------------- ----------------- ------------------ -----------------
Zinc (tonnes) 49,514 51,512 59,399 58,326
- ------------------------------------- --------------- ----------------- ------------------ -----------------
Silver (ounces) 528,049 539,380 567,707 520,092
- ------------------------------------- --------------- ----------------- ------------------ -----------------
Minesite Operating Costs
- ------------------------------------- --------------- ----------------- ------------------ -----------------
Per tonne milled (Cdn$) 50.87 38.88 36.87 39.49
- ------------------------------------- --------------- ----------------- ------------------ -----------------
Total Cash Costs
- ------------------------------------- --------------- ----------------- ------------------ -----------------
Per pound payable zinc (US$) 0.34 0.41 0.41 0.39
- ------------------------------------- --------------- ----------------- ------------------ -----------------
34
HUMAN RESOURCES
The Company employs 10 people at the Nanisivik mine. Most employees work a
rotation that allows for eight weeks of work followed by four weeks of rest.
While on site, employees work a variety of five, six and seven day shift
schedules, with most employees working either 10 or 12 hours per day, depending
upon operational requirements. Hourly-paid employees are represented by the USWA
and negotiations throughout 2000 culminated in a four-year collective agreement
being signed effective November 1, 2000.
ENVIRONMENTAL MANAGEMENT AND PERMITTING
The operating license for the Nanisivik mine is an industrial water license
issued by the Nunavut Water Board ("NWB") and overseen by the Department of
Indian Affairs and Northern Development ("DIAND"). The license sets parameters
for water use and waste disposal during the closure and reclamation period. The
current license was granted in October 2002 and expires in May 2008. Future
activities at the site will comprise of mine decommissioning and reclamation. It
is expected that closure will be completed within the current license period.
During operations, tailings from the mill were pumped to the 60 hectare West
Twin Disposal Area ("WTDA"). The WTDA is made up of a surface cell, reservoir
and polishing pond. Tailings were deposited both sub-aerially and subaqueously.
The WTDA internal dykes are a frozen core construction and were last inspected
in July 2001 by an independent consulting firm. No significant stability issues
were identified during the annual inspection.
Nanisivik holds an "Interim" Closure and Reclamation Plan as approved by the
Nunavut Water Board. Nanisivik submitted an updated Closure and Reclamation Plan
to the Nunavut Water Board in February 2002. The "Final" plan is currently being
prepared and must be submitted for approval by December 15, 2003. The main
components of the February 2002 closure and reclamation plan are summarized
below.
o Use the remaining waste rock currently on surface as backfill in the
underground workings and open pits.
o Cover and contour the backfill in the open pits with a sufficient
amount of local quarried shale to allow permafrost to develop within
the backfill.
o Seal the mine portals with waste rock and allow freezing to provide a
permanent barrier.
o Cover the surface tailings deposit with a 1.25 metre layer of shale and
armouring material to allow permafrost to develop and be maintained for
long term stability.
o Re-contour ore and waste rock pads and borrow pits.
o Remove the settled solids from the sludge pond at the East Adit water
treatment facility and put them underground, then cover and contour the
pond area.
o Return surface drainage patterns to pre-mining conditions wherever
possible. Contour all remaining areas to control run-off.
o Decommission the site infrastructure. Salvage all reusable materials
which are marketable or can be
35
transferred to other BWR operations. Dispose of all remaining
non-hazardous materials in the underground workings.
o Monitor the site for five years following closure.
Closure and reclamation is directed at assets owned by Nanisivik. Some assets,
however, may be transferred to the Government of Nunavut and the local community
at their request. Discussions in this regard are continuing between the
stakeholders.
Under the terms of the present water license, the Company is required to post
security for reclamation in an aggregate amount of $17.6 million. To date,
security of $6.0 million has been posted. The Company estimates the financial
commitment to complete the remaining reclamation work is approximately $9.2
million, which includes an annual post-closure expenditure to anticipated water
treatment and monitoring. Once reclamation of the East Open Pit has been
completed, the Company does not anticipate a requirement for water treatment at
the site.
Canzinco asked the Minister of DIAND consider the process by which the financial
security was determined and the anount of the financial security. The Minister
on behalf of himself and DIAND stated that they could not consider the matter.
Canzinco filed an application in the federal court for for judicial review of
the Minister's decision not to consider the matter.
THE BOUGRINE MINE
The Company, through its wholly-owned subsidiary Breakwater Tunisia S.A. ("BWR
Tunisia"), owns and operates the Bougrine zinc/lead mine which commenced
production in May 1998 and is located in Tunisia.
In September 1997, the Company, through BWR Tunisia, acquired the Bougrine mine
and related assets for $26.8 million. The Company spent $10.7 million in
pre-production capital costs in 1997 and 1998 to ready the mine for production.
A new water pumping system and a new ventilation system were installed in the
mine and the underground mobile mining equipment was rebuilt. In the mill,
improvements were made to the grinding circuit, the material delivery system and
other facilities. Operations commenced on May 2, 1998 and the site was
considered to be in commercial production commencing June 1, 1998.
LOCATION AND ACCESS
The Bougrine mine is located between the towns of Le Sers and Le Kef in Tunisia,
160 kilometres southwest of Tunis, the capital. Access is by paved road.
DESCRIPTION
The Bougrine mine is a zinc/lead underground mine. In addition to a 1,200 tonne
per day concentrator, the site facilities include a security/mine
rescue/ambulance station, a warehouse, dry facilities, offices, repair and
maintenance shops and a concentrate load out facility. The concentrate loading
facilities at the port of La Goulette in Tunis include a concentrate storage
building with a capacity for 12,000 tonnes of zinc concentrate and 3,000 tonnes
of lead concentrate. Concentrates are loaded onto ships by conveyor and ship
loader. The port land is owned by the government and has been leased by the
Company for a 20-year period expiring in 2012. The leases, upon expiry, may be
renewed by formal application to the applicable governmental authorities. BWR
Tunisia holds a 50-year concession over the Bougrine mineralized body, which
concession expires in March 2042.
36
HISTORY
Zinc and lead deposits have been mined in the region since Roman times. Some
small-scale development took place at Bougrine in the 1930's. A drilling program
in the 1980's by ONM (an exploration division of the Tunisian government)
resulted in the discovery of the F2 and F3 zones at depth. In the late 1980's, a
competition was held to find a foreign partner to develop a mine.
Metalgesellschaft AG was awarded a license to develop the mine at Bougrine.
Metalgesellschaft AG transferred its interest in the property to Metall Mining
Corporation (subsequently renamed Inmet Mining Corporation) which, with a group
of Tunisian banks, established Societe Miniere de Bougrine ("SMB"). Construction
of the Bougrine facility began in 1992 with production commencing in June 1994.
The total capital cost of the project was US$81 million. Operations were
suspended in October 1996 due to low zinc prices and financial constraints.
During the operating period of June 1994 to October 1996, the mill processed
675,886 tonnes averaging 14.2 percent zinc and 2.5 percent lead.
In September 1997, the Company purchased the Bougrine mine assets from SMB and
became the sole owner of the Bougrine mine.
GEOLOGY
The Bougrine zinc/lead deposit lies in the "Zone de Domes" of the Tunisian
Atlas, a part of the alpine-age Atlas mountain range extending through part of
Morocco, Algeria and Tunisia along the Mediterranean coast. The "Zone de Domes"
is characterized by Triassic salt diapirs. The Bougrine deposit is located at
the north-eastern plunge of the Lorbeus Diapir. The strike direction of the
diapir structure is deviated into a north-south direction, and the mineralized
bodies lie on the eastern flank, dipping at about 40 to 60 degrees towards the
Sers Basin. The area is cut by several fault systems, with the highest intensity
of faulting being in the centre of the deposit.
Currently five mineralized zones are distinguished within the Bougrine deposit
area. They are designated in order of their discovery as F1 to F5. The majority
of the proven and probable mineral reserves are located in the F2 and F3 zones.
The F2 zone is a stratabound dissemination in laminated limestone. The
mineralization is sharply delineated. Using a six percent zinc-equivalent
cut-off, the flat lens-shaped zone extends for about 500 metres along strike and
500 metres down-dip. Maximum true width is close to 40 metres and average
mineable width is 10 metres.
The F3 zone is an irregular pipe-like deposit approximately 130 metres long,
striking west to east and plunging slightly eastwards. It is up to 80 metres
high and typically has a width of 40 to 50 metres. A semi-massive core zone
returning grades in the range of five to 15 percent lead and 24 to 45 percent
zinc is surrounded by a moderate zinc dissemination in marly limestone.
The F1 zone consists of various small lenticular, strata- or fault-controlled
deposits. It is the only part of the Bougrine deposit with surface outcrops.
Average grades are below 10 percent zinc and two percent lead.
The F4 zone was discovered in mid-1995 and it is thought to be the feeder zone
of the F3 zone. Drilling to date has resulted in a number of very high grade but
fairly narrow intersections. The F5 zone can be regarded as a lateral
continuation of the low grade halo of the F3 zone with grades averaging below 10
percent zinc.
37
RESERVES AND RESOURCES
INTRODUCTION
The resource estimation procedure involves the creation of separate block models
for the main mineralized zones. The resource estimation methodology has been
well developed by the Company based upon the experience of mining the Bougrine
deposit.
MINERAL RESOURCE ESTIMATION
The current mineral resources for the Bougrine mine have been estimated using
block models created with the Gemcom software package. The block models are
constrained by geologic models that were created by correlating the various
mineralized zones and their interaction with faults on all pertinent sections
and plans, updated annually with new information.
The Bougrine deposit is now so well delineated that only limited scope remains
to augment the current resources, primarily in the area down-dip of the F2 zone
that has shown thick but low-grade mineralization that is part of the halo
around Bougrine. Similarly, there is considered to be only limited potential to
identify any significant new deposits amongst the exploration properties being
evaluated by the Company. However, with additional information, there exists a
reasonable prospect of converting the remaining inferred mineral resources to
indicated, and subsequently, to probable reserves. Potential now exists to
expand the resources/reserve base through properties that may be acquired
through acquisition and/or optioned from the Tunisian government.
Measured and indicated mineral resources are converted into proven and probable
mineral reserves by making appropriate provisions for dilution and mining
recoveries.
MINE PLAN
The current mineral reserves at Bougrine allow for three years of production, to
the end of 2005. The overall plan is to continue to mine the F2 and F3 zones,
which can be blended to produce a reasonably consistent mill feed of
approximately 11.6 percent zinc and two percent lead.
MINERAL RESOURCE aND MINERAL RESERVE STATEMENT
The table below sets forth the estimated mineral resources and mineral reserves
for the Bougrine mine as at the dates indicated, as estimated by a Qualified
Person.
BOUGRINE MINE, SUMMARY OF MINERAL RESOURCES aNd MINERAL RESERVES
- --------------------------------------- --------------------------------- ----------------------------------
December 31, 2002 November 30, 2001
- --------------------------------------- --------------------------------- ----------------------------------
Tonnes Zinc Lead Tonnes Zinc Lead
(000s) (%) (%) (000) (%) (%)
- --------------------------------------- ----------- ----------- --------- ------------ ---------- ----------
Proven and Probable Reserves 1,187 11.6 2.0 1,684 10.9 2.1
- --------------------------------------- ----------- ----------- --------- ------------ ---------- ----------
Measured and Indicated Resources(1 1,279 13.3 2.3 1,695 13.7 2.6
- --------------------------------------- ----------- ----------- --------- ------------ ---------- ----------
Inferred Resources 249 8.2 1.3 604 8.3 1.4
- --------------------------------------- ----------- ----------- --------- ------------ ---------- ----------
(1 Measured and Indicated Resources include Proven and Probable Reserves.
Although the local mining conditions have resulted in gains and losses,
overall the main change from the November 30, 2001 reserves to the December 31,
2002 reserves is depletion due to mining. The
38
reduction of inferred resources from 2001 to 2002 is due primarily to recent
mining of the F1 zone, where experience has shown there is a low probability of
recovering a portion of the previously defined inferred resources and
accordingly such portion has been removed.
MINING
The main mining method is modified room and pillar with delayed unconsolidated
backfill between sublevels. In the case of the F2 zone, this could also be
described as a modified AVOCA method where intact slices are kept in the
mineralized body to increase overall stability.
Pillar spacing is approximately 20 metres along strike. Discontinuities, bedding
and fracture orientations are taken into account for the pillar design. The
system allows for an extraction of approximately 80 percent of the in-situ
resources. The geometry of the F2 zone with its 45 degree dip requires a balance
between additional dilution and recovery, as the minimum inclination of the slot
raises and the footwall contact of the stopes is 60 degrees.
The material is extracted by conventional drifting and slashing on sublevels
with 15 metre spacing between sublevels. Longhole blasting is undertaken to
extract the material between the sublevels. Backfill is then placed via the
upper sublevel, which requires that some short access drifts be developed in the
hanging wall sequence.
Mining in the upper levels and namely in the F3 zone had to take into account
the excavations established by the previous owners. In continuation of the
previous mining plan, several slices were recovered in the F2 area between
pillars of cemented backfill. A redesign of the mining method of the F3 zone was
necessary due to ground conditions in the east end of the deposit. Extensive
rockfill with a high cement content was required to fill the entire block,
following which this end of the zone is being mined as a new block by jumbo
method only.
Underground equipment includes three Tamrock 2 boom drill jumbos for
development. Stope drilling equipment consists of two longhole drills, one
Tamrock Solo drill, and one Tamrock Mono drill. Production is carried out with
five Toro 5 cubic metre scooptrams, one Toro 3.5 cubic metre scooptram and six
Toro 35 tonne capacity trucks.
Four ventilation fans supply 250,000 cubic feet per minute. Mine workings
include a 210 metre ventilation raise.
METALLURGICAL PROCESSING
The processing plant has the capacity to treat 1,200 tonnes per day. Stockpiles
are maintained ahead of the crushing plant and ore is blended to provide a
constant head grade (12 to 14 percent zinc) in feed to the mill. Ore from the
mine stockpile passes through three stages of crushing and screening before it
is conveyed to the mill fine ore bin.
Grinding is accomplished in a rod mill in open circuit and a ball mill in closed
circuit with two stages of cycloning to produce the ground feed to flotation.
Conventional, differential flotation is employed to produce saleable lead and
zinc concentrates. This is done in separate flotation circuits that have
roughing and cleaning stages (lead mineral first, then zinc mineral) to maximize
concentrate grades and mineral recoveries. These concentrates are separately
thickened and pressure filtered before being stored at the mill site prior to
shipping to custom smelters.
39
The flotation tailings are thickened with the overflow (tailings effluent)
recycled to the mill process and the thickener underflow pumped to an
impoundment area adjacent to the mill. The tailings effluent discharged to the
tailings pond mostly evaporates and only a limited quantity is available for
recycling to the mill. There is zero discharge of tailings effluent to the
environment.
The proximity of the mineralized body to a salt dome results in the process
water from the mine being highly saline. This high salinity causes poor
selectivity in the flotation circuit when this water is used, and consequently
impacts the concentrate grade. Revised operating procedures have lowered the
salinity of the process water. A desalination plant, designed to provide better
process water quality and thus allow better product quality, was constructed
during 2000 and put into operation in late 2001.
Since restarting the operations in 1998, the Bougrine mill has been processing
ore at a rate of about 425,000 tonnes per year with metal content averaging 11.6
percent zinc and 1.82 percent lead. It was noted that this grade of ore was
about two percent lower than the grades processed in 1994 to 1996. However, the
zinc concentrate grade has improved from an average of about 50 percent zinc
prior to 1997 to the current average of 54.7 percent zinc for 2002. Zinc
recovery has remained relatively consistent in the 81 to 83 percent range. Lead
concentrate grades have improved from 64 percent lead prior to 1997 to the
current grade of 66.57 percent. Lead recovery has improved from 74 percent to
the current 75.1 percent.
The Bougrine zinc concentrate is very low in iron (less than two percent iron)
and the precious metals content is very low, with negligible gold and silver
present. There is a notable low level of the normal 'penalty' elements such as
arsenic, antimony, bismuth and cadmium. However, the zinc concentrate is in
penalty levels for chlorine, silica and lime, as a result of the genetic mode of
the ore (sedimentary in a marine environment) affecting the mineralogy.
Plant availability, which is a measure of the maintenance effectiveness, has
been good, averaging 93.8 percent in the start-up year 1998, 96.2 percent in
1999, 95.9 percent in 2000, 96 percent in 2001 and 96.5 percent in 2002.
The concentrates are hauled by train to the Port of La Goulette to BWR Tunisia's
storage shed to be held for export to international custom smelters for metal
refining.
40
PRODUCTION
The Bougrine mine recommenced production May 2, 1998 with commercial production
being achieved by June 1, 1998.
The following table summarizes the production information from the Bougrine mine
for the periods indicated:
- ----------------------------------- ------------------------------------------------------------------------------
Year ended December 31,
------------------------------------------------------------------------------
2002 2001 2000 1999
- ----------------------------------- ------------------ ------------------- ------------------- -------------------
Milled (tonnes) 423,414 411,052 422,120 429,708
- ----------------------------------- ------------------ ------------------- ------------------- -------------------
Zinc (%) 9.7 11.5 11.3 12.0
- ----------------------------------- ------------------ ------------------- ------------------- -------------------
Lead (%) 1.5 2.1 1.9 1.8
- ----------------------------------- ------------------ ------------------- ------------------- -------------------
Concentrate Production
- ----------------------------------- ------------------ ------------------- ------------------- -------------------
Zinc (tonnes) 61,656 69,724 72,246 84,697
- ----------------------------------- ------------------ ------------------- ------------------- -------------------
Lead (tonnes) 6,859 9,869 9,418 9,268
- ----------------------------------- ------------------ ------------------- ------------------- -------------------
Metal in Concentrates
- ----------------------------------- ------------------ ------------------- ------------------- -------------------
Zinc (tonnes) 33,706 37,832 38,303 42,306
- ----------------------------------- ------------------ ------------------- ------------------- -------------------
Lead (tonnes) 4,565 6,424 6,215 5,801
- ----------------------------------- ------------------ ------------------- ------------------- -------------------
Minesite Operating Costs
- ----------------------------------- ------------------ ------------------- ------------------- -------------------
Per tonne milled (US$) 32.19 28.82 27.49 28.55
- ----------------------------------- ------------------ ------------------- ------------------- -------------------
Total Cash Costs
- ----------------------------------- ------------------ ------------------- ------------------- -------------------
Per pound payable zinc (US$) 0.36 0.33 0.37 0.36
- ----------------------------------- ------------------ ------------------- ------------------- -------------------
HUMAN RESOURCES
BWR Tunisia's workforce consists of 298 people, 10 being expatriate personnel
and 288 local personnel. Of the total 298 personnel, 288 are at the mine site
while 10 are in Tunis. Some of the personnel in Tunis divide their time between
the mine and the port on administration activities. The employees of Bougrine
are represented by an employees' association with the Company and
representatives of the employees reviewing the remuneration package on an annual
basis.
ENVIRONMENTAL MANAGEMENT AND PERMITTING
The Bougrine mine operates under an environmental agreement entered into in
August 1991 (the "Environmental Agreement") with the Tunisian Environmental
Protection Agency which stipulates operational guidelines and closure
requirements for the tailings pond.
The mine is situated in an arid (semi-desert) climate zone with low and
irregular precipitation and a high rate of water evaporation. As a result, the
majority of the water in the tailings pond evaporates and the pond is managed as
a zero discharge facility. Water required for mineral processing is recycled
from the tailings pond and thickener overflows via the polishing pond, but must
also be supplemented by two groundwater wells located approximately two and four
kilometres from the mill. The environment in which the mine operates requires
efficient water management.
The tailings facility consists of two earth embankments constructed of clay
fill. Both dams were raised one metre in 1999. An additional raise of the
tailings dam was completed in early 2001, and again in December 2002. A final
lift is anticipated for 2004 after which there will be sufficient storage
capacity to meet life of mine requirements. The dams are inspected annually by a
geotechnical consultant.
41
It is reported that the tailings facility reports to the underground workings
and into the shallow groundwater system. Some of this seepage reaches the
surface via a natural spring approximately 500 metres to the east. Water also
seeps from the south dyke. This seepage water is collected and pumped back to
the tailings pond. Groundwater in the area is saline, therefore not likely used
as a drinking water source by people in the area. Consequently, the seepage is
unlikely to represent a public health risk. The Tunisian Environmental Authority
has not raised any concerns about this seepage with the Company. As the tailings
facility dries out during closure, seepage from the facility should cease. With
proper covering and surface run-off control, mobilization of secondary oxidation
products, such as acidity and metals, outside of the tailings facility during
the post-closure period, is not expected.
The host rock in the mine is limestone. Acidic drainage issues would not be
expected from any waste rock that may be on surface or from the underground
workings. Sampling and testing of waste rock and development rock will be
required for verification in preparation for the detailed closure plan.
Tunisia does not have closure requirements. However, the Company has committed
in the Environmental Agreement to reclaim the tailings facility. The Company
also intends to dismantle the surface infrastructure, close off all openings to
the underground to prevent public access, stabilize the surface structures that
will remain on site and create conditions that will facilitate the natural
recovery in areas affected by mining.
It is estimated that the financial commitment at closure could be in the order
of $4.6 million. The Tunisian Government does not require security to be posted.
EXPLORATION
Focus of the exploration activities of Breakwater Tunisia S.A. are mainly
comparatively small-scale deposits close to the existing Bougrine mine, which
could provide additional mill feed with low investment. Exploration permits
totalling 39.55 square kilometres are held in two prospective diapir structures
in a 15 kilometre radius around the mine site.
In an on-going effort to increase the mineral reserves and resources and the
operating life of the mine, the Company has been engaged in discussions with the
Tunisian authorities on utilizing reserves currently being mined by a government
enterprise.
THE EL MOCHITO MINE
The Company, through American Pacific Honduras S.A. de C.V., owns and operates
the El Mochito zinc/lead/silver mine located in Honduras that, except for a
short period of time in 1987, has been in production for 54 years.
LOCATION AND ACCESS
The El Mochito mine is located in northwest Honduras, near the town of Las
Vegas. The closest major city is San Pedro Sula, the commercial centre of the
country, 88 kilometres northeast of the mine. The concentrates are trucked to
the Company's concentrate/storage shed on tidewater at Puerto Cortes, 115
kilometres northeast of the mine. Access is by paved roads.
42
DESCRIPTION
The El Mochito mine consists of an underground zinc/lead/silver mine and a 2,000
tonne per day concentrator. The El Mochito property includes 53 exploitation
concessions totalling 10,835 hectares of mineral rights.
HISTORY
The El Mochito mine was originally discovered in 1938. In 1943, New York and
Honduras Mining Corporation (now Rosario Resources Corporation ("Rosario"))
purchased the property. Development work was accelerated after the war and, in
1946, construction commenced on a small mill. Production began in 1948 with the
initial zinc product being jig concentrates containing native silver, a bulk
flotation concentrate and a silver product. Separation of the lead and zinc
concentrates was uneconomic until 1960 when the amount of sulfide material
produced from the deeper levels of the mine was increased. The mill has been
expanded several times and presently has a capacity in excess of 2,000 tonnes
per day. In 1978, Amax, Inc. acquired Rosario. In April 1987, the El Mochito
mine was closed because of high taxes, labour problems and high operating costs.
In September 1987, American Pacific Mining Corporation, Inc. ("American
Pacific") purchased the El Mochito mine, a concentrate warehouse located at
Puerto Cortes and the San Juancito property. The mine was reopened in October
1987. In March 1990, the Company acquired American Pacific by way of an
amalgamation of American Pacific with a wholly-owned subsidiary of the Company
now named Santa Barbara Mining Corporation, Inc. In 1998, the mine was sold to
American Pacific Honduras S.A. de C.V., a wholly-owned subsidiary of Santa
Barbara Mining Corporation, Inc.
GEOLOGY
Zinc/lead/silver mineralization at El Mochito occurs in sedimentary rocks of
Cretaceous age and belongs to the economically important class of
high-temperature replacement zinc/lead deposits in carbonates. Carbonates are
particularly susceptible to replacement by acid hydrothermal solutions which, in
the case of El Mochito, have deposited skarn minerals such as garnet, epidote
and pyroxene together with sulfides of iron, zinc and lead.
The replacement deposits can take two shapes: some follow the essentially flat
bedding of their host rock ("mantos") while others cut across the rocks
("chimneys" or "pipes"). At El Mochito, both of the replacement deposits are
prominently developed, with mantos forming at the lower contact of the
Cretaceous Atima limestone, where upwelling solutions emerged from the
underlying Todos Santos siltstone package. Mantos also formed at the lower
contact of the Mochito shale, a 150 metre thick limy siltstone unit some 550
metres above the base of Atima limestone. In many cases, a chimney-type
connection between the lower and upper mantos is present, the largest of which
is the San Juan pipe, now largely mined out. Others are the Nacional, Salva
Vida, Yojoa, Nina Blanca and Nueva pipes. Overall, some 75 percent of the total
known tonnage at El Mochito occurs in the chimney/pipe setting.
There is also a tendency for the formation of manto-like bodies immediately
above the Mochito shale from which a number of individual pipes rise into the
450 metres of the overlying upper Atima limestone where a number of high grade
pipes or chimneys sustained the mine in its earlier history. The known
mineralization at El Mochito occurs within a rock volume measuring some 2.5
kilometres east-west and 600 metres north-south, with a vertical (stratigraphic)
extent of more than one kilometre. Within these dimensions, the known
mineralized bodies occupy 0.3 percent of the overall volume.
43
El Mochito has a pronounced overall vertical metal zoning. It is generally
accepted that a set of pre-existing faults guided the ascent of the mineralizing
fluids. Of particular importance are the sub-parallel, generally east-northeast
trending Porvenir, Main and Nacional/Salva Vida faults. All of the major
mineralized bodies discovered to date at El Mochito are localized by the
intersection of these faults with north-northeast trending "N" style faults.
The discovery in 1999 of the high-grade Port Royal zone, which is similar to
smaller high-grade zones mined decades ago, however, over 770 metres west of
similar structures previously mined, confirmed the continuing exploration
potential of these structures.
Post-mineralization faulting is ubiquitous. A prominent set strikes
northeasterly and has steep dips, with the hanging-wall side moving down. While
the offsets along these faults are generally small, they create poor ground
conditions. Knowledge of their location in space is required for detailed mine
layout.
RESERVES AND RESOURCES
MINERAL RESOURCE ESTIMATION
The mineral resources are calculated by the Company using a traditional
polygonal method on cross-section and then converted to cuts (for the current
dominant mining method); basically averaging everything across the cut using all
available geologic information, assay data and mine workings.
The mineral resources include continuous mineralization, typically above three
to five percent zinc. Low-grade material is included as internal dilution where
necessary to maintain mining continuity.
DILUTION AND MINING RECOVERY
Internal dilution is included during the original construction of the polygons
during resource estimation. External dilution is added by increasing the area of
the cut polygon depending on the mining method.
The mineral resources and mineral reserves have been classified by the Company
using CIM Standards (August 2000).
MINERAL RESOURCE AND MINERAL RESERVE STATEMENT
The table below sets forth the estimated mineral resources and mineral reserves
for the El Mochito mine as at the dates indicated.
EL MOCHITO MINE, SUMMARY OF MINERAL RESOURCES AND MINERAL RESERVES
- ------------------------------------ ----------------------------------------- ---------------------------------------
December 31, 2002 November 30, 2001
- ------------------------------------ ----------------------------------------- ---------------------------------------
Tonnes Zinc Lead Silver Tonnes Zinc Lead Silver
(000s) (%) (%) (g/t) (000s) (%) (%) (g/t)
- ------------------------------------ ------------ --------- -------- --------- ---------- --------- --------- --------
Proven and Probable Reserves 3,167 6.6 1.8 76 3,356 6.8 1.9 78
- ------------------------------------ ------------ --------- -------- --------- ---------- --------- --------- --------
Measured and Indicated Resources(1) 4,288 8.2 2.5 99 5,937 7.8 2.7 115
- ------------------------------------ ------------ --------- -------- --------- ---------- --------- --------- --------
Inferred Resources 2,411 7.4 3.2 110 793 7.3 4.3 102
- ------------------------------------ ------------ --------- -------- --------- ---------- --------- --------- --------
(1) Measured and Indicated Resources include Proven and Probable Reserves.
In 2002, the Company essentially replaced the mineral reserves that were mined,
primarily with the aid of additional drill data and due to re-interpretation of
some parts of the deposit where previously a large
44
amount of material was mined outside the reserves. The addition to inferred
resources is primarily due to the discovery of new zones, such as Barcasco and
Santo Nino.
MINING
El Mochito utilizes a combination of mining methods which are dependent upon the
size, geometry and geotechnical considerations of the various zones. The Company
is presently using a "post and pillar" cut and fill method, using hydraulic and
pneumatic jumbos with hydraulic backfill, for mining all of the present
mineralized bodies which yields approximately 84 percent recovery of the
reserves.
Improvements in the transportation system, including extending the underground
conveyor system, increasing broken material storage capacity and installing a
crusher to feed the conveyor belt, were completed and commissioned in February
1996. Mineralized material in the Nacional and Lower San Juan is loaded by 2.7
cubic metre capacity load haul dump vehicles into 15 tonne trucks for transport
to an ore-pass which feeds an underground crusher and then a 0.9 metre-wide
conveyor. The material is then conveyed upgrade to chutes on the shaft-access
rail system where it is transported to the shaft ore-pass system. Material is
hoisted via 10-tonne skips to the surface, where it is conveyed to the surface
crushing circuit and subsequently to storage in a surface ore-bin.
The mine functions well within the constraints of small shafts and has
consistently improved over the years.
The post-pillar method, a variety of cut-and-fill mining, is ideally suited to
the very variable geometry, grade distribution and rock conditions of the
present reserves and resources. The method is well understood and well executed
with good control over grade and dilution. It is essentially room-and-pillar but
with backfill to provide a working floor where mining heights are greater than a
few cuts and to provide additional support to the stope pillars. In low height
areas backfill is not used and the excavations are left empty with a maximum
unfilled height of 16 metres over small areas.
The waste rock is generally competent. The depths are moderate and the
post-pillar, cut-and-fill method is only marginally impacted by stress. The
post-pillar, cut-and-fill method is designed on 16 metre centres and trimmed to
a final, six-metre width on retreat, leaving a nominal 16 percent of the
mineralized material in pillars. In sill recovery areas, pillars are started on
backfill. Old backfill areas used high cement contents and the fill is
relatively stiff. The Company starts with large pillars on the first cut and
reduces size as the pillars are surrounded with fresh backfill. From a rock
mechanics point of view, the pillars generally behave very well from the outset.
METALLURGICAL PROCESSING
The mill at El Mochito is a conventional, differential sulfide flotation mill
capable of processing 2,000 tonnes per day, producing separate zinc and lead
concentrates. The process consists of crushing, grinding, flotation, concentrate
dewatering and tailings disposal.
Mineralized material from underground is crushed in a three stage surface
facility (jaw and cone crushers with vibrating screens) prior to trucking to the
ore bin at the mill site. The grinding circuit consists of parallel open circuit
rod mills, the discharges of which are combined and passed through two stages of
ball milling. Each stage of ball milling is in closed circuit with cyclones. The
ground ore is conditioned with reagents and then subjected to differential
flotation in roughing and cleaning flotation circuits to produce saleable lead
concentrate and zinc concentrate. These concentrates are separately thickened
and then vacuum filtered before they are conveyed to storage sheds at the mill
site.
45
The flotation tailings are pumped to the mine backfill facility where the
tailings, upon demand, are subjected to cycloning to produce hydraulic backfill
for the mine or by-passed to the tailings impoundment area. No tailings effluent
is recycled to the mill, but it is treated and discharged.
The concentrates are hauled to a storage shed at Puerto Cortes via truck for
subsequent export to custom smelters.
Since opening in 1948, the El Mochito mine has processed over 16.8 million
tonnes with an average grade of 7.8 percent zinc, 3.9 percent lead and 268 grams
of silver per tonne. Concentrate grades are in the 52 percent range for zinc and
in the 70 percent range for lead (containing ~3,000 grams of silver per tonne).
The high silver content in the lead concentrate combined with the good grade of
lead makes this concentrate readily marketable. A penalty element in this
concentrate is bismuth over 0.35 percent. Typically, the bismuth content in the
lead concentrate is 0.3 to 0.7 percent.
The zinc concentrate contains 1.5 percent lead, 0.7 to 0.9 percent copper, 0.5
percent cadmium and 10 percent to 11 percent iron, of which penalty charges are
paid for iron over eight percent and cadmium greater than 0.30 percent.
Mill operating availability is currently averaging 90 percent.
PRODUCTION
The following table summarizes production information from the El Mochito mine
for the years indicated.
- --------------------------------------- -----------------------------------------------------------
Year ended December 31,
-----------------------------------------------------------
2002 2001 2000 1999
- --------------------------------------- -------------- --------------- ------------- --------------
Milled (tonnes) 663,385 652,331 637,665 612,240
- --------------------------------------- -------------- --------------- ------------- --------------
Zinc (%) 7.5 8.0 7.3 7.3
- --------------------------------------- -------------- --------------- ------------- --------------
Lead (%) 1.5 1.3 1.0 1.1
- --------------------------------------- -------------- --------------- ------------- --------------
Silver (grams/tonne) 90 81 94 87
- --------------------------------------- -------------- --------------- ------------- --------------
Concentrate Production
- --------------------------------------- -------------- --------------- ------------- --------------
Zinc (tonnes) 88,697 93,133 83,545 79,037
- --------------------------------------- -------------- --------------- ------------- --------------
Lead (tonnes) 11,888 9,930 7,337 8,118
- --------------------------------------- -------------- --------------- ------------- --------------
Metal in Concentrates
- --------------------------------------- -------------- --------------- ------------- --------------
Zinc (tonnes) 46,339 48,485 43,064 40,996
- --------------------------------------- -------------- --------------- ------------- --------------
Lead (tonnes) 8,128 6,750 4,805 5,226
- --------------------------------------- -------------- --------------- ------------- --------------
Silver (ounces) 1,700,034 1,505,659 1,690,031 1,496,439
- --------------------------------------- -------------- --------------- ------------- --------------
Minesite Operating Costs
- --------------------------------------- -------------- --------------- ------------- --------------
Per tonne milled (US$) 28.40 30.59 32.83 31.57
- --------------------------------------- -------------- --------------- ------------- --------------
Total Cash Costs
- --------------------------------------- -------------- --------------- ------------- --------------
Per pound payable zinc (US$) 0.32 0.37 0.44 0.42
- --------------------------------------- -------------- --------------- ------------- --------------
HUMAN RESOURCES
The number of personnel currently employed at the El Mochito Mine is 620. This
includes 22 expatriate staff, 138 clerical and local staff, 402 weekly employees
and 58 temporary employees. There are also 86 security guards and 86 contract
miners. The weekly employees are represented by the Union of American Pacific
Workers. A new three-year contract was negotiated with the union representing
the weekly-paid employees for the period October 2002 through September 2005.
46
ENVIRONMENTAL MANAGEMENT AND PERMITTING
The El Mochito mine operates under the Honduras Law of the Environment (1993).
This law has a very limited section referring specifically to mining, for which
the standards are for the most part World Bank standards. The Company believes
that the mine meets relevant North American standards as the relevant guidelines
for its mining practices. In 1998, a new Mining Code was published, which calls
for the creation of a "Manual of Environmental Policy" for establishing
environmental standards. This manual was recently published in draft form and is
now undergoing review by all stakeholders. The mining industry is participating
in the review through its Mining Association.
Mill tailings are discharged to the Pozo Azul tailings facility where they are
hydro-cycloned into coarse and fine fractions. Coarse material is used for
upstream dam construction while the fine fraction reports to the reservoir
portion of the pond. Dam construction and geotechnical evaluations are
contracted to an independent constructing firm. Stage one of a two stage
construction schedule is complete. Stage two is now underway and is expected to
contain tailings resulting from an additional five years production. Dam
inspection reports prepared by an independent consulting firm do not indicate
any significant stability issues associated with the dams on site.
The reservoir portion of Pozo Azul provides retention time to naturally treat
water prior to discharge (along with mine water) to the Quebrada Raices, and
subsequently to Lake Yojoa.
The Company has prepared a conceptual Reclamation and Closure Plan for the El
Mochito mine. The closure plan focuses on the decommissioning of mine and
surface infrastructure and the reclamation of the tailings facilities. Closure
of the Pozo Azul tailings facility will begin once mining operations have
ceased. Final and long-term reclamation of El Bosque tailings facility remains
to be completed and will consist mainly of geotechnical stabilization and
erosion protection.
It is estimated that the financial commitment at closure could be in the order
of $3.0 to $4.6 million in capital. The Honduran government does not require
security to be posted.
An investigation commenced on June 14, 2001 by the FISCAL of the Environment, a
special prosecutor for environmental issues of Honduras, resulted in a petition
being filed by the FISCAL alleging that the Company (El Mochito mine) had
discharged contaminants, resulting from mining operations, into a ravine which
eventually leads to Lake Yojoa, a major lake in Honduras.
These charges were neither initiated nor are they supported by the government
regulatory authority, Direccion Ejecutiva de Fomento a la Mineria ("DEFOMIN"),
which oversees mining activities throughout Honduras and is principally
responsible for monitoring environmental compliance, nor The Center of Control
and Study of Contaminants ("CESCCO"), which regularly inspects and samples the
El Mochito effluents, nor AMUPROLAGO, the environmental organization established
by the municipalities which adjoin the lake. The Company considers the charges
to be unfounded and, as addressed below, has requested that the charges be
dismissed.
The El Mochito mine does release effluent (water) from the mine tailings
impoundment areas, however, this water is monitored for contaminants and
complies with the guidelines set forth by the Honduran government and North
American guidelines. These guidelines are overseen through a process of regular
inspections and technical sampling of both effluents and receiving waters by El
Mochito personnel and separately by CESCCO personnel and by DEFOMIN personnel.
The technical advisor to DEFOMIN at the time was the Japanese International
Cooperation Agency, which provided technical training and facilities necessary
for the accurate analysis of samples.
47
The Company believes that it is in environmental compliance and, as recently as
February 2003, reports were filed by DEFOMIN indicating this to be the case.
The matter continues to be reviewed by the jurisdictional judge who has taken no
action on the FISCAL's requested charges. The Company filed a motion in August
2001 requesting that the charges be dismissed. The motion includes technical
evidence from government agencies supporting the Company's position that the
FISCAL's charges are unfounded. The Company awaits the judge's ruling in this
matter, which it anticipates will be in its favour.
MINE SITE EXPLORATION
Over the years the El Mochito deposit has changed from being predominantly
silver-rich to zinc-rich, generally having a lower net smelter return value. The
considerable cost of exploring, or at least assessing, the potential endowment
of the deposit has limited the work that could be done.
Anomalies that have been drilled by various companies in the past have been
limited to short surface holes to look for vein systems. The original deposit
was started on vein systems but currently is extracting the large bodies mostly
below the Mochito shale. These previous surface holes were well short of where
larger more interesting bodies might be located.
In addition, the El Mochito "system" was arbitrarily limited by faults that may
or may not have been significant; this reduced the area of more intense
exploration. There are many anomalies and indications of systems outside of what
was called El Mochito.
The Company is currently investigating four or five chimney/manto systems. The
average of the known systems that have already been mined, or are being mined,
is 0.7 million tonnes, varying from 0.25 to 1.4 million tonnes. This gives a
reasonable potential for adding to resources in the near term of 3 million
tonnes. There are large areas with no drilling between these four or five
systems with similar potential.
REGIONAL EXPLORATION - MONSERRAT GOLD PROJECT
The Monserrat gold-silver property is located approximately 40 kilometres
east-southeast of the capital city of Tegucigalpa near the village of Yuscaran
in the Department of Paraiso, district of Yuscaran. Geographically, the property
is located on the southern and central highlands of southern Honduras near the
border with Nicaragua. The property is accessible via a paved road from
Tegucigalpa, with gravel roads within the property itself. Topography in the
project area consists of gently rolling hills and lesser steep sided hills in
the east, dominated by the Cerro Monserrat Mountain to the west. Topographic
relief varies from 760 to 1675 metres above sea level. Part of the surface is
covered by tropical forest.
Currently the property consists of the Monserrat Exploration Permit providing
mineral rights for an area of 33.62 square kilometres and is owned by the
Company's wholly-owned subsidiary in Honduras, Corp. Minera Nueva Esperanza.
Previous work on the property consists of:
o Limited underground mining of high grade gold-silver zones on
the western portion of the property during the middle of last
century.
o Extensive exploration consisting of geological mapping,
trenching, pitting and 39 dill holes by the United Nations in
the mid 1980's (United Nations, 1989), primarily in the
eastern portion of the property.
48
o Geological mapping, surface sampling and drilling of 4 holes
(Villanueva, 1997 - Nueva Esperanza Mining Corp.).
The property is underlain by a thick sequence of volcanic rocks of Tertiary age.
The volcanic pile consists of the Matagalpa Formation, a sequence of andesitic
flows and volcanic breccia. This is unconformably overlain by the Padre Miguel
Group that consists of primarily rhyolitic and rhyodacitic ignimbrites. The
property is transected by three main fault sets that have most likely produced
conduits for hydrothermal fluids. The area is considered to be a low sulfidation
epithermal silver-gold system. There are a number (15-20) of roughly parallel
mineralized zones that are defined by quartz veining or strong silication that
have been defined by surface trenching and pitting, underground exploration and
core drilling. By far the largest of these veins is the Guayabillas, that has
been traced over 750 metres along strike and to a maximum depth of 350 metres
and is typically less than 1.5 metres in thickness.
The majority of the data was sampled and assayed at both local and foreign
laboratories, including Bondar-Clegg in Canada and showed no significant
differences (UN, 1989). Polygonal estimates of the mineral resources was
completed on longitudinal sections by the UN and totalled 1.1 million tonnes of
probable reserves grading 10.9 g/t Au equivalent. In addition, ten metallurgical
tests were completed on two bulk samples and gold and silver recoveries were
determined to be 97% and 91%, respectively. Although the data did not include an
adequate number of sample standards and blanks, the methodology used to collect
samples and assaying was appropriate. However, limited infill drilling and
surface sampling completed in the 1990's by Nueva Esperanza Mining Corp. S.A.
("Esperanza") compared reasonably well with surrounding holes, at least to the
extent where elevated silver and gold grades were identified in known areas. It
is for this reason, and SRK's inspection of the mineralized zones while on site,
that provide confidence in the reliability of the data. However, additional
verification sampling or hole "twinning" may be required in any future
exploration efforts to provide better confidence in the data.
In 1997, Esperanza re-interpreted the geology and better correlated individual
veins and silicified zones from hole to hole, thus ensuring that the resources
were calculated for each zone. This polygonal estimate totals 1.5 million tonnes
grading 12.37 g/t Au equivalent (3.5 g/t Au and 493.0 g/t Ag) over a minimum
true width of 1.5 metres. No grade capping was utilized in the resource
estimate. Approximately 600,000 tonnes of the resources occur within the
Guayabillas Vein. Given the drill spacing of 50-100 metres and the variable
grades within the deposit, in the opinion of SRK these resources are classified
as inferred mineral resources.
Additional exploration should concentrate on better defining the controls of the
higher grade mineralization within each structure and assess the potential for
lower grade mineralization adjacent to the high grade zones already defined.
OTHER ACTIVITIES
With the objective of making better use of El Mochito's strategic position in
Central America, during 1995 the Company established a new business development
division in Honduras to initiate new opportunities within Honduras and other
Central American countries.
The Company owns surface rights in the area surrounding the El Mochito mine and
is committed to preserving one of Honduras' largest rain forests and eco-systems
by introducing reforestation and modern farming methods on scrub land left from
earlier cultivation activity. The Company operates small plantations of pepper
and fast growing soft woods and a large coffee plantation.
49
The El Toqui Mine
The Company, through Sociedad Contractual Minera El Toqui ("El Toqui"), owns and
operates the El Toqui zinc/gold mine located in Chile that, except for a brief
time in 1998, has been in production since 1987.
In August 1997, the Company purchased all of the outstanding common shares of
Sociedad Contractual Minera El Toqui, which owns the El Toqui mine in Chile, for
$18.7 million, including $7.8 million for working capital, and a net smelter
return royalty. The royalty is one percent when the LME price of zinc exceeds
US$0.50 per pound and increases to a maximum of three percent when the LME price
of zinc is equal to or greater than US$0.60 per pound.
LOCATION AND ACCESS
The El Toqui mine is located in Chile's Region XI, approximately 1,350
kilometres south of Santiago and 120 kilometres northeast of Coyhaique.
DESCRIPTION
The El Toqui property covers approximately 1,200 square kilometres of
mountainous terrain and includes the currently producing Dona Rosa zinc mine,
the former producing San Antonio and Mallin-Monica zinc/lead mines and an 1,100
tonne per day concentrating plant. The El Toqui operation mines and processes
material which contains zinc, gold, silver, copper and lead. The concentrate
produced by the plant is transported to a deep-water port for export. El Toqui
owns and operates a dedicated hydroelectric power generating plant as well as a
diesel generating plant. The property includes a concentrator, a mine and
maintenance offices, a laboratory and service buildings and houses as well as a
ship loader at Puerto Chacabucco.
HISTORY
The El Toqui deposit was discovered in the early 1970's when two small rich
lead/silver veins, outcropping in a steep-sided valley, were being worked. These
high-grade veins were soon depleted and mining progressed to a series of
manto-type zones. Metallgesellschaft AG owned the property for a number of years
and then sold it to a Chilean entrepreneur. Lac Minerals subsequently acquired a
majority interest in 1987 for US$30 million and, in 1989 became the sole owner
when it acquired the remaining 15 percent minority interest for US$5.5 million.
In 1994, Barrick Gold Corporation ("Barrick") acquired Lac Minerals.
In August 1997, the Company purchased all of the outstanding common shares of El
Toqui from Barrick.
GEOLOGY
The El Toqui property is situated in an area of Jurassic-Cretaceous volcanic and
volcano-sedimentary rocks, which are intruded by intermediate to felsic
porphyritic bodies of Upper Cretaceous to Tertiary age. The volcanic and
volcano-sedimentary rocks have flat to shallow dips in the El Toqui area.
The areas covering the El Toqui claims are mainly characterized by zinc, gold
and copper mineralization in vein, stockwork and disseminated form. The host
rocks are volcanic and sedimentary types, from the Jurassic-Cretaceous period.
The first belt is of the "Toqui type" and is approximately eight kilometres wide
by thirty kilometres long with a northwest orientation, coinciding with the
major structural trend in the region. This belt extends
50
from the source of the River Manihuales, in the northwest, to Cerro Huemules, in
the southeast. Statiform, skarn, mesothermal veins and replacement type
mineralization were found. The area displays favourable geological conditions,
geochemical presence of zinc, lead, copper, gold and molybdenum and important
geophysical anomalies. In general terms, the targets located in this belt are
regarded as attractive for the exploration and development of polymetallic
deposits.
Structurally, the area of the property is characterized by block faulting. The
dominant strike direction is west-northwest to north, but northeast faults of
secondary importance are also present.
The El Toqui property can be divided into two sectors in terms of
mineralization. Zinc and zinc/gold mineralization, as at the El Toqui mine, is
present in the western part of the property within a west-northwest trending
area approximately eight kilometres by 30 kilometres. The El Toqui mining
district occupies a small part of this sector, about five kilometres by six
kilometres. It appears to represent a horst bounded by west-northwest faults.
Zinc/gold mineralization at El Toqui occurs as manto deposits hosted by an eight
metre to 12 metre thick bed of fossiliferous limestone, known as the Main Manto
unit. The Main Manto unit, or Coquina bed, occurs within a sequence of
volcano-sedimentary rocks in the lower part of the Coyhaique Formation.
Sulfides, mainly sphalerite and pyrrhotite, selectively replace the matrix of
the fossil shells, and in places the fossil shells themselves, in the Main Manto
unit. Other sulfides present in lesser quantities include pyrite, galena,
chalcopyrite and arsenopyrite.
The Main Manto unit is not mineralized everywhere. Vertically, the Main Manto
unit contains economic grades in the mine area with thicknesses from a few
metres to twelve metres. In most places, a porphyry sill forms the footwall to
the Main Manto. Locally, apophyses from this sill extend up through the Main
Manto unit.
The three original deposits at El Toqui, Dona Rosa, Mallin-Monica and San
Antonio adjoin each other but are separated by faults. They were likely part of
the same mineralized body, but are now at different elevations due to block
faulting. The Dona Rosa deposit, the most westerly, is faulted down 40 metres to
50 metres from the Mallin-Monica deposit, which in turn is stepped down by
faulting from the San Antonio, the most easterly body. The faults are occupied
by porphyry dikes. In 2000, sufficient exploration activity occurred to identify
several new deposits (Estatuas, Aserradero and Mallin-sur) all believed to be
part of the original mineralized body but now at different elevations due to
faulting.
RESERVES AND RESOURCES
INTRODUCTION
The estimation of mineral resources and mineral reserves at El Toqui is a
two-stage process:
o First, all mineral resources are estimated for the main manto
unit at a minimum width and cutoff grade based upon metal
prices, costs, recoveries and other considerations.
o Second, mineable mineral reserves are estimated by applying a
series of factors and dilution to the mineral resources. The
resource and reserve terminology at El Toqui reflects the
room-and-pillar mining method.
51
MINERAL RESOURCE ESTIMATION
The use of a polygonal-block-based method combined with regularly spaced drill
holes, provides a reasonably accurate estimate of the mineral resources.
To convert mineral resources to mineral reserves, the following assumptions are
made:
o Dilution is added to all resource tonnages at a rate of ten
percent at zero grade, which is based upon a normal over-break
of 0.2 metres on the roof and floor for a typical four metre
high room.
o Room and pillar mining results in a general recovery factor of
80 percent before dilution. In the case of the Mallin-Monica
blocks and polygons and of the Dona Rosa blocks, the first
pass recovery is set at 80 percent followed by a 50 percent
recovery for the remaining pillars.
MINERAL RESOURCE AND MINERAL RESERVE STATEMENT
The table below sets forth the estimated mineral resources and mineral reserves
for the El Toqui mine as at the dates indicated.
EL TOQUI MINE, SUMMARY OF MINERAL RESOURCES AND MINERAL RESERVES
- -------------------------------------------- ------------------------------- -------------------------------
December 31, 2002 November 30, 2001
- -------------------------------------------- ------------------------------- -------------------------------
Tonnes Zinc Gold Tonnes Zinc Gold
(000s) (%) (g/t) (000s) (%) (g/t)
- -------------------------------------------- ---------- ---------- --------- ---------- ---------- ---------
PROVEN AND PROBABLE RESERVES 3,344 7.7 1.4 2,506 8.0 1.8
- -------------------------------------------- ---------- ---------- --------- ---------- ---------- ---------
Measured and Indicated Resources(1) 4,203 8.3 1.4 2,910 8.5 1.6
- -------------------------------------------- ---------- ---------- --------- ---------- ---------- ---------
Inferred Resources 3,050 8.5 0.4 6,362 8.0 0.4
- -------------------------------------------- ---------- ---------- --------- ---------- ---------- ---------
(1) Measured and Indicated Resources include Proven and Probable Reserves.
The most significant change in the mineral resources and reserves from November
30, 2001 to December 31, 2002 is the additional mineral reserves from the
Estatues deposit that has been incorporated into the life of mine plan.
MINING
The El Toqui deposits all dip gently to the south and are amenable to room and
pillar mining. The Dona Rosa mine is accessed via an adit. Mining is carried out
in a single horizon from flat lying mineralization varying in thickness from
eight to 12 metres.
A room and pillar extraction method is used with 11-metre rooms around
eight-metre pillars. Generally, ground conditions are good and roof support
consists of friction split set bolts installed on an as required basis.
The operations are mechanized using electro-hydraulic drill jumbos, a
roofbolting jumbo, eight-cubic yard scooptrams and thirty tonne capacity trucks.
The mine, which is situated well above the valley bottom, is relatively dry.
Rainfall in the area is high and some localized water inflow occurs that is
collected and pumped out.
The mine operations are well staffed and equipped. Daily production is achieved
with only development mining, slashing and some pillar mining. There are three
jumbos and four load haul dumps (three eight
52
yard and one six yard) and two rock bolters. All haulage is done by a
contractor, with loading done by El Toqui personnel.
There are good options to increase the production rate in the future. The
mineral reserves and mineral resources are very extensive and a higher
production rate could easily be sustained.
A key element of the five-year plan is recovery from pillars. It should be noted
that whole pillars are not being extracted. "Pillar recovery" means "pillar
reduction" usually to 50 percent of its current design size.
METALLURGICAL PROCESSING
The El Toqui mine and plant was acquired by the Company in 1997. At that time,
it was recognized that El Toqui was a high cost producer but certain operating
improvements were planned to reduce the high costs. In September 1998, milling
was suspended while a capital improvement plan was implemented, which plan was
completed in January 1999. The mill processes 1,100 tonnes per day of ore
grading 9.2 percent zinc, 0.8 percent lead, 0.69 grams of gold per tonne and 29
grams of silver per tonne.
Ore from underground is trucked to surface stockpiles and/or the crushing plant.
Crushing is performed in three stages (jaw and cone crushers with vibrating
screens) to reduce the ore to minus seven millimetres. Grinding utilizes three
parallel ball mill grinding circuits, with each ball mill circuit being in
closed circuit with cyclones. Conventional differential flotation including
rougher and cleaner flotation circuits produce saleable gold/lead concentrate
and zinc concentrate. The concentrates are separately thickened and filtered on
vacuum and pressure filters before being conveyed to a storage area in the mill.
The flotation tailings are pumped to a tailings impoundment area from which the
tailings effluent is recycled to the mill. The concentrates are trucked 120
kilometres to Puerto Chacabuco for subsequent export to custom smelters for
refining.
The gold/lead concentrate contains 15 to 30 percent lead, 100 to 120 grams of
gold per tonne and 1,500 to 2,000 grams of silver per tonne. For the year ended
December 31, 2002, 4,682 ounces of gold and 282,383 ounces of silver contained
in 5,424 dry tonnes of gold/lead concentrate were reported. Penalty elements
contained in the gold/lead concentrate are bismuth and arsenic which are
penalized when they exceed 0.3 percent and 0.5 percent, respectively.
Zinc concentrate during 2002 was 50.8 percent zinc content with 12 percent iron.
The zinc concentrate iron content is penalized when it exceeds eight percent.
The Company is currently upgrading the mill to a rate of 1,500 tonnes per day.
Construction of a new crushing system will be completed during 2003. The new
crushing plant will have much greater capacity than the existing facility and
will provide for a 25 percent plant capacity increase as well as increase
operator efficiency.
PRODUCTION
The following table summarizes production information from the El Toqui mine for
the years indicated:
- -------------------------------------- ----------------------------------------------------------------------
Year ended December 31,
----------------------------------------------------------------------
2002 2001 2000 1999
- -------------------------------------- ----------------- ----------------- ----------------- ----------------
Milled (tonnes) 424,459 427,552 416,418 391,872
- -------------------------------------- ----------------- ----------------- ----------------- ----------------
Zinc (%) 9.2 8.4 8.4 9.1
- -------------------------------------- ----------------- ----------------- ----------------- ----------------
Gold (grams/tonne) 0.7 0.9 0.9 0.8
- -------------------------------------- ----------------- ----------------- ----------------- ----------------
Concentrate Production
- -------------------------------------- ----------------- ----------------- ----------------- ----------------
Zinc (tonnes) 70,752 64,356 64,356 65,924
- -------------------------------------- ----------------- ----------------- ----------------- ----------------
53
- -------------------------------------- ----------------- ----------------- ----------------- ----------------
Gold (tonnes) 5,424 3,010 3,010 2,992
- -------------------------------------- ----------------- ----------------- ----------------- ----------------
Metal in Concentrates
- -------------------------------------- ----------------- ----------------- ----------------- ----------------
Zinc (tonnes) 35,907 31,226 31,226 32,105
- -------------------------------------- ----------------- ----------------- ----------------- ----------------
Gold (ounces) 4,682 6,232 6,232 4,938
- -------------------------------------- ----------------- ----------------- ----------------- ----------------
Silver (ounces) 282,383 166,568 166,568 139,250
- -------------------------------------- ----------------- ----------------- ----------------- ----------------
Minesite Operating Costs
- -------------------------------------- ----------------- ----------------- ----------------- ----------------
Per tonne milled (US$) 26.04 26.94 26.94 27.26
- -------------------------------------- ----------------- ----------------- ----------------- ----------------
Total Cash Costs
- -------------------------------------- ----------------- ----------------- ----------------- ----------------
Per pound payable zinc (US$) 0.32 0.44 0.44 0.43
- -------------------------------------- ----------------- ----------------- ----------------- ----------------
HUMAN RESOURCES
El Toqui currently has a workforce of 231 people consisting of 187 hourly
personnel and 44 staff personnel. Of the 231 personnel, 229 are at the minesite
and two are in the Santiago office. The El Toqui employees are unionized with
representation being provided by the "Sindicato de Trabajadores de Sociedad
Contractual Minera El Toqui". A new three year collective agreement was signed
in October 2001.
ENVIRONMENTAL MANAGEMENT AND PERMITTING
The El Toqui mine operates under various Chilean permits and
authorities related to the environment. Site discharge waters are regulated
under Decreto No. 90 (Republica de Chile, 2000), which establishes water quality
limits for all effluents (discharges) to surface waters. Decreto No. 90 was
passed as law in May 2000 and published on March 7, 2001. The legislation came
into force on September 7, 2001. Facilities that were discharging to surface
waters at the time of the legislation coming into force (such as SCM El Toqui)
have a five year period after publication, that is until September 7, 2006, to
bring these discharges into compliance with specific water quality parameters.
Mill tailings are discharged to the Confluencia tailings impoundment where they
are separated via hydro-cyclone into coarse and fine fractions. The coarse
fraction is utilized to construct the tailings dams in a centre line
configuration in accordance with Chilean regulations. The fine fraction reports
to the interior of the pond where it is deposited subaqueously. Reclaimed water
is pumped back to the mill for mineral processing while any excess is discharged
via two sedimentation ponds to the Toqui River.
The Confluencia impoundment is expected to have sufficient storage capacity to
contain all tailings produced until 2004. An independent consulting firm has
been contracted for dam design and on-going geotechnical evaluations.
There are three additional tailings facilities that are out of service and at
various stages of reclamation.
A study of the acid generation potential of cycloned tailings was completed by
an independent consulting firm in July 2000. The study concluded that both the
underflow and overflow tailings have the potential to generate acidic drainage.
Zinc release is significant at circum-neutral pH levels.
Chile is currently developing regulatory requirements for mine closure
and reclamation. A working document entitled Documento de Trabajo - Ley que
Regula el Cierre de Faenas e Instanaciones Mineras (Working Document - Law to
Regulate the Closure of Mines and Mining Installations) dated December 2000, as
well as a draft regulation, the Reglamento de la Ley que Regula el Cierre de
Faenas e Instalaciones Mineras (Regulation for the Law to Regulate the Closure
of Mines and Mining Installations)
54
are currently being circulated and reviewed by stakeholders. As of November
2002, the regulations have not been approved.
BWR has developed a conceptual Reclamation and Closure Plan for the El
Mochito mine. The following summarizes the key elements of the closure plan:
o Covering and revegetating the tailings disposal areas (out of
use and existing operating areas);
o Use non-acidic drainage generating waste rock as cover and
backfill maerial during reclamationl
o Dispose of potential acidic drainage generating waste rock in
the underground mine;
o Close and seal (with concrete plugs) all adits, mine portals
and ventilation raises;
o Allow the underground mine to flood;
o Covering and capping former and existing solid waste disposal
areas;
o Salvage equipment and supplies;
o Removal of hazardous waste materials;
o Demolishing and disposing of all surface infrastructure,
including buildings, concentrator plant, power generation etc;
o Transferring selected assets to the local community for their
continued use.
Offsite, facilities that are presently owned and/or operated by SCM El Toqui
will require the following activities as part of closure and reclamation.
The housing facility at Manihuales, located within the community, will likely be
transferred to the municipality. The dam and hydroelectric generating station on
the Rio Toqui will likely be transferred to a third party. The shiploading
facilities at Puerto Chacabuco will be disassembled and moved to another
location for reuse. The warehouse space at SCM El Toqui has utilized will be
returned to the owner.
A five-year monitoring program is planned, encompassing the two-year reclamation
implementation period and three years of post-closure monitoring. Elements
proposed to be monitored include water quality and flow of seepage from the
tailings impoundments, water quality of the receiving environment, dam stability
and revegetation success.
Two items will likely need to be examined further in order to finalize the
closure and monitoring plans. First, the impact of flooding the underground mine
on groundwater and surface water resources, particularly those used by residents
downstream of the mine. The water quality in the flooded workings may be altered
from the background groundwater quality. The amount of change and its potential
impact on downstream users will need to be assessed.
The second issue is the length of the post-closure monitoring period. Given the
potential for acidic drainage conditions to develop in the tailings impoundment
and dyke and the wet climate of the mine site, the plan of leaving the site five
years after production has ceased may be optimistic. The issue will have to be
examined more closely when preparing for post-closure activities.
55
The financial commitment at closure is estimated to be in the order of $3.0 to
$5.0 million in capital, based upon the elements presented in the closure plan.
The financial commitment could change depending on whether Chilean regulators
choose to insist on a more stringent closure plan, whether the closure measures
prevent acid generation, as well as the need to treat excess water and seepage.
The Chilean government does not require security to be posted.
EXPLORATION
Exploration potential in the El Toqui district is considered excellent for
identifying additional resources and reserves. This has been demonstrated by the
success of the 1998-2001 exploration program.
Exploration work during 2002 focussed on additional soil sampling and a
compilation of all of the geological information amassed in the El Toqui
District to date. The available geological database suggests that the district
has a favourable potential for exploration and the discovery of additional
deposits of economic importance, especially in areas which show evidence of
skarn-type mineralization.
As a result of a detailed review by an independent qualified person, a new
geological model has been developed for the Toqui District. The new geological
model holds significant promise and indicates that further work is required for
confirmation and Breakwater intends to pursue this work.
The Langlois Mine
The Company acquired the Langlois zinc/copper mine located near
Lebel-Sur-Quevillon, Quebec effective May 1, 2000. The Langlois mine was placed
on temporary care and maintenance in November 2000 pending the preparation of a
feasibility study, the results of which are addressed below.
ACQUISITION
In May 2000, the Company purchased the Bouchard-Hebert and Langlois zinc/copper
mines for US$40.3 million (Cdn$63.5 million). The purchase price allocated to
the Langlois mine was US$19.8 million (Cdn$31.3 million) which included
approximately US$0.9 million (Cdn$1.3 million) of working capital.
LOCATION AND ACCESS
The Langlois mine is located in north-western Quebec, approximately 48
kilometres northeast of the town of Lebel-sur-Quevillon and 213 kilometres north
of Val d'Or. Lebel-sur-Quevillon has a population of 3,500. The mine is accessed
via a gravel road jointly maintained by the Company and a forest products
company with operations in the area.
56
DESCRIPTION
The underground mine facilities include a headframe, a paste backfill plant,
mechanical and electrical shops, a service building, a zinc/copper concentrator
and a tailings pond. The mine produces zinc and copper concentrates, which are
sold and forwarded to smelters for further processing. From such processing,
gold and silver also result as by-products.
The mine is equipped with a 905 metre deep four-compartment shaft. There are two
hoists, a three-metre diameter double drum hoist for skipping and a 2.4 metre
diameter double drum service hoist. Two seven tonne skips are used to hoist the
blasted material to surface. At present, there is a crusher station on the
bottom level of the mine. However, due to severe ore-pass wall erosion and
consequent dilution, a new loading facility was established on the 11th level.
The property is held through a 133 hectare mining lease granted until the year
2015. In addition, there are 367 claims surrounding the lease covering 5,710
hectares in Grevet and Mountain Townships. There are no royalties payable on
mineral production from the Langlois mine. The lease, upon expiry, may be
renewed by formal application to the applicable governmental authorities.
HISTORY
The deposit, originally known as the Grevet Project, was discovered in 1989 by
Serem-Quebec Inc. (50 percent) and VSM Exploration Inc. (50 percent). Cambior
acquired its initial 50 percent interest in the Grevet Project in July 1992 with
the acquisition of VSM Exploration Inc. In September 1993, Cambior purchased the
remaining 50 percent interest in the project from Serem-Quebec Inc. to hold a
100 percent interest.
In 1994, Cambior commenced an underground exploration program designed to
delineate mineable reserves. Due to the success of the underground exploration
program, development work on the property commenced in the third quarter of 1994
and was completed in December 1995. Commercial production began at the mine in
February 1996.
Production at Langlois was halted in December 1996 due to high dilution problems
in the mine. These problems were rectified by modifications to the mining method
and production was resumed in July 1997.
The mine was purchased by the Company in May 2000. During the months of June and
July, the ore-pass system from the main production zone was out of service while
a new system was being commissioned. This had a negative impact on mill
throughput and grade.
On November 28, 2000, the Company suspended operations at the Langlois mine due
to operating problems associated with the main ore-pass system and low zinc
prices. The difficulties with the ore-pass system combined with a drop in metal
prices and high treatment charges made it uneconomic to operate the mine until
it is properly developed and operated at higher milling rates and/or lower
costs.
The temporary suspension of operations was expected to provide the Company with
the time necessary to compile new geological data and design a long-term
development and operating plan that would allow for production at lower
operating costs. SRK was contracted to conduct a full feasibility study
including the latest drill results of Zone 97 and a complete rework of the mine
design and plan. The feasibility study was issued in August 2001.
57
In the feasibility study, a decision was made to select a production rate of
450,000 tonnes per year and to increase the cutoff grade, creating a high-grade
alternative with a mine life of eight years. The feasibility mine plan does not
include mining of all of the mineable reserves, since it is a high-grade
alternative. High-grade mining in the feasibility study does not isolate the
lower grade reserves, which are currently excluded from the mining schedule.
These reserves can be brought into production if metals prices increase
sufficiently.
The feasibility operating plan incorporates several improvements to ensure
reliability of production and to control costs, and provides a construction and
development work schedule to prepare for recommencement of mining. The operating
schedule for the underground mine will be five days per week, two eight-hour
shifts per day.
At a zinc price of US$0.50 per pound, the feasibility study indicates that the
total net pre-tax cash flow is Cdn$60.9 million. The internal rate of return is
24.0 percent and the net present value at eight percent is $26.4 million. The
net present value at ten percent is $20.9 million. Further information regarding
the feasibility study is set forth below.
During the fourth quarter of 2002, a drill program totaling 7,935 metres was
initiated. The objective of this drill program is to further delineate and
upgrade resources to reserves in Zone 97, both above 6 level and below 13 level.
The drill program was completed in April 2003, and SRK will update the
feasibility study to include any new mineral reserves. The study is expected to
be completed during the second quarter of 2003.
GEOLOGY
The Langlois mine produces zinc (along with lesser values of copper, silver and
gold) from narrow, tabular VMS bodies. They are hosted within mafic to
intermediate volcanic and volcaniclastic units in the central-east portion of
the northern Archean volcanic belt of the Abitibi Sub-province or, more
precisely, within the Miquelon segment. The lithologies in the area
predominately consist of a succession of mafic to intermediate lava flows and
volcaniclastic with less abundant felsic volcanic and sedimentary units. The
rock sequence has been affected by a regional deformation, which forms
sub-vertical isoclinal folds. The regional metamorphism reached the green schist
facies. The predominant structure in the area is the Cameron shear zone, which
trends 120 degrees and extends for more than 80 kilometres along strike and is
up to five kilometres thick. The massive sulfide horizons at the Langlois mine
are hosted by the strongly schistosed rocks of the Cameron shear zone.
The Langlois mine contains four zinc-rich orebodies consisting of zones of
massive sulfide, primarily pyrite and sphalerite, occurring within a thick,
highly deformed felsic volcanic sequence injected by numerous barren mafic
dikes. Each massive sulfide body is relatively thin (one to eight metres), but
with considerable vertical and lateral extensions (more than 500 metres in
either direction). The massive sulfide zones trend easterly with a near vertical
dip, sub-parallel to the regional structural fabric. The zones are stacked
across the felsic sequence along a narrow corridor slightly oblique to the main
structural trend. From southwest to northeast the zones are: Zone 5 (small
uneconomic lens near surface), Zone 4, Zone 3 and Zone 97. In longitudinal
section, each massive sulfide zone portrays an elongated lensoid shape, whose
long axis plunges moderately towards the southeast, parallel to the plunge of
the regional stretching lineation. In addition, the centre of gravity of each
lens becomes progressively deeper moving along the stacking corridor toward the
northeast. Consequently, the top of Zone 97 is located at approximately 300
metres below surface. Ore production at the Langlois mine has come exclusively
from two zones, namely Zones 3 and 4, while Zone 97 was discovered in 1994 but
was not fully defined until recently.
58
Mafic dikes cut the mineralized zones in many areas, and have historically been
a major contributor to dilution. In addition, the well-foliated, chloritic
volcanic host rocks have contributed to ground-control problems and often
excessive dilution.
RESERVES AND RESOURCES
INTRODUCTION
The mineral resources and mineral reserves for the Langlois mine occur within
three separate zones, namely Zones 97 and 3, which host the majority of the
resources and reserves, and Zone 4. The current mineral resources and mineral
reserves for Zones 3 and 4 are essentially the same as the January 31, 2001
mineral resources calculated by the Company, while the mineral resources for
Zone 97 have been re-estimated by SRK incorporating the latest drill results as
part of the feasibility study. The current mineral reserves are based upon a
mining plan that was designed to optimize the economics of the mineral resources
after examining various mining and processing scenarios.
MINERAL RESOURCE ESTIMATION - ZONES 3 AND 4
In general, the Company has calculated the mineral resources and mineral
reserves utilizing two-dimensional polygons on cross-section, using the
information from core drilling and underground chip sampling across development
faces. Two-dimensional kriging and polygons on longitudinal section have also
been used to a lesser degree, typically in areas where there is less available
data. The resources and reserves are based upon a minimum mining width of three
metres.
CONVERSION OF MINERAL RESOURCES TO MINERAL RESERVES
The mineral reserves were calculated by converting indicated or measured
resources based upon a minimum mining width of three metres for Zones 3 and 4
and 2.2 metres for Zone 97. The mineral reserves consist of contiguous zones of
mineralization delineated in the geological model, while isolated areas are not
included.
MINERAL RESOURCE AND MINERAL RESERVE STATEMENT
The table below sets forth the estimated mineral resources and mineral reserves
for the Langlois mine as at the dates indicated.
LANGLOIS MINE, SUMMARY OF MINERAL RESOURCES AND MINERAL RESERVES
- ----------------------- ----------------------------------------------- --------------------------------------------
December 31, 2002 November 30, 2001
- ----------------------- ----------------------------------------------- --------------------------------------------
Tonnes Zinc Copper Gold Silver Tonnes Zinc Copper Gold Silver
(000s) (%) (%) g/t g/t (000s) (%) (%) g/t g/t
- ----------------------- ---------- ------- ---------- -------- -------- --------- ------ --------- -------- --------
Proven and Probable 2,903 11.2 0.7 0.1 53 2,903 11.2 0.7 0.1 53
Reserves
- ----------------------- ---------- ------- ---------- -------- -------- --------- ------ --------- -------- --------
Measured and
Indicated Resources(1) 4,862 11.0 0.7 0.1 53 4,862 11.0 0.7 0.1 53
- ----------------------- ---------- ------- ---------- -------- -------- --------- ------ --------- -------- --------
Inferred Resources 1,547 8.1 0.5 0.1 37 1,547 8.1 0.5 0.1 37
- ----------------------- ---------- ------- ---------- -------- -------- --------- ------ --------- -------- --------
(1) Measured and Indicated Resources include Proven and Probable Reserves.
MINING
The mining method initially implemented in 1996 at the Langlois mine was
transverse longhole stoping using 114 millimetre ITH drills. The level spacing
was 60 metres and blocks were 20 metres along strike
59
and four to five metres thick. Remote scoops were used in mucking. Once
terminated, the stopes were filled with high-density fill with 78 percent
solids.
The mining method was plagued from the beginning with excessive dilution. The
excessive dilution stemmed from the height of the stopes and the sericitization
and chloritization of the joint sets and the wall erosion from the ore passes.
In 1997, a decision was made by Cambior to stop operations and convert the 60
metre high stopes into smaller 15 metre or 30 metre stopes depending on the
width of the mineralization.
The revised mining method saw the block sizes reduced to 20 metre heights and 20
metre lengths (15 metres between sublevels). Where widths were over three
metres, sublevels were spaced at 30 metres. Smaller production drill holes were
employed in order to reduce the blast damage (54 millimetre diameter). Remote
scoops that range from two cubic yards to 3 1/2 cubic yards were used in
mucking.
Production drilling in the 30 metre high stopes was carried out using a CMS 360
ITH drill, drilling 114 millimetre holes. Patterns were three holes wide with a
burden of 2.5 metres to three metres depending on the width. Two other
production drills were used for production drilling and cable bolting. In the 20
metre high stopes, a standard career-mounted top-hammer longhole rig was used
drilling 54 millimetre diameter holes. Hole lengths were 15 metres on a square
drill pattern of 1.2 metres by 1.2 metres.
The stope and drift rounds were blasted using ANFO. Most of the holes were
drilled down except in the extremities of the zone where no access is present
above. Powder factors are 0.6 kilogram/tonne to 0.9 kilogram/tonne. Seventy-six
millimetre plastic casings were used in the 114 millimetre holes to reduce
problems of lost holes and reduce the re-drilling problems. A gradual conversion
of the production drilling to 54 millimetre and 64 millimetre diameter holes
took place in order to reduce the blast damage caused by the larger diameter
holes. All the blasting is done centrally and the fans are turned off before
every blast in order to avoid damage from the potential sulfur blasts.
The mine is largely trackless, apart from some sublevels that do not have ramp
access. In general, where the mineralized widths were over three metres, a ramp
access to the sublevel was made. All broken material from the stopes was hauled
to a V-shaped ore-pass system that converges to a crushing station on the 14th
level. Only one truck existed within the mine and it was used only
intermittently.
All backs were screened with wire mesh. 1.5 metre rebars were placed on a 1.1
metre by 1.1 metre pattern. Resin bolts were used in the back to avoid corrosion
of the ground support due to acid mine water. The walls were bolted with 1.5
metre split set bolts and strapped at two heights on the walls.
Cable bolting was used only on the top stopes. These were six metre cables
spaced every 2.5 metres used to maintain the drift after the stope had been
blasted. Three cables were installed on each side of the drift. Holes were
drilled, one down, one flat and one up. The cabling helped in reducing the
dilution at the drift elevation, but did little for the central part of the
stope.
Two main ventilation raises supply the fresh air to the mine. During the summer
they use a total of 248,000 cubic feet per minute. Exhausting is through the
main production shaft and through a raise bore-hole in Zone 97.
Primary dewatering pumps are multistage Mather and Platts. The average pumping
rate is 100 US gallons per minute. The main pump stations are located on the
13th and 16th levels.
Serious problems developed with the existing ore-pass system being used at the
mine. The ore-passes
60
located close to the shaft in Zone 3 failed due to the excessive scouring of the
walls of the ore-pass causing excessive dilution. Production was also
interrupted due to hang-ups in the ore-pass caused by large slabs of waste.
METALLURGICAL PROCESSING
During operation, the Langlois mill processed approximately 1,800 tonnes per
day, five days per week, however, it has a capacity of 2,500 tonnes per day.
Zinc and copper concentrates are produced by differential flotation, with
payable gold and silver recovered in the copper concentrate.
Ore is crushed in an underground jaw crusher and then sent to the grinding
circuit, which consists of an open circuit SAG mill and a ball mill in closed
circuit with cyclones. The grinding circuit cyclone overflow feeds the copper
flotation circuit, which contains conventional rougher, scavenger and three
cleaner flotation stages with a regrind mill in the circuit to maximize the
copper concentrate grade. The final copper concentrate is pumped to the copper
thickener.
The copper first cleaner tailings and copper scavenger tailings are pumped to
the zinc flotation circuit where they are conditioned in two tanks with lime to
increase pH and depress pyrite. The zinc flotation circuit includes roughers,
scavengers and three cleaner stages. The tailings from the zinc scavenger and
zinc first cleaner scavenger constitute the final mill tailings and are pumped
to the paste backfill plant. The zinc third cleaner concentrate is pumped to the
zinc thickener.
Underflows from the zinc and copper thickeners are separately pumped to storage
tanks and then to designate press filters. The filtered concentrates are
conveyed to their respective loading stations. A storage building is annexed to
the filter area/loading station for storage of final concentrates if direct
shipping is delayed.
Approximately 60 percent of the tailings are used in paste backfill and the
remainder is sent to the tailings pond which covers an area of 1.88 square
kilometers and is located three kilometres from the mine site. The tailings
deposition is subaqueous to prevent acid generation. Most of the tailings pond
effluent overflow is recycled as mill process water, with a portion of the
tailings pond effluent overflow released to the Wedding River after treatment
with caustic lime to maintain pH levels in accordance with regulations.
The paste backfill plant thickens and filters mill tailings and then mixes the
tailings with cement and water to make a paste that flows underground by
gravity. The actual capacity of the paste backfill plant is 75 tonnes per hour
using only one disc filter of the two available.
The zinc concentrate has an average grade of 53.4 percent zinc, and the copper
concentrate has an average grade of 23.9 percent copper. Penalty charges are
paid for the iron content in the zinc concentrate and the lead content in the
copper concentrate.
Zinc concentrate is loaded on CN railcars directly at the mine site and
transported to Noranda's CEZ smelter in Valleyfield or to the port of Montreal.
Copper concentrate is sent by rail to Noranda's Horne smelter in Rouyn-Noranda.
FEASIBILITY STUDY
SRK was retained by the Company in November 2000 to prepare a feasibility study
with the primary objective of developing an operating plan to bring the Langlois
mine back into production on a profitable basis. After reviewing several
operating scenarios, a production rate of 450,000 tonnes per year and an
increased cut-off grade were selected, creating a high-grade alternative with a
mine life of eight years.
61
Before the Langlois mine can resume full production, approximately 18 months of
construction and development work are required.
Based upon the metal prices shown in Table I below, the total net pre-tax cash
flow is estimated to be $60.9 million. The internal rate of return is 24.0
percent and the net present value at eight percent is $26.4 million. The net
present value at ten percent is $20.9 million. The project economics are
sensitive to the price of zinc. A ten percent change in the zinc price causes a
change of $28.5 million in net pre-tax cash flow.
Table I - Metal Prices and Exchange Rate
----------------------------------------
Zinc US$0.50/pound
Copper US$0.80/pound
Silver US$5.00/ounce
Gold US$300/ounce
Exchange Rate Cdn$0.66/$US
Based upon these price assumptions, the operating cost per pound of payable zinc
including smelting, shipping and by-product credits for copper, silver and gold
is US$0.385.
A decision to reopen the Langlois mine awaits an improvement in the price of
zinc and arranging financing.
The feasibility mine plan provides for milling 2,903,130 tonnes of ore over a
period of eight years based upon mineral reserves as of June 1, 2001 classified
by the Company using the CIM Standards (August 2000).
The feasibility mine plan is a high-grade mining alternative and does not
isolate the lower grade reserves, which are currently excluded from the mining
schedule. These reserves can be brought into production if metal prices increase
sufficiently.
The planned average zinc head grade of 11.17 percent is significantly higher
than the head grades achieved during the last four years of production, which
ranged from 6.4 to 7.9 percent. The planned zinc grade is higher because:
(a) Zone 97 high-grade tonnes will become part of the production
stream for the first time;
(b) the feasibility plan incorporates a higher cut-off grade than
past mining; and
(c) the feasibility plan includes mining of the higher grade shaft
pillar which was previously considered sterilized.
The feasibility operating plan incorporates the following improvements to ensure
reliability of production and to control costs:
(a) There are no ore passes planned for Zone 97 due to their
unreliable nature. A fleet of new 20 tonne trucks will haul
ore from stoping areas to the shaft area, and the past problem
of collapsing ore passes will be avoided.
(b) A new steel lined storage bin is planned from level 10 to
level 11 to provide ore storage while overcoming the past hang
up problems.
(c) The feasibility study mining plan provides for pre-development
of several sublevels in Zone 97 so that it can produce higher
grade ore continuously when mine operations resume.
62
(d) Several improvements are planned for the underground mobile
equipment fleet, including:
(i) refurbishing of the existing mobile equipment prior
to going back into service;
(ii) several new units will be purchased to meet mine plan
requirements;
(iii) many improvements are planned to the mobile
maintenance program;
(iv) two graders will be purchased, along with a small
crusher for road material; and
(v) a new underground garage is planned on level 13.
(e) Zone 97 employs an overhand benching method with a reduced
stoping height to control dilution and avoid the associated
delays.
An estimated $33.1 million in capital is required over the life of the mine of
which approximately $16.0 million must be expended prior to the start of
production. The majority of the capital requirements are related to the
underground mine. The total mine operating cost is estimated at Cdn$57.56 per
tonne milled over the life of the mine. This cost is in the range of the
historical 2000 operating cost.
Table II summarizes the estimated life-of-mine production statistics.
Table II - Life-of-mine Production Statistics
---------------------------------------------
Total
Production
Tonnes Milled 2,903,000
Head Grade
Zinc (%) 11.2
Copper (%) 0.7
Gold (grams/tonne) 0.1
Silver (grams/tonne) 52.9
Recoveries
Zinc (%) 94.2
Copper (%) 79.2
Gold (%) 29.0
Silver (%) 35.8
Concentrate Grade
Zinc (%) 54.7
Copper (%) 23.7
Tonnes of Concentrate
Zinc (tonnes) 558,000
Copper (tonnes) 68,000
Metal Contained in Concentrates
Zinc (tonnes) 305,000
Copper (tonnes) 16,000
Gold (ounces) 2,000
Silver (ounces) 1,766,000
63
PRODUCTION
The following table summarizes production information from the Langlois mine for
the period indicated.
- ------------------------------------------------------------------------------- -----------------------------
Eight months ended
December 31, 2000(1)
- ------------------------------------------------------------------------------- -----------------------------
Milled (tonnes) 198,788
- ------------------------------------------------------------------------------- -----------------------------
Zinc (%) 7.8
- ------------------------------------------------------------------------------- -----------------------------
Copper (%) 0.3
- ------------------------------------------------------------------------------- -----------------------------
Gold (grams/tonne) 0.2
- ------------------------------------------------------------------------------- -----------------------------
Silver (grams/tonne) 30
- ------------------------------------------------------------------------------- -----------------------------
Concentrate Production
- ------------------------------------------------------------------------------- -----------------------------
Zinc (tonnes) 27,498
- ------------------------------------------------------------------------------- -----------------------------
Copper (tonnes) 2,227
- ------------------------------------------------------------------------------- -----------------------------
Metal in Concentrates
- ------------------------------------------------------------------------------- -----------------------------
Zinc (tonnes) 14,519
- ------------------------------------------------------------------------------- -----------------------------
Copper (tonnes) 486
- ------------------------------------------------------------------------------- -----------------------------
Gold (ounces) 367
- ------------------------------------------------------------------------------- -----------------------------
Silver (ounces) 58,458
- ------------------------------------------------------------------------------- -----------------------------
Minesite Operating Costs
- ------------------------------------------------------------------------------- -----------------------------
Per tonne milled (US$) 55.71
- ------------------------------------------------------------------------------- -----------------------------
Total Cash Costs
- ------------------------------------------------------------------------------- -----------------------------
Per pound payable zinc (US$) 0.52
- ------------------------------------------------------------------------------- -----------------------------
(1) The Company acquired the Langlois mine effective May 1, 2000 and placed it
on care and maintenance in November 2000.
HUMAN RESOURCES
When the mine was in full production there were a total of 162 workers, 19
contractors and 59 staff. Mine production was scheduled for five days per week,
with weekends used for maintenance, hoisting and haulage when required. The mine
crew normally worked two eight-hour shifts per day. The mill normally operated
five days per week. The hourly paid employees of Langlois are unionized with
representation being provided by the USWA. The negotiation of the first
collective agreement was concluded in November 2001. The collective agreement is
for a term of three years and provides for further discussion limited to wages
and benefits when the mine announces its plans to re-open. The membership
ratified the collective agreement at a vote held on December 21, 2001.
Most of the Langlois personnel live in the town of Lebel-sur-Quevillon, located
48 kilometres from the mine site.
ENVIRONMENTAL MANAGEMENT AND PERMITTING
The mine operates under required Certificates of Authorization issued by the
Quebec Ministry of Environment under the Loi sur la qualite de l'environnement
(L.R.Q., chapter Q-2). In addition, all approvals/leases required for land use
(tailings pond, quarries and pits) have been issued by the Quebec Ministry of
Natural Resources pursuant to the Loi sur les mines (L.R.Q., chapter M-13.1).
There are two surface dumps for the storage of waste rock. One dump is for the
storage of non-acid generating rock and the other is for material with a low
potential for acid generation.
Approximately 60 percent of the mill tailings produced is used for paste
backfill underground with the remainder discharged subaqueously at the tailings
impoundment. Retaining dykes are constructed of a sand and gravel mass with
slope protection comprised of clean, non-acid generating mine rockfill.
64
Seepage control within the dykes is achieved with a low permeability
geosynthetic clay liner (thin layer of bentonite sandwiched between two layers
of geotextile). The pond has the capacity to store all of the tailings produced
in the feasibility study. At the end of mine life, there will be approximately
837,000 tonnes of tailings in the tailings pond. The tailings dams will not
require raising for the tonnes mined in the feasibility study.
During operations, water from the tailings pond is reclaimed and used in the
mill. Excess water is discharged to the Wedding River after being treated with
caustic soda to elevate the pH to compliance levels.
During the current temporary closure period (which began December 2000) the mine
is being kept on a care and maintenance program. The underground workings
continue to be dewatered and all water is treated with lime before being sent to
the tailings pond. All required environmental sampling, monitoring, and
reporting continues.
Langlois holds a Restoration Plan (the "Plan") that received approval from the
Quebec Ministry of Natural Resources, in consultation with the Quebec Ministry
of the Environment, in August 1996. The Plan was subsequently updated, as
required, and approved in January 2000. The Plan consists of the following main
elements:
o Placing non-acid generating waste rock underground and placing
the acid-generating waste rock under one metre of water in the
tailings pond to avoid acid generation.
o Following closure of the tailings pond, directing surplus
water through the emergency discharge and building an
alternate discharge point on the south-eastern side of the
pond.
o Dismantling all the buildings and infrastructure, moving
equipment to another mining operation and disposing of any
remaining hazardous materials off-site.
o Re-vegetating the site.
The next update of the Plan is required by August 2004. The cost to reclaim the
mine site is currently estimated to be $1.7 million.
EXPLORATION
The Company's land holdings around the Langlois mine include several mining
properties that cover a total area of 5,836 hectares in 375 claims. These
properties extend over more than 12 kilometres laterally and are underlain by
the same stratigraphic rock sequence that hosts the massive sulfide zones at the
Langlois mine. The massive sulfide horizons at the Langlois mine are elongated
and narrow.
Extensive exploration works conducted by Cambior and its predecessor companies
in the area located several scattered mineralized horizons that carry anomalous
zinc values. These horizons are predominately located along the general
elongated trends or parallel to the Zones 3, 4 and 97.
The "Grevet B" Zone is a narrow massive sulfide horizon that occurs near the
surface some 1,000 metres south and 2,000 metres east of the mine working area.
Ressources Metco Inc. completed a preliminary drilling program on the Grevet B
property. Under an option agreement, Ressources Metco completed nine drill holes
(1,558 metres) to assess the Grevet B deposit (220,000 tonnes at 8.82 percent
zinc) as part of the feasibility study that was completed by SRK in 2001.
There is a strong potential for discovery of other satellite lenses. In 1998,
exploration drilling intersected sub-economic massive sulfides 300 metres west
of Zone 97, between levels 8 and 10. This sector is open
65
down-plunge and should be drill tested when underground development on level 13
is completed. Lens 4 has also the potential to host satellite lenses below level
9. The Company is currently using lithogeochemistry to define a marker horizon
and other favourable horizons for exploration.
The Caribou Mine
The Company, through CanZinco, also owns the Caribou zinc/lead/silver mine
located in New Brunswick. The Caribou mine has been placed on care and
maintenance for an indefinite period of time due to poor metal recoveries and
low metal prices.
LOCATION AND ACCESS
The Caribou mine consists of an underground mine and mill located in Restigouche
County in northeastern New Brunswick, 50 kilometres west of Bathurst, New
Brunswick and an open pit mine (formerly known as the Restigouche property)
located approximately 80 kilometres west of Bathurst and 30 kilometres from the
Caribou mill. Access is by way of Provincial Highway 180 to within four
kilometres of the minesite and then by local mine road. Access to the open pit
mine is also by way of Provincial Highway 180 and three kilometres by local mine
road.
DESCRIPTION
The Caribou mine property covers an area of 3,106 hectares and is held under a
mining lease. The Caribou underground mine production is subject to a net
smelter return royalty which escalates from one to three percent based upon zinc
prices ranging from US$0.65 to US$0.85 per pound and is capped at a maximum of
$7.8 million. The Caribou underground mine production is also subject to a 10
percent net profit royalty. Net profit is calculated by deducting from revenue
all operating, administration, depreciation, amortization and interest costs,
including all costs incurred in prior years.
The Caribou open pit mine was acquired in October 1995 from Marshall Minerals
Corp. for 1,500,000 Common Shares and a royalty payment on each tonne mined and
hauled to the Caribou mill for processing. The amount of the royalty is $1.00
per tonne when the price of zinc is less than US$0.55 per pound, escalating to a
maximum of $4.00 per tonne at a price in excess of US$0.70 per pound. The
Caribou open pit zinc/lead/silver deposit is shallow and has higher lead and
silver grades than the Caribou underground mine, but is too small to justify
construction of its own processing plant. The Caribou open pit mine had not
previously been in production. The Caribou open pit and underground mines are
referred to collectively herein as the "Caribou mine".
A 3,000 tonne per day concentrator complex is located at the Caribou underground
mine site. Other surface facilities include a headframe and production hoisting
system, a shop-warehouse complex, a compressor building and compressors, an
assay laboratory, an administration building and other service buildings. Mine
services include a fresh water pumping and distribution system, fire protection
and a 100-hectare tailings impoundment pond located 1.5 kilometres southeast of
the concentrator. Electric power is obtained from New Brunswick Power. A 1.5
hectare deep-water concentrate loading and storage building and facilities site
is located on the coast at Belledune, New Brunswick, 75 kilometres from the
Caribou mill. This facility can receive concentrates from the Caribou mine for
shipment to smelters in Europe, North America and Asia.
HISTORY
The Caribou massive sulfide deposit was first discovered by Anaconda in 1955. In
1965, extensive underground drifting, sampling, pilot plant testing and drilling
were initiated and a small high-grade secondary copper cap was developed into an
open pit mine-mill operation until the depletion of the
66
copper mineralization in 1974. In 1982, a silver/gold heap leach plant was
constructed to process 60,000 tonnes of gossan materials, which were stockpiled
during earlier pit operations.
In December 1986, East West Minerals NL ("East West"), an Australian public
company, purchased the mine from Anaconda through a subsidiary, East West
Caribou Mining Limited ("EWCM"). A feasibility study of the project was
developed based upon production of a bulk lead/zinc concentrate and, in 1988, a
concentrator with a design capacity of 2,000 tonnes per day was commissioned and
operated until July 1989 when operations were suspended, pending the formulation
of a new mining plan.
On April 9, 1990, the Caribou concentrator recommenced milling operations.
Pursuant to a series of transactions during the summer and fall of 1990, EWCM
became wholly-owned by Bathurst Base Metals Inc. ("BBMI") and BBMI became
wholly-owned by the Company. The mine and concentrator operated for seven months
in 1990. On October 26, 1990, operations were suspended due to poor recoveries
and falling metal prices. The mine/concentrator/tailings pond complex was placed
on care and maintenance.
In late 1994, the Company initiated a metallurgical review of the Caribou
underground mine mineralization with the objective of developing a process
capable of producing separate saleable zinc and lead concentrates and an
independent consulting firm performed a pilot plan test. In 1995, the decision
was made to reopen the Caribou mine. The plan for the Caribou mine was developed
based upon the combined mineral reserves of the Caribou underground and open pit
mines and an increase of the mill capacity to 3,000 tonnes per day.
The addition of the Caribou open pit deposit to the mine plan facilitated the
early start-up of the Caribou mine, allowing sufficient time to develop the
underground mine to reach its planned capacity and use a more efficient system
of material transfer from underground to the mill.
The Caribou underground mine and Caribou open pit operated as expected. Although
the mill commenced production in July 1997, mechanical deficiencies and design
shortcomings prevented the operation from attaining commercial production. A
number of the mechanical problems and design deficiencies were resolved by the
end of 1997 allowing the Company to focus on achieving the metallurgical
performance targets contained in the feasibility study. Throughout 1998, the
metallurgical performance of the Caribou mill improved steadily but fell short
of the levels anticipated by the feasibility study. As a result, and also
because of declining metal prices, a decision was made to extend a planned
maintenance shutdown that commenced in August 1998. The operation was placed on
care and maintenance pending additional technical and economic studies.
GEOLOGY
The Caribou underground and open pit mines are located in northern New
Brunswick, a province in which over 30 massive sulfide deposits occur. The
deposits are located, broadly, between footwall sediments and hangingwall
volcanics. The hangingwall to the massive sulfides is a sequence of clastic
felsic volcanic flows with local bedded tuffaceous horizons. Sulfide minerals
are not present in the hangingwall. The footwall rocks are rhyolitic with
tuffaceous horizons and, unlike the hangingwall sequence, disseminated sulfide
minerals occur in a stringer zone immediately below the massive sulfide body.
The deposit is cut by two diabase dykes of Devonian age, one in the centre of
the deposit and one at its southern end. These dykes trend northwest/southeast
and dip steeply. The central dyke is two to five metres thick. Three phases of
folding have been identified, all of which predate the intrusion of the diabase
dykes. The first phase imposed gentle folds along the long axis of the deposit.
The second phase resulted in local, minor kink folds and the third phase
resulted in steepening of the flanks of the deposit, approximately along strike.
67
The footwall in direct contact with the sulfide mineralization is, usually, a
band of phyllite averaging about 15 metres in thickness (but ranging from three
to 25 metres). This unit contains disseminated pyrite near the contact with the
massive sulfide lenses. The sulfide mineralization is overlain by felsic
volcanics. In the mine area, a band of phyllite one to three metres thick occurs
between the massive sulfides and the felsic volcanics. Two major faults cut the
Mine Sequence, one north/south and the other east/west.
The mineralization delineated to date consists of six discrete massive sulfide
lenses, overlapping in part, and distributed in an echelon fashion in, and
conformable within, the Mine Sequence. The lenses have been numbered from 1 to
6. The massive sulfide lenses consist of about 90 percent sulfide minerals,
mostly pyrite but with significant amounts of magnetite. In order of abundance,
the major minerals are sphalerite, galena and chalcopyrite. The sphalerite is
reported as being marmatitic. Minor metallic constituents include tetrahedrite,
arsenopyrite, marcasite and gold. In contrast to other massive sulfide deposits
in the district, pyrrhotite is rare. The gangue minerals mostly consist of
siderite, stilpnomelane, quartz and chlorite.
The sulfide minerals are very fine-grained with grains generally less than 50
microns across. Textural and mineralogical banding is common, with the latter
type, usually made up of pyrite and sphalerite/galena layers, being
characteristic of higher grade zones.
The individual massive sulfide lenses exhibit well-developed metal zoning. As
well, there is an overall metal zoning from lens to lens; thus, the zinc/lead
ratio is the highest in lens 1 and lowest in lenses 4 and 6, mainly due to an
increase in galena in the latter lens. The deposit also exhibits distinct metal
zones not coincident with the general metal zoning.
Silver varies proportionately to lead as most of the silver is in solid solution
in galena in lenses 1, 2 and 3, and in solid solution with tetrahedrite in
lenses 4 and 6. Gold occurs mainly in electrum, but is also noted in arsenian
pyrite and arsenopyrite.
The Caribou open pit (Restigouche deposit) is unlike others in the Bathurst area
in that it lies entirely within volcanic rocks. Overall, the deposit is tabular
in form, with the long axis striking north 15 degrees west, and with a dip of
less than 35 degrees to the west. The deposit plunges approximately 20 degrees
on a bearing of north 35 degrees west. The tabular, massive sulfide body extends
425 metres along strike and is up to 120 metres wide and 45 metres thick.
RESERVES AND RESOURCES
INTRODUCTION
The mineral resources and mineral reserves for the Caribou mine include the
Caribou deposit and the Restigouche deposit. Both deposits have experienced
mining on several occasions, open pit and underground mining at Caribou and open
pit mining at Restigouche. The current resources and reserves at both deposits
have been estimated by the Company and independently audited on several
occasions.
MINERAL RESOURCE ESTIMATION
For the Caribou deposit, resource grades were calculated using traditional
polygonal methods on level plans utilizing data points and measuring areas of
influence intimately connected to those data points.
The mineral resource of the open pit was re-evaluated as of December 31, 1998 by
the Company. The resources were calculated by kriging on a block model using
computer software.
68
The mineral resources for the Caribou and Restigouche mines were calculated as
at December 31, 1998 by the Company. The resources were calculated according to
published guidelines of the Canadian Institute of Mining, Metallurgy and
Petroleum for using existing diamond drill hole data and chip sample assays.
MINERAL RESOURCE AND MINERAL RESERVE CLASSIFICATION
The Company classified the mineral resources and mineral reserves based upon
CIM, 1996 definitions and separated them into measured, indicated, and inferred
mineral resources and proven and probable mineral reserves. Using CIM Standards
(August 2000), an independent consultant agrees with the current resource and
reserve classification.
MINERAL RESOURCE AND MINERAL RESERVE STATEMENT
The table below sets forth the estimated mineral resources and mineral reserves
for the Caribou mine as at the dates indicated.
CARIBOU MINE, SUMMARY OF MINERAL RESOURCES AND MINERAL RESERVES
- -------------------------------- ---------------------------------------- -----------------------------------------
December 31, 2002 November 30, 2001
- -------------------------------- ---------------------------------------- -----------------------------------------
Tonnes Zinc Lead Silver Tonnes Zinc Lead Silver
(000s) (%) (%) g/t (000s) (%) (%) (g/t)
- -------------------------------- ---------- --------- -------- ---------- ---------- --------- --------- ----------
Proven and Probable Reserves 5,057 6.5 3.4 90 5,057 6.5 3.4 90
- -------------------------------- ---------- --------- -------- ---------- ---------- --------- --------- ----------
Measured and Indicated 5,152 7.4 3.9 95 5,152 7.4 3.9 95
Resources(1)(2)
- -------------------------------- ---------- --------- -------- ---------- ---------- --------- --------- ----------
Inferred Resources 4,163 6.7 3.2 98 4,163 6.7 3.2 98
- -------------------------------- ---------- --------- -------- ---------- ---------- --------- --------- ----------
(1) Measured and Indicated Resources include Proven and Probable Reserves.
(2) Measured and Indicated Resources as at November 30, 2001 includes a
correction to a previous tabulation error. Measured and Indicated Resources
as at December 31, 2000 were previously stated by the Company as 5,264,000
tonnes.
RE-OPENING PLAN (1999)
A re-opening plan was developed by the Company in 1999 and was updated in 2000.
The plan calls for the production of ore from the Caribou underground mine at
the rate of 1,650 tonnes per day and from the Restigouche open pit mine at the
rate of 1,350 tonnes per day. The reserves from the open pit will be depleted in
21 months and the underground reserves accessed from the open pit will be
developed in time to produce 500 tonnes per day. At this time, production from
the Caribou underground will be increased to 2,500 tonnes per day.
The Restigouche deposit will be mined in two stages. The first stage will be the
resumption of the open pit operation with the second stage being the development
of the underground deposit commencing immediately upon depletion of the open pit
reserves.
For the purposes of mine planning and cost estimation, inferred mineral
resources were estimated to the 1,900 metre elevation, then converted into
possible mineral reserves using the same dilution and mining recovery. The table
below sets forth the mineral reserves used in the re-opening plan at the Caribou
mine.
69
CARIBOU MINE, RESOURCES AND RESERVES IN THE 1999 RE-OPENING PLAN
- ---------------- ------------------------------------------------ --------------------------------------------------
Proven & Probable Reserves Inferred Resources
- ---------------- ------------------------------------------------ --------------------------------------------------
Zinc Lead Silver Zinc Lead Silver
Tonnes (%) (%) (g/t) Tonnes (%) (%) (g/t)
- ---------------- ------------- --------- ----------- ------------ --------------- --------- ---------- -------------
Caribou 3,725,996 6.48 2.83 80 2,204,389 5.99 2.90 95
- ---------------- ------------- --------- ----------- ------------ --------------- --------- ---------- -------------
Restigouche 1,333,108 6.53 5.05 100 - - - -
- ---------------- ------------- --------- ----------- ------------ --------------- --------- ---------- -------------
Total 5,059,104 6.49 3.41 85 2,204,389 5.99 2.90 95
- ---------------- ------------- --------- ----------- ------------ --------------- --------- ---------- -------------
MINING
As part of the re-opening plan at Caribou, the main ramp will be extended down
to the 7th level at the 1900 metre elevation to recover the reserves in this
area. The shaft will be deepened to the 6th level and a crusher and loading
pocket installed. Material from below the 6th level will be hauled by trucks up
the ramp to the ore-dump on the 6th level. Ventilation raises, backfill raises
and mineralization and waste passes will be extended down to the 6th and 7th
levels as needed. An interim mining level will be created on the 5N3 level to
increase the number of working areas and allow for the increased production rate
of 2,500 tonnes per day.
The mining method proposed will be the same as used in the previous operating
period. This is an AVOCA type method with the use of development waste and
stockpiled surface waste as backfill.
The Company plans to mine the Caribou open pit in two stages. The first stage is
expected to be the resumption of the open pit operation with the second stage
being the development of the underground deposit commencing immediately upon
depletion of the open pit reserves. The open pit is expected to be mined using a
conventional bench method, and employ rubber tired loaders and trucks. Waste
will be mined in ten metre benches, while the mineralization is expected to be
mined in five metre benches to allow for better grade control. Mineralized
material from the open pit deposit will be crushed at the open pit site and then
hauled to a separate ore-pass at the Caribou mill site.
METALLURGICAL PROCESSING
The Caribou deposit was first discovered in 1955 and has been subject to
extensive metallurgical investigation since that time. In 1990, a bulk
concentrate was produced for the Imperial Smelting process. The property next
operated from July 1997 to August 1998, producing separate lead and zinc
concentrates. This was possible due to the development of a new flowsheet and
reagent scheme.
While the economics were enhanced with the newly developed flowsheet, plant
performance did not reach the levels anticipated from the laboratory and pilot
plant testing. The operation was closed in August 1998 due to low metal prices
and less than acceptable metallurgical performance. A pilot plant study,
completed in November 1998, was followed up with a combined mineralogical
characterization and metallurgical process development program in 2000. A less
complex flowsheet using a simplified reagent scheme was developed to selectively
produce lead, zinc and copper concentrates.
From the compilation of the pilot plant test results and data in November 1998,
the operating period of 1997 - 1998 and a study completed in 2000 by an
independent consulting firm (the "2000 Study"), it was concluded that a number
of flowsheet modifications are required to obtain the desired response to
treatment of Caribou ore.
The future success of the concentrator is expected to be achieved by addressing
the design and maintenance problems that plagued past operations, using high
level process control equipment and practices, ensuring that all critical
grinding and flotation parameters identified in the 2000 Study are
70
achieved in the plant, utilizing a simplified flotation flowsheet and reagent
scheme enhancing the operator's ability to manage the process and ensuring that
supervisors, technical staff and operators are well trained.
The new flowsheet developed in the 2000 Study is less complex than the existing
flowsheet and fewer reagents are used. Operators will be better able to
understand the process and to respond to changes to ensure that process
disruptions are minimized and that consistently good results are achieved.
Problems experienced in the past of balancing lead concentrate grade and lead
recovery, which invariably resulted in high lead tailings impacting the zinc
circuit, have been eliminated by open circuiting part of the lead cleaner
tailings direct to final mill tailings. The new flowsheet also provides for
improved revenues with the production of a saleable copper concentrate. While
the plant has been redesigned to handle higher circulating loads, the actual
circulating loads will be less onerous than in the past due to the simplified
flowsheet and by ensuring that the fine grinds, proven to be required to process
Caribou materials, are achieved.
The following is the process description of the modified circuit. The ore will
be crushed to minus 150 millimetres and conveyed from the mines into two
2,000-tonne live capacity ore-bins. Caribou underground and Caribou open pit
ores will be stored in separate bins to control the mix of the feed to the mill.
Four feeders will discharge from the coarse ore-bins to a 1,000 millimetre
conveyor. Two weightometers will be in use to control the ratio of Caribou
underground and open pit material being fed to the SAG mill at a combined rate
of 140 tonnes per hour.
Ore will be ground in a 6,700 millimetre diameter by 2,133 millimetre long SAG
mill with 1,500kW connected power. SAG mill discharge will be sized on a Derrick
vibrating screen with the plus 20 mesh portion being returned to the SAG mill.
The minus 20 mesh portion will flow by gravity to the primary cyclone feed
pumps. Further grinding will be completed in a 4,267 millimetre diameter by
1,875 millimetre long ball mill in a closed circuit with a cluster of 254
millimetre diameter of cyclones. Final grind will be approximately 80 percent
minus 27 to 30 microns.
Following aeration, the cyclone overflow will be directed to five 16m(3)
Outokumpu lead rougher cells and a combination of two 16m(3) Outokumpu and two
8.5m(3) Denver DR scavenger cells where the lead rougher/scavenger concentrate
will be produced. This concentrate will be reground in the #1 lead regrind mill,
a 3,250 millimetre diameter by 6,858 millimetre ball mill, and will then be
cleaned in a bank of eight 8.5m(3) Denver flotation cells.
The tailings from the first cleaner will be scavenged in a bank of four 8.5m(3)
Denver DR cells. The first cleaner concentrate will be reground in #2 lead
regrind, a 2,440 millimetre diameter by 3,048 millimetres ball mill. The ground
concentrate will be cleaned in a bank of six 8.5m(3) Denver DR flotation cells.
The tailings from the second cleaner and the first cleaner scavenger concentrate
will be returned to the #1 lead regrind. The second cleaner concentrate will be
cleaned in two successive stages using eight 2.8m(3) and six 2.8m(3) Denver DR
cells to produce a final lead concentrate. The third and fourth cleaner tailings
will be combined and directed to the copper separation circuit. A third 2,400
millimetre diameter by 2,440 millimetre ball mill will be available and
configured into the lead circuit to supplement either the first or second
regrind mill as required.
The copper separation feed, following sodium dioxide conditioning, will be
directed to a four-cell 2.8m(3) Denver DR cell rougher. The rougher concentrate
will be cleaned in two stages of countercurrent cleaning (three 1.4m(3) and two
1.4m(3) Denver DR cells) to produce a saleable copper concentrate and a tailings
product that will be discharged to final tailings.
71
The final lead concentrate will be pumped to a high capacity thickener. The
thickener underflow will be pumped to a stock tank for storage and subsequent
filtration. The copper concentrate will be thickened and stored in a stock tank
for storage and subsequent dewatering using the lead filter.
The lead rougher tailings and the lead cleaner scavenger tailings will be
combined as feed to the zinc circuit. After conditioning in two conditioners,
the zinc rougher scavenger concentrates will be floated in six 17.0m(3) and six
14.2m(3) Denver DR flotation cells. These concentrates will be reground to 15
microns in a 3,200 millimetre diameter by 4,877 millimetre regrind mill and then
subjected to ten minutes of high intensity conditioning. The zinc first cleaners
will consist of seven 14.2m(3) Denver flotation cells followed by four 14.2m(3)
cleaner scavenger cells. The second cleaner will be a bank of seven 8.5m(3)
flotation cells, followed by five 8.5m(3) third cleaners and four 8.5m(3) fourth
cleaners. The second, third and fourth cleaner tailings will be combined with
the first cleaner scavenger concentrate and directed to the zinc regrind cyclone
feed pump.
The final zinc concentrate will be thickened to 65 percent solids and pumped to
a stock tank for storage and subsequent pressure filtration.
The flotation tailings consisting of the zinc rougher tailings, the zinc first
cleaner scavenger tailings and the copper circuit tailings will be pumped to the
tailings pond for subaqueous disposal. Process water requirement for the mill
will be reclaimed from the tailings pond via a 400 millimetre diameter pipeline.
PRODUCTION
The Caribou mine started production in July 1997 and was placed on care and
maintenance for an indefinite period on August 3, 1998 because commercial
production had not been achieved. The following table summarizes production
information from the Caribou mine for the periods indicated:
- ------------------------------------------------------------ ------------------------ -----------------------
1998 1997
- ------------------------------------------------------------ ------------------------ -----------------------
Milled (tonnes) 494,449 322,827
- ------------------------------------------------------------ ------------------------ -----------------------
Zinc (%) 6.3 6.3
- ------------------------------------------------------------ ------------------------ -----------------------
Lead (%) 3.8 3.3
- ------------------------------------------------------------ ------------------------ -----------------------
Silver (grams/tonne) 105 102
- ------------------------------------------------------------ ------------------------ -----------------------
Concentrate Production
- ------------------------------------------------------------ ------------------------ -----------------------
Zinc (tonnes) 40,501 18,328
- ------------------------------------------------------------ ------------------------ -----------------------
Lead (tonnes) 38,266 11,446
- ------------------------------------------------------------ ------------------------ -----------------------
Metal in Concentrates
- ------------------------------------------------------------ ------------------------ -----------------------
Zinc (tonnes) 18,748 8,286
- ------------------------------------------------------------ ------------------------ -----------------------
Lead (tonnes) 12,580 3,994
- ------------------------------------------------------------ ------------------------ -----------------------
Silver (ounces) 724,790 239,639
- ------------------------------------------------------------ ------------------------ -----------------------
HUMAN RESOURCES
The Caribou mine employed 199 personnel at the time the operation was placed on
care and maintenance. Various schedules were worked to maximize efficiencies and
minimize employee travel time. Generally employees averaged 40 hours of work per
week. The mill operated 24 hours per day, seven days per week. The mine operated
two eleven-hour shifts per day seven days per week.
There are currently 12 personnel at Caribou keeping the operation under care and
maintenance.
72
ENVIRONMENTAL MANAGEMENT AND PERMITTING
The Caribou operations are regulated under the New Brunswick MINING ACT (Chapter
M-14.1), CLEAN ENVIRONMENT ACT (Chapter C-6) and CLEAN WATER ACT (Chapter
C-6.1). Certificates of approval to operate have been issued by the New
Brunswick Department of Environment for both the Caribou mine underground site
and the Restigouche open pit.
During the most recent operational period (1997 - 1998), tailings were
discharged to the South Tributary Tailings Pond facility (the "STTP"). Tailings
were deposited subaqueously via floating line and stored under one metre of
water cover in accordance with the certificates of approval to operate.
Retention time in the tailings pond averaged 200 days and served as water
treatment. Water required for the mill is reclaimed while any excess was
discharged to a polishing pond and subsequently to Forty Mile Brook. The
tailings pond dam is a glacial till structure with an inverted filter drain on
the downstream face. The Company believes that there is currently sufficient
storage capacity to contain tailings produced for three additional years of mine
production. As part of the re-opening plan, a 1.4 metre lift will be placed on
the dam to accommodate tailings produced from the entire current mineral
reserves.
The Minister of the Department of Natural Resources and Energy (the "DNRE")
approved a mine reclamation plan for the Caribou mine on March 6, 1996. The
cornerstone of the closure plan is progressive reclamation, namely relocating
the acidic drainage generating materials from the previous open pit operation to
the underground during the course of mining. At the time the closure plan was
prepared, the mine life was estimated to be six years. For economic reasons, the
mine only operated for one year. Consequently, much of the geochemically
problematic waste rock and tailings remain on surface. An older, smaller
tailings facility (Anaconda) is located near the mill. The tailings dam is
constructed of waste rock, some of which is reported to be potentially acid
generating. This tailings facility is no longer used but has not been
remediated.
Approximately 159,000 tonnes of waste rock of the 1.1 million tonnes produced
during the former open pit operations were returned to the underground mine as
backfill during the most recent operational period, in accordance with the
closure plan.
In 2000, an independent consulting firm reviewed options for the remediation of
the Anaconda tailings pond and recommended that they be reslurried, limed and
pumped to the current STTP for subaqueous deposition. An agreement in principal
has been received from DNRE for this remediation plan.
The closure plan is unclear regarding the acidic drainage discharging from the
mine adit during the post-closure period, but it is likely to require treatment
prior to discharge. An independent consulting firm concludes that based upon the
information provided in the closure plan, the closure plan appears to be
reasonable.
The Company and CanZinco Ltd. have an agreement with the Province of New
Brunswick whereby the liability of EWCM, a predecessor to CanZinco Ltd., for
reclamation work, rehabilitation work, other environmental work and
environmental liabilities of any nature related to exploration and development
activities at the Caribou mine that took place prior to October 29, 1993 are
limited to $3 million. The Province of New Brunswick is responsible for
liabilities exceeding the $3 million. As a result of this agreement, most of the
current closure issues will be the responsibility of the Province of New
Brunswick.
Security in the amount of $2,949,350 has been posted with the DNRE towards these
costs in accordance with an agreed schedule. An additional amount of $1.1
million has been posted for environmental protection with the Minister of
Environment as required under Regulation 87-83, the Environmental
73
Assessment Regulation of the CLEAN ENVIRONMENT ACT. The financial commitment at
closure of the Caribou mine underground site could be in the order of $3.5
million in capital. The Company estimates the closure cost to be $3,580,525.
An open pit operation is located at the Restigouche property. Ore extracted from
the open pit was trucked to the Caribou mill for processing. Consequently, the
Restigouche site has a minimal amount of infrastructure, two waste rock storage
pads and a small water treatment plant.
A mine reclamation plan was approved by the DNRE on March 6, 1996 for the
Restigouche open pit site. The following summarizes the key elements of the
closure plan:
o Movement of the potentially acidic drainage producing waste
rock off the storage pad and into the open pit.
o Dredging the hydroxide sludge from the sludge pond, dewatering
and disposing into the Caribou open pit.
o Allowing the pit to flood, which will be an oxygen barrier.
o Filling in all ponds.
o Recontouring the inert waste rock.
o Regrading the site surface to improve site runoff and minimize
erosion.
o Revegetating the site.
o Decommissioning infrastructure.
o Monitoring the site for three years after closure.
Based upon the information provided in the closure plan, an independent
consulting firm that the closure plan for the Restigouche open pit appears to be
reasonable. If the development of the pit and the storage of waste rock was
implemented as described in the closure plan, there is unlikely to be a
significant issue regarding poor quality seepage now and in the future.
Security in the amount of $1.9 million has been posted with the DNRE towards
these costs in accordance with an agreed upon schedule. An additional amount of
$1.7 million has been posted for environmental protection with the Minister of
Environment as required under Regulation 87-83, the Environmental Assessment
Regulation of the CLEAN ENVIRONMENT ACT. The Company estimates the closure cost
for the Restigouche open pit to be $3.7 million.
The mine presently operates a lime plant to treat underground mine drainage. The
mine also has a sizable deposit of old tailings stored separately by the
previous operator to CanZinco, containing significant quantities of pyrite, zinc
and copper. Over the years these tailings have become a source of acidity and
soluble metals due to oxidation and require remediation. CanZinco reached an
agreement with Bioteq Environmental Technologies Inc. ("Bioteq") to construct a
pilot plant on the Caribou mine site to test for the removal of metals from the
mine drainage upstream of the existing lime plant. During its operation in 2002
the plant recovered nearly 35 tonnes of zinc concentrate, which contains copper,
cadmium and lead. The concentrate was delivered and accepted for sale to Noranda
Inc.
Treated water has been discharged to local receiving waters within the
guidelines of the existing permits. Based on the operating results in 2002,
Bioteq has submitted application for permits to construct a plant for the
reprocessing of tailings at Caribou. The tailings to be processed are those left
by previous operators and will be processed concurrently with acidic mine
drainage
74
Exploration Properties
The Company owns base and precious metal exploration properties in Canada,
Honduras, Chile and Tunisia.
BASE METAL EXPLORATION
CANADA
In Canada, the Company is involved in the exploration of 29 base metal
properties covering 44,256 hectares in New Brunswick, Quebec, Ontario and
Nunavut. Exploration work during 2002 concentrated on expending the minimum
amounts to fulfill work commitments for claim renewals.
HONDURAS
During 2002, the Company was not active in surface exploration in Honduras.
CHILE
During the past four years, the Company has carried out an aggressive
exploration program in southern Chile, focusing on the discovery of high-grade
zinc mineralization. Work was concentrated in the El Toqui mine area and the
Lago General Carrera area (Puerto Sanchez Project) located approximately 250
kilometres to the south of El Toqui. The exploration potential in the El Toqui
district is considered excellent for identifying additional resources and
reserves. This has been demonstrated by the success of the 1998-2002 exploration
program.
Exploration work during 2002 focussed on additional soil sampling and a
compilation of all of the geological information amassed in the El Toqui
District to date. The available geological database suggests that the district
has a favourable potential for exploration and the discovery of additional
deposits of economic importance, especially in areas which show evidence of
skarn-type mineralization.
As a result of a detailed review by an independent qualified person, a new
geological model has been developed for the Toqui District. The new geological
model holds significant promise and indicates that further work is required for
confirmation and the Company intends to pursue this work.
During 2002, geochemical soil sampling was completed on the Concordia property
with a total of 4,883 soil samples collected. Results were also received from an
earlier 7,029 sample program of the southern extension of the Estatuas area.
Presently soil sampling is underway on the area between Estatuas and Concordia
and to the north of San Antonio. Detailed geological mapping is being done over
the Concordia area.
During 2003, the Company intends to continue with follow up exploration work on
the anomalous areas identified by the new geological model and enlarged
geochemical database.
TUNISIA
The focus of the Company's exploration activities in Tunisia is on comparatively
small-scale deposits which are close to the mine and could provide additional
mill feed with low investment. In an ongoing effort to increase the mineral
reserves and resources and the operating life of the mine, the Company has been
engaged in discussions with the Tunisian authorities on utilizing reserves
currently being mined by a government enterprise.
75
GOLD EXPLORATION
CANADA
In Canada, the Company holds interests in 12 gold properties covering 4,950
hectares, most of which are located along the Cadillac Break, the major focus of
gold mining and exploration in northwest Quebec.
In 2002, an option agreement was signed between Agnico-Eagle and the Company
that provided Agnico-Eagle with the right to earn a 60 percent interest in the
property over a five-year period by making cash payments totaling $200,000, as
well as work expenditures totaling $3,500,000. Once Agnico-Eagle earned its 60
percent interest, the Company and Agnico-Eagle were to establish a Joint
Operating Agreement with Agnico-Eagle as the operator. Agnico-Eagle had the
right, prior to any decision being made to prepare a feasibility report, to
acquire an additional 10 percent interest in the property by making a payment of
$1 million to the Company. Further, Agnico-Eagle could elect to prepare an
independent feasibility report and assume all costs in consideration for an
additional 10 percent interest in the property for a total interest in the
property of 80 percent.
On February 19, 2003, Agnico-Eagle reported that their qualified person, had
estimated an inferred mineral resource of 2,967,000 tonnes at a grade of 8.5
grams per tonne for a total of 816,000 ounces of gold.
A cutting factor of 50 g/t gold was applied and a gold price of $300 per ounce.
The uncut inferred mineral resource totals 927,963 ounces of gold, a 13.8%
variation.
On April 24, 2003, the Company announced that Agnico-Eagle Mines Limited has
agreed to purchase 100% of the Company's Tonawanda and Zulapa gold properties,
known collectively as the Lapa property, subject to the completion of a
definitive legal agreement.
Agnico-Eagle will pay the Company US$7.925 million for the Company's interest in
the Lapa property. The Company will retain a 1.0 percent net smelter royalty on
all gold production from the Tonawanda property and a 0.5 percent net smelter
royalty on all gold production from the Zulapa property. Agnico-Eagle will also
pay a non-refundable advance royalty of US$1 million on closing and a further
non-refundable advance royalty of US$1 million when the total published inferred
resources reach 2 million ounces of gold on the Zulapa and Tonawanda properties.
In addition to the Lapa property, Agnico-Eagle has purchased the Company's 66
2/3 percent interest in the Chibex South property, located four kilometres south
of the Lapa property in Cadillac Township. Agnico-Eagle will pay the Company
US$75,000 for the property as well as a 66 2/3 percent of a one percent net
smelter royalty.
The Lapa and Chibex South properties are considered by the Company to be
non-producing assets.
76
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion of the financial condition and results of operations of
Breakwater Resources Ltd. (the "Company") constitutes management's review of the
factors that affected the Company's financial and operating performance in 2002
and factors reasonably expected to impact on future operations and results. The
consolidated financial statements of the Company have been prepared using
accounting principles applicable to a going concern, which assumes that the
Company will continue in operation for the foreseeable future and will be able
to realize its assets and satisfy its liabilities in the normal course of
business. See Overview, Liquidity and Liquidity Risk discussion.
OVERVIEW
Breakwater Resources Ltd. is an exploration, development and mining company with
operations in Canada, Honduras, Chile and Tunisia. Approximately 82 percent of
its revenue is derived from the sale of zinc concentrates with the balance of
revenue from lead, copper, gold and silver.
During the years ended December 31, 2002, 2001 and 2000, the Company incurred
net losses of $19.9 million, $111.1 million and $8.7 million, respectively. The
losses in 2001 and 2000 included non-cash write-downs of mineral properties and
fixed assets of $70.3 million and $27.1 million, respectively. This reflects the
Company's policy to defer exploration and development costs until the economic
viability of the property is determined or until the property is abandoned.
The year ended December 31, 2002 saw a continuation of record low prices for
zinc in real terms. After reaching a 14 year low of US$732.50 per tonne
(US$0.332 per pound) in the fourth quarter of 2001 and averaging US$886 per
tonne (US$0.402 per pound) for the year, the price of zinc reached a new low of
US$725.50 per tonne (US$0.329 per pound) in August of 2002 and averaged US$777
per tonne (US$0.352 per pound) in 2002. This represents the lowest average zinc
price since 1986. These continuing low prices put severe pressure on the
liquidity of the Company necessitating a restructuring of its banking
arrangements. In December 2002, the Company's Syndicated Credit Facility
totalling US$45.1 million, which includes a term loan and a revolving loan
required to be repaid or restructured by January 2, 2003, was extended to
January 2, 2004. The Company believes that it will not be able to repay its debt
under the Syndicated Credit Facility at maturity on January 2, 2004, unless the
metal price recovery is stronger and sooner than expected. Accordingly, it will
be necessary for the Company to negotiate an extension, to restructure or to
replace the Syndicated Credit Facility prior to maturity.
In May 2002, a rights offering was completed for 94,455,000 shares at $0.20 per
share to raise $17.6 million net of issue costs. This equity issue was a
requirement placed on the Company by its lenders as a condition to extend the
due date of the Syndicated Credit Facility to January 2, 2003.
Proceeds from the rights issue, combined with operating improvements, reduced
capital expenditures and lower treatment charges provided the working capital
requirements for the period ended December 31, 2002. Going forward into 2003,
with a forecasted price of zinc in excess of US$800 per tonne, it is expected
that the estimated cash flow of the Company, after capital expenditures and debt
servicing requirements, will be sufficient to meet cash requirements for 2003.
However, it will not be sufficient to retire the debt due on January 2, 2004.
77
Selected Financial Data
STATEMENT OF OPERATIONS AND DEFICIT DATA Year ended December 31,
-----------------------------------------------------------
2002 2001 2000
------------------ ------------------- ------------------
($000's except for per share numbers, ratios and weights)
Tonnes of Concentrate Sold
(Zinc, Copper and Lead) 518,820 505,521 381,878
Gross Sales Revenue 305,354 304,037 301,850
Treatment and Marketing Costs 136,738 142,236 135,262
Net Sales Revenue 168,616 161,801 166,588
Total Operating Costs 178,112 185,293 129,808
(Loss) Contribution from Mining Activities (9,496) (23,492) 36,780
Net Loss 19,887 111,058 8,749
Net Loss per Common Share 0.12 0.92 0.08
Cash Provided by (used for)
Operating Activities(1) 8,647 (9,361) 37,720
Capital Expenditures 10,971 21,662 34,619
Weighted Average Number of
Common Shares Outstanding
after Bonus Element 169,074 120,166 109,033
Number of Common Shares Outstanding 193,281 93,848 92,039
(1) Before changes in non-cash working capital items.
BALANCE SHEET DATA As at December 31,
-----------------------------------------------------------
2002 2001 2000
------------------ ------------------- ------------------
Working Capital 22,284 5,048 23,881
Total Assets 223,380 251,569 360,453
Total Debt 78,665 80,406 90,280
Total Other Long-Term Liabilities 14,519 15,708 17,234
Shareholders' Equity (Net Assets) 95,596 98,576 201,859
Net Debt to Net Debt plus Equity 43% 44% 30%
Book Value per Common Share 0.49 1.05 2.19
Capital Stock 257,759 239,214 238,312
SENSITIVITY TO METAL PRICES
The Company's earnings, cash flow and common share price are highly sensitive to
the price of zinc. The following table sets forth the average LME cash prices
for zinc, copper and lead, the London PM fix for gold and silver and the
US/Canadian dollar exchange rates for 2002, 2001 and 2000.
- ------------------------------------------------- -------------------- --------------------- -------------------
Metal Prices 2002 2001 2000
- ------------------------------------------------- -------------------- --------------------- -------------------
Zinc (US$/pound) $0.35 $0.40 $0.51
- ------------------------------------------------- -------------------- --------------------- -------------------
Lead (US$/pound) $0.21 $0.22 $0.21
- ------------------------------------------------- -------------------- --------------------- -------------------
Copper (US$/pound) $0.71 $0.72 $0.82
- ------------------------------------------------- -------------------- --------------------- -------------------
Gold (US$/ounce) $310 $271 $279
- ------------------------------------------------- -------------------- --------------------- -------------------
Silver (US$/ounce) $4.60 $4.37 $4.95
- ------------------------------------------------- -------------------- --------------------- -------------------
Exchange rate (US$1.00/Cdn$) yearly average 1.5701 1.5490 1.4855
- ------------------------------------------------- -------------------- --------------------- -------------------
The following table illustrates the sensitivity of earnings and cash flow to
changes in metal prices and of earnings to changes in the US/Canadian dollar
exchange rate based on production estimates for 2003.
78
- ------------------------------------------------------------------------------------------ ------------------
(Cdn$ thousands) Sensitivities
- ------------------------------------------------------------------------------------------ ------------------
Zinc (US$0.01/pound) 4,197
- ------------------------------------------------------------------------------------------ ------------------
Lead (US$0.01/pound) 415
- ------------------------------------------------------------------------------------------ ------------------
Copper (US$0.01/pound) 115
- ------------------------------------------------------------------------------------------ ------------------
Silver (US$0.10/ounce) 220
- ------------------------------------------------------------------------------------------ ------------------
Gold (US$10.00/ounce) 378
- ------------------------------------------------------------------------------------------ ------------------
Exchange rate (US$0.01/Cdn$1.00) 373
- ------------------------------------------------------------------------------------------ ------------------
SENSITIVITY TO SMELTER TREATMENT CHARGES
The Company sells zinc, lead and copper concentrates to smelters in various
parts of the world including Europe, Asia and the Americas. Smelters charge the
Company for treating the zinc, lead and copper concentrates and also for further
refining copper concentrates. Treatment charges vary according to the world
demand for concentrates. Since 2001, zinc concentrate treatment charges for
sales under annual contract have decreased by US$24 per tonne and are expected
to decrease a further US$20 per tonne or more for 2003. Spot terms have
decreased even further by as much as an additional US$30 per tonne.
The following table outlines the sensitivity of earnings and cash flow to
changes in average treatment charges based on production estimates for 2003.
- ------------------------------------------------------------------------------------------ ------------------
(Cdn$ thousands) Sensitivities
- ------------------------------------------------------------------------------------------ ------------------
Zinc concentrate (US$10.00 per tonne) 5,068
- ------------------------------------------------------------------------------------------ ------------------
Lead concentrate (US$10.00 per tonne) 314
- ------------------------------------------------------------------------------------------ ------------------
Copper concentrate (TC US$10.00 per tonne, RC US$0.01 per pound) 453
- ------------------------------------------------------------------------------------------ ------------------
FINANCIAL RESULTS SUMMARY
NET LOSSES AND CASH FLOW - 2002 AND 2001
The consolidated net loss was $19.9 million ($0.12 per share) for the year ended
December 31, 2002, on gross sales revenue of $305.4 million. This compares with
a consolidated net loss of $111.1 million ($0.92 per share) after a non-cash
charge of $70.3 million on gross sales revenue of $304.0 million in 2001.
Cash flow from operations (before changes in non-cash working capital items) was
$8.6 million ($0.05 per share) in 2002 compared with cash used by operations of
$9.4 million ($0.08 per share) in 2001. For the year 2001, the non-cash
write-down of $70.3 million included $53.4 million to reduce the carrying value
of the Caribou mine to nil, a reduction of $11.3 million to the carrying value
of the Nanisivik mine and $5.6 million for the carrying value of other
exploration and non-producing properties.
- ------------------------------------------------------------------------ ------------------ -----------------
($ millions) 2002 2001
- ------------------------------------------------------------------------ ------------------ -----------------
Loss from mining activities (9.5) (23.5)
- ------------------------------------------------------------------------ ------------------ -----------------
Other expenses (net of other income) 9.7 10.9
- ------------------------------------------------------------------------ ------------------ -----------------
Non-producing property costs 0.9 3.2
- ------------------------------------------------------------------------ ------------------ -----------------
Foreign exchange hedging loss - 3.2
- ------------------------------------------------------------------------ ------------------ -----------------
Income and mining taxes (0.2) -
- ------------------------------------------------------------------------ ------------------ -----------------
Loss before asset valuation adjustments (19.9) (40.8)
- ------------------------------------------------------------------------ ------------------ -----------------
Write-down of properties - 70.3
- ------------------------------------------------------------------------ ------------------ -----------------
Net loss (19.9) (111.1)
- ------------------------------------------------------------------------ ------------------ -----------------
Non-cash expenses 28.5 101.7
- ------------------------------------------------------------------------ ------------------ -----------------
Operating cash flow (outflow) (before changes in non-cash working
capital items) 8.6 (9.4)
- ------------------------------------------------------------------------ ------------------ -----------------
79
STATEMENT OF OPERATIONS REVIEW - 2002 AND 2001
PRODUCTION AND GROSS REVENUE
Sales of zinc, lead and copper concentrate increased by 3 percent in 2002 from
2001 (518,820 tonnes compared with 505,521 tonnes).
- ------------------------------------------------------------------------ ------------------ -----------------
SALES BY METAL IN CONCENTRATE ($ THOUSANDS) 2002 2001
- ------------------------------------------------------------------------ ------------------ -----------------
Zinc - tonnes 206,631 184,418
- ------------------------------------------------------------------------ ------------------ -----------------
Lead - tonnes 17,977 12,086
- ------------------------------------------------------------------------ ------------------ -----------------
Copper - tonnes 5,447 6,543
- ------------------------------------------------------------------------ ------------------ -----------------
Gold - ounces 25,364 39,884
- ------------------------------------------------------------------------ ------------------ -----------------
Silver - ounces 2,226,474 1,995,913
- ------------------------------------------------------------------------ ------------------ -----------------
Gross revenue from sales increased slightly to $305.4 million in 2002 compared
with $304.0 million in 2001.
Zinc metal sales increased by 12 percent while zinc gross revenue decreased
slightly due to the lower price of zinc. The weaker Canadian dollar increased
gross revenue by $4.1 million. The majority of this gain is offset by increased
operating costs as a significant portion of operating costs are incurred in US
dollars.
- ------------------------------------------------------------------------ ------------------ -----------------
GROSS SALES REVENUE BY METAL ($ thousands) 2002 2001
- ------------------------------------------------------------------------ ------------------ -----------------
Zinc (US$) 160,223 160,990
- ------------------------------------------------------------------------ ------------------ -----------------
Lead (US$) 8,397 5,798
- ------------------------------------------------------------------------ ------------------ -----------------
Copper (US$) 8,688 10,656
- ------------------------------------------------------------------------ ------------------ -----------------
Gold (US$) 7,781 10,834
- ------------------------------------------------------------------------ ------------------ -----------------
Silver (US$) 10,111 8,839
- ------------------------------------------------------------------------ ------------------ -----------------
Total Metal Sales Revenue (US$) 195,200 197,117
- ------------------------------------------------------------------------ ------------------ -----------------
- ------------------------------------------------------------------------ ------------------ -----------------
Gross Sales Revenue (CDN$) 305,354 304,037
- ------------------------------------------------------------------------ ------------------ -----------------
Production of zinc in concentrate in 2002 increased by 2 percent over 2001
despite the Nanisivik mine closing in September 2002. Zinc in concentrate
production at the Bouchard-Hebert and El Toqui mines increased by 24 percent and
10 percent, respectively, more than offsetting the lower production at the other
mines.
- ------------------------------------------------------------------------ ------------------ -----------------
ZINC PRODUCTION (MILLION POUNDS ZINC CONTAINED IN CONCENTRATE) 2002 2001
- ------------------------------------------------------------------------ ------------------ -----------------
Nanisivik 109.1 113.6
- ------------------------------------------------------------------------ ------------------ -----------------
El Mochito 102.2 106.9
- ------------------------------------------------------------------------ ------------------ -----------------
Bougrine 74.3 83.4
- ------------------------------------------------------------------------ ------------------ -----------------
El Toqui 79.2 71.8
- ------------------------------------------------------------------------ ------------------ -----------------
Bouchard-Hebert 112.9 90.7
- ------------------------------------------------------------------------ ------------------ -----------------
Total zinc production 477.7 466.4
- ------------------------------------------------------------------------ ------------------ -----------------
The Company periodically hedges against fluctuations in metal prices and foreign
exchange. For 2002, gross revenue decreased by $1.1 million as a result of
hedging activities compared with a $0.6 million reduction during 2001. The net
result of the hedging activities for 2002 includes $0.7 million due to the
decrease in the hedge contract liability compared with $0.9 million in 2001.
Certain of the Company's mining operations receive sales revenue in US dollars
while incurring costs in other currencies such as the Canadian dollar and
Tunisian Dinar. To protect against adverse changes in these exchange rates, the
Company sold forward US$30.0 million at an average exchange rate of Cdn$1.4802
and US$1.5 million for Euros at the rate of US$0.8899 for 2002. Due to the
decision to close the Nanisivik mine in
80
September 2002, the exchange hedge position applicable to 2003 was cancelled and
the Company recognized a hedging loss of $3.2 million in 2001.
NET REVENUE
Net revenue, or net smelter return, which represents the value of concentrates
sold after paying treatment charges, freight and marketing costs, increased by 4
percent to $168.6 million in 2002 from $161.8 million in 2001. Treatment
charges, the amount paid to smelters for refining concentrates to produce metal,
and shipping and marketing costs decreased by 3 percent to $136.7 million in
2002 from $142.2 million in 2001. Treatment charges, shipping and marketing
expenses amounted to 44.8 percent of gross revenue in 2002 compared with 46.8
percent in 2001. Treatment charges per tonne of concentrate expressed as a cost
per pound of payable zinc sold were 11 percent lower at US$0.167 in 2002 from
US$0.187 in 2001.
OPERATING COSTS
Direct operating costs of $147.6 million in 2002 were $284.59 per tonne of
concentrate sold compared with $153.2 million or $303.03 per tonne sold in 2001.
Minesite operating costs per tonne of ore milled decreased slightly to US$27.18
in 2002 from US$27.26 in 2001. The total cash cost per pound of payable zinc,
which includes all minesite cash costs, treatment charges, ocean freight and
other marketing costs, net of by-product credits, was US$0.32 per pound of
payable zinc in 2002 compared with US$0.36 per pound of payable zinc in 2001.
Inventory is carried at the lower of cost or market. For the year 2001, costs in
excess of market value, principally at Nanisivik mine, were added to the direct
operating costs. During, 2002, no such adjustment was necessary.
- ------------------------------------------------------------------------ ------------------ -----------------
DIRECT OPERATING COSTS ($ MILLIONS) 2002 2001
- ------------------------------------------------------------------------ ------------------ -----------------
Bouchard-Hebert 36.9 35.4
- ------------------------------------------------------------------------ ------------------ -----------------
Nanisivik 34.5 43.5
- ------------------------------------------------------------------------ ------------------ -----------------
Bougrine 22.8 20.8
- ------------------------------------------------------------------------ ------------------ -----------------
El Mochito 34.2 33.5
- ------------------------------------------------------------------------ ------------------ -----------------
El Toqui 19.2 20.0
- ------------------------------------------------------------------------ ------------------ -----------------
Total 147.6 153.2
- ------------------------------------------------------------------------ ------------------ -----------------
81
OTHER EXPENSES (INCOME)
Other expenses, net of miscellaneous income, were $9.7 million in 2002 compared
with $10.9 million in 2001. General and administrative expenses decreased by
$1.2 million mostly due to a reduction in staff and office costs. Interest and
financing expense decreased by $2.9 million. The foreign exchange adjustment
resulting from credit facilities denominated in US dollars changed from a loss
of $4.7 million in 2001 to a gain of $0.7 million in 2002, a favourable swing of
$5.4 million. The carrying value of the debt is measured at the end of the year.
In 2002, the Canadian dollar strengthened against the US dollar from 1.5926 at
the end of 2001 to 1.5796 at the end of 2002. Lower investment and other income,
which decreased by $8.3 million, offset most of these improvements.
- ------------------------------------------------------------------------ ------------------ -----------------
OTHER EXPENSES (INCOME) ($ MILLIONS) 2002 2001
- ------------------------------------------------------------------------ ------------------ -----------------
General and administrative 6.2 7.4
- ------------------------------------------------------------------------ ------------------ -----------------
Interest expense and financing 5.1 8.0
- ------------------------------------------------------------------------ ------------------ -----------------
Investment income (0.9) (9.2)
- ------------------------------------------------------------------------ ------------------ -----------------
Foreign exchange (0.7) 4.7
- ------------------------------------------------------------------------ ------------------ -----------------
TOTAL OTHER EXPENSES NET OF OTHER INCOME 9.7 10.9
- ------------------------------------------------------------------------ ------------------ -----------------
Non-producing property costs 0.8 3.2
- ------------------------------------------------------------------------ ------------------ -----------------
Income and mining taxes (0.2) -
- ------------------------------------------------------------------------ ------------------ -----------------
TOTAL 10.3 14.1
- ------------------------------------------------------------------------ ------------------ -----------------
OTHER NON-PRODUCING PROPERTY COSTS
The costs related to properties being held on care and maintenance decreased to
$0.9 million in 2002 from $3.2 million in 2001. These costs include the costs to
maintain the Caribou and Langlois properties on care and maintenance,
exploration costs and $0.9 million of revenue received from optioned properties
in 2002.
OPERATING REVIEW - 2002 AND 2001
OPERATIONS
For the year ended December 31, 2002 and 2001, metal production is shown in the
table below.
PRODUCTION STATISTICS
- ---------------------------------------------------------------------- --------------------------------------
YEAR ENDED DECEMBER 31,
--------------------------------------
2002 2001
- ---------------------------------------------------------------------- ------------------- ------------------
Ore Milled (tonnes) 3,077,811 3,311,290
- ---------------------------------------------------------------------- ------------------- ------------------
Zinc (%) 7.8 7.2
- ---------------------------------------------------------------------- ------------------- ------------------
Concentrate Production
- ---------------------------------------------------------------------- ------------------- ------------------
Zinc (tonnes) 403,661 394,982
- ---------------------------------------------------------------------- ------------------- ------------------
Copper (tonnes) 37,680 42,138
- ---------------------------------------------------------------------- ------------------- ------------------
Lead (tonnes) 18,747 19,799
- ---------------------------------------------------------------------- ------------------- ------------------
Gold (tonnes) 5,424 3,389
- ---------------------------------------------------------------------- ------------------- ------------------
Metal in Concentrates
- ---------------------------------------------------------------------- ------------------- ------------------
Zinc (tonnes) 216,663 211,544
- ---------------------------------------------------------------------- ------------------- ------------------
Copper (tonnes) 6,055 6,932
- ---------------------------------------------------------------------- ------------------- ------------------
Lead (tonnes) 12,693 13,174
- ---------------------------------------------------------------------- ------------------- ------------------
Silver (ounces) 2,957,221 2,940,360
- ---------------------------------------------------------------------- ------------------- ------------------
Gold (ounces) 24,804 38,500
- ---------------------------------------------------------------------- ------------------- ------------------
Minesite Operating Costs
- ---------------------------------------------------------------------- ------------------- ------------------
Per tonne milled (US$) 27.18 27.26
- ---------------------------------------------------------------------- ------------------- ------------------
Total Cash Costs
- ---------------------------------------------------------------------- ------------------- ------------------
Per pound payable zinc (US$) 0.32 0.36
- ---------------------------------------------------------------------- ------------------- ------------------
82
The following table summarizes key financial information for each of the
Company(1)s operating mines.
- -------------------------- -------------------- -------------------- -------------------- -------------------
Contribution
(Loss) From Mining Capital
Gross Revenue Activities(1) Non-cash Costs(2) Expenditures
- -------------------------- -------------------- -------------------- -------------------- -------------------
($ millions) 2002 2001 2002 2001 2002 2001 2002 2001
- -------------------------- --------- ---------- --------- ---------- --------- ---------- --------- ---------
Bouchard-Hebert 81.9 82.8 3.0 7.7 9.7 8.3 1.7 1.7
- -------------------------- --------- ---------- --------- ---------- --------- ---------- --------- ---------
Nanisivik 69.0 54.5 (1.6) (20.3) 3.2 4.3 - 3.9
- -------------------------- --------- ---------- --------- ---------- --------- ---------- --------- ---------
Bougrine 40.9 49.7 (8.5) (3.5) 8.1 9.5 2.0 3.0
- -------------------------- --------- ---------- --------- ---------- --------- ---------- --------- ---------
El Mochito 69.5 68.4 (2.9) (6.6) 6.8 6.7 2.3 2.4
- -------------------------- --------- ---------- --------- ---------- --------- ---------- --------- ---------
El Toqui 44.1 48.6 0.5 (0.7) 2.6 3.1 2.9 5.5
- -------------------------- --------- ---------- --------- ---------- --------- ---------- --------- ---------
Langlois - - - - - - 0.9 4.1
- -------------------------- --------- ---------- --------- ---------- --------- ---------- --------- ---------
Total 305.4 304.0 (9.5) (23.4) 30.4 31.9 9.8 20.6
- -------------------------- --------- ---------- --------- ---------- --------- ---------- --------- ---------
(1) After non-cash costs.
(2) Depreciation, depletion and reclamation costs.
BOUCHARD-HEBERT MINE
Mining of the Bouchard-Hebert deposit in 2002 was in the upper portions of the
deposit, where the zinc grades are higher than in the lower portion of the mine.
The zinc grade was 24 percent greater in 2002, while the precious metals and
copper grades were lower than 2001. As a result, production of zinc in
concentrate was 51,197 tonnes in 2002 compared with 41,150 tonnes in 2001. It is
expected that this grade will continue throughout the remaining life of the
mine.
The mine had an operating profit of $3.0 million in 2002 compared with $7.7
million in 2001. Operating cash flow was $12.7 million on gross sales revenue of
$81.9 million in 2002 compared with $16 million in 2001 on gross sales revenue
of $82.8 million. Capital expenditures in 2002 were $1.7 million the same as in
2001. No capital expenditures are expected over the balance of the mine life.
- ---------------------------------------------------------------------- --------------------------------------
PRODUCTION STATISTICS YEAR ENDED DECEMBER 31,
- ---------------------------------------------------------------------- --------------------------------------
2002 2001
- ---------------------------------------------------------------------- ------------------- ------------------
Ore Milled (tonnes) 1,050,009 1,045,435
- ---------------------------------------------------------------------- ------------------- ------------------
Zinc (%) 5.6 4.5
- ---------------------------------------------------------------------- ------------------- ------------------
Copper (%) 0.7 0.8
- ---------------------------------------------------------------------- ------------------- ------------------
Silver (grams/tonne) 39 46
- ---------------------------------------------------------------------- ------------------- ------------------
Gold (grams/tonne) 1.2 1.5
- ---------------------------------------------------------------------- ------------------- ------------------
Concentrate Production
- ---------------------------------------------------------------------- ------------------- ------------------
Zinc (tonnes) 94,914 75,741
- ---------------------------------------------------------------------- ------------------- ------------------
Recovery (%) 87.6 86.7
- ---------------------------------------------------------------------- ------------------- ------------------
Grade (%) 53.9 54.3
- ---------------------------------------------------------------------- ------------------- ------------------
Copper (tonnes) 37,680 42,138
- ---------------------------------------------------------------------- ------------------- ------------------
Recovery (%) 85.2 84.4
- ---------------------------------------------------------------------- ------------------- ------------------
Grade (%) 16.1 16.5
- ---------------------------------------------------------------------- ------------------- ------------------
Metal in Concentrates
- ---------------------------------------------------------------------- ------------------- ------------------
Zinc (tonnes) 51,197 41,150
- ---------------------------------------------------------------------- ------------------- ------------------
Copper (tonnes) 6,055 6,932
- ---------------------------------------------------------------------- ------------------- ------------------
Silver (ounces) 446,755 562,093
- ---------------------------------------------------------------------- ------------------- ------------------
Gold (ounces) 20,122 28,477
- ---------------------------------------------------------------------- ------------------- ------------------
Minesite Operating Costs
- ---------------------------------------------------------------------- ------------------- ------------------
Per tonne milled (Cdn$) 34.99 33.46
- ---------------------------------------------------------------------- ------------------- ------------------
Total Cash Costs
- ---------------------------------------------------------------------- ------------------- ------------------
Per pound payable zinc (US$) 0.28 0.29
- ---------------------------------------------------------------------- ------------------- ------------------
83
NANISIVIK MINE
The Nanisivik mine was permanently closed in September 2002. Zinc production was
only 4 percent lower in 2002 than 2001 despite only operating for nine months.
The Dense Media Separation plant, which commenced operating in July 2001
provided, on average, a 27 percent increase to the zinc head grade resulting in
a zinc grade to the mill of 10.0 percent compared with 6.9 percent in 2001.
Forty days prior to the closing of the mine, a failure of the ball mill
discharge trunion resulted in a production loss and property damage. The event
is covered by insurance and a financial settlement is imminent. An amount of
$1.0 million has been included in revenue in 2002.
Reclamation activities at Nanisivik commenced during 2002 and are ongoing, with
many technical studies and reports to be completed and filed throughout 2003,
culminating in the final closure plan for Nanisivik, which is due on December
15, 2003. The Nunavut Water Board (NWB) issued a renewal water license on
October 10, 2002 to cover the period October 1, 2002 to May 1, 2008, during
which period all reclamation work and post-closure monitoring will be completed.
Although the final amount and form of the financial security are currently under
discussion, the water license requires that CanZinco Ltd., a wholly-owned
subsidiary of Breakwater and owner of the Nanisivik mine, post total financial
security in the amount of $17.6 million. The amount of financial security
recommended by the NWB is a reflection of the submissions made to them by DIAND
and others on this topic and is significantly at odds with the Company's
estimate of closure costs which is approximately $9.2 million. The Company
continues to strongly defend its estimate of closure costs as being more
realistic and indicative of the amount and nature of work to be completed. Of
that amount, $6.0 million has previously been posted pursuant to the expired
water license. These amounts do not take into consideration the salvage value of
the assets remaining at Nanisivik, all of which are being reviewed for possible
sale. As well, these amounts do not take into consideration the value of
equipment and supplies that were purchased and are currently located at
Nanisivik, earmarked for reclamation activities, and the considerable amount of
reclamation work that was completed prior to and immediately following the
closure of the mine. In addition, discussions with the Government of Nunavut
have been ongoing for some time regarding the infrastructure at Nanisivik, with
the greatest level of interest currently being demonstrated for the fuel tank
farm located near the deep sea port.
The mine had an operating loss of $1.6 million in 2002 compared with $20.3
million in 2001. Operating cash flow was $1.6 million on gross sales revenue of
$69.0 million in 2002 compared with a cash outflow of $16.0 million in 2001 on
gross sales revenue of $54.5 million. Capital expenditures in 2002 were nil
compared with $3.9 million in 2001.
- ---------------------------------------------------------------------- --------------------------------------
PRODUCTION STATISTICS YEAR ENDED DECEMBER 31,
- ---------------------------------------------------------------------- ------------------- ------------------
2002 2001
- ---------------------------------------------------------------------- ------------------- ------------------
Ore Milled (tonnes) 516,544 774,920
- ---------------------------------------------------------------------- ------------------- ------------------
Zinc (%) 10.0 6.9
- ---------------------------------------------------------------------- ------------------- ------------------
Silver (grams/tonne) 42 30
- ---------------------------------------------------------------------- ------------------- ------------------
Concentrate Production
- ---------------------------------------------------------------------- ------------------- ------------------
Zinc (tonnes) 87,644 90,979
- ---------------------------------------------------------------------- ------------------- ------------------
Recovery (%) 96.0 95.7
- ---------------------------------------------------------------------- ------------------- ------------------
Grade (%) 56.5 56.6
- ---------------------------------------------------------------------- ------------------- ------------------
Metal in Concentrate
- ---------------------------------------------------------------------- ------------------- ------------------
Zinc (tonnes) 49,514 51,512
- ---------------------------------------------------------------------- ------------------- ------------------
Silver (ounces) 528,049 539,380
- ---------------------------------------------------------------------- ------------------- ------------------
Minesite Operating Costs
- ---------------------------------------------------------------------- ------------------- ------------------
Per tonne milled (Cdn$) 50.87 50.33
- ---------------------------------------------------------------------- ------------------- ------------------
Total Cash Costs
- ---------------------------------------------------------------------- ------------------- ------------------
Per pound payable zinc (US$) 0.34 0.42
- ---------------------------------------------------------------------- ------------------- ------------------
84
BOUGRINE MINE
The Bougrine mine production of zinc in concentrate decreased in 2002 as a
result of a significant decline in the zinc grade due to limited mill feed from
the higher-grade F-3 zone. The F-3 zone was out of service from April to
mid-July while a cemented fill placement program was underway. Zinc grades
returned to normal once the program was completed.
In an ongoing effort to increase the mineral reserves and resources of the mine
and extend mine life, the Company is continuing its discussions with the
Tunisian authorities to provide additional material from other known mineral
deposits in the area.
The mine had an operating loss of $8.5 million in 2002 compared with $3.5
million in 2001. Operating cash outflow was $0.4 million on gross sales revenue
of $40.9 million in 2002 compared with operating cash flow of $6.0 million in
2001 on gross sales revenue of $49.7 million. Capital expenditures in 2002 were
$2.0 million compared with $3.0 million in 2001.
- ---------------------------------------------------------------------- --------------------------------------
PRODUCTION STATISTICS YEAR ENDED DECEMBER 31,
- ---------------------------------------------------------------------- --------------------------------------
2002 2001
- ---------------------------------------------------------------------- ------------------- ------------------
Ore Milled (tonnes) 423,414 411,052
- ---------------------------------------------------------------------- ------------------- ------------------
Zinc (%) 9.7 11.5
- ---------------------------------------------------------------------- ------------------- ------------------
Lead (%) 1.5 2.1
- ---------------------------------------------------------------------- ------------------- ------------------
Concentrate Production
- ---------------------------------------------------------------------- ------------------- ------------------
Zinc (tonnes) 61,656 69,724
- ---------------------------------------------------------------------- ------------------- ------------------
Recovery (%) 81.8 80.2
- ---------------------------------------------------------------------- ------------------- ------------------
Grade (%) 54.7 54.3
- ---------------------------------------------------------------------- ------------------- ------------------
Lead (tonnes) 6,859 9,869
- ---------------------------------------------------------------------- ------------------- ------------------
Recovery (%) 75.1 76.3
- ---------------------------------------------------------------------- ------------------- ------------------
Grade (%) 66.6 65.1
- ---------------------------------------------------------------------- ------------------- ------------------
Metal in Concentrates
- ---------------------------------------------------------------------- ------------------- ------------------
Zinc (tonnes) 33,706 37,832
- ---------------------------------------------------------------------- ------------------- ------------------
Lead (tonnes) 4,565 6,424
- ---------------------------------------------------------------------- ------------------- ------------------
Minesite Operating Costs
- ---------------------------------------------------------------------- ------------------- ------------------
Per tonne milled (US$) 32.19 28.82
- ---------------------------------------------------------------------- ------------------- ------------------
Total Cash Costs
- ---------------------------------------------------------------------- ------------------- ------------------
Per pound payable zinc (US$) 0.36 0.33
- ---------------------------------------------------------------------- ------------------- ------------------
EL MOCHITO MINE
El Mochito achieved a record mill throughput of 663,385 tonnes in 2002, up 2
percent from 2001. However, with the zinc grade returning to the mineral reserve
and resource levels of 7.5 percent, production of zinc was down 4 percent from
2001.
The record performance was achieved while the employees also set a new safety
record of having worked 1,175,051 hours without experiencing a lost-time
accident.
85
The mine had an operating loss of $2.9 million in 2002 compared with $6.6
million in 2001. Operating cash flow was $3.9 million on gross sales revenue of
$69.5 million in 2002 compared with operating cash flow of $0.1 million in 2001
on gross sales revenue of $68.4 million. Capital expenditures in 2002 were $2.3
million compared with $2.4 million in 2001.
- ---------------------------------------------------------------------- --------------------------------------
PRODUCTION STATISTICS YEAR ENDED DECEMBER 31,
- ---------------------------------------------------------------------- ------------------- ------------------
2002 2001
- ---------------------------------------------------------------------- ------------------- ------------------
Ore Milled (tonnes) 663,385 652,331
- ---------------------------------------------------------------------- ------------------- ------------------
Zinc (%) 7.5 8.0
- ---------------------------------------------------------------------- ------------------- ------------------
Lead (%) 1.5 1.3
- ---------------------------------------------------------------------- ------------------- ------------------
Silver (grams/tonne) 90 81
- ---------------------------------------------------------------------- ------------------- ------------------
Concentrate Production
- ---------------------------------------------------------------------- ------------------- ------------------
Zinc (tonnes) 88,697 93,133
- ---------------------------------------------------------------------- ------------------- ------------------
Recovery (%) 93.0 92.8
- ---------------------------------------------------------------------- ------------------- ------------------
Grade (%) 52.2 52.1
- ---------------------------------------------------------------------- ------------------- ------------------
Lead (tonnes) 11,888 9,930
- ---------------------------------------------------------------------- ------------------- ------------------
Recovery (%) 80.6 79.4
- ---------------------------------------------------------------------- ------------------- ------------------
Grade (%) 68.4 68.0
- ---------------------------------------------------------------------- ------------------- ------------------
Metal in Concentrates
- ---------------------------------------------------------------------- ------------------- ------------------
Zinc (tonnes) 46,339 48,485
- ---------------------------------------------------------------------- ------------------- ------------------
Lead (tonnes) 8,128 6,750
- ---------------------------------------------------------------------- ------------------- ------------------
Silver (ounces) 1,700,034 1,505,659
- ---------------------------------------------------------------------- ------------------- ------------------
Minesite Operating Costs
- ---------------------------------------------------------------------- ------------------- ------------------
Per tonne milled (US$) 28.40 30.59
- ---------------------------------------------------------------------- ------------------- ------------------
Total Cash Costs
- ---------------------------------------------------------------------- ------------------- ------------------
Per pound payable zinc (US$) 0.32 0.37
- ---------------------------------------------------------------------- ------------------- ------------------
EL TOQUI MINE
The El Toqui mine produced 10 percent more zinc in concentrate in 2002 than in
2001.
Metallurgical improvements resulted in record zinc recoveries and concentrate
grades. Recoveries reached 92.1 percent in 2002 from 89.9 percent in 2001, while
the zinc concentrate grade reached 50.8 percent in 2002 from 49.8 percent in
2001.
86
The mine had an operating profit of $0.5 million in 2002 compared with an
operating loss of $0.7 million in 2001. Operating cash flow was $3.1 million on
gross sales revenue of $44.1 million in 2002 compared with operating cash flow
of $2.4 million in 2001 on gross sales revenue of $48.6 million. Capital
expenditures in 2002 were $2.9 million compared with $5.5 million in 2001.
- ---------------------------------------------------------------------- --------------------------------------
PRODUCTION STATISTICS YEAR ENDED DECEMBER 31,
- ---------------------------------------------------------------------- ------------------- ------------------
2002 2001
- ---------------------------------------------------------------------- ------------------- ------------------
Ore Milled (tonnes) 424,459 427,552
- ---------------------------------------------------------------------- ------------------- ------------------
Zinc (%) 9.2 8.5
- ---------------------------------------------------------------------- ------------------- ------------------
Gold (grams/tonne) 0.7 1.4
- ---------------------------------------------------------------------- ------------------- ------------------
Concentrate Production
- ---------------------------------------------------------------------- ------------------- ------------------
Zinc (tonnes) 70,752 65,405
- ---------------------------------------------------------------------- ------------------- ------------------
Recovery (%) 92.1 89.9
- ---------------------------------------------------------------------- ------------------- ------------------
Grade (%) 50.8 49.8
- ---------------------------------------------------------------------- ------------------- ------------------
Gold (tonnes) 5,424 3,389
- ---------------------------------------------------------------------- ------------------- ------------------
Recovery (%) 49.9 52.7
- ---------------------------------------------------------------------- ------------------- ------------------
Grade (grams/tonne) 26.9 92.0
- ---------------------------------------------------------------------- ------------------- ------------------
Metal in Concentrates
- ---------------------------------------------------------------------- ------------------- ------------------
Zinc (tonnes) 35,907 32,565
- ---------------------------------------------------------------------- ------------------- ------------------
Gold (ounces) 4,682 10,023
- ---------------------------------------------------------------------- ------------------- ------------------
Silver (ounces) 282,383 333,228
- ---------------------------------------------------------------------- ------------------- ------------------
Minesite Operating Costs
- ---------------------------------------------------------------------- ------------------- ------------------
Per tonne milled (US$) 26.04 25.08
- ---------------------------------------------------------------------- ------------------- ------------------
Total Cash Costs
- ---------------------------------------------------------------------- ------------------- ------------------
Per pound payable zinc (US$) 0.32 0.35
- ---------------------------------------------------------------------- ------------------- ------------------
LANGLOIS MINE
The Langlois mine was acquired effective May 1, 2000, as a package including the
Bouchard-Hebert mine. Operations were temporarily suspended in November 2000 due
to low metal prices and problems with the ore pass system. Prior to the closure,
the mine was operating at a production level significantly less than required to
operate the mine economically. Delineation drilling of Zone 97 after the
acquisition significantly increased mineral reserves and mineral grades from the
Company's previous estimates.
A feasibility study to reopen the Langlois mine was completed by SRK Consulting
(SRK) in August 2001 indicating a net pre-tax cash flow of $60.9 million based
on a zinc price of US$0.50/lb, a copper price of US$0.80/lb and a silver price
of US$5.00/oz. The internal rate of return was 24.0 percent and the NPV at 8.0
percent was $26.4 million. The capital and working capital requirements to bring
the mine to production total $25.7 million. An additional $7.5 million is
required during the first year of full production.
On February 12, 2003, the Company announced preliminary in-fill drilling results
from the 7,935 metre diamond drill program currently underway at the Langlois
mine. The objective of this drill program is to further delineate and upgrade
resources to reserves in Zone 97, both above the 6 level and below the 13 level.
Once the present drill program is complete, SRK will update the feasibility
study to include any new mineral reserves. Management expects the study will be
completed during the second quarter of 2003.
It is expected that the Langlois mine will replace production lost from the
closing of the Bouchard-Hebert mine, which is expected to occur in 2005 unless
new mineral reserves are identified.
87
CARIBOU MINE
The Caribou mine remained on care and maintenance during 2002. The non-cash
charge to earnings in 2001 includes an amount of $53.4 million to write down the
carrying value of the Caribou mine, to $nil. In addition, costs of $1.7 million
were incurred in 2002 for care and maintenance compared with $2.1 million during
2001. These costs are included as non-producing property costs.
LIQUIDITY AND FINANCIAL POSITION REVIEW
LIQUIDITY
As at December 31, 2002, the Company's total borrowings were $78.7 million, down
from $80.4 million at the end of 2001. Of the total debt, the Syndicated Credit
Facility included:
1. US$22.6 million, the balance of the Term Credit Facility;
2. US$6.5 million, the amount of the Supplemental Term Facility. In
November 2001, the Company completed a refinancing agreement whereby the
existing Term Credit Facility was increased by US$6.5 million. Under the
agreement, Dundee Bancorp Inc., ("Dundee"), a significant shareholder of the
Company agreed to post a letter of credit to support the Supplemental Term
Facility; and
3. US$16.0 million, drawn from the Revolver. The Revolver is repayable
from the collection of accounts receivable and sale of concentrates inventory
and can be redrawn as required based upon approximately 90 percent of the value
of accounts receivable and 80 to 90 percent of concentrate inventory value at
any time depending on the inventory's location.
The Syndicated Credit Facility was due to expire on January 2, 2003. In December
2002, the Company announced that the due date of its Syndicated Credit Facility,
which includes the Term Credit Facility, the Supplemental Term Facility and the
Revolver, was extended to January 2, 2004. As part of the extension to January
2, 2004, the Revolver is capped at US$30.0 million from US$45.0 million under
the previous agreement. With the closure of the Nanisivik mine, this cap is
considered adequate to meet the Company's future requirements.
In addition to the above Syndicated Credit Facility, the Company has
miscellaneous unsecured debt totalling $7.5 million at the end of 2002 compared
with $10.3 million at the end of 2001. Of this amount $3.2 million is in the
form of a prepayment for zinc concentrates by a customer of the Company compared
with $6.4 million in 2001. The payment of fees of $1.0 million associated with
current and previous financing activities has been deferred by agreement to
January 2, 2004. This $1.0 million amount is due to Dundee Securities
Corporation ("DSC") for past services not related to the above noted financing.
Bank fees related to the refinancing in 2001 in the amount of $0.9 million
remain outstanding and are due in December 2003.
As part of the refinancing in 2001, the Company agreed to complete a rights
offering to its shareholders in the amount of $15.0 million. The rights offering
was completed in May, 2002 and the Company issued 94,455,000 common shares at
$0.20 per share for net proceeds of $17.6 million after costs of the issue. The
successful rights offering allowed the Company to meet its operating and capital
requirements for the year 2002 as metal prices failed to recover.
88
LIQUIDITY RISK
The price of zinc is currently at a 15-year low in absolute terms and in real
terms at its lowest levels since the 1930's, and has declined steadily to this
level since the latter months of 2000. The Company is unable to withstand
continued low metal prices for an extended period without the ability to source
cash required from sources other than operating cash flow. Recent debt financing
combined with the rights offering have supported the operations during 2002.
Going forward into 2003, a zinc price in excess of US$800 is required to support
operations to the end of the year. In the event that the price of zinc does not
exceed this level, the Company will be required to find an alternative source of
financing. There is no certainty that an alternative source of financing will be
available to the Company.
World events, including the threat of war and bankruptcies of several major
companies, have put serious stress on the ability of insurers to continue to
provide support as they have in the past. The surety market is shrinking and, as
a result, the availability of environmental bonding is being threatened. It is
not unlikely that some or all of the Company's environmental bonds, which amount
to approximately $13.0 million, may be withdrawn or that the Company may be
required to provide security in the form of cash or letters of credit which
would use a significant portion of available credit lines. Provision for such an
event has not been included in the cash forecast for 2003. In the event that the
bonds are cancelled and the Company is unable to post adequate security, the
Company could be in default under the Syndicated Credit Facility. The Lenders
are secured with all of the assets of the Company and, in the event of default,
could realize on their security. Management is pursuing alternative solutions to
protect the assets in the event that the bonds are cancelled. At this time there
is no assurance that such alternatives will be available.
WORKING CAPITAL
Working capital at the end of 2002 was $22.3 million compared with $5.0 million
at the end of 2001. Cash and cash equivalents were $6.4 million at the end of
2002 compared with $3.3 million at the end of 2001. This amount represents the
normal working cash balance, which is maintained by varying the amount drawn
under the Revolver. The improvement in working capital is directly related to
the completion of the rights offering mentioned earlier.
CURRENT ASSETS
Current assets decreased to $87.1 million in 2002 from $96.0 million at the end
of 2001. Accounts receivable for concentrate sales increased by $13.1 million
while the concentrate and supplies inventories decreased by $16.5 million and
$9.1 million, respectively. These lower inventories are a direct result of
having closed the Nanisivik mine in September 2002. Miscellaneous receivables
for activities unrelated to concentrate sales increased to $6.9 million in 2002,
a $0.7 million increase from 2001. This increase is partly due to an amount of
$0.6 million receivable under an insurance claim for the ball mill failure at
the Nanisivik mine in 2002.
CURRENT LIABILITIES
Current liabilities decreased to $64.8 million at the end of 2002, from $90.9
million at the end of 2001. Of this decrease, accounts payable are lower by
$18.4 million largely due to the Nanisivik closure. Accounts payable were
unusually high at the end of 2001 due to the Company's inability to generate
sufficient cash flow to pay suppliers for supplies delivered to the Nanisivik
mine during the summer of 2001. All overdue amounts have now been paid and the
accounts payable reflect normal terms. Provisional payments to December 2002 for
concentrate inventory shipped but not priced decreased by
89
$3.0 million from December 2001. These provisional payments represent
contractual payments for concentrates shipped to customers but not yet
recognized as sales.
LONG-TERM LIABILITIES
Long-term debt at the end of 2002 was $48.4 million compared with $46.4 million
at the end of 2001. The increase includes $6.4 million drawn under the
Supplemental Term Facility, offset by a $3.2 million concentrate prepayment due
in December 2003 and moved to current debt. In addition, $0.9 million of bank
fees, which were included in long-term debt, are now due in 2003 and were
reclassified to short-term debt.
Reclamation and closure cost accruals decreased by $2.0 million in 2002
reflecting an increase in the provision by $2.9 million offset by $2.2 million
reclassified to current liabilities for expenditures expected to be incurred at
the Nanisivik mine.
USES OF CASH
Cash used for investing activities in 2002 was $11.1 million compared with $20.7
million in 2001. This $9.6 million decrease reflects lower capital expenditures
at the mines.
EQUITY
During 2002, the Company issued 1,375,000 common shares under the employee share
purchase plan for $264,000 compared with 809,000 common shares issued for
$702,000 in 2001. In 2001, 1,000,000 common shares were issued under the Share
Bonus Plan for $200,000. In May 2002, 94,455,000 common shares were issued
pursuant to a rights offering for net proceeds of $17.6 million and 3,603,000
common shares were issued for $638,000 to repurchase certain assets sold in
2001. At the end of 2002, the Company had issued and outstanding common shares
of approximately 193.3 million compared with 93.8 million at the end of 2001.
Shareholders' equity as at December 31, 2002 was $95.6 million compared with
$98.6 million as at December 31, 2001 reflecting a loss of $19.9 million for
2002 offset by $19.2 million of common share issues during the year.
RISKS AND UNCERTAINTIES
In addition to the liquidity risk discussed earlier, the following is a
discussion of some of the most significant risks facing the Company.
The most significant risk affecting the profitability and viability of the
Company is the fluctuation of metal prices, particularly zinc, as the Company's
earnings and cash flow are highly sensitive to changes in the price of zinc. Low
metal prices can impair the Company's liquidity and, if they persist for an
extended period, the Company is required to look to alternatives other than cash
flow to maintain its liquidity until metal prices recover. This is the situation
that the Company faces today as metal prices remain at historical lows. Other
risks facing the Company include fluctuations in treatment charges, operating,
geological and environmental risks associated with mining and, due to the varied
geographic locations of the Company's operations, political risks.
90
ZINC PRICE RISK
The profitability of any mining operation in which the Company has an interest
is significantly affected by the market price of zinc. It is estimated that each
US$0.01 per pound change impacts earnings and cash flow by approximately $4.2
million during 2003. Tables earlier in this section show the approximate impact
on the Company's earnings of variations in metal prices, the US/Canadian dollar
exchange rate and treatment charges, based on current plans for 2003 and
assuming the changes were to remain in effect for the full year.
Fluctuations in the price of zinc are influenced by numerous factors beyond the
control of the Company. Interest rates, inflation, exchange rates, the world
supply and demand for zinc and more recently the threat of war can all cause
significant fluctuations in zinc prices. Such external economic factors are in
turn influenced by changes in international economic growth patterns and
political developments.
OPERATING, GEOLOGICAL AND ENVIRONMENTAL RISK
The Company maintains high operating standards at all of its operations by
adopting stringent social, safety and operating practices. The Company focuses
on environmental protection, employee training and safety. A program of regular
reviews is structured to continually identify risks and control loss at every
level. Co-operation with the Company's insurers increases the effectiveness of
the Company's loss control programs.
Changing environmental laws and regulations can create uncertainty with regard
to future reclamation costs. In addition, the review process can be lengthy and
complex and delay both the commissioning and decommissioning of projects. To
minimize this risk, the Company monitors environmental issues on an ongoing
basis and believes reasonable provision for future environmental costs has been
made and is reflected in the financial statements.
CRITICAL ACCOUNTING POLICIES
The Company's significant accounting policies are fully described in Note 1 to
the consolidated financial statements. Certain accounting policies require the
application of significant judgment by management in selecting the appropriate
assumptions for calculating financial estimates. By their nature, these
judgments are based on historical experience, terms of existing contracts,
observance of trends to the industry, information provided by customers and
information available from other outside sources, as appropriate. The Company's
significant accounting policies include:
Inventories
Inventories are valued at the lower of average costs and net realizable value
(NSR). The quantities used to calculate inventory are subject to adjustments to
reflect changes in weight and assays on shipment. NSR is calculated based on
metal prices and treatment charges at the end of the respective periods. These
could change significantly at the time of final pricing.
Carrying Value Assessments of Mining Assets
The Company reviews the carrying value of its long-lived mining assets on a
quarterly basis by comparing the estimated undiscounted future net cash flow
with its carrying value. When the projected future net cash flows are less that
the carrying value and the difference is considered permanent, a write down is
recorded. Included in these future net cash flows are certain estimates. These
estimates include future production, future production costs, future capital
expenditures, future closure cost estimates, future metal prices, future
exchange rates and current proven and probable reserve estimates. Actual results
may differ from estimates and if they result in a lower actual net cash flow
than planned a write down of the carrying value of the long-live mining assets
may be required.
Reclamation and Site Restoration Costs
The Company provides for estimated reclamation and site restoration costs, where
reasonably determinable, on a unit-of-production basis over the estimated
economic life of the related mine based on estimated costs and current proven
and probable reserve estimates. The actual costs may differ from estimates and
additional adjustments may be required.
OUTLOOK
In the short-term, the prime determinant of the Company's earnings and cash flow
will be the price of zinc. The economic slowdown and possible recession in the
United States' economy are having a negative impact on metal prices. Zinc prices
are likely to remain weak until there are reasonable signs of recovery in the
economy and the automotive industry in particular. The extended period of low
metal prices has forced the closure of several of the world's mines including
the premature closing of the Company's Nanisivik mine. Recent smelter closure
announcements have been attributed to low metal prices combined with low
treatment charges caused by a current shortage of zinc concentrates. These
combined closures should help, in the longer term, to reduce the supply of zinc,
which should result in an increase in the price.
The Company's 2003 operating plan combined with a minimum zinc price of US$800
per tonne is adequate to support the Company's liquidity needs until the end of
2003. Unless metal prices recover, the Company will be required to find
alternate sources of financing to meet its cash requirements beyond 2003.
The last seven years have been a period of significant production growth for the
Company through the acquisition of five mines. As well, operating improvements
have been made at all of the Company's mines resulting in increased production
and lower unit costs. Going forward, with improved prices, the Company expects
the benefit of these acquisitions and improvements will be reflected in improved
financial performance and shareholder value.
91
Looking ahead, the Company has several opportunities from projects currently
owned. These include expansion of production at the El Toqui mine and the
reopening of the Langlois mine to replace the declining production from the
expected closure of the Bouchard-Hebert mine. Price permitting, the Caribou mine
also represents an opportunity for growth.
It is management's intent, as in the past, to grow the Company in a manner that
is accretive to its shareholders. The Company's vision is to grow its business
and increase its ranking in the top 10 global zinc concentrate producers.
Management believes that the future for zinc will improve over the next several
years as mine and smelter closures continue. With few new projects anticipated
and consumption growth fueled by increasing demand in China, the supply/demand
balance is expected to improve dramatically. Vertical integration by acquiring
interest in a smelter is not precluded, however, the Company believes its real
strength lies in mining, and while increasing its position in zinc, is also open
to diversification into mining of other metals.
YEARS ENDED DECEMBER 31, 2001 AND 2000
FINANCIAL RESULTS SUMMARY
NET EARNINGS AND CASH FLOW - 2001 AND 2000
After a non-cash charge to net earnings of $70.3 million for mining property
write-downs, the consolidated net loss was $111.1 million ($1.20 per Common
Share) for the year ended December 31, 2001, compared with a consolidated net
loss of $8.7 million ($0.10 per Common Share) after a non-cash charge of $27.1
million in 2000.
Cash outflow from operations (before changes in non-cash working capital items)
was $9.4 million ($0.10 per Common Share) in 2001 compared with cash flow of
$37.7 million ($0.45 per Common Share) in 2000. The non-cash charge to earnings
in 2001 includes an amount of $53.4 million to reduce the carrying value of the
Caribou mine to $nil, a reduction of $11.3 million to the carrying value of the
Nanisivik mine reflecting the expected realization on the investment and $5.6
million to the carrying values of other exploration and non-producing
properties. For the year 2000, the non-cash charge to earnings included $26.4
million to reduce the carrying value of the Caribou mine and $0.7 million for
other exploration properties. The revised carrying value of the Caribou mine in
2000 conformed to the new guidelines for mineral resource estimates and property
valuations recommended by the Canadian Institute of Mining, Metallurgy and
Petroleum and adopted by securities regulatory authorities. The new rules
exclude the use of inferred resources for property valuations.
- ---------------------------------------------------------------------------- ---------------- ---------------
($ millions) 2001 2000
- ---------------------------------------------------------------------------- ---------------- ---------------
(Loss) Contribution from mining activities (23.5) 36.8
- ---------------------------------------------------------------------------- ---------------- ---------------
Other expenses (net of other income) 10.9 12.0
- ---------------------------------------------------------------------------- ---------------- ---------------
Non-producing property costs 3.2 4.7
- ---------------------------------------------------------------------------- ---------------- ---------------
Foreign exchange hedging loss 3.2 -
- ---------------------------------------------------------------------------- ---------------- ---------------
Income and mining taxes - 1.7
- ---------------------------------------------------------------------------- ---------------- ---------------
(Loss) Earnings before asset valuation adjustments (40.8) 18.4
- ---------------------------------------------------------------------------- ---------------- ---------------
Write-down of properties 70.3 27.1
- ---------------------------------------------------------------------------- ---------------- ---------------
Net loss (111.1) (8.7)
- ---------------------------------------------------------------------------- ---------------- ---------------
Non-cash expenditures 101.7 46.4
- ---------------------------------------------------------------------------- ---------------- ---------------
Operating cash flow (before changes in non-cash working capital items) (9.4) 37.7
- ---------------------------------------------------------------------------- ---------------- ---------------
92
EARNINGS STATEMENT REVIEW - 2001 AND 2000
PRODUCTION AND GROSS REVENUE
Gross revenue from sales increased slightly to $301.8 million in 2001 compared
with $300.0 million in 2000.
The following table illustrates how the production of zinc in concentrate varied
at each mine between 2000 and 2001.
- ---------------------------------------------------------------------- -------------------- -----------------
ZINC PRODUCTION (tonnes zinc contained in concentrate) (000's) 2001 2000
- ---------------------------------------------------------------------- -------------------- -----------------
Bouchard-Hebert 41.2 22.5(1)
- ---------------------------------------------------------------------- -------------------- -----------------
Nanisivik 51.5 59.4
- ---------------------------------------------------------------------- -------------------- -----------------
Bougrine 37.8 38.3
- ---------------------------------------------------------------------- -------------------- -----------------
El Mochito 48.5 43.1
- ---------------------------------------------------------------------- -------------------- -----------------
El Toqui 32.6 31.2
- ---------------------------------------------------------------------- -------------------- -----------------
Langlois - 14.5(1)
- ---------------------------------------------------------------------- -------------------- -----------------
Total zinc production 211.6 209.0
- ---------------------------------------------------------------------- -------------------- -----------------
(1) From the effective date of acquisition of May 1, 2000.
The Company periodically hedges against fluctuations in metal prices and foreign
exchange. For 2001, gross revenue included $0.6 million of expense as a result
of hedging activities compared with $0.3 million of income during 2000. The net
result of the hedging activities for 2001 includes $0.9 million due to the
decrease in the hedge contract liability compared with $2.1 million in 2000.
Certain of the Company's mining operations receive sales revenue in US dollars
while incurring costs in other currencies such as Canadian dollars and Tunisian
Dinars. To protect against adverse changes in these exchange rates, the Company
has sold forward US$30.0 million at an average exchange rate of Cdn$1.4802 for
2002 and US$1.5 million for Euros at the rate of US$0.8899 maturing in 2002. At
the end of 2000, the Company had sold forward US$76.0 million at an average
exchange rate of Cdn$1.4843 for the period 2001 to 2003 and US$4.0 million for
Euros at US$0.875 maturing in 2001. Due to the decision to close the Nanisivik
mine in September 2002, the exchange hedge position applicable to 2003 was
cancelled and the Company recognized a hedging loss of $3.1 million in 2001.
NET REVENUE
Net revenue, or net smelter return, which represents the value of concentrates
sold after paying treatment charges, freight and marketing costs, decreased by 3
percent to $161.8 million in 2001 compared with $166.6 million in 2000.
Treatment charges, the amount paid to smelters for refining concentrates to
produce metal, and shipping and marketing costs increased by 5 percent to $140.0
million in 2001 from $133.4 million in 2000. Treatment charges, shipping and
marketing expenses amounted to 46 percent of gross revenue in 2001 compared with
44 percent in 2000. Treatment charges per pound of payable zinc were 19 percent
lower at US$0.187 in 2001 compared with US$0.231 in 2000.
OPERATING COSTS
Minesite operating costs per tonne of ore milled decreased slightly to US$27.26
in 2001 from US$27.63 in 2000. Total cash costs per pound of payable zinc, which
include treatment charges, ocean freight and other marketing costs, net of
by-product credits, were US$0.36 per pound of payable zinc in 2001 compared with
US$0.40 per pound of payable zinc in 2000.
93
Cost of sales per tonne of concentrate was 4 percent higher in 2001 than in 2000
due entirely to the impact of the weakening Canadian dollar and higher costs at
the Nanisivik mine.
- ---------------------------------------------------------------------- -------------------- -----------------
DIRECT OPERATING COSTS ($millions) 2001 2000
- ---------------------------------------------------------------------- -------------------- -----------------
Bouchard-Hebert 35.4 10.3
- ---------------------------------------------------------------------- -------------------- -----------------
Nanisivik 43.5 27.2
- ---------------------------------------------------------------------- -------------------- -----------------
Bougrine 20.8 16.5
- ---------------------------------------------------------------------- -------------------- -----------------
El Mochito 33.5 25.4
- ---------------------------------------------------------------------- -------------------- -----------------
El Toqui 20.0 18.7
- ---------------------------------------------------------------------- -------------------- -----------------
Langlois - 7.5
- ---------------------------------------------------------------------- -------------------- -----------------
Total 153.2 105.6
- ---------------------------------------------------------------------- -------------------- -----------------
OTHER EXPENSES (INCOME)
Other expenses, net of miscellaneous income, were $10.9 million in 2001 compared
with $12.0 million in 2000. The $1.1 million decrease, was due to increased
investment income of $9.2 million in 2001 which more than offset increases of
$0.2 million in general and administrative expenses, $0.4 million in interest
and financing costs and an increase of $2.7 million in foreign exchange loss.
The Company's debt facilities are denominated in US dollars. In 2001, the
weakening of the Canadian dollar against the US dollar from 1.5002 at the end of
2000 to 1.5926 at the end of 2001 resulted in a $4.6 million foreign exchange
loss in 2001 compared with a $1.9 million foreign exchange loss in 2000 on
translation of this debt to Canadian dollars for financial reporting purposes.
Investment and other income amounted to $9.2 million in 2001 compared with $4.9
million in 2000. The $4.3 million increase includes a gain of $8.6 million
realized on the liquidation of a portion of the investment portfolio obtained
through the Jascan acquisition and other miscellaneous income of $0.6 million.
- ---------------------------------------------------------------------- -------------------- -----------------
OTHER EXPENSES (INCOME) ($ millions) 2001 2000
- ---------------------------------------------------------------------- -------------------- -----------------
Corporate 7.5 7.3
- ---------------------------------------------------------------------- -------------------- -----------------
Interest expense and financing 8.0 7.7
- ---------------------------------------------------------------------- -------------------- -----------------
Investment income (9.2) (4.9)
- ---------------------------------------------------------------------- -------------------- -----------------
Foreign exchange loss 4.6 1.9
- ---------------------------------------------------------------------- -------------------- -----------------
Total Other Expenses net of other income 10.9 12.0
- ---------------------------------------------------------------------- -------------------- -----------------
Non-producing property costs 3.2 4.7
- ---------------------------------------------------------------------- -------------------- -----------------
Income and mining taxes - 1.7
- ---------------------------------------------------------------------- -------------------- -----------------
Total 14.1 18.4
- ---------------------------------------------------------------------- -------------------- -----------------
OTHER NON-PRODUCING PROPERTY COSTS
The costs related to properties being maintained on care and maintenance
decreased to $3.2 million in 2001 from $4.7 million in 2000. These costs include
$0.5 million incurred to place the Langlois mine on temporary care and
maintenance, $2.1 million incurred for care and maintenance at the Caribou mine,
and $0.6 million incurred for other properties.
OPERATING REVIEW - 2001 AND 2000
OPERATIONS
For the year ended December 31, 2001, metal production is shown in the table
below. Total cash costs per pound of payable zinc decreased to US$0.36 per pound
from US$0.40 per pound for the same period of 2000.
94
OPERATIONS SUMMARY
- ---------------------------------------------------------------------- --------------------------------------
YEAR ENDED DECEMBER 31,
- ---------------------------------------------------------------------- --------------------------------------
2001 2000
- ---------------------------------------------------------------------- -------------------- -----------------
Ore Milled (tonnes) 3,311,290 3,028,922
- ---------------------------------------------------------------------- -------------------- -----------------
Zinc (%) 7.2 7.7
- ---------------------------------------------------------------------- -------------------- -----------------
Concentrate Production
- ---------------------------------------------------------------------- -------------------- -----------------
Zinc (tonnes) 394,982 392,655
- ---------------------------------------------------------------------- -------------------- -----------------
Copper (tonnes) 42,138 26,351
- ---------------------------------------------------------------------- -------------------- -----------------
Lead (tonnes) 19,799 16,755
- ---------------------------------------------------------------------- -------------------- -----------------
Gold (tonnes) 3,389 3,010
- ---------------------------------------------------------------------- -------------------- -----------------
Metal in Concentrates
- ---------------------------------------------------------------------- -------------------- -----------------
Zinc (tonnes) 211,544 208,996
- ---------------------------------------------------------------------- -------------------- -----------------
Copper (tonnes) 6,932 4,532
- ---------------------------------------------------------------------- -------------------- -----------------
Lead (tonnes) 13,174 11,021
- ---------------------------------------------------------------------- -------------------- -----------------
Silver (ounces) 2,940,360 2,790,137
- ---------------------------------------------------------------------- -------------------- -----------------
Gold (ounces) 38,500 20,289
- ---------------------------------------------------------------------- -------------------- -----------------
Minesite Operating Costs
- ---------------------------------------------------------------------- -------------------- -----------------
Per tonne milled (US$) 27.26 27.63
- ---------------------------------------------------------------------- -------------------- -----------------
Total Cash Costs
- ---------------------------------------------------------------------- -------------------- -----------------
Per pound payable zinc (US$) 0.36 0.40
- ---------------------------------------------------------------------- -------------------- -----------------
The following table summarizes key financial information for each of the
Company's operating mines.
- ---------------------------- -------------------- -------------------- ------------------- ------------------
Contribution
(Loss) from
Mining Non-cash Capital
Gross Revenue Activities(1) Costs(2) Expenditures
- ---------------------------- --------- ---------- --------- ---------- -------- ---------- -------- ---------
($ millions) 2001 2000 2001 2000 2001 2000 2001 2000
- ---------------------------- --------- ---------- --------- ---------- -------- ---------- -------- ---------
Bouchard-Hebert 82.8 34.4 7.7 8.0 8.3 3.4 1.7 2.0
- ---------------------------- --------- ---------- --------- ---------- -------- ---------- -------- ---------
Nanisivik 54.5 82.8 (20.3) 15.7 4.3 4.2 3.9 8.2
- ---------------------------- --------- ---------- --------- ---------- -------- ---------- -------- ---------
Bougrine 49.7 58.9 (3.5) 9.0 9.5 7.6 3.0 6.4
- ---------------------------- --------- ---------- --------- ---------- -------- ---------- -------- ---------
El Mochito 67.3 59.3 (6.6) 2.8 6.7 4.8 2.4 6.1
- ---------------------------- --------- ---------- --------- ---------- -------- ---------- -------- ---------
El Toqui 47.5 49.6 (0.7) 1.4 3.1 3.5 5.5 10.1
- ---------------------------- --------- ---------- --------- ---------- -------- ---------- -------- ---------
Langlois - 15.0 - - - 0.6 4.1 1.0
- ---------------------------- --------- ---------- --------- ---------- -------- ---------- -------- ---------
Totals 301.8 300.0 (23.4) 36.9 31.9 24.1 20.6 33.8
- ---------------------------- --------- ---------- --------- ---------- -------- ---------- -------- ---------
(1) After non-cash costs.
(2) Depreciation, depletion and reclamation costs.
BOUCHARD-HEBERT MINE
The Bouchard-Hebert mine produced 90.7 million pounds of zinc in 2001 (2000 -
49.6 million pounds), 15.3 million pounds of copper (2000 - 8.9 million pounds),
28,477 ounces of gold (2000 - 13,690 ounces) and 562,093 ounces of silver (2000
- - 307,373 ounces) from 1,045,435 tonnes of ore milled (2000 - 542,648 tonnes).
Minesite operating cost per tonne of ore milled was $33.46 in 2001 compared with
$32.50 in 2000 and total cash costs in 2001 were US$0.29 per pound of payable
zinc compared with US$0.30 per pound of payable zinc in 2000.
The mine had an operating profit of $7.7 million in 2001 compared with $8.0
million in 2000. Operating cash flow was $16.0 million on gross sales revenue of
$82.8 million in 2001 compared with $11.4 million in 2000 on gross sales revenue
of $34.4 million. Capital expenditures in 2001 were $1.7 million compared with
$2.0 million in 2000. The Company purchased and operated the Bouchard-Hebert
mine effective May 1, 2000.
95
NANISIVIK MINE
The Nanisivik mine produced 113.6 million pounds of zinc in 2001 (2000 - 131.0
million pounds) and 539,380 ounces of silver (2000 - 567,707 ounces) from
774,920 tonnes of ore milled (2000 - 811,283 tonnes). Minesite operating costs
per tonne of ore milled were $50.33 in 2001 compared with $38.88 and total cash
costs in 2001 were US$0.42 per pound of payable zinc compared with US$0.41 per
pound of payable zinc in 2000. The increased cost per tonne of ore milled
reflects the operating costs of the DMS plant which commenced operating in July
2001 and the additional mining costs for the increase in mined tonnage to feed
the DMS plant.
The mine had an operating loss of $20.3 million in 2001 compared with an
operating profit of $15.7 million in 2000. Operating cash outflow was $15.9
million on gross sales revenue of $54.5 million in 2001 compared with a cash
flow of $19.9 million in 2000 on gross sales revenue of $82.8 million. Capital
expenditures in 2001 were $3.9 million compared with $8.2 million in 2000.
BOUGRINE MINE
The Bougrine mine produced 83.4 million pounds of zinc in 2001 (2000 - 84.4
million pounds) and 14.2 million pounds of lead (2000 - 13.7 million pounds)
from 411,052 tonnes of ore milled (2000 - 422,120 tonnes). Minesite operating
costs per tonne of ore milled were US$28.82 in 2001 compared with US$27.49 and
total cash costs in 2001 were US$0.33 per pound of payable zinc compared with
US$0.37 per pound of payable zinc in 2000.
The mine had an operating loss of $3.5 million in 2001 compared with an
operating profit of $9.0 million in 2000. Operating cash flow was $6.0 million
on gross sales revenue of $49.7 million in 2001 compared with $16.6 million in
2000 on gross sales revenue of $58.9 million. Capital expenditures in 2001 were
$3.0 million compared with $6.4 million in 2000.
EL MOCHITO MINE
The El Mochito mine produced 106.9 million pounds of zinc in 2001 (2000 - 94.9
million pounds), 14.9 million pounds of lead (2000 - 10.6 million pounds) and
1.5 million ounces of silver (2000 - 1.7 million ounces) from 652,331 tonnes of
ore milled (2000 - 637,665 tonnes). Minesite operating costs per tonne of ore
milled were US$30.59 in 2001 compared with US$32.83 in 2000 and total cash costs
in 2001 were US$0.37 per pound of payable zinc compared with US$0.44 per pound
of payable zinc in 2000.
The mine had an operating loss of $6.6 million in 2001 compared with an
operating profit of $2.8 million in 2000. Operating cash flow was $0.2 million
on gross sales revenue of $67.3 million in 2001 compared with $7.6 million in
2000 on gross sales revenue of $59.3 million. Capital expenditures in 2001 were
$2.4 million compared with $6.1 million in 2000.
EL TOQUI MINE
The El Toqui mine produced 71.8 million pounds of zinc in 2001 (2000 - 68.8
million pounds), 10,023 ounces of gold (2000 - 6,232 ounces) and 333,228 ounces
of silver (2000 - 166,568 ounces) from 427,552 tonnes of ore milled (2000 -
416,418 tonnes). Minesite operating costs per tonne of ore milled were US$25.08
in 2001 compared with US$26.94 and total cash costs in 2001 were US$0.35 per
pound of payable zinc compared with US$0.44 per pound of payable zinc in 2000.
96
The mine had an operating loss of $0.7 million in 2001 compared with an
operating profit of $1.4 million in 2000. Operating cash flow was $2.4 million
on gross sales revenue of $47.5 million in 2001 compared with $4.9 million in
2000 on gross sales revenue of $49.6 million. Capital expenditures in 2001 were
$5.5 million compared with $10.1 million in 2000.
LANGLOIS MINE
The Langlois mine was acquired effective May 1, 2000. The mine produced 32.0
million pounds of zinc and 1.0 million pounds of copper before operations were
temporarily suspended in November 2000 due to low metal prices and problems with
the ore pass system. Prior to the closure, the mine was operating at a
production level significantly less than required to operate the mine
economically. Delineation drilling of Zone 97 after the acquisition
significantly increased mineral reserves and grades from the Company's previous
estimates. A feasibility study for reopening the mine was completed in August
2001. The Langlois mine incurred an operating loss of $41,000 during the period
May 1 to September 30, 2000. In addition, care and maintenance costs of $0.5
million were incurred during 2001 compared with $1.0 million during 2000. These
costs were charged to earnings and included in non-producing property costs. The
mine used $nil of operating cash during 2001 compared with producing operating
cash flow of $0.6 million during 2000. Capital expenditures were $4.1 million in
2001 compared with $1.0 million in 2000.
CARIBOU MINE
The Caribou mine remained on care and maintenance during 2001. The non-cash
charge to earnings in 2001 includes an amount of $53.4 million to reduce the
carrying value of the Caribou mine to $nil. For the year 2000, the non-cash
charge to earnings included $26.4 million to reduce the carrying value of the
Caribou mine. The revised carrying value of the Caribou mine in 2000 conformed
to new guidelines for mineral resource estimates and property valuations
recommended by the Canadian Institute of Mining, Metallurgy and Petroleum and
adopted by securities regulatory authorities. The new rules exclude the use of
inferred resources for property valuations.
In addition, costs of $2.1 million were incurred in 2001 for care and
maintenance compared with $2.3 million during 2000. These costs are included as
non-producing property costs.
LIQUIDITY AND FINANCIAL POSITION REVIEW
WORKING CAPITAL
Working capital at the end of 2001 was $5.0 million compared with $23.9 million
at the end of 2000. Cash and cash equivalents were $3.3 million at the end of
2001 compared with $4.7 million at the end of 2000. This amount represents the
normal working cash balance, which is maintained by varying the amount drawn
under the Revolver.
CURRENT ASSETS
Current assets decreased to $96.0 million in 2001 from $134.5 million at the end
of 2000. Accounts receivable for concentrate sales decreased by $8.5 million
while the concentrate and supplies inventories decreased by $14.2 million and
$0.9 million, respectively. Miscellaneous receivables for activities unrelated
to concentrate sales decreased to $6.3 million in 2001, an $8.6 million decrease
from 2000. This decrease is due to insurance claims of $4.6 million in 2000,
which were received in 2001 and tax receivables of $3.2 million relating to the
Jascan acquisition which were settled in 2001. Short-term investments decreased
by $4.2 million.
97
CURRENT LIABILITIES
Current liabilities decreased to $90.9 million at the end of 2001 from $110.6
million at the end of 2000. Accounts payable and accrued liabilities increased
by $13.9 million in 2001. The increase is primarily due to the Company's
inability to generate sufficient cash flow to pay suppliers for supplies
delivered to the Nanisivik mine during the summer of 2001. Arrangements have
been made for payment over a set period of time in 2002. Provisional payments
for concentrate inventory shipped and not priced decreased by $7.4 million in
2001. These provisional payments represent contractual payments for concentrates
shipped to customers but not yet recognized as sales.
LONG-TERM LIABILITIES
Long-term debt at the end of 2001 was $46.4 million compared with $30.8 million
at the end of 2000. The increase includes $3.8 million drawn under the
Supplemental Term Facility and $3.2 million concentrate prepayments due in 2003.
The $1.4 million deferred hedge contract liability assumed on the purchase of
the Bouchard-Hebert and Langlois mines in 2000 will expire in 2002 and is
therefore included in current liabilities in 2001.
There is no change to the reclamation and closure cost accruals for 2001.
USES OF CASH
Cash used for investing activities in 2001 was $20.7 million compared with $96.7
million in 2000. This $76.0 million decrease reflects lower capital expenditures
of $13.0 million at the mines and the $63.5 million invested in 2000 to purchase
the Bouchard-Hebert and Langlois mines.
DEBT
As at December 31, 2001, the Company's total borrowings were $80.4 million, down
from $90.3 million at the end of 2000. At the end of 2001, the Company's debt
facilities included:
1. $36.0 (US$22.6) million, the balance of the Term Credit
Facility;
2. $3.8 (US$2.4) million, the amount drawn on the Supplemental
Term Facility; and
3. $30.3 (US$19.0) million, drawn on the Revolver. The Revolver
is repayable from the collection of accounts receivable and
sale of concentrates inventory and can be redrawn as required
based upon approximately 90 percent of the value of accounts
receivable and 80 or 90 percent of concentrate inventory value
at any time.
EQUITY
During 2001, the Company issued 809,000 Common Shares under the Share Purchase
Plan for $702,000 and 1,000,000 Common Shares for $200,000 under the Share Bonus
Plan.
In November 2000, the Company completed the acquisition of Jascan. As part of
the transaction, the Company issued 9,491,162 Common Shares with an ascribed
value of $1.75 per Common Share or an aggregate value of $16.6 million. In
December 2000, the Company issued 488,000 flow-through Common Shares by private
placement at $2.05 per Common Share to fund exploration expenditures during
2001.
Shareholders' equity as at December 31, 2001 was $98.6 million compared with
$201.9 million as at December 31, 2000 reflecting the significant write-down of
assets recognized in 2001. At the end of
98
2001, the Company had issued and outstanding Common Shares of approximately 93.8
million compared with 92.0 million at the end of 2000.
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A. DIRECTORS AND SENIOR MANAGEMENT.
The following table sets forth, for each of the directors and executive officers
of the Company, the person's name, municipality of residence, position with the
Company, principal occupation and, if a director, the date on which the person
became a director. Each of the directors of the Company has been elected to
serve until the next annual meeting of shareholders of the Company.
Name and Municipality Position with
of Residence the Company Principal Occupation Director Since
- ----------------------------- -------------------------- --------------------------------- ------------------------
Garth A.C. MacRae(1) Chairman and Director Vice-Chairman, Dundee September 9, 1993
Toronto, Ontario Bancorp Inc., a merchant
banking and financial
service company
Colin K. Benner(1) President, Chief Officer of the Company June 7, 1995
Toronto, Ontario Executive Officer and a
Director
Rene R. Galipeau Executive Vice President Officer of the Company -
Mississauga, Ontario and Chief Financial
Officer
John D. Bracale Vice President, Latin Officer of the Company -
Fort Lauderdale, Florida America and Corporate
Logistics
J. Steven Hayes Vice President, Marketing Officer of the Company -
Oakville, Ontario
William M. Heath Vice President, Officer of the Company -
Toronto, Ontario Administration
Norman L. Calder Treasurer Officer of the Company -
Toronto, Ontario
Leroy A. Fong Controller Officer of the Company -
Mississauga, Ontario
E. Ann Wilkinson Corporate Secretary Officer of the Company -
Toronto, Ontario
Gordon F. Bub Director Self-employed November 12, 1993
Richmond Hill, Ontario
Donald K. Charter(2) Director Executive Vice President, June 14, 1999
Toronto, Ontario Dundee Bancorp Inc. and
Dundee Wealth Management
Inc., a financial service
company, and Chairman and
Chief Executive Officer,
Dundee Securities
Corporation, an investment
dealer
99
- ------------------------------------------------------------------------------------------------------------------------------------
Jonathan C. Goodman(3) Director President and Chief June 19, 2001
Toronto, Ontario Executive Officer, Dundee
Resources Ltd., a resource
holding company, Director,
Dundee Bancorp Inc. and
Director, Dundee Wealth
Management Inc.
Allen J. Palmiere(2)(3) Director Chief Financial Officer, September 9, 1993
Georgetown, Ontario Zemex Corporation, an
industrial minerals company
A. Murray Sinclair, Jr. (2)(3) Director President, Quest Ventures November 20, 1992
Vancouver, British Columbia Ltd., a merchant banking
company
(1) Member of the hedging committee of the directors of the Company.
(2) Member of the compensation committee of the directors of the Company.
(3) Member of the audit committee of the directors of the Company.
Each of the foregoing directors and executive officers has held his or her
present or principal occupation or similar positions with his or her present
employer or its predecessor or affiliates for the past five years except for Mr.
Benner who, prior to November 30, 2001 was President and Chief Operating Officer
of the Company and, prior to June 1998, was also President and Chief Executive
Officer of Black Hawk Mining Inc., Mr. Bub who, prior to November 30, 2001, was
Chairman and Chief Executive Officer of the Company and Mr. Heath who, prior to
January 1999, was self-employed as a consultant.
The following table sets forth other principal directorships for each of the
directors.
- ---------------------------------------- ----------------------------------------------------------------------------
Director Other Principal Directorships
- ---------------------------------------- ----------------------------------------------------------------------------
Colin K. Benner Black Hawk Mining Inc.
- ---------------------------------------- ----------------------------------------------------------------------------
Western Canada Coal Ltd.
- ---------------------------------------- ----------------------------------------------------------------------------
Gordon F. Bub Black Hawk Mining Inc.
- ---------------------------------------- ----------------------------------------------------------------------------
Donald K. Charter Dundee Realty Corporation
- ---------------------------------------- ----------------------------------------------------------------------------
Dundee Wealth Management Inc.
- ---------------------------------------- ----------------------------------------------------------------------------
IAMGold Corporation
- ---------------------------------------- ----------------------------------------------------------------------------
Black Hawk Mining Inc.
- ---------------------------------------- ----------------------------------------------------------------------------
Jonathan C. Goodman Odyssey Resources Ltd.
- ---------------------------------------- ----------------------------------------------------------------------------
Major Drilling Group International Inc.
- ---------------------------------------- ----------------------------------------------------------------------------
Cambior Inc.
- ---------------------------------------- ----------------------------------------------------------------------------
Dayton Mining Corporation
- ---------------------------------------- ----------------------------------------------------------------------------
Dundee Bancorp Inc.
- ---------------------------------------- ----------------------------------------------------------------------------
Dundee Wealth Management Inc.
- ---------------------------------------- ----------------------------------------------------------------------------
Dundee Precious Metals Inc.
- ---------------------------------------- ----------------------------------------------------------------------------
Dundee Resources Limited
- ---------------------------------------- ----------------------------------------------------------------------------
Eurogas Corporation
- ---------------------------------------- ----------------------------------------------------------------------------
Diagem International Resource Corp.
- ---------------------------------------- ----------------------------------------------------------------------------
Hope Bay Gold Corporation
- ---------------------------------------- ----------------------------------------------------------------------------
Pretium Industries
- ---------------------------------------- ----------------------------------------------------------------------------
Garth A.C. MacRae Black Hawk Mining Inc.
- ---------------------------------------- ----------------------------------------------------------------------------
ChondroGene Limited
- ---------------------------------------- ----------------------------------------------------------------------------
Dimethaid Research Inc.
- ---------------------------------------- ----------------------------------------------------------------------------
Dundee Bancorp Inc.
- ---------------------------------------- ----------------------------------------------------------------------------
Dundee Precious Metals Inc.
- ---------------------------------------- ----------------------------------------------------------------------------
100
- ---------------------------------------- ----------------------------------------------------------------------------
Dundee Wealth Management Inc.
- ---------------------------------------- ----------------------------------------------------------------------------
Dynamic Global Fund Corporation
- ---------------------------------------- ----------------------------------------------------------------------------
Eurogas Corporation
- ---------------------------------------- ----------------------------------------------------------------------------
Kinetic Energy Inc.
- ---------------------------------------- ----------------------------------------------------------------------------
A. Murray Sinclair, Jr. Antrim Energy Inc.
- ---------------------------------------- ----------------------------------------------------------------------------
Arapaho Capital Corp.
- ---------------------------------------- ----------------------------------------------------------------------------
Aurora Platinum Corp.
- ---------------------------------------- ----------------------------------------------------------------------------
Avatar Petroleum Corp.
- ---------------------------------------- ----------------------------------------------------------------------------
Coubran Resources Ltd.
- ---------------------------------------- ----------------------------------------------------------------------------
Elgin Resources Inc.
- ---------------------------------------- ----------------------------------------------------------------------------
Goodfellow Resources Ltd.
- ---------------------------------------- ----------------------------------------------------------------------------
Groundstar Resources Limited
- ---------------------------------------- ----------------------------------------------------------------------------
Kirkland Lake Gold Inc.
- ---------------------------------------- ----------------------------------------------------------------------------
Lagasco Corp.
- ---------------------------------------- ----------------------------------------------------------------------------
Marchwell Capital Corp.
- ---------------------------------------- ----------------------------------------------------------------------------
New Inca Gold Ltd.
- ---------------------------------------- ----------------------------------------------------------------------------
Pretium Industries Inc. (formerly VisuaLabs Inc.)
- ---------------------------------------- ----------------------------------------------------------------------------
Quest Investment Corporation
- ---------------------------------------- ----------------------------------------------------------------------------
Rentcash Inc.
- ---------------------------------------- ----------------------------------------------------------------------------
Skye Resources Inc.
- ---------------------------------------- ----------------------------------------------------------------------------
Upland Resources Corporation
- ---------------------------------------- ----------------------------------------------------------------------------
Viceroy Resource Corp.
- ---------------------------------------- ----------------------------------------------------------------------------
Wolfden Resources Inc.
- ---------------------------------------- ----------------------------------------------------------------------------
No director or officer has any family relationship with any other director or
officer.
B. COMPENSATION
The following table sets forth all annual and long-term compensation for
services in all capacities rendered to the Company and its subsidiaries for the
financial years of the Company ended December 31, 2002, 2001 and 2000 in respect
of each of the individuals who were, during the year ended December 31, 2002,
the Chief Executive Officer of the Company and, as at December 31, 2002, the
four other most highly compensated executive officers of the Company
(collectively the "Named Executive Officers").
101
Summary Compensation Table
- ------------------------ ------ ------------------------------------------ ----------------------------------- -----------
Annual Compensation Long-term Compensation
------------------------------------------ -----------------------------------
Awards Payouts
------------------------ ----------
Securities Restricted
Other Annual Under Shares or All Other
Compen- Options Restricted LTIP Compen-
Name and Principal Salary Bonus sation(1) Granted(2) Share Payouts sation(3)
Position Year ($) ($) ($) (#) Units (#) ($) ($)
- ------------------------ ------ -------------- ------------ -------------- ----------- ------------ ---------- -----------
Colin K. Benner(4) 2002 400,000 175,000(4) 56,888(5) 1,000,000 - - 3,500
President, Chief 2001 400,000 75,000 - - - - 5,228
Executive Officer 2000 400,000 200,000 - - - - 19,193
- ------------------------ ------ -------------- ------------ -------------- ----------- ------------ ---------- -----------
Rene R. Galipeau 2002 275,000 36,000 1,375(60 250,000 - - 1,200
Executive Vice 2001 275,000 35,000 2,750(6) - - - 16,200
President and Chief 2000 275,000 100,000 2,875(6) - - - 19,020
Financial Officer
- ------------------------ ------ -------------- ------------ -------------- ----------- ------------ ---------- -----------
William M. Heath 2002 190,000 88,000 3,275(5) 100,000 - - 1,575
Vice President, 2001 175,000 20,000 - - - - 1,481
Administration 2000 175,000 25,000 - - - - 1,019
- ------------------------ ------ -------------- ------------ -------------- ----------- ------------ ---------- -----------
John D. Bracale 2002 US$126,198 - US$14,300 - - - US$574
Vice President, 2001 US$108,339 - US$13,000(7) - - - US$7,286
Latin America and 2000 US$ 98,333 US$20,000 US$14,400(7) - - - -
Corporate Logistics
- ------------------------ ------ -------------- ------------ -------------- ----------- ------------ ---------- -----------
J. Steven Hayes 2002 145,000 5,000 - 100,000 - - 1,305
Vice President, 2001 145,000 10,000 - - - - 4,758
Marketing 2000 145,000 - - - - - 13,901
- ------------------------ ------ -------------- ------------ -------------- ----------- ------------ ---------- -----------
(1) Where no figures have been provided, the only other annual compensation was
taxable benefits that did not exceed minimum threshold disclosure levels.
(2) Options granted under the share option plan comprising part of the share
incentive plan of the Company.
(3) Except in the case of Mr. Bracale, represents the dollar value of any
insurance premium paid by the Company during the year with respect to term
life insurance for the benefit of the Named Executive Officer and, where
applicable, the Company's matching contributions under the share purchase
plan comprising part of the share incentive plan of the Company.
(4) This bonus comprises a cash payment of $125,000 paid in April 2003 and the
issue, in February 2003, of 200,000 Common Shares from the share bonus plan
portion of the share incentive plan of the Company, the fair market value
of which was $50,000 on the day the compensation was awarded.
(5) Represents payout of vacation time earned but not taken.
(6) Represents the dollar value of imputed interest benefits from loans
provided to the Named Executive Officer by the Company as computed in
accordance with the INCOME TAX ACT (Canada).
(7) Represents a housing allowance paid to Mr. Bracale in 2000 and 2001 and a
relocation allowance in 2002.
During the fiscal year ended December 31, 2002, the aggregate cash or other
compensation paid or payable to the executive officers including the Named
Executive Officers of the Company for services rendered was $1,973,000.
102
The following table sets forth information regarding options granted during the
financial year of the Company ended December 31, 2002 to the Named Executive
Officers.
Options Grants During the Most Recently Completed Financial Year
- ---------------------- ------------------ -------------- ----------------- ------------------ ------------------------
Percentage of Market Value
Total Options of Securities
Granted to Underlying
Securities under Employees in Option on the
Options Financial Exercise Price Date of Grant (1)
Name Granted Year ($/security) ($/security) Expiration Date
- ---------------------- ------------------ -------------- ----------------- ------------------ ------------------------
Colin K. Benner 1,000,000 25.6% $0.19 $0.19 June 6, 2012
Common Shares
- ---------------------- ------------------ -------------- ----------------- ------------------ ------------------------
Rene R. Galipeau 250,000 6.4% $0.19 $0.19 June 6, 2012
Common Shares
- ---------------------- ------------------ -------------- ----------------- ------------------ ------------------------
John D. Bracale 100,000 2.6% $0.19 $0.19 June 6, 2012
Common Shares
- ---------------------- ------------------ -------------- ----------------- ------------------ ------------------------
William M. Heath 100,000 2.6% 50,000 - $0.28 $0.28 50,000 - Jan. 16, 2012
Common Shares 50,000 - $0.19 $0.19 50,000 - June 6, 2012
- ---------------------- ------------------ -------------- ----------------- ------------------ ------------------------
J. Steven Hayes 100,000 2.6% $0.19 $0.19 June 6, 2012
Common Shares
- ---------------------- ------------------ -------------- ----------------- ------------------ ------------------------
(1) Reflects the closing price of the Common Shares on the Toronto Stock
Exchange on the day before the date of grant.
The Company does not have any pension, retirement or similar benefits for the
executive officers or the directors.
The Company maintains directors' and officers' liability insurance for the
directors and officers of the Company providing coverage in the amount of
$25,000,000 in each policy year. The deductible amount on the policy is $250,000
and the total annual premium in 2003 is $233,500.
C. BOARD PRACTICES
1. Term of Office
Each director elected holds office until the close of business on the day of the
first annual meeting of the shareholders of the Company following his election
unless his office is earlier vacated in accordance with the by-laws of the
Company.
Compensation of Directors
In October 1996, the Company implemented a standard arrangement pursuant to
which non-management directors of the Company are compensated for their services
in their capacity as directors. Non-management directors are paid $5,000 per
annum and $750 per meeting attended (either of the directors or of a committee
thereof). Fees paid or payable to directors amounted to an aggregate of $60,700
in 2002. The directors of the Company are eligible to participate in the share
incentive plan of the Company, but do not have service contracts providing for
benefits upon retirement.
Colin Benner has entered into a five-year employment agreement with the Company
which expires on October 31, 2004. Mr. Benner's agreement provides for an annual
salary of $350,000 which is reviewed annually by the compensation committee of
the directors of the Company. The agreement further provides that in the event
of the termination of Mr. Benner's employment, other than for cause, Mr. Benner
is entitled to receive 30 months written notice of the Company's decision to
terminate employment or alternatively a lump-sum payment equal to thirty months
salary in lieu of notice. In these
103
circumstances, the agreement also provides that all employment benefits will
continue for a period of 30 months following termination unless full-time
alternative employment is secured, in which case the entitlement to employee
benefits ceases. In the event that the Company's benefits plan prohibits
continued participation in the plan due to employment status, Mr. Benner is
entitled under the agreement to receive a lump-sum payment equal to the value of
the benefits. In the event that Mr. Benner's employment is terminated due to the
sale, amalgamation, merger or reorganization of the Company, the same notice
period or lump sum payments and benefits are due.
Effective November 30, 2001, Gordon Bub resigned as Chairman and Chief Executive
Officer of the Company. The Company had entered into an employment agreement
with Mr. Bub having the same terms as those under the Company's agreement with
Mr. Benner, with the exception of Mr. Bub's annual salary under the agreement,
which was $400,000, subject to annual review by the compensation committee of
the directors of the Company. As consideration for the waiver by Mr. Bub of the
severance arrangements under the employment agreement between the Company and
Mr. Bub, the Company and Mr. Bub have entered into an agreement pursuant to
which (i) the Company has agreed to pay Mr. Bub $25,000 per month for a period
of 14 months which commenced on December 1, 2001, (ii) the Company has granted
to Mr. Bub options to purchase 1,000,000 Common Shares at a price of $0.20 per
Common Share until November 30, 2004 under the share option plan comprising part
of the share incentive plan of the Company and (iii) the Company has issued to
Mr. Bub 1,000,000 Common Shares under the share bonus plan comprising part of
the share incentive plan of the Company.
In addition to the foregoing arrangements, the Company agreed to a supplementary
payment to Mr. Bub to be paid by February 10, 2003 in either cash or, at the
option of the Company, Common Shares and to be calculated as follows: 2,000,000
multiplied by the weighted average trading price of the Common Shares on the TSX
during January 2003 less 2,000,000 multiplied by $0.20.
If the amount calculated above is positive then Mr. Bub was entitled to a
supplementary payment of $700,000 minus the amount calculated above; if the
amount calculated above was zero or negative then Mr. Bub was entitled to a
payment of $700,000; and if the amount calculated above exceeded $700,000 then
Mr. Bub was entitled to a supplementary payment. If at any time prior to January
31, 2003 the 20 trading day average closing price per Common Share on the TSX
was $0.55 or higher, the obligation of the Company to pay the supplementary
payment to Mr. Bub terminated. If, however, at the end of any such 20 trading
day period Mr. Bub was prevented from selling Common Shares as a result of being
in possession of material undisclosed information regarding the Company by
virtue of his position as a director of the Company, then the obligation of the
Company to pay the supplementary payment to Mr. Bub was not to terminate in
respect of that particular 20 trading day period.
In the event that any of the 2,000,000 Common Shares acquired or which may be
acquired by Mr. Bub pursuant to the arrangements described above are sold by Mr.
Bub prior to January 31, 2003, the $700,000 amount referred to above is reduced
PRO RATA in relation to the number of such Common Shares sold.
At no time was the 20 trading day average closing price per Common Share on the
TSX $0.55 or higher. Accordingly, the amount of the supplementary payment, if
any, was calculated. The weighted average trading price of the Common Shares on
the TSX during January 2003 was $0.24097, no Common Shares were sold of the
1,000,000 acquired under the share bonus plan portion of the share incentive
plan of the Company and none of the options granted were exercised. The amount
calculated was positive and accordingly, Mr. Bub was entitled to a supplementary
payment of $618,060, which payment was satisfied by the issue of 2,564,887
Common Shares.
104
2. Committees of the Directors
The audit committee of the directors of the Company is comprised of three
directors, being Messrs. Goodman, Palmiere and Sinclair. The hedging committee
of the Company is comprised of two directors, being Messrs. Benner and MacRae,
and a senior officer, being Rene R. Galipeau, Executive Vice President and Chief
Financial Officer. The directors of the Company have not appointed an executive
committee.
The current members of the compensation committee are Messrs. Charter, Palmiere
and Sinclair. No member of the compensation committee was an officer or employee
of the Company or any of its subsidiaries during the year ended December 31,
2002.
The primary goal of the Compensation Committee is to ensure that the
compensation provided to the executive officers of the Company is determined
with regard to the business strategies and objectives of the Company, such that
the financial interest of the executive officers of the Company is consistent
with the financial interest of the shareholders of the Company. The Compensation
Committee strives to ensure that the executive officers of the Company are paid
fairly and commensurate with their contributions to furthering the strategic
direction and objectives of the Company. The Compensation Committee reviews,
recommends and/or determines all elements of the compensation of the executive
officers of the Company on an annual basis and periodically retains an
independent consultant to evaluate the compensation levels and policies relative
to the market for executives in positions similar to those of the executive
officers of the Company. The Compensation Committee has developed the following
executive compensation philosophy and policies to meet the foregoing objectives.
BASE SALARIES. The Compensation Committee recommends base salaries for each of
the executive officers of the Company on an individual basis, taking into
consideration the individual's performance and contributions to the success of
the Company, tenure in the job, competitive industry pay practices for
comparable positions and internal equities among positions. A periodic survey of
companies of similar size in terms of sales revenues, lines of business,
geographic location and employment levels provides insight into competitive base
salaries.
ANNUAL INCENTIVES. The executive officers of the Company have an opportunity to
earn annual bonuses. Award opportunities vary based on the individual's position
and contributions to the performance of the Company. Bonuses are paid based on
the performance of the individual and the results of the Company measured
against its annual budget.
LONG-TERM INCENTIVES. The Compensation Committee believes that options to
purchase Common Shares encourage the executive officers of the Company to own
and hold Common Shares and tie their long-term interests directly to those of
the shareholders of the Company. Under the terms of the share option plan, the
directors of the Company, acting on the recommendations of the Compensation
Committee, may designate employees, including executive officers, eligible to
receive options to acquire such numbers of Common Shares as the directors
determine at the then current trading price of the Common Shares on the TSX.
When granting options, consideration is given to the exercise price of the
aggregate options that would be held by the executive officer of the Company
after the grant under consideration is made. In determining individual grants of
options, the Compensation Committee considers the following factors, among
others, the performance and contributions to the success of the Company of the
executive officer, the relative position of the executive officer, the years of
service of the executive officer and past grants of options to the executive
officer.
105
COMPENSATION OF THE CHIEF EXECUTIVE OFFICER. The components of the total
compensation of Mr. Colin Benner, the Chief Executive Officer of the Company and
the manner in which they are reviewed and evaluated by the Compensation
Committee are similar to those for other executive officers of the Company. Mr.
Benner receives a base salary and annual incentive compensation, if any, based
on the performance of the Company and his individual performance. The review of
Mr. Benner's performance includes achieving production targets, strategy and
financial performance of the Company. On February 28, 2003, Mr. Benner received,
as partial payment for an incentive bonus for the financial year ended December
31, 2002, an option to purchase 1,000,000 Common Shares at a price of $0.255 per
share and 200,000 Common Shares under the share bonus plan portion of the Share
Incentive Plan of the Company. In April 2003, Mr. Benner received $125,000
representing the balance of the incentive bonus payable.
Until his resignation Mr. Bub was compensated in a similar manner, the details
of his severance arrangements have been outlined above.
SUMMARY. The Compensation Committee will continue to evaluate the executive
compensation programs of the Company on an ongoing basis to ensure that the
compensation practices and philosophies of the Company are consistent with the
objective of enhancing shareholder value.
D. EMPLOYEES
The following table sets forth the number of employees at the end of each period
specified broken down by main geographic location.
------------------------------------ ------------------- ------------------- -------------------
Number of Employees Dec `02 Dec '01 Dec '00
------------------------------------ ------------------- ------------------- -------------------
Bouchard-Hebert, Canada 153 185 210
------------------------------------ ------------------- ------------------- -------------------
Nanisivik, Canada 10 179 185
------------------------------------ ------------------- ------------------- -------------------
Bougrine, Tunisia 298 294 291
------------------------------------ ------------------- ------------------- -------------------
El Mochito, Honduras 620 726 913
------------------------------------ ------------------- ------------------- -------------------
El Toqui, Chile 231 203 239
------------------------------------ ------------------- ------------------- -------------------
Langlois, Canada 9 10 86
------------------------------------ ------------------- ------------------- -------------------
Caribou, Canada 10 12 13
------------------------------------ ------------------- ------------------- -------------------
Corporate Office, Canada 19 19 22
------------------------------------ ------------------- ------------------- -------------------
Totals 1,350 1,629 1,937
===== ===== =====
------------------------------------ ------------------- ------------------- -------------------
See also Item 4.D HUMAN RESOURCES section in each of the seven mines described.
106
E. SHARE OWNERSHIP
The following table sets forth the Common Shares held by each senior officer
and/or director as at May 6, 2003 as well as any options to purchase Common
Shares held, the exercise price of such option and the expiration date of such
option.
- --------------------------------- ------------------- --------------------- ------------------- ---------------------
OPTIONS HELD TO
COMMON PURCHASE EXERCISE PRICE EXPIRATION DATE
NAME SHARES HELD COMMON SHARES OF OPTIONS OF OPTIONS
- --------------------------------- ------------------- --------------------- ------------------- ---------------------
Colin K. Benner 628,561 100,000 $2.20 7/21/05
- --------------------------------- ------------------- --------------------- ------------------- ---------------------
210,000 $1.66 12/11/05
- --------------------------------- ------------------- --------------------- ------------------- ---------------------
50,000 $1.05 11/12/08
- --------------------------------- ------------------- --------------------- ------------------- ---------------------
150,000 $3.90 12/19/09
- --------------------------------- ------------------- --------------------- ------------------- ---------------------
1,000,000 $0.19 6/06/12
- --------------------------------- ------------------- --------------------- ------------------- ---------------------
1,000,000 $0.255 27/02/13
- --------------------------------- ------------------- --------------------- ------------------- ---------------------
Gordon F. Bub 3,150,224 100,000 $1.66 12/11/05
- --------------------------------- ------------------- --------------------- ------------------- ---------------------
500,000 $3.25 2/2/07
- --------------------------------- ------------------- --------------------- ------------------- ---------------------
200,000 $1.05 11/12/08
- --------------------------------- ------------------- --------------------- ------------------- ---------------------
200,000 $3.90 12/19/09
- --------------------------------- ------------------- --------------------- ------------------- ---------------------
1,000,000 $0.20 11/30/04
- --------------------------------- ------------------- --------------------- ------------------- ---------------------
150,000 $0.19 6/06/12
- --------------------------------- ------------------- --------------------- ------------------- ---------------------
Donald K. Charter 21,260 100,000 $1.85 6/13/09
- --------------------------------- ------------------- --------------------- ------------------- ---------------------
50,000 $3.07 3/2/10
- --------------------------------- ------------------- --------------------- ------------------- ---------------------
150,000 $0.19 6/06/12
- --------------------------------- ------------------- --------------------- ------------------- ---------------------
Jonathan C. Goodman 20,050 150,000 $1.15 6/18/11
- --------------------------------- ------------------- --------------------- ------------------- ---------------------
150,000 $0.19 6/06/12
- --------------------------------- ------------------- --------------------- ------------------- ---------------------
Garth A.C. MacRae 309,835 50,000 $3.25 2/2/07
- --------------------------------- ------------------- --------------------- ------------------- ---------------------
50,000 $1.05 11/12/08
- --------------------------------- ------------------- --------------------- ------------------- ---------------------
50,000 $3.90 12/19/09
- --------------------------------- ------------------- --------------------- ------------------- ---------------------
350,000 $0.19 6/06/12
- --------------------------------- ------------------- --------------------- ------------------- ---------------------
Allen J. Palmiere 0 50,000 $3.25 2/2/07
- --------------------------------- ------------------- --------------------- ------------------- ---------------------
50,000 $1.05 11/12/08
- --------------------------------- ------------------- --------------------- ------------------- ---------------------
50,000 $3.90 12/19/09
- --------------------------------- ------------------- --------------------- ------------------- ---------------------
150,000 $0.19 6/06/12
- --------------------------------- ------------------- --------------------- ------------------- ---------------------
A. Murray Sinclair, Jr. 0 50,000 $2.05 10/9/06
- --------------------------------- ------------------- --------------------- ------------------- ---------------------
50,000 $3.25 2/2/07
- --------------------------------- ------------------- --------------------- ------------------- ---------------------
50,000 $1.05 11/12/08
- --------------------------------- ------------------- --------------------- ------------------- ---------------------
50,000 $3.90 12/19/09
- --------------------------------- ------------------- --------------------- ------------------- ---------------------
150,000 $0.19 6/06/12
- --------------------------------- ------------------- --------------------- ------------------- ---------------------
Rene R. Galipeau 280,450 50,000 $2.20 7/21/05
- --------------------------------- ------------------- --------------------- ------------------- ---------------------
80,000 $1.66 12/11/05
- --------------------------------- ------------------- --------------------- ------------------- ---------------------
50,000 $3.25 2/2/07
- --------------------------------- ------------------- --------------------- ------------------- ---------------------
50,000 $1.05 11/12/08
- --------------------------------- ------------------- --------------------- ------------------- ---------------------
50,000 $3.90 12/19/09
- --------------------------------- ------------------- --------------------- ------------------- ---------------------
250,000 $0.19 6/06/12
- --------------------------------- ------------------- --------------------- ------------------- ---------------------
John D. Bracale 0 100,000 $3.90 12/19/09
- --------------------------------- ------------------- --------------------- ------------------- ---------------------
100,000 $0.19 6/06/12
- --------------------------------- ------------------- --------------------- ------------------- ---------------------
J. Steven Hayes 64,032 50,000 $6.65 11/4/07
- --------------------------------- ------------------- --------------------- ------------------- ---------------------
107
- --------------------------------- ------------------- --------------------- ------------------- ---------------------
25,000 $3.22 7/29/09
- --------------------------------- ------------------- --------------------- ------------------- ---------------------
100,000 $0.19 6/06/12
- --------------------------------- ------------------- --------------------- ------------------- ---------------------
William M. Heath 5,172 50,000 $8.20 10/2/07
- --------------------------------- ------------------- --------------------- ------------------- ---------------------
50,000 $3.25 4/29/08
- --------------------------------- ------------------- --------------------- ------------------- ---------------------
50,000 $0.95 1/25/09
- --------------------------------- ------------------- --------------------- ------------------- ---------------------
50,000 $0.28 1/16/12
- --------------------------------- ------------------- --------------------- ------------------- ---------------------
50,000 $0.19 6/06/12
- --------------------------------- ------------------- --------------------- ------------------- ---------------------
Norman L. Calder 23,047 25,000 $2.45 8/19/06
- --------------------------------- ------------------- --------------------- ------------------- ---------------------
10,000 $3.25 2/2/07
- --------------------------------- ------------------- --------------------- ------------------- ---------------------
50,000 $0.19 6/06/12
- --------------------------------- ------------------- --------------------- ------------------- ---------------------
Leroy A. Fong 38,555 25,000 $3.75 4/29/07
- --------------------------------- ------------------- --------------------- ------------------- ---------------------
10,000 $0.24 12/18/11
- --------------------------------- ------------------- --------------------- ------------------- ---------------------
35,000 $0.19 6/06/12
- --------------------------------- ------------------- --------------------- ------------------- ---------------------
E. Ann Wilkinson 14,000 5,000 $2.40 6/6/05
- --------------------------------- ------------------- --------------------- ------------------- ---------------------
15,000 $2.45 8/19/06
- --------------------------------- ------------------- --------------------- ------------------- ---------------------
10,000 $3.25 2/2/07
- --------------------------------- ------------------- --------------------- ------------------- ---------------------
5,000 $4.30 1/9/10
- --------------------------------- ------------------- --------------------- ------------------- ---------------------
50,000 $0.19 6/06/12
- --------------------------------- ------------------- --------------------- ------------------- ---------------------
Totals 4,555,186 7,885,000 - -
- --------------------------------- ------------------- --------------------- ------------------- ---------------------
(1) (1)See also Item 6.B hereof.
SHARE INCENTIVE PLAN
The share incentive plan (the "Share Incentive Plan") is designed to advance the
interests of the Company by encouraging employees and directors to hold equity
in the Company through the acquisition of Common Shares. The Share Incentive
Plan consists of a share purchase plan, a share option plan and a share bonus
plan and is administered by the directors of the Company. On May 6, 2002 the
shareholders of the Company approved the listing by the Company of an additional
11,100,000 Common Shares for issue pursuant to the Share Incentive Plan. The
additional Common Shares were allocated as follows: 4,000,000 to the share
purchase plan, 5,100,000 to the stock option plan and 2,000,000 to the share
bonus plan. The share incentive plan currently provides that the maximum number
of Common Shares that may be issued for all purposes under the Share Incentive
Plan is 22,000,000 Common Shares. Details of the division of the Common Shares
listed and reserved for issue are contained in the sections detailing the share
purchase plan, share option plan and share bonus plan portions of the Share
Incentive Plan.
Under the Share Incentive Plan, (a) the maximum number of Common Shares that may
be reserved for issue pursuant to options granted under the Share Incentive Plan
to insiders of the Company may not exceed 10% of the Common Shares outstanding
at the time of issue (on a non-diluted basis), (b) the maximum number of Common
Shares that may be issued under the Share Incentive Plan to insiders of the
Company within a one-year period may not exceed 10% of the number of Common
Shares outstanding at the time of issue (on a non-diluted basis), and (c) the
maximum number of Common Shares which may be issued under the Share Incentive
Plan within a one-year period to any one insider of the Company and such
insider's associates may not exceed 5% of the number of Common Shares
outstanding at the time of issue (on a non-diluted basis), in each case less the
aggregate number of Common Shares reserved for issue or issued, as the case may
be, to such persons under any other share compensation arrangement (within the
meaning of the policy of The Toronto Stock Exchange) of the Company.
108
SHARE PURCHASE PLAN
The share purchase plan, a component of the Share Incentive Plan (the "Share
Purchase Plan"), entitles certain employees of the Company to contribute up to
10% of their annual basic salary to purchase Common Shares. The Company matches
each participant's contribution on a quarterly basis and issues Common Shares
having a value equal to the aggregate amount contributed to the Share Purchase
Plan by each participant and the Company. The purchase price per Common Share is
the weighted average of the trading prices of the Common Shares on The Toronto
Stock Exchange (the "TSX") for the calendar quarter in respect of which the
Common Shares are issued. The Common Shares are delivered to participants who
are listed on the head office payroll ("Head Office Participants") 12 months
following their date of issue. Participants who are not Head Office Participants
("On-Site Participants") may contribute up to 5% of their annual basic salary.
On-Site Participants may direct the Company to deliver those Common Shares that
were acquired with that participant's contribution at any time. Common Shares
acquired with the Company's contribution are held in safekeeping and delivered
12 months following their date of issue. If there is a take-over bid made for
the Common Shares, the directors may, by resolution, make any Common Shares held
in trust for a participant immediately deliverable. The Share Incentive Plan
currently provides that the maximum number of Common Shares that may be issued
under the Share Purchase Plan is 6,500,000 Common Shares, of which 3,718,014
have been issued as of May 6, 2003.
SHARE OPTION PLAN
The share option plan, a component of the Share Incentive Plan (the "Share
Option Plan"), provides that eligible persons thereunder include any director,
employee (full-time or part-time), officer or consultant of the Company or any
subsidiary thereof. A consultant is a person with whom the Company or a
subsidiary thereof has an agreement for the provision of substantial services.
The directors of the Company have the authority to determine, among other
things, subject to the terms and conditions of the Share Option Plan, the terms,
limitations, restrictions and conditions of the options granted under the Share
Option Plan.
The Share Incentive Plan currently provides that the maximum number of Common
Shares that may be reserved for issue pursuant to options granted under the
Share Option Plan is 12,500,000 Common Shares. As of May 6, 2003, 852,567 Common
Shares have been issued upon the exercise of options granted under the Share
Option Plan, 9,739,100 Common Shares have been reserved for issue pursuant to
outstanding options granted under the Share Option Plan and 515,000 Common
Shares previously subject to options under the Share Option Plan are no longer
available by virtue of the exercise by the optionees of their right to terminate
their options and to receive cash or Common Shares equal in value to the
difference between the fair market value of the Common Shares subject to their
option and the exercise price of their option. Accordingly, as of May 6, 2003
there were 2,245,900 Common Shares available for future option grants under the
Stock Option Plan. Any Common Shares subject to an option that for any reason is
cancelled or terminated without having been exercised are again reserved for
issue pursuant to the Share Option Plan.
The directors of the Company have the authority under the Share Option Plan to
establish the exercise price of the option at the time each option is granted
thereunder, which exercise price shall in all cases be not less than the closing
price of the Common Shares on the TSX on the trading day immediately preceding
the date of the grant of such options or such other day as the directors
determine.
Options granted under the Share Option Plan must be exercised no later than 10
years after the date of the grant thereof and options are not transferable other
than by will or the laws of descent and distribution. If
109
an optionee ceases to be an eligible person under the Plan for any reason
whatsoever other than death, each option held by such optionee will cease to be
exercisable three months from the date of termination (being the date on which
such optionee ceases to be an eligible person). If an optionee dies, the legal
representative of the optionee may exercise the optionee's options within one
year after the date of the optionee's death but only up to and including the
original option expiry date. The Share Option Plan also provides that the grant
of options to consultants as well as the termination thereof will be made in
accordance with the terms of the agreement entered into between the Company and
the applicable consultant.
The Share Option Plan provides that options granted thereunder are subject to
vesting provisions unless the directors of the Company determine otherwise. The
Share Option Plan also contains a provision for all unexercised options (whether
vested or unvested) to become immediately exercisable in the event of the
acquisition by a person of securities which would entitle such person to
exercise 30% or more of the votes entitled to be cast at a meeting of the
shareholders of the Company or the sale of all or substantially all of the
property or assets of the Company.
The Company may, but is not obligated to, provide any optionee with financial
assistance in order to enable such optionee to exercise options granted under
the Share Option Plan. The directors of the Company are empowered to determine
the interest rate charged and the schedule for the repayment of any loan made to
an optionee. Any such loan is to be repayable upon maturity or upon the death of
the optionee or earlier in certain other circumstances such as termination of
employment and in any event shall be full recourse and repayable within 10 years
of the exercise of the option. Such loan is to be secured by a pledge of the
Common Shares purchased with the proceeds of the loan.
An optionee may elect under the Share Option Plan to terminate an option, in
which case the optionee is entitled to receive consideration either in Common
Shares, or with the consent of the Company, cash equal in value to the
difference between the fair market value of the Common Shares subject to the
option and the exercise price of the option.
Subject to the approval of the directors of the Company, options granted under
the Share Option Plan may be assigned to the spouse of an optionee, any minor
children of the optionee, any minor grandchildren of the optionee, a corporation
controlled by the optionee where the only other shareholders of such corporation
are the spouse, minor children or minor grandchildren of the optionee, or a
family-trust where the optionee is the trustee of such trust and the
beneficiaries of such trust do not include anyone other than the spouse, minor
children or minor grandchildren.
SHARE BONUS PLAN
The share bonus plan, a component of the Share Incentive Plan (the "Share Bonus
Plan"), allows for the issue of Common Shares as a discretionary bonus to any
director, employee (full-time or part-time), officer or consultant of the
Company or any subsidiary thereof who are designated under the Share Bonus Plan
from time to time. The number of Common Shares reserved for issue under the
Share Bonus Plan is 3,000,000 Common Shares. As of May 6, 2003, 1,200,000 Common
Shares have been issued under the Share Bonus Plan and 1,800,000 Common Shares
are available to be issued in the future.
110
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A. MAJOR SHAREHOLDERS.
As at May 6, 2003, to the knowledge of the directors and officers of the
Company, the only person, firm or company which beneficially owns, directly or
indirectly, or exercises control or direction over, voting securities of the
Company carrying more than 5% of the voting rights attaching to any class of
voting securities of the Company is as follows:
- ---------------------------------------- ------------------------------------ ---------------------------------------
Name and Municipality Percentage of
of Residence Number of Common Shares Outstanding Common Shares
- ---------------------------------------- ------------------------------------ ---------------------------------------
Dundee Bancorp Inc. (2)
Toronto, Ontario 52,078,651(1) 26.5%
- ---------------------------------------- ------------------------------------ ---------------------------------------
(1) 51,893,651 Common Shares are held indirectly through a wholly-owned
subsidiary of Dundee Bancorp Inc. and 185,000 Common Shares are held in
accounts, managed by subsidiaries of Dundee Bancorp Inc.
(2) Dundee Bancorp Inc. also holds 30,801,410 warrants to purchase Common
Shares at $0.20 and 1,000,000 warrants to purchase Common Shares at $0.19.
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.
As at May 6, 2003 to the best of the Company's knoledge 3,416,882 Common Shares
were held by 2,672 shareholders in the United States of America, 141,363,690
Common Shares were held by 8,789 shareholders in Canada, and 51,912,131 Common
Shares were held by 824 shareholders in countries other than the United States
and Canada.
B. RELATED PARTY TRANSACTIONS.
The only material transactions entered into since January 1, 2002 or proposed to
be entered into that have affected or are expected to materially affect the
Company or any of the affiliates of the Company involving an officer or director
of the Company, the principal shareholder of the Company or any associate or
affiliate of any such persons or companies are as follows:
a) Under an agreement dated June 7, 2001 to sell certain assets
acquired through the acquisition by the Company of Jascan in
November 2000, the Company has granted to a third party in
which Murray Sinclair, Jr. (a director of the Company) has a
significant ownership interest the right under certain
circumstances to cause the Company to reacquire such assets in
consideration for the issuance of Common Shares. The number of
Common Shares issued was be determined based upon the 10-day
weighted average trading price of the Common Shares
immediately preceding the third party's notice of intent to
acquire such Common Shares, less a 10 percent discount.
b) The Company and DSC , an affiliate of Dundee, entered into an
agreement in late 1998 for DSC to act as exclusive financial
advisor to the Company. The agreement was for a term of one
year, and thereafter year to year until cancelled. Under the
agreement, the Company paid DSC a monthly work fee of $25,000
to a maximum of $250,000 per annum and an advisory fee of up
to 1 percent of the value of any transaction (the amount being
dependent on the type of transaction) completed by the Company
and 0.5 percent of any equity or debt financing. Pursuant to
the terms of the agreement, the Company was to pay DSC a fee
of $543,000 in connection with acquisition of the
Bouchard-Hebert mine and the Langlois mine by the Company in
May 2000, a fee of
111
$715,000 in connection with the refinancing of the Company in
April 2000 resulting in the Syndicated Credit Facility, a fee
of $101,500 in connection with a public offering of Common
Shares completed by the Company in May 1999 and a fee of
$75,000 in connection with a restructuring of the credit
arrangements of the Company completed in March 1999. The
agreement was terminated by the Company effective December 31,
2000. The unpaid balance of $1.0 million for the above fees
has been deferred to January 2, 2004. Donald K. Charter, a
director of the Company, is the Chairman and Chief Executive
Officer of DSC.
c) In consideration for restructuring the credit facilities of
the Company on November 15, 2001, in March 2002 and May 2002,
the Company granted to the lenders of the Company ("Lenders")
warrants to purchase an aggregate of 1,000,000 Common Shares
at $0.21 per share. Dundee also received warrants to purchase
an aggregate of 30,801,410 Common Shares at $0.20 per share.
One-half of the warrants are exercisable until March 2, 2007
and the remainder are exercisable until May 2, 2007; no value
was ascribed to these warrants on the date of issue. Garth
A.C. MacRae, the Chairman and a director of the Company, is
the Vice Chairman of Dundee, Donald K. Charter, a director of
the Company, is the Executive Vice President of Dundee and
Jonathan C. Goodman a director, is a director of Dundee.
d) Under an agreement reached on December 23, 2002 with the
Lenders and Dundee, the Company, in consideration for again
restructuring its credit facility granted to the Lenders and
Dundee the right to purchase 2,000,000 and 1,000,000 Common
Shares, respectively, at an exercise price of $0.19 per share.
INDEBTEDNESS OF DIRECTORS AND SENIOR OFFICERS OTHER THAN UNDER
SECURITIES PURCHASE PROGRAMS
The following table sets forth details of the indebtedness to, or guaranteed or
supported by, the Company or any of its subsidiaries of each director and
executive officer of the Company and each associate of any such director or
executive officer for the financial year of the Company ended December 31, 2002.
- -------------------------------- --------------- ----------------- ------------------- ------------- ----------------
Financially
Largest Amount Assisted
Outstanding Securities
Involvement During Year Purchases
of Company Ended Amount During
Name and or December Outstanding as at 2002 Security for
Principal Position Subsidiary 31, 2002 May 6, 2003 (#) Indebtedness
- -------------------------------- --------------- ----------------- ------------------- ------------- ----------------
Rene R. Galipeau(1) Lender $50,000 $50,000 - -
Executive Vice President
and Chief Financial Officer
- -------------------------------- --------------- ----------------- ------------------- ------------- ----------------
(1) Mr. Galipeau executed and delivered to the Company a promissory note dated
December 16, 1994 pursuant to which Mr. Galipeau agreed to pay to the
Company, on demand, the amount of $50,000 plus interest calculated from
December 16, 1994 to the date of repayment at the rate of 10 percent per
annum on such portion of the principal amount as remains unpaid from time
to time until such principal is fully paid. Mr. Galipeau used the proceeds
of this loan to purchase 25,000 Common Shares. Mr. Galipeau has paid the
accrued interest on this loan and, effective January 1, 1998, the
arrangement with Mr. GaIipeau was amended to be non-interest bearing.
C. INTERESTS OF EXPERTS AND COUNSEL.
This Form 20-F is being filed as an annual report under the Exchange Act, and
accordingly, the information called for in Item 7.C is not required.
112
ITEM 8. FINANCIAL INFORMATION
A. FINANCIAL STATEMENTS
See Note 19 to the Notes to the Consolidated Financial Statements.
B. LEGAL PROCEEDINGS
See Note 12 to the Notes to the Consolidated Financial Statements.
C. SIGNIFICANT CHANGES
There have been no significant changes since the date of the annual
financial statements included in the Form 20-F, other than Agnico-Eagle Mines
Limited has agreed to purchase 100 percent interest of the Company's Tonawanda
and Zulapa gold properties, known as the Lapa property, subject to completion of
a definitive legal agreement. Agnico-Eagle will pay the Company US$7.925 million
for the Company's interest in the Lapa property. The Company will retain a 1
percent NSR on all gold production from the Tonawanda property and a 0.5 percent
NSR on all gold production from the Zulapa property. Agnico-Eagle will pay a
non-refundable advance royalty of US$1 million on closing and a further advance
royalty of US$ million when the total published inferred resources reach 2
million ounces of gold on the Zulapa and Tonawanda properties.
ITEM 9. THE OFFER AND LISTING
A. OFFER AND LISTING DETAILS.
On November 23, 1994, the Common Shares were de-listed from NASDAQ, as the
Company no longer met the listing requirements.
The Common Shares are listed on The Toronto Stock Exchange (the "TSX") under the
symbol "BWR". The following table sets forth the high, low and close prices and
volume of the Common Shares for the periods indicated.
- ---------------------- ------------- ------------- ------------- -----------------
Calendar Period High Low Close Volume
- ---------------------- ------------- ------------- ------------- -----------------
$ $ $
- ---------------------- ------------- ------------- ------------- -----------------
1998 4.15 0.76 0.95 67,681,442
- ---------------------- ------------- ------------- ------------- -----------------
1999 4.23 0.87 3.99 73,242,518
- ---------------------- ------------- ------------- ------------- -----------------
2000 4.60 1.15 1.45 61,609,497
- ---------------------- ------------- ------------- ------------- -----------------
2001 1.65 0.14 0.21 49,278,365
- ---------------------- ------------- ------------- ------------- -----------------
2002 0.48 0.075 0.14 92,581,193
- ---------------------- ------------- ------------- ------------- -----------------
- ---------------------- ------------- ------------- ------------- -----------------
1st Q 2001 1.53 1.01 1.23 9,118,136
- ---------------------- ------------- ------------- ------------- -----------------
2nd Q 2001 1.65 0.99 1.06 12,787,745
- ---------------------- ------------- ------------- ------------- -----------------
3rd Q 2001 1.08 0.14 0.16 10,788,917
- ---------------------- ------------- ------------- ------------- -----------------
4th Q 2001 0.38 0.15 0.21 16,583,567
- ---------------------- ------------- ------------- ------------- -----------------
1st Q 2002 0.48 0.21 0.32 18,287,182
- ---------------------- ------------- ------------- ------------- -----------------
2nd Q 2002 0.23 0.14 0.165 35,645,913
- ---------------------- ------------- ------------- ------------- -----------------
3rd Q 2002 0.19 0.11 0.12 11,095,603
- ---------------------- ------------- ------------- ------------- -----------------
4th Q 2002 0.17 0.075 0.14 27,552,495
- ---------------------- ------------- ------------- ------------- -----------------
1st Q 2003 0.325 0.14 0.18 43,233,782
- ---------------------- ------------- ------------- ------------- -----------------
113
- ---------------------- ------------- ------------- ------------- -----------------
November 2002 0.165 0.085 0.12 8,430,715
- ---------------------- ------------- ------------- ------------- -----------------
December 2002 0.17 0.11 0.14 8,078,447
- ---------------------- ------------- ------------- ------------- -----------------
January 2003 0.32 0.14 0.215 23,402,040
- ---------------------- ------------- ------------- ------------- -----------------
February 2003 0.325 0.21 0.25 14,615,761
- ---------------------- ------------- ------------- ------------- -----------------
March 2003 0.225 0.17 0.18 5,215,981
- ---------------------- ------------- ------------- ------------- -----------------
April 2003 0.18 0.13 0.135 7,915,097
- ---------------------- ------------- ------------- ------------- -----------------
114
B. PLAN OF DISTRIBUTION.
This Form 20-F is being filed as an annual report under the Exchange
Act, and accordingly, the information called for in Item 9.B is not
required.
C. MARKETS
The Common Shares are traded on TSX in Canada. Until November 23, 1994
they were also quoted on the NASDAQ over the counter market in the
United States pursuant to the Rule 12(g) 3(b)2 exemption.
D. SELLING SHAREHOLDERS.
This Form 20-F is being filed as an annual report under the Exchange
Act, and accordingly, the information called for in Item 9.D is not
required.
E. DILUTION.
This Form 20-F is being filed as an annual report under the Exchange
Act, and accordingly, the information called for in Item 9.E is not
required.
F. EXPENSES OF THE ISSUE.
This Form 20-F is being filed as an annual report under the Exchange
Act, and accordingly, the information called for in Item 9.F is not
required.
ITEM 10. ADDITIONAL INFORMATION
A. SHARE CAPITAL.
This Form 20-F is being filed as an annual report under the Exchange
Act, and accordingly, the information called for in Item 10.A is not
required.
B. MEMORANDUM AND ARTICLES OF ASSOCIATION.
INCORPORATION
The Company was incorporated under the laws of the Province of British
Columbia under the name "Gambier Exploration Ltd." on October 15, 1979.
Effective June 23, 1981, the name of the Company was changed to
"Breakwater Resources Ltd.". The Company was continued under the CANADA
BUSINESS CORPORATIONS ACT (the "Act") effective May 11, 1992 with
federal incorporation number 281949-0. Pursuant to section 15 of the
Act, the Company has all the powers of a natural person.
POWERS AND FUNCTIONS OF THE DIRECTORS
Subsection 3.10 of the by-laws of the Company provides that every
officer or director who is a party to a material contract or
transaction or proposed material contract or transaction with the
Company, or is a director or officer or has a material interest in any
person who is a party to a material contract or transaction or proposed
material contract or transaction with the Company shall disclose in
writing to the Company or request to have entered in the minutes of a
meeting of directors the nature and extent of his interest at the time
and in the manner required by the Act. Any such contract or proposed
contract shall be referred to the board of directors or shareholders of
the Company for approval even if such contract is
115
one that in the ordinary course of the Company's business would not require
approval by the board of directors or the shareholders of the Company, and a
director interested in a contract so referred to the board of directors shall
not vote on any resolution to approve the same except as provided by the Act.
The by-laws of the Company do not stipulate any age limit requirements for the
directors in addition to those stipulated by the Act. Nor are there any
requirements for the directors of the Company to hold Common Shares in order to
qualify as a director of the Company.
SHARE CAPITAL
The authorized share capital of the Company consists of 200,000 preferred shares
(the "Preferred Shares") issuable in series and an unlimited number of Common
Shares.
PREFERRED SHARES
The Preferred Shares may be issued in one or more series. The directors of the
Company shall, by resolution, fix the number of shares in and determine the
designation, rights, privileges, restrictions and conditions attaching to the
Preferred Shares of such series. The Preferred Shares of each series rank with
regards to the return of capital in priority to the Common Shares and over any
other shares ranking junior to the Preferred Shares, and the Preferred Shares of
each series may also be given such other preferences over the Common Shares and
any other shares ranking junior to the Preferred Shares as may be determined as
to the respective series authorized to be issued. The Preferred Shares of each
series rank on a parity with the Preferred Shares of every other series with
respect to priority in the return of the capital in the event of liquidation,
dissolution or winding-up of the Company. Neither the Common Shares nor the
Preferred Shares shall be subdivided, consolidated, reclassified or otherwise
changed unless contemporaneously therewith the other of the classes is
subdivided, consolidated, reclassified or otherwise changed in the same
proportion and in the same manner.
COMMON SHARES
The holders of Common Shares are entitled to dividends if, as and when declared
by the Board of Directors, to one vote per Common Share and, upon dissolution of
the Company, to receive the remaining property and the assets of the Company
available for distribution.
DIVIDEND RECORD
The Company has not paid any dividends during the past five years. The Company
has no fixed dividend policy. Payment of dividends in the future will depend
upon, among other factors, the Company's earnings, capital requirements and
financial condition. The Company does not anticipate that dividends will be paid
in the foreseeable future.
ALTERATION OF SHARE RIGHTS
A special resolution is required to effect a change in the rights of
shareholders. A special resolution is a resolution passed by a two-thirds
majority of the vote cast by shareholders of the Company who being entitled to
do so, vote in person or by proxy at a meeting of the shareholders of the
Company, or a resolution in writing signed by every shareholder of the Company
who would have been entitled to vote at a meeting of the shareholders of the
Company.
116
MEETINGS OF SHAREHOLDERS
ANNUAL MEETINGS
The annual meeting of the shareholders of the Company is held at such time and
on such day in each year as the directors of the Company may, from time to time,
determine for the purpose of receiving the reports and statements required by
the Act to be presented to the annual meeting, electing directors, appointing
auditors and for the transaction of such other business as may properly be
brought before the meeting. The holders of not less than 5% of the outstanding
Common Shares of the Company may requisition a special meeting of the
shareholders.
SPECIAL MEETINGS
The directors of the Company may, at any time, call a special meeting of the
shareholders of the Company, for the transaction of any business, which may
properly be brought before such a meeting of shareholders. All business
transacted at an annual meeting of shareholders of the Company, except
consideration of the financial statements and auditor's report, election of
directors of the Company and re-appointment of the incumbent auditor, is deemed
to be special business.
PLACE OF MEETINGS
Meetings of shareholders of the Company are to be held within the municipality
of the registered office of the Company, or at such other place within Canada as
the directors of the Company, from time to time, determine or if all the
shareholders of the Company entitled to vote at the meeting agree, at some place
outside Canada.
NOTICE OF MEETINGS
Notice of the time and place of each meeting of shareholders of the Company is
required to be sent not less than 21 days and not more than 60 days before the
date of the meeting to the auditor of the Company, to each director, and to each
person whose name appears on the records of the Company at the close of business
on the day of the record date as determined by the directors or where no record
date has been set at the close of business on the day next preceding the giving
of the notice as a shareholder of the Company entitled to vote at the meeting.
Notice of a meeting of shareholders of the Company shall state:
a) the nature of the business to be transacted at the meeting in sufficient
detail to permit the shareholders of the Company to form a reasoned judgement
thereon; and
b) the text of any special resolution or by-law to be submitted to the
meeting.
A shareholder of the Company and any other person entitled to attend a meeting
of shareholders of the Company may, in any manner and at any time, waive notice
of or otherwise consent to a meeting of shareholders of the Company.
117
PERSONS ENTITLED TO BE PRESENT
The only persons entitled to attend a meeting of shareholders of the Company
shall be those entitled to vote thereat, the directors and the auditor of the
Company and others who, although not entitled to vote, are entitled or required
under any provision of the Act or by-laws of the Company to be present at the
meeting. Any other persons may be admitted only on the invitation of the
chairman of the meeting or with the consent of the meeting.
FOREIGN OWNERSHIP LIMITATIONS
Neither the Act nor the constating documents of the Company impose limitations
on the rights, including the rights of non-resident or foreign shareholders, to
hold or exercise voting rights attached to the Common Shares.
CHANGE OF CONTROL
No provisions of the Company's by-laws exist that would have the effect of
delaying, deferring or preventing a change in control of the Company or that
would operate with respect to any proposed merger, acquisition or corporate
restructuring of the Company.
SHARE OWNERSHIP REPORTING OBLIGATIONS
No provision of the Company's by-laws imposes any requirements on shareholders
requiring share ownership to be disclosed. The securities laws of the Company's
home jurisdiction requires disclosure of shareholdings by:
(a) persons who are directors or senior officers of the Company; and
(b) a person who has direct or indirect beneficial ownership of, control or
direction over, or a combination of direct or indirect beneficial ownership of
and control over securities of the Company carrying more than 10 percent of the
voting rights attached to all of the Company's outstanding voting securities.
Securities legislation in Canada requires that shareholder ownership must be
disclosed once a person owns beneficially or has control or direction over
greater than 10 percent of the issued shares of the Company. This threshold is
higher than the 5 percent threshold under U.S. securities legislation at which
shareholders must report their share ownership.
C. MATERIAL CONTRACTS.
There were no material contracts entered into, other than contracts entered into
in the ordinary course of business, to which the Company or any member of the
group was a party.
D. EXCHANGE CONTROLS.
118
To the best of the Company's knowledge, there are no governmental laws, decrees,
or regulations in Canada (i) relating to restrictions on import/export of
capital or (ii) affecting the remittance of interest, dividends, or other
payments to non-resident holders of the Common Shares. Any such remittance to
United States residents, however, is generally subject to a 15 percent
withholding tax pursuant to the Canada - United States Income Tax Convention.
119
E. TAXATION.
MATERIAL CANADIAN FEDERAL INCOME TAX CONSIDERATIONS
The following is a brief summary of some of the principal Canadian federal
income tax consequences to a holder of Common Shares (a "U.S. Holder") who deals
at arm's length with and is not affiliated with the Company, holds the shares as
capital property and who, for the purposes of the INCOME TAX ACT (Canada) (the
"Tax Act") and the CANADA - UNITED STATES INCOME TAX CONVENTION (the "Treaty"),
is at all relevant times resident or deemed to be resident in the United States
and is not nor is deemed to be in Canada and does not carry on business in
Canada.
This summary is of a general nature only and is not, and should not be
interpreted as, legal or tax advice to any particular U.S. Holder and no
representation is made with respect to the Canadian income tax consequences to
any particular person. Accordingly, U.S. Holders are advised to consult their
own tax advisors with respect to their particular circumstances.
TAXATION OF DIVIDENDS
Under the Tax Act and pursuant to the Treaty, a U.S. Holder of common shares
will be subject to a 15 percent withholding tax on dividends paid or credited or
deemed by the Act to have been paid or credited on such shares. The withholding
tax rate is 5 percent for 2000 where the U.S. Holder is a corporation that
beneficially owns at least 10 percent of the voting shares of the Company.
TAXATION OF CAPITAL GAINS
In general, a U.S. Holder will not be subject to Canadian income tax on capital
gains arising on the disposition of such shares unless (i) at any time in the
five-year period immediately preceding the disposition, 25 percent or more of
the shares of any class or series of the capital stock of the Company were owned
(or were under option or subject to an interest in) by the U.S. Holder, by
persons with whom the U.S. Holder did not deal at arm's length, or by the U.S.
holder and persons with whom the U.S. Holder did not deal at arm's length, and
(ii) the value of the Common Shares at the time of the disposition derives
principally from real property (as defined in the Treaty) situated in Canada.
For this purpose, the Treaty defines real property situated in Canada to include
rights to explore for or exploit mineral deposits and other natural resources
situated in Canada, rights to amounts computed by reference to the amount or
value of production from such resources, certain other rights in respect of
natural resources situated in Canada and shares of a corporation the value of
whose shares is derived principally from real property situated in Canada. The
Company's view is that, at the present time, the value of the Common Shares is
derived principally from real property (as defined in the Treaty) situated in
Canada.
F. DIVIDENDS AND PAYING AGENTS.
This Form 20-F is being filed as an annual report under the Exchange Act, and
accordingly, the information called for in Item 10.F is not required.
G. STATEMENT BY EXPERTS.
This Form 20-F is being filed as an annual report under the Exchange Act, and
accordingly, the information called for in Item 10.G is not required.
120
H. DOCUMENTS ON DISPLAY.
Copies of the most recent annual report, financial statements for the year ended
December 31, 2002 and subsequent interim financial statements of the Company may
be obtained, upon request, from the Secretary of the Company. The Company may
require the payment of a reasonable fee in respect of a request therefor made by
a person who is not a securityholder of the Company.
I. SUBSIDIARY INFORMATION.
Please see Item 4.C.
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See Note 10 to the Notes to the Consolidated Financial Statements.
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
This Form 20-F is being filed as an annual report under the Exchange
Act, and accordingly, the information called for in Item 12 is not
required.
PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
None.
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
PROCEEDS
Not applicable.
ITEM 15. CONTROLS AND PROCEDURES
Disclosure controls and procedures are defined by the Securities and
Exchange Commission as those controls and other procedures that are
designed to ensure that information required to be disclosed by the
Company in reports filed or submitted by it under the Securities
Exchange Act of 1934 is recorded, processed, summarized and reported
within the time periods specified in the Securities and Exchange
Commission's rules and forms. The Company's Chief Executive Officer and
Chief Financial Officer have evaluated the Company's disclosure
controls and procedures within 90 days prior to filing of this Annual
Report on Form 20-F and have determined that such disclosure controls
and procedures are effective.
Since the most recent evaluation of the Company's internal controls,
there have not been any significant changes in the Company's internal
controls or in other factors that could significantly affect internal
controls, including any corrective actions with regard to significant
deficiencies and material weaknesses.
The design of the Company's system of controls and procedures is based,
in part, upon assumptions about the likelihood of future events. There
can be no assurance that the design of such system of controls and
procedures will succeed in achieving its goals under all potential
future conditions, regardless of how remote.
121
ITEM 16. [RESERVED]
PART III
ITEM 17. FINANCIAL STATEMENTS
MANAGEMENT'S REPORT
Management is responsible for the preparation of the accompanying
consolidated financial statements of Breakwater Resources Ltd. and all
of the information contained in the Annual Report. The financial
statements have been prepared in conformity with Canadian generally
accepted accounting principles and management believes that they
present fairly the Company's consolidated financial position, results
of operations and cash flows. The integrity of the information
presented in the financial statements, including estimates and
judgments relating to matters not concluded by fiscal year end, is the
responsibility of management. To fulfill this responsibility, the
Company maintains a system of internal accounting controls designed to
provide reasonable assurance that the Company's assets are protected
and that events and transactions are properly recorded as they occur.
This system of internal control includes organizational arrangement
with clearly defined lines of responsibility. Deloitte & Touche LLP,
the independent auditors appointed by the shareholders to audit the
consolidated financial statements, have full and unrestricted access to
the Audit Committee to discuss their audit and their related findings
as to the integrity of the financial reporting process. During the
course of their audit, Deloitte & Touche LLP reviewed the Company's
system of internal control to the extent necessary to render their
opinion on the consolidated financial statements.
The board of directors is responsible for ensuring that management
fulfills its responsibilities for financial reporting and internal
control. The board is assisted in exercising its responsibilities
through the Audit Committee, which is composed of three unrelated
directors.
The Audit Committee meets periodically with management and the
independent auditors to satisfy itself that management's
responsibilities are properly discharged, to review the consolidated
financial statements and to recommend approval of the consolidated
financial statements to the board.
(signed) COLIN K. BENNER (signed) RENE R. GALIPEAU
President and Executive Vice President
Chief Executive Officer and Chief Financial Officer
- -------------------------------------------------------------------------------
122
Independent Auditors' Report
To the Directors of Breakwater Resources Ltd.
We have audited the consolidated balance sheets of Breakwater Resources
Ltd. as at December 31, 2002 and 2001 and the consolidated statements of
operations and deficit and of cash flows for each of the years in the three-year
period ended December 31, 2002. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with Canadian generally accepted
auditing standards and auditing standards generally accepted in the United
States of America. These standards require that we plan and perform an audit to
obtain reasonable assurance whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, these consolidated financial statements present fairly,
in all material respects, the financial position of the Company as at December
31, 2002 and 2001 and the results of its operations and its cash flows for each
of the years in the three-year period ended December 31, 2002 in accordance with
Canadian generally accepted accounting principles.
As described in Note 16 to the consolidated financial statements, the
Company has restated certain of the U.S. GAAP reconciliation information to
disclose the effect of the write-down of exploration properties as required
under U.S. GAAP. Our previous audit report dated February 28, 2002, except as to
Note 19 which is as of April 24, 2002, addressed to the Directors reporting
under Canadian generally accepted auditing standards and auditing standards
generally accepted in the United States of America has been withdrawn.
(SIGNED) DELOITTE & TOUCHE LLP
CHARTERED ACCOUNTANTS
Toronto, Ontario
March 17, 2003, except as to Note 16 which is as of May 9, 2003
COMMENTS BY AUDITORS FOR U.S. READERS ON CANADA-U.S. REPORTING DIFFERENCES
In the United States, reporting standards for auditors require the addition of
an explanatory paragraph (following the opinion paragraph) to either identify
circumstances in which accounting changes affect consistency such as the matters
described in Note 1 and 16(d) to the consolidated financial statements or when
the financial statements are affected by conditions and events that cast
substantial doubt on the Company's ability to continue as a going concern such
as the matter described in Note 1 to the consolidated financial statements. Our
report to the shareholders dated March 17, 2003 except as to Note 16 which is as
of May 9, 2003 is expressed in accordance with Canadian reporting standards
which do not require a reference to such circumstances in the auditors' report
when the items are properly accounted for and disclosed in the consolidated
financial statements.
123
(SIGNED) DELOITTE & TOUCHE LLP
CHARTERED ACCOUNTANTS
Toronto, Ontario
March 17, 2003, except as to Note 16 which is as of May 9, 2003
124
BREAKWATER RESOURCES LTD.
CONSOLIDATED BALANCE SHEETS
As at December 31, 2002 and 2001
(Expressed in thousands of Canadian dollars)
- -------------------------------------------------------------------------------------------------------------
2002 2001
- -------------------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 6,435 $ 3,305
Accounts receivable - concentrate 17,061 3,957
Other receivables (note 3) 6,921 6,267
Concentrate inventory 25,340 41,853
Materials and supplies inventory 28,967 38,026
Prepaid expenses and other current assets 2,387 2,549
- -------------------------------------------------------------------------------------------------------------
87,111 95,957
DEFERRED LOSSES ON FOREIGN EXCHANGE HEDGING CONTRACTS (note 10) - 2,003
RECLAMATION DEPOSITS (note 4) 1,387 1,237
MINERAL PROPERTIES AND FIXED ASSETS (note 5) 134,882 152,372
- -------------------------------------------------------------------------------------------------------------
$ 223,380 $ 251,569
- -------------------------------------------------------------------------------------------------------------
LIABILITIES
CURRENT LIABILITIES
Accounts payable and accrued liabilities $ 25,577 $ 43,985
Provisional payments for concentrate inventory shipped and not priced 8,642 11,633
Short-term debt including current portion of long-term debt (note 6) 30,227 34,030
Income and mining taxes payable 381 1,261
- -------------------------------------------------------------------------------------------------------------
64,827 90,909
LONG-TERM DEBT (note 7) 48,438 46,376
RECLAMATION AND CLOSURE COST ACCRUALS (note 4) 13,697 15,708
FUTURE TAX LIABILITIES (note 9) 822 -
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
CONTINGENCIES AND COMMITMENTS (notes 1 and 12)
SHAREHOLDERS' EQUITY
Capital stock (note 8) 257,759 239,214
Common shares to be issued (note 8(c)) 618 -
Contributed surplus (note 8(k)) 1,582 1,485
Deficit (178,855) (158,968)
Cumulative translation adjustments 14,492 16,845
- -------------------------------------------------------------------------------------------------------------
95,596 98,576
- -------------------------------------------------------------------------------------------------------------
$ 223,380 $ 251,569
- -------------------------------------------------------------------------------------------------------------
The accompanying notes form an integral part of these consolidated financial statements.
Approved by the Board
(signed) Garth A.C. MacRae (signed) Colin K. Benner
DIRECTOR DIRECTOR
125
BREAKWATER RESOURCES LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT
For the Years Ended December 31, 2002, 2001 and 2000
(Expressed in thousands of Canadian dollars except share and per share amounts)
- -------------------------------------------------------------------------------------------------------------------------
2002 2001 2000
- -------------------------------------------------------------------------------------------------------------------------
Gross sales revenue $ 305,354 $ 304,037 $ 301,850
Treatment and marketing costs 136,738 142,236 135,262
- -------------------------------------------------------------------------------------------------------------------------
Net revenue 168,616 161,801 166,588
- -------------------------------------------------------------------------------------------------------------------------
OPERATING COSTS
Direct operating costs 147,653 153,187 105,561
Depreciation and depletion 27,565 27,980 22,777
Reclamation and closure costs (note 4) 2,894 4,126 1,470
- -------------------------------------------------------------------------------------------------------------------------
178,112 185,293 129,808
- -------------------------------------------------------------------------------------------------------------------------
(LOSS) CONTRIBUTION FROM MINING ACTIVITIES (9,496) (23,492) 36,780
- -------------------------------------------------------------------------------------------------------------------------
OTHER EXPENSES (INCOME)
General and administrative (note 8(c)) 6,198 7,481 7,322
Interest and financing (note 8(k)) 5,122 7,946 8,192
Investment and other income (note 2(b)) (912) (9,224) (4,892)
Foreign exchange (gain) loss on US dollar denominated debt (669) 4,720 1,399
- -------------------------------------------------------------------------------------------------------------------------
9,739 10,923 12,021
- -------------------------------------------------------------------------------------------------------------------------
(LOSS) EARNINGS BEFORE THE FOLLOWING: (19,235) (34,415) (24,759)
- -------------------------------------------------------------------------------------------------------------------------
Write-down of mineral properties and fixed assets (note 5) - 70,281 27,142
Other non-producing property costs 876 3,176 4,662
Foreign exchange hedging loss (note 10) - 3,162 -
Income and mining taxes (recovery) (note 9) (224) 24 1,704
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
NET LOSS
DEFICIT - BEGINNING OF YEAR (158,968) (47,910) (39,161)
- -------------------------------------------------------------------------------------------------------------------------
DEFICIT - END OF YEAR $ (178,855) $ (158,968) $ (47,910)
- -------------------------------------------------------------------------------------------------------------------------
BASIC LOSS PER SHARE (note 15) $ (0.12) $ (0.92) $ (0.08)
- -------------------------------------------------------------------------------------------------------------------------
DILUTED EARNINGS PER COMMON SHARE (note 15) $ N/A $ N/A $ N/A
- -------------------------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING
AFTER BONUS ELEMENT (note 15) 169,074,000 120,166,000 109,033,000
- -------------------------------------------------------------------------------------------------------------------------
The accompanying notes form an integral part of these consolidated financial statements.
126
BREAKWATER RESOURCES LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2002, 2001 and 2000 (Expressed in thousands of Canadian dollars)
- -------------------------------------------------------------------------------------------------------------------------
2002 2001 2000
- -------------------------------------------------------------------------------------------------------------------------
CASH (USED FOR) PROVIDED FROM
OPERATING ACTIVITIES
Net loss $ (19,887) $ (111,058) $ (8,749)
Non-cash items:
Depreciation and depletion 27,565 27,980 22,777
Write-down of mineral properties and fixed assets (note 5) - 70,281 27,142
Other non-cash items 2,379 3,309 (4,749)
Future income taxes (note 9) 822 - -
Reclamation and closure cost accruals 2,894 4,126 1,470
- -------------------------------------------------------------------------------------------------------------------------
Payment of reclamation and closure costs (5,126) (1,996) (171)
Deferred losses on foreign exchange hedging contracts - (2,003) -
Changes in non-cash working capital items (note 14) (11,198) 42,460 (13,692)
- -------------------------------------------------------------------------------------------------------------------------
(2,551) 33,099 24,028
- -------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Issue of common shares for cash (note 8) 17,907 902 1,616
Purchase of common shares for cancellation - - (1,360)
(Decrease) increase in short-term debt (3,495) (27,962) 51,462
Increase in long-term debt 2,390 13,266 20,937
- -------------------------------------------------------------------------------------------------------------------------
16,802 (13,794) 72,655
- -------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Reclamation deposits (150) 962 (781)
Mineral properties and fixed assets (10,971) (21,662) (34,619)
Acquisition of Bouchard-Hebert and Langlois mines (note 2(a)) - - (63,485)
Acquisition of Jascan Resources Inc. - net of cash acquired
(note 2(b)) - - 2,145
- -------------------------------------------------------------------------------------------------------------------------
(11,121) (20,700) (96,740)
- -------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH
CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR 3,305 4,700 4,757
- -------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS - END OF YEAR $ 6,435 $ 3,305 $ 4,700
- -------------------------------------------------------------------------------------------------------------------------
Supplemental Disclosure of Cash Flow Information
Cash paid for:
Interest $ 3,539 $ 5,681 $ 6,671
Income and mining taxes $ 588 $ 699 $ 1,735
The accompanying notes form an integral part of these consolidated financial statements.
127
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
These consolidated financial statements of Breakwater Resources Ltd. (the
"Company") have been presented using accounting principles applicable to a going
concern, which assumes that the Company will continue in operation for the
foreseeable future and be able to realize its assets and satisfy its liabilities
in the normal course of business.
During the years ended December 31, 2002, 2001 and 2000, the Company incurred
net losses of $19,887,000, $111,058,000 and $8,749,000, respectively. The losses
of the years ended December 31, 2001 and 2000 included non-cash write-downs of
mineral properties and fixed assets of $70,281,000 and $27,142,000,
respectively. As at December 31, 2002, the Company had working capital of
$22,284,000 and a deficit of $178,855,000.
During 2002, the price of zinc, the Company's principal product, was at a 15
year low in absolute terms and at its lowest level in real terms since the
1930's and has declined steadily to this level since the beginning of 2001. The
Company is not able to withstand low metal prices for an extended period of time
without the ability to obtain cash required to maintain liquidity from sources
other than operating cash flow.
Management of the Company has reviewed the Company's working capital
requirements for the period ending December 31, 2003. The review was based on
operating plans believed to be achievable assuming that there is a modest
recovery in the price of zinc to US$800 per tonne. Based upon these assumptions
and the estimated operating cash flow, capital expenditures and debt servicing
requirements of the Company, it is estimated that the Company will be able to
meet its cash requirements until December 31, 2003.
At the end of 2002, the Syndicated Credit Facility (see note 6) due for
repayment on January 2, 2003, was restructured and the due date extended to
January 2, 2004. The Company believes that it will not be able to repay its debt
under the credit facilities on maturity on January 2, 2004, unless metal prices
recover. Accordingly, the Company believes that it will be necessary for the
Company to negotiate the extension, restructuring or replacement of the
Syndicated Credit Facility prior to maturity on January 2, 2004.
These consolidated financial statements do not include any adjustments to the
recoverability and classification of recorded asset amounts and classification
of liabilities that might be necessary, if the Company was unable to continue as
a going concern.
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
The consolidated financial statements of the Company have been prepared in
accordance with Canadian generally accepted accounting principles ("Canadian
GAAP").
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and all of its subsidiaries. Interests in joint ventures are consolidated on a
proportionate basis. All inter-company accounts and transactions have been
eliminated on consolidation.
128
REVENUE RECOGNITION AND RECEIVABLES
Revenue is recognized following the transfer of title of metal concentrate and
the determination of the final settlement price in accordance with the
contractual arrangements with customers. Generally, the final settlement price
is computed with reference to the average quoted metal prices for a specified
period of time, normally one to three months subsequent to shipment to the
customer. Concentrate sales and receivables are subject to adjustment on final
settlement to reflect changes in weights and assays. Provisional payments made
by customers upon receipt of shipments of metal concentrate are classified as
current liabilities captioned as "Provisional payments for concentrate inventory
shipped and not priced".
Substantially all of the Company's sales are made under long-term contracts.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash and highly liquid investments with
original maturities of three months or less. The Company invests cash in term
deposits maintained in high credit quality institutions.
CONCENTRATE INVENTORY
Concentrate inventory is valued at the lower of cost and net realizable value.
Cost represents the average cost, and includes direct labour and material costs,
mine site overhead and depreciation and amortization.
MATERIALS AND SUPPLIES INVENTORY
Materials and supplies inventory is valued at the lower of average cost
and replacement cost.
SHORT-TERM INVESTMENTS
Short-term investments are carried at the lower of cost and quoted
market value.
MINERAL PROPERTIES AND FIXED ASSETS
The Company records its interest in mineral properties at cost and defers
exploration and development expenditures. When the properties are brought into
commercial production, the deferred costs are amortized on a unit-of-production
basis using proven and probable reserves. Costs associated with exploration
properties are deferred, on a project basis, until the economic viability of the
project is determined.
If the properties are abandoned or sold, the cost of the mineral property and
any related deferred expenditures are expensed as a write-down of mineral
properties and fixed assets at that time. Administrative costs are expensed as
incurred.
The carrying values of producing mineral properties including properties placed
on a care and maintenance basis (see notes 5(e) and 5(f)) 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);
estimated future zinc price realization (considering historical and current
prices, price trends and related factors); and operating, capital and other cash
flows. Estimates of future cash flows are subject to risks and uncertainties. It
is possible that changes could occur which may affect the recoverability of the
carrying value of mineral properties.
The carrying values of non-producing mineral properties and related deferred
expenditures represent unamortized net costs incurred to date and do not
necessarily reflect present or future values. The
129
recoverability of these amounts is dependent upon the existence of economically
recoverable reserves, upon the Company's ability to obtain the necessary
financing to complete development and upon future profitable production.
Fixed assets are stated at cost. Depreciation is provided to reduce the original
cost of fixed assets to estimated residual values over their useful lives. In
calculating depreciation, the Company employs the straight-line method and the
unit-of-production method. Principally, the rates of depreciation being applied
using the straight-line method are intended to fully depreciate the related
fixed assets over periods from 2 to 12 years.
RECLAMATION AND SITE RESTORATION COSTS
The Company provides for estimated reclamation and site restoration costs, where
reasonably determinable, net of salvage value, on a unit-of-production basis
over the estimated economic life of the related mine. Costs are based on
engineering estimates of the anticipated method and extent of site restoration.
Collateral on deposit with third parties to fund reclamation costs is shown
separately on the balance sheet as Reclamation Deposits. Estimates of the
ultimate site restoration costs are based on current laws and regulations and
expected costs to be incurred, all of which are subject to possible changes
thereby impacting current determinations.
TRANSLATION OF FOREIGN CURRENCIES
DOMESTIC AND FOREIGN OPERATIONS
The Company reports its financial statements in Canadian dollars, while the
currency of measurement for the Company's operations varies depending upon
location.
The currency of measurement for the Company's operations domiciled in Canada is
the Canadian dollar, while the currency of measurement for the Company's foreign
operations is the US dollar, since all the Company's revenue, and a substantial
portion of its expenses relating to the foreign operations, are in US dollars.
US dollar amounts for the Company's foreign operations are translated to
Canadian dollars for reporting purposes using the current rate method. Under the
current rate method assets and liabilities are translated at the exchange rates
in effect at the balance sheet date, revenues and expenses are translated at
average rates for the year, and the resulting gains and losses are accumulated
in a separate component of shareholders' equity, described in the consolidated
balance sheet as cumulative translation adjustments.
As indicated above, the currency of measurement for the Company's foreign
operations, including those in Honduras, Chile and Tunisia, is the US dollar. In
each of these operations, the temporal method is used to translate local
currency amounts into US dollars. Under the temporal method, all non-monetary
items and the related depreciation are translated at the historical rates.
Monetary assets and liabilities are translated at actual exchange rates in
effect at the balance sheet date, revenues and expenses other than depreciation
and depletion of capital assets are translated at the average rate of exchange
for the year, and gains and losses on translation are reflected in income of the
year.
Monetary assets and liabilities of the Company's domestic operations in Canada,
denominated in US dollars, are translated at the rates of exchange prevailing at
the balance sheet date. Non-monetary assets and liabilities are translated at
historical rates. Revenues and expenses are translated at the average rate of
exchange for the year. Exchange gains and losses are included in income for the
year.
130
USE OF ESTIMATES
The preparation of financial statements, in accordance with generally accepted
accounting principles, requires management to make estimates and assumptions
that affect the reported amount of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the year. Management's
estimates are made in accordance with mining industry practice. Actual results
could differ significantly from those estimates. The assets and liabilities
which require management to make significant estimates and assumptions in
determining carrying values include accounts receivable, concentrate inventory,
mineral properties and fixed assets, and reclamation and closure cost accruals.
FINANCIAL INSTRUMENTS
The Company enters into derivative financial instrument contracts to manage
certain market risks which result from the underlying nature of its business.
The Company formally documents all relationships between hedging instruments and
hedged items, as well as its risk management objective and strategy for
undertaking various hedge transactions. This process includes linking all
derivatives to specific assets and liabilities on the balance sheet or to
specific firm commitments or forecasted transactions. The Company uses forward
contracts to hedge exposure to commodity price risk for metals production, and
foreign exchange forward contracts to hedge exposure to fluctuations in foreign
currencies, relating primarily to the US dollar. The Company has written call
options to minimize exposure to commodity price risk. Non-option derivative
financial instruments are accounted for using the accrual method as management
views the contracts as effective hedges and has designated the contracts as
hedges of specific exposures. Hedge effectiveness is assessed based on the
degree to which the cash flows on the derivative contracts are expected to
offset the cash flows of the underlying position or transaction being hedged.
The Company also formally assesses, both at the hedge's inception and on an
ongoing basis, whether the derivatives that are used in hedging transactions are
and continue to be effective. Realized and unrealized gains or losses on
derivative contracts which qualify for hedge accounting are deferred and
recorded in income when the underlying hedge transaction is completed. The
premiums received at the inception of written call options are recorded as a
liability until maturity. Changes in the fair value of the liability are
recognized currently in income. Gains or losses (realized or unrealized) for
derivative contracts which no longer qualify as hedges for accounting purposes
or which relate to a hedged transaction that is no longer expected to occur are
recorded in income.
SHARE INCENTIVE PLAN
The Company has a share incentive plan (the "Plan"), which consists of a share
purchase plan, a share option plan and a share bonus plan which is administered
by the directors of the Company. The Plan provides that eligible persons
thereunder include any director, employee (full-time or part-time), officer or
consultant of the Company or any subsidiary thereof. The Plan is described in
note 8. No compensation expense is recognized for the Plan when shares or share
options are issued to employees. Shares issued under the Plan are recorded at
the issue price. An optionee may elect under the Plan to terminate an option, in
which case the optionee may receive consideration either in cash or shares of
the Company, at the discretion of the Company, equal to the difference between
the fair market value of the shares, as defined, and the exercise price. The
consideration paid to the optionee in the event of such an election is charged
to deficit.
INCOME AND MINING TAXES
The provisions for income and mining taxes are based on the liability method.
Future income taxes arise from the recognition of the tax consequences of
temporary differences by applying substantively enacted
131
statutory tax rates applicable to future years to differences between the
financial statements carrying amounts and the tax bases of certain assets and
liabilities. The Company records a valuation allowance against any portion of
those future income tax assets that it believes will, more likely than not, fail
to be realized. On business acquisitions, where differences between assigned
values and tax bases of assets acquired and liabilities assumed exist, the
Company recognizes the future income tax assets and liabilities for the tax
effects of such differences.
Future withholding taxes are provided on the unremitted net earnings of foreign
subsidiaries and associates to the extent that dividends or other repatriations
are anticipated in the future and will be subject to such taxes.
NEW PRONOUNCEMENTS
The Canadian Institute of Chartered Accountants ("CICA") issued amendments to
Handbook Section 1650, "Foreign Currency Translation". Effective January 1,
2002, the standards require that all unrealized translation gains and losses on
assets and liabilities denominated in foreign currencies be included in earnings
for the year, including gains and losses on long-term monetary assets and
liabilities, such as long-term debt, which were previously deferred and
amortized on a straight-line basis over the remaining lives of the related
items. These amendments are to be applied retroactively with restatement of
prior periods. The Company early adopted this amendment to the standard in the
third quarter of 2001, and retroactively restated prior periods.
Effective January 1, 2002, the Company adopted the new CICA standard for
stock-based compensation and other stock-based payments. This standard
establishes criteria for the recognition, measurement and disclosure of
stock-based compensation and other stock-based payments made in exchange for
goods and services. The standard requires that all stock-based awards made to
non-employees be measured and recognized using a fair value based method. The
standard encourages the use of a fair value based method for all awards granted
to employees, but only requires the use of a fair value based method for direct
awards of stock, stock appreciation rights, and awards that call for settlement
in cash or other assets. The Company's share option plan is disclosed in note
8(e). The Company has elected not to use the fair value method of accounting and
does not recognize compensation expense for its stock-based compensation plan
for employees.
2000 AND 2001 FIGURES
Certain of the 2001 and 2000 figures have been reclassified to conform to
the 2002 presentation.
2. ACQUISITIONS
2000
a) Acquisition of Bouchard-Hebert and Langlois Mines
On May 19, 2000, the Company purchased the fixed assets and working capital of
the Bouchard-Hebert Mine and the Langlois Mine, which are zinc, copper, gold and
silver mines for cash of $63,485,000, including out-of-pocket costs of
$3,229,000. Both mines are located in Quebec, Canada. The acquisitions have been
accounted for using the purchase method and the results of the operations of the
acquired mines are included in income from May 1, 2000.
132
The Company's interest in the net assets acquired was allocated as
follows:
($000's)
----------------------------------------------- -------------------
Current assets 9,474
Mineral properties and fixed assets 63,152
Reclamation deposits 371
Current liabilities (6,450)
Hedge contract liabilities (1,885)
Long-term debt (1,177)
----------------------------------------------- -------------------
Total Cash Consideration 63,485
b) Acquisition of Jascan Resources Inc.
On November 9, 2000, the Company purchased the entire outstanding common shares
of Jascan Resources Inc. ("Jascan"), a natural resource investment company, by
way of a court-approved plan of arrangement. On the same date Jascan was
amalgamated with a wholly-owned subsidiary of the Company to form Watercan Inc.
The purchase price comprised of:
i) Cash of $14,187,000 including out-of-pocket expenses of
$497,000; and
ii) 9,491,162 common shares of the Company at an ascribed value of
$1.75 per share.
The acquisition has been accounted for using the purchase method of accounting
and the results of the operations have been consolidated from November 9, 2000.
The Company's interest in the net assets acquired was allocated as follows:
($000's)
---------------------------------------------------------------------
Cash 16,332
Short-term investments including commercial paper 11,114
Other current assets 3,499
Current liabilities (148)
------------------------------------------------------ --------------
Total 30,797
------------------------------------------------------ --------------
Total Consideration Comprised of:
Cash 14,187
Common Shares of the Company 16,610
------------------------------------------------------ --------------
30,797
The fair value of the identifiable assets acquired exceeded the aggregate value
of the consideration by $11,694,000. This amount has been allocated to
short-term investments to eliminate this excess.
Realized gains of $278,000 (2001 - $8,599,000, 2000 - $1,095,000) from the sale
of short-term investments acquired in the Jascan acquisition, are included in
investment and other income. During 2002, the Company sold $17,000 (2001 -
$5,519,000) of short-term investments.
3. OTHER RECEIVABLES
($000's) 2002 2001
--------------------------------------- --------------- ---------------
Income and other taxes receivable 2,584 3,281
Insurance claims receivable 611 -
Sundry 3,726 2,986
--------------------------------------- --------------- ---------------
133
Insurance claims receivable at December 31, 2002 consist primarily of recoveries
under business interruptions insurance relating to lost production at the
Nanisivik Mine caused by a ball mill failure. These recoveries were included in
revenue.
4. RECLAMATION DEPOSITS AND RECLAMATION AND CLOSURE COST ACCRUALS
Collateral on deposit at December 31, 2002 of $1,387,000 (2001 - $1,237,000)
with third parties to fund reclamation costs is shown separately on the balance
sheet as Reclamation Deposits. The Reclamation Deposits at December 31, 2002 and
2001 are for funding of reclamation costs at the Caribou Mine. In addition, at
December 31, 2002, the Company has posted reclamation security bonds totalling
$13,000,000 (2001 - $13,100,000).
Reclamation and closure costs accruals by mine are as follows:
($000's) 2002 2001
------------------------------------------------------------------------------------ ------------ -------------
Nanisivik Mine 7,224 11,405
Bouchard-Hebert Mine 3,076 2,514
Bougrine Mine 2,339 1,302
El Mochito Mine 1,794 1,561
Caribou Mine 1,000 1,000
El Toqui Mine 425 325
------------------------------------------------------------------------------------ ------------ -------------
Total
Less current portion included in accounts payable and accrued liabilities 2,161 2,399
------------------------------------------------------------------------------------ ------------ -------------
13,697 15,708
The Nanisivik Mine was closed in September 2002, and in connection therewith, is
expected to incur mine closure costs in 2003 of approximately $2,161,000.
5. MINERAL PROPERTIES AND FIXED ASSETS
($000's) 2002 2001
- ---------------------------- -------------------------------------------- -------------------------------------------
Accumulated Accumulated
Depreciation Net Book Depreciation Net Book
Cost and Depletion Value Cost and Depletion Value
- ---------------------------- ----------- ------------------- ------------ ------------ ------------------ -----------
Equipment 158,305 (108,237) 50,068 157,576 (92,923) 64,653
Mineral properties,
Buildings and
improvements 104,736 (63,089) 41,647 102,330 (59,724) 42,606
Development (1) 60,489 (34,795) 25,694 77,405 (46,335) 31,070
Exploration (1) 17,475 (2) 17,473 41,245 (27,202) 14,043
- ---------------------------- ----------- ------------------- ------------ ------------ ------------------ -----------
341,005 (206,123) 134,882 378,556 (226,184) 152,372
(1) The cost and accumulated depletion for development and exploration costs as
at December 31, 2002 exclude amounts related to the Nanisivik Mine as such
costs were fully amortized in 2002.
A summary of the write-downs of mineral properties and fixed assets is as
follows:
134
($000's) 2002 2001 2000
------------------------------------------- ------------------ ------------------ ------------------
Caribou Mine - 53,450 26,448
Nanisivik Mine - 11,252 -
El Mochito Mine - 2,505 -
Other Properties - 3,074 694
------------------------------------------- ------------------ ------------------ ------------------
- 70,281 27,142
Mineral properties and fixed assets of the Company comprises of the
following:
(a) El Mochito Mine $19,447,000 (2001 - $23,376,000)
The El Mochito Mine is a zinc, lead and silver mine located in the
Republic of Honduras.
Deferred exploration costs were written down in 2002 by $nil (2001 -
$2,505,000 and 2000 - $Nil).
(b) Nanisivik Mine $2,899,000 (2001 - $5,857,000)
The Nanisivik Mine is a zinc and silver mine located on Strathcona Sound, Baffin
Island, Nunavut, Canada. The fixed assets of $2,899,000 as at December 31, 2002,
represents the net book value of plant and equipment located at the Nanisivik
Mine which management believes will be realized on the ultimate disposition of
mine equipment and property as part of the mine closure and site restoration
activities. In 2001, as a result of depressed metal prices, the Company
reassessed the carrying value of its properties on the basis set out in note 1,
resulting in a write-down of this property of $11,252,000. The Nanisivik mine
ceased operations on September 30, 2002.
(c) El Toqui Mine $23,596,000 (2001 - $23,576,000)
The El Toqui Mine is a zinc and gold mine located 1,350 kilometres
south of Santiago, Chile.
(d) Bouchard-Hebert Mine $18,452,000 (2001 - $25,901,000)
The Bouchard-Hebert Mine is a zinc, copper, gold and silver mine
located 30 kilometres northeast of Rouyn-Noranda, Quebec, Canada.
(e) Langlois Mine $37,166,000 (2001 - $36,297,000)
The Langlois Mine is a zinc, copper, gold and silver mine located 213 kilometres
north of Val d'Or, Quebec, Canada. Mining activities at the Langlois Mine were
suspended in November 2000, pending the completion of a feasibility study, which
was completed in August 2001. Costs totalling $1,575,000 in 2002, ($2,196,000 in
2001), incurred primarily to upgrade resources to reserves and to maintain the
assets in anticipation of reopening, have been capitalized.
(f) Caribou Mine $Nil (2001 - $Nil)
The Caribou Mine, a zinc, lead and silver mine, is located in the Province of
New Brunswick, Canada.
The Caribou Mine was placed on care and maintenance in 1998. In 2000, the
Company assessed the carrying value of the Caribou Mine and the property was
written down by $26,448,000 to $53,994,000. The revised carrying value was
determined on the basis set out in note 1.
In 2001, as a result of depressed metal prices, the Company reassessed the
carrying value of its properties and the property was further written down by
$53,450,000 to $nil.
135
(g) Bougrine Mine $24,458,000 (2001 - $29,843,000)
The Bougrine Mine is a zinc and lead mine located 160 kilometres west
of Tunis, Tunisia.
(h) Other Properties $8,864,000 (2001 - $7,522,000)
Other Properties are comprised of exploration properties held directly or
through joint ventures. Management reviews the carrying values of these
properties annually and in 2002 recorded a write-down of $nil (2001 -
$3,074,000, 2000 - $694,000).
6. SHORT-TERM DEBT
($000's) 2002 2001
----------------------------------------------------------------------- ----------------- ------------------
Syndicated Credit Facility
- Revolver 25,195 30,259
Customer prepayments for zinc oncentrates (note 7) 3,159 3,185
Other 1,873 586
----------------------------------------------------------------------- ----------------- ------------------
30,227 34,030
On May 18, 2001, the Company completed a restructuring of its syndicated credit
facility (the "Syndicated Credit Facility"), which included:
i) Renewal of its revolving one-year US$45,000,000 credit
facility (the "Revolver") with advances subject to an
inventory and receivable borrowing base calculation and
bearing interest at LIBOR plus 2.25%; and
ii) Deferral of three quarterly payments due July 1, 2001, October
1, 2001 and January 1, 2002 on its four-year US$31,500,000
term credit facility (the "Term Credit Facility") bearing
interest at LIBOR plus 2.375%.
The final payment of a one-year US$15,000,000 bridge credit facility was made on
May 17, 2001. During August 2001, the Syndicated Credit Facility was further
amended to require that the Company enter into additional financing arrangements
totalling $16,000,000 by September 30, 2001, which date was subsequently
extended to October 31, 2001.
On November 15, 2001, the Company completed a refinancing agreement whereby the
balance of the Term Credit Facility of US$22,631,000 was increased by
US$6,500,000 (the "Supplemental Term Facility"). Dundee Bancorp Inc. ("Dundee"),
a significant shareholder of the Company, guaranteed the Supplemental Term
Facility. Under the agreement, the Revolver was extended to January 2, 2003. In
addition, compliance with the existing financial covenants was waived until
January 2, 2003.
The Syndicated Credit Facility is secured by a pledge of the shares in the
Company's operating subsidiaries, through guarantees by such subsidiaries, and
through first charges on the Company's concentrate inventory and receivables and
on the majority of the Company's mining assets.
In December 2002, the Syndicated Credit Facility that was due on January 2, 2003
was extended to January 2, 2004 and the interest rate on the Term Credit
Facility was increased to LIBOR plus 2.75%. The amount of the Revolver was
reduced from a cap of US$45,000,000 to US$30,000,000. In return for amending the
Syndicated Credit Facility, the banking syndicate was granted share purchase
warrants to purchase 2,000,000 common shares of the Company, at a price to be
determined based on the price per share during the five trading days following
the closing of the proposed amendment to the Syndicated Credit Facility. These
warrants are exercisable until three years following the closing date. In
addition,
136
in consideration for extending its support of the Supplement Term Facility,
Dundee was granted warrants to purchase 1,000,000 common shares of the Company
on the same basis as the banking syndicate (see note 8(k)).
Interest expense on short-term debt during 2002 amounted to $1,979,000 (2001 -
$3,018,000, 2000 - $5,018,000).
7. LONG-TERM DEBT
($000's) 2002 2001
---------------------------------------------------------------------------- ------------ -------------
Term Credit Facility (note 6) 35,748 36,042
Supplemental Term Facility (note 6) 10,267 3,822
Reimbursable government assistance, discounted at rate of 8%. 1,390 1,338
Customer prepayments for zinc concentrates 3,159 6,370
Other 1,033 1,989
---------------------------------------------------------------------------- ------------ -------------
Total
Less current portion 3,159 3,185
---------------------------------------------------------------------------- ------------ -------------
48,438 46,376
The Term Credit Facility and the Supplemental Term Facility (see note 6) are
repayable on January 2, 2004. The Term Credit Facility bears interest at LIBOR
plus 2.75% and the Supplemental Term Facility bears interest at LIBOR plus
2.375%.
The current portion of long-term debt at December 31, 2002 and 2001 represents
customer prepayments applicable to zinc concentrate shipments in 2003 and 2002.
Other long-term debt at December 31, 2002 and 2001 includes fees of $1,033,000
payable to Dundee Securities Corporation ("DSC"), a subsidiary of Dundee with
respect to acquisitions in prior years (see note 11), payment of which has been
deferred to January 2, 2004.
The fair value of the Company's long-term debt approximates its carrying value
at December 31, 2002 and 2001.
Interest expense on long-term debt during 2002 amounted to $1,913,000 (2001 -
$2,506,000, 2000 - $1,817,000).
8. CAPITAL STOCK
AUTHORIZED - UNLIMITED COMMON SHARES
200,000,000 preferred shares
Issued:
Common shares
(000's) Number of shares Amount
----------------------------------------------------------- --------------------- ----------------------
As at December 31, 2000 92,039 $238,312
Employee share purchase plan (d) 809 702
Employee share bonus plan (f) 1,000 200
----------------------------------------------------------- --------------------- ----------------------
As at December 31, 2001 93,848 239,214
Rights offering, net of expenses (a) 94,455 17,643
Shares issued on reacquisition of assets (b) 3,603 638
Employee share purchase plan (d) 1,375 264
----------------------------------------------------------- --------------------- ----------------------
As at December 31, 2002 193,281 $257,759
137
(a) On May 1, 2002, the Company completed a rights offering resulting in
the issuance of 94,454,795 common shares of the Company ("Common
Shares") at a price of $0.20 per share resulting in proceeds of
$17,600,000, which are net of costs of issue of approximately
$1,200,000.
(b) Under an agreement dated June 7, 2001, relating to the sale of certain
assets acquired through the acquisition of Jascan in November 2000, the
Company granted to the purchaser who acquired such assets, the right
under certain circumstances to cause the Company to reacquire such
assets in consideration for the issuance of Common Shares. In 2002, the
purchaser exercised its rights and the Company issued 3,603,000 shares
to reacquire certain assets. The number of Common Shares issued was
determined based upon the ten-day weighted average trading price of the
Common Shares immediately preceding the third party's notice of intent
to acquire such Common Shares, less a ten percent discount. A director
of the Company has a significant ownership interest in the purchaser
that acquired the shares.
(c) Under an agreement dated November 30, 2001, relating to the resignation
of an executive, the Company agreed to pay the executive a
supplementary amount of up to $700,000 either in cash or Common Shares.
The amount to be paid is based on a formula using the weighted-average
trading price for the Common Shares for the month of January 2003. As
at December 31, 2002, an amount of $618,000 representing 2,564,887
Common Shares was recorded based on the number of shares to be issued
pursuant to the formula and is shown in the financial statements as
"Common shares to be issued" in shareholders' equity. The supplementary
amount paid in the form of Common Shares is included in general and
administrative expenses.
(d) The share purchase plan entitles certain employees of the Company to
contribute up to 5 percent or up to 10 percent of their annual basic
salary, to purchase Common Shares. The Company matches each
participant's contribution. The purchase price per Common Share is the
weighted average of the trading prices of the Common Shares on The
Toronto Stock Exchange (the "TSX") for the calendar quarter in respect
of which the Common Shares are issued. Common Shares acquired with the
Company's contribution are held in safekeeping and delivered to
employees 12 months following their date of issue. The Company issued
1,375,000 Common Shares pursuant to the Share Purchase Plan during 2002
(2001 - 809,000).
(e) Pursuant to the share option plan, the directors have the authority to
grant options and to establish the exercise price of the option at the
time each option is granted, at a price not less than the closing price
of the Common Shares on the TSX on the trading day immediately
preceding the date of the grant of such option.
Options must be exercised no later than 10 years after the date of the
grant and are subject to vesting provisions unless the directors of the
Company determine otherwise. One third of the options granted become
exercisable from the date of granting such options, and on a cumulative
basis, one third at any time after the first anniversary date and the
balance at any time after the second anniversary date.
138
Optionees may elect to terminate options and receive the difference
between the fair value of a Common Share and the exercise price of the
option so terminated multiplied by the number of options being
terminated in Common Shares or, with the consent of the Company, cash.
The consideration paid upon such terminations is charged to deficit.
There was no termination of options by optionees in 2002 or 2001.
As at December 31, 2002, the outstanding share options of 8,796,000
expire at various dates between May 22, 2006 and June 9, 2012 and are
exercisable at prices ranging from $0.18 to $8.20 per Common Share.
(f) On June 19, 2001, the Plan was amended to add a share bonus plan (the
"Share Bonus Plan") to the Plan. The Share Bonus Plan permits Common
Shares to be issued as a discretionary bonus to any director, employee
(full-time or part-time), officer or consultant of the Company or any
subsidiary thereof who is designated under the Share Bonus Plan from
time to time. As at December 31, 2002 and 2001, the Company has issued
1,000,000 Common Shares under the Share Bonus Plan.
(g) Options transactions were as follows:
Weighted
Options -average
(000's) Exercise
Price
-------------------------------------------------------- -------------------- -------------------
As at December 31, 2000 4,232 2.85
Granted 1,390 0.40
Cancelled (363) 2.61
-------------------------------------------------------- -------------------- -------------------
As at December 31, 2001 5,259 2.21
Granted 3,895 0.19
Cancelled (358) 2.39
-------------------------------------------------------- -------------------- -------------------
As at December 31, 2002 8,796 $1.31
The following table summarizes information about the share options
outstanding at December 31, 2002.
Options Outstanding Options Exercisable
-------------------- ---------------------------------------------------- -------------------------------------
Number Number
Outstanding Weighted- Weighted- Exercisable Weighted-
Range of Exercise as at Dec. Average Average as at Average
Prices 31, 2002 Remaining Exercise Dec. 31, 2002 Exercise
(000's) Contractual Life Price (000's) Price
-------------------- --------------- --------------------- -------------- ------------------- -----------------
$0.18 - $0.19 3,685 9 years 161 days $0.19 1,228 $0.19
$0.20 - $2.00 2,613 4 years 179 days $0.81 2,383 $0.83
$2.05 - $3.35 1,561 4 years 142 days $2.92 1,561 $2.92
$3.75 - $8.20 937 6 years 164 days $4.45 937 $4.45
(h) The Company's share option plan is disclosed in note 8(e). The Company
has elected not to use the fair value method of accounting and does not
recognize compensation expense for its stock-based compensation plan
for employees. Had compensation expense for the stock-based
compensation plan for employees been determined based upon the fair
value of awards granted on or after January 1, 2002, the Company's net
loss for the year ended
139
December 31, 2002, would have increased by $183,000. However the loss
per share for the year ended December 31, 2002, would have been
unchanged.
The fair value of each option grant is estimated on the balance sheet
date using Black-Scholes option-pricing model with the following
weighted-average assumptions:
Exercise price per Common Share $0.19
Quoted market price per Common Share at date of grant $0.19
Expected life (years) 1-10
Risk free interest rate 5.21%
Expected volatility 62%
Dividend yield 0%
(i) In consideration for restructuring the Syndicated Credit Facility (see
note 6) in May 2001, the Company granted to the members of the
syndicate ("the Lenders") warrants to purchase 300,000 Common Shares at
$1.57 per share. The warrants were exercisable until November 29, 2002
(see note 8(j)). No value was ascribed to these warrants on the date of
issue.
(j) In consideration for restructuring the Term Credit Facility on November
15, 2001 (see note 6), in March 2002 and May 2002, the Company granted
to the Lenders warrants to purchase an aggregate of 1,000,000 Common
Shares at $0.21 per share. The warrants are exercisable until May 8,
2005. No value was ascribed to these warrants on the date of issue.
Dundee also received warrants to purchase an aggregate of 30,801,410
Common Shares at $0.20 per share. One-half of the warrants are
exercisable until March 2, 2007 and the remainder are exercisable until
May 2, 2007; no value was ascribed to these warrants on the date of
issue. As at December 31, 2002, none of these warrants have been
exercised.
In addition, as part of the restructuring of the Syndicated Credit
Facility in 2001, the Company agreed to amend the terms of the
outstanding warrants issued to the Lenders to purchase an aggregate of
300,000 Common Shares at a price of $1.57 per share until November 29,
2002, to change the exercise price of such warrants to $0.21 per share
and the expiry date of the warrants to the earlier of May 8, 2005 and
thirty days following the date the 10-day weighted-average trading
price of the Common Shares on the TSX exceeds $0.28 per share. The
exercise price is based on the five-day weighted-average trading price
of the Common Shares on the TSX following the completion of the Rights
Offering.
(k) Under an agreement reached on December 23, 2002 with the Lenders and
Dundee (see note 6), the Company, in consideration for restructuring
its existing credit facilities granted to the Lenders and Dundee the
right to purchase 2,000,000 and 1,000,000 Common Shares respectively,
at an exercise price based on the weighted-average trading price on the
TSX of the Common Shares during the five trading days following the
closing of the proposed amendment to the Syndicated Credit Facility.
This closing occurred in March 2003. The value ascribed to the warrants
to be issued of $97,000 is included in the financial statements at
December 31, 2002 as contributed surplus and interest and financing
expense, respectively.
140
The fair value of each of the above option grants, has been estimated
on the balance sheet date using Black-Scholes option-pricing model with
the following weighted-average assumptions:
Estimated exercise price per Common Share $0.25
Quoted market price per Common Share at date of grant $0.16
Expected life (years) 3
Risk free interest rate 3.23%
Expected volatility 46%
Dividend yield 0%
The quoted market value of the Company's Common Shares as at December
31, 2002 was $0.14.
(l) In 2001, the Company negotiated the deferral of payments of treatment
charges with several of its customers. As consideration for the
deferral of payments, the Company issued warrants to purchase 90,893
Common Shares at $0.50 per share. The warrants are exercisable until
June 30, 2003. No value was ascribed to these warrants on the date of
issue. As at December 31, 2002, no warrants have been exercised.
9. INCOME AND MINING TAXES
Income and mining taxes differ from the amount computed by applying the
statutory federal income tax rate for the year ended December 31, 2002 of 39
percent (2001 - 39%; 2000 - 44%) to the net loss (earnings), excluding income
and mining taxes. The differences are summarized as follows:
($000's) 2002 2001 2000
- --------------------------------------------------------------------------- ------------ ------------- -------------
Tax recovery at statutory rate (7,762) (43,303) (3,100)
Federal resource allowance (289) 470 (1,266)
Unrecognized tax benefit relating to losses 5,781 42,312 10,595
Different effective tax rates on earnings (losses) in foreign subsidiaries 2,725 712 (4,888)
Benefit of previously unrecognized losses available for carry forward (246) - -
Other (88) 483 (865)
Mining taxes (recovery) (345) (650) 1,228
- --------------------------------------------------------------------------- ------------ ------------- -------------
As at December 31, 2002, the significant components of the Company's future
income tax assets (liabilities) were as follows:
($000's)
-------------------------------------------------------------------------- ------------------
Loss carry forwards 30,562
Mineral properties and fixed assets 63,887
Reclamation and closure cost accruals 5,005
-------------------------------------------------------------------------- ------------------
Future income tax assets before valuation allowance 99,454
Valuation allowance 100,276
-------------------------------------------------------------------------- ------------------
Future income tax liabilities (d) (822)
(a) At December 31, 2002, the Company has net operating loss carry
forwards in Canada of approximately $50,700,000, which expire
at various dates through 2009. In addition, the Company has
approximately $47,300,000 of resource expenditures that are
limited in their deduction to income from specific properties.
141
(b) At December 31, 2002, the Company has net operating loss carry
forwards in Chile of approximately $42,900,000, which do not
expire.
(c) At December 31, 2002, the Company has net operating loss carry
forwards in Honduras of approximately $16,500,000, which will
expire four years after the Company in Honduras generates its
first taxable profit.
(d) The future tax liabilities arise from temporary differences
between the net book value of the Company's mineral properties
and fixed assets for financial reporting purposes and their
basis for purposes of computing Quebec mining taxes.
10. FINANCIAL INSTRUMENTS
The Company manages its exposure to fluctuations in commodity prices, foreign
exchange rates and interest rates by entering into derivative financial
contracts in accordance with the formal risk management policy approved by the
Company's Board of Directors and managed by the Company's Hedge Committee. The
Company does not hold or issue derivative contracts for speculation or trading
purposes.
The Company's short-term financial instruments, made up of cash and cash
equivalents, accounts receivable, bank indebtedness, accounts payable and
accrued liabilities, and short-term debt are carried at cost which, due to their
short-term nature, approximates their fair value. The fair value of the
long-term debt is disclosed in note 7.
Such fair value estimates are not necessarily indicative of the amounts the
Company might pay or receive in actual market transactions. Potential taxes and
other transaction costs have not been considered in estimating fair value.
CREDIT RISK
The Company is subject to credit risk through trade receivables. The Company
manages this risk through evaluation and monitoring processes. Although the
Company has a number of significant customers, they are all established and
creditworthy customers. Credit risk is further mitigated through the use of
provisional payment arrangements, the use of letters of credit and credit
insurance where appropriate. Credit risk also relates to derivative contracts
arising from the possibility that a counterparty to an instrument in which the
Company has an unrealized gain fails to perform. The Company transacts only with
highly-rated counterparties. The Company does not consider the credit risk
associated with these financial instruments to be significant.
FOREIGN EXCHANGE HEDGING
In 2001, the Company announced its intention to close the Nanisivik Mine in
September 2002 (see note 5(b)). Accordingly, foreign exchange contracts
totalling US$25,000,000 originally designated as hedges of anticipated 2003
operating costs at the Nanisivik Mine were no longer considered as effective
hedges. Consequently these contracts are being marked to market, resulting in a
gain of $608,000 being recorded in the year ended December 31, 2002 (2001 - a
loss of $3,162,000).
Foreign exchange hedges totalling US$26,000,000 designated as hedges of 2002
operating costs at the Nanisivik Mine, matured in 2001 realizing losses of
$2,003,000 which amounts were deferred until the related costs were recognized
in 2002. The balances remaining as at December 31, 2002 of $nil and as at
142
December 31, 2001 of $2,003,000 are shown on the balance sheet as "Deferred
losses on foreign exchange hedging contracts".
FOREIGN EXCHANGE RISK
The Company operates using principally the Canadian dollar and the US dollar,
and as such may be negatively affected by fluctuations in foreign exchange
rates. The Company manages this risk by minimizing the number of transactions
that result in the settlement currency differing from the currency of the
initial transaction. In addition, the Company's sales are denominated primarily
in US dollars, while a significant percentage of its expenses are denominated in
non-US dollars. This exposes the Company to increased volatility in earnings due
to fluctuations in foreign exchange rates. The Company periodically uses forward
foreign exchange contracts to hedge the exchange rates on identifiable foreign
currency exposures. Gains and losses on these contracts are reported as a
component of the related transactions.
The Company had the following foreign exchange contracts outstanding at December
31, 2002 and 2001:
2002 US ($000's) Exchange Rate Maturity
---------------------------------------- ------------ ---------------------- -------------------------------
US dollar forward
sales against Canadian dollar 5,000 Cdn$1.5540 2003
2001
---------------------------------------- ------------ ---------------------- -------------------------------
US dollar forward
sales against Canadian dollar 30,000 Cdn$1.4802 2002-2003
Euro forward
purchases against US dollar 1,500 US$0.8899 January 2002 - May 2002
COMMODITY PRICE RISK
The profitability of the Company is directly related to the market price of
metals produced. The Company reduces price risk by hedging against the price of
metals for a proportion of its production.
The main tools available to protect against price risk are forward contracts and
options. Various strategies are available using these tools including spot
deferred and synthetic puts.
The Company periodically enters into forward sales to effectively provide a
minimum price for a portion of inventories and future production. Gains and
losses are recognized on these contracts when revenue from the related product
is recognized. The Company also periodically enters into written call options.
No call options have been entered into in either the year 2001 or 2002 other
than those described below.
A substantial commodity hedge position was assumed as of May 1, 2000, in
connection with the acquisition of the Bouchard-Hebert and Langlois Mines (see
note 2(a)). The fair value of the hedge derivatives at the date of acquisition
was a liability of $5,700,000. This liability forms part of the net assets
acquired and liabilities assumed on the acquisition and is being brought into
income when the underlying hedged contract is completed.
The carrying value of the hedge position liability as at December 31, 2002 was
$nil, as all hedged transactions were recognized prior to that date, ($1,434,000
at December 31, 2001 which exceeded the fair value by $1,431,000).
The Company had no contracts outstanding as at December 31, 2002. The following
contracts were outstanding as at December 31, 2001:
143
December 31, 2001 Quantity Average Price/lb (US) Maturity
---------------------------------------------------------------------------------------------------------------
Zinc call options 23,867 tonnes $1,253 January - December 2002
Copper call options 2,275 tonnes $1,625 January - July 2002
Silver call options 630,000 ounces $4.44 January - July 2002
Gold call options 10,500 ounces $275.83 January - July 2002
In June 2001, the Company sold a series of copper, gold and silver calls for the
period August 2001 to July 2002 at average prices of US$1,825/tonne,
US$275.83/oz and US$4.44/oz respectively, for premiums totalling US$760,000.
INTEREST RATE RISK
The Company currently has various operating lines of credit and long-term debt
that tie interest payments to the bank prime or LIBOR lending rates. The Company
is, therefore, exposed to interest rate risk through fluctuations in these
interest rates.
11. RELATED PARTY TRANSACTIONS
All related party transactions are disclosed elsewhere in these consolidated
financial statements (see notes 6, 7 and 8) except for the following:
(a) The Company and DSC, entered into an agreement in late 1998,
for DSC to act as the exclusive financial advisor to the
Company. The agreement was for an initial term of one year and
thereafter year to year until cancelled, and provided the
Company with the right to cancel the agreement. The Company
was obligated to pay to DSC a monthly work fee of $25,000 up
to a maximum of $250,000 per annum and an advisory fee of up
to one percent of the value of any transaction (the amount
being dependent on the type of transaction) completed by the
Company and 0.5 percent of any equity or debt financing.
Pursuant to the terms of the agreement, the Company is
obligated to pay DSC a fee of $543,000 in connection with the
acquisition of the Bouchard-Hebert Mine and the Langlois Mine
by the Company in May 2000, a fee of $715,000 in connection
with the refinancing of the Company in April 2000 resulting in
the Syndicated Credit Facility, a fee of $101,500 in
connection with a public offering of Common Shares completed
by the Company in May 1999 and a fee of $75,000 in connection
with a restructuring of the credit arrangements of the Company
completed in March 1999. The agreement was terminated by the
Company effective December 31, 2000. The unpaid balance of
$1,000,000 for the above fees has been deferred to January 2,
2004 and is included in long-term debt as at December 31, 2002
and 2001 (see note 7).
(b) The Company and Black Hawk Mining Inc. ("BHK"), a company
under common significant influence by Dundee, entered into an
agreement on April 1, 2002, for the Company to manage BHK's
mining operation for a fee of US$100,000 (approximately
Cdn$157,000) per annum plus a bonus to be calculated based on
a formula. The Company also provides logistic and procurement
services to BHK which enables both companies to reduce costs
and negotiate favourable terms for the purchase of materials
and supplies. The companies share office space and the Company
charges BHK for certain administrative services.
144
Transactions for the year 2002 for sale of supplies and
charges for rent and administrative services totalled
$1,827,000 (2001 - $ 913,000, 2000 - $376,000). These
transactions have been reflected in the statements of
operations as cost recoveries and accordingly, as reductions
in either direct operating costs or general and administrative
expenses. In addition, the Company sold surplus equipment to
BHK in 2002 for proceeds of $146,000.
Other accounts receivable at December 31, includes the
following amounts due from BHK:
($000's) 2002 2001 2000
-----------------------------------------------------------------------
For:
Supplies 773 211 111
Services 341 61 13
-----------------------------------------------------------------------
1,114 272 124
Interest will be charged on overdue amounts receivable from BHK at
commercial rates.
12. CONTINGENCIES AND COMMITMENTS
CONTINGENCIES
(a) The Company and TOTC, a former subsidiary of the Company, are
defendants in an action commenced in the Ontario Court
(General Division) on June 18, 1996 by John W. Sheiles,
formerly president of TOTC, claiming arrears of base salary,
salary in lieu of vacation pay, expenses and commissions
aggregating approximately US$185,000 and damages of US$500,000
for wrongful termination of his employment contract. The
Company has filed a statement of defense and is of the opinion
that the claim is without merit.
(b) On October 10, 2002, the Nunavut Water Board ("NWB") issued to
CanZinco Ltd. (a wholly-owned subsidiary of the Company) a
renewal of its water license, for a period of 5.5 years
commencing on October 1, 2002. One of the conditions contained
in the renewal license was a requirement that the Company
guarantee the financial security required by the license. NWB
has established that the amount of security required by the
license is $17,600,000. Of that amount, $5,000,000 was
previously posted in the form of indemnity bonds pursuant to
the expired water license. The issue of the outstanding
balance of $12,600,000 was to have been addressed by the
Company within 30 days of the issuance of the water license.
By way of letter dated November 8, 2002, the Company committed
to the Department of Indian Affairs and Northern Development
("DIAND"), the federal government agency that deals with the
form of financial security pursuant to a water license issued
by NWB, that it would provide to DIAND a guarantee in the form
of an unsecured promissory note in the amount of $11,600,000,
later changed to $12,600,000. On February 20, 2003, CanZinco
delivered a promissory note in the amount of $1,000,000, with
the balance of $11,600,000 under discussion as to amount and
form.
As at December 31, 2002, the balance of the accrual for
current and long-term reclamation, site restoration and
closure costs with respect to the Nanisivik Mine is
$7,224,000. This accrual includes all obligations that the
Company estimates will arise from the requirements of the
water license. Any excess in the amount of the unsecured
promissory note provided to DIAND over actual reclamation and
closure costs accrued will not result in reporting a
145
liability in addition to the amount accrued since any such
excess would give rise to a financial asset in the form of a
receivable from DIAND which would offset the excess and would
be reported net on the balance sheet.
(c) In accordance with the standard industry practice, the Company
seeks to obtain bonding and other insurance in respect of its
liability for costs associated with the reclamation of mine,
mill and other sites used in its operations and against other
environmental liabilities imposed by statute. Due to recent
developments which have affected the insurance and bonding
markets worldwide, such bonding and/or insurance may be
difficult or impossible to obtain in the future, or may only
be available at significant additional cost. In the event that
such bonding and/or insurance cannot be obtained by the
Company or is obtainable only at significant additional cost,
the Company may become subject to financial liabilities which
may affect its financial resources.
(d) The Company is also involved in legal proceedings and claims,
which arise in the ordinary course of its business. The
Company believes these claims are without merit and is
vigorously defending them. In the opinion of the management,
the amount of ultimate liability with respect to these actions
will not materially affect the financial position, results of
operations or cash flows of the Company.
(e) The Company's mining and exploration activities are subject to
various federal, provincial and state laws and regulations
governing the protection of the environment. These laws and
regulations are continually changing and generally becoming
more restrictive. The Company conducts its operations so as to
protect public health and the environment and believes its
operations are materially in compliance with all applicable
laws and regulations. The Company has made, and expects to
make in the future, expenditures to comply with such laws and
regulations.
LEASE COMMITMENTS
The Company is committed to operating leases for business premises as follows:
($000's)
2003 307
2004 34
2005 26
13. SEGMENT INFORMATION
The Company operates primarily in the mining industry. Operations in the
Americas and Tunisia include the production and sale of zinc, lead and copper
concentrates which also contain silver and gold.
The accounting policies used by these segments are the same as those described
in the Summary of Significant Accounting Policies (see note 1).
As the products and services in each of the reportable segments, except for
corporate activities, are essentially the same, the reportable segments have
been determined at the level where decisions are made on the allocation of
resources and capital, and where internal financial statements are available.
146
SEGMENT INFORMATION
For the Year Ended December 31, 2002
($000's)
- ----------------------------- ------------------------- ---------------------------------------------- --------- --------- ---------
Corporate Consol-
Geographical location Latin America Canada Tunisia and other idated
- ----------------------------- -------- -------- ------- -------- -------- ---------- -------- -------- --------- --------- ---------
El El Bouchard-
Mochito Toqui Nanisivik Caribou Hebert Langlois Bougrine
Operating Segment Mine Mine Total Mine Mine Mine Mine Total Mine
- ----------------------------- -------- -------- ------- -------- -------- ---------- -------- -------- --------- --------- ---------
Net revenue 38,143 22,309 60,452 36,021 - 49,702 - 85,723 22,441 - 168,616
Depreciation and depletion (6,030) (2,395) (8,425) (2,873) - (9,125) - (11,998) (7,077) (65) (27,565)
Reclamation and closure (813) (135) (948) (319) - (562) - (881) (1,065) - (2,894)
costs
(Loss) contribution from
mining activities (2,905) 594 (2,311) (1,647) - 3,075 - 1,428 (8,548) (65) (9,496)
General and administrative - - - - - - - - - (6,198) (6,198)
Interest and financing - - - - - - - - - (5,122) (5,122)
Investment and other income - - - - - - - - - 912 912
Foreign exchange gain - - - - - - - - - 669 669
Other non-producing
property costs - - - - (1,678) - (107) (1,785) - 909 (876)
Income and mining tax
recoveries (95) - (95) 602 - (99) 6 509 (165) (25) 224
Net (loss) earnings (3,000) 594 (2,406) (1,045) (1,678) 2,976 (101) 152 (8,713) (8,920) (19,887)
Capital expenditures 2,347 2,859 5,206 17 - 1,676 867 2,560 1,966 1,239 10,971
Identifiable assets 47,901 33,667 81,568 17,141 3,587 28,586 38,786 88,100 36,716 16,996 223,380
Information about major
customers
Of the Company's total consolidated net revenue in 2002, revenue from one
customer of $35,331,000 consisted of $33,686,000 from the Bouchard-Hebert Mine,
and $1,645,0000 from the El Mochito Mine.
147
For the Year Ended December 31, 2001
($000's)
- ----------------------------- ------------------------- ---------------------------------------------- --------- --------- ---------
Corporate Consol-
Geographical location Latin America Canada Tunisia and other idated
- ----------------------------- -------- -------- ------- -------- -------- ---------- -------- -------- --------- --------- ---------
El El Bouchard-
Mochito Toqui Nanisivik Caribou Hebert Langlois Bougrine
Operating Segment Mine Mine Total Mine Mine Mine Mine Total Mine
- ----------------------------- -------- -------- ------- -------- -------- ---------- -------- -------- --------- --------- ---------
Net revenue 33,643 22,400 56,043 27,519 - 51,360 - 78,879 26,879 - 161,801
Depreciation and depletion (5,902) (3,053) (8,955) (4,075) - (6,326) - (10,401) (8,529) (95) (27,980)
Reclamation and closure costs (818) (65) (883) (255) (81) (1,924) - (2,260) (983) - (4,126)
(Loss) contribution from
mining activities (6,564) (733) (7,297) (20,276) (81) 7,737 - (12,620) (3,480) (95) (23,492)
General and administrative - - - - - - - - - (7,481) (7,481)
Interest and financing - - - - - - - - - (7,946) (7,946)
Investment and other income - - - - - - - - - 9,224 9,224
Foreign exchange loss - - - - - - - - - (4,720) (4,720)
Write-down of mineral
properties and fixed assets (2,505) - (2,505) (11,252) (53,450) - - (64,702) - (3,074) (70,281)
Other non-producing property
costs (115) - (115) - (2,147) - (462) (2,609) - (452) (3,176)
Foreign exchange hedging loss - - - (3,162) - - - (3,162) - - (3,162)
Income and mining taxes (27) - (27) 155 - 467 28 650 2 (649) (24)
Net (loss) earnings (9,211) (733) (9,944) (34,535) (55,678) 8,204 (434) (82,443) (3,478) (15,193)(111,058)
Capital expenditures 2,442 5,471 7,913 3,932 (544) 1,701 4,141 9,230 3,015 1,504 21,662
Identifiable assets 48,698 34,161 82,859 35,645 3,826 33,242 39,632 112,345 43,569 12,796 251,569
Information about major customers
Of the Company's total consolidated net revenue in 2001, revenue from one
customer of $29,090,000 consisted of $23,745,000 from the Bouchard-Hebert Mine,
$2,842,0000 from the El Mochito Mine and $2,503,000 from the El Toqui Mine, and
revenue from another customer of $16,401,000 consisted of $5,719,000 from the El
Mochito Mine, $2,807,000 from the Bougrine Mine, $4,074,000 from the
Bouchard-Hebert Mine and $3,801,000 from the Nanisivik Mine.
148
For the Year Ended December 31, 2000
($000's)
- ----------------------------- ------------------------- ---------------------------------------------- --------- --------- ---------
Corporate Consol-
Geographical location Latin America Canada Tunisia and other idated
- ----------------------------- -------- -------- ------- -------- -------- ---------- -------- -------- --------- --------- ---------
El El Bouchard-
Mochito Toqui Nanisivik Caribou Hebert Langlois Bougrine
Operating Segment Mine Mine Total Mine Mine Mine Mine Total Mine
- ----------------------------- -------- -------- ------- -------- -------- ---------- -------- -------- --------- --------- ---------
Net revenue 32,992 23,670 56,662 47,073 - 21,688 8,092 76,853 33,073 - 166,588
Depreciation and depletion (4,580) (3,415) (7,995) (3,865) - (2,850) (632) (7,347) (7,340) (95) (22,777)
Reclamation and closure costs (249) (62) (311) (297) (590) 0 (887) (272) - (1,470)
Contribution (loss) from
mining activities 2,771 1,446 4,217 15,720 - 7,979 (41) 23,658 9,000 (95) 36,780
General and administrative - - - - - - - - - (7,322) (7,322)
Interest and financing - - - - - - - - - (8,192) (8,192)
expenses
Investment and other income - - - - - - - - - 4,892 4,892
Foreign exchange loss - - - - - - - - - (1,399) (1,399)
Write-down of mineral
properties and fixed assets - - - - (26,448) - - (26,448) - (694) (27,142)
Other non-producing property
costs - - - - (2,301) - (961) (3,262) - (1,400) (4,662)
Income and mining taxes (2) - (2) (643) - (675) 90 (1,228) (36) (438) (1,704)
Net (loss) earnings 2,769 1,446 4,215 15,077 (28,749) 7,304 (912) (7,280) 8,964 (14,648) (8,749)
Capital expenditures 6,145 10,108 16,253 8,235 750 1,992 1,018 11,995 6,365 6 34,619
Identifiable assets 59,921 33,856 93,777 48,758 57,916 44,825 38,618 190,117 53,290 23,269 360,453
Information about major customers
Of the Company's total consolidated net revenue in 2000, revenue from one
customer was $31,153,000 consisted of $18,708,000 from the Bouchard-Hebert Mine,
$8,805,000 from the Langlois Mine, $2,279,000 from the El Mochito Mine and
$1,361,000 from the El Toqui Mine and revenue from another customer of
$21,814,000 consisted of $15,099,000 from the Nanisivik Mine, $4,867,000 from
the El Toqui Mine and $1,848,000 from the Bougrine Mine.
14. ANALYSIS OF CHANGES IN NON-CASH WORKING CAPITAL ITEMS
($000's)
---------------------------------------------------
2002 2001 2000
---------------------------------------------------
Accounts receivable - concentrate (13,976) 8,496 211
Other receivables (654) 8,631 (7,867)
Concentrate and supplies inventory 25,200 17,390 (22,148)
Short-term investments - 4,158 7,291
Prepaid expenses and other current assets 183 1,058 213
Provisional payments for concentrate inventory
shipped and not priced (18,108) (7,519) (1,717)
Accounts payable and accrued liabilities (2,963) 10,772 10,358
Income and mining taxes payable (880) (526) (33)
---------------------------------------------------
(11,198) 42,460 (13,692)
---------------------------------------------------
149
15. LOSS PER SHARE
Basic Loss per Share ("EPS") has been calculated using the weighted average
number of shares outstanding during the year. The diluted EPS gives effect to
the exercise of all outstanding options and warrants. Diluted earnings per
common share data is not presented in 2002, 2001 and 2000, as the exercise of
options would not have been dilutive in those years.
The calculation of diluted earnings per share has been computed using the
treasury stock method which assumes that options and warrants with an exercise
price lower than the average quoted market price were exercised at the later of
the beginning of the period, or time of issue. In applying the treasury stock
method, options and warrants with an exercise price greater than the average
quoted market price of the Common Shares are not included in the calculation of
diluted earnings per share as the effect is anti-dilutive. The average quoted
market price of the Common Shares during 2002 was $0.20 (2001 - $0.86; 2000 -
$2.65).
On May 1, 2002, the Company completed a rights issue with an exercise price of
$0.20 per share. The market value of the Common Shares on April 2, 2002, the day
prior to trading ex-rights was $0.37 per share. As a result of the bonus element
in the rights issue, the basic loss per share and the weighted average number of
Common Shares outstanding have been adjusted retroactively as follows:
(000's)
------------------------------------------------------------------------------------------------------
2002 2001 2000
------------------------------------------------------------------------------------------------------
Loss per share - before bonus element $0.12 $1.20 $0.10
Loss per share - after bonus element $0.12 $0.92 $0.08
Diluted earnings per share - before bonus element N/A N/A N/A
Diluted earnings per share - after bonus element N/A N/A N/A
Weighted average number of shares outstanding 159,684 92,560 83,985
Additional shares due to bonus element 9,390 27,606 25,048
------------------------------------------------------------------------------------------------------
Weighted average number of shares outstanding
after bonus element 169,074 120,166 109,033
------------------------------------------------------------------------------------------------------
16. RECONCILIATION WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES
The consolidated financial statements of the Company have been prepared in
accordance with Canadian generally accepted accounting principles ("Cdn. GAAP")
which are different in some respects from those applicable in the United States
of America ("U.S. GAAP") and from practices prescribed by the United States
Securities and Exchange Commission.
Material variations between balance sheet items and statements of operations
items as shown in the consolidated financial statements under Cdn. GAAP and the
amounts determined using U.S. GAAP are as follows:
150
Consolidated Balance Sheets
Deferred
Short-term Losses on Accounts
Mineral Investments Foreign Payable Other
Properties (included in Exchange and Compre-
(Expressed in thousands of Canadian and Cash and Cash Hedging Accrued hensive Contributed Capital
dollars) Fixed assets Equivalents) Contracts Liabilities Income Deficit Surplus Stock
- ------------------------------------------------------------------------------------------------------------------------------------
As at December 31, 2002
As shown in the consolidated
financial statements under
Cdn. GAAP $134,882 $30 $ - $25,577 $ - ($178,855) $1,582 $257,759
Shares issued to promoters or
shareholders in exchange
for non-monetary assets (a) (1,568) 12,638 (14,206)
Adjustment relating to stock-based
compensation to
non-employees (b(i)) (48) 48
Adjustment relating to stock-based
compensation to senior officer
(b(ii)) (156) 156
Adjustment relating to write-down of (2,287) (2,287)
El Toqui Mine (c)
Adjustment relating to exploration (7,202) (7,202)
expenditures (d)
Adjustment relating to unrealized
gains on short-term
investments (f) 142 142
- ------------------------------------------------------------------------------------------------------------------------------------
According to U.S. GAAP $123,825 $172 $ - $25,577 $142 ($175,910) $1,786 $243,553
====================================================================================================================================
(Restated - (Restated -
See (d) See (d)
below) below)
As at December 31, 2001
As shown in the consolidated
financial statements unde
Cdn. GAAP $152,372 $ 68 $2,003 $43,985 $ - ($158,968) $1,485 $239,214
Shares issued to promoters or
shareholders in exchange
for non-monetary assets (a) (1,915) 12,291 (14,206)
Adjustment relating to stock-based
compensation to non-employees
(b(i)) (48) 48
Adjustment relating to stock-based
compensation to senior officer
(b(ii)) (156) 156
Adjustment relating to write-down of (305) (305)
Nanisivik Mine (c)
Adjustment relating to depreciation
and depletion\(c) 69 69
Adjustment relating to exploration (5,052) (5,052)
expenditures (d)
Adjustment relating to unrealized
gains on short-term investments (f) 430 430
Adjustment for mark-to-market of
Hedge Contract Liability (h) (1,431) 1,431
Adjustment for deferred losses on
foreign exchange hedging
contracts (i) (2,003) (2,003)
- ------------------------------------------------------------------------------------------------------------------------------------
According to U.S. GAAP $145,169 $498 $ - $42,554 $430 ($152,741) $1,689 $225,008
====================================================================================================================================
151
Consolidated Statements of Operations
(Expressed in thousands of Canadian dollars, except for per 2002 2001 2000
share information)
- -----------------------------------------------------------------------------------------------------------
(Restated -
See (d)
below)
Loss as shown in the consolidated financial
statements under Cdn. GAAP ($19,887) ($111,058) ($8,749)
Additional (expense) income:
Adjustment to depletion in connection with shares
issued to promoters or shareholders (a) 347 472 417
Adjustment to recognize stock-based compensation to (48) (272)
non-employees (b(i))
Adjustment to recognize stock-based compensation to senior
officer (b(ii)) (156)
Adjustment relating to write-down of the El Toqui Mine,
(2001 - Nanisivik Mine, 2000 - Caribou Mine) (c) (2,287) (305) (18,180)
Adjustment relating to depreciation and depletion (c) 69
Adjustment relating to write-off of exploration expenditures (d) (2,150) (3,772) (266)
Cumulative effect of change in accounting principle (d) (1,014)
Adjustment for marked-to-market of Hedge Contract Liability (h) 1,431 1,288
Adjustment to write-off deferred losses on foreign exchange (2,003)
hedging contracts (i)
- -----------------------------------------------------------------------------------------------------------
Net Loss under U.S. GAAP ($23,977) ($115,370) ($26,776)
===========================================================================================================
Basic loss per share under U.S. GAAP $ (0.14) $ (0.96) $ (0.25)
Diluted earnings per share under U.S. GAAP $ N/A $ N/A $ N/A
Effect of U.S. GAAP adjustments on basic loss per share $ (0.02) $ (0.04) $ (0.17)
CONSOLIDATED STATEMENTS OF OPERATIONS PRESENTATION:
Under U.S. GAAP, the measure "(Loss) contribution from Mining Activities" is not
a recognized term and would therefore not be presented. "(Loss) contribution
from Mining Activities" when adjusted for the items in the table below is
comparable to the terminology "Loss from operations" under U.S. GAAP.
The following table reconciles "(Loss) contribution from Mining Activities under
Cdn. GAAP" to "Loss from operations under U.S.
GAAP"
(Expressed in thousands of Canadian dollars) 2002 2001 2000
- -------------------------------------------------------------------------------------------------------------------
(Restated -
See (d)
below)
(Loss) contribution from Mining Activities under Cdn. GAAP $ (9,496) $ (23,492) $ 36,780
General and administrative (6,198) (7,481) (7,322)
Write-down of mineral properties and fixed assets (70,281) (27,142)
Other non-producing property costs (876) (3,176) (4,662)
- -------------------------------------------------------------------------------------------------------------------
Loss from operations under U.S. GAAP $ (16,570) $ (104,430) $ (2,346)
===================================================================================================================
For U.S. GAAP purposes, the components of non-operating income (loss) are as follows:
(Expressed in thousands of Canadian dollars) 2002 2001 2000
- -------------------------------------------------------------------------------------------------------------------
Interest and financing $ (5,122) $ (7,946) $ (8,192)
Investment and other income 912 9,224 4,892
Foreign exchange gain (loss) on US dollar denominated debt 669 (4,720) (1,399)
Foreign exchange hedging loss (3,162)
- -------------------------------------------------------------------------------------------------------------------
Non-operating loss for U.S. GAAP $ (3,541) $ (6,604) $ (4,699)
===================================================================================================================
152
The following table reconciles "Net loss under U.S. GAAP" to "Comprehensive loss under U.S. GAAP"
(Expressed in thousands of Canadian dollars) 2002 2001 2000
- -------------------------------------------------------------------------------------------------------------------
Net loss under U.S. GAAP $ (23,977) $ (115,370) $ (26,776)
Change in cumulative translation adjustments account (2,353) 6,873 3,848
Adjustment relating to unrealized gains on short-term
investments 142 430 2,514
- -------------------------------------------------------------------------------------------------------------------
Comprehensive loss under U.S. GAAP $ (26,188) $ (108,067) $ (20,414)
===================================================================================================================
There are no differences in cash flows provided from operating activities,
financing activities and investing activities as presented in the statements of
cash flows under Cdn. and U.S. GAAP except that, under U.S. GAAP the
determination of cash provided from operating activities would reflect the net
(loss) earnings under U.S. GAAP (as opposed to Cdn. GAAP) with appropriate
adjustments to non-cash items and non-cash working capital items with respect to
adjustments disclosed in the balance sheet and statement of operations schedules
above to arrive at the same cash flow from operating activities amount under
both Cdn. and U.S. GAAP.
Also, the sub-total within the "Cash (Used for) provided from operating
activities" under "Operating Activities" is not permitted; therefore the reader
should disregard the sub-total of $13,773,000, $(5,362,000) and $37,891,000 for
2002, 2001 and 2000, respectively for U.S. GAAP purposes.
Differences between Cdn. GAAP and U.S. GAAP
a. Transfer of Non-monetary Assets from Promoters or Shareholders
in Exchange for Shares
Under Cdn. GAAP, non-monetary assets acquired in exchange for
common shares of the Company should be valued at the fair
market value of the consideration given, unless the fair value
of the consideration given is not clearly evident, in which
case the acquisition should be accounted for at the fair value
of the net assets acquired.
The Securities and Exchange Commission's interpretative
response to U.S. Accounting Principles Board Opinion No. 29
requires that non-monetary assets transferred from promoters
or shareholders in exchange for common shares of the Company
be recorded at the transferor's historical cost.
b. Accounting for Stock-Based Compensation
i) Under U.S. GAAP, options granted to non-employees
would be fair valued and accounted as compensation
expense. Under current Cdn. GAAP, effective January
1, 2002, options granted to non-employees are also
valued under the fair value method. However, in
accordance with Cdn. GAAP in effect prior to January
1, 2002, the Company did not recognize compensation
expense for options granted to non-employees. For
purposes of determining compensation expense under
U.S. GAAP for 2001 and 2000, the fair value of each
option grant has been estimated on the balance sheet
date using Black-Scholes option-pricing model with
the following weighted-average assumptions:
------------------------------- --------------------------------------------
Years ended December 31,
------------------------------- --------------------------------------------
2001 2000
------------------------------- --------------------- ----------------------
Expected life (years) 1.58 1
------------------------------- --------------------- ----------------------
Risk free interest rate 5.25% 5.35%
------------------------------- --------------------- ----------------------
Expected volatility 136% 71%
------------------------------- --------------------- ----------------------
Dividend yield 0% 0%
------------------------------- --------------------- ----------------------
------------------------------- --------------------- ----------------------
153
ii) During 2001, as part of an employment agreement with
a former senior officer, the Company had granted
stock options to this individual, which fully vested
on the date of the grant.
Under Cdn. GAAP, the Company accounted for the
options in accordance with the Company's accounting
policy for stock options. Under U.S. GAAP the direct
award of stock would be accounted for at the fair
value of the stock on the date of the award. The fair
value of each option grant is estimated on the
balance sheet date using Black-Scholes option-pricing
model with assumptions of a 3-year expected life,
risk free interest rate of 5.25%, an expected
volatility of 136% and an dividend yield of 0%.
iii) The Company does not recognize compensation expense
for its stock-based compensation plans under either
U.S. or Cdn. GAAP. Had compensation cost for the
stock option plans been determined based upon fair
value at the grant date for awards under these plans
consistent with the methodology prescribed under SFAS
No.123 - "Accounting for Stock-Based Compensation"
and SFAS No. 148 "Accounting for Stock-Based
Compensation-Transition and Disclosure, an amendment
to SFAS 123", the Company's pro forma net loss and
loss per share would be as follows:
-------------------------------------------------------- ----------------- ------------------ -----------------
(Expressed in thousands of Canadian dollars, except per 2002 2001 2000
share amount)
-------------------------------------------------------- ----------------- ------------------ -----------------
Net loss applicable to common shares per U.S. GAAP
As reported (23,977) (115,370) (26,776)
Add: Stock compensation costs (183) (543) (1,011)
----------------- ------------------ -----------------
Pro forma (24,160) (115,913) (27,787)
----------------- ------------------ -----------------
Loss per share, basic and diluted
As reported $(0.14) $(0.96) $(0.25)
Pro forma $(0.15) $(1.25) $(0.33)
The fair value of each option grant is estimated on the balance sheet date using
Black-Scholes option-pricing model with the following weighted-average
assumptions:
------------------------------------------- ------------------------------------------------------------------
Years ended December 31,
------------------------------------------- --------------------- ---------------------- ---------------------
2002 2001 2000
------------------------------------------- --------------------- ---------------------- ---------------------
Expected life (years) 1 - 10 1 - 10 1 - 10
------------------------------------------- --------------------- ---------------------- ---------------------
Risk free interest rate 5.21% 5.25% 5.35%
------------------------------------------- --------------------- ---------------------- ---------------------
Expected volatility 62% 136% 71%
------------------------------------------- --------------------- ---------------------- ---------------------
Dividend yield 0% 0% 0%
------------------------------------------- --------------------- ---------------------- ---------------------
------------------------------------------- --------------------- ---------------------- ---------------------
c) Write-down of Mineral Properties and Fixed Assets
Following an evaluation of the Company's mineral properties
and fixed assets on the basis set out in Note 1 of the
Company's 2002 consolidated financial statements, an
154
additional $2,287,000 (2001 - $305,000, 2000 - $18,180,000)
would be written off in 2002 as a result of applying SFAS 121,
"Accounting for the impairment of long-lived assets and for
long-lived assets to be disposed of". These differences arise
from the requirement under U.S. GAAP to discount future cash
flows from impaired properties. Under Cdn. GAAP, future cash
flows from impaired properties are not discounted. As a
consequence of the difference in impairment write-downs, under
U.S. GAAP, depreciation and depletion would be reduced in 2002
by $nil, ($69,000 in 2001 and $nil in 2000).
d. Exploration Expenditures
Under Cdn. GAAP, the Company defers certain exploration
expenditures. When the properties are brought into commercial
production, the deferred costs are amortized on the
unit-of-production basis. If the properties are abandoned or
sold, the deferred expenditures are expensed at that time.
Securities and Exchange Commission published interpretations
with respect to the extractive industry have stated that under
U.S. GAAP exploration expenditures during the exploration
stage prior to determination of the existence of commercially
minable ore bodies are required to be expensed as incurred.
Prior to 2000, for U.S. GAAP purposes the Company deferred
such costs. Under U.S. GAAP, the Company expenses exploration
costs of non-producing properties as incurred. In 2002, the
Company determined that it should have written off additional
expenses incurred in 2001 of $3,663,000 that should have been
written off in 2001. Accordingly, the net loss previously
reported in 2001 for U.S. GAAP purposes has been restated. The
effect of the restatement was to increase the loss by
$3,663,000 with a corresponding reduction in mineral
properties and fixed assets and an increase in deficit as at
December 31, 2001, respectively.
e. Comprehensive Income
Under SFAS No. 130, "Reporting Comprehensive Income", all
components of comprehensive income are to be reported in the
period in which they are recognized. It requires that an
entity classify items of other comprehensive income by their
nature in a financial statement and disclose the accumulated
balance of other comprehensive income separately from retained
earnings (deficit) and additional paid in capital.
f. Short-term Investments
Under Cdn. GAAP, unrealized gains on short-term investments
are not recorded. Under U.S. GAAP, unrealized gains (losses)
on short-term investments are recorded in other comprehensive
income.
g. Derivative Instruments and Hedging Activities
On January 1, 2001, the Company adopted the Financial
Accounting Standards Board ("FASB") Statement No.133,
"Accounting for Derivative Instruments and Hedging Activities"
("SFAS 133"), and the corresponding amendments under FASB
Statement No.138 ("SFAS 138"). SFAS 133 requires that all
derivative financial instruments be recognized in the
financial statements and measured at fair value regardless of
the purpose or intent for holding them. Changes in the fair
value of derivative financial instruments are either
recognized periodically in income or shareholders' equity (as
a
155
component of other comprehensive income), depending on whether
the derivative is being used to hedge changes in fair value or
cash flows. SFAS 138 amends certain provisions of SFAS 133 to
clarify four areas causing difficulties in implementation.
The cumulative effect of adopting SFAS 133, as amended by SFAS
138, did not have a material impact on the Company's
consolidated results of operations, financial position, or
cash flows.
Under both Cdn. and U.S. GAAP, except for the hedge contract
liability and deferred losses on foreign exchange hedge
contracts as described below, the Company marked-to-market its
derivative instruments and the resulting unrealized gains
(losses) are charged to income in the current year.
h. Hedge Contract Liability
Under Cdn. GAAP, the commodity hedge position assumed during
2000 (see note 10 of the Company's consolidated financial
statements) had been set up as a liability and was being
brought into income when the underlying hedge transaction is
recognized. Under U.S. GAAP, the hedge position would not meet
the criteria for hedge accounting and would be
marked-to-market at the end of each year. The resulting
unrealized gains (losses) would be taken into income in the
relevant year. The carrying value of the hedge position as at
December 31, 2002 and 2001 was $nil, as all hedged
transactions were recognized prior to December 31, 2001.
i. Deferred Losses on Foreign Exchange Hedging Contracts
Foreign exchange hedges totalling US$26,000,000 designated as
hedges of 2002 operating costs at the Nanisivik Mine, matured
in 2001 realizing losses of $2,003,000 which amounts were
deferred under Cdn. GAAP until the related costs were
recognized in 2002, (see Note 10 of the Company's consolidated
financial statements). Under U.S. GAAP, these losses did not
qualify for hedge accounting and, accordingly, were charged to
income in the year incurred.
j. Cumulative Translation Adjustments Account
Under Cdn. GAAP, the unrealized translation gains and losses
on the Company's net investment in self-sustaining operations
translated using the current rate method accumulate in a
separate component of shareholders' equity described as
"Cumulative translation adjustment" on the consolidated
balance sheet. Under U.S. GAAP, the unrealized foreign
exchange gains and losses would not accumulate in a separate
component of shareholders' equity but rather as an adjustment
to accumulated other comprehensive income.
k. Accounts Payable and Accrued Liabilities
Included in accounts payable and accrued liabilities are
amounts for accounts payable and accrued expenses,
respectively, as follows:
156
($000's) 2002 2001
- ------------------------------------------------------------------------------------------------
Accounts payable 13,070 24,389
Payroll and severance accrual 5,183 4,210
Utilities cost accrual 2,589 2,020
Deferred zinc hedge revenue - 2,460
Deferred foreign exchange hedge 170 3,162
Deferred treatment charges - 1,001
Reclamation and closure cost accruals - current portion 2,161 2,399
Hedge contract liability - current portion - 1,434
Financing cost accrual 17 195
Capital taxes accrual 168 511
Other accruals 2,219 2,204
- ------------------------------------------------------------------------------------------------
25,577 43,985
l. Recent Accounting Pronouncements
U.S. STANDARDS
In June 2001, the FASB issued Statement No. 143, "Accounting for Asset
Retirement Obligations" (SFAS 143), which addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. It applies to legal
obligations associated with the retirement of long-lived assets that result from
the acquisition, construction, development and (or) the normal operation of a
long-lived asset, except for certain obligations of lessees. SFAS 143 amends
SFAS 19, "Financial Accounting and Reporting by Oil and Gas Producing
Companies", and requires entities to record the fair value of a liability for an
asset retirement obligation in the period in which it is incurred. When the
liability is initially recorded, an entity capitalizes the cost by increasing
the carrying amount of the related long-lived assets. Over time, the liability
is accreted to its present value each period, and the capitalized cost is
amortized over the useful life of the related asset. Upon settlement of the
liability, an entity either settles the obligation for its recorded amount or
incurs a gain or loss upon settlement, SFAS 143 is effective for financial
statements issued for fiscal years beginning after June 15, 2002 with earlier
application encouraged. The Company has not yet determined the impact of this
Statement on its financial statements.
In June 2002, the FASB issued Statement No. 146, "Accounting for Cost Associated
with Exit or Disposal Activities" (SFAS 146), which addresses issues relating to
the recognition, measurement and reporting of costs associated with exit and
disposal activities, including restructuring activities. SFAS 146 is effective
for exit and disposals activities initiated after December 31, 2002 and requires
that these costs be recognized when the liability is incurred and not at project
initiation. The Company has not yet determined the impact of this Statement on
its financial statements.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"). FIN 46 clarifies the application of
Accounting Research Bulletin No. 51 - Consolidated Financial Statements to those
entities defined as "Variable Interest Entities" (more commonly referred to as
special purpose entities) in which equity investors do not have the
characteristics of a "controlling financial interest" or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties. FIN 46 applies immediately to
all Variable Interest Entities created after January 31, 2003, and by the
beginning of the first interim or annual reporting period commencing after June
15, 2003 for Variable Interest Entities created prior to February 1, 2003. The
Company does not conduct any transactions through special purpose entities and
does not expect FIN 46 to have an impact on its financial statements.
In November 2002, the FASB issued Interpretation No. 45 "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others" ("FIN 45), which is effective for financial periods
ending after December 15, 2002. FIN 45 defines guarantees to include
indemnifications granted pursuant to contractual arrangements as well as
contingent consideration. For the year ended December 31, 2002, the Company had
no guarantees other than those already disclosed in Note 12 - "Contingencies" of
the Company's consolidated financial statements.
157
CANADIAN STANDARDS
In 2002, the Canadian Institute of Chartered Accountants' ("CICA") issued
Handbook Sections 3063 - Impairment of Long Lived Assets and 3475 - Disposal of
Long Lived Assets and Discontinued Operations to harmonize with SFAS 144. The
standards will require an impairment loss to be recognized when the carrying
amount of an asset held for use exceeds the sum of undiscounted cash flows. The
impairment loss would be measured as the amount by which the carrying amount
exceeds the fair value of the asset. An asset held for sale is to be measured at
the lower of carrying cost or fair value less cost to sell. In addition, this
guidance broadens the concept of a discontinued operation and eliminates the
ability to accrue operating losses expected between the measurement date and the
disposal date. Section 3063 is effective for fiscal years beginning on or after
April 1, 2003, and Section 3475 applies to disposal activities initiated by an
enterprise's commitment to a plan on or after May 1, 2003. The sections will be
applied prospectively with early adoption encouraged.
In 2002, the Accounting Standards Board of the CICA issued Accounting Guidelines
No. 13 that increase the documentation, designation and effectiveness criteria
to achieve hedge accounting. The guidelines requires the discontinuance of hedge
accounting for hedging relationships established that do not meet the conditions
at the date it is first applied. It does not change the method of accounting for
derivatives in hedging relationships, but requires fair value accounting for
derivatives that do not qualify for hedge accounting. The new guideline is
applicable for fiscal years commencing July 1, 2003. The Company is of the
opinion that this standard will not have any impact on its results of operations
and financial position.
In 2003, the Accounting Standards Board of the CICA issued Accounting Guideline
No. 14 - Disclosure of Guarantee. The guideline requires the disclosure of
guarantees including indemnification pursuant to contractual arrangement. This
guideline is consistent with FIN 45 described above.
158
ITEM 18. FINANCIAL STATEMENTS
Not applicable.
ITEM 19. EXHIBITS
Exhibit Table and Index to Exhibits
(A) refers to documents previously filed as an exhibit to the
Company's Annual Report on Form 20-F for the year ended
December 31, 2001.
(B) refers a document previously filed as an exhibit to the Company's
Annual Report on Form 20-F for the year ended December 31, 2000.
(C) refers to a document previously filed as an exhibit to the
Company's Annual Report on Form 20-F for the year ended
December 31, 2001.
(D) refers to a document previously filed as an exhibit to the
Company's Annual Report on Form 20-F for the year ended
December 31, 2001.
Exhibits in parentheses are references to the Exhibit No. of the filing
indicated.
Exhibit Number
1. Articles of Incorporation and By-laws
1.1 Articles (A)(Exhibit 1-1)
1.2 By-law No. 1 as amended and restated and as in effect on the
date hereof.
4 Compensatory Plans and Arrangements
4(c)(1) Employment agreement - Colin K. Benner(B)(Exhibit 4(c)(1))
4(c)(2) Termination Agreement - Gordon F. Bub(C)(Exhibit 4(c)(1))
4(c)(3) Share Incentive Plan (D)(Exhibit 4(c)(2))
21.1 Subsidiaries
99.1 Certification of Chief Executive Officer and Chief Financial
Officer pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
Signatures
The registrant hereby certifies that it meets all the requirements for
filing on Form 20-F and that it has duly caused the undersigned to sign
this annual report on its behalf.
159
Breakwater Resources Ltd.
May 16, 2003 (signed) Rene Galipeau
--------------------------------------------------
Rene R. Galipeau
Executive Vice President and Chief Financial Officer
160
CERTIFICATION
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Colin K. Benner, certify that:
1. I have reviewed this annual report on Form 20-F of Breakwater Resources
Ltd.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
annual report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date"); and
c. presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (and persons
performing the equivalent function):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
/s/ Colin K. Benner
Date: May 16, 2003
------------------------------------
By: Colin K. Benner
Title: Chief Executive Officer
CERTIFICATION
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Rene R. Galipeau, certify that:
1. I have reviewed this annual report on Form 20-F of Breakwater Resouces
Ltd.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
annual report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date"); and
c. presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (and persons
performing the equivalent function):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
/s/ Rene R. Galipeau
Date: May 16, 2003
---------------------------------
By: Rene R. Galipeau
Title: Chief Financial Officer