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, 2003______________
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 950
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.
as at December 31, 2003
-----------------------
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..............................................9
A. SELECTED FINANCIAL DATA.............................................9
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..................................................20
C. ORGANIZATIONAL STRUCTURE...........................................21
D. PROPERTY, PLANTS AND EQUIPMENT.....................................22
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS................70
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES.................106
A. DIRECTORS AND SENIOR MANAGEMENT...................................106
B. COMPENSATION......................................................110
C. BOARD PRACTICES...................................................112
D. EMPLOYEES.........................................................115
E. SHARE OWNERSHIP...................................................116
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS..........121
A. MAJOR SHAREHOLDERS................................................121
B. RELATED PARTY TRANSACTIONS........................................121
C. INTERESTS OF EXPERTS AND COUNSEL..................................123
ITEM 8. FINANCIAL INFORMATION......................................123
ITEM 9. THE OFFER AND LISTING......................................124
A. OFFER AND LISTING DETAILS.........................................124
B. PLAN OF DISTRIBUTION..............................................125
C. MARKETS...........................................................125
D. SELLING SHAREHOLDERS..............................................125
E. DILUTION..........................................................125
F. EXPENSES OF THE ISSUE.............................................125
ITEM 10. ADDITIONAL INFORMATION.........................................125
A. SHARE CAPITAL.....................................................125
B. MEMORANDUM AND ARTICLES OF ASSOCIATION............................125
C. MATERIAL CONTRACTS................................................129
D. EXCHANGE CONTROLS.................................................129
E. TAXATION..........................................................129
F. DIVIDENDS AND PAYING AGENTS.......................................130
G. STATEMENT BY EXPERTS..............................................130
H. DOCUMENTS ON DISPLAY..............................................130
I. SUBSIDIARY INFORMATION............................................130
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.....130
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES.........130
PART II......................................................................130
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES................130
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS
AND USE OF PROCEEDS............................................131
ITEM 15. CONTROLS AND PROCEDURES........................................131
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ITEM 16. [RESERVED]....................................................131
PART III....................................................................132
ITEM 17. FINANCIAL STATEMENTS..........................................132
ITEM 18. FINANCIAL STATEMENTS..........................................165
ITEM 19. EXHIBITS......................................................166
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, 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".
5
"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.
"WARRANTS" means the common share purchase warrants issued on January 28, 2004,
each such warrant is exercisable for one Common Share at an exercise price of
$1.00 per share until January 27, 2009.
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,
2003, 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, many of which are beyond the control of the Company, that could
cause actual events or results to differ from those reflected in the
forward-looking statements. These include, without limitation,
o metal prices fluctuations,
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 failure to obtain adequate financing on a timely basis,
o possible fluctuations in and volatility of operating results and financial
condition,
o inability to carry out exploration and production plans,
o loss of key executives,
o changes in interest rates,
7
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.
8
ITEM 3. KEY INFORMATION
A. Selected financial data.
The following financial information with respect to the five years ended
December 31, 2003 and as of December 31, 2003, 2002, 2001, 2000 and 1999 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 15 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 2003 2002 2001 2000 1999
and ratio) (1)
- ---------------------------------------- ------------- ------------- -------------- ------------- -------------
Gross Revenue 207,591 305,354 304,037 301,850 236,135
- ---------------------------------------- ------------- ------------- -------------- ------------- -------------
Treatment and Marketing Costs 83,581 136,738 142,236 135,262 105,440
- ---------------------------------------- ------------- ------------- -------------- ------------- -------------
Net Revenue 124,010 168,616 161,801 166,588 130,695
- ---------------------------------------- ------------- ------------- -------------- ------------- -------------
Total Operating Costs 129,631 178,112 185,293 129,808 107,814
- ---------------------------------------- ------------- ------------- -------------- ------------- -------------
(Loss) Contribution from
Mining Activities (5,621) (9,496) (23,492) 36,780 22,881
- ---------------------------------------- ------------- ------------- -------------- ------------- -------------
Net Earnings (Loss) 7,118 (19,887) (111,058) (8,749) 12,917
- ---------------------------------------- ------------- ------------- -------------- ------------- -------------
Basic Earnings (Loss) per share 0.03 (0.12) (0.92) (0.08) 0.17
- ---------------------------------------- ------------- ------------- -------------- ------------- -------------
Diluted Earnings per Share 0.03 N/A N/A N/A 0.16
- ---------------------------------------- ------------- ------------- -------------- ------------- -------------
Cash Provided From
(Used For) Operating
Activities(2) 14,708 8,647 (9,361) 37,720 30,058
- ---------------------------------------- ------------- ------------- -------------- ------------- -------------
Capital Expenditures 10,621 10,971 21,662 34,619 17,546
- ---------------------------------------- ------------- ------------- -------------- ------------- -------------
Weighted Number of Common
Shares Outstanding 211,411 169,074 120,166 83,985 77,691
- ---------------------------------------- ----------------------------------------------------------------------
Diluted Number of Common
Shares Outstanding N/A N/A N/A N/A 78,689
- ---------------------------------------- ----------------------------------------------------------------------
Number of Common
Shares Outstanding 285,790 193,281 93,848 92,039 82,301
- ---------------------------------------- ------------- ------------- -------------- ------------- -------------
Working Capital 36,147 22,284 5,048 23,881 40,054
- ---------------------------------------- ------------- ------------- -------------- ------------- -------------
Total Assets 175,635 223,380 251,569 360,453 261,020
- ---------------------------------------- ------------- ------------- -------------- ------------- --------------
Total Debt 25,846 78,665 80,406 90,280 16,700
- ---------------------------------------- ------------- ------------- -------------- ------------- -------------
Shareholders' Equity (Net assets) 113,699 95,596 98,576 201,859 190,015
- ---------------------------------------- ------------- ------------- -------------- ------------- -------------
Net Debt to Net Debt plus Equity 15% 43% 44% 30% 6%
- ---------------------------------------- ------------- ------------- -------------- ------------- -------------
Book Value per Share 0.40 0.49 1.05 2.19 2.31
- ---------------------------------------- ------------- ------------- -------------- ------------- -------------
Capital Stock 287,743 257,759 239,214 238,312 221,446
- ---------------------------------------- ------------- ------------- -------------- ------------- -------------
Dividends Declared Nil Nil Nil Nil Nil
- ---------------------------------------- ------------- ------------- -------------- ------------- -------------
(1) For U.S. GAAP equivalent figures refer to Item 17 - Financial Statements, Note 15.
(2) Before changes in non-cash working capital items.
On May 7, 2004, the Bank of Canada mid-market rate for the conversion of
United States dollars into Canadian dollars was $1.3856.
9
The following table reflects the monthly high and low exchange rates for US
$1.00 to the Canadian dollar for the following periods.
Month Year High Low
- --------------------------------------------------------
November 2003 1.3359 1.2973
December 2003 1.3397 1.2924
January 2004 1.3339 1.2692
February 2004 1.3440 1.3102
March 2004 1.3476 1.3079
April 2004 1.3707 1.3093
The following table lists the average exchange rate for US $1.00 to the
Canadian dollar for the last five years based on the average month-end exchange
rates.
Year Rate
- --------------------------
1999 1.4826
2000 1.4868
2001 1.5513
2002 1.5699
2003 1.4010
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 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.
10
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 in the price of zinc will impact earnings and
cash flow by approximately $3.0 million during 2004. Fluctuations in the price
of zinc are influenced by numerous factors beyond the control of the Company.
Exchange rates, interest rates, inflation, the world supply and demand for zinc
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.
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.
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.
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 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
11
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.
SURETY BOND RISK 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. If some or all of the Company's environmental bonds, which amount to
approximately $8.2 million, were withdrawn or the Company were required to
provide security in the form of cash or letters of credit it would use a
significant portion of available credit lines. Provision for such an event has
not been included in the cash forecast for 2004. 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.
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 such
risks are 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 that 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. Such events could 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 these factors are; the particular attributes of the deposit,
such as its size and grade, proximity to infrastructure; financing costs and
governmental regulations that include 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 AND RESOURCE ESTIMATES Where used by the Company, figures
for mineral reserves and resources 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/or other metals and/or a fluctuation in currency exchange rates may render
certain mineral reserves and resources uneconomical. Prolonged declines in the
market price of zinc may also render mineral
12
reserves and resources containing relatively lower grades of zinc mineralization
uneconomic to exploit (unless 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 and resources. 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.
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 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.
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.
13
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 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
950, 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 metal that 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 of January 1, 2000 to August 2002, the LME zinc price 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.
There was a marked improvement in the US dollar zinc price in 2003 from the
2002 record low. The zinc price closed at the end of 2003 at US$1,008 per tonne
compared with US$750 at the end of 2002, averaging US$828 per tonne for the year
compared with US$779 for 2002. However, the stronger Canadian dollar offset the
benefit of the improved average US dollar metal price. The average Canadian
14
dollar price of zinc in 2003 was $1,161 per tonne compared with $1,220 per tonne
in 2002 based on an average Canadian/US dollar exchange rate of 1.4004 versus
1.5701.
The Company's financial results are highly sensitive to the market price of
zinc. The Company estimates that each US$0.01 per pound change in the average
price of zinc in 2004 will affect the Company's earnings and cash flow in 2003
by $3.0 million.
Total cash operating costs to produce one pound of zinc for the year ended
December 31, 2003 were unchanged from 2002 at US$0.32 per pound of payable zinc
produced. 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
The Company has a credit facility (the "Syndicated Credit Facility") with a
syndicate of banks (the "Lenders"), which as at September 30, 2003 consisted of:
(i) US$17.6 million term credit facility (the "Non-Revolving Facility");
(ii) US$6.5 million supplement term credit facility (the "Supplemental
Term Facility"); and
(iii) US$30 million revolving credit facility (the "Revolver").
The maturity date of the Syndicated Credit Facility was January 2, 2004.
Dundee Bancorp Inc. ("Dundee"), the holder of an approximate 18.2 percent
interest in the Company (approximately 26.4 percent on a partially diluted
basis) at the time, provided a letter of credit (the "Dundee Letter of Credit")
as security for the obligations of the Company to the Lenders under the
Supplemental Term Facility.
In October 2003, the Company completed a $30 million financing (the
"Subscription Receipt Offering") by way of private placement and issued 85.8
million subscription receipts (the "Subscription Receipts") at a price of $0.35
per Subscription Receipt. Each Subscription Receipt was exchangeable for one
Common Share upon the satisfaction of certain conditions (the "Escrow
Conditions").
Proceeds from the Subscription Receipt Offering were held in escrow pending
the satisfaction of the Escrow Conditions; which included the Company reaching
agreement with the Lenders to, among other things, pay down approximately 50
percent of the Non-Revolving Facility and the Supplemental Term Facility on a
pari passu basis, extend the Non-Revolving Facility and the Supplemental Term
Facility for a period of five years and maintain the Revolver on terms agreeable
to the Company.
The Escrow Conditions were satisfied on November 27, 2003 when the
Corporation entered into an agreement with the Lenders providing for the
amendment of the Syndicated Credit Facility (the "Amended Syndicated Credit
Facility"), which agreement provided for:
(i) repayment of 50 per cent of the Non-Revolving Facility and
Supplemental Term Facility on a pari passu basis;
(ii) extension of the balance of the Non-Revolving Facility and the
Supplemental Term Facility for a period of five years to January 2, 2009;
(iii) repayment of the principal under the Non-Revolving Facility and the
Supplemental Term Facility in equal monthly payments beginning in July 2004;
(iv) amending of the mandatory prepayment provisions; and
(v) maintenance of the Revolver to January 2, 2005 with a new maximum of
US$25 million reduced from US$30 million.
Dundee agreed to extend the Dundee Letter of Credit supporting the
Supplemental Term Facility as reduced in accordance with the Amended Syndicated
Credit Facility until January 31, 2005. After January 31, 2005, Dundee could
renew the Dundee Letter of Credit on an annual basis.
15
With the Escrow Conditions having been satisfied on November 27, 2003, by
the close of business on December 2, 2003, the Company issued 85.8 million
Common Shares upon exchange of the Subscription Receipts. The net proceeds from
the Subscription Receipt Offering were released to the Corporation on November
28, 2003 and payment to the Lenders was made on December 3, 2003 resulting in
the reduction of the Non-Revolving Facility to US$8.8 million and of the
Supplemental Term Facility to US$3.25 million.
On January 28, 2004 the Company completed the sale of 57,142,828 units to a
syndicate of underwriters at a purchase price of $0.70 per unit. The Company
raised net proceeds of $37.0 million. Each unit consisted of one Common Share
and one-half of one common share purchase warrant. Each whole warrant (a
"Warrant") entitles the holder to acquire one Common Share at a price of $1.00
at any time until January 28, 2009.
The Company used $16 million of the net proceeds to retire the
Non-Revolving Facility and the Supplemental Term Facility. The Company plans to
use $16.4 million of the net proceeds to develop the Langlois Mine and the
balance will be used for working capital and general corporate purposes.
RE-DEVELOPMENT OF LANGLOIS MINE
The Langlois mine was placed on care and maintenance in November 2000
pending the resolution of an ore pass problem and an improvement in the price of
zinc. A feasibility study to reopen the Langlois mine including a technical
resolution for the ore pass was completed by SRK in August 2001 (the "2001 SRK
Report"), following an extensive drilling program of Zone 97. The 2001 SRK
Report indicated a net pre-tax cash flow of $60.9 million based on a zinc price
of US$0.50 per pound, a copper price of US$0.80 per pound and a silver price of
US$5.00 per ounce. The internal rate of return was 24.0 per cent and the net
present value at 8.0 per cent was $26.4 million.
Prior to placing the mine on care and maintenance in November 2000, ore was
mined from two zones known as Zones 3 and 4. A third zone, Zone 97, had been
identified and mineral reserves and resources established by diamond drilling.
In April 2003, the Corporation completed an in-fill drill program of 28
holes (11,511 metres) to further delineate and upgrade mineral resources to
mineral reserves in Zone 97 at the Langlois mine. The results of the in-fill
drill program show a 25 percent increase in mineral reserves in Zone 97, which
adds a further year's production to the expected life of the Langlois mine. In
total, the mineral reserves for Zone 97 increased by 419,600 tonnes at a grade
of 8.1 percent zinc, 1.7 percent copper, 46.9 grams of silver per tonne and 0.1
grams of gold per tonne. The mineral reserves and resources for Zones 3 and 4
have not changed.
Following the 2003 in-fill drill program, SRK updated the 2001 SRK report
in June 2003 (the "2003 SRK Report") to include the new mineral reserves in Zone
97. The 2003 SRK Report now estimates that the total net pre-tax cash flow will
be $71.1 million, based on the metal prices shown in the table set out below.
The internal rate of return has increased to 25.3 percent, and the net present
value at 8.0 percent has increased to $30.9 million.
It is estimated in the 2003 SRK Report that $38.2 million in capital is
required over the life of the mine of which approximately $16.4 million must be
expended prior to the start of production at the Langlois mine. The Company
raised net proceeds of $37.3 million from an equity offering in January 2004 and
will use $16.4 million of the proceeds for the development of the Langlois mine
scheduled to commence by mid-year 2004.
16
PROPOSED ACQUISITION OF MYRA FALLS
On February 16, 2004, the Company signed a letter of intent with Boliden AB
to purchase all the outstanding shares of Boliden Westmin (Canada) Limited
("BWCL"). BWCL is the owner of the Myra Falls mine in British Columbia. The
acquisition of BWCL will be exclusive of the Premier Gold property and certain
other assets and liabilities. The general terms of the proposed acquisition
include the Company issuing 18 million Common Shares and 5 million warrants,
exercisable at $1.00 per Common Share until January 28, 2009. Subject to final
due diligence, the acquisition is expected to close in the second quarter of
2004.
The Myra Falls mine produces zinc and copper concentrates containing
significant gold and silver as well as a gold-bearing gravity concentrate. The
operation consists of a 1.25 million tonne per annum underground mining
operation and processing facility, and associated infrastructure including a
storage and load out terminal in the community of Campbell River, BC. In 2003
Myra Falls produced 57,400 tonnes of zinc, 10,700 tonnes of copper, 27,300
ounces of gold and 720,900 ounces of silver.
SALE OF TONAWANDA AND ZULAPA GOLD PROPERTIES
In June 2003, the Company sold to Agnico-Eagle Mines Limited 100 percent of
the Company's Tonawanda and Zulapa gold properties, known collectively as the
Lapa properties.
Agnico-Eagle paid the Company US$7.925 million for the Company's interest
in the Lapa properties. The Company retained 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 also paid
a non-refundable advance royalty of US$1 million on closing and will pay a
further non-refundable advance royalty of US$1 million when the total published
inferred resources reach 2 million ounces of gold on the Lapa properties.
RECLAMATION OF NANISIVIK MINE
The Nanisivik Mine was permanently closed in September 2002. Reclamation
activities at Nanisivik commenced prior to the cessation of operations and are
ongoing, as permitted by the regulators involved. In advance of the closure the
Company submitted to the Nunavut Water Board ("NWB") a proposed closure plan,
which was sufficient for the NWB to issue a renewal water license replacing the
one that expired on September 30, 2002. The closure plan as submitted to the
NWB, though, required additional refinements and expansion in certain areas, and
technical work was undertaken throughout 2003. The Company had initially imposed
upon itself a deadline of December 15, 2003 for the filing of a complete and
comprehensive closure plan, but protracted review exercises and meetings caused
that deadline to be missed. The Company then imposed upon itself a deadline of
February 06, 2004 and the required work progressed sufficiently that the revised
deadline was honoured.
In response to the final closure plan submitted on February 06th, the NWB
convened a meeting of all of the regulators involved in Yellowknife, Northwest
Territories on May 04th, 05th & 06th. At that time many of the outstanding
technical issues related to the closure plan were resolved amongst the parties
and agreements were reached with respect to procedural matters governing the
upcoming public hearing to review the closure plan. The public hearing is set
for June 02nd to June 05th in the Hamlet of Arctic Bay, which is adjacent to the
Nanisivik site.
Although it has not formed and should not form part of the review process
of the closure plan, the matter of financial security related to the closure of
Nanisivik has not been resolved. The NWB and the regulators are not required as
part of the process to submit any form of an updated estimate of closure costs,
so the last figure they have is the $17.6 million dollar figure imposed by the
NWB when they
17
issued the renewal license in October 2002. The Company, however, was required
to submit a revised estimate of closure costs by March 31, 2004 and this was
done. As a result of that exercise the Company increased its estimate of closure
costs, climbing from approximately $9.2 million to approximately $9.9 million,
with the majority of that increase attributable to the increased area required
to be covered around the tailings ponds.
The Company continues to pursue its request for Judicial Review of the
DIAND Minister's (and his predecessors) decision not to meet to discuss the
process by which the amount of financial security was reached as well as the
amount and form of the security. A court date of June 22, 2004 has now been set
for this matter. Other discussions regarding financial security for the
Nanisivik closure are ongoing with DIAND officials.
CLOSURE OF THE BOUCHARD-HEBERT AND BOUGRINE MINES
Closure of the Bouchard-Hebert mine is expected near the end of the first
quarter of 2005, with preliminary reclamation work planned to begin in the
fourth quarter of 2004. The Company will continue its exploration diamond
drilling program in close proximity to the mine, and will carry out geophysics
and other exploration activities in the area of the mine throughout the
remainder of the year. If the Company's drilling program is successful the mine
life could be extended, but it will not prevent a temporary closure due to the
time required to develop a zone, if found.
The Bougrine mine is expected to cease operation during the first half of
2005. The Company is examining alternative uses for the Bougrine mill and
infrastructure. A study was initiated to determine the technical merit of
converting the facility to a clinker grinding and last-stage cement production
plant. A marketing study has also been initiated and the reports are expected to
be completed in the second quarter of 2004.
CAPITAL EXPENDITURES AND DIVESTITURES
The following table sets forth the capital expenditures for the past three
years together with the forecast capital expenditures for 2004. Capital
expenditures are financed by cash flows from operations.
- -------------------------- -------------------------------------------------
BOUCHARD-HEBERT(1)
- -------------------------- ------------- ----------- ---------- ------------
BUDGET
2001 2002 2003 2004
- -------------------------- ------------- ----------- ---------- ------------
Development 1,121 1,530 - -
- -------------------------- ------------- ----------- ---------- ------------
Exploration 82 22 27 682
- -------------------------- ------------- ----------- ---------- ------------
Equipment 498 124 - -
- -------------------------- ------------- ----------- ---------- ------------
Other - - - -
- -------------------------- ------------- ----------- ---------- ------------
Total 1,701 1,676 27 682
- -------------------------- ------------- ----------- ---------- ------------
(1) The Company acquired the Bouchard-Hebert mine effective May 1, 2000.
- -------------------------- -------------------------------------------------
NANISIVIK(1)
- -------------------------- ------------- ----------- ---------- ------------
BUDGET
2001 2002 2003 2004
- -------------------------- ------------- ----------- ---------- ------------
Development - - - -
- -------------------------- ------------- ----------- ---------- ------------
Exploration (468) - - -
- -------------------------- ------------- ----------- ---------- ------------
Equipment 4,400 17 (36) -
- -------------------------- ------------- ----------- ---------- ------------
Other - - - -
- -------------------------- ------------- ----------- ---------- ------------
Total 3,932 17 (36) -
- -------------------------- ------------- ----------- ---------- ------------
(1) The Nanisivik mine closed effective September 1, 2002.
18
- -------------------------- -------------------------------------------------
BOUGRINE
- -------------------------- ------------- ----------- ---------- ------------
BUDGET
2001 2002 2003 2004
- -------------------------- ------------- ----------- ---------- ------------
Development 864 786 280 -
- -------------------------- ------------- ----------- ---------- ------------
Exploration 375 112 80 -
- -------------------------- ------------- ----------- ---------- ------------
Equipment 1,776 1,068 246 -
- -------------------------- ------------- ----------- ---------- ------------
Other - - - -
- -------------------------- ------------- ----------- ---------- ------------
Total 3,015 1,966 606 -
- -------------------------- ------------- ----------- ---------- ------------
- -------------------------- -------------------------------------------------
EL MOCHITO
- -------------------------- ------------- ----------- ---------- ------------
BUDGET
2001 2002 2003 2004
- -------------------------- ------------- ----------- ---------- ------------
Development 929 542 504 2,589
- -------------------------- ------------- ----------- ---------- ------------
Exploration 546 78 141 128
- -------------------------- ------------- ----------- ---------- ------------
Equipment 603 654 591 -
- -------------------------- ------------- ----------- ---------- ------------
Other 364 1,073 1,350 2,198
- -------------------------- ------------- ----------- ---------- ------------
Total 2,442 2,347 2,586 4,915
- -------------------------- ------------- ----------- ---------- ------------
- -------------------------- -------------------------------------------------
EL TOQUI
- -------------------------- ------------- ----------- ---------- ------------
BUDGET
2001 2002 2003 2004
- -------------------------- ------------- ----------- ---------- ------------
Development 1,201 - 811 2,970
- -------------------------- ------------- ----------- ---------- ------------
Exploration 2,970 416 969 640
- -------------------------- ------------- ----------- ---------- ------------
Equipment 1,300 2,443 3,968 1,860
- -------------------------- ------------- ----------- ---------- ------------
Other - - - 2,397
- -------------------------- ------------- ----------- ---------- ------------
Total 5,471 2,859 5,748 7,867
- -------------------------- ------------- ----------- ---------- ------------
- -------------------------- -------------------------------------------------
LANGLOIS
- -------------------------- ------------- ----------- ---------- ------------
BUDGET
2001 2002 2003 2004
- -------------------------- ------------- ----------- ---------- ------------
Development 4,090 1,626 1,659 -
- -------------------------- ------------- ----------- ---------- ------------
Exploration (328) - - -
- -------------------------- ------------- ----------- ---------- ------------
Equipment (2) (25) - -
- -------------------------- ------------- ----------- ---------- ------------
Other 381 (734) - 1,632
- -------------------------- ------------- ----------- ---------- ------------
Total 4,141 867 1,659 1,632
- -------------------------- ------------- ----------- ---------- ------------
- -------------------------- -------------------------------------------------
CARIBOU(1)
- -------------------------- ------------- ----------- ---------- ------------
BUDGET
2001 2002 2003 2004
- -------------------------- ------------- ----------- ---------- ------------
Development - - - -
- -------------------------- ------------- ----------- ---------- ------------
Exploration - - - -
- -------------------------- ------------- ----------- ---------- ------------
Equipment (585) - - -
- -------------------------- ------------- ----------- ---------- ------------
Other 41 - - -
- -------------------------- ------------- ----------- ---------- ------------
Total (544) - - -
- ----------------------------------------------------------------------------
(1) The Caribou mine is on care and maintenance.
- -------------------------- -------------------------------------------------
BREAKWATER CORPORATE
- -------------------------- ------------- ----------- ---------- ------------
BUDGET
2001 2002 2003 2004
- -------------------------- ------------- ----------- ---------- ------------
Development - - - -
- -------------------------- ------------- ----------- ---------- ------------
Exploration - - - 128
- -------------------------- ------------- ----------- ---------- ------------
Equipment - - - -
- -------------------------- ------------- ----------- ---------- ------------
Other 1,504 1,239 31 177
- -------------------------- ------------- ----------- ---------- ------------
Total 1,504 1,239 31 305
- -------------------------- ------------- ----------- ---------- ------------
19
- -------------------------- -------------------------------------------------
TOTAL CONSOLIDATED
- -------------------------- ------------- ----------- ---------- ------------
BUDGET
2001 2002 2003 2004
- -------------------------- ------------- ----------- ---------- ------------
Development 8,205 4,484 3,254 5,559
- -------------------------- ------------- ----------- ---------- ------------
Exploration 3,177 628 1,217 1,450
- -------------------------- ------------- ----------- ---------- ------------
Equipment 7,990 4,281 4,769 1,988
- -------------------------- ------------- ----------- ---------- ------------
Other 2,290 339 1,381 6,404
- -------------------------- ------------- ----------- ---------- ------------
Total 21,662 10,971 10,621 15,401
- -------------------------- ------------- ----------- ---------- ------------
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 2002 and reclamation activities are ongoing. The Company
also owns base metal and gold exploration properties in Canada, Honduras,
Tunisia and Chile. In 2003, the Company's mines produced 364.7 million pounds of
zinc, 29.8 million pounds of lead, 8.2 million pounds of copper, 2.2 million
ounces of silver and 26,220 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,
-----------------------------------------------------
2003(1) 2002(2) 2001
- ------------------------------------------------------- ----------------- ----------------- -----------------
Milled (tonnes) 2,586,180 3,077,811 3,311,290
- ------------------------------------------------------- ----------------- ----------------- -----------------
Zinc (%) 7.2 7.8 7.2
- ------------------------------------------------------- ----------------- ----------------- -----------------
Concentrate Production
- ------------------------------------------------------- ----------------- ----------------- -----------------
Zinc (tonnes) 310,337 403,661 394,982
- ------------------------------------------------------- ----------------- ----------------- -----------------
Copper (tonnes) 23,781 37,680 42,138
- ------------------------------------------------------- ----------------- ----------------- -----------------
Lead (tonnes) 20,220 18,747 19,799
- ------------------------------------------------------- ----------------- ----------------- -----------------
Gold (tonnes) 2,575 5,424 3,389
- ------------------------------------------------------- ----------------- ----------------- -----------------
Metal in Concentrates
- ------------------------------------------------------- ----------------- ----------------- -----------------
Zinc (tonnes) 165,422 216,663 211,544
- ------------------------------------------------------- ----------------- ----------------- -----------------
Copper (tonnes) 3,710 6,055 6,932
- ------------------------------------------------------- ----------------- ----------------- -----------------
Lead (tonnes) 13,516 12,693 13,174
- ------------------------------------------------------- ----------------- ----------------- -----------------
Silver (ounces) 2,225,728 2,957,221 2,940,360
- ------------------------------------------------------- ----------------- ----------------- -----------------
Gold (ounces) 26,220 24,804 38,500
- ------------------------------------------------------- ----------------- ----------------- -----------------
Minesite Operating Costs
- ------------------------------------------------------- ----------------- ----------------- -----------------
Per tonne milled (US$) 28.31 27.18 27.26
- ------------------------------------------------------- ----------------- ----------------- -----------------
Total Cash Costs
- ------------------------------------------------------- ----------------- ----------------- -----------------
Per pound payable zinc (US$) 0.32 0.32 0.36
- ------------------------------------------------------- ----------------- ----------------- -----------------
(1) 2003 includes production from Bouchard-Hebert, Bougrine, El Mochito and El Toqui.
(2) 2002 includes production from Bouchard-Hebert, Bougrine, El Mochito, El Toqui and Nanisivik.
The majority of all of the concentrate produced by the Company are sold by
the Company under long-term supply agreements with commercial terms negotiated
annually with the balance being sold by tender and into the spot market.
20
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
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. Canada 100%
Consell Marketing Inc. Barbados 100%
American Pacific Honduras S.A. de C.V. Honduras 100%
Sociedad Contractual Minera El Toqui Chile 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 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 was
placed on care and maintenance in November 2000. As a result of the recent metal
price increase and improved working capital position, the Company
21
is planning to commence re-development of the mine by mid-year 2004 with full
production expected to commence in the first quarter of 2006. See Item 4.D -
PROPERTIES, PLANT AND EQUIPMENT - THE LANGLOIS MINE.
The Company, through CanZinco Ltd. ("CanZinco"), owns the Nanisivik
zinc/silver mine located on Strathcona Sound, Baffin Island, Nunavut, Canada.
The Nanisivik mine was permanently closed in September 2002. See Item 4.D -
PROPERTIES, PLANT AND EQUIPMENT - THE NANISIVIK 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.
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 milling facility 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.
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 215 claims covering 7,982 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.
22
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.
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 that resulted in a temporary shutdown 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 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
23
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 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.
24
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 general recovery of 82 percent. The above parameters
have been established from very detailed volumetric examinations of the
mined-out stopes, reconciled to the reserve estimates and with experience of
mining..
MINERAL RESOURCE AND MINERAL RESERVE CLASSIFICATION
All of the current mineral reserves for the Bouchard-Hebert mine are
classified as proven. These proven reserves, approximately 86 percent are
located in secondary stopes where mining has already exposed the mineralization
on four sides. The remaining proven reserves are located between level 1 and
level 6 (+9-19N), where definition drilling on a 15 to 20 metre spacing covers
the ground between the underground workings on these levels.
MINERAL RESOURCE AND MINERAL RESERVE STATEMENT
The table below sets forth the estimated mineral resources and mineral
reserves for the Bouchard-Hebert mine for the dates indicated, as estimated by
Marc Ruel, P.Geo., a qualified person, and an employee of the Corporation.
BOUCHARD-HEBERT MINE, SUMMARY OF MINERAL RESOURCES AND MINERAL RESERVES
- ---------------------------- ------------------------------------------- --------------------------------------------
December 31, 2003 December 31, 2002
- ---------------------------- ------------------------------------------- --------------------------------------------
Tonnes Zinc Copper Gold Silver Tonnes Zinc Copper Gold Silver
(000) (%) (%) (g/t) (g/t) (000) (%) (%) (g/t) (g/t)
- ---------------------------- --------- ------ --------- ------- -------- --------- ------ --------- ------- ---------
Proven and Probable 1,126 6.1 0.4 0.9 27 2,143 6.0 0.4 1.0 31
Reserves
- ---------------------------- --------- ------ --------- ------- -------- --------- ------ --------- ------- ---------
Measured and Indicated 1,218 6.9 0.4 1.0 30 2,296 6.8 0.4 1.1 34
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
25
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 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. 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 of 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 that requires 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 36 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.
26
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 54.5 to 55.0 percent zinc at
88.5 percent recovery. The copper concentrate typically has a grade of 15.0 to
16.0 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 trucked 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 trucked approximately 30 kilometres to
Noranda's Horne Smelter in Rouyn-Noranda, Quebec.
27
PRODUCTION
The following table summarizes production information from the
Bouchard-Hebert mine for the periods indicated.
- ------------------------------------- -------------------------- --------------------------
YEAR ENDED Year ended
DECEMBER 31, 2003 December 31, 2002
- ------------------------------------- -------------------------- --------------------------
Milled (tonnes) 1,082,833 1,050,009
- ------------------------------------- -------------------------- --------------------------
Zinc (%) 5.6 5.6
- ------------------------------------- -------------------------- --------------------------
Copper (%) 0.4 0.7
- ------------------------------------- -------------------------- --------------------------
Silver (grams/tonne) 36 39
- ------------------------------------- -------------------------- --------------------------
Gold (grams/tonne) 1.2 1.2
- ------------------------------------- -------------------------- --------------------------
Concentrate Production
- ------------------------------------- -------------------------- --------------------------
Zinc (tonnes) 98,149 94,914
- ------------------------------------- -------------------------- --------------------------
Copper (tonnes) 23,781 37,680
- ------------------------------------- -------------------------- --------------------------
Metal in Concentrates
- ------------------------------------- -------------------------- --------------------------
Zinc (tonnes) 53,844 51,197
- ------------------------------------- -------------------------- --------------------------
Copper (tonnes) 3,710 6,055
- ------------------------------------- -------------------------- --------------------------
Silver (ounces) 361,568 446,755
- ------------------------------------- -------------------------- --------------------------
Gold (ounces) 23,686 20,122
- ------------------------------------- -------------------------- --------------------------
Minesite Operating Costs
- ------------------------------------- -------------------------- --------------------------
Per tonne milled (Cdn$) 34.80 34.99
- ------------------------------------- -------------------------- --------------------------
Total Cash Costs
- ------------------------------------- -------------------------- --------------------------
Per pound payable zinc (US$) 0.30 0.28
- ------------------------------------- -------------------------- --------------------------
HUMAN RESOURCES
Bouchard-Hebert currently employs 132 people, of which 50 are hourly
employees. In addition to the mine's personnel, there are also 53 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 2003 inspection
report, there are no significant issues with the dams on site.
A closure plan is registered with the Quebec Ministry of Environment. Key
elements of the closure plan include:
28
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 percent 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 percent slope on the south face and a 10 percent 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 conceptual plan has been approved by both the Quebec Ministry of Environment
and 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.
The Company will continue its diamond-drilling program in close proximity
to the mine and will carry out geophysics and other exploration activities in
the area of the mine. The current program is focused on the targets that the
Company believes have the greatest potential to be future source of mill feed
through the existing mine infrastructure. If the Company is successful in its
efforts this could extend the life of the mine but it will not prevent a
temporary closure due the time requirements to develop a zone, if found.
29
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.
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.
Metallgesellschaft 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.
30
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.
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. The Company is currently exploring the
Bou Khil property, 38-road kilometres north east of the Bougrine mill, where
aproximately one-half million tonnes of lower-grade zinc ore resources
31
have been identified. An economic appraisal of these resources is underway.
Additional mill feed is being purchased from a government-owned mine near-by.
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 production to the second
quarter of 2005. The overall plan is to continue to mine the F2 and F3 zones and
minor amounts of F1 ore, which can be blended to produce a reasonably consistent
mill feed of approximately ten 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
Messrs. J. Tremblay, Ing. and S. Schmidt, P.Geo., qualified persons, and
employees of the Company.
BOUGRINE MINE, SUMMARY OF MINERAL RESOURCES AND MINERAL RESERVES
- --------------------------------------- --------------------------------- ----------------------------------
December 31, 2003 December 31, 2002
- --------------------------------------- --------------------------------- ----------------------------------
Tonnes Zinc Lead Tonnes Zinc Lead
(000s) (%) (%) (000s) (%) (%)
- --------------------------------------- ----------- ----------- --------- ------------ ---------- ----------
Proven and Probable Reserves 475 10.2 1.8 1,187 11.6 2.0
- --------------------------------------- ----------- ----------- --------- ------------ ---------- ----------
Measured and Indicated Resources(1) 768 11.4 2.1 1,279 13.3 2.3
- --------------------------------------- ----------- ----------- --------- ------------ ---------- ----------
Inferred Resources 68 10.7 1.9 249 8.2 1.3
- --------------------------------------- ----------- ----------- --------- ------------ ---------- ----------
(1) Measured and Indicated Resources include Proven and Probable Reserves.
While in-situ resources remained largely unchanged, ground stability
concerns led to a lower extraction factor, and thus, to a decrease of the
mineral reserves. Areas, which are now considered inaccessible, have been
removed from both, resources and reserves. The amount of inferred resources
decreased principally due to upgrading inferred into indicated resources in the
lower portion of the F2 orebody, which has been developed during 2003.
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.
32
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. Small blocks
are now being mined using sublevel stoping with cemented fill, whereby
second-pass mining requires access by secondary drifting through fill.
Underground equipment includes three Tamrock 2 boom drill jumbos for
development. Stope drilling equipment consists of three longhole drills, one
Tamrock Solo drill, and two Boart pneumatic drills. 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 (9 to 12 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.
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 11.1 percent zinc and 1.8 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 an average of 54.7 percent zinc for 2002. In 2003
the zinc concentrate grade was an average of 54.6 percent. 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 a grade of 66.6
percent in 2002. Lead recovery has improved from 74 percent to 75.1 percent in
2002. Lead grades and recovery remained relatively unchanged between 2003 and
2002.
33
Production of zinc metal in concentrate increased by 4 percent in 2003, due
to improved supply of mill feed from the higher-grade F-3 zone. Access to the
higher-grade ore resulted from correcting ground control conditions experienced
in 2002.
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 92.3 percent in 2003. Utilization in 2003 was slightly
lower than in previous years (95.8 percent to 96.5 percent) due to rescheduling
of the operation (six operating days in 2003).
The tonnes milled decreased in 2003 from 2002 due to a change in the shift
schedules of the milling operations. In the third quarter of 2003, milling
operations were rescheduled to five days per week to allow for the stockpiling
of ore on surface in order to blend the feed to the mill. The purpose of
blending is to improve metallurgical recovery.
The milling operation in 2004 will continue to be impacted by the change in
shift schedules. As well, due to interruptions in mining experienced in the
first quarter of 2004 the tonnes to be processed for the year are estimated to
be 364,700 compared with the original estimate of 375,800 tonnes. The contained
zinc metal will drop accordingly.
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.
34
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,
------------------------------------------------------------------------------
2003 2002 2001 2000
- ----------------------------------- ------------------ ------------------- ------------------- -------------------
Milled (tonnes) 410,961 423,414 411,052 422,120
- ----------------------------------- ------------------ ------------------- ------------------- -------------------
Zinc (%) 10.4 9.7 11.5 11.3
- ----------------------------------- ------------------ ------------------- ------------------- -------------------
Lead (%) 1.5 1.5 2.1 1.9
- ----------------------------------- ------------------ ------------------- ------------------- -------------------
Concentrate Production
- ----------------------------------- ------------------ ------------------- ------------------- -------------------
Zinc (tonnes) 64,036 61,656 69,724 72,246
- ----------------------------------- ------------------ ------------------- ------------------- -------------------
Lead (tonnes) 6,900 6,859 9,869 9,418
- ----------------------------------- ------------------ ------------------- ------------------- -------------------
Metal in Concentrates
- ----------------------------------- ------------------ ------------------- ------------------- -------------------
Zinc (tonnes) 34,964 33,706 37,832 38,303
- ----------------------------------- ------------------ ------------------- ------------------- -------------------
Lead (tonnes) 4,502 4,565 6,424 6,215
- ----------------------------------- ------------------ ------------------- ------------------- -------------------
Minesite Operating Costs
- ----------------------------------- ------------------ ------------------- ------------------- -------------------
Per tonne milled (US$) 35.81 32.19 28.82 27.49
- ----------------------------------- ------------------ ------------------- ------------------- -------------------
Total Cash Costs
- ----------------------------------- ------------------ ------------------- ------------------- -------------------
Per pound payable zinc (US$) 0.35 0.36 0.33 0.37
- ----------------------------------- ------------------ ------------------- ------------------- -------------------
HUMAN RESOURCES
BWR Tunisia's workforce currently consists of 274 people, 8 being
expatriate personnel and 266 local personnel. Of the total 274 personnel, 266
are at the mine site while 8 are in Tunis. 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 a semi-arid 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 an earthen embankment constructed of clay
fill. The dam was raised by one metre earthen lifts in 1999 and 2000. A
two-metre lift was completed in September 2003 which consisted of the placement
of a gabion wall with a grout trench positioned downstream. A final lift is
anticipated for 2004 that will provide sufficient storage capacity to meet life
of mine requirements. The dams are inspected annually by a Canadian geotechnical
consultant.
35
Water from the tailings facility seeps into the underground mine workings
and into the shallow groundwater system. Some of this seepage also reaches the
surface via a natural spring approximately 500 metres to the east. This seepage
water is collected and pumped back to the tailings pond. Groundwater in the area
is saline, therefore not used as a drinking water source by people in the area.
As the tailings facility dries out during closure, seepage from the facility
should cease. With a planned 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. Acid 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 tailing facility. The
Company is currently in discussions with the Tunisian government regarding the
possibility of reusing the surface infrastructure for other purposes. In the
event that these discussions do not identify feasible options, the Company will
demobilize the facility and rehabilitate the footprint, dismantle the surface
infrastructure, close off all openings to the underground to prevent public
access, stabilize any 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 $3.4 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 55.55 square kilometres are held in three prospective diapir
structures in a 30 kilometre radius around the mine site. This includes the
four-square kilometre mining lease of the Bougrine Mine. The Company recently
completed a nine-hole exploration program on the Bou Khil property, 38 road
kilometres from the Bougrine mill, which identified approximately one half
million tonnes of zinc mineralization. An in-house technical and economic
appraisal is currently being conducted with the objective of evaluating the
economic potential of the mineralization. Additional drilling programs are
planned for the second half of 2004 in the Lorbeus and Bou Khil extension areas.
In an on-going effort to increase the operating life of the mine, the
Company has concluded a contract for the purchase of zinc-lead ore from a
government owned mine.
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.
36
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.
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,
37
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, prepared under the
supervision of Rod Lamond, P. Eng., a qualified person, and employee of the
Company.
EL MOCHITO MINE, SUMMARY OF MINERAL RESOURCES AND MINERAL RESERVES
- ------------------------------------ ----------------------------------------- ---------------------------------------
December 31, 2003 December 31, 2002
- ------------------------------------ ----------------------------------------- ---------------------------------------
Tonnes Zinc Lead Silver Tonnes Zinc Lead Silver
(000s) (%) (%) (g/t) (000s) (%) (%) (g/t)
- ------------------------------------ ------------ --------- -------- --------- ---------- --------- --------- --------
Proven and Probable Reserves 2,686 6.5 1.8 87 3,167 6.6 1.8 76
- ------------------------------------ ------------ --------- -------- --------- ---------- --------- --------- --------
Measured and Indicated Resources(1) 3,599 7.9 2.4 108 4,288 8.2 2.5 99
- ------------------------------------ ------------ --------- -------- --------- ---------- --------- --------- --------
Inferred Resources 2,911 7.3 3.2 101 2,411 7.4 3.2 110
- ------------------------------------ ------------ --------- -------- --------- ---------- --------- --------- --------
(1) Measured and Indicated Resources include Proven and Probable Reserves.
In 2003, the Company replaced 30 percent of the mineral reserves that were
mined, primarily with the aid of additional drill data. The addition to inferred
resources is primarily due to wide spaced drilling in the Salva Vida NE and
Santo Nino areas.
38
MINING
El Mochito utilizes a combination of mining methods that 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 the broken ore 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 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.
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.
39
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 17.1 million
tonnes with an average grade of 7.5 percent zinc, 3.7 percent lead and 251 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 averages 90 percent.
PRODUCTION
The following table summarizes production information from the El Mochito
mine for the years indicated.
- --------------------------------------- -----------------------------------------------------------
Year ended December 31,
-----------------------------------------------------------
2003 2002 2001 2000
- --------------------------------------- -------------- --------------- ------------- --------------
Milled (tonnes) 652,085 663,385 652,331 637,665
- --------------------------------------- -------------- --------------- ------------- --------------
Zinc (%) 7.3 7.5 8.0 7.3
- --------------------------------------- -------------- --------------- ------------- --------------
Lead (%) 1.7 1.5 1.3 1.0
- --------------------------------------- -------------- --------------- ------------- --------------
Silver (grams/tonne) 87 90 81 94
- --------------------------------------- -------------- --------------- ------------- --------------
Concentrate Production
- --------------------------------------- -------------- --------------- ------------- --------------
Zinc (tonnes) 84,045 88,697 93,133 83,545
- --------------------------------------- -------------- --------------- ------------- --------------
Lead (tonnes) 13,320 11,888 9,930 7,337
- --------------------------------------- -------------- --------------- ------------- --------------
Metal in Concentrates
- --------------------------------------- -------------- --------------- ------------- --------------
Zinc (tonnes) 43,766 46,339 48,485 43,064
- --------------------------------------- -------------- --------------- ------------- --------------
Lead (tonnes) 9,014 8,128 6,750 4,805
- --------------------------------------- -------------- --------------- ------------- --------------
Silver (ounces) 1,638,465 1,700,034 1,505,659 1,690,031
- --------------------------------------- -------------- --------------- ------------- --------------
Minesite Operating Costs
- --------------------------------------- -------------- --------------- ------------- --------------
Per tonne milled (US$) 29.96 28.40 30.59 32.83
- --------------------------------------- -------------- --------------- ------------- --------------
Total Cash Costs
- --------------------------------------- -------------- --------------- ------------- --------------
Per pound payable zinc (US$) 0.29 0.32 0.37 0.44
- --------------------------------------- -------------- --------------- ------------- --------------
HUMAN RESOURCES
The number of personnel currently employed at the El Mochito Mine is 624.
This includes 21 expatriate staff, 132 clerical and local staff, 404 weekly
employees and 67 temporary employees. There are also 89 contract miners. The
weekly employees are represented by the Union of American Pacific Workers. The
weekly paid employees are represented by a union; the contract with the union
expires in September 2005.
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
40
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 that are not used for mine backfill 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 American-based
constructing firm. Stage two of a two-stage dam construction schedule is nearing
completion. Stage two has sufficient capacity to contain tailings until the
spring of 2006. To accommodate reserves past this date, a new tailing disposal
facility is currently being engineered and will begin construction in 2004. The
new facility will have sufficient space to accommodate tailings for 20 years of
operations. Dam inspection reports prepared annually 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 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 was
underway in 2003 and consists 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, that commenced on June 14, 2001 by the FISCAL of the
Environment by a special prosecutor for environmental issues of Honduras,
resulted in a petition being filed by the FISCAL. The petition alleged 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 were 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 mine does release effluent (water) from the mine tailing impoundment
areas, however, this water is monitored for contaminants as required under the
Honduran regulations for releases of waste water. These regulations are overseen
through a process of regular inspections and monitoring of both effluents and
receiving waters by El Mochito personnel and separately by CESCCO and DEFOMIN
personnel.
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
41
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 several chimney/manto systems.
The largest program, with the greatest potential, is the exploration of the
northeastern extension of the Salva Vida. The purpose of the program is to
further explore and delineate manto material. This program has the potential to
convert a large amount of resources to reserves as the targets have been
generally identified.
The El Raton west program is targeting the area between the Nacional
southwest and El Raton, an area known to contain manto skarn material. The goal
of the program is to delineate areas within the low grade manto that contain
sufficient grade for mining.
Exploration is underway on the 2100 level of Nina Blanca. This program is
searching for the lower extension of the Nina Blanca chimney. The chimney has
been mined down to just below the 1975 level but the location of the lower
extent remains unknown. If the lower extension can be found then exploration
will continue to determine the location of manto material at the base of the
chimney.
Rehabilitation of the old 1100 drift has given access to explore for the
upper extensions of the Port Royal and Nacional orebodies, where the chimneys
may mushroom into mantos at the contact of the Mochito Shale Formation.
Drilling on levels 1850 and 2100 has located the Barbasco orebody.
Definition drilling was completed with the existing development. Manto and
chimney mineralization have been defined along an interpreted N/S fault. The
mine is currently driving waste development to provide access for mining of the
orebody and for further drilling. Drilling is also planned to explore diamond
drill hole intercepts north of the Barbasco orebody.
After the NE Salva Vida, the Santo Nino probably contains the greatest
potential to convert resources to reserves. Development is currently underway to
provide drill stations for delineation drilling. The ramp access for the Santo
Nino orebody is on hold until sufficient information has been obtained to
warrant advancement and to allow proper mine planning.
REGIONAL EXPLORATION - MONSERRAT GOLD PROJECT
42
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.
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.
43
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.
The Company and Gold-Ore Resources Ltd. ("Gold-Ore") entered into an option
and joint venture agreement in March 2004. Gold-Ore has an option to acquire a
100 percent interest in the property upon incurring exploration expenditures of
US$1.5 million on or before October 31, 2006. If Gold-Ore completes the
exploration expenditures within the time prescribed, the Company may elect to:
(i) receive 1.5 million common shares of Gold-Ore and Gold-Ore shall obtain a
100 percent interest in the property or (ii) to buy-back a 51 percent interest
in the property upon incurring exploration expenditures of US$3.75 million over
a three-year period. The Company may increase its interest from 51 percent to 70
percent by completing a positive feasibility study, during an additional
two-year period, and arranging financing of the venture on certain terms.
Gold-Ore commenced a focused and systematic program of evaluation of the
Guayabillas Zone in January 2004. The program successfully verified the model
proposed by the United Nations and the Company and validates the high-grade
silver-gold values along the vein systems. Three high priority drill targets,
Guayabillas, Hill 55, and Leonidas, were defined. Previously, the mineralization
within the Guayabillas zone was traced for 800 metres, and was drill intersected
in 23 holes. Results ranged from 0.25 g/t gold, 94.7 g/t silver over 1.0 metre
to 13.8 g/t gold, 2003.2 g/t silver over 5.0 metres and averaged 4.36 g/t gold,
614.7 g/t silver over 1.9 metres. Hill 55 was previously tested by two holes 50
metres apart. The holes intersected 7.75 g/t gold, 453 g/t silver over 2.07
metres and 1.54 g/t gold, 374 g/t silver over 2.0 metres. The Leonidas vein
system was identified 200 metres south of the main Guayabillas zone and was
traced for 100 metres and is open along strike in both directions. This system
has not been drill tested.
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 yucca, fast growing soft woods and a large coffee plantation.
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.
44
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.
El Toqui is located in a mineralized belt approximately eight kilometres
wide by thirty kilometres long with a northwest orientation, coinciding with the
major structural trend in the region. This belt extends 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, namely zinc and zinc/gold. Zinc and zinc/gold mineralization is
present in the western part of the property within a west-
45
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. Some faults are occupied
by porphyry dikes. In 2000, sufficient exploration activity occurred to identify
several new deposits (Estatuas, San Antonio East, 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.
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.
46
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. The mineral reserve
and resource estimate was prepared under the supervision of John McCombe, P.
Eng., a qualified person, and an employee of the Company.
EL TOQUI MINE, SUMMARY OF MINERAL RESOURCES AND MINERAL RESERVES
- -------------------------------------------- ------------------------------- -------------------------------
December 31, 2003 December 31, 2002
- -------------------------------------------- ------------------------------- -------------------------------
Tonnes Zinc Gold Tonnes Zinc Gold
(000s) (%) (g/t) (000s) (%) (g/t)
- -------------------------------------------- ---------- ---------- --------- ---------- ---------- ---------
PROVEN AND PROBABLE RESERVES 2,801 7.4 1.7 3,344 7.7 1.4
- -------------------------------------------- ---------- ---------- --------- ---------- ---------- ---------
Measured and Indicated Resources(1) 3,499 8.1 1.6 4,203 8.3 1.4
- -------------------------------------------- ---------- ---------- --------- ---------- ---------- ---------
Inferred Resources 2,990 8.4 0.4 3,050 8.5 0.4
- -------------------------------------------- ---------- ---------- --------- ---------- ---------- ---------
(1) Measured and Indicated Resources include Proven and Probable Reserves.
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 yard and one six yard)
and two rock bolters. All haulage is done by a contractor, with loading done by
El Toqui personnel. Recently, high water inflows were experienced in the
development of the Aserradero zone. Additional pumping capacity was installed in
order to deal with the increased volumes. The area was subsequently drained and
pumping volumes have returned to historic levels.
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
47
implemented, which plan was completed in January 1999. The mill processes 1,100
tonnes per day of ore grading 8.1 percent zinc, 0.5 percent lead, 0.3 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, 2003, 2,534 ounces of gold and 225,695 ounces of silver
contained in 2,575 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 2003 was 51.2 percent zinc content with 11.3
percent iron. The zinc concentrate iron content is penalized when it exceeds
eight percent.
The Company is upgrading the mill to a rate of 1,500 tonnes per day.
Construction of a new crushing system was completed and commissioned in July
2003. The new crushing plant has a 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,
- -------------------------------------- ----------------------------------------------------------------------
2003 2002 2001 2000
- -------------------------------------- ----------------- ----------------- ----------------- ----------------
Milled (tonnes) 440,301 424,459 427,552 416,418
- -------------------------------------- ----------------- ----------------- ----------------- ----------------
Zinc (%) 8.1 9.2 8.5 8.4
- -------------------------------------- ----------------- ----------------- ----------------- ----------------
Gold (grams/tonne) 0.3 0.7 1.4 0.9
- -------------------------------------- ----------------- ----------------- ----------------- ----------------
Concentrate Production
- -------------------------------------- ----------------- ----------------- ----------------- ----------------
Zinc (tonnes) 64,107 70,752 65,405 64,356
- -------------------------------------- ----------------- ----------------- ----------------- ----------------
Gold (tonnes) 2,575 5,424 3,389 3,010
- -------------------------------------- ----------------- ----------------- ----------------- ----------------
Metal in Concentrates
- -------------------------------------- ----------------- ----------------- ----------------- ----------------
Zinc (tonnes) 32,848 35,907 32,565 31,226
- -------------------------------------- ----------------- ----------------- ----------------- ----------------
Gold (ounces) 2,534 4,682 10,023 6,232
- -------------------------------------- ----------------- ----------------- ----------------- ----------------
Silver (ounces) 225,695 282,383 333,228 166,568
- -------------------------------------- ----------------- ----------------- ----------------- ----------------
Minesite Operating Costs
- -------------------------------------- ----------------- ----------------- ----------------- ----------------
Per tonne milled (US$) 27.38 26.04 25.08 26.94
- -------------------------------------- ----------------- ----------------- ----------------- ----------------
Total Cash Costs
- -------------------------------------- ----------------- ----------------- ----------------- ----------------
Per pound payable zinc (US$) 0.36 0.32 0.35 0.44
- -------------------------------------- ----------------- ----------------- ----------------- ----------------
HUMAN RESOURCES
El Toqui currently has a workforce of 244 people consisting of 198 hourly
personnel and 46 staff personnel. Of the 244 personnel, 242 are at the minesite
and two are in the Santiago office. The El Toqui
48
employees are unionized with representation being provided by the "Sindicato de
Trabajadores de Sociedad Contractual Minera El Toqui". The collective agreement
will expire in October 2004.
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 being expanded in 2004 to accommodate an
additional 5 years of reserves. 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) 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
Toqui 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
material 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;
49
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.
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 2003 consisted of detailed surface geological
mapping in the Concordia and Dona Rosa areas and a 3,000 meter, 19 hole surface
diamond drill program.
Surface diamond drilling consisted of 19 widely spaced drill holes aimed at
targeting various soil geochemical anomalies between the Dona Rosa orebody and
Concordia. The results of this drilling program will form the basis of future
drilling campaigns in the Concordia area.
50
During 2003, 35 samples were submitted for petrography study. The results
from this study will help in understanding the skarn alteration pattern and the
gold placement event associated within the Toqui district and guide future
exploration efforts.
On a regional scale exploration was carried out at the Cerro Colorado and
La Leona properties, located 25 kilometers to the south of El Toqui. Work
consisted of geological mapping and a 60 sample stream sediment survey.
Additional work is warranted on both of these properties.
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.
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.
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.
51
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.
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.
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, SRK updated the 2001 feasibility
study in June 2003 and the results are addressed below.
52
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.
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.
53
CONVERSION OF MINERAL RESOURCES TO MINERAL RESERVES
The mineral reserves were calculated by converting the 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. Mr. Torben Jensen,
a qualified person, and an employee of the Company, supervised the preparation
of the mineral reserve and resource estimates.
LANGLOIS MINE, SUMMARY OF MINERAL RESOURCES AND MINERAL RESERVES
- ----------------------- ----------------------------------------------- --------------------------------------------
December 31, 2003 December 31, 2002
- ----------------------- ----------------------------------------------- --------------------------------------------
Tonnes Zinc Copper Silver Gold Tonnes Zinc Copper Silver Gold
(000s) (%) (%) g/t g/t (000s) (%) (%) g/t g/t
- ----------------------- ---------- ------- ---------- --------- ------- --------- ------ --------- -------- --------
Proven and Probable 3,323 10.8 0.8 52 0.1 2,903 11.2 0.7 53 0.1
Reserves
- ----------------------- ---------- ------- ---------- --------- ------- --------- ------ --------- -------- --------
Measured and 4,981 11.1 0.8 54 0.1
Indicated Resources(1) 4,862 11.0 0.7 53 0.1
- ----------------------- ---------- ------- ---------- --------- ------- --------- ------ --------- -------- --------
Inferred Resources 1,255 9.7 0.5 40 0.1 1,547 8.1 0.5 37 0.1
- ----------------------- ---------- ------- ---------- --------- ------- --------- ------ --------- -------- --------
(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 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
54
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 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
55
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 that covers an area of 1.88 square
kilometers and is located three kilometres from the mine site. The tailing
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
The Langlois mine was placed on care and maintenance in November 2000
pending the resolution of an ore pass problem and an improvement in the price of
zinc. A feasibility study to reopen the Langlois mine including a technical
resolution for the ore pass was completed by SRK in August 2001 (the "2001 SRK
Report"), following an extensive drilling program of Zone 97. The 2001 SRK
Report indicated a net pre-tax cash flow of $60.9 million based on a zinc price
of US$0.50 per pound, a copper price of US$0.80 per pound and a silver price of
US$5.00 per ounce. The internal rate of return was 24.0 per cent and the net
present value at 8.0 per cent was $26.4 million.
Prior to placing the mine on care and maintenance in November 2000, ore was
mined from two zones known as Zones 3 and 4. A third zone, Zone 97, had been
identified and mineral reserves and resources established by diamond drilling.
In April 2003, the Corporation completed an in-fill drill program of 28
holes (11,511 metres) to further delineate and upgrade mineral resources to
mineral reserves in Zone 97 at the Langlois mine. The results of the in-fill
drill program show a 25 per cent increase in mineral reserves in Zone 97, which
adds a further year's production to the expected life of the Langlois mine. In
total, the mineral reserves for Zone 97 increased by 419,600 tonnes at a grade
of 8.1 per cent zinc, 1.7 per cent copper, 46.9 grams of silver per tonne and
0.1 grams of gold per tonne. The mineral reserves and resources for Zones 3 and
4 have not changed.
Following the 2003 in-fill drill program, SRK updated the 2001 SRK report
in June 2003 (the "2003 SRK Report") to include the new mineral reserves in Zone
97. The 2003 SRK Report now estimates that the total net pre-tax cash flow will
be $71.1 million, based on the metal prices shown in the table set out below.
The internal rate of return has increased to 25.3 per cent, and the net present
value at 8.0 per cent has increased to $30.9 million.
The following table sets forth the metal prices and exchange rate used in
the 2003 SRK Report:
56
Zinc US$0.50/lb
Copper US$0.80/lb
Silver US$5.00/oz
Gold US$343/oz
Exchange Rate US$0.70/Cdn$
Based on these price assumptions, the 2003 SRK Report determined the
operating cost per pound of payable zinc including smelting, shipping and
by-product credits for copper and precious metals to be US$0.38.
It is estimated in the 2003 SRK report that $38.2 million in capital is
required over the life of the mine of which approximately $16.4 million must be
expended prior to the start of production at the Langlois mine. The aggregate
operating cost to mine gate is estimated at $55.61 per tonne milled over the
life of the Langlois mine.
When a long-term zinc price of US$0.45 per pound is assumed in the 2003 SRK
Report, the total net pre-tax cash flow decreases to $41.5 million, the internal
rate of return decreases to 15.2 per cent and the net present value at 8.0 per
cent decreases to $12.6 million. Based on this price assumption, the 2003 SRK
Report sets the operating cost per pound of payable zinc including smelting,
shipping and by-product credits for copper and precious metals at US$0.36.
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 2003 SRK Report incorporates several improvements to ensure reliability of
production and to control costs. These improvements include the elimination of
ore passes for Zone 97, a steel lined storage bin, improvements in the
underground mobile equipment, pre-development of several sublevels in Zone 97 to
allow production of higher grade ore continuously when mine operations resume
and improvements for the underground mobile equipment fleet.
The following table sets forth a summary of the estimated life of mine
production statistics set out in the 2003 SRK Report assuming the milling of
3,323,000 tonnes.
57
Head Grade
Zn (%) 10.8
Cu (%) 0.8
Au (g/t) 0.1
Ag (g/t) 52.1
Recoveries
Zn (%) 93.7
Cu (%) 82.3
Au (g/t) 29.0
Ag (g/t) 35.8
Concentrate Grade
Zn (%) 54.8
Cu (%) 23.9
Tonnes Concentrate
Zn (t) 612,000
Cu (t) 94,000
Contained Metal
Zn (t) 335,000
Cu (t) 22,7000
Au (oz) 2,600
Ag (oz) 1,991,000
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
58
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. 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.
59
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 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 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, 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 depressed metal prices, permanently closed the
Nanisivik mine in September 2002 and reclamation activities are ongoing.
HUMAN RESOURCES
The Company employs seven full time people at the Nanisivik mine, all of
whom work a rotation of eight weeks work at the site followed by four weeks of
vacation, although there are occasions when work requirements dictate modest
changes to individual schedules. Hourly-paid employees are represented by the
USWA and a four-year collective agreement signed in 2002 will expire on October
31, 2004.
ENVIRONMENTAL MANAGEMENT AND PERMITTING
The operating license for the Nanisivik mine is an industrial water license
issued by the Nunavut Water Board ("NWB") and enforced 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. It is
expected that all reclamation work and post-closure monitoring will be completed
within the current license period, although the duration of the post-closure
monitoring period has not yet been decided by the NWB. Future activities at the
site will comprise mine decommissioning and reclamation.
60
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 August 2003 by an independent consulting firm. No significant
stability issues were identified during the annual inspection.
Nanisivik submitted its initial closure and reclamation plan in February
2002 and received comments by the NWB as well as other regulators involved,
principally DIAND and the Government of Nunavut (the "GN"). In response to the
observations made and issues raised by these agencies, the Company further
refined its closure plan and the final closure and reclamation plan was filed
with the NWB in February 2004. During that intervening period, there were a
number of technical and procedural meetings held with the regulators in an
ongoing effort to resolve as many technical issues as possible, in preparation
for a second public meeting to be held in Arctic Bay. Those technical and
procedural meetings culminated in a final technical meeting convened in
Yellowknife, Northwest Territories on May 4 and 5, 2004 and a pre-hearing
meeting to resolve any procedural matters on May 6, 2004 also in Yellowknife.
The public hearing has now been set for June 2 to 5, 2004 in the Hamlet of
Arctic Bay.
As permitted by the regulators, certain reclamation activities were
initiated in 2002 and have been ongoing using internal resources only.
Despite the changes that have been made to the closure and reclamation
plan, the underlying goals have remained the same, as follows.
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
that are marketable or can be transferred to other BWR operations.
Dispose of all remaining non-hazardous materials in the underground
workings.
o Monitor the site for the duration prescribed by the NWB, following
closure.
61
Under the terms of the present water license, CanZinco is required to post
security for reclamation in an aggregate amount of $17.6 million. The Company's
original estimate of the financial commitment to complete the remaining
reclamation work was approximately $9.2 million. The Company submitted a revised
estimate of closure costs in March 2004 which estimates the costs to be $9.9
million. The majority of the increase is attributable to increased volume of
material required to cover the tailing ponds. Once reclamation of the site has
been completed, the Company does not anticipate a requirement for water
treatment at the site.
The NWB estimate of the closure costs does not take into consideration the
salvage value of the assets remaining at Nanisivik, all of which are being
reviewed for possible sale or transfer. In 2003 an agreement was reached with
Wolfden Resources Inc. ("Wolfden") whereby Wolfden will acquire certain assets,
including the contents of the industrial complex (principally the mill
processing equipment), four electrical generators, the concentrate storage
facility and the ship loading equipment. In return, Wolfden will clean up the
industrial complex, the concentrate storage facility and ship loading areas to
the satisfaction of CanZinco and the regulators. Wolfden plans to have a crew on
site during the summer of 2004 to commence the dismantling work. Wolfden has
provided a $2 million letter of credit to the Company to secure the performance
of its obligations.
Further, the NWB estimate does not take into consideration the value of
equipment and supplies purchased and currently located at Nanisivik and
earmarked for the reclamation for the reclamation, and the considerable amount
of reclamation work completed prior to and following the closure of the mine in
2002 and 2003.
Of the amount of financial security mandated by the NWB ($17.6 million), $5
million was previously posted pursuant to the expired water license in the form
of a surety bond. The bond expired in July 2003 as scheduled and was not
replaced. Discussions regarding the final amount and the form of the financial
security are ongoing with DIAND.
CanZinco asked the DIAND Minister to consider the process by which the
financial security was determined and the amount 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 judicial review
of the Minister's decision not to consider the matter. Discussions are ongoing
regarding the DIAND Minister's decision not to consider the matter, and the
Company has sent a letter to the new DIAND Minister suggesting a compromise. The
Federal Court has assigned a court date of June 22, 2004 for the judicial review
of the Minister's decision.
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.
62
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 the
revenue all the operating, administration, depreciation, amortization and
interest costs, including all costs incurred in prior years.
The Caribou open pit mine (formerly known as the Restigouche 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 economically justify construction of its
own processing plant. The Caribou open pit 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.
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 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.
63
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 intersected by two diabase dykes of Devonian age, one in the
centre of the deposit and one diabase dyke 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.
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 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.
64
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.
RESERVES AND RESOURCES
INTRODUCTION
The mineral resources and mineral reserves for the Caribou mine include the
Caribou underground and open pit deposit. Both deposits have been mined on
several occasions. 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.
The mineral resources for the Caribou mine 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, 2003 December 31, 2002
- -------------------------------- ---------------------------------------- -----------------------------------------
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)
- -------------------------------- ---------- --------- -------- ---------- ---------- --------- --------- ----------
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.
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 Caribou 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
65
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.
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.
The Company has recently reviewed the re-opening plan. Taking current metal
prices and exchange rates into consideration, the Company is evaluating the
value of the property either as a stand-alone producer of base metals, or as
satellite feed sources for another producer. The Company has not yet reached any
conclusions with respect to this property, although various alternatives are
currently being explored.
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.
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
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.
66
From a 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. The
use of high level process control equipment and practices to ensure that all
critical grinding and flotation parameters identified in the 2000 Study are
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. 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.
Ore will be ground in a 6,700 millimetre diameter SAG mill with 1,500kW
connected power. SAG mill discharge will be sized with the plus 20 mesh portion
being returned to the SAG mill. The minus 20 mesh portion will receive further
grinding in a 4,267 millimetre diameter ball mill in a closed circuit with a
cluster of cyclones. Final grind will be approximately 80 percent minus 30
microns.
Following aeration, the cyclone overflow will be directed to lead rougher
cells and a combination of scavenger cells where the lead rougher/scavenger
concentrate will be produced. This concentrate will be reground and then cleaned
in a bank of flotation cells.
Subsequent lead processing includes a series of scavenger cells, four
stages of cleaner flotation and two additional regrind stages.
The copper separation feed, following sodium dioxide conditioning, will be
directed to the flotation circuit to produce a saleable copper concentrate and a
tailing product that will be discharged to final tailings.
The final lead and copper concentrates will be thickened and stored in a
stock tank for storage and subsequent dewatering using the lead filter.
The lead tailings will feed the zinc circuit. After conditioning, the zinc
rougher scavenger concentrates will be floated and these concentrates will be
reground and then subjected to high intensity conditioning prior to flotation.
The flotation 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.
67
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 five employees located at Caribou keeping the operation
under care and maintenance, and, in some cases, dealing with financial and
administrative matters arising from CanZinco's operation.
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 for operating 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 the 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
68
one year. Consequently, much of the geochemically problematic waste rock and
tailings remain on surface. An older, smaller tailing 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.
The closure plan is not clear on 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 is
limited to $3 million. The Province of New Brunswick is responsible for
liabilities exceeding $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 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 Caribou open pit 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
Caribou 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 Caribou open pit appears to be
reasonable. If the development of the pit and the
69
storage of waste rock was implemented as described in the closure plan, there is
unlikely to be any water quality treatment requirements.
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 Caribou 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. 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, with contained copper,
cadmium and lead. The concentrate was delivered to and accepted for sale by
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 received all necessary 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.
The water treatment project was suspended in late 2002 and the minewater
was diverted to fill the underground workings. Water treatment recommenced in
April 2004.
In the first quarter of 2004, CanZinco reached an agreement with Bioteq for
mine dewatering, water collection and water treatment services, as well as
general site management. The agreement with Bioteq is for a period of six years
and replaces various earlier agreements between the parties. The agreement is
conditional upon a three-month transition period that is currently underway,
following which the parties will finalize a definitive operating agreement.
A fixed annual fee will be charged for water treatment and site management,
subject to adjustments for variable commodity price changes and process
variations. An additional fee for re-treatment of tailings, stored at the
Caribou site by a previous operator will be charged, which will commence at
CanZinco's option. It is anticipated that tailings re-treatment will commence in
2005. Bioteq plans to modify the biological reduction plant during 2004 to
continue treatment of the mine drainage and to also retreat the Anaconda
tailings stored at the Caribou site. All metals recovered in the Bioteq plant
are the property of Bioteq.
Exploration Properties
The Company owns base and precious metal exploration properties in Canada,
Honduras, Chile and Tunisia.
70
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. constitutes management's review of the
factors that affected the Company's financial and operating performance in 2003
and factors reasonably expected to impact on future operations and results.
OVERVIEW
Breakwater Resources Ltd. (the "Company") is an exploration, development
and mining company with operations in Canada, Honduras, Chile and Tunisia. The
Company produces and sells zinc, lead and copper concentrates to customers
around the world. All of the Company's Gross sales revenue is transacted in US
dollars. In 2003 and 2002, approximately 82 percent of Gross sales revenue was
derived from the sale of zinc metal in concentrates with the balance from lead,
copper, gold and silver metals in concentrates. In 2004, the sale of zinc metal
in concentrates, from currently owned operations, is expected to account for
approximately 80 percent of Gross sales revenue.
Since 1994 production has generally increased through the acquisition of
operating mines but also from production improvements and efficiencies. The low
metal price cycle of the last two to three years and the Company's debt burden
have prevented continued growth. This has now been resolved and the Company
intends to return to its growth strategy through acquisitions and development of
existing assets.
For the year ended December 31, 2003, the Company realized Net Earnings of
$7.1 million ($0.03 per share) compared with Net Losses in the years 2002 and
2001 of $19.9 million ($0.12 per share) and $111.1 million ($0.92 per share)
respectively. The loss in 2001 included non-cash write-downs of mineral
properties and fixed assets of $70.3 million.
The following are the notable details related to the Net Earnings of 2003
compared with the Net Loss of 2002:
o Gross sales revenue decreased by 32 percent due mainly to the closure
of the Nanisivik mine in September 2002 and the effect of the stronger
Canadian dollar.
o General and administrative costs were reduced by $1.1 million due to
lower capital taxes, lower office costs and a one-time compensation expense
of $0.6 million incurred in 2002.
o Interest and financing costs decreased by $1.4 million due to reduced
debt levels following the partial repayment of debt and lower interest
rates.
o Foreign exchange gain on US dollar denominated debt rose by $10.9
million, $4.4 million of this gain was realized on the repayment of US$17.1
million of the bank debt in July and December.
o Other non-producing property costs decreased by $9.3 million largely
as a result of the gain on the sale of the Lapa properties of $10.3 million
in June of 2003.
The year ended December 31, 2003, saw a marked improvement in the US dollar
zinc price from the 2002 record low. The zinc price closed at the end of 2003 at
US$1,008 per tonne compared with US$750 at the end of 2002, averaging US$828 per
tonne for the year compared with US$779 for 2002. However, the stronger Canadian
dollar offset the benefit of the improved average US dollar metal price. The
average Canadian dollar price of zinc in 2003 was $1,161 per tonne compared with
$1,220 per tonne in 2002 based on an average Canadian/US dollar exchange rate of
1.4004 versus 1.5701. All metal prices closed significantly higher at the end of
2003 compared with the end of 2002 and are expected to remain at these levels or
higher in 2004.
71
In November 2003, the Company received net proceeds of approximately $28.0
million on the issuance of 85.8 million Common Shares pursuant to a subscription
receipt offer in October. A portion of these funds was used to repay part of the
bank debt as more completely described later in this document.
- ---------------------------------- ------------------
Use of Proceeds ($ millions)
- ---------------------------------- ------------------
- ---------------------------------- ------------------
Bank Debt Repayment 15.7
- ---------------------------------- ------------------
Working Capital 12.3
- ---------------------------------- ------------------
Net Proceeds 28.0
- ---------------------------------- ------------------
Total debt was substantially lower at the end of 2003 at $25.8 million
compared with $78.7 million at the end of 2002. During 2003, US$17.1 million was
repaid against the Non-Revolving Facility and the Supplementary Term Facility,
(combined as the "Non-Revolving Facility"). The revolver component of the Credit
Facility (the "Revolver") was paid down from US$16.0 million to US$5.0 million,
and the stronger Canadian dollar reduced the carrying value of the balance of
the US dollar denominated debt.
The Company's Credit Facility, which was repayable in full on January 2,
2004, was renegotiated in November 2003. Under this amended agreement the term
of the Non-Revolving Facility was extended to January 2, 2009 and requires 54
equal monthly principal payments starting in July 2004. The Revolver was
extended to January 2, 2005 and is subject to annual review. The amount
available under the Revolver was reduced from US$30.0 million to US$25.0
million.
On January 28, 2004, the Company completed the sale of 57,142,858 units for
net proceeds of $37.3 million. Each unit consisted of one Common Share and
one-half of one Common Share purchase warrant. Each whole warrant entitles the
holder to acquire one Common Share at a price of $1.00 at any time until January
28, 2009. The Company used $16.0 million of the proceeds to retire the
Non-Revolving Facility, $16.4 million of the proceeds will be used to start the
development of the Langlois mine and the balance for working capital and general
corporate purposes.
- -------------------------------------------------------- ------------
Use of Proceeds ($ millions)
- -------------------------------------------------------- ------------
- -------------------------------------------------------- ------------
Bank Debt Repayment 16.0
- -------------------------------------------------------- ------------
Langlois Development 16.4
- -------------------------------------------------------- ------------
Working Capital and General Corporate Purposes 4.9
- -------------------------------------------------------- ------------
Net Proceeds 37.3
- -------------------------------------------------------- ------------
On February 16, 2004, the Company signed a letter of intent with Boliden AB
to purchase all the outstanding shares of Boliden Westmin (Canada) Limited
("BWCL"). BWCL is the owner of the Myra Falls mine in British Columbia. The
acquisition of BWCL will be exclusive of the Premier Gold property and certain
other assets and liabilities. The general terms of the proposed acquisition
include the Company issuing 18 million Common Shares and 5 million warrants,
exercisable at $1.00 per Common Share until January 28, 2009. Subject to final
due diligence, the acquisition is expected to close early in the second quarter
of 2004.
The Myra Falls mine produces zinc and copper concentrates containing
significant gold and silver as well as a gold-bearing gravity concentrate. The
operation consists of a 1.25 million tonne per annum underground mine and
processing facility, and associated infrastructure including a storage and load
out terminal in the community of Campbell River, BC. In 2003, Myra Falls
produced 57,400 tonnes of zinc, 10,700 tonnes of copper, 27,300 ounces of gold
and 720,900 ounces of silver.
72
OUTLOOK
The Company's earnings and cash flow have historically, in a very large
part, been determined by the zinc metal price. However, with the planned
acquisition of BWCL and its principal asset, the Myra Falls mine, sales revenue
from copper, gold and silver will be a higher percentage of Gross sales revenue
and lessen our dependence on one metal.
While the past three years have been challenging due to depressed metal
prices, the commodity markets turned for the better during the last few months
of 2003 and are forecast to be very strong for 2004 and onward. Continued strong
Chinese consumption, in conjunction with increasing demand in the rest of the
world, has improved both market fundamentals and sentiment. Although zinc metal
inventories remain relatively high, they have begun to decline and appear to be
following the trends of other base metals, including copper and lead.
As a result of the improved metals markets and two successful financings,
the Company can now return to a growth mode. The injection of new equity allowed
the Company to retire its Non-Revolving Facility and add working capital and,
combined with the improved metal prices, should support the improved financial
performance of the Company and underpin its ability to grow.
Looking ahead, the Company has several opportunities for currently owned
projects. These include the completion of the expansion at the El Toqui mine and
the reopening of the Langlois mine which will replace the declining production
due to the expected closure of the Bouchard-Hebert and Bougrine mines in 2005.
The Company also plans to expand its exploration programs in and around all of
its mines, and pursue an industrial mineral opportunity in Tunisia. In terms of
acquisitions, the Company is working toward the prompt finalization of the
purchase of BWCL and its Myra Falls mine and continues to pursue additional
opportunities in the base metal sector.
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 ten global zinc concentrate
producers, and the base metal sector in general.
SELECTED ANNUAL INFORMATION
The consolidated financial statements of the Company have been prepared in
accordance with Canadian generally accepted accounting principles. The reporting
currency is Canadian dollars.
73
OPERATIONS Years ended December 31,
-------------------------------------------------------------
2003 2002 2001
---------------- ----------------------- ------------------
($000's except for per share numbers, ratios and weights)
Tonnes of Concentrate Sold
(Zinc, Copper and Lead) 378,164 523,330 505,521
Gross Sales Revenue 207,591 305,354 304,037
Treatment and Marketing Costs 83,581 136,738 142,236
Net Sales Revenue 124,010 168,616 161,801
Total Operating Costs 129,631 178,112 185,293
Loss from Mining Activities (5,621) (9,496) (23,492)
Net Earnings (Loss) 7,118 (19,887) (111,058)
Earnings (Loss) per Common Share 0.03 (0.12) (0.92)
Diluted Earnings per Common Share 0.03 N/A N/A
Cash Provided by (used for)
Operating Activities(1) 14,708 8,647 (9,361)
Capital Expenditures 10,621 10,971 21,662
Weighted-Average Number of
Common Shares Outstanding
After Bonus Element 211,411 169,074 120,166
Number of Common Shares Outstanding 285,790 193,281 93,848
(1) Before changes in non-cash working capital items.
BALANCE SHEET As at December 31,
-------------------------------------------------------------
2003 2002 2001
---------------- ----------------------- ------------------
Working Capital 36,147 22,284 5,048
Total Assets 175,635 223,380 251,569
Total Debt 25,846 78,665 80,406
Total Long-Term Liabilities 29,889 62,957 62,084
Shareholders' Equity (Net Assets) 113,699 95,596 98,576
Net Debt to Net Debt plus Equity 15% 43% 44%
Book Value per Common Share 0.40 0.49 1.05
Capital Stock 287,743 257,759 239,214
Cash Dividends per Common Share 0.00 0.00 0.00
SENSITIVITY TO METAL PRICES
The Company's earnings, cash flows and common share price are highly
sensitive to the price of zinc. The following table sets forth the average LME
cash prices for zinc, copper and lead, the London PM fix for gold and silver,
and the US$/C$ exchange rates for 2003, 2002 and 2001.
- --------------------------------------------- ------------------- -------------------- -------------------
Metal Prices 2003 2002 2001
- --------------------------------------------- ------------------- -------------------- -------------------
Zinc (US$/pound) 0.38 0.35 0.40
- --------------------------------------------- ------------------- -------------------- -------------------
Lead (US$/pound) 0.23 0.21 0.22
- --------------------------------------------- ------------------- -------------------- -------------------
Copper (US$/pound) 0.81 0.71 0.72
- --------------------------------------------- ------------------- -------------------- -------------------
Gold (US$/ounce) 364 310 271
- --------------------------------------------- ------------------- -------------------- -------------------
Silver (US$/ounce) 4.88 4.60 4.37
- --------------------------------------------- ------------------- -------------------- -------------------
Exchange rate (US$1.00/Cdn$) yearly average 1.4004 1.5701 1.5490
- --------------------------------------------- ------------------- -------------------- -------------------
74
The following table illustrates the sensitivity of earnings and cash flows
to changes in metal prices and in the US$/C$ exchange rate based on production
estimates for 2004, and on a US$/C$ exchange rate of $0.75/$1.00.
- --------------------------------------------------------- ----------------------
SENSITIVITIES (CDN$ THOUSANDS)
- --------------------------------------------------------- ----------------------
Zinc (US$0.01/pound) 3,010
- --------------------------------------------------------- ----------------------
Lead (US$0.01/pound) 315
- --------------------------------------------------------- ----------------------
Copper (US$0.01/pound) 72
- --------------------------------------------------------- ----------------------
Silver (US$0.10/ounce) 174
- --------------------------------------------------------- ----------------------
Gold (US$10.00/ounce) 436
- --------------------------------------------------------- ----------------------
Exchange rate (US$0.01/Cdn$)* 763
- --------------------------------------------------------- ----------------------
*WHEN THE CANADIAN DOLLAR WEAKENS AGAINST THE US DOLLAR EARNINGS WOULD INCREASE.
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. Treatment charges
vary according to the world demand for concentrates. In 2004, there should
continue to be downward pressure on zinc concentrate treatment charges as the
world zinc smelting capacity continues to exceed mine production. It is expected
that the overall demand for zinc concentrates should remain strong in 2004.
The following table outlines the sensitivity to changes in the average
treatment charges based on production estimates for 2004 and is based on a
US$/C$ exchange rate of $0.75/$1.00.
- --------------------------------------------------------------------- ------------------------
SENSITIVITIES (CDN$ THOUSANDS)
- --------------------------------------------------------------------- ------------------------
Zinc concentrate (US$5.00 per tonne) 1,973
- --------------------------------------------------------------------- ------------------------
Lead concentrate (US$5.00 per tonne) 154
- --------------------------------------------------------------------- ------------------------
Copper concentrate (TC US$10.00 per tonne, RC US$0.01 per pound) 313
- --------------------------------------------------------------------- ------------------------
STATEMENT OF OPERATIONS REVIEW - 2003 AND 2002
GROSS SALES REVENUE
Sales of zinc, lead and copper concentrate decreased by 28 percent in 2003
from 2002 (378,164 tonnes compared with 523,330 tonnes).
- ----------------------------------------------------- ------------------- --------------------
SALES BY METAL IN CONCENTRATE 2003 2002
- ----------------------------------------------------- ------------------- --------------------
Zinc - tonnes 149,850 206,631
- ----------------------------------------------------- ------------------- --------------------
Lead - tonnes 11,533 17,977
- ----------------------------------------------------- ------------------- --------------------
Copper - tonnes 3,909 5,447
- ----------------------------------------------------- ------------------- --------------------
Gold - ounces 22,952 25,364
- ----------------------------------------------------- ------------------- --------------------
Silver - ounces 1,328,903 2,226,474
- ----------------------------------------------------- ------------------- --------------------
75
Gross sales revenue decreased by $97.8 million due to less concentrate
available for sale, mainly resulting from the closure of the Nanisivik mine in
September 2002, ($75.3 million) and the stronger Canadian dollar ($22.5
million).
- ------------------------------------------------------------- ------------------- --------------------
GROSS SALES REVENUE BY METAL ($ THOUSANDS) 2003 2002
- ------------------------------------------------------------- ------------------- --------------------
Zinc (US) 120,547 160,223
- ------------------------------------------------------------- ------------------- --------------------
Lead (US) 5,403 8,397
- ------------------------------------------------------------- ------------------- --------------------
Copper (US) 6,905 8,688
- ------------------------------------------------------------- ------------------- --------------------
Gold (US) 8,109 7,781
- ------------------------------------------------------------- ------------------- --------------------
Silver (US) 6,106 10,111
- ------------------------------------------------------------- ------------------- --------------------
Total Gross sales revenue (US) 147,070 195,200
- ------------------------------------------------------------- ------------------- --------------------
Realized exchange rate 1.4115 1.5643
- ------------------------------------------------------------- ------------------- --------------------
Total Gross sales revenue (Cdn) 207,591 305,354
- ------------------------------------------------------------- ------------------- --------------------
The Company periodically hedges against fluctuations in metal prices and
foreign exchange with the use of various financial instruments (forward sales or
options). At the end of 2003, the mark-to-market of the liability inherent in
these instruments was $0.3 million compared with $0.7 million in 2002. These
amounts are included in Gross sales revenue.
NET REVENUE
Net revenue, the value of concentrates sold after deducting treatment
charges, freight and marketing costs, decreased by 26 percent to $124.0 million
in 2003 from $168.6 million in 2002. Treatment charges, the amount paid to
smelters for refining concentrates to produce metal, and shipping and marketing
costs decreased by 39 percent to $83.6 million in 2003 from $136.7 million in
2002. Treatment charges, shipping and marketing expenses were $220 per tonne of
concentrate sold in 2003 compared with $263 per tonne in 2002. This improvement
was due to the tightness of the zinc concentrate market globally, which allowed
the Company to secure lower smelter treatment charges, and the stronger Canadian
dollar, as these costs are denominated in US dollars.
OPERATING COSTS
Direct operating costs were $103.2 million in 2003 compared with $147.7
million in 2002, 30 percent lower. Concentrate sold in 2003 was 378,164 tonnes
compared with 523,330 tonnes in 2002 due primarily to the closure of the
Nanisivik mine in 2002.
- -------------------------------------------------- --------------- -------------
DIRECT OPERATING COSTS ($ MILLIONS) 2003 2002
- -------------------------------------------------- --------------- -------------
Bouchard-Hebert 38.9 36.9
- -------------------------------------------------- --------------- -------------
Nanisivik 5.9 34.5
- -------------------------------------------------- --------------- -------------
Bougrine 17.9 22.9
- -------------------------------------------------- --------------- -------------
El Mochito 23.9 34.2
- -------------------------------------------------- --------------- -------------
El Toqui 16.6 19.2
- -------------------------------------------------- --------------- -------------
Total 103.2 147.7
- -------------------------------------------------- --------------- -------------
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 at an average LME zinc price of US$0.38 in 2003.
This compares with US$0.32 at an average LME zinc price of US$0.35 in 2002.
(See non-GAAP reconciliation of the total cash cost per pound of payable zinc
below).
76
NON GAAP RECONCILIATIONS
- ---------------------------------------------------------------------------------- ---------------- ------------------
NON GAAP RECONCILIATION OF TOTAL CASH COST PER POUND OF PAYABLE ZINC TO
CONSOLIDATED FINANCIAL STATEMENTS 2003 2002
- ---------------------------------------------------------------------------------- ---------------- ------------------
By-Product Credit ($ millions)
- ---------------------------------------------------------------------------------- ---------------- ------------------
Gross sales revenue per financial statements 207.6 305.4
- ---------------------------------------------------------------------------------- ---------------- ------------------
Less zinc sales revenue (162.4) (224.1)
- ---------------------------------------------------------------------------------- ---------------- ------------------
Inventory adjustment (1.6) (32.9)
- ---------------------------------------------------------------------------------- ================ ==================
43.6 48.4
- ---------------------------------------------------------------------------------- ================ ==================
- ---------------------------------------------------------------------------------- ---------------- ------------------
Treatments Charges ($ millions)
- ---------------------------------------------------------------------------------- ---------------- ------------------
Per financial statements 83.6 136.7
- ---------------------------------------------------------------------------------- ---------------- ------------------
Inventory adjustment (5.8) (16.6)
- ---------------------------------------------------------------------------------- ================ ==================
77.8 120.1
- ---------------------------------------------------------------------------------- ================ ==================
- ---------------------------------------------------------------------------------- ---------------- ------------------
Direct operating costs ($ millions)
- ---------------------------------------------------------------------------------- ---------------- ------------------
Per financial statements 103.2 147.7
- ---------------------------------------------------------------------------------- ---------------- ------------------
Inventory adjustment (0.7) (16.3)
- ---------------------------------------------------------------------------------- ================ ==================
102.5 131.4
- ---------------------------------------------------------------------------------- ================ ==================
Total Cash Costs - Canadian ($ millions) 136.7 203.1
- ---------------------------------------------------------------------------------- ---------------- ------------------
- ---------------------------------------------------------------------------------- ---------------- ------------------
Exchange rate C$/US$ 1.4004 1.5701
- ---------------------------------------------------------------------------------- ---------------- ------------------
- ---------------------------------------------------------------------------------- ---------------- ------------------
Total Cash Costs - US ($ millions) 97.6 129.4
- ---------------------------------------------------------------------------------- ---------------- ------------------
- ---------------------------------------------------------------------------------- ---------------- ------------------
Zinc pounds produced (millions) 307.4 405.5
- ---------------------------------------------------------------------------------- ---------------- ------------------
Total Cash Costs per pound of payable zinc (US$) 0.32 0.32
- ---------------------------------------------------------------------------------- ---------------- ------------------
- ---------------------------------------------------------------------------------- ---------------- ------------------
RECONCILIATION OF MINESITE OPERATING CASH COSTS PER TONNE MILLED TO CONSOLIDATED
FINANCIAL STATEMENTS 2003 2002
- ---------------------------------------------------------------------------------- ---------------- ------------------
Direct operating costs ($ millions)
- ---------------------------------------------------------------------------------- ---------------- ------------------
Per finacial statements 103.2 147.7
- ---------------------------------------------------------------------------------- ---------------- ------------------
Inventory adjustment (0.7) (16.3)
- ---------------------------------------------------------------------------------- ================ ==================
Minesite Operating Cash Costs - Canadian ($ millions) 102.5 131.4
- ---------------------------------------------------------------------------------- ================ ==================
- ---------------------------------------------------------------------------------- ---------------- ------------------
Exchange rate C$/US$ 1.4004 1.5701
- ---------------------------------------------------------------------------------- ---------------- ------------------
- ---------------------------------------------------------------------------------- ---------------- ------------------
Minesite Operating Cash Costs - US ($ millions) 73.2 83.7
- ---------------------------------------------------------------------------------- ---------------- ------------------
- ---------------------------------------------------------------------------------- ---------------- ------------------
Tonnes milled (millions) 2.6 3.1
- ---------------------------------------------------------------------------------- ---------------- ------------------
Minesite Operating Cash Costs per tonne milled (US$) 28.31 27.18
- ---------------------------------------------------------------------------------- ---------------- ------------------
Total Cash Costs per Pound of Payable Zinc and Minesite Operating Cash
Costs per Tonne Milled are furnished to provide additional information and are
non-GAAP measures. These measures should not be considered in isolation as a
substitute for measures of performance prepared in accordance with generally
accepted accounting principles and are not necessarily indicative of operating
expenses as determined under generally accepted accounting principles. These
measures intend to provide investors with information about the cash generating
capabilities of the Company's mining operations. The Company uses this
information for the same purpose. Mining operations are capital intensive. These
measures
77
exclude capital expenditures. Capital expenditures are discussed throughout the
MD&A and the consolidated financial statements.
OTHER (INCOME) EXPENSES
Other (Income) Expenses, was an income of $3.8 million in 2003 compared
with an expense of $9.7 million in 2002. General and administrative expenses
decreased by $1.1 million due to lower capital taxes, lower general office
expenses and a one-time compensation expense of $0.6 million incurred in 2002.
Interest and financing expense decreased by $1.4 million due to the reduction in
debt during the year and a lower average LIBOR rate of 1.17 percent in 2003
compared with 1.80 percent in 2002. The foreign exchange gain resulting from
having debt denominated in US dollars increased to $11.6 million in 2003 from
$0.7 million in 2002. The carrying value of the US dollar debt is measured at
the end of each period. In 2003, the Canadian dollar strengthened significantly
against the US dollar from 1.5926 at the end of 2002 to 1.2924 at the end of
2003. A total of $4.4 million of the foreign exchange gain was realized when
US$5.0 million and US$12.1 million of the Non-Revolving Facility were repaid in
July 2003 and December 2003 respectively.
- -------------------------------------------------------------- ----------------- ----------------
OTHER (INCOME) EXPENSES ($ millions) 2003 2002
- -------------------------------------------------------------- ----------------- ----------------
General and administrative 5.1 6.2
- -------------------------------------------------------------- ----------------- ----------------
Interest and financing 3.3 4.8
- -------------------------------------------------------------- ----------------- ----------------
Investment and other income (0.6) (0.6)
- -------------------------------------------------------------- ----------------- ----------------
Foreign exchange (gain) on US dollar denominated debt (11.6) (0.7)
- -------------------------------------------------------------- ----------------- ----------------
TOTAL OTHER (INCOME) EXPENSES (3.8) 9.7
- -------------------------------------------------------------- ----------------- ----------------
Write-down of mineral property and fixed assets 0.3 0.0
- -------------------------------------------------------------- ----------------- ----------------
Other non-producing property (income) costs (8.4) 0.9
- -------------------------------------------------------------- ----------------- ----------------
Income and mining taxes (recovery) (0.8) (0.2)
- -------------------------------------------------------------- ----------------- ----------------
TOTAL (INCOME) EXPENSE (12.7) 10.4
- -------------------------------------------------------------- ----------------- ----------------
OTHER NON-PRODUCING PROPERTY (INCOME) COSTS
The activities related to Other non-producing properties generated income
of $8.4 million in 2003, primarily as a result of the sale of the Lapa
properties in June for $10.6 million. This compares with a cost in 2002 of $0.9
million. Other non-producing property (income) costs include care and
maintenance costs for the Caribou, Langlois and Nanisivik properties,
exploration costs and revenues received from optioned or sold properties.
78
CASH PROVIDED FROM OPERATING ACTIVITIES (BEFORE CHANGES IN NON-CASH WORKING
CAPITAL ITEMS)
- 2003 and 2002
Cash Provided from Operating Activities (before changes in non-cash working
capital items) was $14.7 million in 2003 compared with $8.6 million in 2002.
- ------------------------------------------------------------------------ ---------------- ---------------
($ millions) 2003 2002
- ------------------------------------------------------------------------ ---------------- ---------------
Loss from mining activities 5.6 9.5
- ------------------------------------------------------------------------ ---------------- ---------------
Other (income) expenses (3.8) 9.7
- ------------------------------------------------------------------------ ---------------- ---------------
Other non-producing property (income) costs* (8.4) 0.9
- ------------------------------------------------------------------------ ---------------- ---------------
Income and mining taxes (recovery) (0.8) (0.2)
- ------------------------------------------------------------------------ ---------------- ---------------
Earnings (loss) before asset valuation adjustments 7.4 (19.9)
- ------------------------------------------------------------------------ ---------------- ---------------
Write-down of properties 0.3 0.0
- ------------------------------------------------------------------------ ---------------- ---------------
Net earnings (loss) 7.1 (19.9)
- ------------------------------------------------------------------------ ---------------- ---------------
Reclamation expenditures (4.6) (5.1)
- ------------------------------------------------------------------------ ---------------- ---------------
Non-cash expenses 12.2 33.6
- ------------------------------------------------------------------------ ---------------- ---------------
Cash Provided from Operating Activities (before changes in non-cash 14.7 8.6
working capital items)
- ------------------------------------------------------------------------ ---------------- ---------------
*Other non-producing property (income) costs include the proceeds from the sale of the Lapa properties
in 2003.
Cash Provided from Operating Activities (before changes in non-cash working
capital items) is furnished to provide additional information and is a non-GAAP
measure. This measure should not be considered in isolation as a substitute for
measures of performance prepared in accordance with generally accepted
accounting principles and is not necessarily indicative of cash flow as
determined under generally accepted accounting principles. This measure is
intended to provide investors with information about the cash generating
capabilities of the Company's mining operations. The Company uses this
information for the same purpose.
LIQUIDITY AND FINANCIAL POSITION REVIEW
WORKING CAPITAL
Cash and cash equivalents were $6.4 million at the end of 2003, the same as
at the end of 2002. This amount represents the normal working cash balance,
which is maintained by varying the amount drawn under the Revolver. Working
capital at the end of 2003 was $36.1 million compared with $22.3 million at the
end of 2002. The improvement in working capital was directly related to improved
Cash Provided from Operating Activities ($17.9 million), the completion of the
Common Share issue in November for net proceeds of ($28.0 million) and the funds
received ($10.6 million) from the sale of the Lapa properties.
The current working capital position and the expected cash flows from
operations at the current metal prices and foreign exchange rates will be
sufficient to fund all debt obligations and planned capital expenditures in
2004. Tables earlier in this section show the approximate sensitivity of the
Company's earnings and cash flows to variations in metal prices, the US/Canadian
dollar exchange rate and treatment charges, based on current plans for 2004 and
assuming the changes were to remain in effect for the full year. Capital
expenditures were $10.6 million in 2003 compared with $11.0 million in 2002. For
2004 capital expenditures are forecast to be $15.4 million.
CURRENT ASSETS
Current assets decreased to $68.2 million in 2003 from $87.1 million at the
end of 2002. The largest component of the reduction came from reduced Accounts
receivable - concentrate ($9.6 million). This was due to the closure of the
Nanisivik mine, the timing of the shipments of concentrate from the various mine
sites and the effect of the stronger Canadian dollar on the US dollar based
amounts. The closure of the Nanisivik mine and the effect of the stronger
Canadian dollar also contributed to reduce Supplies inventory by $5.2 million.
It is expected that a future tax asset of $1.2 million will be realized in 2004.
79
CURRENT LIABILITIES
Current liabilities decreased to $32.0 million at the end of 2003, from
$64.8 million at the end of 2002. Of this decrease, Accounts payable and accrued
liabilities and Short-term debt including current portion of long-term debt were
lower by $6.1 million and $19.9 million respectively. Provisional payments for
concentrate inventory shipped but not priced decreased by $6.6 million. These
provisional payments represent contractual payments from customers for
concentrates shipped but not yet recognized as sales pending pricing.
LONG-TERM LIABILITIES
A Deferred Royalty of $1.3 million was setup in 2003 for the advance of a
non-refundable royalty payment (US$1.0 million) received on the sale of the Lapa
properties in June. This amount will be taken into revenue when the royalty is
earned as per the sale agreement.
Long-term debt at the end of 2003 was $15.5 million compared with $48.4
million at the end of 2002. The reduction reflects the repayments of US$5.0
million ($6.9 million) and US$12.1 million ($15.7 million) in July and December
respectively, the reclassification of a portion of the Non-Revolving Facility
($1.7 million) to current liabilities and the balance due to the effect of the
stronger Canadian dollar when translating US dollar denominated debt.
Reclamation and closure cost accruals decreased by $1.6 million in 2003 due
to $2.5 million of actual expenditures at the Nanisivik mine partially offset by
additional accruals set up for the other mines.
- --------------------------------------- ---------------------------------------------------------------------------
PAYMENTS DUE BY PERIOD
- --------------------------------------- ---------------------------------------------------------------------------
CONTRACTUAL OBLIGATIONS
($ THOUSANDS) TOTAL < 1 YEAR 1-3 YEARS 4-5 YEARS 5 YEARS
- --------------------------------------- ------------- --------------- -------------- -------------- ---------------
Long-term Debt* 1,657 0 1,657 0 0
- --------------------------------------- ------------- --------------- -------------- -------------- ---------------
Capital Lease Obligations 0 0 0 0 0
- --------------------------------------- ------------- --------------- -------------- -------------- ---------------
Operating Leases 2,460 839 1,087 404 130
- --------------------------------------- ------------- --------------- -------------- -------------- ---------------
Purchase Obligations 484 137 347 0 0
- --------------------------------------- ------------- --------------- -------------- -------------- ---------------
Other Long-term Obligations 0 0 0 0 0
- --------------------------------------- ------------- --------------- -------------- -------------- ---------------
Total Contractual Obligations 4,601 976 3,091 404 130
- --------------------------------------- ------------- --------------- -------------- -------------- ---------------
* The Non-Revolving Facility was fully repaid in January 2004.
DEBT
As at December 31, 2003, the Company's total borrowings were $25.8 million,
down 67 percent from the $78.7 million at the end of 2002. Of the total debt,
the Credit Facility included:
1. US$12.1 million, the balance of the Non-Revolving Facility,
(US$29.1 million at December 31, 2002); and
2. US$5.0 million, drawn from the Revolver (US$16.0 million at
December 2002). The Revolver can be drawn as required based upon
approximately 90 percent of the value of accounts receivable and 75 to 90
percent of concentrate inventory value at any time depending on the
inventory's location.
The Credit Facility was repayable in full on January 2, 2004. In November
of 2003, the Company renegotiated the terms of the Credit Facility. The new
terms extended the due date of the Non-Revolving Facility to January 2, 2009,
with 54 equal monthly principal payments starting in July 2004. As part of the
extension, the Revolver was extended to January 2, 2005, and is subject to
annual renewal. The Revolver cap was reduced to US$25.0 million from US$30.0
million. Interest rates remained unchanged.
The Non-Revolving Facility was repaid in full in late January 2004.
In addition to the above Credit Facility, the Company had miscellaneous
unsecured debt totalling $3.8 million at the end of 2003 compared with $7.5
million at the end of 2002. Of this amount, $0.6 million was in the form of a
prepayment for zinc concentrates by a customer of the Company ($3.2 million at
the end of 2002) which is to be settled in the first quarter of 2004 and $1.0
million associated with previous financing activities owed to Dundee Securities
Corporation (unchanged from 2002) which was paid in February 2004.
80
SOURCES AND USES OF CASH
The net cash received from investing activities in 2003 was $1.3 million
and composed of the following:
o $10.6 million received for the sale of the Lapa properties,
o $1.3 million on the return of cash deposits for future
reclamation (replaced with Letters of Credit),
o $10.6 million used for capital expenditures at the mine sites of
which principal expenditures were $5.7 million for El Toqui's mill
expansion and $2.6 million at El Mochito for environmental engineering and
mine development.
FINANCIAL CAPABILITY
With its existing credit availability and working capital the Company is
well positioned to carry out its operating, capital and acquisition program as
presently contemplated.
EQUITY
During 2003, the Company issued 92.5 million Common Shares for net proceeds
of $30.0 million compared with 99.4 million Common Shares for net proceeds of
$18.5 million in 2002. The majority of the 2003 proceeds ($28.0 million) were
received for the issuance of 85.8 million Common Shares in November pursuant to
a subscription receipt offer in October. These funds were used to repay US$12.1
million of the Company's Non-Revolving Facility with the balance to be used for
working capital. The majority of the 2002 net proceeds ($17.6 million) was
raised pursuant to a rights offering in May for 94.5 million Common Shares,
these funds were used for working capital. At the end of 2003, the Company had
issued and outstanding Common Shares of approximately 285.8 million compared
with 193.3 million at the end of 2002.
Shareholders' equity as at December 31, 2003 was $113.7 million compared
with $95.6 million as at December 31, 2002, reflecting a net profit of $7.1
million for 2003 plus $30.0 million of proceeds from the issue of Common Shares
during the year offset by a reduction in Cumulative translation adjustments of
$18.4 million.
OPERATING REVIEW - 2003 AND 2002
The following table summarizes financial results for each of the
Company(1)s operating mines. Although Nanisivik closed in September of 2002,
sales continued into 2003.
- ------------------------ ----------------------- --------------------- --------------------- ---------------------
Contribution (Loss)
From Mining
Activities(1) Capital
Gross Revenue Non-cash Costs(2) Expenditures
- ------------------------ ----------------------- --------------------- --------------------- ---------------------
($ millions) 2003 2002 2003 2002 2003 2002 2003 2002
- ------------------------ ------------ ---------- ---------- ---------- ---------- ---------- ---------- ----------
Bouchard-Hebert 75.7 81.9 0.2 3.0 10.1 9.7 0.0 1.7
- ------------------------ ------------ ---------- ---------- ---------- ---------- ---------- ---------- ----------
Bougrine 33.3 40.9 (6.5) (8.5) 8.8 8.1 0.6 2.0
- ------------------------ ------------ ---------- ---------- ---------- ---------- ---------- ---------- ----------
El Mochito 53.9 69.5 3.9 (2.9) 4.7 6.8 2.6 2.3
- ------------------------ ------------ ---------- ---------- ---------- ---------- ---------- ---------- ----------
El Toqui 34.3 44.1 (1.5) 0.6 2.3 2.6 5.7 2.9
- ------------------------ ------------ ---------- ---------- ---------- ---------- ---------- ---------- ----------
Nanisivik 11.5 69.0 (0.2) (1.6) 0.0 3.2 0.0 0.0
- ------------------------ ------------ ---------- ---------- ---------- ---------- ---------- ---------- ----------
Langlois 0.0 0.0 0.0 0.0 0.0 0.0 1.7 0.9
- ------------------------ ------------ ---------- ---------- ---------- ---------- ---------- ---------- ----------
Unallocated (1.1) (3) 0.0 (1.5) (0.1) 0.4 0.0 0.0 1.2
- ------------------------ ------------ ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total 207.6 305.4 (5.6) (9.5) 26.3 30.4 10.6 11.0
- ------------------------ ------------ ---------- ---------- ---------- ---------- ---------- ---------- ----------
(1) After non-cash costs.
81
(2) Depreciation, depletion and reclamation costs.
(3) Net realised from metal hedging activity.
PRODUCTION STATISTICS
Production for the years ended December 31, 2003 and 2002 is shown in the tables
below.
Production of zinc in concentrate in 2003 decreased by 24 percent from 2002 due
to the closure of the Nanisivik mine in September 2002. Production of zinc in
concentrate at the four mines operating in 2003 was only 1 percent lower than
2002 levels (364.7 million pounds compared with 368.6 million pounds).
- ------------------------------------------------------------------ --------------------- --------------------
ZINC PRODUCTION (million pounds of zinc contained in concentrate)
2003 2002
- ------------------------------------------------------------------ --------------------- --------------------
Bouchard-Hebert 118.7 112.9
- ------------------------------------------------------------------ --------------------- --------------------
Bougrine 77.1 74.3
- ------------------------------------------------------------------ --------------------- --------------------
El Mochito 96.5 102.2
- ------------------------------------------------------------------ --------------------- --------------------
El Toqui 72.4 79.2
- ------------------------------------------------------------------ --------------------- --------------------
Nanisivik 0 109.1
- ------------------------------------------------------------------ --------------------- --------------------
Total zinc production 364.7 477.7
- ------------------------------------------------------------------ --------------------- --------------------
- ------------------------------------------------------------------ --------------------- --------------------
ALL MINES 2003(1) 2002(2)
- ------------------------------------------------------------------ --------------------- --------------------
Ore Milled (tonnes) 2,586,180 3,077,811
- ------------------------------------------------------------------ --------------------- --------------------
Zinc (%) 7.2 7.8
- ------------------------------------------------------------------ --------------------- --------------------
Concentrate Production
- ------------------------------------------------------------------ --------------------- --------------------
Zinc (tonnes) 310,337 403,661
- ------------------------------------------------------------------ --------------------- --------------------
Copper (tonnes) 23,781 37,680
- ------------------------------------------------------------------ --------------------- --------------------
Lead (tonnes) 20,220 18,747
- ------------------------------------------------------------------ --------------------- --------------------
Gold (tonnes) 2,575 5,424
- ------------------------------------------------------------------ --------------------- --------------------
Metal in Concentrates
- ------------------------------------------------------------------ --------------------- --------------------
Zinc (tonnes) 165,422 216,663
- ------------------------------------------------------------------ --------------------- --------------------
Copper (tonnes) 3,710 6,055
- ------------------------------------------------------------------ --------------------- --------------------
Lead (tonnes) 13,516 12,693
- ------------------------------------------------------------------ --------------------- --------------------
Silver (ounces) 2,225,728 2,957,221
- ------------------------------------------------------------------ --------------------- --------------------
Gold (ounces) 26,220 24,804
- ------------------------------------------------------------------ --------------------- --------------------
Minesite Operating Cash Costs
- ------------------------------------------------------------------ --------------------- --------------------
Per tonne milled (US$) 28.31 27.18
- ------------------------------------------------------------------ --------------------- --------------------
Total Cash Costs
- ------------------------------------------------------------------ --------------------- --------------------
Per pound payable zinc (US$) 0.32 0.32
- ------------------------------------------------------------------ --------------------- --------------------
(1)2003 includes production from Bouchard-Hebert, Bougrine, El Mochito and El Toqui.
(2)2002 includes production from Bouchard-Hebert, Bougrine, El Mochito, El Toqui and Nanisivik.
82
BOUCHARD-HEBERT MINE
Production of zinc metal in concentrate at Bouchard-Hebert increased by 5
percent in 2003 from 2002 due to record milled tonnage, improved zinc recovery
and an improved zinc concentrate grade. The copper metal in concentrate was
lower than in 2002 due to mining in the upper portions of the deposit where
copper grades were lower. The copper recovery and concentrate grade were lower
in 2003 than 2002 due to the decreased copper head grade resulting in a 39
percent reduction of copper in concentrate in 2003 compared with 2002.
- ------------------------------------------- ---------------------------------
PRODUCTION STATISTICS YEAR ENDED DECEMBER 31,
- ------------------------------------------- ---------------------------------
2003 2002
- ------------------------------------------- ---------------- ----------------
Ore Milled (tonnes) 1,082,833 1,050,009
- ------------------------------------------- ---------------- ----------------
Zinc (%) 5.6 5.6
- ------------------------------------------- ---------------- ----------------
Copper (%) 0.4 0.7
- ------------------------------------------- ---------------- ----------------
Silver (grams/tonne) 36 39
- ------------------------------------------- ---------------- ----------------
Gold (grams/tonne) 1.2 1.2
- ------------------------------------------- ---------------- ----------------
Concentrate Production
- ------------------------------------------- ---------------- ----------------
Zinc (tonnes) 98,149 94,914
- ------------------------------------------- ---------------- ----------------
Recovery (%) 89.5 87.6
- ------------------------------------------- ---------------- ----------------
Grade (%) 54.9 53.9
- ------------------------------------------- ---------------- ----------------
Copper (tonnes) 23,781 37,680
- ------------------------------------------- ---------------- ----------------
Recovery (%) 80.4 85.2
- ------------------------------------------- ---------------- ----------------
Grade (%) 15.6 16.1
- ------------------------------------------- ---------------- ----------------
Metal in Concentrates
- ------------------------------------------- ---------------- ----------------
Zinc (tonnes) 53,844 51,197
- ------------------------------------------- ---------------- ----------------
Copper (tonnes) 3,710 6,055
- ------------------------------------------- ---------------- ----------------
Silver (ounces) 361,568 446,755
- ------------------------------------------- ---------------- ----------------
Gold (ounces) 23,686 20,122
- ------------------------------------------- ---------------- ----------------
Minesite Operating Cash Costs
- ------------------------------------------- ---------------- ----------------
Per tonne milled (C$) 34.80 34.99
- ------------------------------------------- ---------------- ----------------
Total Cash Costs
- ------------------------------------------- ---------------- ----------------
Per pound of payable zinc (US$) 0.30 0.28
- ------------------------------------------- ---------------- ----------------
BOUCHARD-HEBERT MINE OUTLOOK
The tonnes to be processed in 2004 are forecast to drop modestly from 2003
(1.025 million from 1.082 million); however, the zinc head grade is expected to
increase by 11 percent, while the copper head grade is expected to remain
constant year over year. Production of zinc metal in concentrate is planned to
increase in 2004, while copper, gold and silver will be slightly lower. These
grade forecasts are consistent with the mining sequences in the life-of-mine
plan.
In line with the life-of-mine plan is the expected closure of the mine near
the end of the first quarter 2005. As a result of the pending closure, there
were no capital expenditures in 2003 compared with $1.7 million in 2002 and
there will be no capital expenditures required in 2004. Preliminary reclamation
work will begin in the fourth quarter of 2004.
The Company will continue its diamond-drilling program on two known
anomalies in close proximity to the mine and will carry out geophysics and other
exploration activities in the area of the mine. The current program is focussed
on the targets with the greatest potential to be a future source of mill feed
through the existing mine infrastructure. If the Company is successful in its
efforts this could extend the
83
life of the mine but it will not prevent a temporary closure due to the time
requirements to develop a zone, if found.
BOUGRINE MINE
The tonnes milled at Bougrine decreased in 2003 from 2002 due to a change
in the shift schedules of the milling operations. In the third quarter of 2003,
milling operations were rescheduled to five days per week to allow for the
surface stockpiling of ore in order to blend the feed to the mill. The purpose
of blending the mill feed is to ensure maximum metallurgical recovery. The zinc
head grade increased in 2003 as a result of correcting ground control conditions
experienced in 2002, which correction resulted in an improved supply of mill
feed from the higher-grade F-3 zone. As a result, production of zinc metal in
concentrate increased by 4 percent. Lead grades and lead metal in concentrate
remained unchanged between 2003 and 2002.
- -------------------------------------------------- -------------------------------------
PRODUCTION STATISTICS YEAR ENDED DECEMBER 31,
- -------------------------------------------------- -------------------------------------
2003 2002
- -------------------------------------------------- ------------------- -----------------
Ore Milled (tonnes) 410,961 423,414
- -------------------------------------------------- ------------------- -----------------
Zinc (%) 10.4 9.7
- -------------------------------------------------- ------------------- -----------------
Lead (%) 1.5 1.5
- -------------------------------------------------- ------------------- -----------------
Concentrate Production
- -------------------------------------------------- ------------------- -----------------
Zinc (tonnes) 64,036 61,656
- -------------------------------------------------- ------------------- -----------------
Recovery (%) 81.8 81.8
- -------------------------------------------------- ------------------- -----------------
Grade (%) 54.6 54.7
- -------------------------------------------------- ------------------- -----------------
Lead (tonnes) 6,900 6,859
- -------------------------------------------------- ------------------- -----------------
Recovery (%) 74.7 75.1
- -------------------------------------------------- ------------------- -----------------
Grade (%) 65.2 66.6
- -------------------------------------------------- ------------------- -----------------
Metal in Concentrates
- -------------------------------------------------- ------------------- -----------------
Zinc (tonnes) 34,964 33,706
- -------------------------------------------------- ------------------- -----------------
Lead (tonnes) 4,502 4,565
- -------------------------------------------------- ------------------- -----------------
Minesite Operating Cash Costs
- -------------------------------------------------- ------------------- -----------------
Per tonne milled (US$) 35.81 32.19
- -------------------------------------------------- ------------------- -----------------
Total Cash Costs
- -------------------------------------------------- ------------------- -----------------
Per pound payable zinc (US$) 0.35 0.36
- -------------------------------------------------- ------------------- -----------------
BOUGRINE MINE OUTLOOK
While the zinc head grade will remain the same in 2004 as in 2003, the
tonnes to be processed are estimated to be 375,800 compared with 411,000 in
2003, a 9 percent reduction. The zinc metal contained in concentrate will drop
accordingly. However, the lead head grade is expected to increase in 2004 and
will result in an increase of approximately 10 percent of lead metal contained
in concentrate.
Capital expenditures were 70 percent lower in 2003 than 2002 at $0.6
million. No further capital expenditures are anticipated at the mine because the
F-2 and F-3 ore zones, the primary sources of mill feed at Bougrine, are
expected to be depleted by the end of the second quarter of 2005. The Company
is, however, presently drilling on the Bou Khil property 38 road kilometres from
the Bougrine mill, where zinc and lead resources of approximately 0.5 million
tonnes have been identified. The Company expects to determine the worthiness of
these resources as a mill feed source by the end of the third quarter of 2004.
In addition, the Company is exploring the possibility of converting the Bougrine
mill to a cement mill grinding plant, producing a finished product. Cement
clinker would be purchased from a local cement plant in the area and crushed,
ground and the final cement product bagged in the Bougrine mill. It is
anticipated that the Bougrine mill, after a suitable conversion, could produce
up to 500,000 tonnes of
84
cement annually with the finished product transported by rail to the Company's
storage building at the Port of Rades near Tunis and, from there, shipped to
customers in the Mediterranean area. A full feasibility is planned for
completion by early in the third quarter of 2004.
EL MOCHITO MINE
Production of zinc metal in concentrate at El Mochito decreased by 5
percent in 2003 compared with 2002 as a result of lower ore production and
grades. The lead metal in concentrate production increased by 11 percent over
the same period in 2002 due to the increased head grade.
- ----------------------------------------------- -------------------------------
PRODUCTION STATISTICS YEAR ENDED DECEMBER 31,
- ----------------------------------------------- -------------------------------
2003 2002
- ----------------------------------------------- --------------- ---------------
Ore Milled (tonnes) 652,085 663,385
- ----------------------------------------------- --------------- ---------------
Zinc (%) 7.3 7.5
- ----------------------------------------------- --------------- ---------------
Lead (%) 1.7 1.5
- ----------------------------------------------- --------------- ---------------
Silver (grams/tonne) 87 90
- ----------------------------------------------- --------------- ---------------
Concentrate Production
- ----------------------------------------------- --------------- ---------------
Zinc (tonnes) 84,045 88,697
- ----------------------------------------------- --------------- ---------------
Recovery (%) 92.0 93.0
- ----------------------------------------------- --------------- ---------------
Grade (%) 52.1 52.2
- ----------------------------------------------- --------------- ---------------
Lead (tonnes) 13,320 11,888
- ----------------------------------------------- --------------- ---------------
Recovery (%) 81.9 80.6
- ----------------------------------------------- --------------- ---------------
Grade (%) 67.7 68.4
- ----------------------------------------------- --------------- ---------------
Metal in Concentrates
- ----------------------------------------------- --------------- ---------------
Zinc (tonnes) 43,766 46,339
- ----------------------------------------------- --------------- ---------------
Lead (tonnes) 9,014 8,128
- ----------------------------------------------- --------------- ---------------
Silver (ounces) 1,638,465 1,700,034
- ----------------------------------------------- --------------- ---------------
Minesite Operating Cash Costs
- ----------------------------------------------- --------------- ---------------
Per tonne milled (US$) 29.96 28.40
- ----------------------------------------------- --------------- ---------------
Total Cash Costs
- ----------------------------------------------- --------------- ---------------
Per pound payable zinc (US$) 0.29 0.32
- ----------------------------------------------- --------------- ---------------
EL MOCHITO MINE OUTLOOK
For 2004, the zinc head grade is expected to drop slightly, while the lead
and silver head grades will remain about the same as in 2003. The tonnes to be
processed will be the same as in 2003 resulting in a drop in the zinc metal
contained in concentrate.
Capital expenditures for 2004 will be US$3.7 million (up substantially from
US$1.8 million spent in 2003). The primary focus will be on mine equipment, mine
development and exploration, and preliminary work on a new tailings' disposal
site. The Company has launched an accelerated development and exploration
program on several promising in-mine targets to increase reserves and resources.
As well, a cost improving mine-pumping plan will be implemented.
EL TOQUI MINE
The milled tonnage at El Toqui increased due to improved operating efficiencies
in the new plant. The 2003 milled tonnage was a new record for the operation. As
well, a new crushing plant, which was commissioned in July 2003, aided in
improving the delivery of crushed material to the grinding plant. Zinc and gold
head grades in 2003 were lower than in 2002 resulting in an 8 percent decrease
in zinc production and a 46 percent decrease in gold production.
85
The gold grades were lower due to a delay in reaching the high-grade Aserradero
area caused by water inflow. The matter was rectified by the end of 2003 and
gold grades are expected to be higher in 2004. Metallurgical improvements
initiated in 2002 continued with both the zinc recovery and concentrate grade
being at record levels in 2003.
Capital expenditures were $5.7 million in 2003, 97 percent higher than 2002
expenditures with the majority spent on the mill expansion.
- ---------------------------------------------------- -----------------------------------------
PRODUCTION STATISTICS YEAR ENDED DECEMBER 31,
- ---------------------------------------------------- -----------------------------------------
2003 2002
- ---------------------------------------------------- ------------------- ---------------------
Ore Milled (tonnes) 440,301 424,459
- ---------------------------------------------------- ------------------- ---------------------
Zinc (%) 8.1 9.2
- ---------------------------------------------------- ------------------- ---------------------
Gold (grams/tonne) 0.3 0.7
- ---------------------------------------------------- ------------------- ---------------------
Concentrate Production
- ---------------------------------------------------- ------------------- ---------------------
Zinc (tonnes) 64,107 70,752
- ---------------------------------------------------- ------------------- ---------------------
Recovery (%) 92.5 92.1
- ---------------------------------------------------- ------------------- ---------------------
Grade (%) 51.2 50.8
- ---------------------------------------------------- ------------------- ---------------------
Gold (tonnes) 2,575 5,424
- ---------------------------------------------------- ------------------- ---------------------
Recovery (%) 31.8 49.9
- ---------------------------------------------------- ------------------- ---------------------
Grade (grams/tonne) 17.7 26.9
- ---------------------------------------------------- ------------------- ---------------------
Metal in Concentrates
- ---------------------------------------------------- ------------------- ---------------------
Zinc (tonnes) 32,848 35,907
- ---------------------------------------------------- ------------------- ---------------------
Gold (ounces) 2,534 4,682
- ---------------------------------------------------- ------------------- ---------------------
Silver (ounces) 225,695 282,383
- ---------------------------------------------------- ------------------- ---------------------
Minesite Operating Cash Costs
- ---------------------------------------------------- ------------------- ---------------------
Per tonne milled (US$) 27.38 26.04
- ---------------------------------------------------- ------------------- ---------------------
Total Cash Costs
- ---------------------------------------------------- ------------------- ---------------------
Per pound payable zinc (US$) 0.36 0.32
- ---------------------------------------------------- ------------------- ---------------------
EL TOQUI MINE OUTLOOK
Improvements in operating efficiencies at El Toqui have been ongoing, as
has the expansion of the milling facilities. In July 2003, the new crushing
plant installation was completed and the corresponding expansions in the
grinding, de-watering and tails handling circuits are expected to be complete by
June of 2004. Once complete, the annual processing capacity will be increased to
550,000 tonnes from 440,000 tonnes. Nonetheless, in 2004 only a modest increase
in mill throughput is expected due to allowances for commissioning the new
systems and ramping up to the increased tonnage level. While the zinc metal
contained in concentrate will not change appreciably in 2004 from 2003, gold
output will increase as mining activities move into the gold-rich Aserradero
zone. During 2004 the gold output is expected to increase to 20,000 ounces
compared with 2,500 ounces in 2003.
With the resurgence of the zinc price in late 2003 the Company placed a
renewed emphasis on exploration in the mineral-rich Toqui District and will be
quite aggressive in 2004, unlike in the past three years. New targets identified
following extensive geochem surveys over the past few years will be explored by
way of diamond-drilling. These targets are all within the overall area known to
host zinc mineralization at El Toqui, which is an area about 4.5 by 3.5
kilometres. As a result of increased exploration and development, capital
expenditures in these two categories will be US$2.7 million compared with US$1.3
million in 2003.
86
LANGLOIS
The Langlois mine was placed on care and maintenance in November 2000
pending the resolution of an ore pass problem and an improvement in the price of
zinc. A feasibility study to reopen the Langlois mine including a technical
resolution for the ore pass was completed by SRK in August 2001 (the "2001 SRK
Report"), following an extensive drilling program of Zone 97.
In April 2003, the Company completed an in-fill drill program of 28 holes
(11,511 metres) to further delineate and upgrade mineral resources to mineral
reserves in Zone 97 at the Langlois mine. The results of the in-fill drill
program show a 25 percent increase in mineral reserves, which added a further
year's production to the expected life of the Langlois mine. In total, the
mineral reserves for Zone 97 increased by 419,600 tonnes at a grade of 8.1
percent zinc, 1.7 percent copper, 46.9 grams of silver per tonne and 0.1 grams
of gold per tonne. The mineral reserves and resources for Zones 3 and 4 have not
changed.
Following the 2003 in-fill drill program, SRK updated the 2001 SRK Report
in June 2003 (the "2003 SRK Report") to include the new mineral reserves in Zone
97. The 2003 SRK Report estimates that the total net pre-tax cash flow will be
$71.1 million based on the metal prices shown in the table set out below. The
pre-tax internal rate of return is 25.3 percent, and the pre-tax net present
value at 8.0 percent is $30.9 million.
The following table sets forth the metal prices and exchange rate used in
the 2003 SRK Report:
Zinc US$0.50/lb
Copper US$0.80/lb
Silver US$5.00/oz
Gold US$343/oz
Exchange Rate US$0.70/Cdn$
Based on these price assumptions, the 2003 SRK Report determined the
operating cost per pound of payable zinc including smelting, shipping and
by-product credits for copper and precious metals to be US$0.38.
It was estimated in the 2003 SRK Report that $38.2 million in capital is
required over the life of the mine of which approximately $16.4 million must be
expended on development prior to the start of production at the Langlois mine.
The aggregate operating cost to mine gate is estimated at $55.61 per tonne
milled over the life of the Langlois mine. The estimated capital cost prior to
the start of production of $16.4 million excludes working capital and capital
contingencies.
When a long-term zinc price of US$0.45 per pound is assumed in the 2003 SRK
Report, the total net pre-tax cash flow decreases to $41.5 million, the pre-tax
internal rate of return decreases to 15.2 percent and the pre-tax net present
value at 8.0 percent decreases to $12.6 million. Based on this price assumption,
the 2003 SRK Report sets the operating cost per pound of payable zinc including
smelting, shipping and by-product credits for copper and precious metals at
US$0.36.
The difference between the operating cost per pound, US$0.36 versus US$0.38
in the two SRK reports is due to lower treatment charges related to the
de-escalator from a lower zinc price assumption (US$0.45 versus US$0.50 per
pound).
LANGLOIS OUTLOOK
As a result of the recent metal price increase and improved working capital
position the Company is planning to commence re-development of the mine by
mid-year 2004. It is anticipated the development
87
program will take approximately 18 months, with full production targeted for the
first quarter of 2006. Over an eight-year mine life it is expected that the mine
will produce 358,000 tonnes of zinc metal in concentrate, 27,000 tonnes of
copper metal in concentrate and 2,200,000 ounces of silver metal in concentrate.
NANISIVIK MINE
The Nanisivik mine was permanently closed in September 2002.
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 the
Company 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. The Company's revised estimate of
closure costs, based on the revised closure and reclamation plan must be filed
with the NWB no later than March 31, 2004.
Of the amount of financial security mandated by the NWB (i.e. $17.6
million), $5.0 million was previously posted pursuant to the expired water
license in the form of a surety bond. That bond was scheduled to and did expire
in July 2003 and was not replaced. Discussions regarding the full amount of
financial security required are ongoing with DIAND.
Reclamation activities at Nanisivik commenced during 2002, continued
throughout 2003 and will continue again throughout 2004 as permitted by the NWB,
pending their review and acceptance of a final closure and reclamation plan.
Throughout 2003 many technical reports were prepared, reviewed and amended
accordingly, taking into consideration the views of the technical staff of the
NWB and the various regulators involved as well as their retained consultants
and experts. It had originally been anticipated and communicated to the NWB that
the final closure plan would be filed with them on December 15, 2003. A longer
than anticipated technical review process required that the Company postpone the
filing of its final report until February 6, 2004, an obligation which was
largely honoured with only one report to follow within ten days of the revised
submission date. In response to the filed closure and reclamation report the NWB
continues to finalize their arrangements for a thorough and complete technical
review of the documents as well as the timing of a public hearing, most likely
to occur in Arctic Bay in the second quarter of 2004. Based on the technical
meetings that have been held to date and the ongoing, thorough review process,
it is not anticipated that the final reclamation and closure plan will require
significant modification.
The NWB estimate of closure costs set out above does not take into
consideration the salvage value of the assets remaining at Nanisivik, all of
which are being reviewed for possible sale. Most notably in 2003 an agreement
was reached with Wolfden Resources Inc. that they would earn the right to the
contents of the industrial complex (principally the mill processing equipment),
four of the five electrical generators located on site, the concentrate storage
facility and the ship loading equipment. In return, Wolfden has agreed to clean
up those areas (i.e. industrial complex, concentrate storage facility and ship
loading areas) to the satisfaction of CanZinco Ltd. and the regulators involved.
Wolfden is scheduled to commence their dismantling work during the summer of
2004 with the expectation that the equipment involved will be ready for shipment
during the shipping season of 2005. Wolfden has provided a $2.0 million letter
of credit to the Company to secure its performance.
88
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 following the closure of the
mine (both 2002 and 2003).
- ------------------------------------------------ --------------------------------------
PRODUCTION STATISTICS YEAR ENDED DECEMBER 31,
- ------------------------------------------------ --------------------------------------
2003 2002
- ------------------------------------------------ ------------------- ------------------
Ore Milled (tonnes) 0.0 516,544
- ------------------------------------------------ ------------------- ------------------
Zinc (%) 0.0 10.0
- ------------------------------------------------ ------------------- ------------------
Silver (grams/tonne) 0.0 42
- ------------------------------------------------ ------------------- ------------------
Concentrate Production
- ------------------------------------------------ ------------------- ------------------
Zinc (tonnes) 0.0 87,644
- ------------------------------------------------ ------------------- ------------------
Recovery (%) 0.0 96.0
- ------------------------------------------------ ------------------- ------------------
Grade (%) 0.0 56.5
- ------------------------------------------------ ------------------- ------------------
Metal in Concentrate
- ------------------------------------------------ ------------------- ------------------
Zinc (tonnes) 0.0 49,514
- ------------------------------------------------ ------------------- ------------------
Silver (ounces) 0.0 528,049
- ------------------------------------------------ ------------------- ------------------
Minesite Operating Cash Costs
- ------------------------------------------------ ------------------- ------------------
Per tonne milled (Cdn$) 0.0 50.87
- ------------------------------------------------ ------------------- ------------------
Total Cash Costs
- ------------------------------------------------ ------------------- ------------------
Per pound payable zinc (US$) 0.0 0.34
- ------------------------------------------------ ------------------- ------------------
CARIBOU MINE
The Caribou mine remained on care and maintenance during 2003. Costs of
$1.5 million were incurred in 2003 compared with $1.7 million during 2002.
CARIBOU MINE OUTLOOK
Based on the most recent zinc and lead prices the Company is revisiting the
Caribou Re-opening Plan of 2000 (the "Plan"). The Plan is being updated to
incorporate the current prices and exchange rates in order to determine the
worth of the property.
FOURTH QUARTER REVIEW
For the quarter ended December 31, 2003, the Company reported Net Earnings
of $0.3 million ($0.00 per share) on Gross sales revenue of $51.4 million
compared with a Net Loss of $2.0 million ($0.01 per share) on $104.2 million of
Gross sales revenue for the fourth quarter of 2002.
The reduction in Gross sales revenue quarter over quarter was a result of
the closure of the Nanisivik mine in September 2002 reducing the amount of
concentrate available for sale, the timing of the shipments from the other
mines, a $1.1 million charge for metal hedge settlements and the mark-to-market
liability inherent in these instruments and the stronger Canadian dollar
resulting in lower realized Canadian dollar revenue. Despite the increase in the
average realized US dollar zinc price in the fourth quarter of 2003 to US$859
compared with US$775 in 2002 the average realized Canadian dollar price actually
declined slightly to $1,202 from $1,217. Notwithstanding the lower Gross sales
revenue, the Contribution from mining activities in 2003 was $0.9 million, only
slightly less than the $1.1 million in 2002 or 1.7 percent versus 1.1 percent of
Gross sales revenue respectively. This improved contribution on a percentage
basis resulted from lower unit Treatment and marketing costs and the stronger
Canadian dollar as Treatment and marketing costs are incurred mainly in US
dollars.
89
General and administrative costs were $0.7 million dollars lower for the
quarter, as the fourth quarter of 2002 included a one-time compensation expense
of $0.6 million.
$2.0 million Foreign exchange was realized on US dollar denominated debt
compared with $0.2 million in the fourth quarter of 2002 due to the larger gain
by the Canadian dollar.
The Company realized a recovery of Income and mining taxes of $1.0 million
compared with less than $0.1 million in the fourth quarter of 2002.
Cash flow from operations (before changes in non-cash working capital
items) was $10.4 million in fourth quarter of 2003 compared with $3.1 million in
the same period in 2002.
SUMMARY OF QUARTERLY RESULTS
- --------------------------------- -------------------------------------------- --------------------------------------------
2002 2003
- --------------------------------- -------------------------------------------- --------------------------------------------
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
- --------------------------------- ----------- ---------- ---------- ---------- ----------- ---------- ---------- ----------
Gross Sales Revenue 64.5 60.9 74.2 104.2 52.9 61.7 41.6 51.4
($ millions)
- --------------------------------- ----------- ---------- ---------- ---------- ----------- ---------- ---------- ----------
Net Earning (Loss) (3.3) 2.3 (16.9) ($2.0) 0.1 10.8 (4.1) 0.3
($ millions)
- --------------------------------- ----------- ---------- ---------- ---------- ----------- ---------- ---------- ----------
Per share basic ($0.03) $0.01 ($0.09) ($0.01) $0.00 $0.05 ($0.02) $0.00
- --------------------------------- ----------- ---------- ---------- ---------- ----------- ---------- ---------- ----------
Per share diluted N/A $0.01 N/A N/A $0.00 $0.05 N/A $0.00
- --------------------------------- ----------- ---------- ---------- ---------- ----------- ---------- ---------- ----------
YTD to the end of the Quarter 1.5943 1.5741 1.5704 1.5701 1.5097 1.4537 1.4290 1.4004
(C$/US$)
- --------------------------------- ----------- ---------- ---------- ---------- ----------- ---------- ---------- ----------
Average realized zinc price 791 813 752 775 785 768 810 859
(US$/t)
- --------------------------------- ----------- ---------- ---------- ---------- ----------- ---------- ---------- ----------
Average realized zinc price 1,261 1,280 1,181 1,217 1,185 1,116 1,157 1,202
(C$/t)
- --------------------------------- ----------- ---------- ---------- ---------- ----------- ---------- ---------- ----------
Concentrate tonnes sold 105,388 98,069 139,425 180,448 89,653 116,366 78,626 93,519
- --------------------------------- ----------- ---------- ---------- ---------- ----------- ---------- ---------- ----------
The quantity of concentrate tonnes sold directly effects Gross sales
revenue. The shipment and sale of concentrate can vary from quarter to quarter
based on customer agreements and the availability of ships. The Nanisivik mine
closure in September 2002 reduced the amount of concentrate available for sale
in subsequent quarters. As all sales are based in US dollars the impact of the
declining US dollar against the Canadian dollar reduced the realized Canadian
dollar Gross sales revenue, this despite an improvement in the average realized
US dollar price of zinc in the third and fourth quarters of 2003.
Net Earnings (Loss) in 2003 were positively impacted by the foreign
exchange gain on the US dollar denominated debt as a result of the stronger
Canadian dollar. As well in the second quarter of 2003 the Company realized a
one-time gain of $10.3 million on the sale of the Lapa properties in Quebec.
90
RELATED PARTY TRANSACTIONS
The Company accrued expenses of $500,000 for services provided by Dundee
Bancorp Inc. ("Dundee"), during the period from October 2001 to December 2003.
In December 2002, the Company extended its Credit Facility to January 2,
2004, and issued warrants to the banking syndicate. In consideration for
extending its support related to a portion of the Non-Revolving Facility by way
of guarantee, Dundee was granted warrants to purchase 1,000,000 Common Shares at
$0.19 per share until March 27, 2006, on the same basis as the banking
syndicate.
In consideration for guaranteeing the US$6.5 million Supplemental Term
Facility in 2001 Dundee received warrants to purchase an aggregate of 30,801,410
Common Shares at $0.20 per share. One-half of these warrants are exercisable
until March 2, 2007, and the remainder is exercisable until May 2, 2007.
On May 21, 2002, the Company issued 3,602,540 Common Shares under the terms
of an agreement in satisfaction of an obligation of $573,000 to a company of
which Murray Sinclair, Jr., a director of the Company, has a significant
ownership interest.
CHANGES IN ACCOUNTING POLICIES
There were no changes in Accounting Policies in 2003.
In 2004, the Company will adopt the following policies:
CICA 3870, Stock Based Compensation; the Company will expense the estimated
cost of compensation options issued in each period. Had this policy been adopted
in 2003 and 2002 the compensation expense recognized would have been $274,000
and $183,000 respectively.
CICA 3110, Asset Retirement Obligation; the Company is required to estimate
the fair value of mine site reclamation based on the current laws and
regulations. The fair value estimate is set up as an asset and a liability on
the Balance Sheet with the asset being amortized over the life of the mine. As
the policy must be adopted retroactively to the point in time when each mine was
acquired, the depreciation related to prior periods will be charged to Retained
Earnings. The fair value estimate must be reviewed on a regular basis to reflect
changes in laws and regulations, the estimated scope of work and estimated
costs. The total estimated fair value for reclamation of the Company's mine
sites at December 2003 is $40.6 million.
CRITICAL ACCOUNTING ESTIMATES
ASSET IMPAIRMENT
The carrying values of producing mineral properties including properties
placed on care and maintenance and related deferred expenditures are reviewed
regularly and, where necessary, are written down to the estimated net
recoverable amounts. Estimated future net cash flows, on an undiscounted basis,
are calculated for each property using: estimated recoverable reserves (on the
basis of current proven and probable reserves); estimated future zinc price
realization (considering historical and current prices, price trends and related
factors); and estimated 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.
91
RESERVES
Annually the Company estimates its proven and probable mineral reserves
(the "Reserves") in accordance with National Policy 43-101 ("NI 43-101") a rule
adopted by Canadian securities administrators as the standard of disclosure for
mineral projects. This estimate is used to determine mine viability, mine life
and amortization rates. The estimation of Reserves is based on drill hole
information, historical mining results, historical metallurgical results,
estimated future operating costs and estimated future metal prices. A "qualified
person" as defined by NI 43-101 performs the reserves estimate. As all of the
Company's operations have had significant operating history, the factor that
could impact the Reserves estimate most is future metal prices.
AMORTIZATION
The Company uses the units of production method for amortization of Mineral
Properties and some of its Fixed Assets based on the Reserves. Any significant
changes in the Reserves could impact the amount of annual amortization.
INVENTORY
The Company values its Concentrate inventories on the lower of cost or
realizable value. Costs represent the average cost, and include direct labour
and materials costs, mine site overhead, and depreciation and amortization. At
December 2003, all Concentrate inventories were recorded at cost.
RECLAMATION
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.
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.
RISKS AND UNCERTAINTIES
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. 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.
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 in the price of zinc will impact earnings and
cash flow by approximately $3.0 million during 2004. Tables earlier in this
section show the approximate impact on the Company's earnings and cash flows of
variations in metal prices, the US/Canadian dollar exchange rate and treatment
charges, based on current plans for 2004 and assumes the changes remain in
effect for the full year.
Fluctuations in the price of zinc are influenced by numerous factors beyond
the control of the Company. Exchange rates, interest rates, inflation, the world
supply and demand for zinc 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.
92
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 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 is also exposed to foreign exchange rate risk
through its long and short-term debt. While foreign currencies are generally
convertible into Canadian and US 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.
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.
SURETY BOND RISK
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. If some
or all of the Company's environmental bonds, which amount to approximately $8.2
million, were withdrawn or the Company were required to provide security in the
form of cash or letters of credit it would use a significant portion of
available credit lines. Provision for such an event has not been included in the
cash forecast for 2004. 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.
OUTSTANDING SHARE DATA AND FULL DILUTION CALCULATION
The Company is authorized to issue an unlimited number of Common Shares and
200,000,000 preferred shares, issuable in series. There are no preferred shares
outstanding. Each Common Share entitles the holder of record thereof to one vote
at all meetings of shareholders of the Company, except at meetings at which only
holders of another class or series of shares of the Company are entitled to
vote. The table set forth below summarizes the Capital Stock. For a more
complete description of certain elements please refer to note 6 to the
consolidated financial statements of the Company.
93
- --------------------------------------------------------------------------- -------------------
Common Shares or Securities Convertible into Common Shares March 5, 2004
- --------------------------------------------------------------------------- -------------------
Common Shares 344,394,741
- --------------------------------------------------------------------------- -------------------
Share Option Plan - Options 10,347,434
Weighted average exercise price $1.07.
- --------------------------------------------------------------------------- -------------------
1,000,000 warrants granted at $0.21, expire May 8, 2005. 500,000
- --------------------------------------------------------------------------- -------------------
30,801,410 warrants granted at $0.20, 15,400,705 expire March 2, 2007 and 30,801,410
15,400,705 expire May 2, 2007.
- --------------------------------------------------------------------------- -------------------
3,000,000 warrants granted at $0.19, expire March 27, 2006. 2,000,000
- --------------------------------------------------------------------------- -------------------
FULLY DILUTED 388,043,585
- --------------------------------------------------------------------------- -------------------
Warrants exerciseable at $1.00, expire January 28, 2009 - traded on TSX 28,571,429
- --------------------------------------------------------------------------- -------------------
Shares to be issued to Boliden pursuant to the acquisition of BWCL* 18,000,000
- --------------------------------------------------------------------------- -------------------
Warrants to be issued to Boliden pursuant to the acquisition of BWCL* 5,000,000
- --------------------------------------------------------------------------- -------------------
FUTURE FULLY DILUTED 439,615,014
- --------------------------------------------------------------------------- -------------------
* The Company has not completed its due diligence review. Accordingly, this
assumes that the transaction will be completed as proposed.
94
Years Ended December 31, 2002 and 2001
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 $53.5 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)
- ------------------------------------------------- ---------------- -------------
Reclamation Expenditures (5.1) (2.0)
- ------------------------------------------------- ---------------- -------------
Non-cash expenses 33.6 103.7
- ------------------------------------------------- ---------------- -------------
Operating cash flow (outflow) (before
changes in non-cash working capital items) 8.6 (9.4)
- ------------------------------------------------- ---------------- -------------
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 $4.1 million. The majority of this gain is offset by increased
operating costs as a significant portion of operating costs are incurred in US
dollars.
95
- ------------------------------------------------- ---------------- -------------
GROSS SALES REVENUE BY METAL ($ 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 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 $147.7 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
96
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 22.9 20.8
- ----------------------------------------------- ---------------- ---------------
El Mochito 34.2 33.5
- ----------------------------------------------- ---------------- ---------------
El Toqui 19.2 20.0
- ----------------------------------------------- ---------------- ---------------
Total 147.7 153.2
- ----------------------------------------------- ---------------- ---------------
Non GAAP Reconciliations
- ----------------------------------------------- ---------------- ---------------
NON GAAP RECONCILIATION OF TOTAL CASH COST PER
POUND OF PAYABLE ZINC TO CONSOLIDATED
FINANCIAL STATEMENTS 2002 2001
- ----------------------------------------------- ---------------- ---------------
By-Product Credit ($ millions)
- ----------------------------------------------- ---------------- ---------------
Gross sales revenue per financial statements 305.4 301.8
- ----------------------------------------------- ---------------- ---------------
Less zinc sales revenue (224.1) (223.7)
- ----------------------------------------------- ---------------- ---------------
Inventory adjustment (32.9) (27.6)
- ----------------------------------------------- ================ ===============
48.4 50.5
- ----------------------------------------------- ================ ===============
- ----------------------------------------------- ---------------- ---------------
Treatments Charges ($ millions)
- ----------------------------------------------- ---------------- ---------------
Per financial statements 136.7 140.0
- ----------------------------------------------- ---------------- ---------------
Inventory adjustment (16.6) (12.8)
- ----------------------------------------------- ================ ===============
120.1 127.2
- ----------------------------------------------- ================ ===============
- ----------------------------------------------- ---------------- ---------------
Direct operating costs ($ millions)
- ----------------------------------------------- ---------------- ---------------
Per financial statements 147.7 153.2
- ----------------------------------------------- ---------------- ---------------
Inventory adjustment (16.3) (13.4)
- ----------------------------------------------- ================ ===============
131.4 139.8
- ----------------------------------------------- ================ ===============
Total Cash Costs - Canadian ($ millions) 203.1 216.5
- ----------------------------------------------- ---------------- ---------------
- ----------------------------------------------- ---------------- ---------------
Exchange rate C$/US$ 1.5701 1.5490
- ----------------------------------------------- ---------------- ---------------
- ----------------------------------------------- ---------------- ---------------
Total Cash Costs - US ($ millions) 129.4 139.8
- ----------------------------------------------- ---------------- ---------------
- ----------------------------------------------- ---------------- ---------------
Zinc pounds produced (millions) 405.5 391.9
- ----------------------------------------------- ---------------- ---------------
Total Cash Costs Per pound of payable zinc
(US$) 0.32 0.357
- ----------------------------------------------- ---------------- ---------------
97
- ----------------------------------------------- ---------------- ---------------
RECONCILIATION OF MINESITE OPERATING CASH
COSTS PER TONNE MILLED TO CONSOLIDATED
FINANCIAL STATEMENTS 2002 2001
- ----------------------------------------------- ---------------- ---------------
Direct operating costs ($ millions)
- ----------------------------------------------- ---------------- ---------------
Per finacial statements 147.7 153.2
- ----------------------------------------------- ---------------- ---------------
Inventory adjustment (16.3) (13.4)
- ----------------------------------------------- ================ ===============
Minesite Operating Cash Costs - Canadian
($ millions) 131.4 139.8
- ----------------------------------------------- ================ ===============
- ----------------------------------------------- ---------------- ---------------
Exchange rate C$/US$ 1.5701 1.5490
- ----------------------------------------------- ---------------- ---------------
- ----------------------------------------------- ---------------- ---------------
Minesite Operating Cash Costs - US ($ millions) 83.7 90.3
- ----------------------------------------------- ---------------- ---------------
- ----------------------------------------------- ---------------- ---------------
Tonnes milled (millions) 3.1 3.3
- ----------------------------------------------- ---------------- ---------------
Minesite Operating Cash Costs Per tonne milled
(US$) 27.18 27.26
- ----------------------------------------------- ---------------- ---------------
Total Cash Costs per Pound of Payable Zinc and Minesite Operating Cash
Costs per Tonne Milled are furnished to provide additional information and are
non-GAAP measures. These measures should not be considered in isolation as a
substitute for measures of performance prepared in accordance with generally
accepted accounting principles and are not necessarily indicative of operating
expenses as determined under generally accepted accounting principles. These
measures intend to provide investors with information about the cash generating
capabilities of the Company's mining operations. The Company uses this
information for the same purpose. Mining operations are capital intensive. These
measures exclude capital expenditures. Capital expenditures are discussed
throughout the MD&A and the consolidated financial statements.
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 $1.3 million mostly due to a reduction in staff and office costs.
Interest and financing expense decreased by $3.2 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 $8.6 million, offset most of
these improvements.
- ----------------------------------------------- ---------------- ---------------
Other Expenses (Income) ($ millions) 2002 2001
- ----------------------------------------------- ---------------- ---------------
General and administrative 6.2 7.5
- ----------------------------------------------- ---------------- ---------------
Interest expense and financing 4.8 8.0
- ----------------------------------------------- ---------------- ---------------
Investment income (0.6) (9.3)
- ----------------------------------------------- ---------------- ---------------
Foreign exchange (0.7) 4.7
- ----------------------------------------------- ---------------- ---------------
Total Other Expenses net of other income 9.7 10.9
- ----------------------------------------------- ---------------- ---------------
Non-producing property costs 0.9 3.2
- ----------------------------------------------- ---------------- ---------------
Foreign Exchange Hedging Loss 0.0 (3.2)
- ----------------------------------------------- ---------------- ---------------
Income and mining taxes (0.2) -
- ----------------------------------------------- ---------------- ---------------
Total 10.4 17.3
- ----------------------------------------------- ---------------- ---------------
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
98
on care and maintenance, exploration costs and $0.9 million of revenue received
from optioned properties in 2002.
OPERATING REVIEW - 2002 AND 2001
Certain of the 2002 and 2001 figures have been reclassified to conform to
the 2003 presentation.
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
- ----------------------------------------------- ---------------- ---------------
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 2.5
- -------------------------- --------- ---------- --------- ---------- --------- ---------- --------- ---------
El Toqui 44.1 48.6 0.6 (0.8) 2.6 3.1 2.9 5.5
- -------------------------- --------- ---------- --------- ---------- --------- ---------- --------- ---------
Langlois - - - - - - 0.9 4.1
- -------------------------- --------- ---------- --------- ---------- --------- ---------- --------- ---------
Unallocated 0.0 0.0 (0.1) 0.0 0.1 0.2 1.2 1.0
- -------------------------- --------- ---------- --------- ---------- --------- ---------- --------- ---------
Total 305.4 304.0 (9.5) (23.5) 30.5 32.1 11.0 21.7
- -------------------------- --------- ---------- --------- ---------- --------- ---------- --------- ---------
(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.
99
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
- ----------------------------------------------- ---------------- ---------------
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
100
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
- ----------------------------------------------- ---------------- ---------------
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 $3.0 million in 2001.
101
- ----------------------------------------------- --------------------------------
PRODUCTION STATISTICS YEAR ENDED DECEMBER 31,
- ----------------------------------------------- ---------------- ---------------
2002 2001
- ----------------------------------------------- ---------------- ---------------
Ore Milled (tonnes) 423,414 411,052
- ----------------------------------------------- ---------------- ---------------
Zinc (%) 9.7 11.5
- ----------------------------------------------- ---------------- ---------------
Lead (%) 1.5 2.1
- ----------------------------------------------- ---------------- ---------------
Concentrate Production
- ----------------------------------------------- ---------------- ---------------
Zinc (tonnes) 61,656 69,724
- ----------------------------------------------- ---------------- ---------------
Recovery (%) 81.8 80.2
- ----------------------------------------------- ---------------- ---------------
Grade (%) 54.7 54.3
- ----------------------------------------------- ---------------- ---------------
Lead (tonnes) 6,859 9,869
- ----------------------------------------------- ---------------- ---------------
Recovery (%) 75.1 76.3
- ----------------------------------------------- ---------------- ---------------
Grade (%) 66.6 65.1
- ----------------------------------------------- ---------------- ---------------
Metal in Concentrates
- ----------------------------------------------- ---------------- ---------------
Zinc (tonnes) 33,706 37,832
- ----------------------------------------------- ---------------- ---------------
Lead (tonnes) 4,565 6,424
- ----------------------------------------------- ---------------- ---------------
Minesite Operating Costs
- ----------------------------------------------- ---------------- ---------------
Per tonne milled (US$) 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.
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
- ----------------------------------------------- ---------------- ---------------
102
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.
The mine had an operating profit of $0.6 million in 2002 compared with an
operating loss of $0.8 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
103
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.
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
104
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.
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.
105
Provisional payments to December 2002 for concentrate inventory shipped but not
priced decreased by $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 $18.5 million of common share issues during the year.
106
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
Ontario, Canada Bancorp Inc., a merchant
banking and financial
service company
Colin K. Benner(1) President, Chief Officer of the Company June 7, 1995
Ontario, Canada Executive Officer and a
Director
John D. Bracale Vice President, Latin Officer of the Company -
Florida, America and Corporate
USA Logistics
Richard R. Godfrey Vice President, Finance Officer of the Company
Ontario, Canada and Chief Financial
Officer (Acting)
J. Steven Hayes Vice President, Marketing Officer of the Company -
Ontario, Canada
William M. Heath Vice President, Officer of the Company -
Ontario, Canada Administration
Torben Jensen Vice President, Officer of the Company
Ontario, Canada Engineering and
Exploration
John B. McCombe Vice President, Latin Officer of the Company
Chile American Operations
Norman L. Calder Treasurer Officer of the Company -
Ontario, Canada
Leroy A. Fong Controller Officer of the Company -
Ontario, Canada
E. Ann Wilkinson Corporate Secretary Officer of the Company -
Ontario, Canada
Gordon F. Bub Director President and Chief November 12, 1993
Ontario, Canada Executive Officer, Gold
Hawk Resources Inc., a
precious metals exploration
company
Donald K. Charter(2) Director Executive Vice President, June 14, 1999
Ontario, Canada Dundee Bancorp Inc. and
Dundee Wealth Management
Inc., a financial service
company, and Chairman and
Chief Executive Officer,
Dundee Securities
Corporation, an investment
dealer
Jonathan C. Goodman(3) Director President and Chief June 19, 2001
107
Name and Municipality Position with
of Residence the Company Principal Occupation Director Since
- ------------------------------ ------------------------- ----------------------------- ---------------------------
Ontario, Canada Executive Officer, Dundee
Precious Metals Inc., a
gold mining company,
Director, Dundee Bancorp
Inc.
Allen J. Palmiere(2)(3) Director President and Chief September 9, 1993
Ontario, Canada Executive Officer, Silk
Road Resources, a mining
company
A. Murray Sinclair, Jr. (2)(3) Director President, Quest Ventures November 20, 1992
British Columbia, Canada 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, Mr. Bub who, prior to November 30, 2001, was Chairman
and Chief Executive Officer of the Company, Mr. Godfrey who prior to June 2003
was Financial Advisor to the CEO and President of Ma'aden (Saudi Arabian Mining
Company), a state owned mining company, Mr. Heath who, prior to January 1999,
was self-employed as a consultant, Mr. Jensen who prior to December 2003 was
Manager, Engineering and North American Exploration of the Company, Mr. Palmiere
who, prior to May 2003, was Vice President and Chief Financial Officer of Zemex
Corporation, an industrial mineral company.
108
The following table sets forth other principal directorships for each of
the directors.
- ------------------------------ -------------------------------------------------
Director Other Principal Directorships
- ------------------------------ -------------------------------------------------
Colin K. Benner Glencairn Gold Corporation.
- ------------------------------ -------------------------------------------------
Gold Hawk Resources Inc.
- ------------------------------ -------------------------------------------------
Tahera Corporation
- ------------------------------ -------------------------------------------------
Western Canadian Coal Corp.
- ------------------------------ -------------------------------------------------
Gordon F. Bub Glencairn Gold Corporation.
- ------------------------------ -------------------------------------------------
Gold Hawk Resources Inc.
- ------------------------------ -------------------------------------------------
Western Canadian Coal Corp.
- ------------------------------ -------------------------------------------------
Donald K. Charter Dundee Real Estate Investment Trust
- ------------------------------ -------------------------------------------------
Dundee Wealth Management Inc.
- ------------------------------ -------------------------------------------------
IAMGold Corporation
- ------------------------------ -------------------------------------------------
Glencairn Gold Corporation
- ------------------------------ -------------------------------------------------
Jonathan C. Goodman
- ------------------------------ -------------------------------------------------
Dundee Bancorp Inc.
- ------------------------------ -------------------------------------------------
Dundee Precious Acquisition Inc.
- ------------------------------ -------------------------------------------------
Dundee Precious Metals Inc.
- ------------------------------ -------------------------------------------------
Dundee Resources Limited
- ------------------------------ -------------------------------------------------
Eurogas Corporation
- ------------------------------ -------------------------------------------------
Diagem International Resource Corp.
- ------------------------------ -------------------------------------------------
Major Drilling Group International Inc.
- ------------------------------ -------------------------------------------------
Miramar Mining Corporation
- ------------------------------ -------------------------------------------------
Odyssey Resources Ltd
- ------------------------------ -------------------------------------------------
Tahera Corporation
- ------------------------------ -------------------------------------------------
Garth A.C. MacRae ChondroGene Limited
- ------------------------------ -------------------------------------------------
Dimethaid Research Inc.
- ------------------------------ -------------------------------------------------
Dundee Bancorp Inc.
- ------------------------------ -------------------------------------------------
Dundee Precious Metals Inc.
- ------------------------------ -------------------------------------------------
Dundee Wealth Management Inc.
- ------------------------------ -------------------------------------------------
Dynamic Global Fund Corporation
- ------------------------------ -------------------------------------------------
Eurogas Corporation
- ------------------------------ -------------------------------------------------
Torque Energie Inc. (formerly Kinetic Energy
Inc.)
- ------------------------------ -------------------------------------------------
Allen J. Palmiere Silk Road Resources Ltd.
- ------------------------------ -------------------------------------------------
A. Murray Sinclair, Jr. Antrim Energy Inc.
- ------------------------------ -------------------------------------------------
Arapaho Capital Corp.
- ------------------------------ -------------------------------------------------
Aurora Platinum Corp.
- ------------------------------ -------------------------------------------------
Bannockburn Resources Inc.
- ------------------------------ -------------------------------------------------
Elgin Resources Inc.
- ------------------------------ -------------------------------------------------
Gabriel Resources Ltd.
- ------------------------------ -------------------------------------------------
General Minerals Corporation
- ------------------------------ -------------------------------------------------
Goodfellow Resources Ltd.
- ------------------------------ -------------------------------------------------
Groundstar Resources Limited
- ------------------------------ -------------------------------------------------
Kirkland Lake Gold Inc. (formerly Foxpoint
Resources Ltd.)
- ------------------------------ -------------------------------------------------
Lagasco Corp.
- ------------------------------ -------------------------------------------------
Navan Capital Corp..
- ------------------------------ -------------------------------------------------
New Inca Gold Ltd.
- ------------------------------ -------------------------------------------------
Skye Resources Inc.
- ------------------------------ -------------------------------------------------
109
- ------------------------------ -------------------------------------------------
Wolfden Resources Inc.
- ------------------------------ -------------------------------------------------
Quest Capital Corp.
- ------------------------------ -------------------------------------------------
No director or officer has any family relationship with any other director
or officer.
None of the directors or officers of the Company are, or within the
previous 10 years, have been a director or officer of any other issuer that,
while acting in such capacity, (i) was subject to a cease trade or a similar
order or an order that denied the issuer access to any exemptions under Canadian
securities legislation for a period of more than 30 consecutive days, or (ii)
became bankrupt, made a proposal under any legislation relation to bankruptcy or
insolvency or was subject to or instituted any proceedings, arrangements or
compromise with creditors or had a receiver, receiver manager or trustee
appointed to hold the assets of such issuer except as follows:
On November 28, 2001, Quest Ventures Ltd. ("Quest"), a company in which Mr.
Sinclair is a shareholder and director participated in a private placement of
4,000,000 common shares in Pretium Industries Inc. (formerly Visual LABS Inc.)
("Pretium"). Pretium is a corporation whose common shares trade on the
facilities of the TSX-VE. Subsequent to the private placement, Mr. Sinclair was
appointed a director and President of Pretium. Notwithstanding that Pretium
received the appropriate levels of approvals prior to the completion of the
private placement, including that of the TSX-VE an existing shareholder of
Pretium appealed the approval of the TSX-VE to the British Columbia Securities
Commission ("BCSC"). On February 27, 2002, the BCSC rendered a decision that,
among other items, required the following:
"Under section 161(1)(c) of the SECURITIES ACT (British Columbia) that the
exemptions described in sections 44 to 47, 74, 75 98 and 99 do not apply to
Pretium Industries Inc. until a meeting of shareholders has been held at
which the shareholders of Pretium Industries Inc. can ratify the private
placement noted above. Under section 161(1)(c) of the SECURITIES ACT
(British Columbia) that the exemptions described in sections 44 to 47, 74,
75, 98 or 99 do not apply to Quest Ventures Ltd. in respect of the
4,000,000 common shares of Pretium Industries Inc. issued to Quest Ventures
Ltd. pursuant to the private placement of November 28, 2001 until a meeting
of shareholders has been held at which the shareholders of Pretium
Industries Inc. can ratify the private placement noted above."
On April 19, 2002, the BCSC issued a Variation Order amending the above
decision which provided as follows:
1. on May 23, 2002, Pretium hold the annual and special meeting of its
shareholders at which the shareholders will elect the board of
directors of Pretium;
2. at the meeting, before the election of the board, the shareholders
vote whether to ratify Pretium's issuance of 4,000,000 shares to Quest
(the "Quest Shares") on November 28, 2001, or to direct the board to
take all necessary steps to reverse the issuance of the Quest Shares;
3. the ratification of the issuance of the Quest Shares be by way of
resolution passed by a majority of the votes cast at the meeting,
other than votes attaching to shares owned directly or indirectly, by
(a) Quest, the officers or directors of Quest, the officers or
directors of Pretium, or their associates, (b) Sheldon Zelitt, Joy
Zelitt or The Downsview Investment Group being the former officers and
directors of Pretium;
110
4. the information circular provided to the shareholders in connection
with the meeting disclose all material facts relating to the issuance
of the Quest Shares;
5. if the shareholders do not ratify the issuance of the Quest Shares (a)
the Quest Shares cannot be voted in respect of the election of the
board at the meeting, and (b) the boards of Pretium and Quest take all
necessary steps to reverse the issuance of the Quest Shares; and
6. if any issues arise in connection with our order, any of the parties
may apply to the BCSC for further direction.
A meeting of the shareholders of Pretium Industries Inc. was held on May
23, 2002, at which time the resolution was ratified by shareholders.
Mr. Sinclair is a director of New Inca Gold Ltd. On February 25, 2002, New
Inca Gold Ltd. was issued a cease trade from the BCSC and the Ontario Securities
Commission for failure to file financial statements within the prescribed time
and pay the filing fees. New Inca Gold Ltd. has since filed the financial
statements and paid the filing fees as required by those securities commissions.
Effective October 21, 2003, trading of the securities of New Inca Gold Ltd.
resumed. The Alberta Order was rescinded on October 23, 2003, and the Ontario
Order was rescinded on March 6, 2003.
Mr. Sinclair is a director of Navan Capital Corp. and a former director of
Upland Resources Corp. Upland Resources Corp. was suspended from trading for
failure to meet TSX Venture Exchange tier maintenance requirements on October 4,
2002, and was reinstated on February 28, 2003. Navan Capital Corp. was suspended
from trading on November 12, 2002, for failure to complete a qualifying
transaction within 18 months of the date of listing on the Exchange.
None of the directors or officers of the Company have been subject to (i)
any penalties or sanctions proposed by a court relating to Canadian securities
legislation or by a Canadian securities regulatory authority or have entered
into a settlement agreement with a Canadian securities regulatory authority, or
(ii) any other penalties or sanctions imposed by a court or regulatory body that
would likely be considered important to a reasonable investor in making an
investment decision.
None of the directors or officers of the Company have become, within the
previous 10 years, bankrupt, made a proposal under any legislation relating to
bankruptcy or insolvency or was subject to or instituted any proceedings,
arrangement or compromise with creditors or had a receiver, receiver manager or
trustee appointed to hold their assets.
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, 2003, 2002 and 2001 in respect
of each of the individuals who were, during the year ended December 31, 2003,
the Chief Executive Officer of the Company and, as at December 31, 2003, the
four other most highly compensated executive officers of the Company
(collectively the "Named Executive Officers").
111
Summary Compensation Table
- ----------------------------- --------- ------------------------------------------ -------------------- --------------
Annual Compensation
------------------------------------------
Long-term
Compensation
Awards
Other Annual Securities Under All Other
Salary Bonus Compensation(1) Options Granted(2) Compensation(3)
Name and Principal Position Year ($) ($) ($) (#) ($)
- ----------------------------- --------- ------------ ------------- --------------- -------------------- --------------
Colin K. Benner 2003 500,000 200,000 - 1,000,000 13,500
President and 2002 408,430 175,000(4) 56,888(5) 1,000,000 13,500
Chief Executive Officer 2001 400,000 75,000 - - 13,500
- ----------------------------- --------- ------------ ------------- --------------- -------------------- --------------
Rene R. Galipeau 2003 275,000 - 1,625(6) 250,000 13,500
Executive Vice 2002 275,000 36,000 1,375(6) 150,000 13,500
President and Chief 2001 275,000 35,000 2,750(6) - 13,500
Financial Officer
- ----------------------------- --------- ------------ ------------- --------------- -------------------- --------------
J. Steven Hayes 2003 166,667 36,000 - 75,000 13,500
Vice President, 2002 145,000 5,000 - 100,000 13,500
Marketing 2001 145,000 10,000 - - 13,500
- ----------------------------- --------- ------------ ------------- --------------- -------------------- --------------
William M. Heath 2003 190,000 47,500 - 150,000 13,500
Vice President, 2002 190,000 88,000 3,275(5) 100,000 13,500
Administration 2001 175,000 20,000 - - 13,500
- ----------------------------- --------- ------------ ------------- --------------- -------------------- --------------
John B. McCombe 2003 US$151,667 US$47,500 US$77,720(7) - -
Vice President, 2002 US$130,002 - US$82,065(7) 100,000 -
Latin American 2001 US$120,000 - US$81,090(7) - -
Operations
- ----------------------------- --------- ------------ ------------- --------------- -------------------- --------------
(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 Corporation.
(3) Except in the case of Mr. McCombe, represents the dollar value of any
contribution paid by the Corporation during the year with respect to a
registered retirement savings plan for the benefit of the Named Executive
Officer.
(4) This bonus comprises a cash payment of $125,000 paid in April of 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 Corporation, the fair
market value of which was $50,000 on the day the compensation was awarded.
(5) Represents a payout of vacation time earned but not taken.
(6) Represents the dollar value of imputed interest benefits from loans
provided to the Mr. Galipeau by the Corporation as computed in accordance
with the INCOME TAX ACT (Canada).
(7) Represents a US$42,000 housing allowance per annum with the balance
applicable to education expenses incurred on behalf of Mr. McCombe.
During the fiscal year ended December 31, 2003, 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 $2,756,440.
The following table sets forth information regarding options granted during
the financial year of the Company ended December 31, 2003 to the Named Executive
Officers.
112
Option Grants During the Most Recently Completed Financial Year
- ------------------------- --------------- --------------- --------------- ----------------- --------------------------
Market Value
Percent of of Securities
Total Options Underlying
Securities, Granted to Options on the
Under Options Employees in Exercise Price Date of Grant(1)
Name Granted Financial Year ($/security) ($/security) Expiration Date
- ------------------------- --------------- --------------- --------------- ----------------- --------------------------
Colin K. Benner 1,000,000 61.0% $0.255 $0.255 February 27, 2013
Common Shares
- ------------------------- --------------- --------------- --------------- ----------------- --------------------------
Rene R. Galipeau 15.2% $0.29 $0.29 September 11, 2013
250,000
Common Shares
- ------------------------- --------------- --------------- --------------- ----------------- --------------------------
J. Steven Hayes 75,000 4.6% $0.285 $0.285 August 11, 2013
Common Shares
- ------------------------- --------------- --------------- --------------- ----------------- --------------------------
William M. Heath 150,000 9.1% $0.285 0.285 August 11, 2013
Common Shares
- ------------------------- --------------- --------------- --------------- ----------------- --------------------------
John B. McCombe 0 n/a n/a n/a n/a
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. In 2003 non-management directors were paid
$5,000 per annum and $750 per meeting attended (either of the directors or of a
committee thereof). Fees paid to directors amounted to an aggregate of $117,300
in 2003. 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. Effective January 1, 2004, each non-management
director will receive $15,000 per annum and $1,000 per meeting attended (either
of the directors or of a committee thereof). In addition, any non-management
chair of a committee of the directors will receive $5,000 per annum.
Colin K. Benner has entered into a four-year employment agreement with the
Company, which expires on December 31, 2006, and which is effective as of
December 19, 2002. The agreement calls for automatic renewal for two-year terms
beyond that termination date unless Mr. Benner's employment with the Company is
terminated.
113
Mr. Benner's agreement provides for an annual salary of $500,000, which
amount is reviewed annually by the compensation committee of the directors of
the Company. It further stipulates that the annual salary paid to Mr. Benner
would be limited to $400,000 while the Company was experiencing financial
hardship. The difference between these two amounts was to be deferred, and
payment of this deferred amount, in a lump sum, and the implementation of the
higher salary level, would occur when Mr. Benner and the directors of the
Company mutually agreed that the financial affairs of the Company were improved,
allowing such payments.
By way of letter to the directors of the Company dated January 6, 2004, Mr.
Benner acknowledged that the deferral terms of his employment agreement had been
satisfied, that all deferred amounts had been paid, and that Mr. Benner's base
annual salary had been adjusted accordingly.
In the event of termination of Mr. Benner's employment without cause, not
associated with a change of control, Mr. Benner is entitled to either 30 months'
written notice of termination or pay in lieu of notice, as well as benefits
continuation for the 30-month period. If Mr. Benner elects to resign his
employment with Breakwater, he will be required to provide no less than one
months' written notice of his decision.
The agreement defines a "change of control" as the acquisition by any
group, other than Dundee Bancorp Inc. ("Dundee") or an affiliate of Dundee, of
sufficient security that the acquiring group establishes the right to cast more
than 30 percent of the votes that may be cast to elect directors of the Company,
and the exercise of such voting rights causes the incumbent directors of the
Company to cease to be the majority.
In the event of a change of control, Mr. Benner has the unilateral right to
terminate his employment by providing notice to the Company, at which time he
will be paid a lump sum equal to 250 percent of his base annual salary at the
time notice is given plus an amount equal to 250 percent of the average of any
bonuses paid to Mr. Benner in the prior three financial years. In the event that
Mr. Benner's employment is terminated without cause following a change of
control, he will be entitled to these two payments plus payment in lieu of
benefits.
Effective November 30, 2001, Gordon Bub resigned as Chairman and Chief
Executive Officer of the Company. As partial consideration for waiving certain
terms under the employment agreement 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 was 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
could be acquired by Mr. Bub pursuant to the arrangements described above were
sold by Mr. Bub prior to January 31, 2003, the
114
$700,000 amount referred to above was to be 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.
2. Committees of the Directors
The audit committee of the directors of the Company is composed of three
directors, being Messrs. Goodman, Palmiere and Sinclair. The hedging committee
of the Company is composed of two directors, being Messrs. Benner and MacRae,
and a senior officer, being Richard R. Godfrey, Vice President Finance and Chief
Financial Officer (Acting). 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, 2003.
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
115
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.
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.
Effective March 11, 2004, Mr. Rene R. Galipeau, Executive Vice President
and Chief Financial Officer resigned to pursue other interests. Mr. Richard R.
Godfrey, Vice President, Finance was appointed to the position of Chief
Financial Officer (Acting).
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 `03 Dec `02 Dec '01
- ----------------------------- --------------- --------------- ---------------
Bouchard-Hebert, Canada 131 153 185
- ----------------------------- --------------- --------------- ---------------
Nanisivik, Canada 7 10 179
- ----------------------------- --------------- --------------- ---------------
Bougrine, Tunisia 279 298 294
- ----------------------------- --------------- --------------- ---------------
El Mochito, Honduras 624 620 726
- ----------------------------- --------------- --------------- ---------------
El Toqui, Chile 244 231 203
- ----------------------------- --------------- --------------- ---------------
Langlois, Canada 6 9 10
- ----------------------------- --------------- --------------- ---------------
Caribou, Canada 5 10 12
- ----------------------------- --------------- --------------- ---------------
Corporate Office, Canada 18 19 19
- ----------------------------- --------------- --------------- ---------------
Totals 1,314 1,350 1,629
----- ===== =====
- ----------------------------- --------------- --------------- ---------------
See also Item 4.D HUMAN RESOURCES section in each of the seven mines
described.
116
E. SHARE OWNERSHIP
The following table sets forth the Common Shares held by each senior
officer and/or director as at May 7, 2004, 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 EXPIRATION DATE OF
COMMON SHARES HELD PURCHASE COMMON EXERCISE PRICE OF OPTIONS
NAME SHARES OPTIONS (M/D/Y)
- --------------------------------- ------------------- --------------------- ------------------- ---------------------
Colin K. Benner 648,861 100,000 $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
- --------------------------------- ------------------- --------------------- ------------------- ---------------------
750,000 $0.19 6/06/12
- --------------------------------- ------------------- --------------------- ------------------- ---------------------
1,000,000 $0.255 2/27/13
- --------------------------------- ------------------- --------------------- ------------------- ---------------------
1,500,000 $0.67 3/08/09
- --------------------------------- ------------------- --------------------- ------------------- ---------------------
Gordon F. Bub 27,500 100,000 $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
- --------------------------------- ------------------- --------------------- ------------------- ---------------------
50,000 $0.19 6/06/12
- --------------------------------- ------------------- --------------------- ------------------- ---------------------
200,000 $0.67 3/8/09
- --------------------------------- ------------------- --------------------- ------------------- ---------------------
Donald K. Charter 41,560 100,000 $1.85 6/13/09
- --------------------------------- ------------------- --------------------- ------------------- ---------------------
50,000 $3.90 12/19/09
- --------------------------------- ------------------- --------------------- ------------------- ---------------------
150,000 $0.19 6/06/12
- --------------------------------- ------------------- --------------------- ------------------- ---------------------
200,000 $0.67 3/08/09
- --------------------------------- ------------------- --------------------- ------------------- ---------------------
Jonathan C. Goodman 80,850 150,000 $1.15 6/18/11
- --------------------------------- ------------------- --------------------- ------------------- ---------------------
150,000 $0.19 6/06/12
- --------------------------------- ------------------- --------------------- ------------------- ---------------------
200,000 $0.67 3/08/09
- --------------------------------- ------------------- --------------------- ------------------- ---------------------
Garth A.C. MacRae 343,635 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
- --------------------------------- ------------------- --------------------- ------------------- ---------------------
750,000 $0.67 3/08/09
- --------------------------------- ------------------- --------------------- ------------------- ---------------------
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
- --------------------------------- ------------------- --------------------- ------------------- ---------------------
200,000 $0.67 3/08/09
- --------------------------------- ------------------- --------------------- ------------------- ---------------------
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
- --------------------------------- ------------------- --------------------- ------------------- ---------------------
200,000 $0.67 3/08/09
- --------------------------------- ------------------- --------------------- ------------------- ---------------------
John D. Bracale 0 100,000 $3.90 12/19/09
- --------------------------------- ------------------- --------------------- ------------------- ---------------------
100,000 $0.19 6/06/12
- --------------------------------- ------------------- --------------------- ------------------- ---------------------
100,000 $0.75 2/18/09
- --------------------------------- ------------------- --------------------- ------------------- ---------------------
117
- --------------------------------- ------------------- --------------------- ------------------- ---------------------
Richard R. Godfrey 3,333 200,000 $0.175 7/07/13
- --------------------------------- ------------------- --------------------- ------------------- ---------------------
75,000 $0.75 2/18/09
- --------------------------------- ------------------- --------------------- ------------------- ---------------------
J. Steven Hayes 65,032 50,000 $6.65 11/4/07
- --------------------------------- ------------------- --------------------- ------------------- ---------------------
25,000 $3.22 7/29/09
- --------------------------------- ------------------- --------------------- ------------------- ---------------------
100,000 $0.19 6/06/12
- --------------------------------- ------------------- --------------------- ------------------- ---------------------
75,000 $0.285 8/11/13
- --------------------------------- ------------------- --------------------- ------------------- ---------------------
100,000 $0.75 2/18/09
- --------------------------------- ------------------- --------------------- ------------------- ---------------------
William M. Heath 42,307 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
- --------------------------------- ------------------- --------------------- ------------------- ---------------------
150,000 $0.285 8/11/13
- --------------------------------- ------------------- --------------------- ------------------- ---------------------
100,000 $0.75 2/18/09
- --------------------------------- ------------------- --------------------- ------------------- ---------------------
Torben Jensen 103,333 2,000 $2.30 4/30/05
- --------------------------------- ------------------- --------------------- ------------------- ---------------------
1,333 $2.45 8/19/06
- --------------------------------- ------------------- --------------------- ------------------- ---------------------
50,000 $0.19 6/06/12
- --------------------------------- ------------------- --------------------- ------------------- ---------------------
50,000 $0.75 2/18/09
- --------------------------------- ------------------- --------------------- ------------------- ---------------------
John McCombe 1,539 6,000 $2.30 4/30/05
- --------------------------------- ------------------- --------------------- ------------------- ---------------------
4,000 $2.40 6/06/05
- --------------------------------- ------------------- --------------------- ------------------- ---------------------
40,000 $2.45 8/19/06
- --------------------------------- ------------------- --------------------- ------------------- ---------------------
10,000 $3.25 2/02/97
- --------------------------------- ------------------- --------------------- ------------------- ---------------------
25,000 $5.10 7/11/07
- --------------------------------- ------------------- --------------------- ------------------- ---------------------
100,000 $0.19 6/06/12
- --------------------------------- ------------------- --------------------- ------------------- ---------------------
200,000 $0.75 2/18/09
- --------------------------------- ------------------- --------------------- ------------------- ---------------------
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
- --------------------------------- ------------------- --------------------- ------------------- ---------------------
50,000 $0.75 2/18/09
- --------------------------------- ------------------- --------------------- ------------------- ---------------------
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
- --------------------------------- ------------------- --------------------- ------------------- ---------------------
45,000 $0.75 2/18/09
- --------------------------------- ------------------- --------------------- ------------------- ---------------------
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
- --------------------------------- ------------------- --------------------- ------------------- ---------------------
100,000 $0.75 2/18/09
- --------------------------------- ------------------- --------------------- ------------------- ---------------------
Totals 1,433,552 10,658,333 - -
- --------------------------------- ------------------- --------------------- ------------------- ---------------------
(1) (1)See also Item 6.B hereof.
118
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. The Plan
currently provides that the maximum number of Common Shares that may be issued
for all purposes under the Plan is 22,000,000. 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.
The directors of the Company, subject to regulatory and shareholder
approval, have approved an amendment of the Plan to provide that the maximum
number of Common Shares that may be issued under the Plan shall be 34,500,000
Common Shares, and in respect of each component of the Plan, that the maximum
number of Common Shares that may be issued pursuant to the: (i) Share Purchase
Plan shall be 7,500,000 Common Shares; (ii) Stock Option Plan shall be
23,000,000 Common Shares; and (iii) Share Bonus Plan shall be 4,000,000 Common
Shares. The amendment of the Plan will be considered at a meeting of
shareholders of the Company scheduled for June 1, 2004.
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 percent 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
percent 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 percent 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.
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 percent 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 percent
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 4,343,204 have been issued as of May 7, 2004.
119
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 7, 2004, 2,319,233
Common Shares have been issued upon the exercise of options granted under the
Share Option Plan, 13,647,434 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 7,
2004 there were 3,981,668 more option than Common Shares available for future
option grants under the Stock Option Plan. Of the currently outstanding option,
700,000 options to purchase Common Shares were granted, subject to regulatory
and shareholder approval, to five senior officers and one senior employee on
February 19, 2004, at an exercise price of $0.75 per share, expiring February
18, 2009, 2,250,000 options to purchase Common Shares were granted, subject to
regulatory and shareholder approval, to two executive officers on March 9, 2004,
at an exercise price of $0.67 per share, expiring March 8, 2009, 1,000,000
options to purchase Common Shares were granted, subject to regulatory and
shareholder approval, to five outside directors on March 9, 2004, at an exercise
price of $0.67 per share, expiring March 8, 2009 and 50,000 options to purchase
Common Shares were granted, subject to regulatory and shareholder approval, to a
senior employee on April 29, 2004, at an exercise price of $0.43 per share,
expiring April 28, 2009.
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 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. 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 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
120
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 percent 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 7, 2004, 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.
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A. MAJOR SHAREHOLDERS.
As at May 14, 2004, 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 percent 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. (1)
Toronto, Ontario 52,078,651(2) 15.1%(3)
- ------------------------------------------------ --------------------------------- ----------------------------------
Wellington Management Company LLP
Boston, Massachusetts 46,528,049(4) 13.3%
- ------------------------------------------------ --------------------------------- ----------------------------------
(1) 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.
121
(2) 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.
(3) The change in percentage ownership (26.5% as at May 7, 2003) is due to
dilution.
(4) Wellington Management Company LLP has shared voting power over 41,862,154
Common Shares and shared power to dispose or direct the disposition of
46,528,049 Common Shares.
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 7, 2004, to the best of the Company's knowledge 39,063,157 Common
Shares were held by 794 shareholders in the United States of America,
252,595,083 Common Shares were held by 521 shareholders in Canada, and
52,832,692 Common Shares were held by 37 shareholders in countries other than
the United States and Canada.
B. RELATED PARTY TRANSACTIONS.
The only material transactions entered into since January 1, 2003 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) The Company and Dundee Securities Corporation ("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 an
initial term of one year, and thereafter year to year until cancelled
and provided the Corporation with the right to cancel the agreement.
The Company was obligated to pay to DSC a monthly work fee of $25,000
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 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 $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 (unchanged from 2002) was
paid in February 2004. Donald K. Charter, a director of the Company,
is the Chairman and Chief Executive Officer of DSC. DSC is an
indirect, partially-owned subsidiary of Dundee.
b) 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.
c) Under an agreement reached on December 23, 2002 with the Lenders and
Dundee, the Company, in consideration for again restructuring the
credit facilities of the Corporation, granted to the
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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.
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 of the Company, is a director of Dundee.
d) The Company accrued expenses of $500,000 for services provided by
Dundee, during the period from October 2001 to December 2003.
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, 2003.
- -------------------------- -------------- -------------------- -------------- --------------- --------------- ----------------
Financially Amount
Largest Amount Assisted Forgiven
Involvement Outstanding During Amount Securities During Year
of Company Year Ended Outstanding Purchases Ended
Name and or December as at April During 2002 Security for December
Principal Position Subsidiary 31, 2003 29, 2003 (#) Indebtedness 31, 2003
- -------------------------- -------------- -------------------- -------------- --------------- --------------- ----------------
Rene R. Galipeau(1) Lender $50,000 $50,000 - - $0
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 $50,000 plus interest calculated from
December 16, 1994 to the date of repayment at the rate of 10 percent per
annum on such portion of the principal amount as remains unpaid from time
to time until such principal is fully paid. Mr. Galipeau used the proceeds
of this loan to purchase 25,000 Common Shares. Mr. Galipeau has paid the
accrued interest on this loan and, effective January 1, 1998, the
arrangement with Mr. GaIipeau was amended to be non-interest bearing.
Effective March 11, 2004, Mr. Galipeau's indebtedness was retired.
INDEBTEDNESS OF EMPLOYEES
- ----------------------------------------------------------------------------------------------------------------------------
AGGREGATE INDEBTEDNESS ($)
- ----------------------------------------------------------------------------------------------------------------------------
Purpose To the Company or its To Another Entity
Subsidiaries
- ----------------------------------------------- ------------------------------- --------------------------------------------
Share Purchases - -
- ----------------------------------------------- ------------------------------- --------------------------------------------
Other(1) $50,000 -
- ----------------------------------------------- ------------------------------- --------------------------------------------
(1) Mr. St-Pierre was transferred from the Langlois Mine to serve as General
Manager of the Bouchard-Hebert Mine near Rouyn-Noranda, Quebec. As part of the
transfer Mr. St-Pierre was required to move from Breakwater provided
accommodations to privately owned accommodations. Breakwater provided to Mr.
St-Pierre an interest free loan in the amount of $50,000 for the sole purpose of
purchasing accommodations. Within thirty (30) days of leaving his employment
with Breakwater for any reason, Mr. St-Pierre is required to repay the loan in
its entirety. The loan is unsecured.
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.
ITEM 8. FINANCIAL INFORMATION
A. FINANCIAL STATEMENTS
123
See Note 15 to the Notes to the Consolidated Financial Statements.
B. LEGAL PROCEEDINGS
See Note 10 to the Notes to the Consolidated Financial Statements.
Significant Changes
There have been no significant changes since the date of the annual
financial statements included in the Form 20-F, other than the events described
in Note 14 to the Consolidated Financial Statements.
ITEM 9. THE OFFER AND LISTING
A. OFFER AND LISTING DETAILS.
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
- ---------------------- ------------- ------------- ------------- ---------------
$ $ $
- ---------------------- ------------- ------------- ------------- ---------------
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
- ---------------------- ------------- ------------- ------------- ---------------
2003 0.85 0.13 0.64 220,665,090
- ---------------------- ------------- ------------- ------------- ---------------
1st Q 2002 0.48 0.21 0.32 18,287,182
- ---------------------- ------------- ------------- ------------- ---------------
2nd Q 2002 0.375 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
- ---------------------- ------------- ------------- ------------- ---------------
2nd Q 2003 0.235 0.13 0.175 19,234,059
- ---------------------- ------------- ------------- ------------- ---------------
3rd Q 2003 0.49 0.17 0.395 55,900,742
- ---------------------- ------------- ------------- ------------- ---------------
4th Q 2003 0.85 0.375 0.640 102,296,507
- ---------------------- ------------- ------------- ------------- ---------------
1st Q 2004 0.86 0.57 0.59 141,381,841
- ---------------------- ------------- ------------- ------------- ---------------
- ---------------------- ------------- ------------- ------------- ---------------
November 2003 0.85 0.475 0.65 37,893,606
- ---------------------- ------------- ------------- ------------- ---------------
December 2003 0.69 0.56 0.64 16,125,225
- ---------------------- ------------- ------------- ------------- ---------------
January 2004 0.80 0.62 0.64 31,637,102
- ---------------------- ------------- ------------- ------------- ---------------
February 2004 0.82 0.61 0.76 63,568,077
- ---------------------- ------------- ------------- ------------- ---------------
March 2004 0.86 0.57 0.59 46,176,662
- ---------------------- ------------- ------------- ------------- ---------------
April 2004 0.64 0.42 0.43 25,266,511
- ---------------------- ------------- ------------- ------------- ---------------
The Warrants are listed on the TSX under the symbol "BWR". The following
table sets forth the high, low and close prices and volume of the Warrants for
the periods indicated. The Warrants were listed on February 10, 2004.
- ---------------------- ------------- ------------- ------------- ---------------
Calendar Period High Low Close Volume
- ---------------------- ------------- ------------- ------------- ---------------
1st Q 2004 0.51 0.20 0.35 14,658,356
- ---------------------- ------------- ------------- ------------- ---------------
February 2004 0.395 0.20 0.37 10,524,428
- ---------------------- ------------- ------------- ------------- ---------------
March 2004 0.51 0.32 0.35 4,133,928
- ---------------------- ------------- ------------- ------------- ---------------
April 2004 0.37 0.26 0.29 2,362,800
- ---------------------- ------------- ------------- ------------- ---------------
124
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 and the Warrants are traded on TSX in Canada. The Common
Shares are 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
125
be referred to the board of directors or shareholders of the Company for
approval even if such contract is 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.
Pursuant to subsection 4.01 of the by-laws of the Company, the directors
shall be paid such remuneration as may from time to time be determined by the
board, nothing herein shall preclude any director from serving the Company in
any other capacity and receiving remuneration therefor. In addition, the by-laws
direct that directors shall be paid their out-of-pocket expenses incurred in
attending board, committee or shareholders meetings or otherwise in respect of
the performance by them of their duties as the board may from time to time
determine.
The Act, subject to the articles or by-laws of or a unanimous shareholder
agreement relating to company, authorizes the directors of a company, without
authorization of the shareholders, to: i) borrow money upon the credit of the
company; ii) issue, reissue, sell, pledge or hypothecate debt obligations of the
company; iii) give a guarantee on behalf of the company to secure performance of
an obligation of any person; and iv) mortgage, hypothecate, pledge or otherwise
create a security interest in all or any property of the company, owned or
subsequently acquired, to secure any obligation of the company.
In addition, unless the articles or by-laws of or a unanimous shareholder
agreement relating to a company otherwise provide, the directors may, by
resolution, delegate such powers to a director, a committee of directors or an
officer.
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.
126
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.
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 percent 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 30 days and not more than 60 days before
the date of the meeting to the auditor of the
127
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.
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.
128
C. MATERIAL CONTRACTS.
Other than the Third Further Amended and Restated Credit Agreement dated
November 25, 2003, 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.
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 10 percent for 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.
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 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
129
situated in Canada. The Company's view is that, at the present time, the value
of the Common Shares is not 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.
H. DOCUMENTS ON DISPLAY.
Financial information is provided in the Company's comparative financial
statements and management's discussion and analysis ("MD&A") thereof for the
year ended December 31, 2003, are included herein. Copies of the most recent
annual report for the year ended December 31, 2003, and subsequent interim
reports which include interim MD&A and interim financial statements of the
Company may be obtained, upon request, from the Secretary of the Company, Suite
950, 95 Wellington Street West, Toronto, Ontario M5J 2N7, telephone:
416-363-4798, email: investorinfo@breakwater.ca, website: www.breakwater.ca or
by accessing the disclosure documents of the Corporation available through the
internet on the Canadian System for Electronic Document Analysis and Retrieval
(SEDAR) which can be accessed at www.sedar.com. The 2003 annual report and
subsequent interim reports are also filed on Form 6K with the U.S. Securities
and Exchange Commission (the "SEC") and can be accessed through the internet at
www.sec.gov. The Company may require the payment of a reasonable fee in respect
of a request therefor made by a person who is not a shareholder of the Company.
I. SUBSIDIARY INFORMATION.
Please see Item 4.C.
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See Note 8 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.
130
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 (Acting) 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.
ITEM 16. [RESERVED]
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
The board of directors of the Company has determined that Allen J.
Palmiere, the audit committee chairman, satisfies the requirements of an audit
committee financial expert serving on the audit committee in accordance with the
attributes prescribed with Item 16A of Form 20-F. Mr. Palmiere is an independent
director.
ITEM 16B. CODE OF ETHICS
The Company has not adopted a written code of ethics for its principal
executive officer, principal financial officer, principal accounting officer or
controller, or persons performing similar functions. Ethical oversight and
actual or apparent conflicts of interest have historically been handled
informally by senior management and the board of directors. The Company is
currently reviewing examples of written codes of ethics and will address the
adoption of such a code with the board of directors in the near future.
ITEM 16C. DURATION OF THE MANDATE AND TERMS OF OFFICE OF THE INDEPENDENT
AUDITORS
Duration of the Mandate
Deloitte & Touche LLP, Chartered Accountants are the independent auditors
of the Company. Deloitte & Touche began serving as the Company's auditors June
30, 1994.
131
Policy on Pre-Approval of Audit and Non-Audit Services of Independent
Auditors
The audit committee is responsible for the oversight of our independent
auditor's work. The policy of our audit committee is to pre-approve all audit
and non-audit services provided by Deloitte & Touche, including audit services,
audit-related services, tax services and other services provided by the
auditors. Any services provided by the auditors that are not specifically
included in the scope of the audit must be pre-approved by the audit committee
prior to any engagement. The audit committee is permitted to approve certain fee
for audit-related services, tax services and other services pursuant to a de
minimus exception before the completion of the engagement.
Independent Auditor Fees
The following are the fees for professional services, Deloitte & Touche,
for the years ended December 31, 2002 and 2003:
- ----------------------- --------------------------------------------------------
YEAR ENDED
- ----------------------- ----------------------------- --------------------------
Services 2002 2003
- ----------------------- ----------------------------- --------------------------
Audit Fees $270,000 $310,000
- ----------------------- ----------------------------- --------------------------
Audit Related Fees 152,500 245,400
- ----------------------- ----------------------------- --------------------------
Tax Services 48,000 91,400
- ----------------------- ----------------------------- --------------------------
Other 37,000 5,100
- ----------------------- ----------------------------- --------------------------
Total $507,500 $651,900
- ----------------------- ----------------------------- --------------------------
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
Not applicable.
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
Not applicable.
PART III
ITEM 17. FINANCIAL STATEMENTS
The consolidated financial statements of the Company and the report thereon
by its independent auditors listed below, are attached hereto as follows:
Independent Auditors' Report of the Company dated as of February 27, 2004,
except as to Note 15 which is as of April 8, 2004.
Consolidated Balance Sheets of the Company for the years ended December 31,
2003 and 2002.
Consolidated Statements of Operations and Deficit of the Company for the
years ended December 31, 2003, 2002 and 2001.
Consolidated Statements of Cash Flows of the Company for the years ended
December 31, 2003, 2002 and 2001.
Notes to the Consolidated Financial Statements of the Company.
132
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 consolidated 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.
"COLIN K. BENNER" (SIGNED) "RICHARD R. GODFREY" (SIGNED)
President and Vice President, Finance and
Chief Executive Officer Chief Financial Officer (Acting)
- --------------------------------------------------------------------------------
133
Independent Auditors' Report
TO THE SHAREHOLDERS OF BREAKWATER RESOURCES LTD.
We have audited the consolidated balance sheets of Breakwater Resources Ltd. as
at December 31, 2003 and 2002 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, 2003. 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, 2003
and 2002 and the results of its operations and its cash flows for each of the
years in the three-year period ended December 31, 2003 in accordance with
Canadian generally accepted accounting principles.
"DELOITTE & TOUCHE LLP" (SIGNED)
Chartered Accountants
Toronto, Ontario
February 27, 2004, except as to Note 15 which is as of April 8, 2004
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 15(d) to the consolidated financial statements. Our
report to the shareholders dated February 27, 2004, except as to Note 15 which
is as of April 8, 2004, 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.
"DELOITTE & TOUCHE LLP" (SIGNED)
Chartered Accountants
Toronto, Ontario
February 27, 2004, except as to Note 15 which is as of April 8, 2004
134
BREAKWATER RESOURCES LTD.
CONSOLIDATED BALANCE SHEETS
As at December 31, 2003 and 2002
(Expressed in thousands of Canadian dollars)
- -------------------------------------------------------------------------------------------------------------
2003 2002
- -------------------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents (note 1) $ 6,388 $ 6,435
Accounts receivable - concentrate 7,450 17,061
Other receivables 5,650 6,921
Concentrate inventory 21,828 25,340
Materials and supplies inventory 23,783 28,967
Prepaid expenses and other current assets 1,905 2,387
Future tax assets (note 7) 1,190 -
- -------------------------------------------------------------------------------------------------------------
68,194 87,111
RECLAMATION DEPOSITS (note 2) 100 1,387
MINERAL PROPERTIES AND FIXED ASSETS (note 3) 107,341 134,882
- -------------------------------------------------------------------------------------------------------------
$ 175,635 $ 223,380
- -------------------------------------------------------------------------------------------------------------
LIABILITIES
CURRENT LIABILITIES
Accounts payable and accrued liabilities $ 19,456 $ 25,577
Provisional payments for concentrate inventory shipped and not priced 2,010 8,642
Short-term debt including current portion of long-term debt (note 4) 10,329 30,227
Income and mining taxes payable 252 381
- -------------------------------------------------------------------------------------------------------------
32,047 64,827
DEFERRED ROYALTY (note 3(h)) 1,340 -
LONG-TERM DEBT (note 5) 15,517 48,438
RECLAMATION AND CLOSURE COST ACCRUALS (note 2) 12,070 13,697
FUTURE TAX LIABILITIES (note 7) 962 822
- -------------------------------------------------------------------------------------------------------------
61,936 127,784
- -------------------------------------------------------------------------------------------------------------
CONTINGENCIES AND COMMITMENTS (notes 1 and 10)
SHAREHOLDERS' EQUITY
Capital stock (note 6) 287,743 257,759
Common shares to be issued (note 6(c)) - 618
Contributed surplus (note 6(m)) 1,582 1,582
Deficit (171,737) (178,855)
Cumulative translation adjustments (3,889) 14,492
- -------------------------------------------------------------------------------------------------------------
113,699 95,596
- -------------------------------------------------------------------------------------------------------------
$ 175,635 $ 223,380
- -------------------------------------------------------------------------------------------------------------
The accompanying notes form an integral part of these consolidated
financial statements.
Approved by the Board
"GARTH A. C. MACRAE" (SIGNED) "COLIN K. BENNER" (SIGNED)
DIRECTOR DIRECTOR
135
BREAKWATER RESOURCES LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT
For the Years Ended December 31, 2003, 2002 and 2001
(Expressed in thousands of Canadian dollars except share and per share amounts)
- -------------------------------------------------------------------------------------------------------------------------
2003 2002 2001
- -------------------------------------------------------------------------------------------------------------------------
Gross sales revenue $ 207,591 $ 305,354 $ 304,037
Treatment and marketing costs 83,581 136,738 142,236
- -------------------------------------------------------------------------------------------------------------------------
Net revenue 124,010 168,616 161,801
- -------------------------------------------------------------------------------------------------------------------------
OPERATING COSTS
Direct operating costs 103,239 147,653 153,187
Depreciation and depletion 24,115 27,565 27,980
Reclamation and closure costs (note 2) 2,277 2,894 4,126
- -------------------------------------------------------------------------------------------------------------------------
129,631 178,112 185,293
- -------------------------------------------------------------------------------------------------------------------------
LOSS FROM MINING ACTIVITIES (5,621) (9,496) (23,492)
- -------------------------------------------------------------------------------------------------------------------------
OTHER (INCOME) EXPENSES
General and administrative (note 6(c)) 5,087 6,198 7,481
Interest and financing (note 6(l)) 3,321 4,761 8,015
Investment and other income (611) (551) (9,293)
Foreign exchange (gain) loss on US dollar denominated debt (11,578) (669) 4,720
- -------------------------------------------------------------------------------------------------------------------------
(3,781) 9,739 10,923
- -------------------------------------------------------------------------------------------------------------------------
LOSS BEFORE THE FOLLOWING: (1,840) (19,235) (34,415)
- -------------------------------------------------------------------------------------------------------------------------
Write-down of mineral properties and fixed assets (note 3) 279 - 70,281
Other non-producing property (income) costs (note 3(h)) (8,396) 876 3,176
Foreign exchange hedging loss (note 8) - - 3,162
Income and mining taxes (recovery) (note 7) (841) (224) 24
- -------------------------------------------------------------------------------------------------------------------------
(8,958) 652 76,643
- -------------------------------------------------------------------------------------------------------------------------
NET EARNINGS (LOSS) 7,118 (19,887) (111,058)
DEFICIT - BEGINNING OF YEAR (178,855) (158,968) (47,910)
- -------------------------------------------------------------------------------------------------------------------------
DEFICIT - END OF YEAR $ (171,737) $ (178,855) $ (158,968)
- -------------------------------------------------------------------------------------------------------------------------
BASIC EARNINGS (LOSS) PER SHARE (note 13) $ 0.03 $ (0.12) $ (0.92)
- -------------------------------------------------------------------------------------------------------------------------
DILUTED EARNINGS PER COMMON SHARE (note 13) $ 0.03 $ N/A $ N/A
- -------------------------------------------------------------------------------------------------------------------------
WEIGHTED-AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING AFTER BONUS ELEMENT (note 13) 211,411,000 169,074,000 120,166,000
- -------------------------------------------------------------------------------------------------------------------------
The accompanying notes form an integral part of these consolidated financial statements.
136
BREAKWATER RESOURCES LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2003, 2002 and 2001
(Expressed in thousands of Canadian dollars)
- -------------------------------------------------------------------------------------------------------------------------
2003 2002 2001
- -------------------------------------------------------------------------------------------------------------------------
CASH (USED FOR) PROVIDED FROM
OPERATING ACTIVITIES
Net earnings (loss) $ 7,118 $ (19,887) $ (111,058)
Non-cash items:
Depreciation and depletion 24,115 27,565 27,980
Gain on sale of property (note 3(h)) (10,336) - -
Write-down of mineral properties and fixed assets (note 3) 279 - 70,281
Other non-cash items (3,133) 2,379 3,309
Future income taxes (note 7) (1,050) 822 -
Reclamation and closure cost accruals 2,277 2,894 4,126
- -------------------------------------------------------------------------------------------------------------------------
19,270 13,773 (5,362)
Payment of reclamation and closure costs (4,562) (5,126) (1,996)
Deferred losses on foreign exchange hedging contracts - - (2,003)
Changes in non-cash working capital items (note 12) 3,179 (11,198) 42,460
- -------------------------------------------------------------------------------------------------------------------------
17,887 (2,551) 33,099
- -------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Issue of common shares for cash (note 6) 29,316 17,907 902
Decrease in short-term debt (18,711) (3,495) (27,962)
(Decrease) increase in long-term debt (29,821) 2,390 13,266
- -------------------------------------------------------------------------------------------------------------------------
(19,216) 16,802 (13,794)
- -------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Reclamation deposits 1,287 (150) 962
Mineral properties and fixed assets (10,621) (10,971) (21,662)
Proceeds from sale of mineral properties 10,616 - -
- -------------------------------------------------------------------------------------------------------------------------
1,282 (11,121) (20,700)
- -------------------------------------------------------------------------------------------------------------------------
(DECREASE) INCREASE IN CASH (47) 3,130 (1,395)
CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR 6,435 3,305 4,700
- -------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS - END OF YEAR $ 6,388 $ 6,435 $ 3,305
- -------------------------------------------------------------------------------------------------------------------------
Supplemental Disclosure of Cash Flow Information
Cash paid for:
Interest $ 2,681 $ 3,539 $ 5,681
Income and mining taxes $ 339 $ 588 $ 699
The accompanying notes form an integral part of these consolidated financial statements.
137
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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.
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. Included in cash and
cash equivalents for 2003 was an amount of $355,000 that was held in escrow as a
condition to the restructuring of the Company's banking agreement. The cash is
expected to be released in March 2004.
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 current reserve estimates. 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 3(e) and 3(f)) and related
deferred expenditures, are reviewed regularly and, where necessary, are written
down to the estimated net recoverable amounts. Estimated future net cash
138
flows, on an undiscounted basis, are calculated for each property using:
estimated recoverable 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 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 for
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.
139
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 that 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 6. No compensation expense is recognized for the Plan when
share options are issued to employees (see note 6(j)). 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 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,
140
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 PRONOUNCEMENT
In February 2003, the Canadian Institute of Chartered Accountants ("CICA")
issued Accounting Guideline 14, Disclosure of Guarantees ("AcG-14"). AcG-14
requires disclosure for certain contracts or obligations that meet the
definition of a guarantee. As at December 31, 2003, the Company has outstanding
letters of credit totalling $3,811,000, which are renewable annually. $3,141,000
of these letters of credit are for security deposits for rehabilitation and
restoration expenses, $250,000 relates to the operating lease at the Nanisivik
Mine (see note 3(g)) and $420,000 (US$325,000) to guarantee a purchase contract.
2002 AND 2001 FIGURES
Certain of the 2002 and 2001 figures have been reclassified to conform to
the 2003 presentation.
2. RECLAMATION DEPOSITS AND RECLAMATION AND CLOSURE COST ACCRUALS
Reclamation and closure costs accruals by mine are as follows:
($000's) 2003 2002
---------------------------------------------------------------------------
Nanisivik Mine 3,391 7,224
Bouchard-Hebert Mine 3,785 3,076
Bougrine Mine 2,489 2,339
El Mochito Mine 1,613 1,794
Caribou Mine 1,000 1,000
El Toqui Mine 620 425
---------------------------------------------------------------------------
Total
Less current portion included in accounts
payable and accrued liabilities 828 2,161
---------------------------------------------------------------------------
Cash collateral on deposit at December 31, 2003 of $100,000 (2002 -
$1,387,000) with third parties to fund reclamation costs is shown separately on
the balance sheet as Reclamation Deposits. During 2003, $1,287,000 of the
collateral on deposit was converted to letters of credit (see note 1 - New
Pronouncement). The Reclamation Deposits at December 31, 2003 and 2002 are for
funding of reclamation costs at the Caribou Mine. In addition, at December 31,
2003, the Company has posted reclamation security bonds totalling $8,181,000
(2002 - $13,000,000) of which $3,141,000 is covered by letters of credit (see
note 1 - New Pronouncement).
141
3. MINERAL PROPERTIES AND FIXED ASSETS
($000's) 2003 2002
--------------------------------------------------------------------------------------------------------------------------
Accumulated Accumulated
Depreciation Net Book Depreciation Net Book
Cost and Depletion Value Cost and Depletion Value
--------------------------------------------------------------------------------------------------------------------------
Equipment 146,562 (104,365) 42,197 158,305 (108,237) 50,068
Mineral properties,
buildings and
improvements 95,193 (64,732) 30,461 104,736 (63,089) 41,647
Development 54,866 (34,503) 20,363 60,489 (34,795) 25,694
Exploration 14,845 (525) 14,320 17,475 (2) 17,473
--------------------------------------------------------------------------------------------------------------------------
311,466 (204,125) 107,341 341,005 (206,123) 134,882
A summary of the write-downs of mineral properties and fixed assets is as
follows:
($000's) 2003 2002 2001
---------------------------------------------------------------------------
Caribou Mine - - 53,450
Nanisivik Mine - - 11,252
El Mochito Mine 279 - 2,505
Other Properties - - 3,074
---------------------------------------------------------------------------
279 70,281
Mineral properties and fixed assets of the Company comprise the following:
a) El Mochito Mine $14,322,000 (2002 - $19,447,000)
The El Mochito Mine is a zinc, lead and silver mine located in the Republic
of Honduras. Deferred exploration costs were written down in 2003 by
$279,000 (2002 - $Nil and 2001- $2,505,000)
b) Bougrine Mine $12,762,000 (2002 - $24,458,000)
The Bougrine Mine is a zinc and lead mine located 160 kilometres west of
Tunis, Tunisia.
c) El Toqui Mine $21,677,000 (2002 - $23,596,000)
The El Toqui Mine is a zinc and gold mine located 1,350 kilometres south of
Santiago, Chile.
d) Bouchard-Hebert Mine $10,111,000 (2002 - $18,452,000)
The Bouchard-Hebert Mine is a zinc, copper, gold and silver mine located 30
kilometres northeast of Rouyn-Noranda, Quebec, Canada.
e) Langlois Mine $39,643,000 (2002 - $37,166,000)
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 $1,659,000 in 2003,
($1,575,000 in 2002), incurred primarily to upgrade resources to reserves and
$778,000 (2002 - $Nil) in pre-production costs in anticipation of reopening,
have been capitalized.
142
f) Caribou Mine $Nil (2002 - $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 2001, as a
result of depressed metal prices, the Company reassessed the carrying value of
its properties and the property was written down by $53,450,000 to $Nil. The
revised carrying value was determined on the basis set out in note 1.
g) Nanisivik Mine $2,542,000 (2002 - $2,899,000)
The Nanisivik Mine was a zinc and silver mine located on Strathcona Sound,
Baffin Island, Nunavut, Canada. The fixed asset carrying value of $2,542,000 as
at December 31, 2003, 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 in the amount of
$11,252,000. The Nanisivik mine ceased operations on September 30, 2002.
h) Other Properties $6,284,000 (2002 - $8,864,000)
Other Properties comprise exploration properties held directly or through
joint ventures. Management reviews the carrying values of these properties
annually and in 2003 recorded a write-down of $Nil (2002 - $Nil, 2001 -
$3,074,000).
On June 16, 2003, the Company sold the Lapa exploration properties
consisting of the Tonawanda and Zulapa properties, respectively, for
US$7,925,000. The Company retains a 1.0 percent net smelter royalty from the
Tonawanda property and a 0.5 percent net smelter royalty from the Zulapa
property. The Company also received a non-refundable advance royalty of
US$1,000,000 against the above net smelter royalty of the Lapa properties and
will receive a further non-refundable advance royalty of US$1,000,000 when the
total published inferred resource reaches 2,000,000 ounces of gold.
The non-refundable advance royalty of $1,340,000 (US$1,000,000) received
has been deferred and is shown on the balance sheet as "Deferred Royalty". The
deferred royalty will be brought into income when earned.
The Lapa properties were non-producing properties and the gain on sale of
$10,336,000 is included in "Other non-producing property (income) costs" of
$8,396,000 in the consolidated statement of operations and deficit in 2003.
4. SHORT-TERM DEBT
($000's) 2003 2002
---------------------------------------------------------------------------
Syndicated Credit Facility
- Revolver 6,462 25,195
- Non-Revolving Facility, current portion (note 5) 1,266 -
- Supplemental Term Facility, current portion (note 5) 467 -
Customer prepayments for zinc concentrates (note 5) 646 3,159
Other (note 5) 1,488 1,873
---------------------------------------------------------------------------
10,329 30,227
On November 15, 2001, the Company completed a refinancing agreement whereby the
balance of the Non-Revolving 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.
143
The syndicated credit facility (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
Non-Revolving 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 an
exercise price of $0.19 per Common Share with an expiry date of March 27, 2006.
In addition, as consideration for extending its support of the Supplemental 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 6(m)).
On November 27, 2003, the Company completed a restructuring of the
Syndicated Credit Facility, which included:
i) A pay down of 50% of US$17,600,000 and US$6,500,000 of the
Non-Revolving Facility and the Supplemental Term Facility,
respectively, on a pari passu basis;
ii) An extension of the Non-Revolving Facility and the Supplemental
Term Facility, both due January 2, 2004, for a period of five
years to January 2, 2009;
iii) An agreement that principal under the Non-Revolving Facility and
the Supplemental Term Facility will be repaid in fifty-four equal
monthly payments beginning in July, 2004; and
iv) Maintaining the existing Revolver until January 2, 2005 with a
reduction of the cap from US$30,000,000 to US$25,000,000.
Interest expense on short-term debt during 2003 amounted to $797,000 (2002
- - $1,979,000, 2001 - $3,018,000).
5. LONG-TERM DEBT
($000's) 2003 2002
---------------------------------------------------------------------------
Non-Revolving Facility (note 4) 11,393 35,748
Supplemental Term Facility (note 4) 4,201 10,267
Reimbursable government assistance, discounted at
a rate of 8% 1,412 1,390
Customer prepayments for zinc concentrates 646 3,159
Other 1,277 1,033
---------------------------------------------------------------------------
Total 18,929 51,597
Less current portion 3,412 3,159
---------------------------------------------------------------------------
15,517 48,438
The Non-Revolving Facility and the Supplemental Term Facility (see note 4),
which bear interest at LIBOR plus 2.75%, are repayable through January 2, 2009,
with principal repayments in fifty-four equal monthly amounts beginning in July,
2004.
On January 30, 2004, the Non-Revolving Facility and the Supplemental Term
Facility were repaid and cannot be redrawn, using a portion of the proceeds from
the sale of units to a syndicate of underwriters (see note 14(a)).
Other long-term debt at December 31, 2003 and 2002 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 9), payment of
which has been deferred to 2004 and for 2003 is included in Other short-term
debt.
The fair value of the Company's long-term debt approximates its carrying
value at December 31, 2003 and 2002. Interest expense on long-term debt during
2003 amounted to $1,432,000 (2002 - $1,913,000, 2001 - $2,506,000).
144
6. CAPITAL STOCK
Authorized - Unlimited Common Shares
200,000,000 preferred shares
Issued:
Common shares
(000's) Number of shares Amount
-------------------------------------------------------------------------------------------------
As at December 31, 2001 93,848 $239,214
Rights offering, net of expenses (e) 94,455 17,643
Shares issued on reacquisition of assets (d) 3,603 638
Employee share purchase plan (f) 1,375 264
-------------------------------------------------------------------------------------------------
As at December 31, 2002 193,281 257,759
Private placement (a) 1,014 742
Shares issued for subscription receipts, net of expenses (b) 85,800 28,002
Shares issued as supplementary payment to employee (c) 2,565 618
Shares issued on exercise of warrants (k) 500 105
Shares issued on exercise of options (g) 1,333 263
Employee share bonus plan (h) 200 50
Employee share purchase plan (f) 1,097 204
-------------------------------------------------------------------------------------------------
As at December 31, 2003 285,790 $287,743
(a) In December 2003, the Company issued 1,013,514 flow-through common shares
at a price of $0.74, exclusive of share issue costs to finance exploration
activities in the vicinity of the Bouchard-Hebert Mine.
(b) On October 7, 2003, the Company issued 85,800,000 subscription receipts, at
a price of $0.35 per subscription receipt resulting in proceeds of
$28,002,000, net of costs of issue of approximately $2,028,000. The
proceeds from the issue were escrowed subject to the satisfaction of
certain conditions (the "Escrow Conditions") which included the Company
reaching agreement with its lenders on the restructuring and pay down of
the Syndicated Credit Facility. The Escrow Conditions were satisfied on
November 27, 2003, the proceeds were released to the Company and the
subscription receipts were exchanged for 85,800,000 common shares of the
Company ("Common Shares").
(c) In February 2003, 2,564,887 Common Shares were issued for $618,000, as
required under an agreement dated November 30, 2001, relating to the
resignation of an executive. The Company had agreed to pay the executive a
supplementary amount of up to $700,000, either in cash or Common Shares.
The amount to be paid was 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, the amount of $618,000 was shown on the balance sheet as
"Common shares to be issued" in Shareholders' Equity. The supplementary
amount paid in the form of Common Shares was included in general and
administrative expenses in 2002.
(d) 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 per cent discount. A director of the Company has
a significant ownership interest in the purchaser that acquired the shares.
145
(e) On May 1, 2002, the Company completed a rights offering resulting in the
issuance of 94,454,795 Common Shares at a price of $0.20 per share
resulting in proceeds of $17,600,000, net of costs of issue of
approximately $1,300,000.
(f) The share purchase plan entitles certain employees of the Company to
contribute up to 5% or up to 10% 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 1,097,000 Common Shares pursuant to the Share
Purchase Plan during 2003 (2002 - 1,375,000). The number of shares
authorized for issue under the share purchase plan as at December 31, 2003
was 6,500,000.
(g) 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 ten 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.
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 were no terminations of
options by optionees in 2003 or 2002.
As at December 31, 2003, the outstanding share options which total
8,885,000 expire at various dates between April 30, 2005 and November 9,
2013 and are exercisable at prices ranging from $0.18 to $8.20 per Common
Share. The number of shares authorized for grants of options under the
share option plan as at December 31, 2003 was 12,500,000.
(h) 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. For
the year ended December 31, 2003, the Company has issued 1,200,000 (2002 -
1,000,000) Common Shares under the Share Bonus Plan. The number of shares
authorized for issue under the share bonus plan as at December 31, 2003 was
3,000,000.
146
(i) Share option transactions were as follows:
Options Weighted- Average
(000's) Exercise Price
- ----------------------------------------------------------------------------------------
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
Granted 1,740 0.27
Exercised (1,333) 0.20
Cancelled (318) 1.95
- ----------------------------------------------------------------------------------------
As at December 31, 2003 8,885 $1.25
The following table summarizes information about the share options
outstanding at December 31, 2003.
Options Outstanding Options Exercisable
- -----------------------------------------------------------------------------------------------------------------------
Number Weighted- Number
Outstanding Average Weighted- Exercisable Weighted-
as at Remaining Average as at Average
Range of Dec. 31, 2003 Contractual Exercise Dec. 31, 2003 Exercise
Exercise Prices (000's) Life Price (000's) Price
- -----------------------------------------------------------------------------------------------------------------------
$0.18 - $0.20 3,555 8 years 190 days $0.19 2,282 $0.19
$0.24 - $2.00 2,921 7 years 58 days $0.74 2,554 $0.79
$2.05 - $3.35 1,501 3 years 142 days $2.92 1,501 $2.92
$3.75 - $8.20 908 5 years 183 days $4.33 908 $4.33
(j) The Company's share option plan is described in note 6(g). The Company has
elected not to use the fair value method of accounting and does not
recognize compensation expense for its stock-based compensation 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 earnings for the year ended
December 31, 2003 would have decreased by $274,000 and the net loss for
2002 would have increased by $183,000. However, the earnings and loss per
share for the years ended December 31, 2003 and 2002, respectively would
have been unchanged.
The fair value of each option grant is estimated on the balance sheet
date using the Black-Scholes option-pricing model with the following
weighted-average assumptions:
2003 2002
--------------------------------------------------------------------------------------------
Weighted-average exercise price per Common Share $0.27 $0.19
Weighted quoted market price per Common Share at date of grant $0.27 $0.19
Weighted-average grant-date fair value price per Common Share $0.17 $0.15
Expected life (years) 1 - 10 1 - 10
Risk free interest rate 4.62% 5.21%
Expected volatility 46% 62%
Dividend yield 0% 0%
The exercise price of all options granted during 2003 and 2002 equals
the quoted market price at the date of grant.
(k) In consideration for restructuring the Syndicated Credit Facility in May
2001, the Company granted to the members of the syndicate ("the Lenders")
warrants to purchase 300,000 Common
147
Shares at $1.57 per share. The warrants were exercisable until November 29,
2002 (see note 6(l)). No value was ascribed to these warrants on the date
of issue.
(l) In consideration for restructuring the Non-Revolving Facility on November
15, 2001 (see note 4), 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 these 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. During the year ended December 31,
2003, 500,000 of the warrants issued to the Lenders were exercised and
50,000 cancelled. As at December 31, 2002, none of these warrants had been
exercised or cancelled.
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 ten-day weighted-average trading price of the Common Shares on the
TSX exceeds $0.28 per share. The exercise price was based on the five-day
weighted-average trading price of the Common Shares on the TSX following
the completion of the Rights Offering.
(m) Under an agreement reached on December 23, 2002 with the Lenders and Dundee
(see note 4), 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 of
$0.19 per Common Share with an expiry date of March 27, 2006. The value
ascribed to the warrants issued of $97,000 was included in the financial
statements at December 31, 2002 as contributed surplus.
The fair value of each of the above option grants, had been estimated
on December 31, 2002 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, 2003 was $0.64.
(n) 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 expired on June 30, 2003. No value was
ascribed to these warrants on the date of issue.
148
7. 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, 2003 of 38%
(2002 - 39%, 2001 - 39%) to the net earnings (loss), excluding income and mining
taxes. The differences are summarized as follows:
($000's) 2003 2002 2001
-----------------------------------------------------------------------------------------------------------------
Tax provision (recovery) at statutory rate 2,364 (7,762) (43,303)
Federal resource allowance 119 (289) 470
Unrecognized tax benefit relating to losses 916 5,781 42,312
Different effective tax rates on earnings (losses) in foreign 1,630 2,725 712
subsidiaries
Benefit of previously unrecognized losses available for carry forward (5,984) (246) -
Other 124 (88) 483
Mining taxes (recovery) (10) (345) (650)
-----------------------------------------------------------------------------------------------------------------
(841) (224) 24
As at December 31, 2003, the significant components of the Company's future
tax assets (liabilities) were as follows:
($000's) 2003 2002
-------------------------------------------------------------------------------------------------------
Future tax assets
Loss carry forwards 19,043 30,562
Mineral properties and fixed assets 56,062 64,709
Reclamation and closure cost accruals 5,354 5,005
-------------------------------------------------------------------------------------------------------
Future tax assets before valuation allowance 80,459 100,276
Valuation allowance 79,269 100,276
-------------------------------------------------------------------------------------------------------
Future tax assets 1,190 -
Future tax liabilities
Mineral properties - mining tax (962) (822)
-------------------------------------------------------------------------------------------------------
Net future tax assets (liabilities) 228 (822)
a) At December 31, 2003, the Company has net operating loss carry
forwards in Canada of approximately $29,000,000, which expire at
various dates through 2010. In addition, the Company has approximately
$46,700,000 of resource expenditures that are limited in their
deduction to income from specific properties.
b) At December 31, 2003, the Company has net operating loss carry
forwards in Chile of approximately $42,700,000, which do not expire.
c) At December 31, 2003, the Company has net operating loss carry
forwards in Honduras of approximately $8,900,000, which will expire
four years after the Company in Honduras generates its first taxable
profit.
8. 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 also approximates its carrying value as set out in note 5.
149
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 and
carries credit insurance when necessary. 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 and 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 3(g)). 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 were being marked to market, resulting in a
gain of $608,000 included in gross sales revenue in the year ended December 31,
2002 (2001 - a loss of $3,162,000).
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 no foreign exchange contracts outstanding at December 31,
2003, and the following at December 31, 2002:
US ($000's) Exchange Rate Maturity
--------------------------------------------------------------------------------------------------
US dollar forward
sales against Canadian dollar 5,000 Cdn$1.5540 2003
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 portion 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. These
contracts are marked to market, and gains and losses are recognized in the
relevant period. The Company also periodically enters into written call options.
No call options have been entered into in either 2003 or 2002 other than those
described below.
150
The Company had no contracts outstanding as at December 31, 2002. The
following contracts were entered into in 2003 and outstanding as at December 31,
2003:
December 31, 2003 Quantity Average Price (US) Maturity
--------------------------------------------------------------------------------------------------------
Zinc forward sale 4,600 tonnes $969 per tonne January 2004
Silver call options 250,000 ounces $5.42 per ounce January - February 2004
Gold call options 2,500 ounces $395 per ounce January - February 2004
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.
Therefore, the Company is exposed to interest rate risk through fluctuations in
these interest rates.
9. RELATED PARTY TRANSACTIONS
All related party transactions are disclosed elsewhere in these
consolidated financial statements (see notes 4, 5 and 6) 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 agreement
was terminated by the Company effective December 31, 2000. The unpaid
balance of $1,033,000 for the above fees has been deferred to 2004, and is
included in short-term debt as at December 31, 2003 and was included in
long-term debt as at December 31, 2002 (see note 5).
b) The Company incurred management fees in each of 2003 and 2002 of $250,000
(2001 - $Nil) for services provided by Dundee.
c) At December 31, 2003, the Company has an amount of $544,000 (2002- $Nil) on
deposit with DSC.
d) The Company and Black Hawk Mining Inc. ("BHK"), a company under common
significant influence by Dundee, entered into an agreement on April 1,
2002, whereby the Company was 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. This agreement was terminated in 2003. 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 shared office space
until 2003 and the Company charged BHK for certain administrative services.
Transactions for the year ended December 31, 2003 for sale of
supplies and charges for rent and administrative services to BHK totalled
$574,000 (2002 - $1,827,000, 2001 - $913,000). 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 2003 for proceeds of $106,000 (2002 - $146,000, 2001-$Nil).
151
Other accounts receivable at December 31, 2003 and 2002 included the
following amounts due from BHK:
($000's) 2003 2002
--------------------------------------------------------------------------
For:
Supplies 203 773
Services 112 341
--------------------------------------------------------------------------
315 1,114
Interest was charged on overdue amounts receivable from BHK at commercial
rates.
10. 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, 2003, the balance of the accrual for current and
long-term reclamation, site restoration and closure costs with respect to
the Nanisivik Mine is $3,391,000, net of estimated salvage value of
$6,400,000. 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 the
actual reclamation and closure costs incurred will not result in the
recognition of an incremental liability since any such excess would give
rise to a financial asset in the form of a receivable from DIAND. This
receivable would offset the excess and would be reported net on the balance
sheet.
The indemnity bonds amounting to $5,000,000 expired in July 2003.
The Company and DIAND are in the process of replacing these bonds with an
additional promissory note for $5,000,000.
c) In 2003, Kalwea Financial Corp., BVI ("Kalwea") commenced an action against
the Company and CanZinco Ltd. ("CanZinco"), a subsidiary of the Company for
damages in the amount of $560,000 plus additional annual minimum royalty
payments of $70,000 each quarter
152
on October 1, January 1, April 1, and July 1, sequentially. Kalwea also
claims a transfer of certain mining claims in Restigouche County, New
Brunswick. The Company and CanZinco have filed a statement of defense and
have counterclaimed for damages in the amount of $840,000 for overpayment
of royalties. Kalwea alleges that it is a secured creditor of Marshall
Minerals Corp. ("Marshall"), a company with which CanZinco has a royalty
agreement arising from the purchase of mining claims in 1995. The Company
and CanZinco are of the opinion that Kalwea's claims are without merit.
This action has been scheduled for mandatory mediation on March 23, 2004.
d) 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 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.
e) 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.
f) 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
and equipment as follows:
($000's)
---------------------------------------------------------------
2004 839
2005 495
2006 307
2007 285
2008 274
11. 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 adopted
by these segments are the same as those described in the Summary of Significant
Accounting Policies (see note 1).
153
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.
SEGMENT INFORMATION
For the Year Ended December 31, 2003
($000's)
- ------------------------------------------------------------------------------------------------------------------------------------
Corporate
Geographic location Latin America Canada Tunisia and Other Consolidated
- ------------------------------------------------------------------------------------------------------------------------------------
Operating Segment El El Bouchard
Mochito Toqui Nanisivik Caribou -Hebert Langlois Bougrine
Mine Mine Total Mine Mine Mine Mine Total Mine
- ------------------------------------------------------------------------------------------------------------------------------------
Net revenue 32,588 17,394 49,982 5,660 - 49,286 - 54,946 20,202 (1,120) 124,010
Depreciation and
depletion (4,025) (2,025) (6,050) - - (9,315) - (9,315) (8,351) (399) (24,115)
Reclamation and
closure costs (680) (295) (975) - - (809) - (809) (493) - (2,277)
(Loss) contribution from
mining activities 3,932 (1,520) 2,412 (200) - 245 - 45 (6,559) (1,519) (5,621)
General and administrative - - - - - - - - - (5,087) (5,087)
Interest and financing - - - - - - - - - (3,321) (3,321)
Investment and other
income - - - - - - - - - 611 611
Foreign exchange gain
on US dollar denominated
debt - - - - - - - - - 11,578 11,578
Write-down of mineral
properties and fixed
assets (279) - (279) - - - - - - - (279)
Other non-producing
property income (costs) - - - (384) (1,521) - (83) (1,988) - 10,384 8,396
Income and mining taxes
(recovery) (83) - (83) - - (141) 5 (136) 145 915 841
Net earnings (loss) 3,570 (1,520) 2,050 (584) (1,521) 104 (78) (2,079) (6,414) 13,561 7,118
Capital expenditures 2,586 5,748 8,334 (36) - 27 1,659 1,650 606 31 10,621
Identifiable assets 35,332 33,965 69,297 7,266 1,499 20,650 41,182 70,597 24,715 11,026 175,635
Information about major customers
Of the Company's total consolidated net revenue in 2003, revenue from one
customer of $48,795,000 originated from the Bouchard-Hebert Mine, and revenue
from another customer of $15,126,000 consisted of $7,719,000 that originated
from the Bourgrine Mine and $7,407,000 that originated from the El Toqui Mine.
SEGMENT INFORMATION
For the Year Ended December 31, 2002
($000's)
- ------------------------------------------------------------------------------------------------------------------------------------
Corporate
Geographic location Latin America Canada Tunisia and Other Consolidated
- ------------------------------------------------------------------------------------------------------------------------------------
Operating Segment El El Bouchard
Mochito Toqui Nanisivik Caribou -Hebert Langlois Bougrine
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 costs (813) (135) (948) (319) - (562) - (881) (1,065) - (2,894)
(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 - - - - - - - - - (4,761) (4,761)
Investment and other
income - - - - - - - - - 551 551
Foreign exchange gain
on US dollar denominated
debt - - - - - - - - - 669 669
Other non-producing
property income (costs) - - - - (1,678) - (107) (1,785) - 909 (876)
Income and mining taxes
(recovery) (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 that originated from the
Bouchard-Hebert Mine, and $1,645,000 that originated from the El Mochito Mine.
154
For the Year Ended December 31, 2001
($000's)
- ------------------------------------------------------------------------------------------------------------------------------------
Corporate
Geographic location Latin America Canada Tunisia and Other Consolidated
- ------------------------------------------------------------------------------------------------------------------------------------
Operating Segment El El Bouchard
Mochito Toqui Nanisivik Caribou -Hebert Langlois Bougrine
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 - - - - - - - - - (8,015) (8,015)
Investment and other
income - - - - - - - - - 9,293 9,293
Foreign exchange loss on
US dollar denominated
debt - - - - - - - - - (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 that originated from the
Bouchard-Hebert Mine, $2,842,000 that originated from the El Mochito Mine and
$2,503,000 that originated from the El Toqui Mine. Revenue from another customer
of $16,401,000 consisted of $5,719,000 that originated from the El Mochito Mine,
$2,807,000 that originated from the Bougrine Mine, $4,074,000 that originated
from the Bouchard-Hebert Mine and $3,801,000 that originated from the Nanisivik
Mine.
12. ANALYSIS OF CHANGES IN NON-CASH WORKING CAPITAL ITEMS
($000's)
---------------------------------------
2003 2002 2001
---------------------------------------
Accounts receivable - concentrate 8,376 (13,976) 8,496
Other receivables 1,271 (654) 8,631
Concentrate and materials and supplies inventory 2,541 25,200 17,390
Short-term investments - - 4,158
Prepaid expenses and other current assets (145) 183 1,058
Provisional payments for concentrate inventory
shipped and not priced (6,105) (18,108) (7,519)
Accounts payable and accrued liabilities (2,630) (2,963) 10,772
Income and mining taxes payable (129) (880) (526)
---------------------------------------
3,179 (11,198) 42,460
---------------------------------------
13. EARNINGS (LOSS) PER SHARE
Basic Earnings (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 and 2001, 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
155
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 2003 was $0.32 (2002 - $0.20, 2001 - $0.86).
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 in 2002 and 2001 and the
weighted-average number of Common Shares outstanding in those years have been
adjusted retroactively as follows:
2003 2002 2001
------------------------------------------------------------------------------------------------
Earnings (loss) per share - before bonus element $0.03 ($0.12) ($1.20)
Earnings (loss) per share - after bonus element $0.03 ($0.12) ($0.92)
Diluted earnings per share - before bonus element $0.03 N/A N/A
Diluted earnings per share - after bonus element $0.03 N/A N/A
(000's)
------------------------------------------------------------------------------------------------
Weighted-average number of shares outstanding 211,411 159,684 92,560
Additional shares due to bonus element - 9,390 27,606
------------------------------------------------------------------------------------------------
Weighted average number of Common Shares
Outstanding after bonus element 211,411 169,074 120,166
------------------------------------------------------------------------------------------------
Incremental shares on assumed exercise of options and
warrants 10,259 601 20
------------------------------------------------------------------------------------------------
Weighted average number of Common Shares used for
diluted earnings per sahre 221,670 169,675 120,186
------------------------------------------------------------------------------------------------
14. SUBSEQUENT EVENTS
a) On January 28, 2004, the Company completed the sale of 57,142,858
units to a syndicate of underwriters at a purchase price of $0.70 per unit,
for net proceeds of $37,326,000, net of costs of issue of approximately
$2,674,000. Each unit consisted of one Common Share and one-half of one
Common Share purchase warrant. Each whole warrant entitles the holder to
acquire one Common Share at a price of $1.00 at any time until January 28,
2009. The Company plans to use the net proceeds for the development of the
Langlois Mine, debt repayment, working capital and general corporate
purposes.
b) On February 16, 2004, the Company signed a letter of intent with
Boliden AB ("Boliden") to purchase all the outstanding shares of Boliden
Westmin (Canada) Limited ("BWCL"). BWCL is the owner of the Myra Falls
Mine, a zinc, copper and gold mine in British Columbia. The acquisition of
BWCL will be exclusive of the Premier Gold property and certain other
assets and liabilities of BWCL. The general terms of the proposed
acquisition include the Company issuing 18,000,000 Common Shares and
5,000,000 warrants, exercisable at $1.00 per Common Share until January 28,
2009.
156
15. 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:
Short-term Accounts
Mineral Investments Reclamation Payable
Properties (included in and Closure and Other
(Expressed in thousands and Fixed Cash and Cash Restricted Costs Accrued Comprehensive
of Canadian dollars) Assets Equivalents Cash Accruals Liabilities Income (Loss) Deficit
CONSOLIDATED BALANCE SHEETS
As at December 31, 2003
As shown in the consolidated
financial statements under
Cdn. GAAP $107,341 $49 $ - $12,070 $19,456 $ - ($171,737)
Shares issued to promoters or
shareholders in exchange for
non-monetary assets (a) (1,289) 12,917
Adjustment relating to
stock-based compensation to
non-employees (b(i)) (48)
Adjustment relating to stock-based
compensation to senior
officer (b(ii)) (156)
Adjustment relating to write-down
of El Toqui Mine (c) (2,130) (2,130)
Adjustment relating to exploration
expenditures (d) (7,808) (7,808)
Adjustment relating to unrealized
gains on short-term
investments (f) 18 18
Adjustment relating to asset
retirement obligations (j) 3,674 22,183 (695) 567 (18,381)
Adjustment relating to
flow-through shares (k) (742) 742 142
Adjustment to reclassify
cumulative translation
adjustment (i) (3,889)
- ---------------------------------------------------------------------------------------------------------------------------
According to U.S. GAAP $99,788 ($675) $742 $34,253 $18,903 ($3,304) ($187,343)
===========================================================================================================================
As at December 31, 2002
As shown in the consolidated
financial statements under
Cdn. GAAP $134,882 $30 $ - $ - $25,577 $ - ($178,855)
Shares issued to promoters or
shareholders in exchange for
non-monetary assets (a) (1,568) 12,638
Adjustment relating to stock-based
compensation to non-employees
(b(i)) (48)
Adjustment relating to stock-based
compensation to senior
officer (b(ii)) (156)
Adjustment relating to write-down
of El Toqui Mine (c) (2,287) (2,287)
Adjustment relating to
exploration expenditures (d) (7,129) (7,129)
Adjustment relating to unrealized
gains on short-term
investments (f) 142 142
Adjustment to reclassify cumulative
translation adjustment (i) 14,492
- ---------------------------------------------------------------------------------------------------------------------------
According to U.S. GAAP $123,898 $172 $ - $ - $25,577 $14,634 ($175,837)
===========================================================================================================================
(Continued)
Cumulative
(Expressed in thousands Contributed Translation Capital
of Canadian dollars) Surplus Adjustment Stock
CONSOLIDATED BALANCE SHEETS
As at December 31, 2003
As shown in the consolidated
financial statements under
Cdn. GAAP $1,582 ($3,889) $287,743
Shares issued to promoters or
shareholders in exchange for
non-monetary assets (a) (14,206)
Adjustment relating to
stock-based compensation to
non-employees (b(i)) 48
Adjustment relating to stock-based
compensation to senior
officer (b(ii)) 156
Adjustment relating to write-down
of El Toqui Mine (c)
Adjustment relating to exploration
expenditures (d)
Adjustment relating to unrealized
gains on short-term
investments (f)
Adjustment relating to asset
retirement obligations (j)
Adjustment relating to
flow-through shares (k) (142)
Adjustment to reclassify
cumulative translation
adjustment (i) 3,889
- -------------------------------------------------------------------------------
According to U.S. GAAP $1,786 $0 $273,395
===============================================================================
As at December 31, 2002
As shown in the consolidated
financial statements under
Cdn. GAAP $1,582 $14,492 $257,759
Shares issued to promoters or
shareholders in exchange for
non-monetary assets (a) (14,206)
Adjustment relating to stock-based
compensation to non-employees
(b(i)) 48
Adjustment relating to stock-based
compensation to senior
officer (b(ii)) 156
Adjustment relating to write-down
of El Toqui Mine (c)
Adjustment relating to
exploration expenditures (d)
Adjustment relating to unrealized
gains on short-term
investments (f)
Adjustment to reclassify cumulative
translation adjustment (i) (14,492)
- -------------------------------------------------------------------------------
According to U.S. GAAP $1,786 $0 $273,395
===============================================================================
157
CONSOLIDATED STATEMENTS OF OPERATIONS
(Expressed in thousands of Canadian dollars, except for per share 2003 2002 2001
information)
- --------------------------------------------------------------------------------------------------------------
Earnings (loss) as shown in the consolidated financial
statements under Cdn. GAAP $7,118 ($19,887) ($111,058)
Additional (expense) income:
Adjustment to depletion in connection with shares
issued to promoters or shareholders (a) 279 347 472
Adjustment to recognize stock-based compensation to non-employees
(b(i)) - - (48)
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) (c) - (2,287) (305)
Adjustment relating to depreciation and depletion (c) 158 73 69
Adjustment relating to write-off of exploration expenditures (d) (837) (2,150) (3,772)
Adjustment relating to ARO - depreciation and depletion (j) (1,849) - -
Adjustment relating to ARO - net adjustment to reclamation
expenses (j) (2,305) - -
Adjustment relating to ARO - accretion (j) (2,118) - -
Cumulative effect of change in accounting principle (j ) (12,109) - -
Adjustment for mark-to-market of Hedge Contract Liability (h) - - 1,431
Adjustment to write-off deferred losses on foreign exchange
hedging contracts (h) - - (2,003)
- --------------------------------------------------------------------------------------------------------------
Net Loss under U.S. GAAP ($11,663) ($23,904) ($115,370)
==============================================================================================================
Basic loss per share under U.S. GAAP
($0.06) ($0.14) ($0.96)
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 ($0.09) ($0.02) ($0.04)
158
CONSOLIDATED STATEMENTS OF OPERATIONS PRESENTATION:
Under U.S. GAAP, the measure "Loss from Mining Activities" is not a recognized
term and would therefore not be presented. "Loss 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 from Mining Activities under Cdn. GAAP" to
"Loss from operations under U.S. GAAP"
(Expressed in thousands of Canadian dollars) 2003 2002 2001
- ---------------------------------------------------------------------------------------------------------------------
Loss from Mining Activities under Cdn. GAAP $ (5,621) $ (9,496) $ (23,492)
General and administrative (5,087) (6,198) (7,481)
Write-down of mineral properties and fixed assets (279) - (70,281)
Other non-producing property income (costs) 8,396 (876) (3,176)
Aggregate adjustments for U.S. GAAP (see Statements
of Operations above) (18,781) (4,017) (4,312)
=====================================================================================================================
Loss from operations under U.S. GAAP $ (21,372) $ (20,587) $ (108,742)
=====================================================================================================================
For U.S. GAAP purposes, the components of non-operating income (loss) are as
follows:
(Expressed in thousands of Canadian dollars) 2003 2002 2001
- ---------------------------------------------------------------------------------------------------------------------
Interest and financing $ (3,321) $ (4,761) $ (8,015)
Investment and other income 611 551 9,293
Foreign exchange gain (loss) on US dollar
denominated debt 11,578 669 (4,720)
Foreign exchange hedging loss - - (3,162)
- ---------------------------------------------------------------------------------------------------------------------
Non-operating income (loss) for U.S. GAAP $ 8,868 $ (3,541) $ (6,604)
======================================================================================================================
The following table reconciles "Net loss under U.S. GAAP" to "Comprehensive loss under U.S. GAAP"
(Expressed in thousands of Canadian dollars) 2003 2002 2001
- ---------------------------------------------------------------------------------------------------------------------
Net loss under U.S. GAAP $ (11,663) $ (23,904) $ (115,370)
Change in cumulative translation adjustments account (17,814) (2,353) 6,873
Adjustment relating to unrealized gains on short-term
investments (124) 142 430
- ---------------------------------------------------------------------------------------------------------------------
Comprehensive loss under U.S. GAAP $ (29,601) $ (26,115) $ (108,067)
=====================================================================================================================
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 caption "Cash (Used for) provided from
operating activities" under "Operating Activities" is not permitted; therefore
the reader should disregard the sub-total of $19,270,000, $13,773,000 and
($5,362,000) for 2003, 2002 and 2001, respectively for U.S. GAAP purposes.
159
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
should be valued at the fair 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 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 to non-employees under
U.S. GAAP for 2001, the fair value of each option grant has been
estimated at the balance sheet date using the Black-Scholes
option-pricing model with the following weighted-average assumptions:
------------------------------------------- ----------------------
Expected life (years) 1.58
------------------------------------------- ----------------------
Risk free interest rate 5.25%
------------------------------------------- ----------------------
Expected volatility 136%
------------------------------------------- ----------------------
Dividend yield 0%
------------------------------------------- ----------------------
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 has been
estimated at the balance sheet date using the Black-Scholes
option-pricing model with assumptions of a 1.58-year expected life,
risk free interest rate of 5.25 percent, an expected volatility of 136
percent and an dividend yield of 0 percent.
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 have been as follows:
------------------------------------------------------------------ --------------- ---------------- ---------------
(Expressed in thousands of Canadian dollars, except per 2003 2002 2001
share amounts)
------------------------------------------------------------------ --------------- ---------------- ---------------
Net loss applicable to common shares per U.S. GAAP
As reported ($11,663) ($23,904) ($115,370)
Add: Stock compensation costs (274) (183) (543)
------------------------------------------------------------------ --------------- ---------------- ---------------
Pro forma ($11,937) ($24,087) ($115,913)
------------------------------------------------------------------ --------------- ---------------- ---------------
Loss per share, basic and diluted
As reported ($0.06) ($0.14) ($0.96)
Pro forma ($0.06) ($0.15) ($1.25)
------------------------------------------------------------------ --------------- ---------------- ---------------
160
The fair value of each option grant is estimated at the balance sheet
date using the Black-Scholes option-pricing model with the following
weighted-average assumptions:
----------------------------------- -----------------------------------------------------------
Years ended December 31,
----------------------------------- -----------------------------------------------------------
2003 2002 2001
----------------------------------- ------------------ -------------------- -------------------
Expected life (years) 10 10 10
----------------------------------- ------------------ -------------------- -------------------
Risk free interest rate 4.62% 5.21% 5.25%
----------------------------------- ------------------ -------------------- -------------------
Expected volatility 46% 62% 136%
----------------------------------- ------------------ -------------------- -------------------
Dividend yield 0% 0% 0%
----------------------------------- ------------------ -------------------- --------\-----------
Effective January 1, 2004, for Cdn. GAAP purposes, the Company will
recognize all employee stock-based compensation as an expense in accordance
with the CICA handbook section 3870 - "Stock-based compensation and other
stock-based payments".
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 2003 consolidated
financial statements, the Company determined that no write-down was required in
2003 (2002 - $2,287,000, 2001 - $305,000) as a result of applying SFAS 144,
"Accounting for the impairment or disposal of long-lived assets". In 2002 and
2001, differences in the amount of write-down arose 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 2003 by $158,000 ($73,000 in
2002, and $69,000 in 2001).
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. The Securities and
Exchange Commission published interpretations with respect to the extractive
industry and have stated that under U.S. GAAP exploration expenditures during
the exploration stage prior to determination of the existence of commercially
mineable 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.
e. COMPREHENSIVE INCOME (LOSS)
Under SFAS No. 130, "Reporting Comprehensive Income", all components of
comprehensive income (loss) 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 up capital.
f. SHORT-TERM INVESTMENTS
Under Cdn. GAAP, unrealized gains (losses) on short-term investments are
not recorded. Under U.S. GAAP, unrealized gains (losses) on short-term
investments are recorded in other comprehensive income.
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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 in shareholders' equity (as a component of other comprehensive income),
depending on whether the derivative is being used to hedge changes in the fair
value or cash flows. SFAS 138 amends certain provisions of SFAS 133 to clarify
four areas of 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) have been charged to income in the relevant year.
h. 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 resulting in the
realization of losses of $2,003,000, which amounts were deferred under Cdn. GAAP
until the related costs were recognized in 2002 (see Note 8 to the Company's
consolidated financial statements as at December 31, 2003). Under U.S. GAAP,
these losses did not qualify for hedge accounting and, accordingly, were charged
to income in the year incurred.
i. 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, such 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.
j. ASSET RETIREMENT OBLIGATIONS
Under Cdn. GAAP, 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. In 2003, the CICA issued Handbook Section 3110 - "Asset
Retirement Obligations" ("CICA 3110"), which is consistent with SFAS 143,
"Accounting for Asset Retirement Obligations" ("SFAS 143"). The standard
provides for the recognition, measurement and disclosure of liabilities for
asset retirement obligations and the associated asset retirement costs. It
addresses obligations required to be settled as a result of an existing law,
regulation or contract related to asset retirements. The new CICA standard is
applicable for fiscal years beginning January 1, 2004. Upon adoption, CICA 3110
will require retroactive restatement of all comparative periods.
On January 1, 2003, for U.S. GAAP, the Company adopted SFAS 143, which
requires that the fair value of liabilities for asset retirement obligations be
recognized in the period in which they are incurred. For the purposes of
applying SFAS 143, asset retirement obligations are based principally on legal
and regulatory requirements associated with the retirement of long-lived assets
that result from the acquisition, construction,
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development and/or the normal operation of a long-lived asset. When the
liability is initially recorded, a corresponding increase in the carrying amount
of the related asset is generally recorded and then depreciated over the life of
the asset. 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. Under SFAS 143, accretion is charged against earnings during the
life of the mine and afterwards until all obligations have been settled. Upon
settlement of the liability, an entity either settles the obligation for its
recorded amount or incurs a gain or loss upon settlement. The cumulative effect
of adopting SFAS 143 was to increase mineral properties and fixed assets by
$3,674,000, increase reclamation and closure costs accruals by $22,183,000,
decrease accounts payable and accrued liabilities by $695,000, increase other
comprehensive income by $567,000 and to record a one-time charge of $12,109,000
($0.06 per share) to earnings in the year ended December 31, 2003. Following the
adoption of SFAS 143, the total amount of recognized liabilities for asset
retirement obligations was $34,253,000. If the change had occurred on January 1,
2002, the cumulative effect would have resulted in an increase in mineral
properties and fixed assets of $6,096,000, an increase of $19,283,000 in
reclamation and closure costs accruals, a decrease in accounts payable and
accrued liabilities of $1,197,000 and a one-time charge of $8,609,000 ($0.05 per
share) to earnings in the year ended December 31, 2002.
k. FLOW-THROUGH SHARES
Under Canadian income tax legislation, a company is permitted to issue
shares whereby the company agrees to incur qualifying expenditures and renounce
the related income tax deductions to the investors. The Company has accounted
for the issue of flow-through shares using the deferral method in accordance
with Cdn. GAAP. At the time of issue, the funds received are recorded as share
capital. No qualifying expenditure was incurred in 2003. For U.S. GAAP, the
premium paid in excess of the market value of $750,000 is credited to accounts
payable and accrued liabilities and will be included in income as the qualifying
expenditures are made. The flow-through fund, which is unexpended at December
31, 2003, is considered to be restricted and is not considered to be cash or
cash equivalents under U.S. GAAP.
l. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Included in accounts payable and accrued liabilities are amounts for
accounts payable and accrued expenses, respectively, as follows:
($000's) 2003 2002
------------------------------------------------------------------------------
Accounts payable $11,147 $13,070
Payroll and severance accrual 2,921 5,183
Utilities cost accrual 854 2,589
Management fees accrual 500 -
Mark-to-market of metal forward sale and call options 708 -
Deferred foreign exchange hedge accrual - 170
Reclamation and closure cost accruals - current portion 133 2,161
Financing cost accrual - 17
Capital taxes accrual 65 168
Other accruals 2,575 2,219
------------------------------------------------------------------------------
$18,903 $25,577
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m. RECENT ACCOUNTING PRONOUNCEMENTS
U.S. STANDARDS
In June 2002, the FASB issued Statement No. 146, "Accounting for Costs
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 determined
that this standard has no impact 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. In
December 2003, the FASB issued FIN 46(R), amending the guidance in FIN 46 as
well as the related transition guidance. FIN 46(R) is effective for the first
reporting period that ends after March 15, 2004. The Company does not conduct
any transactions through special purpose entities and does not expect the
amended standard will have any impact on its financial statements.
CANADIAN STANDARDS
In 2002, the Canadian Institute of Chartered Accountants' ("CICA") Handbook
Section 3063 "Impairment of Long Lived Assets" was amended to harmonize with
SFAS 144. The standard requires that an impairment loss be recognized when the
carrying amount of an asset held for use exceeds the sum of the future
anticipated undiscounted cash flows. The impairment loss would be measured as
the amount by which the carrying amount exceeds the fair value of the asset.
Section 3063 is effective for fiscal years beginning on or after April 1, 2003.
The Company does not expect the standard will have any impact on its financial
statements.
In 2002, the Accounting Standards Board of the CICA issued Accounting
Guideline No. 13 "Hedging Relationships" that increases the documentation,
designation and effectiveness criteria to achieve hedge accounting. The
guideline 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
does not have any impact on its results of operations and financial position.
In June 2003, the CICA issued Accounting Guideline No. 15 "Consolidation of
Variable Interest Entities" ("AcG 15") which is similar to FIN 46(R). AcG 15 is
effective for reporting periods beginning on or after November 1, 2004. The
Company does not expect the standard will have any impact on its financial
statements.
In July 2003, the CICA issued Handbook Section 1100 "Generally Accepted
Accounting Principles" ("CICA 1100") and Handbook Section 1400 "General
Standards of Financial Statement Presentation" ("CICA 1400"). CICA 1100
describes what constitutes Cdn. GAAP and its sources. CICA 1400 clarifies
164
what constitutes fair presentation in accordance with generally accepted
accounting principles. Both sections are effective for fiscal years beginning on
or after October 1, 2003. The Company is currently evaluating the potential
impact these standards may have on its results of operations, financial position
and note disclosures.
In December 2003, the Emerging Issues Committee of the CICA issued EIC-141
"Revenue Recognition" and EIC-142, "Revenue arrangements with multiple
deliverables". EIC-141 harmonizes with SAB 101 in the United States. EIC-142
will harmonize with recently issued EITF 00-21 on multiple-element arrangements.
EITF 00-21 supercedes the multiple-element guidance under SAB 101. EIC-141 and
EIC-142 are effective for interim or annual fiscal periods beginning subsequent
to December 17, 2003. The Company is of the opinion that this standard does not
have any impact on its results of operations and financial position.
The terms "proven and probable reserves", "development", and "production"
have the same meaning under both U.S. and Cdn. GAAP. In addition, mining related
costs are only capitalized after proven and probable reserves have been
designated under both U.S. and Cdn. GAAP.
ITEM 18. FINANCIAL STATEMENTS
Not applicable.
165
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 to a document previously filed as an exhibit to the Company's
Annual Report on Form 20-F for the year ended December 31, 2002.
(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-laws No. 1 as amended and restated and as in effect on the date
hereof (B)(Exhibit 1-2)
4(a) Material Contracts
4(a)(1) Third Further Amended and Restated Credit Agreement
(Exhibit 4(a)(1))
4(c) Compensatory Plans and Arrangements
4(c)(1) Employment agreement - Colin K. Benner(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
31 Certification of Chief Executive Officer and Chief Financial
Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32 Certification of C.E.O. and C.F.O. 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.
Breakwater Resources Ltd.
May 18, 2004 /s/ Colin K. Benner
-------------------------------------
Colin K. Benner
President and Chief Executive Officer
166