EXHIBIT 1
BREAKWATER RESOURCES LTD.
2003 ANNUAL REPORT
R E N E W E D
C O M M I T M E N T
T O G R O W T H
[PICTURE]
CONTENTS BREAKWATER RESOURCES LTD.
IS A CANADIAN-BASED COMPANY
1 MINE LOCATIONS ENGAGED IN THE ACQUISITION,
1 2003 HIGHLIGHTS EXPLORATION, DEVELOPMENT
1 2004 OBJECTIVES AND MINING OF BASE METAL
2 MESSAGE TO SHAREHOLDERS DEPOSITS WORLDWIDE.
4 OPERATIONS SUMMARY
5 RESERVES AND RESOURCES
6 MANAGEMENT'S DISCUSSION AND ANALYSIS
27 MANAGEMENT'S REPORT
28 AUDITORS' REPORT
29 FINANCIAL STATEMENTS
48 MANAGEMENT AND CORPORATE INFORMATION
ALL DOLLAR AMOUNTS USED IN THIS REPORT ARE CANADIAN DOLLARS
UNLESS OTHERWISE SPECIFIED.
This report includes certain forward-looking statements regarding
the intent, belief or current expectations of the Company and
members of its senior management team, including, without
limitation, expectations regarding prospective performance and
opportunities. Investors are cautioned that any such
forward-looking statements are not guarantees of future
performance and involve risks and uncertainties, and that actual
results and future events may differ materially from those
anticipated in such statements.
[PICTURE]
AT THE END OF 2003 THE COMPANY OWNED FOUR OPERATING MINES:
BOUCHARD-HEBERT MINE IN QUEBEC, CANADA; BOUGRINE MINE IN TUNISIA;
EL MOCHITO MINE IN HONDURAS; AND EL TOQUI MINE IN CHILE;
ONE MINE PREPARING FOR RE-OPENING: LANGLOIS MINE IN QUEBEC, CANADA; AND
ONE MINE ON CARE AND MAINTENANCE: CARIBOU MINE IN NEW BRUNSWICK, CANADA.
[PERFORMANCE GRAPH]
MESSAGE TO SHAREHOLDERS
IN OUR 1994 LETTER TO OUR SHAREHOLDERS, WE SAID, "WITH THE FINANCIAL
RESTRUCTURING BEHIND US AND THE CLOSING OF THE CANNON MINE IN LATE 1994,
BREAKWATER'S FUTURE PROSPECTS ARE CLOSELY TIED TO THE OUTLOOK FOR THE WORLD ZINC
MARKET." IN THAT YEAR, BREAKWATER'S ONLY OPERATION WAS THE EL MOCHITO MINE IN
HONDURAS, WHICH WAS PRODUCING AT APPROXIMATELY HALF OF ITS CAPACITY (PRODUCTION
FROM EL MOCHITO IN 1994 AMOUNTED TO 50,595 TONNES OF ZINC AND LEAD CONCENTRATE
COMBINED). WE WENT ON TO SAY, "...WE ARE NOT RELYING ON HIGHER METAL PRICES
ALONE TO IMPROVE YOUR COMPANY'S FINANCIAL PERFORMANCE. WE ARE PURSUING A
STRATEGY OF INCREASED PRODUCTION AND LOWER COSTS TO ASSURE BREAKWATER'S
VIABILITY UNDER ALL MARKET CONDITIONS".
We are pleased to report that we have met our long term goals and
objectives. We have grown substantially since 1994. Our operations comprise four
operating mines, one on a care and maintenance basis and one that is preparing
to reopen. In 2002, Breakwater produced 465,512 tonnes of zinc, lead, copper and
gold concentrate. With the closing of the Nanisivik mine in late 2002, brought
about by low zinc prices, Breakwater produced 356,913 tonnes of concentrate in
2003. In the past ten years we have increased production six fold, lowered total
cash costs per pound of payable zinc from US$0.53 to US$0.32, survived one of
the lowest zinc price periods in recent history and maintained Breakwater's
viability. It should be noted that this would not have been achieved without the
support of our suppliers, bankers and major shareholder.
Clearly we achieved what we set out to accomplish despite the many ups and
downs. Breakwater's management team has now renewed its commitment to growth and
has recently signed a letter of intent to acquire another producing mine.
Significant to the past ten years are the achievements of 2003, as it was a
pivotal year. During the first half of 2003 we saw numerous reports of mining
companies in financial difficulty as they suffered from continued low commodity
prices. The general consensus in the base metal sector at the beginning of the
year was that 2003 was shaping up to be a repeat of 2001 and 2002 when zinc
averaged US$882 and US$772 per tonne respectively. Nonetheless, as we said in
our 2002 message to shareholders, there was continued optimism that the price of
zinc would return to more typical levels late in 2003. This occurred and the
price of zinc closed at US$1008 per tonne at the end of 2003, up from US$750 per
tonne at the beginning of the year. Unfortunately the effect of the weakening US
dollar resulted in Breakwater receiving an average price for zinc of C$1,161 per
tonne in 2003 compared with C$1,220 per tonne for 2002.
In 2003, our costs on an aggregate basis were maintained and our
productivity improved despite the closure of the highly productive Nanisivik
mine in 2002.
While we laboured under heavy debt and low commodity prices for most of
2003 at the end of January 2004 following two financings, the Company eliminated
all of its bank debt.
These financings also allowed Breakwater to fund the preliminary reopening
work at Langlois and add working capital.
ANNUAL REPORT 2003 2
"ON THE DEMAND SIDE, METAL CONSUMPTION REMAINS STRONG IN CHINA AND
CONTINUES TO IMPROVE WORLDWIDE. AS A CONSEQUENCE OF ALL OF THESE
FACTORS, THE METAL MARKET IS EXPECTED TO BE IN DEFICIT BOTH IN 2004
AND 2005."
We cannot emphasize enough that it is management's objective to maintain a
low level of debt in the future. We will continue to exercise discipline in
managing our cash flows in order to maintain a healthy balance sheet.
The shortage of free cash flow over the past few years restricted
Breakwater from conducting significant exploration activities or capital
improvements at our operations. Despite this, headway was made on a number of
fronts during 2003 and resulted in the Company:
o expanding the crushing facilities and commencing the expansion of the
grinding plant at the El Toqui mine,
o adding more reserves at the Langlois mine, and
o formulating a plan for an industrial future for the Bougrine mill and
infrastructure.
In spite of the shortage of cash over the past few years our employees have
rallied to support the Company and have maintained or improved productivity,
safety and environmental best practices.
Productivity was improved across the Company with the tonnes milled per
person shift in 2003 at 13.32 compared with 11.54 in 2000 (an increase of 15%).
Safety measured in lost time accidents per 200,000 person hours was 4.4 in
2003 and compares favourably with the previous eight years, and there were no
environmental incidents of any consequence.
In the latter half of 2003, with an improvement in the commodity markets,
we were successful in restructuring the Company financially. This, and the
current zinc market, has positioned Breakwater well for future growth.
The zinc concentrate market is currently very tight. Poor metal prices over
the past few years have proven to be a disincentive for exploration and new mine
development. At the same time, worldwide smelting capacity has grown while metal
output has been constrained due to the lack of feed.
On the demand side, metal consumption remains strong in China and continues
to improve worldwide. As a consequence of all of these factors, the metal market
is expected to be in deficit both in 2004 and 2005. This bodes well for zinc
concentrate producers and Breakwater intends to build on these favourable market
conditions.
Principal amongst our skills is the ability, as a concentrate producer, to
manage costs aggressively without jeopardizing the safety and well being of our
employees or the integrity of our physical assets. We are confident that we have
well managed and professionally staffed operations, a seasoned management team
that is dedicated to the success and future growth of the Company, a Board of
Directors that is knowledgeable and helpful, and supportive shareholders who
understand the cycles inherent in our business.
It is the efforts of our employees, combined with the support of our
shareholders that has enabled us to get through these recent challenges and
emerge with a strong balance sheet and a renewed focus on the future. We wish to
thank our employees and shareholders for this support.
/s/ COLIN K. BENNER
COLIN K. BENNER
PRESIDENT AND
CHIEF EXECUTIVE OFFICER
April 22, 2004
RENEWED COMMITMENT TO GROWTH 3 BREAKWATER RESOURCES LTD.
- --------------------------------------------------------------------------------
OPERATIONS SUMMARY
2003 2002 2001 2000 1999
- ----------------------------------------------------------------------------------------------------
ORE MILLED (tonnes) 2,586,180 3,077,811 3,311,290 3,028,922 2,236,626
Zinc (%) 7.2 7.8 7.2 7.7 8.6
- ----------------------------------------------------------------------------------------------------
CONCENTRATE PRODUCTION
Zinc (tonnes) 310,337 403,661 394,982 392,655 330,971
Copper (tonnes) 23,781 37,680 42,138 26,351 --
Lead (tonnes) 20,220 18,747 19,799 16,755 17,386
Gold (tonnes) 2,575 5,424 3,389 3,010 2,992
- ----------------------------------------------------------------------------------------------------
METAL IN CONCENTRATES
Zinc (tonnes) 165,422 216,663 211,544 208,996 173,733
Copper (tonnes) 3,710 6,055 6,932 4,532 --
Lead (tonnes) 13,516 12,693 13,174 11,021 11,027
Silver (ounces) 2,225,728 2,957,221 2,940,360 2,790,137 2,155,781
Gold (ounces) 26,220 24,804 38,500 20,289 4,938
- ----------------------------------------------------------------------------------------------------
MINESITE OPERATING COSTS
Per tonne milled (US$) 28.31 27.18 27.26 27.63 27.81
- ----------------------------------------------------------------------------------------------------
TOTAL CASH COSTS
Per pound payable zinc (US$) 0.32 0.32 0.36 0.40 0.40
ANNUAL REPORT 2003 4
- --------------------------------------------------------------------------------
RESERVES AND RESOURCES
- --------------------------------------------------------------------------------
The following table lists Breakwater's mineral reserves and resources as
calculated by Torben Jensen, Vice President, Engineering, Breakwater's Qualified
Person as of December 31, 2003, according to the "CIM Standards on Mineral
Resources and Reserves: Definitions and Guidelines" (August, 2000). Accordingly,
the Resources have been classified as Measured, Indicated or Inferred and the
Reserves have been classified as Proven and Probable based on the Measured and
Indicated Resources.
DECEMBER 31, 2003 December 31, 2002
- ------------------------------------------------------------------------------------------------------------------------
TONNES ZN PB CU AG AU Tonnes Zn Pb Cu Ag Au
(000's) (%) (%) (%) (g/t) (g/t) (000's) (%) (%) (%) (g/t) (g/t)
- ------------------------------------------------------------------------------------------------------------------------
PROVEN AND PROBABLE MINERAL RESERVES
BOUCHARD-HEBERT 1,126 6.1 - 0.4 27 0.9 2,143 6.0 - 0.4 31 1.0
BOUGRINE 475 10.2 1.8 - - - 1,187 11.6 2.0 - - -
EL MOCHITO 2,686 6.5 1.8 - 87 - 3,167 6.6 1.8 - 76 -
EL TOQUI 2,801 7.4 - - - 1.7 3,344 7.7 - - - 1.4
LANGLOIS 3,323 10.8 - 0.8 52 0.1 2,903 11.2 - 0.7 53 0.1
CARIBOU 5,057 6.5 3.4 - 90 - 5,057 6.5 3.4 - 90 -
- ------------------------------------------------------------------------------------------------------------------------
TOTAL 15,468 7.7 - - - - 17,801 7.8 - - - -
MEASURED AND INDICATED MINERAL RESOURCES*
BOUCHARD-HEBERT 1,218 6.9 - 0.4 30 1.0 2,296 6.8 - 0.4 34 1.1
BOUGRINE 768 11.4 2.1 - - - 1,279 13.3 2.3 - - -
EL MOCHITO 3,599 7.9 2.4 - 108 - 4,288 8.2 2.5 - 99 -
EL TOQUI 3,499 8.1 - - - 1.6 4,203 8.3 - - - 1.4
LANGLOIS 4,981 11.1 - 0.8 54 0.1 4,862 11.0 - 0.7 53 0.1
CARIBOU 5,152 7.4 3.9 - 95 - 5,152 7.4 3.9 - 95 -
- ------------------------------------------------------------------------------------------------------------------------
TOTAL 19,217 8.7 - - - - 22,080 8.8 - - - -
* Includes proven and probable reserves but excludes inferred resources.
INFERRED MINERAL RESOURCES
BOUCHARD-HEBERT - - - - - - - - - - - -
BOUGRINE 68 10.7 1.9 - - - 249 8.2 1.3 - - -
EL MOCHITO 2,911 7.3 3.2 - 101 - 2,411 7.4 3.2 - 110 -
EL TOQUI 2,990 8.4 - - - 0.4 3,050 8.5 - - - 0.4
LANGLOIS 1,255 9.7 - 0.5 40 0.1 1,547 8.1 - 0.5 37 0.1
CARIBOU 4,163 6.7 3.2 - 98 - 4,163 6.7 3.2 - 98 -
- ------------------------------------------------------------------------------------------------------------------------
TOTAL 11,387 7.7 - - - - 11,420 7.6 - - - -
RENEWED COMMITMENT TO GROWTH 5 BREAKWATER RESOURCES LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
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.
In November 2003, the Company received net proceeds of approximately $28.0
million on the issuance of 85.8 million common shares of the Company (the
"Common Shares") pursuant to a subscription receipt offer in October. A portion
of these funds was used to repay part of the bank debt as more completely
described later in this document.
Use of Proceeds ($ millions)
- -------------------------------------------------
Bank Debt Repayment 15.7
Working Capital 12.3
- -------------------------------------------------
Net Proceeds 28.0
ANNUAL REPORT 2003 6
"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."
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.
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
RENEWED COMMITMENT TO GROWTH 7 BREAKWATER RESOURCES LTD.
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.
SELECTED FINANCIAL DATA
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
ANNUAL REPORT 2003 8
" 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."
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.
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
The following table illustrates the sensitivity of earnings and cash flow
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
RENEWED COMMITMENT TO GROWTH 9 BREAKWATER RESOURCES LTD.
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
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 ($22.5
million).
GROSS SALES REVENUE BY METAL 2003 2002
($ thousands)
- ---------------------------------------------------
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$0.35 in 2002.
(See non-GAAP reconciliation of the total cash cost per pound of payable
zinc below).
ANNUAL REPORT 2003 10
"IN 2004, THERE SHOULD CONTINUE TO BE DOWNWARD PRESSURE ON ZINC
CONCENTRATE TREATMENT CHARGES AS THE WORLD ZINC SMELTING CAPACITY
CONTINUES TO EXCEED MINE PRODUCTION. IT IS EXPECTED THAT THE OVERALL
DEMAND FOR ZINC CONCENTRATES SHOULD REMAIN STRONG IN 2004."
NON GAAP RECONCILIATIONS
NON GAAP RECONCILIATION OF TOTAL CASH COST PER POUND OF PAYABLE ZINC
TO CONSOLIDATED FINANCIAL STATEMENTS
2003 2002
- ------------------------------------------------------------------------------------------------
By-Product Credit ($ 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 financial 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 exclude capital expenditures. Capital expenditures are discussed
throughout the MD&A and the consolidated financial statements.
RENEWED COMMITMENT TO GROWTH 11 BREAKWATER RESOURCES LTD.
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.
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 working capital items) 14.7 8.6
* Other non-producing property (income) costs include the proceeds from the
sale of the Lapa properties in 2003.
ANNUAL REPORT 2003 12
"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."
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.
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.
RENEWED COMMITMENT TO GROWTH 13 BREAKWATER RESOURCES LTD.
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.
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.
ANNUAL REPORT 2003 14
"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$12.1 MILLION OF THE COMPANY'S NON-REVOLVING FACILITY WITH THE
BALANCE TO BE USED FOR WORKING CAPITAL."
OPERATING REVIEW - 2003 AND 2002
The following table summarizes financial results for each of the Company's
operating mines. Although Nanisivik closed in September of 2002, sales continued
into 2003.
Contribution (Loss) Capital
Gross Revenue From Mining Activities(1) Non-cash Costs(2) Expenditures
($ 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.
(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 2003 2002
(million pounds of zinc contained in concentrate)
- -------------------------------------------------------
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.
RENEWED COMMITMENT TO GROWTH 15 BREAKWATER RESOURCES LTD.
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.
Year Ended
December 31,
PRODUCTION STATISTICS 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 (Cdn$) 34.80 34.99
Total Cash Costs
Per pound of payable zinc (US$) 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 life of the mine but it will not prevent a
temporary closure due to the time requirements to develop a zone, if found.
ANNUAL REPORT 2003 16
"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."
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.
Year Ended
December 31,
PRODUCTION STATISTICS 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 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.
RENEWED COMMITMENT TO GROWTH 16 BREAKWATER RESOURCES LTD.
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.
Year Ended
December 31,
PRODUCTION STATISTICS 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.
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 $5.7 million in 2003, 97 percent higher than 2002
expenditures with the majority spent on the mill expansion.
Year Ended
December 31,
PRODUCTION STATISTICS 2003 2002
- -------------------------------------------------------
Ore Milled (tonnes) 440,301 424,459
Zinc (%) 8.1 9.2
Gold (grams/tonne) 0.3 0.7
Concentrate Production
Zinc (tonnes) 64,107 70,752
Recovery (%) 92.5 92.1
Grade (%) 51.2 50.8
Gold (tonnes) 2,575 5,424
Recovery (%) 31.8 49.9
Grade (grams/tonne) 17.7 26.9
Metal in Concentrates
Zinc (tonnes) 32,848 35,907
Gold (ounces) 2,534 4,682
Silver (ounces) 225,695 282,383
Minesite Operating Cash Costs
Per tonne milled (US$) 27.38 26.04
Total Cash Costs
Per pound payable zinc (US$) 0.36 0.32
ANNUAL REPORT 2003 18
"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."
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.
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.
RENEWED COMMITMENT TO GROWTH 19 BREAKWATER RESOURCES LTD.
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 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.
ANNUAL REPORT 2003 20
"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."
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 $2.0 million letter
of credit to the Company to secure its performance.
As well, these amounts do not take into consideration the value of
equipment and supplies that were purchased and are currently located at
Nanisivik, earmarked for reclamation activities, and the considerable amount of
reclamation work that was completed prior to and following the closure of the
mine (both 2002 and 2003).
Year Ended
December 31,
PRODUCTION STATISTICS 2003 2002
- -------------------------------------------------------
Ore Milled (tonnes) 0.0 516,544
Zinc (%) 0.0 10.0
Silver (grams/tonne) 0.0 42
Concentrate Production
Zinc (tonnes) 0.0 87,644
Recovery (%) 0.0 96.0
Grade (%) 0.0 56.5
Metal in Concentrate
Zinc (tonnes) 0.0 49,514
Silver (ounces) 0.0 528,049
Minesite Operating Cash Costs
Per tonne milled (Cdn$) 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.
RENEWED COMMITMENT TO GROWTH 21 BREAKWATER RESOURCES LTD.
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.
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 $10.3 million on the sale of the Lapa properties in Quebec.
SUMMARY OF QUARTERLY RESULTS
2002 2003
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
- --------------------------------------------------------------------------------------------------------------
Gross Sales Revenue ($ millions) 64.5 60.9 74.2 104.2 52.9 61.7 41.6 51.4
Net Earning (Loss) ($ millions) (3.3) 2.3 (16.9) ($2.0) 0.1 10.8 (4.1) 0.3
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$)
Average realized zinc price (US$/t) 791 813 752 775 785 768 810 859
Average realized zinc price (C$/t) 1,261 1,280 1,181 1,217 1,185 1,116 1,157 1,202
Concentrate tonnes sold 105,388 98,069 139,425 180,448 89,653 116,366 78,626 93,519
CONTRACTUAL OBLIGATIONS
CONTRACTUAL OBLIGATIONS PAYMENTS DUE BY PERIOD
($ thousands) TOTAL (less than) 1 YEAR 1-3 YEARS 4-5 YEARS (greater than) 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 February 2004.
ANNUAL REPORT 2003 22
"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."
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.
RENEWED COMMITMENT TO GROWTH 23 BREAKWATER RESOURCES LTD.
RESERVES
Annually the Company estimates it's 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.
ANNUAL REPORT 2003 24
"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."
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 on page 26 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.
RENEWED COMMITMENT TO GROWTH 25 BREAKWATER RESOURCES LTD.
COMMON SHARES OR
SECURITIES CONVERTIBLE
INTO COMMON SHARES MARCH 5, 2004
- ---------------------------------------------------------------------
Common Shares 344,394,741
Share Option Plan - Options
Weighted average exercise price $1.07. 10,347,434
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
15,400,705 expire May 2, 2007. 30,801,410
3,000,000 warrants granted at $0.19,
expire March 27, 2006. 2,000,000
FULLY DILUTED 388,043,585
Warrants exercisable 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.
OTHER INFORMATION
Additional information regarding the Company is included in the Company's
Annual Report on Form 20-F filed with the Canadian securities regulators and the
United States Securities and Exchange Commission, a copy of which is posted on
the SEDAR website at www.sedar.com.
CAUTIONARY NOTE
CERTAIN STATEMENTS INCLUDED IN THIS 2003 ANNUAL REPORT, FINANCIAL
STATEMENTS FOR THE PERIOD ENDED DECEMBER 31, 2003 AND MANAGEMENT'S DISCUSSION
AND ANALYSIS THEREON ARE FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF THE
UNITED STATES PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. THEY INCLUDE
ESTIMATES AND STATEMENTS THAT DESCRIBE THE COMPANY'S FUTURE PLANS, OBJECTIVES
AND GOALS, INCLUDING WORDS TO THE EFFECT THAT THE COMPANY OR MANAGEMENT EXPECTS
A STATED CONDITION OR RESULT TO OCCUR. SUCH FORWARD-LOOKING STATEMENTS INVOLVE
INHERENT RISKS AND UNCERTAINTIES AND OTHER FACTORS THAT MAY CAUSE THE ACTUAL
RESULTS OR PERFORMANCE TO DIFFER MATERIALLY FROM THOSE CURRENTLY ANTICIPATED IN
SUCH STATEMENTS. IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM THOSE CURRENTLY ANTICIPATED ARE DESCRIBED ABOVE AND IN THE
COMPANY'S MOST RECENT ANNUAL REPORT UNDER "MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL RESULTS" AND ANNUAL REPORT ON FORM 20-F UNDER "RISK FACTORS" ON
FILE WITH THE U.S. SECURITIES AND EXCHANGE COMMISSION AND CANADIAN PROVINCIAL
SECURITIES REGULATORY AUTHORITIES. THE COMPANY DISCLAIMS ANY OBLIGATION TO
UPDATE OR REVISE ANY FORWARD-LOOKING STATEMENTS WHETHER AS A RESULT OF NEW
INFORMATION, EVENTS OR OTHERWISE.
ANNUAL REPORT 2003 26
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.
/s/ COLIN K. BENNER /s/ RICHARD R. GODFREY
COLIN K. BENNER RICHARD R. GODFREY
PRESIDENT AND VICE PRESIDENT, FINANCE AND
CHIEF FINANCIAL OFFICER CHIEF EXECUTIVE OFFICER (ACTING)
RENEWED COMMITMENT TO GROWTH 27 BREAKWATER RESOURCES LTD.
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. Those 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.
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.
/s/ Deloitte & Touche LLP
Chartered Accountants
Toronto, Ontario
February 27, 2004
ANNUAL REPORT 2003 28
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
/s/ GARTH A. C. MACRAE /s/ COLIN K. BENNER
GARTH A. C. MACRAE COLIN K. BENNER
DIRECTOR DIRECTOR
RENEWED COMMITMENT TO GROWTH 29 BREAKWATER RESOURCES LTD.
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.
ANNUAL REPORT 30
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.
RENEWED COMMITMENT TO GROWTH 31 BREAKWATER RESOURCES LTD.
Breakwater Resources Ltd.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2003, 2002 and 2001
(Expressed in thousands of Canadian dollars except share and per share amounts)
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 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.
ANNUAL REPORT 2003 32
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.
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.
RENEWED COMMITMENT TO GROWTH 33 BREAKWATER RESOURCES LTD.
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, 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.
ANNUAL REPORT 2003 34
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 12,898 15,858
Less current portion included in accounts
payable and accrued liabilities 828 2,161
---------------------------------------------------------------
12,070 13,697
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).
3. MINERAL PROPERTIES AND FIXED ASSETS
($000's) 2003 2002
- --------------------------------------------------------------------- ---------------------------------------
ACCUMULATED Accumulated
DEPRECIATION Depreciation
AND NET BOOK and Net Book
COST DEPLETION VALUE Cost 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.
RENEWED COMMITMENT TO GROWTH 35 BREAKWATER RESOURCES LTD.
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.
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.
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)).
ANNUAL REPORT 2003 36
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).
RENEWED COMMITMENT TO GROWTH 37 BREAKWATER RESOURCES LTD.
6. CAPITAL STOCK
AUTHORIZED - Unlimited Common Shares
200,000,000 preferred shares
Issued:
Common shares NUMBER
(000's) 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.
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.
ANNUAL REPORT 2003 38
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.
I) Share option transactions were as follows:
WEIGHTED
- AVERAGE
OPTIONS EXERCISE
(000's) 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.
RENEWED COMMITMENT TO GROWTH 39 BREAKWATER RESOURCES LTD.
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 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.
ANNUAL REPORT 2003 40
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 subsidiaries 1,630 2,725 712
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.
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.
RENEWED COMMITMENT TO GROWTH 41 BREAKWATER RESOURCES LTD.
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 EXCHANGE
($000's) 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.
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 sales 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.
ANNUAL REPORT 2003 42
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).
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.
RENEWED COMMITMENT TO GROWTH 43 BREAKWATER RESOURCES LTD.
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 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).
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.
ANNUAL REPORT 2003 44
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.
RENEWED COMMITMENT TO GROWTH 45 BREAKWATER RESOURCES LTD.
SEGMENT INFORMATION
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
ANNUAL REPORT 2003 46
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 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 share 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.
RENEWED COMMITMENT TO GROWTH 47 BREAKWATER RESOURCES LTD.
MANAGEMENT AND
CORPORATE INFORMATION
DIRECTORS OFFICERS
Garth A. C. MacRae+ Colin K. Benner
CHAIRMAN PRESIDENT AND
CHIEF EXECUTIVE OFFICER
Colin K. Benner+
John D. Bracale
Gordon F. Bub VICE PRESIDENT, LATIN AMERICA AND
CORPORATE LOGISTICS
Donald K. Charter(degree)
Richard R. Godfrey+
Jonathan C. Goodman* VICE PRESIDENT, FINANCE AND CHIEF FINANCIAL
OFFICER (ACTING)
Allen J. Palmiere*(degree)
J. Steven Hayes
A. Murray Sinclair, Jr.*(degree) VICE PRESIDENT, MARKETING
William M. Heath
* Member of Audit Committee VICE PRESIDENT, ADMINISTRATION
(degree) Member of Compensation Torben Jensen
Committee VICE PRESIDENT, ENGINEERING
John B. McCombe
+ Member of Hedging Committee VICE PRESIDENT, LATIN AMERICAN OPERATIONS
Norman L. Calder
TREASURER
Leroy A. Fong
CONTROLLER
E. Ann Wilkinson
CORPORATE SECRETARY
TRANSFER AGENT CORPORATE AND REGISTERED OFFICE
AND REGISTRAR
95 Wellington Street West
Computershare Trust Suite 950
Company of Canada Toronto, Ontario
100 University Ave. M5J 2N7
9th Floor
Toronto, Ontario Tel: (416) 363-4798
M5J 2Y1 Fax: (416) 363-1315
Tel: (514) 982-7555
(800) 564-6253 E-MAIL
Fax: (416) 263-9524
(866) 249-7775 investorinfo@breakwater.ca
E-Mail:
service@computershare.com
WEBSITE
www.computershare.com
www.breakwater.ca
CO-TRANSFER AGENTS
SHARES TRADED
Computershare Trust
Company of Canada Toronto Stock Exchange
510 Burrard Street Symbol - BWR
2nd Floor
Vancouver, AUDITORS
British Columbia
V6C 3B9 Deloitte & Touche LLP
Suite 1700
Computershare Trust 5140 Yonge Street
Company Inc. Toronto, Ontario
350 Indiana Street M2N 6L7
Suite 800
Golden, Colorado Tel: (416) 601-6150
U.S.A. 80401
Tel: (303) 262-0600
Fax: (303) 262-0603
ANNUAL REPORT 2003 48
[PICTURE]
BREAKWATER RESOURCES LTD.
WWW.BREAKWATER.CA