Exhibit 2
FORM 51-102F3
MATERIAL CHANGE REPORT
ITEM 1. NAME AND ADDRESS OF COMPANY
Breakwater Resources Ltd.
Suite 950, 95 Wellington Street West
Toronto, Ontario M5J 2N7
(the "Company")
ITEM 2. DATE OF MATERIAL CHANGE
March 7, 2005
ITEM 3. NEWS RELEASE
A press release regarding the material change was issued in
Toronto, Ontario on March 7, 2005 through Canada NewsWire.
ITEM 4. SUMMARY OF MATERIAL CHANGE
The Company released its financial and operating results for the
year ended December 31, 2004.
ITEM 5. FULL DESCRIPTION OF MATERIAL CHANGE
The press release dated March 7, 2005 is attached.
ITEM 6. RELIANCE ON SUBSECTION 7.1(2) OR 3) OF NATIONAL INSTRUMENT 51-102
Not applicable.
ITEM 7. OMITTED INFORMATION
Not applicable.
ITEM 8. EXECUTIVE OFFICER
Priya Patil
Corporate Counsel and Asst. Corporate Secretary
Breakwater Resources Ltd.
Suite 950, 95 Wellington Street West
Toronto, Ontario M5J 2N7
Telephone: (416) 363-4798 Ext. 275
ITEM 9. - DATE OF REPORT
March 11, 2005
1
[LOGO] Breakwater Resources Ltd.
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BREAKWATER RESOURCES LTD.
95 WELLINGTON STREET WEST, SUITE 950
TORONTO, ONT., M5J 2N7
Tel: (416) 363-4798
Fax: (416) 363-1315
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NEWS RELEASE (TSX: BWR)
BREAKWATER ANNOUNCES 2004 ANNUAL FINANCIAL AND OPERATING RESULTS
Toronto, Canada, March 7, 2005... For the year ended December 31, 2004,
BREAKWATER RESOURCES LTD. (the "Company") reported Net Earnings of $2.6 million
($0.01 per share) on Gross Sales Revenue of $240.3 million compared with Net
Earnings of $0.7 million ($0.00 per share) on Gross Sales Revenue of $207.6
million in 2003. Earnings for 2003 included a foreign exchange gain of $11.6
million and a gain of $10.3 million from the sale of the Lapa properties.
Excluding these two items, the 2004 results show an improvement in Net Earnings
of $23.8 million in 2004 over 2003.
The Company realized an average zinc price of US$1,035 per tonne (US$0.47 per
pound) in 2004. Zinc prices have strengthened in 2005 averaging US$1,283 per
tonne (US$0.58 per pound) in the first two months of the year and an end of
February price of US$1,385 per tonne (US$0.63 per pound). The results for 2004
include five months of operation for the Myra Falls mine, acquired in July 2004.
Bouchard-Hebert completed mining in late February of 2005 and will complete
concentrate shipment by the end of the first quarter of 2005.
The Board has approved the initial capital expenditure required for shaft
rehabilitation at the Langlois mine in preparation for re-opening.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion of the financial condition and results of operations of
Breakwater Resources Ltd. constitutes management's review of the factors that
affected the Company's financial and operating performance for the year ended
December 31, 2004, 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 2004 and 2003, approximately 74 percent and 83 percent,
respectively, of gross sales revenue was derived from the sale of zinc in
concentrates with the balance from lead, copper, gold and silver in
concentrates.
Since 1994, production has generally increased through the acquisition of
operating mines but has also increased from productivity improvements and
efficiencies. The low metal price cycle of the last few years and the Company's
bank debt burden prevented continued growth. This has now been resolved with
higher metal prices, the full repayment of the bank debt, the acquisition of the
Myra Falls mine and the redevelopment of the Langlois mine. The Company has
returned to its strategy of growth through acquisition and the development of
existing assets.
2
The following are the notable details related to the Company's financial results
in 2004 compared with 2003.
o Gross sales revenue increased by 16 percent to $240.3 million on 336,896
tonnes of concentrate sold in 2004, from $207.6 million on 378,164
tonnes of concentrate sold in 2003.
o Contribution from mining activities increased by $34.5 million to $25.7
million in 2004, from a loss of $8.8 million in 2003.
o Metals prices were significantly stronger in 2004, as the Company
realized an average zinc price of $1,035 per tonne compared with $804
per tonne in 2003. The improved metals prices were offset to some degree
by the stronger Canadian dollar which averaged C$1.3010 per US$ in 2004,
compared with C$1.4115 in 2003 (see metal price table).
o Net income increased to $2.6 million in 2004 compared with $0.7 million
in 2003. Included in 2003's net earnings was a $10.3 million gain on the
sale of the Lapa properties and a $11.6 million foreign exchange gain on
US dollar denominated debt. Removing these two items result in an
improvement in net income of $23.8 million from 2003 to 2004. To date
the acquisition of the Myra Falls mine has negatively impacted the
Company's earning by $5.1 million. The Company continues to effect
change at this newly acquired operation with the anticipated
improvements expected in the latter half of 2005.
o The Company completed the acquisition of the Myra Falls mine on July 23,
2004, adding significantly to the Company's production profile.
Annualized zinc and copper concentrate from Myra Falls is expected to be
over 110,000 tonnes and 35,000 tonnes, respectively. The acquisition was
accounted for as a purchase transaction in accordance with CICA Handbook
Section 1581, Business Combinations.
o Total concentrate production increased to 388,736 tonnes in 2004 from
356,913 tonnes in 2003 due mainly to the acquisition of the Myra Falls
mine.
o Total cash cost per pound of payable zinc increased in 2004 to US$0.34
from US$0.32. This increase was due to the inclusion of the higher cost
Myra Falls mine in the Company's production profile in 2004, higher than
expected unit costs at the Bougrine mine, higher treatment charges and
freight costs and the stronger Canadian dollar (see production statistic
section for details).
o The bank debt was fully repaid and the credit facility agreement
cancelled in 2004.
On January 28, 2004, the Company completed the sale of 57,142,858 units for net
proceeds of $37.0 million. Each unit consisted of one Common Share and one-half
of one Common Share purchase warrant. Each whole warrant entitles the holder to
acquire one Common Share at a price of $1.00 at any time until January 27, 2009.
The Company used $16.0 million of the proceeds to retire the Non-Revolving
Facility, $16.4 million was targeted for use to continue the development of the
Langlois mine of which $4.0 million was spent in 2004 and $4.6 million was used
for working capital and general corporate purposes.
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Use of Proceeds ($ millions)
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Bank Debt Repayment 16.0
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Langlois Development 16.4
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Working Capital and General Corporate Purposes 4.6
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Net Proceeds 37.0
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In December 2004, the Company entered into a royalty agreement (the "Agreement")
with Red Mile Resources No. 5 Limited Partnership ("Red Mile") whereby the
Company sold a basic royalty on a portion of the payable zinc production, over
the life of the Myra Falls mine. The Company received cash of $13.5 million,
which included a royalty of $12.0 million and fees and interest of $1.5 million.
Under the terms of the Agreement the Company is required to make basic royalty
payments at fixed amounts per pound of payable zinc produced, which amounts
escalate from $0.003 per pound to $0.016 per pound over the first twelve years
of the agreement. In addition, the Company granted Red Mile a net smelter return
of 0.4%, 0.5% or 0.7% in years 2010 through 2014 if the price of zinc in a given
calendar year in that period averages US$2,250, US$2,500 or US$2,750 per tonne,
respectively. $11.8 million of the cash received was placed with a financial
institution for which the Company received an interest bearing promissory note.
Interest earned from the promissory note will be used to fund the expected basic
royalty payments during the first five years of the Agreement. Over the
remaining years of the Agreement, interest and principal from the promissory
note will be used to fund the basic royalty payments.
3
The balance of the funds received, $1.7 million will be used for working capital
and capital requirements at the Myra Falls mine.
Under certain circumstances the Company has the right under the terms of a call
option to acquire the partnership units of Red Mile for the lower of fair market
value or the balance outstanding under the promissory note.
OUTLOOK
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.
With the resignation of Colin Benner (Chief Executive Officer) in December
2004 a committee of the Board of Directors was appointed to direct the search
for a new Chief Executive Officer. The committee has engaged a consultant to
carry out this search and hope to fill this vacancy before the Annual General
Meeting of the Shareholders.
The completion of the processing expansion at El Toqui in 2004 will allow the
plant to increase production to 520,000 tonnes in 2005 from 467,000 tonnes in
2004. This higher throughput will provide higher metal production at a reduced
unit cost.
With the positive results from the El Toqui exploration program in 2004, the
Company plans to continue exploration work in 2005 in the Concordia area, with
the goal of adding resources and upgrading existing resources to reserves (see
February 15, 2005 press release).
The Myra Falls mine, acquired in 2004, was a significant event for the Company
and will be a major focus in 2005. The Company has made important changes to the
on-site management and believes there is an opportunity to significantly improve
the performance of this mine.
Labour negotiations were successfully completed in January 2005 at Myra Falls.
With this agreement, and those completed in 2004 at the El Toqui and El Mochito
mines, the Company now has in place agreements at its three key operations
covering the next three years.
The Company expects to complete the reclamation work at Nanisivik in 2005 so
that the only requirement will be ongoing site monitoring.
The Company completed mining and processing at the Bouchard-Hebert mine on
February 20, 2005. An exploration program is underway to try and identify a new
deposit. The processing facilities will remain in place pending the outcome of
the exploration program in 2006, but reclamation of the mine and the tailings
area have commenced.
The Bougrine mine will close in the third quarter of 2005. The Company expects
to come to a final decision on the clinker grinding option by the second quarter
of 2005 (see Bougrine Outlook). Otherwise, reclamation will commence with the
closure of the mine and will be completed in 2006.
Metal prices are expected to remain strong during 2005 and generate a
significant contribution from mining activities.
The Company is committing significant resources across the organization in 2005
to become compliant with Sarbanes Oxley by the end of the year.
4
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.
STATEMENT OF OPERATIONS AND DEFICIT DATA Years ended December 31,
-------------------------------------------------------------
2004 2003 2002
------------------- ------------------- -------------------
($ millions except for per share numbers, ratios and weights)
Tonnes of Concentrate Sold
(Zinc, Copper, Lead and Gold) 336,896 378,164 523,330
Gross Sales Revenue 240.3 207.6 305.3
Treatment and Marketing Costs 81.9 83.6 136.7
Net Revenue 158.4 124.0 168.6
Total Operating Costs 132.7 132.8 181.8
Contribution (Loss) from Mining Activities 25.7 (8.8) (13.2)
Net Earnings (Loss) 2.6 0.7 (26.7)
Earnings (Loss) per Common Share 0.01 0.00 (0.16)
Diluted Earnings per Common Share 0.01 0.00 (0.16)
Cash Provided by Operating Activities(1) 29.3 15.5 9.9
Capital Expenditures 27.7 10.6 11.0
Weighted-Average Number of
Common Shares Outstanding
After Bonus Element 353,508 211,411 169,074
Number of Common Shares Outstanding 363,156 285,790 193,281
(1) Before changes in non-cash working capital items.
BALANCE SHEET DATA As at December 31,
----------------------------------------
2004 2003
------------------- -------------------
Working Capital 36.6 36.8
Total Assets 287.5 179.6
Total Debt 1.7 25.8
Total Long-Term Liabilities 65.8 52.1
Shareholders' Equity (Net Assets) 141.4 96.2
Book Value per Common Share 0.39 0.34
Capital Stock & Warrants 335.0 287.8
SENSITIVITY TO METAL PRICES
The Company's earnings, cash flow and common share price are highly sensitive to
the price of zinc. The following table 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 2005 and on a US$/C$ exchange rate of $0.82/$1.00.
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SENSITIVITIES
(C$ 000)
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Zinc (US$0.01/pound) 2,487
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Lead (US$0.01/pound) 254
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Copper (US$0.01/pound) 240
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Silver (US$0.10/ounce) 236
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Gold (US$10.00/ounce) 582
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Exchange rate (US$0.01/Cdn$1.00)* 1,355
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*When the Canadian dollar weakens against the US dollar earnings would increase.
SENSITIVITY TO SMELTER TREATMENT CHARGES
The Company sells zinc, lead and copper concentrates to smelters in various
parts of the world including Europe, Asia and the Americas. Smelters charge the
Company for treating the zinc, lead and copper concentrates. Treatment charges
vary according to the world demand for concentrates. In 2005, there
5
should continue to be downward pressure on zinc concentrate treatment charges as
the world zinc smelting capacity continues to exceed mine production. It is
expected that the overall demand for zinc concentrates should remain strong in
2005.
The following table outlines sensitivity to changes in average treatment
charges, based on production estimates for 2005 and a US$/C$ exchange rate of
$0.82/$1.00.
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SENSITIVITIES
(C$ 000)
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Zinc concentrate (US$5.00 per tonne) 1,738
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Lead concentrate (US$5.00 per tonne) 124
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Copper concentrate (TC US$10.00 per tonne, RC US$0.01 per pound) 461
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STATEMENT OF OPERATIONS REVIEW - 2004 AND 2003
GROSS SALES REVENUE
Gross sales revenue on the sales of zinc, lead and copper concentrates increased
by 16 percent in 2004 to $240.3 million from $207.6 million in 2003, while
tonnes of concentrate sold in 2004 were 336,896 compared with 378,164 tonnes
sold in 2003. Despite less tonnes of concentrate sold in 2004, gross sales
revenue was higher due to improved metal prices, offset partially by the
stronger Canadian dollar. The Company recognizes revenue on a risk and title
transferred and priced basis. Even though total concentrate production in 2004
was 388,736 tonnes, not all tonnes met the Company's revenue recognition policy
and accordingly are recorded as concentrate inventory. At year end the Company
had received provisional payments of $23.0 million for concentrate shipped that
did not qualify to be recorded as gross sales revenue. This amount will be
brought into gross sales revenue in 2005 as the revenue recognition requirements
are met.
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REALIZED PRICES 2004 2003
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Zinc (US$/tonne) 1,035 804
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Lead (US$/tonne) 900 468
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Copper (US$/tonne) 2,852 1,766
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Gold (US$/ounce) 414 354
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Silver (US$/ounce) 6.52 4.61
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Exchange rate (US$1.00/Cdn$) yearly average 1.3010 1.4115
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6
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SALES BY METAL 2004 2003
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Zinc - tonnes 131,831 149,850
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Lead - tonnes 13,256 11,533
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Copper - tonnes 3,194 3,909
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Gold - ounces 40,211 22,952
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Silver - ounces 1,600,407 1,328,903
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GROSS SALES REVENUE BY METAL ($ thousands) 2004 2003
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Zinc (US) 136.3 120.6
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Lead (US) 11.9 5.4
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Copper (US) 9.2 6.9
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Gold (US) 16.8 8.1
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Silver (US) 10.5 6.1
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Total Gross Sales Revenue (US) 184.7 147.1
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Realized exchange rate 1.3010 1.4099
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Total Gross Sales Revenue (Cdn) 240.3 207.6
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The Company periodically hedges against fluctuations in metal prices and foreign
exchange with the use of forward sales or options. The Company does not apply
hedge accounting. Realized and mark-to-market gains or losses are included in
gross sales revenue at the end of each period. The Company had no hedge
positions outstanding at the end of the year. The Company recorded a gain from
hedging of $0.1 million in 2004 compared with a loss of $1.1 million in 2003.
NET REVENUE
Net revenue, the value of concentrates sold after deducting treatment charges,
freight and marketing costs, increased by 28 percent to $158.4 million in 2004
from $124.0 million in 2003. Total treatment charges, the amount paid to
smelters for refining concentrates to produce metal, and shipping and marketing
costs remained essentially unchanged at $81.9 million in 2004 compared with
$83.6 million in 2003. On a per tonne of concentrate basis these costs increased
in 2004 to $243 per tonne sold compared with $221 per tonne in 2003. Higher
metal prices triggered price escalators in the treatment charges and higher
freight rates, especially to Asia, contributed to these higher unit costs.
However, these factors were partially offset by the stronger Canadian dollar as
all these costs are incurred in US dollars.
OPERATING COSTS
Direct operating costs were $101.9 million in 2004 compared with $103.2 million
in 2003, slightly higher despite the lower volume of concentrate sold. Higher
unit production costs at the Bougrine mine and the newly acquired Myra Falls
mine were the main contributors to these higher costs (see mine details below).
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DIRECT OPERATING COSTS ($ millions) 2004 2003
- --------------------------------------------------------- ------------------ ----------------
Bouchard-Hebert 32.0 38.9
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Bougrine 17.6 17.9
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El Mochito 25.7 23.9
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El Toqui 13.6 16.6
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Myra Falls 13.0 0.0
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Nanisivik 0.0 5.9
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Total 101.9 103.2
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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$0.34 in 2004 compared with US$0.32 in 2003 (see
non-GAAP reconciliation of the total cash cost per pound of payable zinc below).
7
NON-GAAP RECONCILIATIONS
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NON-GAAP RECONCILIATION OF TOTAL CASH COST PER POUND OF PAYABLE ZINC
TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------
2004 2003
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By-Product Credit ($ millions)
- ------------------------------------------------------------------------ ------------------ -----------------
Gross Sales Revenue per financial statements 240.3 207.6
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Less zinc sales revenue (177.3) (170.0)
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Inventory adjustment 28.9 6.0
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91.9 43.6
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Treatments Charges ($ millions)
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Per financial statements 81.9 83.6
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Inventory adjustment 16.2 (5.8)
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98.1 77.8
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Direct Operating Costs ($ millions)
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Per financial statements 101.9 103.2
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Inventory adjustment 32.4 (0.7)
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134.3 102.5
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Total Cash Costs - Canadian ($ millions) 140.5 136.7
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Exchange rate C$/US$ 1.3008 1.4004
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Total Cash Costs - US ($ millions) 108.0 97.6
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Zinc pounds produced (millions) 313.3 307.4
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Total Cash Cost
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Per pound of payable zinc (US$) 0.34 0.32
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RECONCILIATION OF MINESITE OPERATING CASH COSTS PER TONNE MILLED TO
CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------
2004 2003
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Direct Operating Costs ($ millions)
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Per finacial statements 101.9 103.2
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Inventory adjustment 32.4 (0.7)
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Minesite Operating Cash Costs - Canadian ($ millions) 134.3 102.5
- ------------------------------------------------------------------------ ================== =================
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Exchange rate C$/US$ 1.3008 1.4004
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Minesite Operating Cash Costs - US ($ millions) 103.2 73.2
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Tonnes milled (millions) 2.8 2.6
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Minesite Operating Cash Costs
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Per tonne milled (US$) 36.58 28.31
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Total Cash Costs per Pound of Payable Zinc and Minesite Operating Cash Costs per
Tonne Milled are furnished to provide additional information and are non-GAAP
measures. These measures should not be considered in isolation as a substitute
for measures of performance prepared in accordance with GAAP and are not
necessarily indicative of operating expenses as determined under GAAP. These
measures are intended to provide investors with information about the cash
generating capabilities of the Company's mining operations. The Company uses
this information for the same purpose. Mining operations are capital intensive.
These measures exclude capital expenditures. Capital expenditures are discussed
throughout the MD&A and the consolidated financial statements.
8
OTHER (INCOME) EXPENSES
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OTHER (INCOME) EXPENSES ($ millions) 2004 2003
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General and administrative 9.5 5.1
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Stock based compensation 1.3 0.3
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Interest and financing 0.5 3.3
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Investment and other income (0.8) (0.4)
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Other foreign exchange loss (gain) 1.8 (0.2)
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Foreign exchange loss (gain) on US dollar denominated debt 0.4 (11.6)
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TOTAL OTHER EXPENSES (INCOME) 12.7 (3.5)
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Write-down of mineral property and fixed assets 1.2 0.3
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Other non-producing property costs (income) 8.6 (5.4)
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Income and mining taxes (recovery) 0.6 (0.8)
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TOTAL EXPENSE (INCOME) 23.1 (9.4)
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GENERAL AND ADMINISTRATIVE
General and administrative costs increased to $9.5 million in 2004 from
$5.1 million in 2003. The main reasons for this $4.4 million increase were:
o Reassessment of Quebec capital tax for the years 2000 to 2003 and higher
Capital taxes in 2004 ($1.2 million).
o Accrued costs related to the introduction of a formal incentive program
in 2004 ($0.9 million).
o Higher employment costs due to an increase in the head office staffing
levels and salaries ($0.9 million).
o Performance and retention bonuses related to 2003 earned, paid and
expensed in 2004 ($0.6 million).
o Increased legal, audit and directors fees to comply with the new public
reporting and accounting requirements ($0.5million).
o Increased business development activities ($0.2 million).
9
STOCK BASED COMPENSATION
The Company's adoption of CICA 3870, Stock Based Compensation, resulted in the
recording of an expense of $1.3 million in 2004 and a restatement of the 2003
results with an expense of $0.3 million. This is a non-cash cost.
INTEREST AND FINANCING COSTS
Interest costs were significantly lower in 2004 at $0.5 million compared with
$3.3 million in 2003 as the bank debt was fully repaid in January 2004.
OTHER FOREIGN EXCHANGE LOSS (GAIN)
Other foreign exchange (gain) loss was a loss of $1.8 million in 2004 compared
with a gain of $0.2 million in 2003. This shows the strengthening Canadian
dollar on the Company's US dollar bank balances.
FOREIGN EXCHANGE (GAIN) LOSS ON US DOLLAR DENOMINATED DEBT
During 2003 the Company recorded a gain of $11.6 million on the US dollar
denominated debt as the Canadian dollar strengthened during the year. When the
debt was fully repaid in January 2004 this gain was realized and the Company
carried no further exposure to US dollar denominated debt in 2004.
WRITE DOWN OF MINERAL PROPERTIES AND FIXED ASSETS
The Company wrote off its investment of $1.2 million in the exploration
properties Heninga Lake in Nunavut and Bousquet Ferris in Quebec in 2004, as
there is no further work planned.
OTHER NON-PRODUCING PROPERTY (INCOME) COSTS
Other non-producing property costs (income) include care and maintenance costs,
holding costs and other costs related mainly to the Caribou, Langlois and
Nanisivik properties, and revenues received from optioned or sold properties. In
2004 the Company incurred costs of $8.6 million related to non-producing
properties compared with a gain of $5.4 million in 2003. 2003 included the gain
on the sale of the Lapa properties in June for $10.3 million. In 2004, $6.8
million was incurred at the Nanisivik mine, which is currently being reclaimed,
and of this amount $2.1 million relates to the write down of supplies
inventories as it was deemed that this amount would not be recoverable on the
final closure of the mine in 2005. $1.6 million was spent at the Caribou mine,
which is currently on a care and maintenance program and $0.1 million at the
Langlois mine.
CASH PROVIDED FROM OPERATING ACTIVITIES (BEFORE CHANGES IN NON-CASH
WORKING CAPITAL ITEMS) - 2004 AND 2003
Cash provided from operating activities (before changes in non-cash working
capital items) was $29.3 million in 2004 compared with $15.5 million in 2003.
- --------------------------------------------------------------------- ------------------ ----------------
($ millions) 2004 2003
- --------------------------------------------------------------------- ------------------ ----------------
Contribution (loss) from mining activities 25.7 (8.8)
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Other income (expenses)* (12.7) 3.5
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Other non-producing property income (costs)** (8.6) 5.4
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Income and mining taxes recovery (expense) (0.6) 0.9
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Write-down of properties (1.2) (0.3)
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Net earnings 2.6 0.7
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Closure cost expenditures (8.8) (0.7)
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Non-cash expenses 35.5 15.5
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Cash provided from operating activities (before changes in non-cash 29.3 15.5
working capital items)
- --------------------------------------------------------------------- ------------------ ----------------
*Other income (expenses) for 2003 includes foreign exchange gains on US dollar
bank debt of $11.6 million. **Other non-producing property income (costs) for
2003 includes the gain from the sale of the Lapa properties of $10.3 million.
10
LIQUIDITY AND FINANCIAL POSITION REVIEW
WORKING CAPITAL
Working capital at the end of 2004 was $36.6 million compared with $36.8 million
at the end of 2003. No change in working capital was realized due to the
increase in the current portion of reclamation, closure accruals and other
environmental obligations to $21.1 million in 2004 from $0.1 million in 2003.
This represents the expected environmental and reclamation spending at the
Nanisivik, Myra Falls, Bouchard-Hebert and the Bougrine mines in 2005. This
amount, except for the Myra Falls portion of $7.7 million, was classified as a
long-term liability at the end of 2003.
CURRENT ASSETS
Current assets increased to $116.9 million in 2004 from $68.2 million at the end
of 2003. The majority of the $48.7 million increase is related to accounts
receivable - concentrates ($2.2 million), concentrate inventory ($34.4 million)
and short-term investments ($2.6 million) due to the acquisition of the Myra
Falls mine in July. In addition, cash and cash equivalents and restricted cash
increased by $9.7 million due to improved cash provided from operating
activities. Restricted cash short term is cash on deposit to support
environmental security requirements in Quebec and New Brunswick.
CURRENT LIABILITIES
Current liabilities increased by $48.9 million to $80.3 million at the end of
2004, from $31.4 million at the end of 2003. Accounts payable and accrued
liabilities increased $16.9 million, of which $10.7 million was attributable to
the inclusion of the Myra Falls mine. The current portion of reclamation,
closure cost accruals and other environmental obligations increased to $21.1
million. $7.7 million was due to the acquisition of the Myra Falls mine with the
balance due to the reclassification to short term, of reclamation expenditures
planned in 2005 for the Nanisivik mine of $6.2 million, the Bouchard-Hebert mine
of $5.0 million and the Bougrine mine of $2.2 million. Provisional payments for
concentrate inventory shipped but not priced increased to $23.0 million from
$2.0 million. These provisional payments represent contractual payments received
from customers for concentrates shipped but not yet recognized as sales pending
title and risk transfer and final pricing, in accordance with the Company's
revenue recognition policy.
PROMISSORY NOTE
The Company received a promissory note in the amount of $11.8 million as part
the Red Mile transaction.
LONG-TERM LIABILITIES
Deferred income was $1.8 million at the end of 2004 compared with $1.3 million
at the end of 2003. $0.5 million relates to the Indemnity agreement fee that the
Company received related to the Red Mile transaction. The balance is the advance
of a non-refundable royalty payment (US$1.0 million) received on the sale of the
Lapa properties in June 2003. These amounts will be taken into revenue as
earned.
The Royalty Obligation of $11.7 million relates to the royalty payment received
related to the Red Mile transaction.
Long-term debt at the end of 2004 was $1.4 million compared with $15.5 million
at the end of 2003. The Company's credit facility was fully repaid in January
2004 leaving $1.4 million owing to the Quebec Government related to the Langlois
property.
The Company adopted CICA 3110, Asset Retirement Obligation, as of January 1,
2004. 2003 has been restated accordingly. Total reclamation, closure cost
accruals and other environmental obligations increased by $29.4 million in 2004
to $63.8 million, ($42.7 million long-term and $21.1 million short-term) from
$34.4 million at the end of 2003. The increase was attributable to the
acquisition of the Myra Falls mine ($30.4 million), and accretion with respect
to the existing mine sites. This was offset by $4.5 million of reclamation
expenditures mainly at the Nanisivik mine in 2004.
With the acquisition of the Myra Falls mine, the Company assumed the obligations
related to a defined benefit plan having a liability of $6.4 million as at
December 31, 2004.
11
DEBT
As at December 31, 2004, the Company's total debt was $1.7 million, down 93
percent from $25.8 million at the end of 2003. The majority of the amount
outstanding at the end of 2003 related to the credit facility, which was repaid
in full in January 2004. The credit facility was subsequently cancelled in
December of 2004. In addition, a prepayment by a customer of the Company for
zinc concentrates in the amount of $0.6 million was settled in the first quarter
of 2004 and $1.0 million associated with previous financing activities owed to
Dundee Securities Corporation was paid in February 2004.
The Company has no immediate plans to re-establish a Credit Facility but is
investigating concentrate prepayment options as a source of credit. In addition,
the Company is reviewing financing options for the reopening of the Langlois
mine in Quebec.
EQUITY
During 2004, the Company issued 57,142,858 Common Shares and 28,571,429 share
purchase warrants for net proceeds of $37.3 million in connection with the debt
retirement initiatives and 18,000,000 Common Shares and 5,000,000 share purchase
warrants for the acquisition of the Myra Falls mine. At the end of 2004, the
Company had issued and outstanding Common Shares of approximately 363.2 million
compared with 285.8 million at the end of 2003.
Shareholders' equity at December 31, 2004, was $141.4 million compared with
$96.2 million at December 31, 2003, an increase of $45.2 million. This reflects
a net profit of $2.6 million for 2004 plus $47.2 million of proceeds from the
issue of Common Shares and warrants, an increase in the contributed surplus of
$1.1 million, offset by a reduction in Cumulative Translation Adjustments of
$5.7million.
CAPITAL EXPENDITURES
The Company invested $27.7 million in mineral properties and fixed assets in
2004 compared with $10.6 million in 2003. The majority of the capital was spent
as follows:
|X| $6.8 million at El Mochito, for the beginning of construction
work at the Solidad tailings facility, ongoing work at the Pozo
Azul tailings facility and reclamation at the El Bosque tailings
facility, deferred mine development, installation of new pumps
on the 975 level and mobile equipment upgrades.
|X| $11.0 million at El Toqui for the Estatuas mine development, the
completion of the mill expansion, surface exploration,
completion of the expansion of the Confluencia tailings facility
and mobile equipment upgrades.
|X| $4.0 million at Myra Falls mainly on deferred mine development,
infrastructure improvements on surface and underground, and mine
equipment.
|X| $1.2 million at Bouchard-Hebert on exploration around the
existing mine area.
|X| $4.0 million at Langlois on the continuing redevelopment.
FINANCIAL CAPABILITY
With the existing working capital, the current metal prices and current US$/C$
exchange rate the Company is well positioned to carry out its operating, capital
and environmental programs is 2005 as presently contemplated.
The Langlois mine, which is highly sensitive to the zinc price and the US$/C4
exchange rate, is being re-assessed with a view to accelerating the
re-development in 2005. This development will require up to $50 million and
sources of additional financing are being investigated.
The Company's financial capability is sensitive to metal prices and the US$/C$
exchange rate.
12
Operating Review - 2004 and 2003
- ---------------------------- ------------------- ------------------- -------------------- -------------------
OPERATING REVIEW FOR CONTRIBUTION
THE YEAR ENDED (LOSS) FROM CAPITAL
DECEMBER 31 NET REVENUE MINING NON-CASH COSTS(2) EXPENDITURES
ACTIVITIES(1)
- ---------------------------- ------------------- ------------------- -------------------- -------------------
($ millions) 2004 2003 2004 2003 2004 2003 2004 2003
- ---------------------------- --------- --------- -------- ---------- --------- ---------- --------- ---------
Bouchard-Hebert 62.2 49.3 21.3 (1.6) 8.9 12.0 1.2 0.0
- ---------------------------- --------- --------- -------- ---------- --------- ---------- --------- ---------
Bougrine 20.8 20.2 (5.2) (6.7) 8.4 9.0 0.4 0.6
- ---------------------------- --------- --------- -------- ---------- --------- ---------- --------- ---------
El Mochito 40.4 32.6 10.5 3.9 4.2 4.7 6.8 2.6
- ---------------------------- --------- --------- -------- ---------- --------- ---------- --------- ---------
El Toqui 23.2 17.4 6.2 (1.7) 3.5 2.5 11.0 5.7
- ---------------------------- --------- --------- -------- ---------- --------- ---------- --------- ---------
Myra Falls 11.8 0.0 (5.1) 0.0 3.8 0.0 4.0 0.0
- ---------------------------- --------- --------- -------- ---------- --------- ---------- --------- ---------
Nanisivik 0.0 5.6 (0.7) (0.9) 0.7 0.7 (0.2) 0.0
- ---------------------------- --------- --------- -------- ---------- --------- ---------- --------- ---------
Langlois 0.0 0.0 (0.1) 0.0 0.1 0.0 4.0 1.7
- ---------------------------- --------- --------- -------- ---------- --------- ---------- --------- ---------
Other 0.0(3) (1.1)(3) (1.2) (1.8) 1.2 0.7 0.5 0.0
- ---------------------------- --------- --------- -------- ---------- --------- ---------- --------- ---------
Total 158.4 124.0 25.7 (8.8) 30.8 29.6 27.7 10.6
- ---------------------------- --------- --------- -------- ---------- --------- ---------- --------- ---------
(1) After non-cash costs
(2) Depreciation, depletion and accretion costs
(3) Net realized from metal hedging activities
PRODUCTION STATISTICS
Production for the years ended December 31, 2004 and 2003 is shown in the tables
below.
Production of zinc in concentrate in 2004 increased by 3 percent from 2003 due
to the addition of the Myra Falls mine in July 2004. Production of zinc in
concentrate at the four mines operating for the entire year in 2004 was 8
percent lower than 2003 levels (334.4 million pounds compared with 364.7 million
pounds).
- ---------------------------------------- --------------------------------- -----------------------------------
Zinc Production (million pounds of YEAR ENDED DECEMBER 31 FOURTH QUARTER
zinc contained in concentrate)
--------------------------------- -----------------------------------
2004 2003 2004 2003
======================================== ================== ============== =================== ===============
Myra Falls 40.2 - 19.3 -
- ---------------------------------------- ------------------ -------------- ------------------- ---------------
Bouchard-Hebert 120.9 118.7 23.8 28.9
- ---------------------------------------- ------------------ -------------- ------------------- ---------------
Bougrine 62.3 77.1 14.9 20.2
- ---------------------------------------- ------------------ -------------- ------------------- ---------------
El Mochito 91.3 96.5 24.3 24.3
- ---------------------------------------- ------------------ -------------- ------------------- ---------------
El Toqui 59.9 72.4 13.9 18.4
- ---------------------------------------- ------------------ -------------- ------------------- ---------------
Total zinc production 374.6 364.7 96.2 91.8
- ---------------------------------------- ------------------ -------------- ------------------- ---------------
13
- ---------------------------------------- ------------------------------------- -------------------------------------
All Mines YEAR ENDED DECEMBER 31 FOURTH QUARTER
------------------------------------- -------------------------------------
2004 2003 2004 2003
======================================== ================== ================== ================== ==================
Ore Milled (tonnes) 2,822,228 2,586,180 802,040 652,528
- ---------------------------------------- ------------------ ------------------ ------------------ ------------------
Zinc (%) 6.8 7.2 6.2 7.2
- ---------------------------------------- ------------------ ------------------ ------------------ ------------------
Concentrate Production
- ---------------------------------------- ---------------------------------------------------------------------------
Zinc (tonnes) 318,206 310,337 82,526 78,427
- ---------------------------------------- ------------------ ------------------ ------------------ ------------------
Copper (tonnes) 43,882 23,781 15,702 5,413
- ---------------------------------------- ------------------ ------------------ ------------------ ------------------
Lead (tonnes) 21,633 20,220 6,473 5,267
- ---------------------------------------- ------------------ ------------------ ------------------ ------------------
Gold (tonnes) 5,015 2,575 1,540 560
- ---------------------------------------- ---------------------------------------------------------------------------
Metal in Concentrates
- ---------------------------------------- ---------------------------------------------------------------------------
Zinc (tonnes) 169,909 165,422 43,630 41,632
- ---------------------------------------- ------------------ ------------------ ------------------ ------------------
Copper (tonnes) 8,363 3,710 3,194 823
- ---------------------------------------- ------------------ ------------------ ------------------ ------------------
Lead (tonnes) 14,347 13,516 4,205 3,446
- ---------------------------------------- ------------------ ------------------ ------------------ ------------------
Silver (ounces) 2,538,021 2,225,728 736,113 623,172
- ---------------------------------------- ------------------ ------------------ ------------------ ------------------
Gold (ounces) 56,388 26,220 19,217 8,484
- ---------------------------------------- ---------------------------------------------------------------------------
Minesite Operating Costs
- ---------------------------------------- ---------------------------------------------------------------------------
Per tonne milled (US$) 36.58 28.31 45.65 28.83
- ---------------------------------------- ---------------------------------------------------------------------------
Total Cash Cost
- ---------------------------------------- ---------------------------------------------------------------------------
Per lb. payable zinc (US$) 0.34 0.32 0.43 0.32
- ---------------------------------------- ------------------ ------------------ ------------------ ------------------
BOUCHARD-HEBERT MINE
Production of zinc in concentrate increased by 2 percent in 2004 from 2003 due
to improved zinc head grades, recoveries and concentrate grades. Milled tonnage
was 8 percent lower in 2004 compared with 2003. The copper in concentrate was 5
percent higher in 2004 than in 2003 due to improved copper head grades and
recoveries.
- ---------------------------------------- ------------------------------------- -------------------------------------
YEAR ENDED DECEMBER 31 FOURTH QUARTER
------------------------------------- -------------------------------------
2004 2003 2004 2003
======================================== ================== ================== ================== ==================
Ore Milled (tonnes) 993,168 1,082,833 233,525 269,965
- ---------------------------------------- ------------------ ------------------ ------------------ ------------------
Zinc (%) 6.1 5.6 5.2 5.5
- ---------------------------------------- ------------------ ------------------ ------------------ ------------------
Copper (%) 0.5 0.4 0.5 0.4
- ---------------------------------------- ------------------ ------------------ ------------------ ------------------
Silver (g/t) 29 36 28 40
- ---------------------------------------- ------------------ ------------------ ------------------ ------------------
Gold (g/t) 1.0 1.2 0.8 1.4
- ---------------------------------------- ---------------------------------------------------------------------------
Concentrate Production
- ---------------------------------------- ---------------------------------------------------------------------------
Zinc (tonnes) 99,446 98,149 19,846 24,135
- ---------------------------------------- ----------------- ------------------- ------------------ ------------------
Recovery (%) 90.3 89.5 88.9 89.3
- ---------------------------------------- ----------------- ------------------- ------------------ ------------------
Grade (%) 55.1 54.9 54.4 54.3
- ---------------------------------------- ----------------- ------------------- ------------------ ------------------
Copper (tonnes) 25,738 23,781 6,794 5,413
- ---------------------------------------- ----------------- ------------------- ------------------ ------------------
Recovery (%) 82.3 80.4 83.8 80.6
- ---------------------------------------- ----------------- ------------------- ------------------ ------------------
Grade (%) 15.2 15.6 15.1 15.2
- ---------------------------------------- ---------------------------------------------------------------------------
Metal in Concentrates
- ---------------------------------------- ---------------------------------------------------------------------------
Zinc (tonnes) 54,823 53,844 10,803 13,100
- ---------------------------------------- ----------------- ------------------- ------------------ ------------------
Copper (tonnes) 3,914 3,710 1,024 823
- ---------------------------------------- ----------------- ------------------- ------------------ ------------------
Silver (ounces) 309,920 361,568 65,346 101,900
- ---------------------------------------- ----------------- ------------------- ------------------ ------------------
Gold (ounces) 17,284 23,686 2,969 7,730
- ---------------------------------------- ---------------------------------------------------------------------------
Minesite Operating Costs
- ---------------------------------------- ---------------------------------------------------------------------------
Per tonne milled (C$) 33.42 34.80 33.55 34.39
- ---------------------------------------- ---------------------------------------------------------------------------
Total Cash Cost
- ---------------------------------------- ---------------------------------------------------------------------------
Per lb. payable zinc (US$) 0.26 0.30 0.32 0.28
- ---------------------------------------- ----------------- ------------------- ------------------ ------------------
14
BOUCHARD-HEBERT MINE OUTLOOK
In line with the life-of-mine plan, the Bouchard-Hebert mine closed permanently
on February 20, 2005, due to the exhaustion of known mineral reserves.
Reclamation of the tailings impoundment is under way.
The Company has continued to explore the area around the mine, but no economic
mineralization in the immediate mine area has been encountered. Based on the
results to date, a decision has been made to remove the mobile equipment and
some of the underground infrastructure and allow the mine to flood.
The Company will continue to explore for mineral deposits at a greater distance
from the existing infrastructure. The concentrator building and equipment will
be left intact pending any success in discovering economic mineralization in the
near term.
MYRA FALLS MINE
Breakwater commenced managing the Myra Falls operation as of July 23, 2004. As
this is a recent acquisition, no comparison can be made to past years.
- ---------------------------------------- ------------------------------------ --------------------------------------
YEAR ENDED DECEMBER 31 FOURTH QUARTER
------------------------------------ --------------------------------------
2004 2003 2004 2003
======================================== ================ =================== =================== ==================
Ore Milled (tonnes) 381,698 - 197,215 -
- ---------------------------------------- ---------------- ------------------- ------------------- ------------------
Zinc (%) 5.6 - 5.3 -
- ---------------------------------------- ---------------- ------------------- ------------------- ------------------
Copper (%) 1.5 - 1.4 -
- ---------------------------------------- ---------------- ------------------- ------------------- ------------------
Silver (g/t) 49 - 45 -
- ---------------------------------------- ---------------- ------------------- ------------------- ------------------
Gold (g/t) 1.7 - 1.6 -
- ---------------------------------------- ---------------------------------------------------------------------------
Concentrate Production
- ---------------------------------------- ---------------------------------------------------------------------------
Zinc (tonnes) 34,155 - 16,751 -
- ---------------------------------------- ---------------- ------------------- ------------------- ------------------
Recovery (%) 85.3 - 84.1 -
- ---------------------------------------- ---------------- ------------------- ------------------- ------------------
Grade (%) 53.3 - 52.2 -
- ---------------------------------------- ---------------- ------------------- ------------------- ------------------
Copper (tonnes) 18,144 - 8,908 -
- ---------------------------------------- ---------------- ------------------- ------------------- ------------------
Recovery (%) 78.1 - 78.5 -
- ---------------------------------------- ---------------- ------------------- ------------------- ------------------
Grade (%) 24.5 - 24.4 -
- ---------------------------------------- ---------------- ------------------- ------------------- ------------------
Gold (tonnes) 5.34 - 3.59 -
- ---------------------------------------- ---------------- ------------------- ------------------- ------------------
Recovery (%) 8.7 - 9.8 -
- ---------------------------------------- ---------------- ------------------- ------------------- ------------------
Grade (g/t) 8,498 - 7,268 -
- ---------------------------------------- ---------------------------------------------------------------------------
Metal in Concentrate
- ---------------------------------------- ---------------------------------------------------------------------------
Zinc (tonnes) 18,218 - 8,750 -
- ---------------------------------------- ---------------- ------------------- ------------------- ------------------
Copper (tonnes) 4,449 - 2,170 -
- ---------------------------------------- ---------------- ------------------- ------------------- ------------------
Silver (ounces) 445,997 - 212,598 -
- ---------------------------------------- ---------------- ------------------- ------------------- ------------------
Gold (ounces) 11,239 - 5,171 -
- ---------------------------------------- ---------------------------------------------------------------------------
Minesite Operating Costs
- ---------------------------------------- ---------------------------------------------------------------------------
Per tonne milled (C$) 80.71 - 86.29 -
- ---------------------------------------- ---------------------------------------------------------------------------
Total Cash Cost
- ---------------------------------------- ---------------------------------------------------------------------------
Per lb. payable zinc (US$) 0.40 - 0.55 -
- ---------------------------------------- ---------------- ------------------- ------------------- ------------------
MYRA FALLS OUTLOOK
During the period from July 23 to December 31, 2004, the Company proceeded to
integrate the Myra Falls mine into Breakwater's organization and put into effect
some changes identified as desirable during the due diligence phase.
Since the purchase of the Myra Falls mine a number of initiatives have been
undertaken by Breakwater, and a number of ongoing matters have also been
addressed. Principal amongst the ongoing matters was the finalization of a
collective agreement with the Canadian Auto Workers (CAW local 3019), with an
expiry date of March 31, 2008.
15
Design and construction work on the Myra Falls Tailings Dam Facility (TDF)
proceeded during 2004 and is scheduled to be completed in 2007. The work is
being undertaken to ensure that the TDF complies with the 1999 Canadian Dam
Association guidelines to withstand a seismic event with a 1:1,000 year return.
Breakwater's immediate focus at Myra Falls is on mine design and planning, both
in the short and long-term. Planning activities at all levels have been
initiated with focus on the development of an optimum mine plan. The plans call
for feeding quality tonnes to the milling operation rather than maximizing
tonnage. Short-term mine planning activities have been bolstered with the
addition of a new Chief Engineer, General Manager, Manager of Mining and Site
Controller. Initiatives are also underway for the improvement of the metallurgy
in the mill. Preliminary testing of reserve grade ore by Lakefield Laboratories
indicates significant opportunity for improving copper recoveries, concentrate
grades and developing of a lead concentrate of marketable quality. This work
should be complete by the end of the fourth quarter. The primary focus in the
mining operations is on materials handling from the operating face to the mill,
and the development of a ramp from surface to the underground operations. The
ramp will improve ventilation and servicing of the mine and will provide
exploration platforms for many areas that, to date, have been unexplored but
have high potential for new resources.
BOUGRINE MINE
The tonnes milled at Bougrine decreased in 2004 from 2003 due to a change in the
shift schedules of the milling operations which were restricted to five days per
week. This change was precipitated by a reduced production plan for the mine. As
well, a further reduction in tonnes milled was brought about by a nine-day
interruption of mining in the first quarter to stabilize a caved area between
277 and 316 levels. A major back-filling program was undertaken at that time.
Ground control difficulties were experienced during the second quarter of 2004
in the higher grade F3 zone, which necessitated the reduction of the production
rate and the use of more fill than was planned.
The zinc head grade remained the same in 2004 as in 2003. As a result of the
decrease in tonnes milled in 2004, production of zinc metal in concentrate
decreased by 19 percent from 2003. Lead grades increased and lead metal in
concentrate increased 22 percent between 2004 and 2003. The higher lead head
grade reflects the purchase and processing of ore from a government owned
zinc/lead mining operation. During 2004, a total of 28,869 tonnes of this
material was processed.
- ---------------------------------- ---------------------------------- --------------------------------
YEAR ENDED DECEMBER 31 FOURTH QUARTER
---------------------------------- --------------------------------
2004 2003 2004 2003
================================== =============== ================== ================ ===============
Ore Milled (tonnes) 330,392 410,961 84,395 102,106
- ---------------------------------- --------------- ------------------ ---------------- ---------------
Zinc (%) 10.4 10.4 9.8 11.1
- ---------------------------------- --------------- ------------------ ---------------- ---------------
Lead (%) 2.1 1.5 2.7 1.6
- ---------------------------------- -------------------------------------------------------------------
Concentrate Production
- ---------------------------------- -------------------------------------------------------------------
Zinc (tonnes) 52,149 64,036 12,377 16,874
- ---------------------------------- --------------- ------------------ ---------------- ---------------
Recovery (%) 82.2 81.8 81.7 81.2
- ---------------------------------- --------------- ------------------ ---------------- ---------------
Grade (%) 54.2 54.6 54.5 54.3
- ---------------------------------- --------------- ------------------ ---------------- ---------------
Lead (tonnes) 8,499 6,900 3,057 2,013
- ---------------------------------- --------------- ------------------ ---------------- ---------------
Recovery (%) 79.9 74.7 82.3 79.4
- ---------------------------------- --------------- ------------------ ---------------- ---------------
Grade (%) 64.4 65.2 61.7 63.7
- ---------------------------------- -------------------------------------------------------------------
Metal in Concentrates
- ---------------------------------- -------------------------------------------------------------------
Zinc (tonnes) 28,265 34,964 6,748 9,162
- ---------------------------------- --------------- ------------------ ---------------- ---------------
Lead (tonnes) 5,470 4,502 1,886 1,283
- ---------------------------------- -------------------------------------------------------------------
Minesite Operating Costs
- ---------------------------------- -------------------------------------------------------------------
Per tonne milled (US$) 47.67 35.81 56.63 33.84
- ---------------------------------- -------------------------------------------------------------------
Total Cash Cost
- ---------------------------------- -------------------------------------------------------------------
Per lb. payable zinc (US$) 0.42 0.35 0.50 0.32
- ---------------------------------- --------------- ------------------ ---------------- ---------------
16
BOUGRINE MINE OUTLOOK
In late 2003, management undertook the examination of alternative uses for the
Bougrine mill and infrastructure, and initiated studies to determine the merits
of converting the facility to a clinker grinding and last-stage cement producing
plant. During the second quarter of 2004 a feasibility study was initiated and
the preliminary findings indicated the appropriate price and costs that could be
borne by the project in order to generate an acceptable return. Subsequently,
the Company has entered into discussions with government officials responsible
for projects of this nature. Implementation of the project, or a variation on
the Company's proposal, is dependent on the outcome of these discussions. In the
interim, there have been several changes in government officials resulting in a
delay. Management expects that it will be in possession of all material
information in order to make an informed decision as to the viability of the
project in the second quarter of 2005.
The Bougrine mine is expected to cease operation in September 2005.
EL MOCHITO MINE
Production of zinc in concentrate at El Mochito decreased by 5 percent in 2004
compared with 2003 as a result of lower zinc head grades. The production of lead
in concentrate decreased by 2 percent from the same period in 2003 due to the
decreased lead recovery. Silver production decreased by 5 percent over the same
period as a result of lower silver head grades.
- ------------------------------------ ---------------------------------- --------------------------------
YEAR ENDED DECEMBER 31 FOURTH QUARTER
---------------------------------- --------------------------------
2004 2003 2004 2003
==================================== =============== ================== ================ ===============
Ore Milled (tonnes) 650,017 652,085 170,560 164,941
- ------------------------------------ --------------- ------------------ ---------------- ---------------
Zinc (%) 6.9 7.3 7.0 7.3
- ------------------------------------ --------------- ------------------ ---------------- ---------------
Lead (%) 1.7 1.7 1.7 1.6
- ------------------------------------ --------------- ------------------ ---------------- ---------------
Silver (g/t) 84 87 82 94
- ------------------------------------ -------------------------------------------------------------------
Concentrate Production
- ------------------------------------ -------------------------------------------------------------------
Zinc (tonnes) 78,652 84,045 21,083 21,126
- ------------------------------------ --------------- ------------------ ---------------- ---------------
Recovery (%) 91.8 92.0 92.2 92.1
- ------------------------------------ --------------- ------------------ ---------------- ---------------
Grade (%) 52.7 52.1 52.3 52.2
- ------------------------------------ --------------- ------------------ ---------------- ---------------
Lead (tonnes) 13,134 13,320 3,416 3,254
- ------------------------------------ --------------- ------------------ ---------------- ---------------
Recovery (%) 80.5 81.9 80.4 81.9
- ------------------------------------ --------------- ------------------ ---------------- ---------------
Grade (%) 67.6 67.7 67.9 66.5
- ------------------------------------ -------------------------------------------------------------------
Metal in Concentrates
- ------------------------------------ -------------------------------------------------------------------
Zinc (tonnes) 41,413 43,766 11,034 11,022
- ------------------------------------ --------------- ------------------ ---------------- ---------------
Lead (tonnes) 8,877 9,014 2,319 2,163
- ------------------------------------ --------------- ------------------ ---------------- ---------------
Silver (ounces) 1,550,232 1,638,465 396,631 455,286
- ------------------------------------ -------------------------------------------------------------------
Minesite Operating Costs
- ------------------------------------ -------------------------------------------------------------------
Per tonne milled (US$) 32.97 29.96 34.55 31.38
- ------------------------------------ -------------------------------------------------------------------
Total Cash Cost
- ------------------------------------ -------------------------------------------------------------------
Per lb. payable zinc (US$) 0.31 0.29 0.32 0.30
- ------------------------------------ --------------- ------------------ ---------------- ---------------
EL MOCHITO MINE OUTLOOK
During 2004, the Company accelerated its development and exploration programs in
various areas of the mine with the most promise to increase reserves and
resources, namely Salva Vida Northeast, Santo Nino, and San Jose areas.
In the Salva Vida Northeast area, diamond drilling was stepped out 120 metres to
the northeast on 15 metre centers to increase the resource and upgrade
previously identified resources into reserves. This trend remains open to the
northeast and will be a top target in 2005.
17
To the north of Salva Vida Northeast, several diamond drill holes were completed
on the newly designated San Jose target. This zone is at the projected
intersection of the Santo Nino and Salva Vida faults. Two earlier phases of
exploration in this zone returned good results. The best intercept in 2004 was
19.2 metres grading 16.7 percent zinc. In 2005 an exploration drift is planned
to provide drill access for this zone.
In the Santo Nino zone, where over one million tonnes of resources have been
delineated, sectional drilling was started behind the advance of a new
exploration drift. By the end of 2004, four north-south sections covering 215
metres of the 335 metre long drift were completed. These sections proved the
continuity of a mineralized manto from the El Pie zone in the west, to the Santo
Nino zone and possibly the Hope zone in the east; a distance of 1,200 to 1,800
metres. The thickness of the manto and the continuity of the mineralization
increases to the east. On section 8600E (completed January 2005), there were
three ore grade intercepts ranging from 12 to 21 metres true thickness. During
the first quarter of 2005, drilling will focus on the projected centre of the
Santo Nino target. Development in this area will continue the exploration drift
to the southeast to allow drilling access to a projected chimney structure
In addition to the targets mentioned above, exploration was carried out in the
South Manto zone. Drilling into the El Raton West found that the South Manto
extends to the south several hundred metres past previously mined zones and that
there are zones of high-grade material in this predominately low-grade skarn
zone. A 215-metre exploration drift will be driven during 2005 to facilitate
drilling this target.
During 2005, construction work will continue on the new Solidad tailings
facility.
EL TOQUI MINE
The milled tonnage at El Toqui increased due to the changes made to the grinding
circuit at the El Toqui mill. Zinc head grades in 2004 were lower than in the
same period in 2003 resulting in a 17 percent decrease in zinc contained in
concentrate. Gold head grades were higher in 2004 than 2003 resulting in a
significant increase in gold production, a reflection of mining the higher gold
grade Aserradero area. The contribution of the Aserradero area ore can be seen
in the total cash costs per pound of payable zinc, which dropped to US$0.34 due
to the high gold credits.
- --------------------------------------- ---------------------------------- --------------------------------
YEAR ENDED DECEMBER 31 FOURTH QUARTER
---------------------------------- --------------------------------
2004 2003 2004 2003
======================================= =============== ================== ================ ===============
Ore Milled (tonnes) 466,953 440,301 116,345 115,516
- --------------------------------------- --------------- ------------------ ---------------- ---------------
Zinc (%) 6.4 8.1 6.0 7.7
- --------------------------------------- --------------- ------------------ ---------------- ---------------
Gold (g/t) 2.3 0.3 3.5 0.4
- --------------------------------------- -------------------------------------------------------------------
Concentrate Production
- --------------------------------------- -------------------------------------------------------------------
Zinc (tonnes) 53,804 64,107 12,469 16,292
- --------------------------------------- --------------- ------------------ ---------------- ---------------
Recovery (%) 91.0 92.5 89.8 94.0
- --------------------------------------- --------------- ------------------ ---------------- ---------------
Grade (%) 50.5 51.2 50.5 51.2
- --------------------------------------- --------------- ------------------ ---------------- ---------------
Gold (tonnes) 5,009 2,575 1,536 560
- --------------------------------------- --------------- ------------------ ---------------- ---------------
Recovery (%) 57.2 31.8 61.3 28.1
- --------------------------------------- --------------- ------------------ ---------------- ---------------
Grade (g/t) 122.0 17.7 164.9 23.5
- --------------------------------------- -------------------------------------------------------------------
Metal in Concentrates
- --------------------------------------- -------------------------------------------------------------------
Zinc (tonnes) 27,190 32,848 6,295 8,348
- --------------------------------------- --------------- ------------------ ---------------- ---------------
Gold (ounces) 27,865 2,534 11,077 754
- --------------------------------------- --------------- ------------------ ---------------- ---------------
Silver (ounces) 231,872 225,695 61,537 65,986
- --------------------------------------- -------------------------------------------------------------------
Minesite Operating Costs
- --------------------------------------- -------------------------------------------------------------------
Per tonne milled (US$) 31.86 27.38 39.77 27.02
- --------------------------------------- -------------------------------------------------------------------
Total Cash Cost
- --------------------------------------- -------------------------------------------------------------------
Per lb. Payable zinc (US$) 0.34 0.36 0.36 0.39
- --------------------------------------- --------------- ------------------ ---------------- ---------------
18
EL TOQUI MINE OUTLOOK
The milled tonnage at El Toqui will increase in 2005 due to a full-year at the
new production rate. Gold production from Aserradero is forecasted to increase
due to the higher throughput. Production commenced from the Estatuas zone in the
fourth quarter of 2004, with the completion of the access drift. Further
exploration will be conducted on the Concordia area to add resources to this
zone and to upgrade existing resources to reserves in support of a preliminary
feasibility for mining the deposit. This deposit remains open in all directions.
LANGLOIS MINE
Preparation work leading to the reopening of the Langlois mine continued during
the year. Work included detailed design of the new material handling systems,
detailed mine planning of Zone 97, redesigning the paste-fill distribution
system, updating the power distribution system for the mine, equipment repair
and stope design for Zones 3 and 4, electrical cabling in the shaft, preparing
raise bore drill pads, cementing of surface diamond drill holes, clearing of
waste for an ore stockpile area on surface and continued repair work on scoops
and jumbos. Management is presently reassessing the timing of bringing this mine
back into production, considering the current metal prices, operating and
capital costs and the US$/C$ exchange rate. Development will require
approximately $50 million, and sources of additional financing are currently
being investigated.
NANISIVIK MINE
Reclamation work on the tailings area at Nanisivik commenced in late August 2004
and was suspended for the season in mid-October. During the winter months the
focus of the reclamation activity shifted to the demolition and removal of
buildings within the townsite. Schedules have now been prepared and are
currently being refined to ensure that the entire reclamation program is
completed during summer 2005. Once the program has been completed, all of the
contractor's equipment and most of the Company's mobile fleet will be removed
from site. A few pieces of mobile equipment will be left behind to undertake any
repair and maintenance work that may be required on the cover in the coming
years.
Wolfden Resources' contractor is continuing with the dismantling and crating of
the industrial complex, the powerhouse and the DMS Plant. The DMS Plant will
remain the property of Breakwater and will be available for sale to a third
party or may be deployed at another of Breakwater's properties. Efforts are
underway to ensure that Wolfden's work is completed during the shipping season
of 2005.
Wolfden should be in a position to ship their materials to their site, also
located in Nunavut, in 2006.
CARIBOU MINE
The Company's wholly-owned subsidiary, CanZinco Ltd. ("CanZinco") signed a
letter of intent with Forest Gate Resources Inc. to sell the Caribou mine
located in New Brunswick. To date, no agreement has been reached and the
property continues to be held on care and maintenance.
CanZinco has entered into a definitive agreement with BIOTEQ Environmental
Technologies Inc. ("BIOTEQ"), whereby BIOTEQ will assume responsibility for the
operation and maintenance of the wastewater treatment facilities at CanZinco's
Caribou and Restigouche mines. This definitive agreement, which is for a period
of six years, follows an operating agreement that was signed between the parties
in 2004. BIOTEQ will receive a monthly fee for the technical and managerial
services provided to CanZinco at Caribou and Restigouche.
In addition, BIOTEQ will earn an additional fee for the treatment of tailings
located at Caribou, a process that will commence during the second quarter of
2005. The conclusion of this agreement with BIOTEQ will have no impact on the
transaction with Forest Gate.
19
FOURTH QUARTER REVIEW
The Company incurred a net loss in the fourth quarter of 2004 of $6.3 million
compared with a net loss of $1.4 million in the same period in 2003. As with the
third quarter, the Myra falls mine continued to operate at a loss in the quarter
($3.6 million). The Company continues to effect change at this newly acquired
operation with the anticipated improvements expected in the latter half of 2005.
In addition, as described below, there were a number of one-time items in the
quarter that negatively impacted results, including exploration property write
off downs, supplies inventory provisions and higher reclamation/holding costs at
the Nanisivik mine.
For the quarter ended December 31, 2004, the Company generated gross sales of
$61.5 million on 79,848 tonnes of concentrate sold compared with $51.4 million
on 93,519 tonnes of concentrate sold. Higher metal prices offset partially by
the stronger Canadian dollar were the main reason for this improvement, despite
the lower tonnage sold. Treatment charges and freight costs averaged $250 per
tone of concentrate sold in the fourth quarter of 2004 compared with $233 per
tonne in the same period in 2003. Treatment charge escalators were triggered by
the higher metal prices and world wide freight rates were higher in 2004. Direct
operating costs were higher in 2004 at $28.5 million compared with $21.7 million
in 2003. Higher unit production costs at the Bougrine mine due to lower
production and the inclusion of the higher cost Myra Falls mine were the main
contributors to these higher costs.
Other Expenses were $3.7 million in the fourth quarter of 2004 compared with
$0.8 million in 2003, an increase of $2.9 million.
General and administrative costs were $1.4 million higher in the fourth quarter
of 2004 compared with 2003 due to:
o Accrued costs related to the introduction of a formal incentive
program in 2004 ($0.4 million).
o Higher employment costs due to an increase in the head office
staffing levels and salaries ($0.5 million).
o Increased legal, audit and directors fees to comply with the new
public reporting and accounting requirements ($0.2million).
o Increased business development activities ($0.2 million).
o Increased shareholder communication costs ($0.1 million).
Stock based compensation was $0.6 million higher due to an adjustment related to
options issue earlier in 2004.
Interest and financing cost was $0.8 million less than the fourth quarter of
2003 as the bank debt was repaid in January 2004.
In 2003, the Company recorded a foreign exchange gain of $2.0 million on US
dollar denominated debt, which was realized when the debt was repaid in January
2004.
The Company wrote off its investment in the Heninga Lake property in Nunavut and
Bousquet Ferris property in Quebec in the fourth quarter of 2004 as there is no
further work planned, recording a non cash expense of $1.2 million.
Other non-producing property costs were significantly higher in the fourth
quarter of 2004 at $5.1 million compared with $1.3 million in 2003. The main
reason for the increase was write down of supplies inventory at the Nanisivik
mine of $2.1 million and higher than expected holding costs at the Nanisivik
mine during the reclamation process.
Income and mining taxes were $0.2 million in the fourth quarter of 2004 compared
with a recovery of $1.0 million in 2003. The Company recorded a tax asset of
$1.2 million in the 2003 against the CanZinco tax pool, which was subsequently
realized in January 2004.
20
SUMMARY OF QUARTERLY RESULTS
- --------------------------------- -------------------------------------------- --------------------------------------------
2003 2004
- --------------------------------- -------------------------------------------- --------------------------------------------
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
- --------------------------------- ----------- ---------- ---------- ---------- ----------- ---------- ---------- ----------
Gross Sales Revenue 52.9 61.7 41.6 51.4 60.2 52.5 66.1 61.5
($ millions)
- --------------------------------- ----------- ---------- ---------- ---------- ----------- ---------- ---------- ----------
Net Earning (Loss) 0.1 10.8 (4.1) 0.3 2.2 4.4 2.3 (6.3)
($ millions)
- --------------------------------- ----------- ---------- ---------- ---------- ----------- ---------- ---------- ----------
Per share basic $0.00 $0.05 ($0.02) $0.00 $0.01 $0.01 $0.01 ($0.02)
- --------------------------------- ----------- ---------- ---------- ---------- ----------- ---------- ---------- ----------
Per share diluted $0.00 $0.05 N/A $0.00 $0.01 $0.01 $0.00 $0.00
- --------------------------------- ----------- ---------- ---------- ---------- ----------- ---------- ---------- ----------
(C$/US$) End of the quarter 1.5097 1.4537 1.4290 1.4004 1.3167 1.3390 1.3298 1.3010
year to date realized rate
- --------------------------------- ----------- ---------- ---------- ---------- ----------- ---------- ---------- ----------
Average realized zinc price 785 768 810 859 1,058 1,006 988 1095
(US$/t)
- --------------------------------- ----------- ---------- ---------- ---------- ----------- ---------- ---------- ----------
Average realized zinc price 1,185 1,116 1,157 1,202 1,393 1,347 1,312 1,425
(C$/t)
- --------------------------------- ----------- ---------- ---------- ---------- ----------- ---------- ---------- ----------
Concentrate tonnes sold 89,653 116,366 78,626 93,519 86,030 76,061 94,957 79,848
- --------------------------------- ----------- ---------- ---------- ---------- ----------- ---------- ---------- ----------
The quantity of concentrate tonnes sold directly affects Gross sales revenue.
The recognition of revenue from the sale of concentrate can vary from quarter to
quarter based on customer agreements, the availability of ships and compliance
with Company's revenue recognition policy. As all sales are based in US dollars,
the impact of the US dollar weakening against the Canadian dollar over the past
eight quarters has reduced the realized Canadian dollar gross sales revenue.
Net earnings 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
$10.3 million on the sale of the Lapa properties in Quebec.
CONTRACTUAL OBLIGATIONS
- ----------------------------------- -------------------------------------------------------------------------
PAYMENTS DUE BY PERIOD
- ----------------------------------- -------------------------------------------------------------------------
CONTRACTUAL OBLIGATIONS
($ thousands) TOTAL ( 1 YEAR >1-3 YEARS 4-5 YEARS > 5 YEARS
- ----------------------------------- ------------- -------------- --------------- -------------- -------------
Capital Leases 348 126 183 39 0
- ----------------------------------- ------------- -------------- --------------- -------------- -------------
Operating Leases 4,078 1,454 1,491 750 383
- ----------------------------------- ------------- -------------- --------------- -------------- -------------
Purchase Obligations 0 0 0 0 0
- ----------------------------------- ------------- -------------- --------------- -------------- -------------
Other LT Obligations 10,754 3,974 1,732 3,290 1,758
- ----------------------------------- ------------- -------------- --------------- -------------- -------------
Total 15,180 5,554 3,406 4,079 2,141
- ----------------------------------- ------------- -------------- --------------- -------------- -------------
RELATED PARTY TRANSACTIONS
There were no related party transactions with Dundee Corporation in 2004. The
Company accrued expenses of $500,000 for services provided by Dundee Corporation
during the period from October 2001 to December 2003.
The Company provides to Glencairn Gold Corporation ("Glencairn"), formerly Black
Hawk Mining Inc., a company that is related through common directorship,
logistics and procurement service which enables both companies to reduce costs
and negotiate favourable terms for the purchase of materials and supplies. At
the end of 2004, accounts receivable due from Glencairn was $0.3 million
compared with $0.3 million at the end of 2003.
21
CHANGES IN ACCOUNTING POLICIES
In 2004 the Company adopted the following policies:
CICA 3870, Stock Based Compensation; the Company will expense the estimated cost
of compensation options issued over the vesting period of such options.
CICA 3110, Asset Retirement Obligation; the Company is required to estimate the
fair value of mine site reclamation costs 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 when each mine was
acquired, the depreciation related to prior periods has been 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.
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 metal price
realization (considering historical and current prices, price trends and related
factors); and estimated operating and capital cash flows. Estimates of future
cash flows are subject to risks and uncertainties. It is possible that changes
could occur that may affect the recoverability of the carrying value of mineral
properties.
RESERVES
Annually the Company estimates its proven and probable mineral reserves (the
"Reserves") in accordance with National Policy 43-101 ("NI 43-101"), a rule
adopted by Canadian securities administrators as the standard of disclosure for
mineral projects. This estimate is used to determine mine viability, mine life
and amortization rates. The estimation of Reserves is based on drill hole
information, historical mining results, historical metallurgical results,
estimated future operating costs and estimated future metal prices. A "Qualified
Person" as defined by NI 43-101 performs the Reserves estimate. As all of the
Company's operations have had significant operating history, the factor that
could impact the Reserves estimate most is future metal prices.
AMORTIZATION
The Company uses the units of production method for amortization of Mineral
Properties and some of its Fixed Assets based on the reserves. Any significant
changes in the reserves could impact the amount of annual amortization.
INVENTORY
The Company values its concentrate inventories at the lower of cost or
realizable value at the end of the reporting period. Costs represent the average
cost, and include direct labour and materials costs, mine site overhead and
depreciation and amortization. Realizable value includes metal prices net of
treatment charges and freight. Metal prices can be subject to significant change
from period to period. At December 2004 all concentrate inventories were
recorded at cost except for the Myra Falls and Bougrine mines, which are
recorded at net realizable value.
RECLAMATION
The Company provides for the fair value of liabilities and capitalized costs for
asset retirement obligations in the period in which they are incurred. Over
time, the liability is accreted to its present value and the capitalized cost is
amortized over the useful life of the related asset. Upon settlement of the
liability, an entity either settles the obligation for its recorded amount or
records a gain or loss upon settlement. Asset retirement obligations are
provided for obligations that are required to be settled as a result of an
existing law, regulation or contract related to asset retirements. Estimates of
the liability are based on current laws and regulations and the resulting
expected costs, all of which are subject to changes.
22
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 would be 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 owned by the Company 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 $2.5 million during 2005. An earlier table shows the approximate
impact on the Company's earnings and cash flows reflecting variations in metal
prices, the US/Canadian dollar exchange rate and treatment charges based on
current plans for 2005 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, and the
world's supply and demand for zinc can each cause significant fluctuations in
zinc prices. Such external economic factors are, in turn, influenced by changes
in international economic growth patterns and political developments.
FOREIGN EXCHANGE RISK
The Corporation operates using the Canadian dollar and the United States dollar
as well as several other currencies, and as such may be negatively affected by
fluctuations in foreign exchange rates. Currency fluctuations may affect the
revenues which the Corporation realizes from its operations, as concentrates are
sold in United States dollars, while a significant percentage of its expenses
are denominated in non-United States dollars. This exposes the Corporation to
increased volatility in earnings as reported in Canadian dollars due to
fluctuations in foreign exchange rates. While foreign currencies are generally
convertible into Canadian and United States dollars, there is no guarantee that
they will continue to be so convertible or that fluctuations in the value of
such currencies will not have an adverse effect on the Corporation.
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.
ENVIRONMENTAL SECURITY
Currently the following environmental security in place:
o A cash deposit of $0.9 million with the Quebec Government related to the
Company's Quebec properties. The Company has agreed to provide an
additional $1.7 million by May of 2005.
o Letters of credit of $13.8 million in favour of the British Columbia
government related to the Myra Falls mine. These letters of credit are
currently supported by Boliden Ltd. and will have to be replaced by the
Company in June 2005.
o Surety bonds in the amount of $8.2 million related to the Company's
Quebec and New Brunswick properties. These bonds are supported by a cash
collateralized letter of credit of $2.6 million. Events in the past few
years 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 Company's current surety bond provider has given
notice that they will not renew the existing surety expiring in June
2005. The Company will look to replace these bonds with other surety
bond providers if possible or other types of security, which may take
the form of cash or letters of credit.
23
As regulations regarding environmental restoration and the security of such can
change from time to time, it is possible that demands may be made on the Company
to provide additional security.
If these environmental security requirements have to be funded entirely with
cash this will consume a significant portion of the Company's available cash in
2005.
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 Corporation, except at meetings at which
only holders of another class or series of shares of the Corporation are
entitled to vote. The table set forth below summarizes the Capital Stock. For a
more complete description of certain elements please refer to note #12 to the
consolidated financial statements of the Company.
- ------------------------------------------------------------------------------- --------------------
Common Shares or Securities Convertible into Common Shares February 23, 2005
- ------------------------------------------------------------------------------- --------------------
Common Shares 365,828,953
- ------------------------------------------------------------------------------- --------------------
Share Option Plan - Options
Weighted average exercise price $1.23. 11,120,767
- ------------------------------------------------------------------------------- --------------------
1,000,000 warrants granted at $0.21, expire May 8, 2005. 500,000
- ------------------------------------------------------------------------------- --------------------
30,801,410 warrants granted at $0.20, 15,400,705 expire March 2, 2007 and 30,801,410
15,400,705 expire May 2, 2007.
- ------------------------------------------------------------------------------- --------------------
3,000,000 warrants granted at $0.19, expire March 27, 2006. 2,000,000
- ------------------------------------------------------------------------------- --------------------
Warrants granted at $1.00, expire January 28, 2009 - traded on TSX 33,571,429
- ------------------------------------------------------------------------------- --------------------
FUTURE FULLY DILUTED 443,822,559
- ------------------------------------------------------------------------------- --------------------
OTHER INFORMATION
Additional information regarding the Company is included in the Company's Annual
Information Form filed with the Canadian securities regulators and the United
States Securities and Exchange Commission, a copy of which is posted on the
SEDAR website at WWW.SEDAR.COM.
CAUTIONARY NOTE ON FORWARD LOOKING STATEMENTS
Certain statements included in this news release are forward-looking statements,
which are made pursuant to the "safe harbor" provisions of the United States
Private Securities Litigation Reform Act of 1995. They include estimates and
statements that describe the Company's future plans, objectives and goals,
including words to the effect that the Company or management expects a stated
condition or result to occur. When used herein, words such as "forecast",
"estimate", "expect, "believe", "intend", "intent", "budget", "plan",
"projection" "hope" and other similar expressions are intended to identify
forward-looking statements. In particular, statements relating to the estimated
future metal prices, cash flows, expenses, capital costs, ore production, mine
life, financing, construction and commissioning are forward-looking statements.
Such forward-looking statements involve inherent risks and uncertainties and are
subject to other factors, many of which are beyond our control, that may cause
the actual results or performance to differ materially from those expressed or
implied by such forward-looking statements. Such factors include, among others,
asset impairment, metal price volatility, fluctuations in foreign exchange
rates, economic and political events affecting metal supply and demand,
fluctuations in ore grade or ore tonnes milled, geological, operating and
environmental risks, problems during the development, construction and start-up
phases of an underground mine, inadequacy of environmental insurance. For a more
comprehensive review of risk factors, please refer to the Company's most recent
annual report under "Management's Discussion and Analysis of Financial Results"
and Form 20-F under "Risk Factors" on file with the U.S. Securities and Exchange
Commission and Canadian provincial securities regulatory authorities filed on
SEDAR at www.sedar.com. The Company disclaims any obligation to update or revise
any forward-looking statements whether as a result of new information, events or
otherwise. Readers are cautioned not to put undue reliance on these
forward-looking statements.
24
For further information please contact:
Garth A.C. MacRae Richard Godfrey
President and Chief Executive Officer Vice President, Finance
(416) 363-4798 Ext. 231 And Chief Financial Officer
(416) 363-4798 Ext. 276
25
BREAKWATER RESOURCES LTD.
Consolidated Balance Sheets
As at December 31, 2004 and 2003
(Expressed in thousands of Canadian dollars)
- ----------------------------------------------------------------------------------------------------------
2004 2003
- ----------------------------------------------------------------------------------------------------------
ASSETS (Restated)
CURRENT ASSETS
Cash and cash equivalents $ 12,667 $ 6,033
Restricted cash 3,391 355
Short-term investments (quoted market value -2004: $3,886; 2003: $59) 2,633 50
Accounts receivable - concentrate 9,637 7,450
Other receivables 6,488 5,650
Concentrate inventory 56,215 21,828
Materials and supplies inventory 23,863 23,783
Prepaid expenses and other current assets 2,007 1,855
Future tax assets - 1,190
- ----------------------------------------------------------------------------------------------------------
116,901 68,194
RECLAMATION DEPOSITS 100 100
MINERAL PROPERTIES AND FIXED ASSETS 153,073 111,299
LONG-TERM INVESTMENT 5,615 -
PROMISSORY NOTE 11,785 -
- ----------------------------------------------------------------------------------------------------------
$ 287,474 $ 179,593
==========================================================================================================
LIABILITIES
CURRENT LIABILITIES
Accounts payable and accrued liabilities $ 35,558 $ 18,629
Provisional payments for concentrate inventory shipped and not priced 22,962 2,010
Short-term debt including current portion of long-term debt 256 10,329
Income and mining taxes payable 441 252
Current portion of reclamation, closure cost accruals and other
environmental obligations 21,081 132
- ----------------------------------------------------------------------------------------------------------
80,298 31,352
DEFERRED INCOME 1,848 1,340
ROYALTY OBLIGATION 11,696 -
LONG-TERM DEBT 1,424 15,517
RECLAMATION, CLOSURE COST ACCRUALS AND OTHER ENVIRONMENTAL
OBLIGATIONS 42,673 34,253
EMPLOYEE FUTURE BENEFITS 6,446 -
FUTURE TAX LIABILITIES 1,681 962
- ----------------------------------------------------------------------------------------------------------
146,066 83,424
- ----------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Capital stock 326,403 287,790
Warrants 8,561 -
Contributed surplus 3,120 1,991
Deficit (187,667) (190,291)
Cumulative translation adjustments (9,009) (3,321)
- ----------------------------------------------------------------------------------------------------------
141,408 96,169
- ----------------------------------------------------------------------------------------------------------
$ 287,474 $ 179,593
==========================================================================================================
26
BREAKWATER RESOURCES LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT
For the Years Ended December 31, 2004, 2003 and 2002
(Expressed in thousands of Canadian dollars except share and per
share amounts)
- ------------------------------------------------------------------------------------------------------------
2004 2003 2002
============================================================================================================
(Restated) (Restated)
Gross sales revenue $ 240,299 $ 207,591 $ 305,354
Treatment and marketing costs 81,856 83,581 136,738
- ------------------------------------------------------------------------------------------------------------
Net revenue 158,443 124,010 168,616
- ------------------------------------------------------------------------------------------------------------
OPERATING COSTS
Direct operating costs 101,922 103,239 147,653
Depreciation and depletion 25,896 25,964 29,987
Reclamation and closure costs 4,896 3,619 4,166
- ------------------------------------------------------------------------------------------------------------
132,714 132,822 181,806
- ------------------------------------------------------------------------------------------------------------
CONTRIBUTION (LOSS) FROM MINING ACTIVITIES 25,729 (8,812) (13,190)
- ------------------------------------------------------------------------------------------------------------
OTHER EXPENSES (INCOME)
General and administrative 9,559 5,087 6,198
Stock-based compensation 1,253 274 184
Interest and financing 509 3,321 5,122
Investment and other income (843) (405) (1,273)
Foreign exchange loss (gain) on US dollar denominated debt 431 (11,578) (669)
Other foreign exchange loss (gain) 1,809 (206) 361
- ------------------------------------------------------------------------------------------------------------
12,718 (3,507) 9,923
- ------------------------------------------------------------------------------------------------------------
EARNINGS (LOSS) BEFORE THE FOLLOWING: 13,011 (5,305) (23,113)
- ------------------------------------------------------------------------------------------------------------
Write-down of mineral properties and fixed assets 1,178 279 -
Other non-producing property costs (income) 8,638 (5,394) 3,847
Income and mining taxes (recovery) 571 (841) (224)
- ------------------------------------------------------------------------------------------------------------
10,387 (5,956) 3,623
- ------------------------------------------------------------------------------------------------------------
NET EARNINGS (LOSS) 2,624 651 (26,736)
DEFICIT - BEGINNING OF YEAR (190,291) (190,942) (164,206)
============================================================================================================
DEFICIT - END OF YEAR $ (187,667) $ (190,291) $ (190,942)
- ------------------------------------------------------------------------------------------------------------
BASIC EARNINGS (LOSS) PER SHARE $ 0.01 $ 0.00 $ (0.16)
============================================================================================================
DILUTED EARNINGS PER COMMON SHARE $ 0.01 $ 0.00 $ (0.16)
============================================================================================================
WEIGHTED-AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING AFTER BONUS ELEMENT 353,508,000 211,411,000 169,074,000
============================================================================================================
27
BREAKWATER RESOURCES LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2004, 2003 and 2002
(Expressed in thousands of Canadian dollars)
==============================================================================================================
2004 2003 2002
==============================================================================================================
CASH (USED FOR) PROVIDED FROM (Restated) (Restated)
OPERATING ACTIVITIES
Net earnings (loss) $ 2,624 $ 651 $ (26,736)
Non-cash items:
Depreciation and depletion 25,896 25,964 29,987
Gain on sale of property - (10,336) -
Write-down of mineral properties and fixed assets 1,178 279 -
Foreign exchange gain on US dollar denominated loans - (3,712) (608)
Other non-cash items (133) (761) 2,984
Stock-based compensation 1,253 274 184
Deferred income - 1,340 -
Future income taxes 1,909 (1,050) 822
Reclamation closure cost accruals and other
environmental obligations 4,896 3,619 4,166
Employee future benefits 553 - -
- --------------------------------------------------------------------------------------------------------------
38,176 16,268 10,799
Payment of reclamation, closure cost accruals and other
environmental obligations (7,879) (728) (945)
Payment of employee future benefits (968) - -
Changes in non-cash working capital items (5,177) 2,347 (12,406)
- --------------------------------------------------------------------------------------------------------------
24,152 17,887 (2,552)
- --------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Increase in short-term restricted cash (3,036) (355) -
Proceeds from sale of royalty 12,204 - -
Issue of common shares for cash 30,407 29,316 17,907
Issue of warrants for cash 7,211 - -
Decrease in short-term debt (10,059) (18,711) (3,495)
(Decrease) increase in long-term debt (14,095) (29,821) 2,390
- --------------------------------------------------------------------------------------------------------------
22,632 (19,571) 16,802
- --------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Funds advanced on promissory note (11,785) - -
Reclamation deposits - 1,287 (150)
Acquisition of Boliden Westmin (Canada) Limited, net of cash
acquired (886) - -
Mineral properties and fixed assets (27,689) (10,621) (10,970)
Proceeds from sale of mineral properties 210 10,616 -
- --------------------------------------------------------------------------------------------------------------
(40,150) 1,282 (11,120)
- --------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH 6,634 (402) 3,130
CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR 6,033 6,435 3,305
- --------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS - END OF YEAR $ 12,667 $ 6,033 $ 6,435
==============================================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for:
Interest $ 436 $ 2,681 $ 3,539
Income and mining taxes $ 358 $ 339 $ 588
28