BREAKWATER RESOURCES LTD.
FORM 51-102F4
BUSINESS ACQUISITION REPORT
ITEM 1 IDENTITY OF COMPANY
1.1 NAME AND ADDRESS OF COMPANY
Breakwater Resources Ltd.
Suite 950 - 95 Wellington Street
Toronto, Ontario
M5J 2N7
1.2 EXECUTIVE OFFICER
Richard Godfrey
Vice President, Finance & CFO
Telephone Number: (416) 363-4798 Ext. 276
ITEM 2 DETAILS OF ACQUISITION
2.1 NATURE OF BUSINESS ACQUIRED
On July 23, 2004, Breakwater Resources Ltd. ("Breakwater") concluded the
acquisition of 100 percent of the shares of Boliden Westmin (Canada)
Ltd. ("BWCL") which owned, amongst other things, 100 percent of the Myra
Falls zinc, copper, gold and silver mine located on Vancouver Island,
BC. Breakwater also acquired certain indebtedness owed by BWCL to an
affiliate of BWCL.
The Myra Falls mine's existing proven and probable mineral reserves are
sufficient for at least seven years of production.
Mr. Torben Jensen, P. Eng., Breakwater's qualified person, in
conjunction with qualified persons from BWCL, estimates the mineral
reserves and resources for the Myra Falls mine as of December 31, 2003
to be as shown in the following table:
- -------------------------------------------------------------------------------
TONNES ZN CU AU AG
(000S) (%) (%) G/T G/T
- -------------------------------------------------------------------------------
Proven and Probable Reserves 7,747 6.3 1.2 1.2 40
Measured and Indicated Resources* 10,388 7.8 1.4 1.7 56
Inferred Resources 2,284 4.9 1.1 1.4 57
- -------------------------------------------------------------------------------
*Measured and Indicated Resources include Proven and Probable Reserves.
Zinc and copper concentrates from the Myra Falls operation are sold
principally to customers in Asia.
2.2 DATE OF ACQUISITION
The transaction closed on July 23, 2004.
2.3 CONSIDERATION
Breakwater issued to Boliden Limited ("Boliden"), a subsidiary of
Boliden AB of Stockholm, Sweden, 18 million common shares, with a value
of approximately $7,361,000, and 5 million warrants with a value of
approximately $157,000, exercisable at $1.00 per common share and
expiring January 27, 2009.
The economic effective date of the transaction was June 1, 2004. In
accordance with the purchase agreement, Breakwater agreed to reimburse
Boliden the net amount of cash advances (including interest) provided by
Boliden, and its affiliates, to BWCL in the period between the economic
effective date and the Date of Acquisition. On closing, Breakwater paid
Boliden $3,625,000. In addition, Breakwater incurred $559,000 in costs.
For accounting purposes, such payment and costs are treated as part of
the consideration for the acquisition of BWCL.
2.4 EFFECT ON FINANCIAL POSITION
Management believes the acquisition of BWCL will:
o Result in the proportion of gross sales revenue derived from the
sale of copper concentrates increasing from 3% to 14% at current
metal prices, reducing Breakwater's exposure to zinc price
movements.
o Add an additional mine with a minimum mine life of seven years.
There is considerable scope for mineral resources to be
converted to reserves as well as potential for additional new
discoveries. Being an underground operation, additional
mineralization tends to be delineated as mining proceeds. The
mine has a potential life of twelve years.
o Increase Breakwater's current zinc production by 68% over the
period 2004 to 2010.
o Increase Breakwater's current copper, gold and silver production
by 367%, 139%, and 98% respectively over the period 2004 to
2010.
2.5 PRIOR VALUATIONS
None
2.6 PARTIES TO THE TRANSACTION
The transaction is not with an informed person, associate or affiliate
of Breakwater.
2.7 DATE OF REPORT
October 5, 2004.
ITEM 3 FINANCIAL STATEMENTS
The following financial statements are attached to, and form part of,
this Business Acquisition Report:
a) Unaudited pro forma consolidated balance sheet of Breakwater as
at June 30, 2004, and unaudited pro forma consolidated
statements of operations of Breakwater for the six months ended
June 30, 2004 and the year ended December 31, 2003, together
with the auditors' compilation report thereon;
b) Unaudited comparative consolidated financial statements of BWCL
as at and for the six months ended June 30, 2004;
c) Audited comparative consolidated financial statements of BWCL as
at and for the year ended December 31, 2003;
d) Unaudited comparative consolidated financial statements of
Breakwater as at and for the six months ended June 30, 2004; and
e) Audited comparative consolidated financial statements of
Breakwater as at and for the year ended December 31, 2003.
COMPILATION REPORT ON PRO FORMA FINANCIAL STATEMENTS
To the Directors of
Breakwater Resources Ltd.
We have read the accompanying unaudited pro forma consolidated balance sheet of
Breakwater Resources Ltd. ("Breakwater") as at June 30, 2004 and the unaudited
pro forma consolidated statements of operations for the six months then ended
and for the year ended December 31, 2003, and have performed the following
procedures:
1. Compared the figures in the column captioned "Breakwater Resources Ltd."
to the unaudited consolidated financial statements of Breakwater as at
June 30, 2004 and for the six months then ended, and to the audited
consolidated financial statements of Breakwater for the year ended
December 31, 2003, respectively, and found them to be in agreement.
2. Compared the figures in the column captioned "Boliden Westmin Canada
Ltd." ("BWCL") to the unaudited financial statements of BWCL as at June
30, 2004 and for the six months then ended, and to the audited financial
statements of BWCL for the year ended December 31, 2003, respectively,
and found them to be in agreement.
3. Made enquiries of certain officials of Breakwater who have
responsibility for financial and accounting matters about:
(a) the basis for determination of the pro forma adjustments; and
(b) whether the pro forma financial statements comply as to form in
all material respects with the regulatory requirements of the
various securities commissions and similar regulatory
authorities in Canada.
The officials:
(a) described to us the basis for determination of the pro forma
adjustments, and
(b) stated that the pro forma financial statements comply as to form
in all material respects with the regulatory requirements of the
various securities commissions and similar regulatory
authorities in Canada.
4. Read the notes to the pro forma financial statements and found them to
be consistent with the basis described to us for determination of the
pro forma adjustments.
5. Recalculated the application of the pro forma adjustments to the
aggregate of the amounts in the columns captioned "Breakwater Resources
Ltd." and "Boliden Westmin Canada Ltd.", as at June 30, 2004 and for the
six months then ended, and for the year ended December 31, 2003, and
found the amounts in the column captioned "Pro Forma Consolidated" to be
arithmetically correct.
A pro forma financial statement is based on management assumptions and
adjustments which are inherently subjective. The foregoing procedures are
substantially less than either an audit or a review, the objective of which is
the expression of assurance with respect to management's assumptions, the pro
forma adjustments, and the application of the adjustments to the historical
financial information. Accordingly, we express no such assurance. The foregoing
procedures would not necessarily reveal matters of significance to the pro forma
consolidated financial statements, and we therefore make no representation about
the sufficiency of the procedures for the purposes of a reader of such
statements.
Signed "Deloitte & Touche LLP"
Chartered Accountants
Toronto, Ontario
October 1, 2004
BREAKWATER RESOURCES LTD.
PRO FORMA CONSOLIDATED BALANCE SHEET
AS AT JUNE 30, 2004
(unaudited)
(Expressed in Thousands of Canadian Dollars)
BOLIDEN
BREAKWATER WESTMIN PRO FORMA PRO FORMA
RESOURCES LTD. CANADA LTD. NOTES ADJUSTMENTS CONSOLIDATED
Assets
Current Assets
Cash and cash equivalents 33,969 3,154 2 (a) (4,184) 32,939
Accounts receivable - concentrate 5,558 5,312 - 10,870
Other accounts receivable 7,477 837 2 (b) (67) 8,247
Concentrate inventory 26,631 5,335 - 31,966
Materials and supplies inventory 24,239 3,355 - 27,594
Prepaid expenses 3,981 1,275 - 5,256
Future tax assets 688 - - 688
----------------------------- ------------------------------
102,543 19,268 (4,251) 117,560
Reclamation deposits 100 - - 100
Long-term investments - 23,505 2 (b) (16,183) 8,228
2 (b) (188)
2 (c) 1,094
Mineral Properties and Fixed Assets 113,211 35,831 2 (d) (2,996) 146,046
----------------------------- ------------------------------
215,854 78,604 (22,524) 271,934
============================= ==============================
Liabilities
Current Liabilities
Accounts payable and accrued liabilities 29,712 13,627 2 (b) (97) 43,242
Provisional payments 8,871 - - 8,871
Short-term debt 650 - - 650
Income and mining taxes payable 140 - - 140
----------------------------- ------------------------------
39,373 13,627 (97) 52,903
Deferred Royalty 1,340 - - 1,340
Long-Term Debt 1,419 293,105 2 (b) (292,835) 1,689
Reclamation and Closure Cost Accruals 27,496 48,598 2 (b) (16,297) 59,797
Employee Future Benefits - 2,461 - 2,461
Future Tax Liabilities 1,732 - - 1,732
----------------------------- ------------------------------
71,360 357,791 (309,229) 119,922
----------------------------- ------------------------------
Shareholders' Equity
Capital stock 321,999 157,205 2 (e) (157,205) 329,360
- - 2 (a) 7,361
Warrants 3,270 - 2 (a) 157 3,427
Contributed surplus 2,779 - - 2,779
Deficit (183,716) (436,392) 2 (e) 436,392 (183,716)
Cumulative translation adjustments 162 - - 162
-------------------------------------------------------------------
144,494 (279,187) 286,705 152,012
-----------------------------------------------------------------
215,854 78,604 (22,524) 271,934
=================================================================
BREAKWATER RESOURCES LTD.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2004
(unaudited)
(Expressed in Thousands of Canadian Dollars)
BOLIDEN
BREAKWATER WESTMIN PRO FORMA PRO FORMA
RESOURCES LTD. CANADA LTD. NOTES ADJUSTMENTS CONSOLIDATED
NET REVENUE 73,971 66,070 - 140,041
------------------------------ ----------------------------
OPERATING COSTS
DIRECT OPERATING COSTS 45,345 65,910 - 111,255
DEPRECIATION AND DEPLETION 11,356 3,665 - 15,021
RECLAMATION AND CLOSURE COSTS 2,060 - - 2,060
------------------------------ ----------------------------
58,761 69,575 - 128,336
------------------------------ ----------------------------
CONTRIBUTION (LOSS) FROM MINING ACTIVITIES 15,210 (3,505) - 11,705
------------------------------ ----------------------------
GENERAL AND ADMINISTRATIVE 5,436 1,298 - 6,734
INTEREST AND FINANCING 186 786 3 (b) (736) 236
INVESTMENT AND OTHER EXPENSE 122 72 - 194
EXPLORATION - 586 - 586
FOREIGN EXCHANGE LOSS 431 5,345 3 (a) (5,171) 605
------------------------------ ----------------------------
6,175 8,087 (5,907) 8,355
------------------------------ ----------------------------
EARNINGS (LOSS) BEFORE THE FOLLOWING 9,035 (11,592) 5,907 3,350
OTHER NON-PRODUCING PROPERTIES 2,462 - - 2,462
INCOME AND MINING TAXES (2) 65 - 63
------------------------------ ----------------------------
NET EARNINGS (LOSS) 6,575 (11,657) 5,907 825
============================== ============================
WEIGHTED-AVERAGE NUMBER OF SHARES 344,156,000 4 (a) 18,000,000 362,156,000
PRO FORMA BASIC AND DILUTED EARNINGS PER SHARE $ 0.00
==============
BREAKWATER RESOURCES LTD.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 2003
(unaudited)
(Expressed in Thousands of Canadian Dollars)
BOLIDEN
BREAKWATER WESTMIN PRO FORMA PRO FORMA
RESOURCES LTD. CANADA LTD. NOTES ADJUSTMENTS CONSOLIDATED
NET REVENUE 124,010 115,769 - 239,779
---------------------------- ----------------------------
OPERATING COSTS
DIRECT OPERATING COSTS 103,239 111,737 - 214,976
DEPRECIATION AND DEPLETION 24,115 5,809 - 29,924
RECLAMATION AND CLOSURE COSTS 2,277 - - 2,277
-----------------------------------------------------------------
129,631 117,546 - 247,177
---------------------------- ----------------------------
LOSS FROM MINING ACTIVITIES (5,621) (1,777) - (7,398)
---------------------------- ----------------------------
GENERAL AND ADMINISTRATIVE 5,087 2,451 - 7,538
INTEREST AND FINANCING 3,321 850 3 (b) (555) 3,616
INVESTMENT AND OTHER INCOME (611) 544 3 (c) (405) (472)
GAIN ON SALE OF CAPITAL ASSETS - (931) 3 (d) 866 (65)
EXPLORATION - 465 - 465
FOREIGN EXCHANGE GAIN (11,578) (30,748) 3 (a) 29,878 (12,448)
---------------------------- ----------------------------
(3,781) (27,369) 29,784 (1,366)
---------------------------- ----------------------------
EARNINGS (LOSS) BEFORE THE FOLLOWING (1,840) 25,592 (29,784) (6,032)
WRITE-DOWN OF MINERAL PROPERTIES 279 - - 279
OTHER NON-PRODUCING PROPERTIES (8,396) - - (8,396)
INCOME AND MINING TAXES (841) 124 - (717)
---------------------------- ----------------------------
NET EARNINGS 7,118 25,468 (29,784) 2,802
============================ ============================
WEIGHTED-AVERAGE NUMBER OF SHARES 211,411,000 4 (b) 18,000,000 229,411,000
PRO FORMA BASIC AND DILUTED EARNINGS PER SHARE $ 0.01
==============
BREAKWATER RESOURCES LTD.
Notes to Pro Forma Consolidated Financial Statements
Six Months Ended June 30, 2004 and Year Ended December 31, 2003 (unaudited)
(EXPRESSED IN THOUSANDS OF CANADIAN DOLLARS)
1. BASIS OF PRESENTATION
The accompanying unaudited pro forma consolidated financial statements
(the "Statements") give effect to the acquisition by Breakwater
Resources Ltd. ("Breakwater") of all of the outstanding shares of
Boliden Westmin Canada Ltd. ("BWCL") and certain indebtedness owed by
BWCL to an affiliate of BWCL (collectively the "Transaction"), as if it
had occurred as at:
o June 30, 2004 for the purposes of the unaudited pro forma
consolidated balance sheet; and
o January 1, 2003 for the purposes of the unaudited pro forma
consolidated statement of operations for the six-month period ended June
30, 2004 and year ended December 31, 2003.
The Statements have been prepared by management in accordance with
Canadian generally accepted accounting principles.
The Statements have been prepared using the following information:
(a) Audited consolidated financial statements of Breakwater as at
and for the year ended December 31, 2003;
(b) Audited consolidated financial statements of BWCL as at and for
the year ended December 31, 2003;
(c) Unaudited consolidated interim financial statements of
Breakwater as at and for the six months ended June 30, 2004;
(d) Unaudited consolidated interim financial statements of BWCL as
at and for the six months ended June 30, 2004;
(e) Certain assets and liabilities of BWCL were assigned or
forgiven, prior to and as a condition of the Transaction, and
have therefore been removed from the Statements as noted below;
(f) Such other supplementary information as was considered necessary
to reflect the Transaction in the Statements.
The Statements are not necessarily indicative of the results of
operations or the financial position that would have resulted had the
Transaction been effected on the dates indicated, or the results that
may be obtained in the future.
Certain elements of the Breakwater and BWCL consolidated financial
statements have been reclassified to provide a consistent classification
format.
The Statements have been prepared based on a preliminary allocation of
the purchase consideration, and may be adjusted subsequently on
completion of the allocation.
2. PRO FORMA CONSOLIDATED BALANCE SHEET
The unaudited pro forma consolidated balance sheet gives effect to the
following transactions and assumptions as if they had occurred at the
balance sheet date, June 30, 2004:
a) The acquisition of all of the outstanding shares of BWCL and
certain indebtedness owed by BWCL to an affiliate of BWCL for
total consideration of $11,702,000 comprised of the following:
o Cash of $3,625,000;
o 18,000,000 common shares of Breakwater for an ascribed
value of $7,361,000 ;
o 5,000,000 warrants of Breakwater, exercisable for the
same number of common shares, for an ascribed value of
$157,000; and
o Costs of $559,000.
b) Certain assets and liabilities of BWCL were removed from the
BWCL statements because the parties agreed that such assets and
liabilities would be assigned or forgiven (the "Pre-closing
Transactions") prior to and as a condition of the Transaction:
o Assignment to Boliden Limited ("Boliden") of the
$16,297,000 of reclamation liability related to a
non-acquired asset;
o Forgiveness by Boliden of $292,835,000 of inter-company
debts;
o Forgiveness by BWCL of $16,183,000 of inter-company
accounts receivable;
o Assignment to Boliden of $67,000 of other accounts
receivable related to a non-acquired asset;
o Assignment to Boliden of $188,000 of mortgage
receivables related to a non-acquired asset;
o Assignment to Boliden of $97,000 of accounts payable
related to a non-acquired asset; and
o Assignment of the shares of a non-acquired asset to an
affiliate of Boliden.
c) Long-term investments were increased by $1,094,000 to reflect
the fair market value of certain investments, namely the
Expatriate Resources Ltd. shares and the Taseko Mines Ltd.
debenture acquired;
d) Mineral properties and fixed assets were decreased by $2,996,000
to reflect the fair value of the mineral properties and fixed
assets acquired;
e) Elimination of BWCL share capital of $157,205,000 and deficit of
$436,392,000.
3. PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
The unaudited pro forma consolidated statements of operations for the
six months ended June 30, 2004 and for the year ended December 31, 2003
give effect to the following assumed transactions and assumptions as if
they had taken place at January 1, 2003:
a) Removal of foreign exchange (gains) losses related to
inter-company receivables and debt eliminated by certain
Pre-closing Transactions; $5,171,000 loss (in the six months
ended June 30, 2004) and $29,878,000 gain (in the year ended
December 31, 2003);
b) Removal of interest and financing expenses related to
inter-company receivables and debt eliminated by certain
Pre-closing Transactions; $736,000 (in the six months ended June
30, 2004) and $555,000 (in the year ended December 31, 2003);
c) Removal of $405,000 (in the year ended December 31, 2003) loss
from Investment and other expense (income) related to
non-acquired assets as a result of certain Pre-closing
Transactions
d) Removal of $866,000 (in the year ended December 31, 2003) from
Gain on sale of capital assets related to non-acquired assets as
a result of certain Pre-closing Transactions.
4. PRO FORMA EARNINGS PER SHARE
a) The pro forma weighted-average number of common shares of
Breakwater outstanding after giving effect to the Transaction is
362,156,000 for the six month period ended June 30, 2004, this
reflects the issuance of 18,000,000 common shares of Breakwater
on the assumption that these common shares were issued on
January 1, 2004.
b) The pro forma weighted-average number of common shares of
Breakwater outstanding after giving effect to the Transaction is
229,411,000 for the year ended December 31, 2003, reflecting the
issuance of 18,000,000 common shares of Breakwater on the
assumption that these shares were issued at January 1, 2003.
BOLIDEN WESTMIN (CANADA) LIMITED
CONSOLIDATED BALANCE SHEETS
AS AT JUNE 30, 2004 AND DECEMBER 31, 2003
UNAUDITED
- -------------------------------------------------------------------------------------------------
(In Canadian dollars)
June 30, 2004 December 31, 2003
------------------ -------------------
ASSETS
CURRENT
Cash and cash equivalents $ 3,153,481 $ 1,160,028
Accounts and metal settlements receivable 6,148,641 3,506,331
Inventories 8,689,946 10,608,301
Prepaid expenses 1,275,307 185,314
- -------------------------------------------------------------------------------------------------
19,267,374 15,459,974
DUE FROM COMPANIA MINERA LOMAS BAYAS 16,183,145 22,148,799
LONG-TERM INVESTMENTS 7,322,343 7,519,408
CAPITAL ASSETS 35,831,030 23,892,518
- -------------------------------------------------------------------------------------------------
$ 78,603,892 $ 69,020,699
=================================================================================================
LIABILITIES
CURRENT
Accounts payable and accrued liabilities $ 13,027,064 $ 11,202,797
Current portion of long-term debt (Note 8) - 4,600,800
Current portion of capital lease obligations (Note 8) 600,000 398,832
- -------------------------------------------------------------------------------------------------
13,627,064 16,202,429
LONG-TERM DEBT - 4,600,800
CAPITAL LEASE OBLIGATIONS 269,681 407,086
RECLAMATION AND OTHER ENVIRONMENTAL
OBLIGATIONS 48,597,513 50,878,707
DUE TO RELATED PARTIES 292,835,441 307,867,903
EMPLOYEE FUTURE BENEFITS 2,460,987 2,448,200
- -------------------------------------------------------------------------------------------------
357,790,686 382,405,125
- -------------------------------------------------------------------------------------------------
SHAREHOLDER'S NET CAPITAL DEFICIENCY
Share capital (Note 12) 157,205,123 157,205,123
Deficit (436,391,916) (470,589,549)
- -------------------------------------------------------------------------------------------------
(279,186,793) (313,384,426)
- -------------------------------------------------------------------------------------------------
78,603,893 69,020,699
BOLIDEN WESTMIN (CANADA) LIMITED
CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT
SIX MONTHS ENDED JUNE 30, 2004 AND 2003
(IN CANADIAN DOLLARS)
===============================================================================================
June 30, 2004 June 30, 2003
------------------ ------------------
REVENUE $ 66,069,583 $ 71,712,265
- -----------------------------------------------------------------------------------------------
EXPENSES
Cost of metal and other product sales 65,909,908 72,078,511
Depletion and depreciation 3,576,224 3,689,523
Mineral exploration 586,236 21,496
- -----------------------------------------------------------------------------------------------
70,072,368 75,789,530
- -----------------------------------------------------------------------------------------------
LOSS BEFORE THE FOLLOWING (4,022,784) (4,077,265)
- -----------------------------------------------------------------------------------------------
GENERAL AND ADMINISTRATIVE EXPENSES 1,297,606 1,386,450
LOSS (GAIN) ON INVESTMENTS 72,070 -
GAIN ON SALE OF CAPITAL ASSETS - (64,987)
INTEREST EXPENSE 786,008 247,471
UNREALIZED FOREIGN EXCHANGE GAIN 5,344,415 (26,726,529)
- -----------------------------------------------------------------------------------------------
7,500,100 (25,157,596)
- -----------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE CAPITAL AND
MINING TAXES (11,502,884) 21,080,330
CAPITAL AND MINING TAXES 64,982 28,118
- -----------------------------------------------------------------------------------------------
NET INCOME (LOSS) FOR THE YEAR (11,567,867) 21,052,213
See accompanying Notes to the Consolidated Financial Statements.
AUDITORS' REPORT AND CONSOLIDATED FINANCIAL STATEMENTS OF
BOLIDEN WESTMIN (CANADA) LIMITED
DECEMBER 31, 2003 AND 2002
AUDITORS' REPORT
To the Shareholder of
Boliden Westmin (Canada) Limited
We have audited the consolidated balance sheets of Boliden Westmin (Canada)
Limited as at December 31, 2003 and 2002 and the consolidated statements of
operations and deficit and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with Canadian generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the Company as at December 31, 2003
and 2002 and the results of its operations and its cash flows for the years then
ended in accordance with Canadian generally accepted accounting principles.
/s/ Deloitte & Touche LLP
Chartered Accountants
Vancouver, British Columbia
June 11, 2004
BOLIDEN WESTMIN (CANADA) LIMITED
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2003 AND 2002
(IN CANADIAN DOLLARS)
================================================================================================
2003 2002
---------------- ----------------
ASSETS
CURRENT
Cash and cash equivalents $ 5,768,758 $ 1,160,028
Accounts and metal settlements receivable (Note 3) 10,563,863 3,506,331
Inventories (Note 4) 3,650,417 10,608,301
Prepaid expenses 440,077 185,314
20,423,115 15,459,974
- ------------------------------------------------------------------------------------------------
DUE FROM COMPANIA MINERA LOMAS BAYAS (Note 5) 18,121,745 22,148,799
LONG-TERM INVESTMENTS (Note 6) 6,975,305 7,519,408
CAPITAL ASSETS (Note 7) 33,391,367 23,892,518
- ------------------------------------------------------------------------------------------------
$ 78,911,532 $ 69,020,699
================================================================================================
LIABILITIES
CURRENT
Accounts payable and accrued liabilities $ 9,539,939 $ 11,202,797
Current portion of long-term debt (Note 8) 3,928,800 4,600,800
Current portion of capital lease obligations (Note 8) 795,021 398,832
- ------------------------------------------------------------------------------------------------
14,263,760 16,202,429
LONG-TERM DEBT (Note 8) - 4,600,800
CAPITAL LEASE OBLIGATIONS (Note 8) 195,408 407,086
RECLAMATION AND OTHER ENVIRONMENTAL
OBLIGATIONS (Note 9) 48,821,605 49,579,149
DUE TO RELATED PARTIES (Note 10) 299,635,899 307,867,903
EMPLOYEE FUTURE BENEFITS (Note 11) 2,612,300 2,448,200
- ------------------------------------------------------------------------------------------------
365,528,972 381,105,567
- ------------------------------------------------------------------------------------------------
SHAREHOLDER'S NET CAPITAL DEFICIENCY
Share capital (Note 12) 157,205,123 157,205,123
Deficit (443,822,563) (469,289,991)
- ------------------------------------------------------------------------------------------------
(286,617,440) (312,084,868)
- ------------------------------------------------------------------------------------------------
$ 78,911,532 $ 69,020,699
================================================================================================
GOING CONCERN (Note 1)
COMMITMENTS AND CONTINGENCIES (Notes 1 and 13)
APPROVED BY THE BOARD
- --------------------------------------- ---------------------------------------
Director Director
See accompanying Notes to the Consolidated Financial Statements.
BOLIDEN WESTMIN (CANADA) LIMITED
CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT
YEARS ENDED DECEMBER 31, 2003 AND 2002
(IN CANADIAN DOLLARS)
=====================================================================================
2003 2002
------------------ ------------------
REVENUE $ 115,769,111 $ 79,254,163
- -------------------------------------------------------------------------------------
EXPENSES
Cost of metal and other product sales 111,736,518 83,641,029
Depletion and depreciation 5,809,023 3,373,684
Mineral exploration 464,888 340
- -------------------------------------------------------------------------------------
118,010,429 87,015,053
- -------------------------------------------------------------------------------------
LOSS BEFORE THE FOLLOWING (2,241,318) (7,760,890)
- -------------------------------------------------------------------------------------
GENERAL AND ADMINISTRATIVE EXPENSES 2,451,497 2,757,301
LOSS (GAIN) ON INVESTMENTS 544,103 (48,139)
GAIN ON SALE OF CAPITAL ASSETS (930,601) -
INTEREST INCOME - (1,540)
INTEREST EXPENSE 850,220 185,382
UNREALIZED FOREIGN EXCHANGE GAIN (29,877,608) (2,623,837)
REALIZED FOREIGN EXCHANGE GAIN (870,264) (258,277)
- -------------------------------------------------------------------------------------
(27,832,653) 10,890
- -------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE CAPITAL AND
MINING TAXES 25,591,335 (7,771,780)
CAPITAL AND MINING TAXES (RECOVERY) 123,907 (545,668)
- -------------------------------------------------------------------------------------
NET INCOME (LOSS) FOR THE YEAR 25,467,428 (7,226,112)
DEFICIT, BEGINNING OF YEAR (469,289,991) (462,063,879)
- -------------------------------------------------------------------------------------
DEFICIT, END OF YEAR $ (443,822,563) $ (469,289,991)
=====================================================================================
See accompanying Notes to the Consolidated Financial Statements.
BOLIDEN WESTMIN (CANADA) LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2003 AND 2002
(IN CANADIAN DOLLARS)
- -------------------------------------------------------------------------------------------------
2003 2002
---------------- ----------------
OPERATING ACTIVITIES
Net income (loss) for the year $ 25,467,428 $ (7,226,112)
Items not affecting cash:
Depletion and depreciation 5,809,023 3,373,684
Gain on sale of capital assets (930,601) -
Loss (gain) on investments 544,103 (48,139)
Unrealized foreign exchange gain (29,877,608) (2,623,837)
Reclamation expense 1,895,827 1,895,827
Decrease in reclamation obligation (2,653,371) (3,191,023)
Increase (decrease) in employee future benefits, net 164,100 (70,363)
Net change in non-cash operating working capital
items (Note 16 (a)) (2,017,269) (3,107,382)
- -------------------------------------------------------------------------------------------------
(1,598,368) (10,997,345)
- -------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Additions to capital assets (14,603,889) (9,631,260)
Proceeds on disposal of capital assets 930,601 -
Proceeds from disposal of investments - 719,296
- -------------------------------------------------------------------------------------------------
(13,673,288) (8,911,964)
- -------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Increase in due to related parties 25,672,658 7,591,023
(Repayment of) proceeds from long-term debt (5,272,800) 9,201,600
Repayment of capital lease obligations (519,472) (334,286)
- -------------------------------------------------------------------------------------------------
19,880,386 16,458,337
- -------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 4,608,730 (3,450,972)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 1,160,028 4,611,000
- -------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 5,768,758 $ 1,160,028
=================================================================================================
See accompanying Notes to the Consolidated Financial Statements.
BOLIDEN WESTMIN (CANADA) LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003 AND 2002
(IN CANADIAN DOLLARS, EXCEPT PERCENTAGES)
- --------------------------------------------------------------------------------
1. GOING CONCERN BASIS
The consolidated financial statements of Boliden Westmin (Canada)
Limited (the "Company") have been prepared on a going concern basis,
which assumes that the Company will be able to realize the carrying
value of its assets and discharge its liabilities in the normal course
of operations. Accordingly, the accompanying consolidated financial
statements do not include any adjustments to the carrying values and
classification of assets and liabilities that might be necessary should
the Company be unable to continue as a going concern.
The Company has incurred significant operating losses in 2003 and 2002
and is dependent upon the continued financial support of its ultimate
parent, Boliden AB ("Boliden"), to continue operations. As well, the
Company requires significant capital expenditures to complete
modifications to its tailings facility to meet recommended design
standards for seismic stability and is required to incur certain capital
expenditures in order to be able to continue its operations in
accordance with its mine plan.
At December 31, 2003 and 2002, the Company has significant loans payable
to related parties which it would not be able to repay in the normal
course of operations. The Company's ability to realize the carrying
value of its assets in the normal course of operations is dependent
upon, among other things, receipt of governmental approvals for and
completion of the required capital expenditures, including completion of
the tailings facility modifications, sourcing of additional capital and
continuation of operations in accordance with plans. There can be no
assurance that the Company will be successful with these initiatives.
2. SIGNIFICANT ACCOUNTING POLICIES
These consolidated financial statements have been prepared in accordance
with Canadian generally accepted accounting principles. The principal
accounting policies followed by the Company are summarized below:
(A) BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries: Gibraltar Mines
Finance Limited ("GMFL") and Gibraltar Mines Exploration Ltd.,
which was wound up in February 2003. Intercompany transactions
and balances have been eliminated upon consolidation.
(B) TRANSLATION OF FOREIGN CURRENCIES
Monetary assets and liabilities denominated in foreign
currencies are translated into Canadian dollars at exchange
rates in effect at the balance sheet date and non-monetary
assets and liabilities at exchange rates in effect at the time
of acquisition or issue. Revenue and expenses are translated at
rates approximating the exchange rate in effect at the time of
the transaction. All exchange gains and losses are included in
operations.
BOLIDEN WESTMIN (CANADA) LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003 AND 2002
(IN CANADIAN DOLLARS, EXCEPT PERCENTAGES)
- --------------------------------------------------------------------------------
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(C) REVENUE RECOGNITION AND METAL SETTLEMENTS RECEIVABLE
Estimated revenue, based upon prevailing metal prices, is
recorded in the financial statements when title to the
concentrate transfers to the customer. The estimated revenue is
subject to adjustment upon final settlement, which is usually
four to five months after the date of shipment. These
adjustments reflect changes in metal prices, currency rates and
quantities arising from final weight and assay calculations, and
are accounted for when known.
(D) CASH
Cash and cash equivalents consist of balances with banks and
investments in money market instruments with remaining terms to
maturity at the date of acquisition of three months or less. At
December 31, 2003 and 2002, there were no investments in money
market instruments.
(E) INVENTORY
Concentrate inventories are valued at the lower of production
cost to produce saleable metal and net realizable value.
Materials and supplies inventories are valued at the lower of
average cost of acquisition and net realizable value.
(F) CAPITAL ASSETS
Mining properties, plant and equipment, including related
capitalized development and preproduction expenditures, are
recorded at cost. Repairs and maintenance expenditures are
charged to operations; major betterments and replacements are
capitalized.
Mining properties are depleted on a unit-of-production basis
using estimated proven and probable reserves as the basis for
depletion. The plant and equipment and other capital assets used
in mining operations are depreciated on a straight-line basis
for immobile assets and on a unit of production basis for mobile
assets.
Mine development costs incurred to maintain the current
production of operating mines are included in operating costs.
Mine development costs incurred to expand the capacity of
operating mines, to develop new ore bodies or to develop mine
areas substantially in advance of current production are
capitalized and charged to operations over the estimated
economic life of the mine.
BOLIDEN WESTMIN (CANADA) LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003 AND 2002
(IN CANADIAN DOLLARS, EXCEPT PERCENTAGES)
- --------------------------------------------------------------------------------
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(F) CAPITAL ASSETS (CONTINUED)
When events or changes in circumstances indicate that the
carrying amount of a capital asset will not be recoverable, an
impairment loss is recognized and the cost is written down to
its net recoverable amount based on estimated undiscounted
future net cash flows using the Company's estimate of long-term
metal prices, exchange rates and mining plans.
(G) LONG-TERM INVESTMENTS
Investments in shares of other companies are accounted for using
the cost method and are carried at cost, less amounts written
off to reflect impairments in values that are considered other
than temporary. Investment income is included in operations when
received or receivable.
(H) RECLAMATION AND OTHER ENVIRONMENTAL OBLIGATIONS
The Company provides for estimated reclamation and site
restoration costs, where reasonably determinable, net of salvage
value, on a straight-line basis over the estimated economic life
of the related mine. Costs are based on engineering estimates of
the anticipated method and extent of site restoration. Estimates
of the ultimate reclamation and site restoration costs are based
on current laws and regulations and expected costs to be
incurred, all of which are subject to possible changes thereby
impacting current determinations.
Accruals for other environmental costs (including the
modifications to the tailings facilities) are expensed when the
obligation is reasonably determinable.
(I) INCOME TAXES
The provision for income taxes is based on the liability method.
Future income taxes arise from the recognition of the tax
consequences of differences between the carrying amounts and the
tax bases of assets and liabilities, and tax carryforwards,
using substantively enacted statutory tax rates applicable to
future years when these temporary differences are expected to
reverse or the losses are expected to be utilized. The Company
records a valuation allowance against any portion of those
future income tax assets that it believes will, more likely than
not, fail to be realized.
BOLIDEN WESTMIN (CANADA) LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003 AND 2002
(IN CANADIAN DOLLARS, EXCEPT PERCENTAGES)
- --------------------------------------------------------------------------------
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(J) EMPLOYEE FUTURE BENEFITS
The cost of pensions and post-retirement benefits earned by
employees is actuarially determined using the projected benefit
method prorated on service and management's best estimate of
expected plan investment performance, salary escalation,
retirement ages of employees and expected health care costs.
For the purpose of calculating the expected return on plan
assets, those assets are valued at fair value.
The excess of the net actuarial gain (loss) over 10% of the
greater of the benefit obligation and the fair value of the plan
assets is amortized over the average remaining service period of
active employees for each respective plan.
(K) USE OF ESTIMATES
Generally accepted accounting principles require management to
make assumptions and estimates that affect the reported amounts
and other disclosures in these consolidated financial
statements. Actual results may differ from those estimates.
Significant estimates used in the preparation of these
consolidated financial statements include, amongst other things,
the recoverability of accounts and metal settlements receivable,
future income tax assets and investments, the proven and
probable ore reserves, the estimated net realizable value of
metals inventories, the expected economic lives of and the
estimated future operating results and net cash flows from
producing mining property, plant and equipment, and the
anticipated costs of reclamation obligations.
3. ACCOUNTS AND METAL SETTLEMENTS RECEIVABLE
2003 2002
---------------- ----------------
Concentrate and metal settlements $ 9,763,450 $ 1,448,775
Other accounts receivable 800,413 2,057,556
----------------------------------------------------------------------------
$ 10,563,863 $ 3,506,331
============================================================================
BOLIDEN WESTMIN (CANADA) LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003 AND 2002
(IN CANADIAN DOLLARS, EXCEPT PERCENTAGES)
- --------------------------------------------------------------------------------
4. INVENTORIES
2003 2002
---------------- ----------------
Concentrate inventory $ 578,473 $ 7,405,726
Materials and supplies 3,071,944 3,202,575
----------------------------------------------------------------------------
$ 3,650,417 $ 10,608,301
============================================================================
5. DUE FROM COMPANIA MINERA LOMAS BAYAS
This receivable in GMFL arose in 2001 when Boliden Limited sold its
interest in the Lomas Bayas SX-EW copper project and adjacent Fortuna de
Cobre copper deposit located in Chile. The amount due to GMFL at
December 31, 2003 consists of a note of U.S.$14,021,777 (2002 -
U.S.$14,021,777) (see Note 18).
6. LONG-TERM INVESTMENTS
2003 2002
-------------- --------------
Taseko Mines Limited convertible debenture (a) $ 5,000,000 $ 5,000,000
Shares of Expatriate Resources Inc. (b) 1,604,812 2,324,000
Shares of Strata Gold Corporation (b) 203,085 -
Employee receivables 160,400 188,400
Other 7,008 7,008
---------------------------------------------------------------------------------------
$ 6,975,305 $ 7,519,408
=======================================================================================
BOLIDEN WESTMIN (CANADA) LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003 AND 2002
(IN CANADIAN DOLLARS, EXCEPT PERCENTAGES)
- --------------------------------------------------------------------------------
6. LONG-TERM INVESTMENTS (CONTINUED)
(a) On July 21, 1999, the Company, in exchange for a loan of $17
million, received a convertible debenture from Taseko Mines Ltd.
("Taseko") which matures on July 21, 2009. In 1999, the Company
recorded an impairment of $12 million on the loan receivable.
The principal sum does not bear interest and is not secured by
any charge or mortgage on any assets of Taseko.
The debenture was convertible at the option of the Company
during the first year at market price at the date of issue. From
the first anniversary of the date of issuance to the tenth
anniversary, the conversion price shall increase by $0.25 per
year cumulatively.
From the fifth anniversary from the date of issuance until the
tenth anniversary, the outstanding principal may, at the
election of Taseko, be converted into Taseko common shares at
the then prevailing market price.
(b) During the year ended December 31, 2003, the Company exchanged
its shares in Expatriate Resources Inc. ("Expatriate") into
Expatriate special shares on a 1:1 basis. Each special share was
then exchanged for one new Expatriate common share and one
Expatriate Class B preferred share ("Preferred Share"). Each
Preferred Share was redeemed by Expatriate for a redemption
price equal to 0.118626 of a share of StrataGold Corporation
("StrataGold"). The redemption price was paid by the transfer of
the shares of StrataGold to the holders of the Preferred Shares.
The cost of the new Expatriate common shares and the shares in
StrataGold were based on the pro rata value of the estimated
fair value of the new Expatriate common shares and the
StrataGold shares at the date of exchange.
At December 31, 2003, the Company held 8,150,000 common shares (11.4%)
of Expatriate (2002 - 8,150,000 (16.3%)) and 966,802 common shares
(3.5%) of StrataGold (2002 - Nil). The market values of these shares at
December 31, 2003 were $2,934,000 and $406,000, respectively (2002 -
$1,509,000 and $Nil).
7. CAPITAL ASSETS
2003 2002
----------------------------------------------- --------------
Accumulated Net Book Net Book
Cost Depreciation Value Value
--------------- -------------- -------------- --------------
Mining properties $ 238,450,712 $ 221,719,017 $ 16,731,695 $ 12,843,014
Plant and equipment 229,125,507 214,153,268 14,972,239 10,501,816
Equipment under capital lease 3,473,259 1,791,826 1,681,433 541,688
Other capital assets 1,087,756 1,081,756 6,000 6,000
----------------------------------------------------------------------------------------------
$ 472,137,234 $ 438,745,867 $ 33,391,367 $ 23,892,518
==============================================================================================
BOLIDEN WESTMIN (CANADA) LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003 AND 2002
(IN CANADIAN DOLLARS, EXCEPT PERCENTAGES)
- --------------------------------------------------------------------------------
8. LONG-TERM LOAN AND CAPITAL LEASE OBLIGATIONS
2003 2002
--------------- --------------
(I) LOAN
U.S. dollar loan of $3,000,000 which bears
interest at three-month LIBOR plus 1.5%,
is secured by a floating charge over the
Company's current assets and is repayable
in quarterly principal instalments of
U.S.$1,500,000 until June 2004. $ 3,928,800 $ 9,201,600
Less current portion (3,928,800) (4,600,800)
---------------------------------------------------------------------------------
$ - $ 4,600,800
=================================================================================
(II) EQUIPMENT LEASES
The Company's capital leases are at fixed
interest rates of between 5.25% and 6.70%
(2002 - between 5.25% and 6.70%). $ 990,429 $ 805,918
Less current portion, excluding interest (795,021) (398,832)
---------------------------------------------------------------------------------
$ 195,408 $ 407,086
=================================================================================
The future minimum lease payments for each of the next five
years until the leases expire are as follows:
2004 $ 851,652
2005 72,795
2006 72,795
2007 54,602
2008 30,827
----------------------------------------------
1,082,671
Less imputed interest expense 92,242
----------------------------------------------
$ 990,429
==============================================
BOLIDEN WESTMIN (CANADA) LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003 AND 2002
(IN CANADIAN DOLLARS, EXCEPT PERCENTAGES)
- --------------------------------------------------------------------------------
9. RECLAMATION AND OTHER ENVIRONMENTAL OBLIGATIONS
(a) The Company's mining operations are subject to reclamation and
closure requirements. Minimum standards for mine reclamation
have been established by various governmental agencies, which
affect certain operations of the Company. A reserve for mine
reclamation costs has been established for restoring certain
abandoned and currently disturbed mining areas, based upon
estimates of costs to comply with existing reclamation
standards. Mine reclamation costs for operating properties are
accrued on a straight-line basis over the remaining useful life
of the mine. The Company's estimate of its ultimate accrual for
reclamation costs may change due to changes in laws and
regulations, and interpretation thereof, and changes in cost
estimates. Changes in estimated amounts, which affect
reclamation cost accrual rates, are accounted for on a
prospective basis. Actual costs incurred are offset against the
amount of the obligation in the period they are incurred.
2003 2002
---------------- ---------------
Opening balance $ 30,709,857 $ 29,481,956
Increase in obligation:
Amounts accrued 1,895,827 1,895,827
Decrease in obligation:
Work performed (1,079,473) (667,926)
-----------------------------------------------------------------------
Closing balance $ 31,526,211 $ 30,709,857
=======================================================================
(b) The Company's operations require significant capital
expenditures to complete modifications to its tailings facility
at the Myra Falls operation. The modifications are intended to
enable the tailings facility to meet recommended design
standards for seismic stability. The Company expects to complete
the work required by 2007. The Company has recorded the full
amount of the estimated obligation and is offsetting actual
expenditures incurred against the obligation.
2003 2002
---------------- ---------------
Opening balance $ 18,869,292 $ 21,392,389
Decrease in obligation:
Work performed (1,573,898) (2,523,097)
-----------------------------------------------------------------------
Closing balance $ 17,295,394 $ 18,869,292
=======================================================================
BOLIDEN WESTMIN (CANADA) LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003 AND 2002
(IN CANADIAN DOLLARS, EXCEPT PERCENTAGES)
- --------------------------------------------------------------------------------
10. DUE TO RELATED PARTIES
2003 2002
----------------- ----------------
Due to Boliden Limited, US$120,614,237
(2002 - US$120,614,267), non-interest bearing,
unsecured and with no specific terms of repayment. $ 156,376,358 $ 190,281,020
Due to Boliden Limited, non-interest bearing,
unsecured and with no specific terms of repayment. 113,779,450 113,779,450
Due to Boliden Mineral AB, bearing interest at a rate
based on LIBOR, unsecured, renewable monthly, and
with no specific terms of repayment. 28,082,722 2,511,113
Due to Boliden Mineral AB, SEK 4,332,084 (2002 - Nil)
bearing interest at a rate based on LIBOR, unsecured,
renewable monthly, and with no specific terms of
repayment. 829,428 -
Other Boliden group companies, non-interest bearing,
unsecured, and with no specific terms of repayment. 567,941 1,296,320
-------------------------------------------------------------------------------------------------
$ 299,635,899 $ 307,867,903
=================================================================================================
11. EMPLOYEE FUTURE BENEFITS
The Company's unionized hourly employees have a defined benefit plan.
The hourly employees benefits under this plan are specified by a
collective agreement. Actuarial reports for this hourly plan are
prepared every three years, with January 1, 2003 being the most recent
valuation. The Company also provides extended health and dental benefits
for certain employees in Canada.
BOLIDEN WESTMIN (CANADA) LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003 AND 2002
(IN CANADIAN DOLLARS, EXCEPT PERCENTAGES)
- --------------------------------------------------------------------------------
11. PENSION PLANS (CONTINUED)
Information about the Company's benefit plans as at December 31, 2003
are as follows:
Post-retirement
benefits
Pension other than
benefits pensions
--------------- ------------------
Expected long-term rate of return on plan assets 7.75% 6.75%
Discount rate on accrued pension obligations 6.75% 6.25%
Extended health care rate of expense increase - % 12% for the
first ten years,
5% thereafter
Dental care rate of expense increase - % 4.00%
Pension expenses:
Current service cost $ 1,053,800 $ 80,000
Interest cost of projected benefit obligation 1,804,500 125,500
Expected return on pension fund assets (1,341,100) -
Net amortization, deferrals and other 521,900 77,900
------------------------------------------------------------------------------------------
$ 2,039,100 $ 283,400
==========================================================================================
Plan assets:
Market value of plan assets, beginning of year $ 16,639,200 $ -
Actual return on plan assets 2,089,600 -
Employer contributions 2,110,500 47,900
Benefits paid (779,700) (47,900)
------------------------------------------------------------------------------------------
Market value of plan assets, end of year $ 20,059,600 $ -
==========================================================================================
Accrued benefit obligation:
Accrued benefit obligation, beginning of year $ 26,069,600 $ 1,803,300
Current service cost 1,053,800 80,000
Interest cost 1,804,500 125,500
Benefits paid (779,700) (47,900)
Actuarial (gain) loss 1,926,100 106,000
------------------------------------------------------------------------------------------
Accrued benefit obligation, end of year $ 30,074,300 $ 2,066,900
==========================================================================================
Plan assets $ 20,059,600 $ -
Benefit obligations (30,074,300) (2,066,900)
Unamortized transitional asset 8,481,700 987,600
------------------------------------------------------------------------------------------
Pension (liability) asset $ (1,533,000) $ (1,079,300)
==========================================================================================
BOLIDEN WESTMIN (CANADA) LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003 AND 2002
(IN CANADIAN DOLLARS, EXCEPT PERCENTAGES)
- --------------------------------------------------------------------------------
11. PENSION PLANS (CONTINUED)
Information about the Company's benefit plans as at December 31, 2002
are as follows:
Post-retirement
benefits
Pension other than
benefits pensions
--------------- ------------------
Expected long-term rate of return on plan assets 8.00% 7.00%
Discount rate on accrued pension obligations 7.00% 6.75%
Extended health care rate of expense increase - % 10.00%
Dental care rate of expense increase - % 3.00%
Pension expenses:
Current service cost $ 880,600 $ 38,900
Interest cost of projected benefit obligation 1,481,600 59,600
Expected return on pension fund assets (1,426,100) -
Net amortization, deferrals and other - -
------------------------------------------------------------------------------------------
$ 936,100 $ 98,500
==========================================================================================
Plan assets:
Market value of plan assets, beginning of year $ 17,808,900 $ -
Actual return on plan assets (1,205,300) -
Employer contributions 862,300 16,200
Benefits paid (826,700) (16,200)
------------------------------------------------------------------------------------------
Market value of plan assets, end of year $ 16,639,200 $ -
==========================================================================================
Accrued benefit obligation:
Accrued benefit obligation, beginning of year $ 20,697,700 $ 820,100
Current service cost 880,600 38,900
Interest cost 1,481,600 59,600
Benefits paid (826,700) (16,200)
Actuarial (gain) loss 3,836,400 900,900
------------------------------------------------------------------------------------------
Accrued benefit obligation, end of year $ 26,069,600 $ 1,803,300
==========================================================================================
Plan assets $ 16,639,200 $ -
Benefit obligations (26,069,600) (1,803,300)
Unamortized transitional asset 7,826,000 959,500
------------------------------------------------------------------------------------------
Pension (liability) asset $ (1,604,400) $ (843,800)
==========================================================================================
BOLIDEN WESTMIN (CANADA) LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003 AND 2002
(IN CANADIAN DOLLARS, EXCEPT PERCENTAGES)
- --------------------------------------------------------------------------------
12. SHARE CAPITAL
2003 2002
--------------------- ---------------------
Issued and outstanding
10,000 Class A common shares $ 74,652,518 $ 74,652,518
11,057 Class B common shares 82,552,605 82,552,605
------------------------------------------------------------------------------------
$ 157,205,123 $ 157,205,123
------------------------------------------------------------------------------------
13. COMMITMENTS AND CONTINGENCIES
(a) The Company has, in the normal course of business, entered into
various long-term contracts which include commitments for future
operating payments under contracts for equipment rentals and
other arrangements as follows:
2004 $ 2,021,000
2005 1,318,000
2006 695,000
2007 467,000
2008 364,000
Thereafter to 2012 1,300,000
-------------------------------------------------
$ 6,165,000
-------------------------------------------------
(b) The Company has entered into contracts with two of its major
customers for the sale of a guaranteed quantity of metal
concentrates. The sales price of the concentrates specified in
these agreements is renegotiated annually.
(c) The Company received notice in 2001 from Gibraltar Mines Ltd.
("Gibraltar") with respect of claims made by Gibraltar against
the Company pursuant to the purchase agreement in 1999 whereby
Gibraltar acquired certain assets from the Company.
The claims relate to the tax liabilities relating to the
environmental reclamation deposit that was transferred to
Gibraltar as a result of the purchase agreement. The estimated
tax liabilities are $3.57 million. The second claim relates to
potential tax liabilities with respect to a severance trust
which is in excess of $500,000 and, if the claim is successful,
exposes the Company to further direct liabilities which have not
been quantified.
No legal proceedings have been commenced with respect to these
claims.
BOLIDEN WESTMIN (CANADA) LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003 AND 2002
(IN CANADIAN DOLLARS, EXCEPT PERCENTAGES)
- --------------------------------------------------------------------------------
13. COMMITMENTS AND CONTINGENCIES (CONTINUED)
(d) In June 2004, the Company received from British Columbia tax
authorities proposals for an adjustment to the tax returns from
1998 through 2002 for approximately $1.4 million of unpaid
corporation capital tax (plus interest, if applicable) as a
result of the proposed denial of certain deductions. The Company
intends to challenge these claims. The Company is not able to
assess the likelihood nor the amount of the contingent liability
at the date of these financial statements.
(e) The Company has a flex supplier payable plan and a flex salary
plan, both of which expire in June 2004. Under the flex salary
plan, the Company has reduced costs by $1.7 million over the
last two years. No repayment amount has been accrued at December
31, 2003 and 2002 since metal prices did not reach specified
levels. The Company has accrued all amounts owing under the flex
supplier plan.
(f) The Company is involved in certain other legal actions and
claims. It is the opinion of management that these legal matters
will be resolved without a material effect on the Company's
financial position or results of operations.
14. INCOME, RESOURCE AND CAPITAL TAXES
The Company has available non-capital losses estimated, by management,
to aggregate $88 million which may be used to reduce future years' net
income for tax purposes. These losses, which expire in 2005 to 2009, are
subject to final determination by the tax authorities. No future income
tax asset has been recognized in respect of these losses.
15. RELATED PARTY TRANSACTION
During the year, the Company paid $734,500 (2002 - $9,349) in marketing
and management fees and $539,357 (2002 - $Nil) in interest to Boliden
AB.
Also during the year, the Company paid another entity in the Boliden
group, Contech AB ("Contech"), $2,034,212 (2002 - $528,688) for
technical consulting services in connection with plant construction.
Contech was sold at the end of 2003 and, though no longer a related
party, the Company had a balance owing to Contech of $30,029 at December
31, 2003 (2002 - $528,688).
BOLIDEN WESTMIN (CANADA) LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003 AND 2002
(IN CANADIAN DOLLARS, EXCEPT PERCENTAGES)
- --------------------------------------------------------------------------------
16. CASH FLOW INFORMATION
(A) NET CHANGE IN NON-CASH OPERATING WORKING CAPITAL ITEMS
Year ended December 31,
------------------------------------------
2003 2002
-------------------- -------------------
(Increase) decrease in:
Accounts and metal settlements receivable $(7,057,532) $ (1,332,331)
Inventories 6,957,884 (7,160,301)
Prepaid expenses (254,763) 233,686
(Decrease) increase in:
Accounts payable and accrued liabilities (1,662,858) 5,151,564
-----------------------------------------------------------------------------------------
$(2,017,269) $ (3,107,382)
=========================================================================================
(B) SUPPLEMENTARY INFORMATION REGARDING NON-CASH TRANSACTIONS
Year ended December 31,
------------------------------------------
2003 2002
-------------------- -------------------
Investing activities
Acquisition of plant and equipment under
capital lease $ (703,983) $ -
Financing activities
Increase in capital lease obligations 703,983 -
(C) OTHER SUPPLEMENTARY INFORMATION
Year ended December 31,
------------------------------------------
2003 2002
-------------------- -------------------
Interest paid $ 838,087 $ 8,083
======================================================================================
Capital and mining taxes paid (recovered) $ 26,372 $ (452,874)
======================================================================================
BOLIDEN WESTMIN (CANADA) LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003 AND 2002
(IN CANADIAN DOLLARS, EXCEPT PERCENTAGES)
- --------------------------------------------------------------------------------
17. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
(A) FINANCIAL INSTRUMENTS
The carrying value of cash and cash equivalents, accounts and
metal settlements receivable and accounts payable, as reflected
on the balance sheets, approximates their respective fair values
because of the demand nature or short-term maturity of these
instruments. The carrying value of capital lease obligations
also approximates the fair value as these obligations bear
interest at current market rates. The fair value of long-term
debt and amounts due to related parties is not readily
determinable.
(B) FINANCIAL RISK
The financial risk is the risk that the values of the Company's
financial instruments will vary due to fluctuations in interest
rates, foreign exchange rates and metal prices. The Company does
not use derivative instruments to reduce its exposure to
financial risk.
(C) CONCENTRATION OF CREDIT RISK
The Company has a few major customers who account for 55% of
concentrate sales revenue. The loss of any of these customers or
curtailment of purchases by such customers could have a material
adverse affect on the Company's results of operations and
financial condition.
18. SUBSEQUENT EVENT
On February 16, 2004, the Company's sole shareholder signed a letter of
intent to sell all of its shares in the Company to Breakwater Resources
Ltd. Certain transactions are pre-conditions to the sale including the
following:
(a) On June 16, 2004, the Company's interest in Gibraltar Mines
Finance Limited was assigned to Boliden Minerals AB in exchange
for a reduction in the amount payable to Boliden Minerals AB of
approximately $19 million. The significant asset held by
Gibraltar Mines Finance Limited is the note receivable from
Lomas Bayas for U.S.$14,021,777 (see Note 5).
(b) The assets and liabilities of the Premier Gold mine will be
transferred to the Company's sole shareholder, Boliden Limited,
at carrying values, which amount to a net obligation of
approximately $16.9 million.
(c) The shares in StrataGold will be sold to Boliden Limited at
market value.
(d) The remaining balances outstanding with any entities in the
Boliden group will be substantially forgiven.
BREAKWATER RESOURCES LTD.
CONSOLIDATED BALANCE SHEETS
As at June 30, 2004 and December 31, 2003
(Expressed in thousands of Canadian dollars)
- ------------------------------------------------------------------------------------------------------
JUNE 30, December 31,
2004 2003
======================================================================================================
ASSETS (Unaudited) (Restated -
note 1)
CURRENT ASSETS
Cash and cash equivalents $ 33,969 $ 6,388
Accounts receivable - concentrate 5,558 7,450
Other receivables 7,477 5,650
Concentrate inventory 26,631 21,828
Materials and supplies inventory 24,239 23,783
Prepaid expenses and other current assets 3,981 1,905
Future tax assets (note 7) 688 1,190
- ------------------------------------------------------------------------------------------------------
102,543 68,194
RECLAMATION DEPOSITS 100 100
MINERAL PROPERTIES AND FIXED ASSETS 113,211 111,299
- ------------------------------------------------------------------------------------------------------
$ 215,854 $ 179,593
======================================================================================================
LIABILITIES
CURRENT LIABILITIES
Accounts payable and accrued liabilities (note 4) $ 29,712 $ 18,761
Provisional payments for concentrate inventory shipped and not priced 8,871 2,010
Short-term debt including current portion of long-term debt (note 2) 650 10,329
Income and mining taxes payable 140 252
- ------------------------------------------------------------------------------------------------------
39,373 31,352
DEFERRED ROYALTY 1,340 1,340
LONG-TERM DEBT (note 3) 1,419 15,517
RECLAMATION AND CLOSURE COST ACCRUALS (note 4) 27,496 34,253
FUTURE TAX LIABILITIES (note 7) 1,732 962
- ------------------------------------------------------------------------------------------------------
71,360 83,424
- ------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Capital stock (notes 5(a) and 5(d)) 321,999 287,790
Warrants (note 5(a)) 3,270 -
Contributed surplus (note 5(d)) 2,779 1,991
Deficit (183,716) (190,291)
Cumulative translation adjustments 162 (3,321)
- ------------------------------------------------------------------------------------------------------
144,494 96,169
- ------------------------------------------------------------------------------------------------------
$ 215,854 $ 179,593
- ------------------------------------------------------------------------------------------------------
The accompanying notes form an integral part of these consolidated financial statements
BREAKWATER RESOURCES LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT
For the Periods Ended June 30, 2004 and 2003
(Expressed in thousands of Canadian dollars except share and per share amounts)
(Unaudited)
- -----------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2004 2003 2004 2003
=======================================================================================================================
(Restated - (Restated -
note 1) note 1)
Gross sales revenue $ 52,474 $ 61,667 $ 112,646 $ 114,577
Treatment and marketing costs 17,838 24,671 38,675 47,103
- -----------------------------------------------------------------------------------------------------------------------
Net revenue 34,636 36,996 73,971 67,474
- -----------------------------------------------------------------------------------------------------------------------
OPERATING COSTS
Direct operating costs 18,553 32,637 45,345 58,851
Depreciation and depletion 6,277 6,200 11,356 12,704
Reclamation and closure costs 984 1,511 2,060 3,076
- -----------------------------------------------------------------------------------------------------------------------
25,814 40,348 58,761 74,631
- -----------------------------------------------------------------------------------------------------------------------
CONTRIBUTION (LOSS) FROM MINING ACTIVITIES 8,822 (3,352) 15,210 (7,157)
- -----------------------------------------------------------------------------------------------------------------------
OTHER EXPENSES (INCOME)
General and administrative (note 5(d)) 3,487 1,539 5,436 2,914
Interest and financing 44 881 186 1,584
Investment and other expense (income) 129 (578) 122 (607)
Foreign exchange loss (gain) on U.S. dollar
denominated debt - (4,742) 431 (9,771)
- -----------------------------------------------------------------------------------------------------------------------
3,660 (2,900) 6,175 (5,880)
- -----------------------------------------------------------------------------------------------------------------------
EARNINGS (LOSS) BEFORE THE FOLLOWING: 5,162 (452) 9,035 (1,277)
- -----------------------------------------------------------------------------------------------------------------------
Other non-producing property costs 1,167 (9,779) 2,462 (9,196)
Income and mining taxes (recovery) (391) 108 (2) 150
- -----------------------------------------------------------------------------------------------------------------------
776 (9,671) 2,460 (9,046)
- -----------------------------------------------------------------------------------------------------------------------
NET EARNINGS 4,386 9,219 6,575 7,769
DEFICIT - BEGINNING OF PERIOD (as restated note 1) (188,102) (192,392) (190,291) (190,942)
=======================================================================================================================
DEFICIT - END OF PERIOD $ (183,716) $ (183,173) $ (183,716) $ (183,173)
=======================================================================================================================
EARNINGS PER SHARE - BASIC (note 6) $ 0.01 $ 0.05 $ 0.02 $ 0.04
=======================================================================================================================
DILUTED EARNINGS PER COMMON SHARE (note 6) $ 0.01 $ 0.05 $ 0.02 $ 0.04
=======================================================================================================================
WEIGHTED-AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING (note 6) 344,501,000 196,693,000 344,156,000 196,101,000
=======================================================================================================================
The accompanying notes form an integral part of these consolidated financial statements
BREAKWATER RESOURCES LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Periods Ended June 30, 2004 and 2003
(Expressed in thousands of Canadian dollars)
(Unaudited)
- ------------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2004 2003 2004 2003
========================================================================================================================
CASH PROVIDED FROM (USED FOR) (Restated - (Restated -
note 1) note 1)
OPERATING ACTIVITIES
Net earnings $ 4,386 $ 9,219 $ 6,575 $ 7,769
Non-cash items:
Depreciation and depletion 6,277 6,200 11,356 12,704
Gain on sale of property - (10,336) - (10,336)
Foreign exchange gain on U.S. dollar denominated
debt - (4,742) - (9,771)
Other non-cash items 761 1,285 959 1,249
Future income taxes (194) (57) 1,272 9
Reclamation and closure cost accruals 984 1,511 2,060 3,076
- ------------------------------------------------------------------------------------------------------------------------
12,214 3,080 22,222 4,700
Payment of reclamation and closure costs (243) (708) (495) (1,524)
Changes in non-cash working capital items (note 10) 1,146 4,207 3,603 7,978
- ------------------------------------------------------------------------------------------------------------------------
13,117 6,579 25,330 11,154
- ------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Increase in restricted cash - (10,741) - (10,741)
Issue of common shares for cash (note 5(a)) 72 49 34,149 103
Issue of warrants for cash (note 5(a)) - - 3,270 -
Increase (decrease) in short-term debt 41 (5,746) (9,719) (7,626)
Decrease in long-term debt (1) - (14,107) -
- ------------------------------------------------------------------------------------------------------------------------
112 (16,438) 13,593 (18,264)
- ------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Reclamation deposits - (75) - (150)
Mineral properties and fixed assets (6,543) (2,020) (11,500) (5,284)
Proceeds from sale of fixed assets and property 18 10,616 158 10,616
- ------------------------------------------------------------------------------------------------------------------------
(6,525) 8,521 (11,342) 5,182
- ------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH 6,704 (1,338) 27,581 (1,928)
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 27,265 5,845 6,388 6,435
- ------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 33,969 $ 4,507 $ 33,969 $ 4,507
========================================================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for:
Interest $ 28 $ 641 $ 203 $ 1,384
Income and mining taxes $ 171 $ 16 $ 297 $ 124
The accompanying notes form an integral part of these consolidated financial statements
BREAKWATER RESOURCES LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the Periods Ended June 30, 2004 and 2003
(Unaudited)
1. BASIS OF PRESENTATION AND NEW PRONOUNCEMENTS
BASIS OF PRESENTATION
These interim consolidated financial statements of Breakwater Resources
Ltd. (the "Company") for the three months and six months ended June 30, 2004 and
2003 have been prepared in accordance with Canadian generally accepted
accounting principles ("Canadian GAAP") and follow the same accounting
principles and methods of application as those disclosed in note 1 to the
Company's consolidated financial statements for the year ended December 31,
2003, except for those new pronouncements described below. The accompanying
interim unaudited consolidated financial statements include all adjustments that
are, in the opinion of management, necessary for fair presentation. These
interim consolidated financial statements do not include all disclosures
required by Canadian GAAP for annual financial statements and, accordingly,
should be read in conjunction with the Company's consolidated financial
statements included in its 2003 Annual Report.
NEW PRONOUNCEMENTS
On January 1, 2004, the Company adopted the Canadian Institute of
Chartered Accountants ("CICA") Handbook Section 3110 - "Asset Retirement
Obligations" ("CICA 3110") which requires that the fair value of liabilities for
asset retirement obligations be recognized in the period in which they are
incurred. A corresponding increase in the carrying amount of the related asset
is generally recorded and then depreciated over the life of the asset. Over
time, the liability is accreted to its present value each period, and the
capitalized cost is amortized over the useful life of the related asset. Upon
settlement of the liability, an entity either settles the obligation for its
recorded amount or incurs a gain or loss upon settlement.
CICA 3110 is applicable to obligations that are required to be settled
as a result of an existing law, regulation or contract related to asset
retirements.
Previously, the Company provided for estimated reclamation and site
restoration costs, where reasonably determinable, net of salvage value, on a
unit-of-production basis over the estimated economic life of the related mine.
The adoption of CICA 3110 has been applied retroactively and the effects
on the consolidated financial statements are as follows:
Increase (decrease) in Statement of Operations and Deficit amounts:
Three months ended Six months ended
($000's) June 30, 2003 June 30, 2003
-----------------------------------------------------------------------------------------------------
Depreciation and depletion 480 954
Reclamation and closure costs 952 1,928
-----------------------------------------------------------------------------------------------------
Net earnings
Deficit - beginning of period 13,354 11,904
-----------------------------------------------------------------------------------------------------
Deficit - end of period
Earnings per share ($0.01) ($0.02)
Increase (decrease) in Balance Sheet amounts:
($000's) December 31, 2003
-----------------------------------------------------------------------------
ASSETS
Mineral properties and fixed assets 3,958
LIABILITIES
Accounts payable and accrued liabilities (695)
Reclamation and closure cost accruals 22,183
SHAREHOLDERS' EQUITY
Deficit 18,098
Cumulative translation adjustment (568)
On January 1, 2004, the Company adopted the CICA Handbook Section 3870 -
"Stock-based Compensation and Other Stock-based payments" ("CICA 3870") which
requires that the Company use the fair value method of accounting for, and to
recognize as compensation expense, its stock-based compensation for employees.
The adoption of CICA 3870 has been applied retroactively and the effects on the
consolidated financial statements are as follows:
Increase (decrease) in Statement of Operations and Deficit amounts:
Three months ended Six months ended
($000's) June 30, 2003 June 30, 2003
------------------------------------------------------------------------------------------------
Administrative expenses 164 233
------------------------------------------------------------------------------------------------
Net earnings
Deficit - beginning of period 252 183
------------------------------------------------------------------------------------------------
Deficit - end of period
------------------------------------------------------------------------------------------------
Earnings per share $Nil $Nil
Increase in Balance Sheet amounts:
($000's) December 31, 2003
---------------------------------------------------------------------------
Shareholders' Equity
Capital stock 47
Contributed surplus 409
Deficit 456
2003 FIGURES
In addition to the restatements described under "New Pronouncements"
above, certain of the 2003 figures have been reclassified to conform to the 2004
presentation.
2. SHORT-TERM DEBT
($000's) June 30,2004 December 31, 2003
------------------------------------------------------------------------------------------------------
Syndicated Credit Facility
- Revolver - 6,462
- Non-Revolving Credit Facility, current portion (note 3) - 1,266
- Supplemental Term Credit Facility, current portion (note 3) - 467
Customer prepayments for zinc concentrate - 646
Other 650 1,488
------------------------------------------------------------------------------------------------------
650 10,329
On January 30, 2004, the Revolver was fully repaid. The Revolver is
still available to be drawn against and as at June 30, 2004, the amount
available was $16,786,000.
3. LONG-TERM DEBT
($000's) June 30, 2004 December 31, 2003
------------------------------------------------------------------------------------------------------
Non-Revolving Credit Facility (note 2) - 11,393
Supplemental Term Credit Facility (note 2) - 4,201
Reimbursable government assistance, discounted at rate of 8% 1,412
1,419
Customer prepayments for zinc concentrates - 646
Other - 1,277
------------------------------------------------------------------------------------------------------
Total 1,419 18,929
Less: current portion - 3,412
------------------------------------------------------------------------------------------------------
1,419 15,517
On January 30, 2004, the Non-Revolving Credit Facility and the
Supplemental Term Credit Facility were fully repaid and cannot be redrawn. The
Company's various credit facilities were repaid using a portion of the proceeds
of the sale of units to a syndicate of underwriters (see note 5(a)).
4. RECLAMATION AND CLOSURE COSTS ACCRUALS
The Reclamation and Closure Costs Accruals shown on the balance sheet of
$27,496,000 (December 31, 2003 - $34,253,000) includes a liability for asset
retirement obligations of $22,965,000 (December 31, 2003 - $30,237,000) (see
note 1 "New Pronouncements" above) and severance accruals of $4,531,000
(December 31, 2003 - $4,016,000). The current portion of the liability for asset
retirement obligations of $8,600,000 (December 31, 2003 - $Nil) is included in
accounts payable and accrued liabilities on the balance sheet.
Asset Retirement Obligations - ($000's)
----------------------------------------------------------------------------------
As at December 31, 2003 30,237
Accretion (included in reclamation and closure costs) 540
Impact of foreign exchange 107
----------------------------------------------------------------------------------
As at March 31, 2004 30,884
Accretion (included in reclamation and closure costs) 586
Expenditures (30)
Impact of foreign exchange 125
----------------------------------------------------------------------------------
As at June 30, 2004 31,565
Less: current portion included in accounts payable and accrued
liabilities 8,600
----------------------------------------------------------------------------------
22,965
The estimated amount of undiscounted cash flows required to settle the asset
retirement obligations as at June 30, 2004 was $41,112,000 (December 31, 2003 -
$40,770,000). The expected timing of payments of the cash flows ranges from the
year 2004 to 2017 and the credit-adjusted risk-free rates at which the estimated
cash flows have been discounted range from 7.17% to 7.89%.
5. CAPITAL STOCK AND STOCK OPTIONS
(a) Common Shares
(000's) Number of shares Amount
--------------------------------------------------------------------------------------------------
As at December 31, 2003 - as originally reported 285,790 $ 287,743
Adjustment relating to options exercised under stock-based
compensation (see note 1) - 47
--------------------------------------------------------------------------------------------------
December 31, 2003 - Restated 285,790 287,790
Common shares issued for cash (see below) 57,143 33,757
Exercise of warrants 1,250 243
Value ascribed to options exercised under stock-based
compensation (see (d) below) - 57
Adjustment to flow-through shares costs - 3
Employee share purchase plan 79 49
Employee share option plan - proceeds of options exercised 133 25
--------------------------------------------------------------------------------------------------
As at March 31, 2004 344,395 321,924
Value ascribed to options exercised under stock-based
compensation (see (d) below) - 3
Employee share purchase plan 96 69
Employee share option plan - proceeds of options exercised 18 3
--------------------------------------------------------------------------------------------------
As at June 30, 2004 344,509 321,999
On January 28, 2004, the Company completed the sale of 57,142,858 units
to a syndicate of underwriters at a purchase price of $0.70 per unit, for net
proceeds of $37,027,000, net of costs of issue of approximately $2,973,000. Each
unit consisted of one Common Share and one-half of one Common Share purchase
warrant. Each whole warrant entitles the holder to acquire one Common Share at a
price of $1.00 at any time until January 27, 2009. The fair value of the
warrants, net of costs of issue, of $3,270,000 is shown separately under
shareholders' equity on the balance sheet as "Warrants".
b) Options transactions were as follows:
Weighted-Average
Options (000's) Exercise Price
--------------------------------------------------------------------------------------
As at December 31, 2003 8,885 $1.25
Granted 915 0.75
Exercised (134) 0.19
Cancelled (19) 1.34
--------------------------------------------------------------------------------------
As at March 31, 2004 9,647 $1.22
Granted 4,000 0.68
Exercised (18) 0.18
Cancelled (27) 0.18
--------------------------------------------------------------------------------------
As at June 30, 2004 13,602 $1.07
The following table summarizes the information about the share options
outstanding at June 30, 2004:
Options Outstanding Options Exercisable
----------------------------------------------------------------------------------------------------
Average Weighted- Weighted-
Number Remaining Average Number Average
Range of Outstanding Contractual Exercise Exercisable Exercise
Exercise Prices (000's) Life Price (000's) Price
----------------------------------------------------------------------------------------------------
$0.18 - $0.43 4,977 8 years 157 days $0.22 3,504 $0.22
$0.64 - $0.95 5,015 5 years 4 days $0.70 1,805 $0.71
$1.05 - $2.45 1,618 3 years 270 days $1.58 1,618 $1.54
$2.72 - $8.20 1,992 4 years 99 days $3.70 1,993 $3.70
----------------------------------------------------------------------------------------------------
13,602 8,920
c) On June 1, 2004, the shareholders of the Company approved an amendment
to the share incentive plan (the Plan") which is described in note 1 of the
Company's consolidated financial statements for the year ended December 31,
2003, to increase the maximum number of Common Shares that may be issued under
the Plan to 34,500,000 Common Shares, of which 7,500,000 will be the maximum
number that may be issued under the share purchase plan, 23,000,000 will be the
maximum number that may be issued under the share option plan, and 4,000,000
will be the maximum number that may be issued under the share bonus plan.
d) The Company's share option plan is disclosed in note 6(g) of the
Company's consolidated financial statements for the year ended December 31,
2003. Compensation expense for the stock-based compensation plan for employees
has been determined based upon the fair value of awards granted on or after
January 1, 2002. The compensation expense for the three months ended June 30,
2004 of $662,000 (2003 - $164,000) and for the six months ended June 30, 2004 of
$848,000 (2003 - $233,000) are included in "General and administrative" on the
consolidated statements of operations and deficit. Net compensation expense of
$788,000 (2003 - $233,000), net of options exercised of $60,000 (2003 - $Nil)
were credited to "Contributed Surplus" and Capital stock", respectively, under
shareholders' equity on the balance sheet.
The fair value of each option grant has been estimated using the
Black-Scholes option-pricing model with the following weighted-average
assumptions:
Three Months ended June 30, Six Months ended June 30,
------------------------------------------------------------------
2004 2003 2004 2003
------------------------------------------------------------------
Expected life (years) 10 10 10 10
Risk free interest rate 4.65% 5.19% 4.53% 4.83%
Expected volatility 34% 43% 34% 48%
Dividend yield 0% 0% 0% 0%
6. EARNINGS PER SHARE
Earnings per Share ("EPS") has been calculated using the
weighted-average number of shares outstanding during the period. The diluted EPS
gives effect to the exercise of all outstanding options and warrants.
The calculation of diluted earnings per share assumes that options and
warrants with an exercise price lower than the average quoted market price were
exercised at the later of the beginning of the period, or time of issue. In
applying the treasury stock method, options and warrants with an exercise price
greater than the average quoted market price of the Common Shares are not
included in the calculation of diluted earnings per share as the effect is
anti-dilutive. The average quoted market price of the Common Shares during the
three months ended June 30, 2004 was $0.47 (2003 - $0.16) and during the six
months ended June 30, 2004 was $0.58 (2003 - $0.19).
Three months ended Six months ended
June 30, June 30
-----------------------------------------------
(000's) 2004 2003 2004 2003
------------------------------------------------------------------------------------------------------------
Weighted-average number of Common Shares outstanding 344,501 196,693 344,156 196,101
Incremental Common Shares on assumed exercise of
options and warrants 21,911 - 24,780 1,643
------------------------------------------------------------------------------------------------------------
WEIGHTED-AVERAGE NUMBER OF COMMON SHARES USED FOR
DILUTED EARNINGS PER SHARE 366,412 196,693 368,936 197,744
7. INCOME AND MINING TAXES
As at June 30, 2004 and December 31, 2003, the significant components of
the Company's future tax assets (liabilities) were as follows:
($000's) June 30, 2004 December 31, 2003
--------------------------------------------------------------------------------------------------
Future tax assets
Loss carry forwards 14,174 19,043
Mineral properties and fixed assets 57,678 56,062
Reclamation and closure cost accruals 11,445 5,354
--------------------------------------------------------------------------------------------------
Future tax assets before valuation allowance 83,297 80,459
Valuation allowance 82,609 79,269
--------------------------------------------------------------------------------------------------
Future tax assets 688 1,190
Future tax liabilities
Mineral properties - mining tax (1,732) (962)
--------------------------------------------------------------------------------------------------
Net future tax (liabilities) assets (1,044) 228
8. FINANCIAL INSTRUMENTS
The Company's policy for financial instruments is disclosed in note 8 of
the Company's consolidated financial statements for the year ended December 31,
2003.
COMMODITY PRICE RISK The profitability of the Company is directly
related to the market price of metals produced. The Company attempts to reduces
price risk by hedging against the price of metals for a portion of its
production.
The Company periodically enters into forward sales to effectively
provide a minimum price for a portion of inventories and future production.
These contracts are marked to market, and gains and losses are recognized in the
relevant period. The Company also periodically enters into written call options.
No call options have been entered into in either 2004 or 2003 other than those
described below.
The Company had the following contracts which were outstanding as at
June 30, 2004 and December 31, 2003:
June 30, 2004 Quantity Average Price (US) Maturity
--------------------------------------------------------------------------------------------------------
Silver forward sale 397,000 ounces $7.75 per ounce July - December 2004
December 31, 2003 Quantity Average Price (US) Maturity
--------------------------------------------------------------------------------------------------------
Zinc forward sale 4,600 tonnes $969 per tonne January 2004
Silver call options 250,000 ounces $5.42 per ounce January - February 2004
Gold call options 2,500 ounces $395 per ounce January - February 2004
9. SEGMENT INFORMATION
For the Six Months Ended June 30, 2004
($000's)
(Unaudited)
- ------------------------------------------------------------------------------------------------------------------------------------
Corporate
Geographic location Latin America Canada Tunisia and Other
- ------------------------------------------------------------------------------------------------------------------------------------
El El Bouchard-
Mochito Toqui Nanisivik Caribou Hebert Langlois Bougrine Con-
Operating Segment Mine Mine Total Mine Mine Mine Mine Total Mine solidated
- ------------------------------------------------------------------------------------------------------------------------------------
Net revenue 19,338 7,195 26,533 - - 33,922 - 33,922 12,627 889 73,971
Depreciation and depletion (1,686) (1,529) (3,215) - - (3,349) - (3,349) (4,413) (379) (11,356)
Reclamation and closure costs (312) (151) (463) (357) (183) (814) (43) (1,397) (200) - (2,060)
Contribution (loss) from
mining activities 5,345 296 5,641 (357) (183) 12,612 (43) 12,029 (2,970) 510 15,210
General and administrative - - - - - - - - - (5,436) (5,436)
Interest and financing - - - - - - - - - (186) (186)
Investment and other income
(expense) - - - - - - - - - (122) (122)
Foreign exchange loss on US
dollar denominated debt - - - - - - - - - (431) (431)
Other non-producing property
(costs) income - - - (1,685) (717) - (62) (2,464) - 2 (2,462)
Income and mining (taxes)
recovery (72) - (72) - - (770) 6 (764) - 838 2
Net earnings (loss) 5,273 296 5,569 (2,042) (900) 11,842 (99) 8,801 (2,970) (4,825) 6,575
Capital expenditures 3,094 5,544 8,638 - - 762 1,199 1,961 403 498 11,500
Identifiable assets 39,886 43,042 82,928 6,703 2,111 19,703 43,604 72,121 19,750 41,055 215,854
INFORMATION ABOUT MAJOR CUSTOMERS
Of the Company's total consolidated net revenue in the six months ended
June 30, 2004, revenue from one customer of $33,198,000 originated from the
Bouchard-Hebert Mine and revenue from another customer of $7,547,000 consisted
of $3,710,000 that originated from the El Mochito Mine, $2,363,000 that
originated from the El Toqui Mine and $1,474,000 that originated from the
Bougrine Mine.
For the Six Months Ended June 30, 2003
($000's)
(Unaudited) (Restated - note 1)
- ------------------------------------------------------------------------------------------------------------------------------------
Corporate
Geographic location Latin America Canada Tunisia and Other
- ------------------------------------------------------------------------------------------------------------------------------------
El El Bouchard-
Mochito Toqui Nanisivik Caribou Hebert Langlois Bougrine Con-
Operating Segment Mine Mine Total Mine Mine Mine Mine Total Mine solidated
- ------------------------------------------------------------------------------------------------------------------------------------
Net revenue 18,703 7,044 25,747 5,088 - 26,078 - 31,166 10,561 - 67,474
Depreciation and depletion (2,042) (1,334) (3,376) - - (5,408) - (5,408) (3,756) (164) (12,704)
Reclamation and closure costs (359) (152) (511) (1,653) (169) (606) - (2,428) (137) - (3,076)
Loss from mining activities (38) (456) (494) (1,926) (169) (627) - (2,722) (3,777) (164) (7,157)
General and administrative - - - - - - - - - (2,914) (2,914)
Interest and financing - - - - - - - - - (1,584) (1,584)
Investment and other income - - - - - - - - - 607 607
Foreign exchange gain on US
dollar denominated debt - - - - - - - - - 9,771 9,771
Other non-producing property
(costs) income - - - (236) (832) - (49) (1,117) - 10,313 9,196
Income and mining (taxes)
recovery (84) - (84) - - (9) 3 (6) 151 (211) (150)
Net earnings (loss) (122) (456) (578) (2,162) (1,001) (636) (46) (3,845) (3,626) 15,818 7,769
Capital expenditures 606 2,871 3,477 (36) - - 955 919 503 385 5,284
Identifiable assets 32,024 31,917 63,941 8,415 3,285 25,137 40,977 77,814 30,017 24,189 195,961
INFORMATION ABOUT MAJOR CUSTOMERS
Of the Company's total consolidated net revenue in the six months ended
June 30, 2003, revenue from one customer of $25,584,000 originated from the
Bouchard-Hebert Mine and revenue from another customer of $7,427,000 consisted
of $2,564,000 that originated from the Bougrine Mine and $4,863,000 that
originated from the El Toqui Mine.
For the Three Months Ended June30, 2004
($000's)
(Unaudited)
- ------------------------------------------------------------------------------------------------------------------------------------
Corporate
Geographic location Latin America Canada Tunisia and Other
- ------------------------------------------------------------------------------------------------------------------------------------
El El Bouchard-
Mochito Toqui Nanisivik Caribou Hebert Langlois Bougrine Con-
Operating Segment Mine Mine Total Mine Mine Mine Mine Total Mine solidated
- ------------------------------------------------------------------------------------------------------------------------------------
Net revenue 9,387 3,869 13,256 - - 14,225 - 14,225 5,580 1,575 34,636
Depreciation and depletion (827) (786) (1,613) - (1,734) - (1,734) (2,645) (285) (6,277)
Reclamation and closure costs (153) (77) (230) (179) (91) (377) (43) (690) (64) - (984)
Contribution (loss) from
mining activities 3,312 388 (3,700 179) (91) 6,033 (43) 5,720 (1,888) 1,290 8,822
General and administrative - - - - - - - - - (3,487) (3,487)
Interest and financing - - - - - - - - - (44) (44)
Investment and other income
(expense) - - - - - - - - - (129) (129)
Other non-producing property
(costs) income - - - (750) (380) - (41) (1,171) - 4 (1,161)
Income and mining (taxes)recovery (23) - (23) - - (494) 5 (489) - 903 391
Net earnings (loss) 3,289 388 3,677 (929) (471) 5,539 (79) 4/060 (1,888) (1,463) 4,386
Capital expenditures 2,216 2,751 3,677 - - 348 813 1,161 323 92 6,543
Identifiable assets 39,886 43,042 82,928 6,703 2,111 19,703 43,604 72,121 19,750 41,055 215,854
INFORMATION ABOUT MAJOR CUSTOMERS
Of the Company's total consolidated net revenue in the three months
ended June 30, 2004, revenue from one customer of $13,484,000 originated from
the Bouchard-Hebert Mine, revenue from another customer of $4,193,,000
originated from the Bougrine Mine, revenue from a third customer of $3,851,000
originated from the Bougrine Mine and revenue from a fourth customer of
$3,531,000 originated from the El Mochito Mine.
For the Three Months Ended June 30, 2003
($000's)
(Unaudited) (Restated - note 1)
- ------------------------------------------------------------------------------------------------------------------------------------
Corporate
Geographic location Latin America Canada Tunisia and Other
- ------------------------------------------------------------------------------------------------------------------------------------
El El Bouchard-
Mochito Toqui Nanisivik Caribou Hebert Langlois Bougrine Con-
Operating Segment Mine Mine Total Mine Mine Mine Mine Total Mine solidated
- ------------------------------------------------------------------------------------------------------------------------------------
Net revenue 10,497 2,778 13,275 2,801 - 13,128 - 15,929 7,792 - 36,996
Depreciation and depletion (897) (737) (1,634) - - (2,748) - (1,724) (94) (6,200)
Reclamation and closure costs (170) (73) (243) (818) (85) (306) - (59) - (1,511)
Contribution (loss) from
mining activities 344 (318) 26 (706) (85) (592) - (1,901) (94) (3,352)
General and administrative - - - - - - - - - (1,539) (1,539)
Interest and financing - - - - - - - - - (881) (881)
Investment and other income - - - - - - - - - 578 578
Foreign exchange gain on US
dollar denominated debt - - - - - - - - - 4,742 4,742
Other non-producing property
(costs) income - - - (95) (387) - (28) - 10,289 9,779
Income and mining taxes (50) - (50) - - 57 2 (6) (111) (108)
Net earnings (loss) 294 (318) (24) (801) (472) (535) (26) (1,834) (1,907) 12,984 9,219
Capital expenditures 454 1,315 1,769 (17) - - 465 448 141 (338) 2,020
Identifiable assets 32,024 31,917 63,941 8,415 3,285 25,137 40,977 77,184 30,017 24,189 195,961
INFORMATION ABOUT MAJOR CUSTOMERS
Of the Company's total consolidated net revenue in the three months
ended June 30, 2003, revenue from one customer of $13,130,000 originated from
the Bouchard-Hebert Mine, revenue from another customer of $5,727,000 consisted
of $3,105,000 that originated from the Bougrine Mine and $2,622,000 that
originated from the El Mochito Mine and revenue from a third customer of
$3,922,000 consisted of $2,806,000 than originated from the El Toqui Mine and
$1,116,000 that originated from the Bougrine Mine.
10. ANALYSIS OF CHANGES IN NON-CASH WORKING CAPITAL ITEMS
Three months ended June 30, Six months ended June 30,
-----------------------------------------------------------
($000's) 2004 2003 2004 2003
--------------------------------------------------------------------------------------------------------------
(Restated (Restated
- note1) - note 1)
Accounts receivable - concentrate 3,001 (199) 2,641 10,568
Other receivables (1,792) 315 (1,827) 1,545
Concentrate and materials and supplies inventory (6,669) 6,731 (3,935) 6,118
Prepaid expenses and other current assets 459 189 (1,972) (1,022)
Accounts payable and accrued liabilities 677 (1,203) 2,029 (3,215)
Provisional payments for concentrate inventory
shipped and not priced 5,568 (1,784) 6,779 (6,042)
Income and mining taxes payable (98) 158 (112) 26
-----------------------------------------------------------
1,146 4,207 3,603 7,978
11. SUBSEQUENT EVENT
On July 23, 2004, the Company acquired 100% of the shares of Boliden
Westmin (Canada) Limited ("BWCL") from Boliden AB ("Boliden"). BWCL is the owner
of the Myra Falls Mine, a zinc, copper and gold mine in British Columbia.
The Company issued to Boliden 18,000,000 Common Shares, with a value of
approximately $7,500,000, and 5,000,000 warrants exercisable at $1.00 per Common
Share with an expiry date of January 27, 2009.
As part of the acquisition the Company assumed environmental liabilities
of approximately $21,500,000. However, Boliden is required to maintain the
posted environmental Letters of Credit for a period of one year, after which
time the Company is required to retire Boliden's obligation in this regard.
MANAGEMENT'S REPORT
Management is responsible for the preparation of the accompanying
consolidated financial statements of Breakwater Resources Ltd. and all of the
information contained in the Annual Report. The consolidated financial
statements have been prepared in conformity with Canadian generally accepted
accounting principles and management believes that they present fairly the
Company's consolidated financial position, results of operations and cash flows.
The integrity of the information presented in the financial statements,
including estimates and judgments relating to matters not concluded by fiscal
year end, is the responsibility of management. To fulfill this responsibility,
the Company maintains a system of internal accounting controls designed to
provide reasonable assurance that the Company's assets are protected and that
events and transactions are properly recorded as they occur. This system of
internal control includes organizational arrangement with clearly defined lines
of responsibility. Deloitte & Touche LLP, the independent auditors appointed by
the shareholders to audit the consolidated financial statements, have full and
unrestricted access to the Audit Committee to discuss their audit and their
related findings as to the integrity of the financial reporting process. During
the course of their audit, Deloitte & Touche LLP reviewed the Company's system
of internal control to the extent necessary to render their opinion on the
consolidated financial statements.
The board of directors is responsible for ensuring that management
fulfills its responsibilities for financial reporting and internal control. The
board is assisted in exercising its responsibilities through the Audit
Committee, which is composed of three unrelated directors.
The Audit Committee meets periodically with management and the
independent auditors to satisfy itself that management's responsibilities are
properly discharged, to review the consolidated financial statements and to
recommend approval of the consolidated financial statements to the board.
COLIN K. BENNER RICHARD R. GODFREY
President and Vice President, Finance and
Chief Executive Officer Chief Financial Officer (Acting)
- --------------------------------------------------------------------------------
AUDITORS' REPORT
TO THE SHAREHOLDERS OF BREAKWATER RESOURCES LTD.
We have audited the consolidated balance sheets of Breakwater Resources
Ltd. as at December 31, 2003 and 2002 and the consolidated statements of
operations and deficit and of cash flows for each of the years in the three-year
period ended December 31, 2003. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with Canadian generally accepted
auditing standards. Those standards require that we plan and perform an audit to
obtain reasonable assurance whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation.
In our opinion, these consolidated financial statements present fairly,
in all material respects, the financial position of the Company as at December
31, 2003 and 2002 and the results of its operations and its cash flows for each
of the years in the three-year period ended December 31, 2003 in accordance with
Canadian generally accepted accounting principles.
CHARTERED ACCOUNTANTS
TORONTO, ONTARIO
FEBRUARY 27, 2004
BREAKWATER RESOURCES LTD.
CONSOLIDATED BALANCE SHEETS
As at December 31, 2003 and 2002
(Expressed in thousands of Canadian dollars)
- -------------------------------------------------------------------------------------------------------------
2003 2002
- -------------------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents (note 1) $ 6,388 $ 6,435
Accounts receivable - concentrate 7,450 17,061
Other receivables 5,650 6,921
Concentrate inventory 21,828 25,340
Materials and supplies inventory 23,783 28,967
Prepaid expenses and other current assets 1,905 2,387
Future tax assets (note 7) 1,190 -
- -------------------------------------------------------------------------------------------------------------
RECLAMATION DEPOSITS (note 2) 100 1,387
MINERAL PROPERTIES AND FIXED ASSETS (note 3) 107,341 134,882
- -------------------------------------------------------------------------------------------------------------
$ 61,936 $ 127,784
- -------------------------------------------------------------------------------------------------------------
LIABILITIES
CURRENT LIABILITIES
Accounts payable and accrued liabilities $ 19,456 $ 25,577
Provisional payments for concentrate inventory shipped and not priced 2,010 8,642
Short-term debt including current portion of long-term debt (note 4) 10,329 30,227
Income and mining taxes payable 252 381
- -------------------------------------------------------------------------------------------------------------
DEFERRED ROYALTY (note 3(h)) 1,340 -
LONG-TERM DEBT (note 5) 15,517 48,438
RECLAMATION AND CLOSURE COST ACCRUALS (note 2) 12,070 13,697
FUTURE TAX LIABILITIES (note 7) 962 822
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
CONTINGENCIES AND COMMITMENTS (notes 1 and 10)
SHAREHOLDERS' EQUITY
Capital stock (note 6) 287,743 257,759
Common shares to be issued (note 6(c)) - 618
Contributed surplus (note 6(m)) 1,582 1,582
Deficit (171,737) (178,855)
Cumulative translation adjustments (3,889) 14,492
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
$ 175,635 $ 223,380
- -------------------------------------------------------------------------------------------------------------
The accompanying notes form an integral part of these consolidated financial
statements.
Approved by the Board
DIRECTOR DIRECTOR
BREAKWATER RESOURCES LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT
For the Years Ended December 31, 2003, 2002 and 2001
(Expressed in thousands of Canadian dollars except share and per share amounts)
- -------------------------------------------------------------------------------------------------------------------------
2003 2002 2001
- -------------------------------------------------------------------------------------------------------------------------
Gross sales revenue $ 207,591 $ 305,354 $ 304,037
Treatment and marketing costs 83,581 136,738 142,236
- -------------------------------------------------------------------------------------------------------------------------
Net revenue
- -------------------------------------------------------------------------------------------------------------------------
OPERATING COSTS
Direct operating costs 103,239 147,653 153,187
Depreciation and depletion 24,115 27,565 27,980
Reclamation and closure costs (note 2) 2,277 2,894 4,126
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
LOSS FROM MINING ACTIVITIES
- -------------------------------------------------------------------------------------------------------------------------
OTHER (INCOME) EXPENSES
General and administrative (note 6(c)) 5,087 6,198 7,481
Interest and financing (note 6(l)) 3,321 4,761 8,015
Investment and other income (611) (551) (9,293)
Foreign exchange (gain) loss on US dollar denominated debt (11,578) (669) 4,720
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
LOSS BEFORE THE FOLLOWING:
- -------------------------------------------------------------------------------------------------------------------------
Write-down of mineral properties and fixed assets (note 3) 279 - 70,281
Other non-producing property (income) costs (note 3(h)) (8,396) 876 3,176
Foreign exchange hedging loss (note 8) - - 3,162
Income and mining taxes (recovery) (note 7) (841) (224) 24
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
NET EARNINGS (LOSS)
DEFICIT - BEGINNING OF YEAR (178,855) (158,968) (47,910)
- -------------------------------------------------------------------------------------------------------------------------
DEFICIT - END OF YEAR $ (171,737) $ (178,855) $ (158,968)
- -------------------------------------------------------------------------------------------------------------------------
BASIC EARNINGS (LOSS) PER SHARE (note 13) $ 0.03 $ (0.12) $ (0.92)
- -------------------------------------------------------------------------------------------------------------------------
DILUTED EARNINGS PER COMMON SHARE (note 13) $ 0.03 $ N/A $ N/A
- -------------------------------------------------------------------------------------------------------------------------
WEIGHTED-AVERAGE NUMBER OF COMMON SHARES OUTSTANDING
AFTER BONUS ELEMENT (note 13) 211,411,000 169,074,000 120,166,000
- -------------------------------------------------------------------------------------------------------------------------
The accompanying notes form an integral part of these consolidated financial
statements.
BREAKWATER RESOURCES LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2003, 2002 and 2001 (Expressed in thousands of
Canadian dollars)
- -------------------------------------------------------------------------------------------------------------------------
2003 2002 2001
- -------------------------------------------------------------------------------------------------------------------------
CASH (USED FOR) PROVIDED FROM
OPERATING ACTIVITIES
Net earnings (loss) $ 7,118 $ (19,887) $ (111,058)
Non-cash items:
Depreciation and depletion 24,115 27,565 27,980
Gain on sale of property (note 3(h)) (10,336) - -
Write-down of mineral properties and fixed assets (note 3) 279 - 70,281
Other non-cash items (3,133) 2,379 3,309
Future income taxes (note 7) (1,050) 822 -
Reclamation and closure cost accruals 2,277 2,894 4,126
- -------------------------------------------------------------------------------------------------------------------------
Payment of reclamation and closure costs (4,562) (5,126) (1,996)
Deferred losses on foreign exchange hedging contracts - - (2,003)
Changes in non-cash working capital items (note 12) 3,179 (11,198) 42,460
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Issue of common shares for cash (note 6) 29,316 17,907 902
Decrease in short-term debt (18,711) (3,495) (27,962)
(Decrease) increase in long-term debt (29,821) 2,390 13,266
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Reclamation deposits 1,287 (150) 962
Mineral properties and fixed assets (10,621) (10,971) (21,662)
Proceeds from sale of mineral properties 10,616 - -
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
(DECREASE) INCREASE IN CASH
CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR 6,435 3,305 4,700
- -------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS - END OF YEAR $ 6,388 $ 6,435 $ 3,305
- -------------------------------------------------------------------------------------------------------------------------
Supplemental Disclosure of Cash Flow Information
Cash paid for:
Interest $ 2,681 $ 3,539 $ 5,681
Income and mining taxes $ 339 $ 588 $ 699
The accompanying notes form an integral part of these consolidated financial
statements.
Breakwater Resources Ltd.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2003
(Expressed in thousands of Canadian dollars except share and per share amounts)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
The consolidated financial statements of the Company have been prepared
in accordance with Canadian generally accepted accounting principles ("Canadian
GAAP").
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and all of its subsidiaries. Interests in joint ventures are
consolidated on a proportionate basis. All inter-company accounts and
transactions have been eliminated on consolidation.
REVENUE RECOGNITION AND RECEIVABLES
Revenue is recognized following the transfer of title of metal
concentrate and the determination of the final settlement price in accordance
with the contractual arrangements with customers. Generally, the final
settlement price is computed with reference to the average quoted metal prices
for a specified period of time, normally one to three months subsequent to
shipment to the customer. Concentrate sales and receivables are subject to
adjustment on final settlement to reflect changes in weights and assays.
Provisional payments made by customers upon receipt of shipments of metal
concentrate are classified as current liabilities captioned as "Provisional
payments for concentrate inventory shipped and not priced".
Substantially all of the Company's sales are made under long-term
contracts.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash and highly liquid investments
with original maturities of three months or less. The Company invests cash in
term deposits maintained in high credit quality institutions. Included in cash
and cash equivalents for 2003 was an amount of $355,000 that was held in escrow
as a condition to the restructuring of the Company's banking agreement. The cash
is expected to be released in March 2004.
CONCENTRATE INVENTORY
Concentrate inventory is valued at the lower of cost and net realizable
value. Cost represents the average cost and includes direct labour and material
costs, mine site overhead and depreciation and amortization.
MATERIALS AND SUPPLIES INVENTORY
Materials and supplies inventory is valued at the lower of average cost
and replacement cost.
SHORT-TERM INVESTMENTS
Short-term investments are carried at the lower of cost and quoted
market value.
MINERAL PROPERTIES AND FIXED ASSETS
The Company records its interest in mineral properties at cost and
defers exploration and development expenditures. When the properties are brought
into commercial production, the deferred costs are amortized on a
unit-of-production basis using current reserve estimates. Costs associated with
exploration properties are deferred, on a project basis, until the economic
viability of the project is determined.
If the properties are abandoned or sold, the cost of the mineral
property and any related deferred expenditures are expensed as a write-down of
mineral properties and fixed assets at that time. Administrative costs are
expensed as incurred.
The carrying values of producing mineral properties, including
properties placed on a care and maintenance basis (see notes 3(e) and 3(f)) and
related deferred expenditures, are reviewed regularly and, where necessary, are
written down to the estimated net recoverable amounts. Estimated future net cash
flows, on an undiscounted basis, are calculated for each property using:
estimated recoverable reserves; estimated future zinc price realization
(considering historical and current prices, price trends and related factors);
and, operating, capital and other cash flows. Estimates of future cash flows are
subject to risks and uncertainties. It is possible that changes could occur
which may affect the recoverability of the carrying value of mineral properties.
The carrying values of non-producing mineral properties and related
deferred expenditures represent unamortized net costs incurred to date and do
not necessarily reflect present or future values. The recoverability of these
amounts is dependent upon the existence of economically recoverable reserves,
upon the Company's ability to obtain the necessary financing to complete
development and upon future profitable production.
Fixed assets are stated at cost. Depreciation is provided to reduce the
original cost of fixed assets to estimated residual values over their useful
lives. In calculating depreciation, the Company employs the straight-line method
and the unit-of-production method. Principally, the rates of depreciation being
applied using the straight-line method are intended to fully depreciate the
related fixed assets over periods from 2 to 12 years.
RECLAMATION AND SITE RESTORATION COSTS
The Company provides for estimated reclamation and site restoration
costs, where reasonably determinable, net of salvage value, on a
unit-of-production basis over the estimated economic life of the related mine.
Costs are based on engineering estimates of the anticipated method and extent of
site restoration. Collateral on deposit with third parties to fund reclamation
costs is shown separately on the balance sheet as Reclamation Deposits.
Estimates of the ultimate site restoration costs are based on current laws and
regulations and expected costs to be incurred, all of which are subject to
possible changes thereby impacting current determinations.
TRANSLATION OF FOREIGN CURRENCIES
DOMESTIC AND FOREIGN OPERATIONS
The Company reports its financial statements in Canadian dollars, while
the currency of measurement for the Company's operations varies depending upon
location.
The currency of measurement for the Company's operations domiciled in
Canada is the Canadian dollar, while the currency of measurement for the
Company's foreign operations is the US dollar, since all the Company's revenue,
and a substantial portion of its expenses relating to the foreign operations,
are in US dollars. US dollar amounts for the Company's foreign operations are
translated to Canadian dollars for reporting purposes using the current rate
method. Under the current rate method, assets and liabilities are translated at
the exchange rates in effect at the balance sheet date, revenues and expenses
are translated at average rates for the year, and the resulting gains and losses
are accumulated in a separate component of shareholders' equity, described in
the consolidated balance sheet as cumulative translation adjustments.
As indicated above, the currency of measurement for the Company's
foreign operations, including those in Honduras, Chile and Tunisia, is the US
dollar. In each of these operations, the temporal method is used to translate
local currency amounts into US dollars. Under the temporal method, all
non-monetary items and the related depreciation are translated at the historical
rates. Monetary assets and liabilities are translated at actual exchange rates
in effect at the balance sheet date, revenues and expenses other than
depreciation and depletion of capital assets are translated at the average rate
of exchange for the year, and gains and losses on translation are reflected in
income for the year.
Monetary assets and liabilities of the Company's domestic operations in
Canada, denominated in US dollars, are translated at the rates of exchange
prevailing at the balance sheet date. Non-monetary assets and liabilities are
translated at historical rates. Revenues and expenses are translated at the
average rate of exchange for the year. Exchange gains and losses are included in
income for the year.
USE OF ESTIMATES
The preparation of financial statements, in accordance with generally
accepted accounting principles, requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the year.
Management's estimates are made in accordance with mining industry practice.
Actual results could differ significantly from those estimates. The assets and
liabilities which require management to make significant estimates and
assumptions in determining carrying values include accounts receivable,
concentrate inventory, mineral properties and fixed assets, and reclamation and
closure cost accruals.
FINANCIAL INSTRUMENTS
The Company enters into derivative financial instrument contracts to
manage certain market risks which result from the underlying nature of its
business. The Company formally documents all relationships between hedging
instruments and hedged items, as well as its risk management objective and
strategy for undertaking various hedge transactions. This process includes
linking all derivatives to specific assets and liabilities on the balance sheet
or to specific firm commitments or forecasted transactions. The Company uses
forward contracts to hedge exposure to commodity price risk for metals
production, and foreign exchange forward contracts to hedge exposure to
fluctuations in foreign currencies, relating primarily to the US dollar. The
Company has written call options to minimize exposure to commodity price risk.
Non-option derivative financial instruments are accounted for using the accrual
method as management views the contracts as effective hedges and has designated
the contracts as hedges of specific exposures. Hedge effectiveness is assessed
based on the degree to which the cash flows on the derivative contracts are
expected to
offset the cash flows of the underlying position or transaction being hedged.
The Company also formally assesses, both at the hedge's inception and on an
ongoing basis, whether the derivatives that are used in hedging transactions
are, and continue to be, effective. Realized and unrealized gains or losses on
derivative contracts that qualify for hedge accounting are deferred and recorded
in income when the underlying hedge transaction is completed. The premiums
received at the inception of written call options are recorded as a liability
until maturity. Changes in the fair value of the liability are recognized
currently in income. Gains or losses (realized or unrealized) for derivative
contracts which no longer qualify as hedges for accounting purposes or which
relate to a hedged transaction that is no longer expected to occur are recorded
in income.
SHARE INCENTIVE PLAN
The Company has a share incentive plan (the "Plan"), which consists of a
share purchase plan, a share option plan and a share bonus plan which is
administered by the directors of the Company. The Plan provides that eligible
persons thereunder include any director, employee (full-time or part-time),
officer or consultant of the Company or any subsidiary thereof. The Plan is
described in note 6. No compensation expense is recognized for the Plan when
share options are issued to employees (see note 6(j)). Shares issued under the
Plan are recorded at the issue price. An optionee may elect under the Plan to
terminate an option, in which case the optionee may receive consideration either
in cash or shares of the Company, at the discretion of the Company, equal to the
difference between the fair market value of the shares, as defined, and the
exercise price. The consideration paid to the optionee in the event of such an
election is charged to deficit.
INCOME AND MINING TAXES
The provisions for income and mining taxes are based on the liability
method. Future income taxes arise from the recognition of the tax consequences
of temporary differences by applying substantively enacted statutory tax rates
applicable to future years to differences between the financial statements
carrying amounts and the tax bases of certain assets and liabilities. The
Company records a valuation allowance against any portion of those future income
tax assets that it believes will, more likely than not, fail to be realized. On
business acquisitions, where differences between assigned values and tax bases
of assets acquired and liabilities assumed exist, the Company recognizes the
future income tax assets and liabilities for the tax effects of such
differences.
Future withholding taxes are provided on the unremitted net earnings of
foreign subsidiaries and associates to the extent that dividends or other
repatriations are anticipated in the future and will be subject to such taxes.
NEW PRONOUNCEMENT
In February 2003, the Canadian Institute of Chartered Accountants
("CICA") issued Accounting Guideline 14, Disclosure of Guarantees ("AcG-14").
AcG-14 requires disclosure for certain contracts or obligations that meet the
definition of a guarantee. As at December 31, 2003, the Company has outstanding
letters of credit totalling $3,811,000, which are renewable annually. $3,141,000
of these letters of credit are for security deposits for rehabilitation and
restoration expenses, $250,000 relates to the operating lease at the Nanisivik
Mine (see note 3(g)) and $420,000 (US$325,000) to guarantee a purchase contract.
2002 AND 2001 FIGURES
Certain of the 2002 and 2001 figures have been reclassified to conform
to the 2003 presentation.
2. RECLAMATION DEPOSITS AND RECLAMATION AND CLOSURE COST ACCRUALS
Reclamation and closure costs accruals by mine are as follows:
($000's) 2003 2002
-------------------------------------------------------------------------------------------------------
Nanisivik Mine 3,391 7,224
Bouchard-Hebert Mine 3,785 3,076
Bougrine Mine 2,489 2,339
El Mochito Mine 1,613 1,794
Caribou Mine 1,000 1,000
El Toqui Mine 620 425
-------------------------------------------------------------------------------------------------------
Total 12,898 15,858
Less current portion included in accounts payable and accrued liabilities 828 2,161
-------------------------------------------------------------------------------------------------------
12,070 13,697
Cash collateral on deposit at December 31, 2003 of $100,000 (2002 -
$1,387,000) with third parties to fund reclamation costs is shown separately on
the balance sheet as Reclamation Deposits. During 2003, $1,287,000 of the
collateral on deposit was converted to letters of credit (see note 1 - New
Pronouncement). The Reclamation Deposits at December 31, 2003 and 2002 are for
funding of reclamation costs at the Caribou Mine. In addition, at December 31,
2003, the Company has posted reclamation security bonds totalling $8,181,000
(2002 - $13,000,000) of which $3,141,000 is covered by letters of credit (see
note 1 - New Pronouncement).
3. MINERAL PROPERTIES AND FIXED ASSETS
($000's) 2003 2002
--------------------------------------------------------------------------------------------------------------------------
Accumulated Accumulated
Depreciation Net Book Depreciation Net Book
Cost and Depletion Value Cost and Depletion Value
--------------------------------------------------------------------------------------------------------------------------
Equipment 146,562 (104,365) 42,197 158,305 (108,237) 50,068
Mineral properties,
buildings and
improvements 95,193 (64,732) 30,461 104,736 (63,089) 41,647
Development 54,866 (34,503) 20,363 60,489 (34,795) 25,694
Exploration 14,845 (525) 17,475 (2) 17,473
--------------------------------------------------------------------------------------------------------------------------
311,466 (204,125) 107,341 341,005 (206,123) 134,882
A summary of the write-downs of mineral properties and fixed assets is
as follows:
($000's) 2003 2002 2001
---------------------------------------------------------------------
Caribou Mine - - 53,450
Nanisivik Mine - - 11,252
El Mochito Mine 279 - 2,505
Other Properties - - 3,074
---------------------------------------------------------------------
279 - 70,281
Mineral properties and fixed assets of the Company comprise the
following:
a) El Mochito Mine $14,322,000 (2002 - $19,447,000)
The El Mochito Mine is a zinc, lead and silver mine located in the
Republic of Honduras. Deferred exploration costs were written down in 2003 by
$279,000 (2002 - $Nil and 2001- $2,505,000)
b) Bougrine Mine $12,762,000 (2002 - $24,458,000)
The Bougrine Mine is a zinc and lead mine located 160 kilometres west of
Tunis, Tunisia.
c) El Toqui Mine $21,677,000 (2002 - $23,596,000)
The El Toqui Mine is a zinc and gold mine located 1,350 kilometres south
of Santiago, Chile.
d) Bouchard-Hebert Mine $10,111,000 (2002 - $18,452,000)
The Bouchard-Hebert Mine is a zinc, copper, gold and silver mine located
30 kilometres northeast of Rouyn-Noranda, Quebec, Canada.
e) Langlois Mine $39,643,000 (2002 - $37,166,000)
The Langlois Mine is a zinc, copper, gold and silver mine located 213
kilometres north of Val d'Or, Quebec, Canada. Mining activities at the Langlois
Mine were suspended in November 2000, pending the completion of a feasibility
study, which was completed in August 2001. Costs totalling $1,659,000 in 2003,
($1,575,000 in 2002), incurred primarily to upgrade resources to reserves and
$778,000 (2002 - $Nil) in pre-production costs in anticipation of reopening,
have been capitalized.
f) Caribou Mine $Nil (2002 - $Nil)
The Caribou Mine, a zinc, lead and silver mine, is located in the
Province of New Brunswick, Canada.
The Caribou Mine was placed on care and maintenance in 1998. In 2001, as a
result of depressed metal prices, the Company reassessed the carrying value of
its properties and the property was written down by $53,450,000 to $Nil. The
revised carrying value was determined on the basis set out in note 1.
g) Nanisivik Mine $2,542,000 (2002 - $2,899,000)
The Nanisivik Mine was a zinc and silver mine located on Strathcona
Sound, Baffin Island, Nunavut, Canada. The fixed asset carrying value of
$2,542,000 as at December 31, 2003, represents the net book value of plant and
equipment located at the Nanisivik Mine which management believes will be
realized on the ultimate disposition of mine equipment and property as part of
the mine closure and site restoration activities. In 2001, as a result of
depressed metal prices, the Company reassessed the carrying value of its
properties on the basis set out in note 1, resulting in a write-down of this
property in the amount of $11,252,000. The Nanisivik mine ceased operations on
September 30, 2002.
h) Other Properties $6,284,000 (2002 - $8,864,000)
Other Properties comprise exploration properties held directly or
through joint ventures. Management reviews the carrying values of these
properties annually and in 2003 recorded a write-down of $Nil (2002 - $Nil, 2001
- - $3,074,000).
On June 16, 2003, the Company sold the Lapa exploration properties
consisting of the Tonawanda and Zulapa properties, respectively, for
US$7,925,000. The Company retains a 1.0 percent net smelter royalty from the
Tonawanda property and a 0.5 percent net smelter royalty from the Zulapa
property. The Company also received a non-refundable advance royalty of
US$1,000,000 against the above net smelter royalty of the Lapa properties and
will receive a further non-refundable advance royalty of US$1,000,000 when the
total published inferred resource reaches 2,000,000 ounces of gold.
The non-refundable advance royalty of $1,340,000 (US$1,000,000) received
has been deferred and is shown on the balance sheet as "Deferred Royalty". The
deferred royalty will be brought into income when earned.
The Lapa properties were non-producing properties and the gain on sale
of $10,336,000 is included in "Other non-producing property (income) costs" of
$8,396,000 in the consolidated statement of operations and deficit in 2003.
4. SHORT-TERM DEBT
($000's) 2003 2002
-------------------------------------------------------------------------------------
Syndicated Credit Facility
- Revolver 6,462 25,195
- Non-Revolving Facility, current portion (note 5) 1,266 -
- Supplemental Term Facility, current portion (note 5) 467 -
Customer prepayments for zinc concentrates (note 5) 646 3,159
Other (note 5) 1,488 1,873
-------------------------------------------------------------------------------------
10,329 30,227
On November 15, 2001, the Company completed a refinancing agreement
whereby the balance of the Non-Revolving Facility of US$22,631,000 was increased
by US$6,500,000 (the "Supplemental Term Facility"). Dundee Bancorp Inc.
("Dundee"), a significant shareholder of the Company, guaranteed the
Supplemental Term Facility. Under the agreement, the Revolver was extended to
January 2, 2003. In addition, compliance with the existing financial covenants
was waived until January 2, 2003.
The syndicated credit facility (the "Syndicated Credit Facility") is
secured by a pledge of the shares in the Company's operating subsidiaries,
through guarantees by such subsidiaries, and through first charges on the
Company's concentrate inventory and receivables and on the majority of the
Company's mining assets.
In December 2002, the Syndicated Credit Facility that was due on January
2, 2003 was extended to January 2, 2004 and the interest rate on the
Non-Revolving Facility was increased to LIBOR plus 2.75%. The amount of the
Revolver was reduced from a cap of US$45,000,000 to US$30,000,000. In return for
amending the Syndicated Credit Facility, the banking syndicate was granted share
purchase warrants to purchase 2,000,000 common shares of the Company at an
exercise price of $0.19 per Common Share with an expiry date of March 27, 2006.
In addition, as consideration for extending its support of the Supplemental Term
Facility, Dundee was granted warrants to purchase 1,000,000 common shares of the
Company on the same basis as the banking syndicate (see note 6(m)).
On November 27, 2003, the Company completed a restructuring of the
Syndicated Credit Facility, which included:
i) A pay down of 50% of US$17,600,000 and US$6,500,000 of the
Non-Revolving Facility and the Supplemental Term Facility,
respectively, on a pari passu basis;
ii) An extension of the Non-Revolving Facility and the Supplemental
Term Facility, both due January 2, 2004, for a period of five
years to January 2, 2009;
iii) An agreement that principal under the Non-Revolving Facility and
the Supplemental Term Facility will be repaid in fifty-four
equal monthly payments beginning in July, 2004; and
iv) Maintaining the existing Revolver until January 2, 2005 with a
reduction of the cap from US$30,000,000 to US$25,000,000.
Interest expense on short-term debt during 2003 amounted to $797,000
(2002 - $1,979,000, 2001 - $3,018,000).
5. LONG-TERM DEBT
($000's) 2003 2002
--------------------------------------------------------------------------------
Non-Revolving Facility (note 4) 11,393 35,748
Supplemental Term Facility (note 4) 4,201 10,267
Reimbursable government assistance, discounted
at a rate of 8% 1,412 1,390
Customer prepayments for zinc concentrates 646 3,159
Other 1,277 1,033
--------------------------------------------------------------------------------
Total 18,929 51,597
Less current portion 3,412 3,159
--------------------------------------------------------------------------------
15,517 48,438
The Non-Revolving Facility and the Supplemental Term Facility (see note
4), which bear interest at LIBOR plus 2.75%, are repayable through January 2,
2009, with principal repayments in fifty-four equal monthly amounts beginning in
July, 2004.
On January 30, 2004, the Non-Revolving Facility and the Supplemental
Term Facility were repaid and cannot be redrawn, using a portion of the proceeds
from the sale of units to a syndicate of underwriters (see note 14(a)).
Other long-term debt at December 31, 2003 and 2002 includes fees of
$1,033,000 payable to Dundee Securities Corporation ("DSC"), a subsidiary of
Dundee, with respect to acquisitions in prior years (see note 9), payment of
which has been deferred to 2004 and for 2003 is included in Other short-term
debt.
The fair value of the Company's long-term debt approximates its carrying
value at December 31, 2003 and 2002. Interest expense on long-term debt during
2003 amounted to $1,432,000 (2002 - $1,913,000, 2001 - $2,506,000).
6. CAPITAL STOCK
Authorized - Unlimited Common Shares
200,000,000 preferred shares
Issued:
Common shares
(000's) Number of shares Amount
--------------------------------------------------------------------------------------------------------
As at December 31, 2001 93,848 $239,214
Rights offering, net of expenses (e) 94,455 17,643
Shares issued on reacquisition of assets (d) 3,603 638
Employee share purchase plan (f) 1,375 264
--------------------------------------------------------------------------------------------------------
As at December 31, 2002
Private placement (a) 1,014 742
Shares issued for subscription receipts, net of expenses (b) 85,800 28,002
Shares issued as supplementary payment to employee (c) 2,565 618
Shares issued on exercise of warrants (k) 500 105
Shares issued on exercise of options (g) 1,333 263
Employee share bonus plan (h) 200 50
Employee share purchase plan (f) 1,097 204
--------------------------------------------------------------------------------------------------------
As at December 31, 2003 285,790 $287,743
a) In December 2003, the Company issued 1,013,514 flow-through common
shares at a price of $0.74, exclusive of share issue costs to finance
exploration activities in the vicinity of the Bouchard-Hebert Mine.
b) On October 7, 2003, the Company issued 85,800,000 subscription receipts,
at a price of $0.35 per subscription receipt resulting in proceeds of
$28,002,000, net of costs of issue of approximately $2,028,000. The
proceeds from the issue were escrowed subject to the satisfaction of
certain conditions (the "Escrow Conditions") which included the Company
reaching agreement with its lenders on the restructuring and pay down of
the Syndicated Credit Facility. The Escrow Conditions were
satisfied on November 27, 2003, the proceeds were released to the
Company and the subscription receipts were exchanged for 85,800,000
common shares of the Company ("Common Shares").
c) In February 2003, 2,564,887 Common Shares were issued for $618,000, as
required under an agreement dated November 30, 2001, relating to the
resignation of an executive. The Company had agreed to pay the executive
a supplementary amount of up to $700,000, either in cash or Common
Shares. The amount to be paid was based on a formula using the
weighted-average trading price for the Common Shares for the month of
January 2003. As at December 31, 2002, the amount of $618,000 was shown
on the balance sheet as "Common shares to be issued" in Shareholders'
Equity. The supplementary amount paid in the form of Common Shares was
included in general and administrative expenses in 2002.
d) Under an agreement dated June 7, 2001, relating to the sale of certain
assets acquired through the acquisition of Jascan in November 2000, the
Company granted to the purchaser who acquired such assets, the right
under certain circumstances to cause the Company to reacquire such
assets in consideration for the issuance of Common Shares. In 2002, the
purchaser exercised its rights and the Company issued 3,603,000 shares
to reacquire certain assets. The number of Common Shares issued was
determined based upon the ten-day weighted-average trading price of the
Common Shares immediately preceding the third party's notice of intent
to acquire such Common Shares, less a ten per cent discount. A director
of the Company has a significant ownership interest in the purchaser
that acquired the shares.
e) On May 1, 2002, the Company completed a rights offering resulting in the
issuance of 94,454,795 Common Shares at a price of $0.20 per share
resulting in proceeds of $17,600,000, net of costs of issue of
approximately $1,300,000.
f) The share purchase plan entitles certain employees of the Company to
contribute up to 5% or up to 10% of their annual basic salary, to
purchase Common Shares. The Company matches each participant's
contribution. The purchase price per Common Share is the
weighted-average of the trading prices of the Common Shares on The
Toronto Stock Exchange (the "TSX") for the calendar quarter in respect
of which the Common Shares are issued. Common Shares acquired with the
Company's contribution are held in safekeeping and delivered to
employees 12 months following their date of issue. The Company issued
1,097,000 Common Shares pursuant to the Share Purchase Plan during 2003
(2002 - 1,375,000). The number of shares authorized for issue under the
share purchase plan as at December 31, 2003 was 6,500,000.
g) Pursuant to the share option plan, the directors have the authority to
grant options and to establish the exercise price of the option at the
time each option is granted, at a price not less than the closing price
of the Common Shares on the TSX on the trading day immediately preceding
the date of the grant of such option.
Options must be exercised no later than ten years after the date of the
grant and are subject to vesting provisions unless the directors of the Company
determine otherwise. One third of the options granted become exercisable from
the date of granting such options, and on a cumulative basis, one third at any
time after the first anniversary date and the balance at any time after the
second anniversary date.
Optionees may elect to terminate options and receive the difference
between the fair value of a Common Share and the exercise price of the option so
terminated multiplied by the number of options being terminated in Common Shares
or, with the consent of the Company, cash. The consideration paid upon such
terminations is charged to deficit. There were no terminations of options by
optionees in 2003 or 2002.
As at December 31, 2003, the outstanding share options which total
8,885,000 expire at various dates between April 30, 2005 and November 9, 2013
and are exercisable at prices ranging from $0.18 to $8.20 per Common Share. The
number of shares authorized for grants of options under the share option plan as
at December 31, 2003 was 12,500,000.
h) On June 19, 2001, the Plan was amended to add a share bonus plan (the
"Share Bonus Plan") to the Plan. The Share Bonus Plan permits Common
Shares to be issued as a discretionary bonus to any director, employee
(full-time or part-time), officer or consultant of the Company or any
subsidiary thereof who is designated under the Share Bonus Plan from
time to time. For the year ended December 31, 2003, the Company has
issued 1,200,000 (2002 - 1,000,000) Common Shares under the Share Bonus
Plan. The number of shares authorized for issue under the share bonus
plan as at December 31, 2003 was 3,000,000.
i) Share option transactions were as follows:
Weighted-
Options Average
(000's) Exercise
Price
------------------------------------------------------------------------
As at December 31, 2001 5,259 $2.21
Granted 3,895 0.19
Cancelled (358) 2.39
------------------------------------------------------------------------
As at December 31, 2002 1.31
Granted 1,740 0.27
Exercised (1,333) 0.20
Cancelled (318) 1.95
------------------------------------------------------------------------
As at December 31, 2003 8,885 $1.25
The following table summarizes information about the share options
outstanding at December 31, 2003.
Options Outstanding Options Exercisable
-----------------------------------------------------------------------------------------------------------------
Number Weighted- Number
Outstanding Average Weighted- Exercisable Weighted-
as at Remaining Average as at Average
Range of Dec. 31, 2003 Contractual Exercise Dec. 31, 2003 Exercise
Exercise Prices (000's) Life Price (000's) Price
-----------------------------------------------------------------------------------------------------------------
$0.18 - $0.20 3,555 8 years 190 days $0.19 2,282 $0.19
$0.24 - $2.00 2,921 7 years 58 days $0.74 2,554 $0.79
$2.05 - $3.35 1,501 3 years 142 days $2.92 1,501 $2.92
$3.75 - $8.20 908 5 years 183 days $4.33 908 $4.33
j) The Company's share option plan is described in note 6(g). The Company
has elected not to use the fair value method of accounting and does not
recognize compensation expense for its stock-based compensation for
employees. Had compensation expense for the stock-based compensation
plan for employees been determined based upon the fair value of awards
granted on or after January 1, 2002, the Company's net earnings for the
year ended December 31, 2003 would have decreased by $274,000 and the
net loss for 2002 would have increased by $183,000. However, the
earnings and loss per share for the years ended December 31, 2003 and
2002, respectively would have been unchanged.
The fair value of each option grant is estimated on the balance sheet
date using the Black-Scholes option-pricing model with the following
weighted-average assumptions:
2003 2002
------------------------------------------------------------------------------------------------------
Weighted-average exercise price per Common Share $0.27 $0.19
Weighted quoted market price per Common Share at date of grant $0.27 $0.19
Weighted-average grant-date fair value price per Common Share $0.17 $0.15
Expected life (years) 1 - 10 1 - 10
Risk free interest rate 4.62% 5.21%
Expected volatility 46% 62%
Dividend yield 0% 0%
The exercise price of all options granted during 2003 and 2002 equals
the quoted market price at the date of grant.
k) In consideration for restructuring the Syndicated Credit Facility in May
2001, the Company granted to the members of the syndicate ("the
Lenders") warrants to purchase 300,000 Common Shares at $1.57 per share.
The warrants were exercisable until November 29, 2002 (see note 6(l)).
No value was ascribed to these warrants on the date of issue.
l) In consideration for restructuring the Non-Revolving Facility on
November 15, 2001 (see note 4), in March 2002 and May 2002, the Company
granted to the Lenders warrants to purchase an aggregate of 1,000,000
Common Shares at $0.21 per share. The warrants are exercisable until May
8, 2005. No value was ascribed to these warrants on the date of issue.
Dundee also received warrants to purchase an aggregate of 30,801,410
Common Shares at $0.20 per share. One-half of these warrants are
exercisable until March 2, 2007 and the remainder are exercisable until
May 2, 2007; no value was ascribed to these warrants on the date of
issue. During the year ended December 31, 2003, 500,000 of the warrants
issued to the Lenders were exercised and 50,000 cancelled. As at
December 31, 2002, none of these warrants had been exercised or
cancelled.
In addition, as part of the restructuring of the Syndicated Credit
Facility in 2001, the Company agreed to amend the terms of the outstanding
warrants issued to the Lenders to purchase an aggregate of 300,000 Common Shares
at a price of $1.57 per share until November 29, 2002, to change the exercise
price of such warrants to $0.21 per share and the expiry date of the warrants to
the earlier of May 8, 2005 and thirty days following the date the ten-day
weighted-average trading price of the Common Shares on the TSX exceeds $0.28 per
share. The exercise price was based on the five-day weighted-average trading
price of the Common Shares on the TSX following the completion of the Rights
Offering.
m) Under an agreement reached on December 23, 2002 with the Lenders and
Dundee (see note 4), the Company, in consideration for restructuring its
existing credit facilities, granted to the Lenders and Dundee the right
to purchase 2,000,000 and 1,000,000 Common Shares respectively, at an
exercise price of $0.19 per Common Share with an expiry date of March
27, 2006. The value ascribed to the warrants issued of $97,000 was
included in the financial statements at December 31, 2002 as contributed
surplus.
The fair value of each of the above option grants, had been estimated on
December 31, 2002 using Black-Scholes option-pricing model with the following
weighted-average assumptions:
Estimated exercise price per Common Share $0.25
Quoted market price per Common Share at date of grant $0.16
Expected life (years) 3
Risk free interest rate 3.23%
Expected volatility 46%
Dividend yield 0%
The quoted market value of the Company's Common Shares as at December
31, 2003 was $0.64.
n) In 2001, the Company negotiated the deferral of payments of treatment
charges with several of its customers. As consideration for the deferral
of payments, the Company issued warrants to purchase 90,893 Common
Shares at $0.50 per share. The warrants expired on June 30, 2003. No
value was ascribed to these warrants on the date of issue.
7. INCOME AND MINING TAXES
Income and mining taxes differ from the amount computed by applying the
statutory federal income tax rate for the year ended December 31, 2003 of 38%
(2002 - 39%, 2001 - 39%) to the net earnings (loss), excluding income and mining
taxes. The differences are summarized as follows:
($000's) 2003 2002 2001
-----------------------------------------------------------------------------------------------------------------------
Tax provision (recovery) at statutory rate 2,364 (7,762) (43,303)
Federal resource allowance 119 (289) 470
Unrecognized tax benefit relating to losses 916 5,781 42,312
Different effective tax rates on earnings (losses) in foreign
subsidiaries 1,630 2,725 712
Benefit of previously unrecognized losses available for carry forward (5,984) (246) -
Other 124 (88) 483
Mining taxes (recovery) (10) (345) (650)
-----------------------------------------------------------------------------------------------------------------------
(841) (224) 24
As at December 31, 2003, the significant components of the Company's
future tax assets (liabilities) were as follows:
($000's) 2003 2002
-------------------------------------------------------------------------- ------------------ --------------
Future tax assets
Loss carry forwards 19,043 30,562
Mineral properties and fixed assets 56,062 64,709
Reclamation and closure cost accruals 5,354 5,005
-------------------------------------------------------------------------- ------------------ --------------
Future tax assets before valuation allowance 80,459 100,276
Valuation allowance 79,269 100,276
-------------------------------------------------------------------------- ------------------ --------------
Future tax assets 1,190 -
Future tax liabilities
Mineral properties - mining tax (962) (822)
-------------------------------------------------------------------------- ------------------ --------------
Net future tax assets (liabilities) 228 (822)
a) At December 31, 2003, the Company has net operating loss carry forwards
in Canada of approximately $29,000,000, which expire at various dates
through 2010. In addition, the Company has approximately $46,700,000 of
resource expenditures that are limited in their deduction to income from
specific properties.
b) At December 31, 2003, the Company has net operating loss carry forwards
in Chile of approximately $42,700,000, which do not expire.
c) At December 31, 2003, the Company has net operating loss carry forwards
in Honduras of approximately $8,900,000, which will expire four years
after the Company in Honduras generates its first taxable profit.
8. FINANCIAL INSTRUMENTS
The Company manages its exposure to fluctuations in commodity prices,
foreign exchange rates and interest rates by entering into derivative financial
contracts in accordance with the formal risk management policy approved by the
Company's Board of Directors and managed by the Company's Hedge Committee. The
Company does not hold or issue derivative contracts for speculation or trading
purposes.
The Company's short-term financial instruments, made up of cash and cash
equivalents, accounts receivable, bank indebtedness, accounts payable and
accrued liabilities, and short-term debt are carried at cost which, due to their
short-term nature, approximates their fair value. The fair value of the
long-term debt also approximates its carrying value as set out in note 5.
Such fair value estimates are not necessarily indicative of the amounts
the Company might pay or receive in actual market transactions. Potential taxes
and other transaction costs have not been considered in estimating fair value.
CREDIT RISK
The Company is subject to credit risk through trade receivables. The
Company manages this risk through evaluation and monitoring processes and
carries credit insurance when necessary. Although the Company has a number of
significant customers, they are all established and creditworthy customers.
Credit risk is further mitigated through the use of provisional payment
arrangements and the use of letters of credit and credit insurance where
appropriate. Credit risk also relates to derivative contracts arising from the
possibility that a counterparty to an instrument in which the Company has an
unrealized gain fails to perform. The Company transacts only with highly-rated
counterparties. The Company does not consider the credit risk associated with
these financial instruments to be significant.
FOREIGN EXCHANGE HEDGING
In 2001, the Company announced its intention to close the Nanisivik Mine
in September 2002 (see note 3(g)). Accordingly, foreign exchange contracts
totalling US$25,000,000, originally designated as hedges of anticipated 2003
operating costs at the Nanisivik Mine, were no longer considered as effective
hedges. Consequently these contracts were being marked to market, resulting in a
gain of $608,000 included in gross sales revenue in the year ended December 31,
2002 (2001 - a loss of $3,162,000).
FOREIGN EXCHANGE RISK
The Company operates using principally the Canadian dollar and the US
dollar, and as such may be negatively affected by fluctuations in foreign
exchange rates. The Company manages this risk by minimizing the number of
transactions that result in the settlement currency differing from the currency
of the initial transaction. In addition, the Company's sales are denominated
primarily in US dollars, while a significant percentage of its expenses are
denominated in non-US dollars. This exposes the Company to increased volatility
in earnings due to fluctuations in foreign exchange rates. The Company
periodically uses forward foreign exchange contracts to hedge the exchange rates
on identifiable foreign currency exposures. Gains and losses on these contracts
are reported as a component of the related transactions.
The Company had no foreign exchange contracts outstanding at December
31, 2003, and the following at December 31, 2002:
US ($000's) Exchange Rate Maturity
----------------------------------------------------------------------------------------------
US dollar forward
sales against Canadian dollar 5,000 Cdn$1.5540 2003
COMMODITY PRICE RISK
The profitability of the Company is directly related to the market price
of metals produced. The Company reduces price risk by hedging against the price
of metals for a portion of its production.
The main tools available to protect against price risk are forward
contracts and options. Various strategies are available using these tools
including spot deferred and synthetic puts.
The Company periodically enters into forward sales to effectively
provide a minimum price for a portion of inventories and future production.
These contracts are marked to market, and gains and losses are recognized in the
relevant period. The Company also periodically enters into written call options.
No call options have been entered into in either 2003 or 2002 other than those
described below.
The Company had no contracts outstanding as at December 31, 2002. The
following contracts were entered into in 2003 and outstanding as at December 31,
2003:
December 31, 2003 Quantity Average Price (US) Maturity
---------------------------------------------------------------------------------------------------------
Zinc forward sale 4,600 tonnes $969 per tonne January 2004
Silver call options 250,000 ounces $5.42 per ounce January - February 2004
Gold call options 2,500 ounces $395 per ounce January - February 2004
INTEREST RATE RISK
The Company currently has various operating lines of credit and
long-term debt that tie interest payments to the bank prime or LIBOR lending
rates. Therefore, the Company is exposed to interest rate risk through
fluctuations in these interest rates.
9. RELATED PARTY TRANSACTIONS
All related party transactions are disclosed elsewhere in these
consolidated financial statements (see notes 4, 5 and 6) except for the
following:
a) The Company and DSC entered into an agreement in late 1998 for DSC to
act as the exclusive financial advisor to the Company. The agreement was
for an initial term of one year and thereafter year to year until
cancelled, and provided the Company with the right to cancel the
agreement. The agreement was terminated by the Company effective
December 31, 2000. The unpaid balance of $1,033,000 for the above fees
has been deferred to 2004, and is included in short-term debt as at
December 31, 2003 and was included in long-term debt as at December 31,
2002 (see note 5).
b) The Company incurred management fees in each of 2003 and 2002 of
$250,000 (2001 - $Nil) for services provided by Dundee.
c) At December 31, 2003, the Company has an amount of $544,000 (2002- $Nil)
on deposit with DSC.
d) The Company and Black Hawk Mining Inc. ("BHK"), a company under common
significant influence by Dundee, entered into an agreement on April 1,
2002, whereby the Company was to manage BHK's mining operation for a fee
of US$100,000 (approximately Cdn$157,000) per annum plus a bonus to be
calculated based on a formula. This agreement was terminated in 2003.
The Company also provides logistic and procurement services to BHK which
enables both companies to reduce costs and negotiate favourable terms
for the purchase of materials and supplies. The companies shared office
space until 2003 and the Company charged BHK for certain administrative
services.
Transactions for the year ended December 31, 2003 for sale of supplies
and charges for rent and administrative services to BHK totalled $574,000 (2002
- - $1,827,000, 2001 - $913,000). These transactions have been reflected in the
statements of operations as cost recoveries and accordingly, as reductions in
either direct operating costs or general and administrative expenses. In
addition, the Company sold surplus equipment to BHK in 2003 for proceeds of
$106,000 (2002 - $146,000, 2001-$Nil).
Other accounts receivable at December 31, 2003 and 2002 included the
following amounts due from BHK:
($000's) 2003 2002
-------------------------------------------------------
For:
Supplies 203 773
Services 112 341
-------------------------------------------------------
Interest was charged on overdue amounts receivable from BHK at
commercial rates.
10. CONTINGENCIES AND COMMITMENTS
CONTINGENCIES
a) The Company and TOTC, a former subsidiary of the Company, are defendants
in an action commenced in the Ontario Court (General Division) on June
18, 1996 by John W. Sheiles, formerly president of TOTC, claiming
arrears of base salary, salary in lieu of vacation pay, expenses and
commissions aggregating approximately US$185,000 and damages of
US$500,000 for wrongful termination of his employment contract. The
Company has filed a statement of defense and is of the opinion that the
claim is without merit.
b) On October 10, 2002, the Nunavut Water Board ("NWB") issued to CanZinco
Ltd. (a wholly-owned subsidiary of the Company) a renewal of its water
license, for a period of 5.5 years commencing on October 1, 2002. One of
the conditions contained in the renewal license was a requirement that
the Company guarantee the financial security required by the license.
NWB has established that the amount of security required by the license
is $17,600,000. Of that amount, $5,000,000 was previously posted in the
form of indemnity bonds pursuant to the expired water license. The issue
of the outstanding balance of $12,600,000 was to have been addressed by
the Company within 30 days of the issuance of the water license.
By way of letter dated November 8, 2002, the Company committed to the
Department of Indian Affairs and Northern Development ("DIAND"), the federal
government agency that deals with the form of financial security pursuant to a
water license issued by NWB, that it would provide to DIAND a guarantee in the
form of an unsecured promissory note in the amount of $11,600,000, later changed
to $12,600,000. On February 20, 2003, CanZinco delivered a promissory note in
the amount of $1,000,000, with the balance of $11,600,000 under discussion as to
amount and form.
As at December 31, 2003, the balance of the accrual for current and
long-term reclamation, site restoration and closure costs with respect to the
Nanisivik Mine is $3,391,000, net of estimated salvage value of $6,400,000. This
accrual includes all obligations that the Company estimates will arise from the
requirements of the water license. Any excess in the amount of the unsecured
promissory note provided to DIAND over the actual reclamation and closure costs
incurred will not result in the recognition of an incremental liability since
any such excess would give rise to a financial asset in the form of a receivable
from DIAND. This receivable would offset the excess and would be reported net on
the balance sheet.
The indemnity bonds amounting to $5,000,000 expired in July 2003. The
Company and DIAND are in the process of replacing these bonds with an additional
promissory note for $5,000,000.
c) In 2003, Kalwea Financial Corp., BVI ("Kalwea") commenced an action
against the Company and CanZinco Ltd. ("CanZinco"), a subsidiary of the
Company for damages in the amount of $560,000 plus additional annual
minimum royalty payments of $70,000 each quarter on October 1, January
1, April 1, and July 1, sequentially. Kalwea also claims a transfer of
certain mining claims in Restigouche County, New Brunswick. The Company
and CanZinco have filed a statement of defense and have counterclaimed
for damages in the amount of $840,000 for overpayment of royalties.
Kalwea alleges that it is a secured creditor of Marshall Minerals Corp.
("Marshall"), a company with which CanZinco has a royalty agreement
arising from the purchase of mining claims in 1995. The Company and
CanZinco are of the opinion that Kalwea's claims are without merit. This
action has been scheduled for mandatory mediation on March 23, 2004.
d) In accordance with the standard industry practice, the Company seeks to
obtain bonding and other insurance in respect of its liability for costs
associated with the reclamation of mine, mill and other sites used in
its operations and against other environmental liabilities imposed by
statute. Due to developments which have affected the insurance and
bonding markets worldwide, such bonding and/or insurance may be
difficult or impossible to obtain in the future, or may only be
available at significant additional cost. In the event that such bonding
and/or insurance cannot be obtained by the Company or is obtainable only
at significant additional cost, the Company may become subject to
financial liabilities, which may affect its financial resources.
e) The Company is also involved in legal proceedings and claims, which
arise in the ordinary course of its business. The Company believes these
claims are without merit and is vigorously defending them. In the
opinion of the management, the amount of ultimate liability with respect
to these actions will not materially affect the financial position,
results of operations or cash flows of the Company.
f) The Company's mining and exploration activities are subject to various
federal, provincial and state laws and regulations governing the
protection of the environment. These laws and regulations are
continually changing and generally becoming more restrictive. The
Company conducts its operations so as to protect public health and the
environment and believes its operations are materially in compliance
with all applicable laws and regulations. The Company has made, and
expects to make in the future, expenditures to comply with such laws and
regulations.
LEASE COMMITMENTS
The Company is committed to operating leases for business premises and
equipment as follows:
($000's)
2004 839
2005 495
2006 307
2007 285
2008 274
11. SEGMENT INFORMATION
The Company operates primarily in the mining industry. Operations in the
Americas and Tunisia include the production and sale of zinc, lead and copper
concentrates which also contain silver and gold.
The accounting policies adopted by these segments are the same as those
described in the Summary of Significant Accounting Policies (see note 1).
As the products and services in each of the reportable segments, except
for corporate activities, are essentially the same, the reportable segments have
been determined at the level where decisions are made on the allocation of
resources and capital, and where internal financial statements are available.
SEGMENT INFORMATION
For the Year Ended December 31, 2003
($000's)
- ------------------------------------------------------------------------------------------------------------------------------------
Corporate Consol-
Geographic location Latin America Canada Tunisia and Other idated
- ------------------------------------------------------------------------------------------------------------------------------------
Operating Segment El El Bouchard
Mochito Toqui Nanisivik Caribou -Hebert -Langlois Bougrine
Mine Mine Total Mine Mine Mine Mine Total Mine
- ------------------------------------------------------------------------------------------------------------------------------------
Net revenue 32,588 17,394 49,982 5,660 - 49,286 - 59,946 20,202 (1,120) 124,010
Depreciation and depletion (4,025) (2,025) (6,050) - - (9,315) - (9,315) (8,351) (399) (24,115)
Reclamation and closure costs (680) (295) (975) - - (809) - (809) (493) - (2,277)
(Loss) contribution from
mining activities 3,932 (1,520) 2,412 (200) - 245 - 45 (6,559) (1,519) (5,621)
General and administrative - - - - - - - - - - (5,087)
Interest and financing - - - - - - - - - - (3,321)
Investment and other income - - - - - - - - - - 611
Foreign exchange gain on US
dollar denominated debt - - - - - - - - - - 11,578
Write-down of mineral
properties and fixed assets (279) - (279) - - - - - - - (279)
Other non-producing property
income (costs) - - - (384) (1,521) - (83) (1,988) - 10,384 8,396
Income and mining taxes
(recovery) (83) - (83) - - (141) 5 (136) 145 915 841
Net earnings (loss) 3,570 (1,520) 2,050 (584) (1,521) 104 (78) (2,079) (6,414) 13,561 7,118
Capital expenditures 2,586 5,748 8,334 (36) - 27 1,659 1,650 606 31 10,621
Identifiable assets 35,332 33,965 69,297 7,266 1,499 20,650 41,182 70,597 24,715 11,026 175,635
Information about major customers
Of the Company's total consolidated net revenue in 2003, revenue from one
customer of $48,795,000 originated from the Bouchard-Hebert Mine, and revenue
from another customer of $15,126,000 consisted of $7,719,000 that originated
from the Bourgrine Mine and $7,407,000 that originated from the El Toqui Mine.
SEGMENT INFORMATION
For the Year Ended December 31, 2002
($000's)
- ------------------------------------------------------------------------------------------------------------------------------------
Corporate Consol-
Geographic location Latin America Canada Tunisia and Other idated
- ------------------------------------------------------------------------------------------------------------------------------------
Operating Segment El El Bouchard
Mochito Toqui Nanisivik Caribou -Hebert -Langlois Bougrine
Mine Mine Total Mine Mine Mine Mine Total Mine
- ------------------------------------------------------------------------------------------------------------------------------------
Net revenue 38,143 22,309 60,452 36,021 - 49,702 - 85,723 22,441 - 168,616
Depreciation and depletion (6,030) (2,395) (8,425) (2,873) - (9,125) - (11,998) (7,077) (65) (27,565)
Reclamation and closure costs (813) (135) (948) (319) - (562) - (881) (1,065) - (2,894)
(Loss) contribution from
mining activities (2,905) 594 (2,311) (1,647) - 3,075 - 1,428 (8,548) (65) (9,496)
General and administrative - - - - - - - - - - (6,198)
Interest and financing - - - - - - - - - - (4,761)
Investment and other income - - - - - - - - - - 551
Foreign exchange gain on US
dollar denominated debt - - - - - - - - - - 669
Other non-producing property
income (costs) - - - - (1,678) - (107) (1,785) - 909 (876)
Income and mining taxes
(recovery) (95) - (95) 602 - (99) 6 509 (165) (25) 224
Net (loss) earnings (3,000) 594 (2,406) (1,045) (1,678) 2,976 (101) 152 (8,713) (8,920) (19,887)
Capital expenditures 2,347 2,859 5,206 17 - 1,676 867 2,560 1,966 1,239 10,971
Identifiable assets 47,901 33,667 81,568 17,141 3,587 28,586 38,786 88,100 36,716 16,996 223,380
Information about major customers
Of the Company's total consolidated net revenue in 2002, revenue from one
customer of $35,331,000 consisted of $33,686,000 that originated from the
Bouchard-Hebert Mine, and $1,645,000 that originated from the El Mochito Mine.
For the Year Ended December 31, 2001
($000's)
- ------------------------------------------------------------------------------------------------------------------------------------
Corporate Consol-
Geographic location Latin America Canada Tunisia and Other idated
- ------------------------------------------------------------------------------------------------------------------------------------
Operating Segment El El Bouchard
Mochito Toqui Nanisivik Caribou -Hebert -Langlois Bougrine
Mine Mine Total Mine Mine Mine Mine Total Mine
- ------------------------------------------------------------------------------------------------------------------------------------
Net revenue 33,643 22,400 56,043 27,519 - 51,360 - 78,879 26,879 - 161,801
Depreciation and depletion (5,902) (3,053) (8,955) (4,075) - (6,326) - (10,401) (8,529) (95) (27,980)
Reclamation and closure costs (818) (65) (883) (255) (81) (1,924) - (2,260) (983) - (4,126)
(Loss) contribution from
mining activities (6,564) (733) (7,297) (20,276) (81) 7,737 - (12,620) (3,480) (95) (23,492)
General and administrative - - - - - - - - - (7,481) (7,481)
Interest and financing - - - - - - - - - (8,015) (8,015)
Investment and other income - - - - - - - - - 9,293 9,293
Foreign exchange loss on US
dollar denominated debt - - - - - - - - - (4,720) (4,720)
Write-down of mineral
properties and fixed assets (2,505) - (2,505) (11,252) (53,450) - - (64,702) - (3,074) (70,281)
Other non-producing property
costs (115) - (115) - (2,147) - (462) (2,609) - (452) (3,176)
Foreign exchange hedging loss - - - (3,162) - - - (3,162) - - (3,162)
Income and mining taxes (27) - (27) 155 - 467 28 650 2 (649) (24)
Net (loss) earnings (9,211) (733) (9,944) (34,535) (55,678) 8,204 (434) (82,443) (3,478) (15,193) (111,058)
Capital expenditures 2,442 5,471 7,913 3,932 (544) 1,701 4,141 9,230 3,015 1,504 21,662
Identifiable assets 48,698 34,161 82,859 35,645 3,826 33,242 39,632 112,345 43,569 12,796 251,569
Information about major customers
Of the Company's total consolidated net revenue in 2001, revenue from one
customer of $29,090,000 consisted of $23,745,000 that originated from the
Bouchard-Hebert Mine, $2,842,000 that originated from the El Mochito Mine and
$2,503,000 that originated from the El Toqui Mine. Revenue from another customer
of $16,401,000 consisted of $5,719,000 that originated from the El Mochito Mine,
$2,807,000 that originated from the Bougrine Mine, $4,074,000 that originated
from the Bouchard-Hebert Mine and $3,801,000 that originated from the Nanisivik
Mine.
12. ANALYSIS OF CHANGES IN NON-CASH WORKING CAPITAL ITEMS
($000's)
---------------------------------------------------
2003 2002 2001
---------------------------------------------------
Accounts receivable - concentrate 8,376 (13,976) 8,496
Other receivables 1,271 (654) 8,631
Concentrate and materials and supplies inventory 2,541 25,200 17,390
Short-term investments - - 4,158
Prepaid expenses and other current assets (145) 183 1,058
Provisional payments for concentrate inventory
shipped and not priced (6,105) (18,108) (7,519)
Accounts payable and accrued liabilities (2,630) (2,963) 10,772
Income and mining taxes payable (129) (880) (526)
---------------------------------------------------
3,179 (11,198) 42,460
---------------------------------------------------
13. EARNINGS (LOSS) PER SHARE
Basic Earnings (Loss) per Share ("EPS") has been calculated using the
weighted-average number of shares outstanding during the year. The diluted EPS
gives effect to the exercise of all outstanding options and warrants. Diluted
earnings per common share data is not presented in 2002 and 2001, as the
exercise of options would not have been dilutive in those years.
The calculation of diluted earnings per share has been computed using
the treasury stock method which assumes that options and warrants with an
exercise price lower than the average quoted market price were exercised at the
later of the beginning of the period, or time of issue. In applying the treasury
stock method, options and warrants with an exercise price greater than the
average quoted market price of the Common Shares are not included in the
calculation of diluted earnings per share as the effect is anti-dilutive. The
average quoted market price of the Common Shares during 2003 was $0.32 (2002 -
$0.20, 2001 - $0.86).
On May 1, 2002, the Company completed a rights issue with an exercise
price of $0.20 per share. The market value of the Common Shares on April 2,
2002, the day prior to trading ex-rights was $0.37 per share. As a result of the
bonus element in the rights issue, the basic loss per share in 2002 and 2001 and
the weighted-average number of Common Shares outstanding in those years have
been adjusted retroactively as follows:
2003 2002 2001
---------------------------------------------------------------------------------------------------------------
Earnings (loss) per share - before bonus element $0.03 ($0.12) ($1.20)
Earnings (loss) per share - after bonus element $0.03 ($0.12) ($0.92)
Diluted earnings per share - before bonus element $0.03 N/A N/A
Diluted earnings per share - after bonus element $0.03 N/A N/A
(000's)
Weighted-average number of shares outstanding 211,411 159,684 92,560
Additional shares due to bonus element - 9,390 27,606
---------------------------------------------------------------------------------------------------------------
Weighted-average number of Common Shares
outstanding after bonus element 211,411 169,074 120,166
Incremental shares on assumed exercise of options and
warrants 10,259 601 20
---------------------------------------------------------------------------------------------------------------
Weighted-average number of Common Shares used for
diluted earnings per share 221,670 169,675 120,186
---------------------------------------------------------------------------------------------------------------
14. SUBSEQUENT EVENTS
a) On January 28, 2004, the Company completed the sale of 57,142,858 units
to a syndicate of underwriters at a purchase price of $0.70 per unit,
for net proceeds of $37,326,000, net of costs of issue of approximately
$2,674,000. Each unit consisted of one Common Share and one-half of one
Common Share purchase warrant. Each whole warrant entitles the holder to
acquire one Common Share at a price of $1.00 at any time until January
28, 2009. The Company plans to use the net proceeds for the development
of the Langlois mine, debt repayment, working capital and general
corporate purposes.
b) On February 16, 2004, the Company signed a letter of intent with Boliden
AB ("Boliden") to purchase all the outstanding shares of Boliden Westmin
(Canada) Limited ("BWCL"). BWCL is the owner of the Myra Falls Mine, a
zinc, copper and gold mine in British Columbia. The acquisition of BWCL
will be exclusive of the Premier Gold property and certain other assets
and liabilities of BWCL. The general terms of the proposed acquisition
include the Company issuing 18,000,000 Common Shares and 5,000,000
warrants, exercisable at $1.00 per Common Share until January 28, 2009.
CAUTIONARY NOTE
Certain statements included in this 2003 annual report, financial statements for
the period ended December 31, 2003, and management's discussion and analysis
thereon are forward-looking statements within the meaning of the United States
Private Securities Litigation Reform Act of 1995. They include estimates and
statements that describe the Company's future plans, objectives and goals,
including words to the effect that the Company or management expects a stated
condition or result to occur. Such forward-looking statements involve inherent
risks and uncertainties and other factors that may cause the actual results or
performance to differ materially from those currently anticipated in such
statements. Important factors that could cause actual results to differ
materially from those currently anticipated are described above and in the
Company's most recent Annual Report under "Management's Discussion and Analysis
of Financial Results" and Annual Report on Form 20-F under "Risk Factors" on
file with the U.S. Securities and Exchange Commission and Canadian provincial
securities regulatory authorities. The Company disclaims any obligation to
update or revise any forward-looking statements whether as a result of new
information, events or otherwise.