Exhibit 1
BREAKWATER RESOURCES LTD.
2005 ANNUAL REPORT
GOLD
COPPER
ZINC
LEAD
SILVER
UNLOCKING POTENTIAL
ASSETS
Breakwater Resources Ltd. is a Canadian-based company engaged in the
acquisition, exploration, development and mining of base metal deposits in the
Americas and North Africa. Breakwater is focused on building a world-class
diversified mining company.
MYRA FALLS
Zn Cu Ag Au
Myra Falls is an underground mine located in Strathcona-Westmin Provincial Park
in central Vancouver Island, British Columbia. The mine is linked to the port of
Campbell River by a 90 km paved road.
BOUCHARD-HEBERT
The Bouchard-Hebert mill is being left in place pending the results of
exploration activities focused on 215 claims covering 7,982 hectares.
LANGLOIS
Zn Cu Ag Au
The Langlois mine is an underground mine located 47 kilometres north-east of
Lebel-sur-Quevillon and 213 kilometres north of Val d'Or. The mine includes a
2,500 tonne per day concentrator and related infrastructure.
CARIBOU
Zn Pb Ag
The Caribou mine is being held on care and maintenance pending its sale.
BOUGRIN
The Bougrine mill is being left in place pending the results of exploration
activities focused on a lead/zinc deposit located in northern Tunisia.
EL MOCHITO
Zn Pb Ag
The El Mochito mine, located in Honduras, Central America, is in its
fifty-seventh year of production.
EL TOQUI
Zn Au
The El Toqui mine is located in Chile approximately 1,200 kilometres south of
Santiago.
MESSAGE TO SHAREHOLDERS
"ZINC CONTINUES TO LEAD BASE METALS,SHARES RESPONDING"
BASE METALS - JANUARY 22, 2006
"UNSTOPPABLE ZINC FLIES EVER HIGHER"
METALS INSIDER - APRIL 11, 2006
"LME REVIEW - FUND BUYING PUSH ZINC, COPPER TO RECORD HIGHS"
DOW JONES - APRIL 12, 2006
"COPPER, ZINC PRICE FORECASTS RAISED AT MACQUARIE BANK (UPDATE 1)"
BLOOMBERG - APRIL 13, 2006
The above is a sampling of the headlines investors in the commodities markets
are reading each day. In the face of such exuberance, it's hard to remember that
less than a year ago Breakwater operated in a different market. Although the
dark days of 2002, 2003 and 2004, where zinc averaged $0.35, $0.38 and $0.48 per
pound respectively, were in the past, the world had yet to wake up to the fact
that demand was outstripping supply. Given years of poor returns, zinc industry
participants were not spending large sums of money to bring additional zinc
mines into production. In the first quarter of 2005, the average LME official
cash price for zinc was $0.60
per pound. In the first quarter of 2006, the average LME official cash price for
zinc was $1.02. Today, April 13, 2006, the price is $1.40. In the same period
inventories on the London Metal Exchange moved from 574,050 tonnes to 273,225
tonnes. On April 10, 2006 the Economic Times (India) wrote, "The non-ferrous
metal sector has seen a dramatic shift in pecking order. Zinc, a poor cousin to
the non-ferrous family of aluminium and copper, has emerged as the best wealth
creator on the stock markets."
Notwithstanding its position as primarily a zinc producer positioned in
front of what I believed to be a market with excellent fundamentals, what also
attracted me to Breakwater was its disciplined approach to operating. It's easy
enough to make operating look easy in the face of robust prices but much more
difficult to operate when money is tight. In 2004, Breakwater spent $7.9 million
on reclamation and closure. In 2005, that number rose to $25.2 million. It is
the mark of a good operator when operations are mined from beginning to end to
the highest standards. It will stand us in good stead in future negotiations
with governments and more senior mining companies, making us the partner of
choice for both parties.
For Breakwater, 2005 represented a year of change and of consolidation.
The closures of Bouchard-Hebert in February and Bougrine in September were
balanced with a full year's production from Myra Falls and a decision to bring
Langlois into production. While capital expenditures were up considerably in
2005 to $39.0 million from $27.7 million in 2004 and $10.6 million in 2003, the
operations continue to require additional investments to unlock their full
potential. Accordingly, capital expenditures in 2006 are forecast to be $75.3
million with $9.7 million of that aimed directly at organic growth through the
exploration of our considerable land holdings in the vicinity of our operating
mines and our previously operated mines.
Breakwater's business plan is simple and focussed. We will invest in
capital projects to increase the productivity, efficiency and effectiveness of
our operations. As noted above we will increase our investment in overall
exploration and we will acquire value added projects or assets. We will do this
while maintaining production costs that will sustain the Company through most
market conditions.
Looking ahead to the balance of 2006 and into 2007, we continue to see a
strong zinc market as inventories continue to decline. Much of this improvement
has been driven by the high levels of demand growth from China. In 2003, China
accounted for 21% of global zinc demand compared to 8% in 1990. In 2005, this
number had grown to 27%.
While the markets will certainly not be without volatility, we expect that
with our well managed and professionally staffed operations and a seasoned
management team that is dedicated to the success and future growth of the
Company, we will be well positioned to enjoy robust markets for several years.
It is the efforts of our employees, combined with the support of our
shareholders, that will enable us to continue to operate profitable and safe
mines and expand our operations in a prudent manner. We wish to thank our
employees and shareholders for this continued support.
SIGNATURE
GEORGE E. PIRIE
President and Chief Executive Officer
APRIL 13, 2006
2005 HIGHLIGHTS
2005 2004 % CHANGE
- ----------------------------------------------------------------------------------------
FINANCIAL (`000s) (`000s)
NET REVENUES $ 207,574 $ 158,443 31%
NET EARNINGS 14,739 2,624 462%
CAPITAL EXPENDITURES 38,962 27,689 41%
WORKING CAPITAL 44,419 36,603 21%
LONG-TERM DEBT 4,143 1,424 191%
SHAREHOLDERS' EQUITY 162,746 141,408 15%
COMMON SHARES OUTSTANDING 380,917 363,156 5%
- ----------------------------------------------------------------------------------------
OPERATIONAL
ORE MILLED 2,468.6 2,822.2 (13)%
CONCENTRATE PRODUCTION
ZINC (TONNES) 268.7 318.2 (16)%
COPPER (TONNES) 35.4 43.9 (19)%
LEAD (TONNES) 28.7 21.6 33%
GOLD (TONNES) 4.1 5.0 (18)%
METAL IN CONCENTRATES
ZINC (TONNES) 141.3 169.9 (17)%
COPPER (TONNES) 8.1 8.4 (4)%
LEAD (TONNES) 19.2 14.3 34%
SILVER (OUNCES) 3,059.9 2,538.0 21%
GOLD (OUNCES) 76.0 56.4 35%
TOTAL CASH COSTS
PER POUND PAYABLE ZINC SOLD (US$) 0.40 0.34 18%
- ----------------------------------------------------------------------------------------
RESERVES AND RESOURCES
- --------------------------------------------------------------------------------
THE FOLLOWING TABLE LISTS BREAKWATER'S MINERAL RESERVES AND RESOURCES AS
CALCULATED BY TORBEN JENSEN, VICE PRESIDENT, ENGINEERING, BREAKWATER'S QUALIFIED
PERSON AS OF DECEMBER 31, 2005, ACCORDING TO THE "CIM STANDARDS ON MINERAL
RESOURCES AND RESERVES: DEFINITIONS AND GUIDELINES" (AUGUST, 2000). ACCORDINGLY,
THE RESOURCES HAVE BEEN CLASSIFIED AS MEASURED, INDICATED OR INFERRED AND THE
RESERVES HAVE BEEN CLASSIFIED AS PROVEN AND PROBABLE BASED ON THE MEASURED AND
INDICATED RESOURCES.
- --------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 2005 December 31, 2004
TONNES ZN PB CU AG AU Tonnes Zn Pb Cu Ag Au
(000's) (%) (%) (%) (g/t) (g/t) (000's) (%) (%) (%) (g/t) (g/t)
- ---------------------------------------------------------------------------------------------------------------------------
PROVEN AND PROBABLE
RESERVES
MYRA FALLS 6,000 6.4 - 1.1 46 1.3 6,392 6.7 - 1.1 49 1.4
BOUCHARD-HEBERT - - - - - - 99 4.9 - 0.5 26 0.7
BOUGRINE - - - - - - 110 10.7 6.0 - - -
EL MOCHITO 2,413 6.6 2.2 - 87 - 1,986 6.5 2.0 - 91 -
EL TOQUI 2,591 7.8 - - - 2.1 2,565 7.4 - - - 2.0
LANGLOIS 3,323 10.8 - 0.8 52 0.1 3,323 10.8 - 0.8 52 0.1
CARIBOU 5,057 6.5 3.4 0.8 90 - 5,057 6.5 3.4 0.8 90 -
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL 19,384 7.4 - - - - 19,532 7.4 - - - -
MEASURED AND INDICATED
RESOURCES*
MYRA FALLS 8,647 7.8 - 1.4 64 1.8 9,736 7.6 - 1.4 63 1.9
BOUCHARD-HEBERT - - - - - - 99 4.9 - 0.5 26 0.7
BOUGRINE - - - - - - 188 12.6 5.0 - - -
EL MOCHITO 3,195 8.2 2.8 - 111 - 3,140 8.2 2.7 - 112 -
EL TOQUI 3,420 8.4 - - - 1.9 3,066 8.1 - - - 2.0
LANGLOIS 4,981 11.1 - 0.8 54 0.1 4,981 11.1 - 0.8 54 0.1
CARIBOU 5,152 7.4 3.9 - 95 - 5,152 7.4 3.9 - 95 -
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL 25,395 8.5 - - - - 26,362 8.4 - - - -
* Includes proven and probable reserves but excludes inferred resources.
INFERRED
RESOURCES
MYRA FALLS 2,419 4.8 - 0.9 45 1.4 2,485 4.7 - 0.9 43 1.4
BOUCHARD-HEBERT - - - - - - - - - - - -
BOUGRINE - - - - - - 92 8.8 2.1 - - -
EL MOCHITO 2,174 7.2 4.3 - 131 - 3,221 7.3 3.7 - 106 -
EL TOQUI 3,012 7.9 - - - 0.5 2,310 7.1 - - - 0.9
LANGLOIS 1,255 9.7 - 0.5 40 0.1 1,255 9.7 - 0.5 40 0.1
CARIBOU 4,163 6.7 3.2 - 98 - 4,163 6.7 3.2 - 98 -
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL 13,023 7.0 - - - - 13,526 6.8 - - -
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion of the financial condition and results of operations of
Breakwater Resources Ltd. prepared as of March 2, 2006, constitutes management's
review of the factors that affected the Company's financial and operating
performance for the year ended December 31, 2005, and factors reasonably
expected to impact on future operations and results. The reporting currency is
Canadian dollars. All amounts disclosed are in Canadian dollars unless otherwise
stated.
The Company is a base metals mining company. It produces zinc, lead, copper and
gold concentrates. During 2005, the Company's concentrate production was derived
from two mines located in Canada, one each in British Columbia and Quebec; and a
mine located each in Chile, Honduras and Tunisia. Its mine in Quebec, the
Bouchard-Hebert mine, was closed in February 2005 and its mine in Tunisia was
closed in September 2005; both due to depletion of mineral reserves. The Company
also owns base metal and gold exploration properties in Canada, Honduras,
Tunisia and Chile.
OVERVIEW
o Breakwater realized net earnings of $14.7 million or $0.04 per share in
2005 compared with $2.6 million or $0.01 per share in 2004, a $12.1 million
increase. These results were generated from a realized zinc price of
US$1,297 per tonne of zinc compared with US$1,035 per tonne in 2004. This
compares with a significantly higher current price of US$2,372 per tonne.
Included in the 2005 net earnings was an amount of $6.5 million, set up to
recognize future income tax assets at El Mochito and El Toqui. This amount
was offset by an $8.1 million charge against Nanisivik for higher than
estimated costs for reclamation and closure of that mine.
o Gross sales revenue increased by 30% to $313.0 million, a new high, from
$240.3 million in the prior year.
o The contribution from mining activities was $28.0 million compared with
$25.7 million in 2004.
o Reclamation and closure activities, and reclamation security funding
consumed $31.9 million of the Company's cash, $25.2 million on actual
reclamation work and severance payments and $6.7 million for reclamation
security deposits.
o The development of Langlois was announced in November 2005 with commercial
production expected from the mine by mid-2007.
o Breakwater announced a mineral resource for the El Toqui mine's Concordia
deposit of 1.87 million tonnes grading 10.0 percent zinc, 5.2 percent lead
and 68 grams of silver per tonne. Breakwater is working towards bringing
Concordia into production in 2007.
o In May 2005, the Company entered into a contract with a customer whereby
the customer made a prepayment of US$5.0 million against future deliveries
of zinc concentrate for the years 2005 through to 2009. The facility was
assigned to a third party to whom Breakwater has issued eight promissory
notes, each for US$625,000, plus interest. The prepayment facility is
repayable in eight tranches, one in each of the consecutive six month
periods commencing July 1, 2005.
o In August 2005, the Company entered into a gold loan facility with Natexis
Banques Populaires of France whereby the Company received US$10.0 million
gold equivalent (sufficient gold was borrowed and then sold at the
prevailing spot price of $431 per ounce to provide the equivalent US dollar
value of the Facility). The funds were used for capital investment and
working capital requirements at Myra Falls.
o In December 2005, the Company entered into a Royalty Agreement
("Agreement") with Red Mile Resources No. 4 Limited Partnership ("Red
Mile") whereby the Company sold a "Basic Royalty" on a portion of the
payable zinc production, over the life of the Myra Falls Mine. The Company
received cash of $56.5 million which included royalty income of $50.5
million and indemnity fees and interest of $6.0 million. The royalty income
is shown as Royalty Obligation on the balance sheet and will attract a
level interest rate over the life of the obligation that will be recorded
as interest expense. The fees and interest received will be brought into
income over the life of the agreement. $50.5 million of the funds received
were placed with a financial institution, for which the Company took back a
restricted promissory note. Interest earned from the promissory note and a
portion of the principal
1
must be used to fund the expected Basic Royalty payments. The remaining
funds of $6.0 million will be used for working capital and capital
requirements at the Myra Falls Mine. (See note 10 of the consolidated
financial statements for details).
OUTLOOK
Our business plan is focused. In 2006 we plan to:
o Invest in capital projects to increase the productivity, efficiency
and effectiveness of our operations;
o Increase the investment in overall exploration;
o Advance mine exploration and development to increase reserves and
resources, both quantitatively and qualitatively;
o Advance the Langlois mine and Concordia projects to commercial
production by mid-2007; and
o Acquire value added projects or assets.
Our production projections for 2006 are:
- ------------- ---------------------------------
(payable)
- ------------- ---------------------------------
Zinc 240,100,000 pounds
- ------------- ---------------------------------
Copper 18,700,000 pounds
- ------------- ---------------------------------
Lead 20,500,000 pounds
- ------------- ---------------------------------
Silver 1,889,500 ounces
- ------------- ---------------------------------
Gold 59,600 ounces
- ------------- ---------------------------------
The projections above are based on the following mine site production forecasts:
- ------------------------------- --------------- -------------- -------------- ---------------
FORECAST 2006 MYRA FALLS EL MOCHITO EL TOQUI ALL SITES
- ------------------------------- --------------- -------------- -------------- ---------------
Ore Milled (tonnes) 1,000,000 650,000 515,600 2,165,600
- ------------------------------- --------------- -------------- -------------- ---------------
Zinc (%) 6.8 6.6 6.1 6.5
- ------------------------------- --------------- -------------- -------------- ---------------
Copper (%) 1.1 n/a n/a n/a
- ------------------------------- --------------- -------------- -------------- ---------------
Lead (%) 0.5 1.9 n/a n/a
- ------------------------------- --------------- -------------- -------------- ---------------
Gold (g/t) 1.4 n/a 3.0 n/a
- ------------------------------- --------------- -------------- -------------- ---------------
Silver (g/t) 52.7 88.0 5.6 n/a
- ------------------------------- --------------- -------------- -------------- ---------------
Concentrate Production
- ------------------------------- --------------- -------------- -------------- ---------------
Zinc (tonnes) 111,100 74,600 57,000 242,700
- ------------------------------- --------------- -------------- -------------- ---------------
Copper (tonnes) 34,300 n/a n/a 34,300
- ------------------------------- --------------- -------------- -------------- ---------------
Lead (tonnes) 900 14,400 n/a 15,300
- ------------------------------- --------------- -------------- -------------- ---------------
Gold (tonnes) 56 n/a 4,100 4,156
- ------------------------------- --------------- -------------- -------------- ---------------
Payable Metal
- ------------------------------- --------------- -------------- -------------- ---------------
Zinc (pounds) 114,900,000 73,200,000 52,000,000 240,100,000
- ------------------------------- --------------- -------------- -------------- ---------------
Copper (pounds) 18,700,000 n/a n/a 18,700,000
- ------------------------------- --------------- -------------- -------------- ---------------
Lead (pounds) n/a 20,500,000 n/a 20,500,000
- ------------------------------- --------------- -------------- -------------- ---------------
Silver (ounces) 781,600 1,100,000 7,900 1,889,500
- ------------------------------- --------------- -------------- -------------- ---------------
Gold (ounces) 22,100 n/a 37,500 59,600
- ------------------------------- --------------- -------------- -------------- ---------------
CAPITAL EXPENDITURES
Capital expenditures for Breakwater's operations are planned to be $75.3 million
in 2006. Of this amount the bulk of funds are related to the development of
Langlois, the improvements to Myra Falls' mine and
2
mill, and upgrading both mobile and stationary equipment at Myra Falls. The
balance will be spent at the other mines and for exploration.
- ----------------------------------------- --------------------
CAPITAL EXPENDITURES ($ millions) 2006 BUDGET
- ----------------------------------------- --------------------
Myra Falls $24.1
- ----------------------------------------- --------------------
El Mochito $9.1
- ----------------------------------------- --------------------
El Toqui $9.0
- ----------------------------------------- --------------------
Langlois $23.4
- ----------------------------------------- --------------------
Exploration* $9.7
- ----------------------------------------- --------------------
TOTAL CAPITAL $75.3
- ----------------------------------------- --------------------
*This amount is more fully described below in the exploration table.
EXPLORATION
It is expected that Breakwater will spend $15.1 million on exploration in 2006.
The breakdown of the exploration is set forth in the following table:
- ---------------------------------------- ----------------
CAPITALIZED EXPLORATION ($ MILLIONS)
- ---------------------------------------- ----------------
El Mochito (US) 1.1
El Toqui (US) 4.0
Tunisia (US) 0.5
Langlois 3.1
- ---------------------------------------- ----------------
TOTAL CAPITALIZED EXPLORATION 9.7
- ---------------------------------------- ----------------
EXPENSED EXPLORATION
- ---------------------------------------------------------
Bouchard-Hebert 2.9
Myra Falls 2.5
- ---------------------------------------- ----------------
TOTAL EXPENSED EXPLORATION 5.4
- ---------------------------------------- ----------------
TOTAL EXPLORATION 15.1
- ---------------------------------------- ----------------
SELECTED ANNUAL INFORMATION
The consolidated financial statements of the Company have been prepared in
accordance with Canadian generally accepted accounting principles (GAAP).
STATEMENT OF OPERATIONS AND DEFICIT DATA Years ended December 31,
------------------------------------------------------
2005 2004 2003
----------------- ----------------- ----------------
($ million's except for per share numbers and weights)
Tonnes of Concentrate Sold 367,630 336,901 378,164
(Zinc, Copper, Lead and Gold)
Gross Sales Revenue 313.0 240.3 207.6
Treatment and Marketing Costs 105.4 81.9 83.6
Net Revenue 207.6 158.4 124.0
Total Operating Costs 179.6 132.7 132.8
Contribution (Loss) from Mining Activities 28.0 25.7 (8.8)
Net Earnings 14.7 2.6 0.7
Earnings per Common Share 0.04 0.01 0.00
Diluted Earnings per Common Share 0.04 0.01 0.00
Cash Provided by Operating Activities(1) 19.5 29.3 15.5
Capital Expenditures 39.0 27.7 10.6
Weighted-Average Number of
Common Shares Outstanding (000's) 369,190 353,508 211,411
Number of Common Shares Outstanding (000's) 380,917 363,156 285,790
(1) Before changes in non-cash working capital items (see non-GAAP
reconciliation below).
3
BALANCE SHEET DATA As at December 31,
------------------------------------
2005 2004
----------------- ------------------
Working Capital 44.4 36.6
Total Assets 357.2 287.5
Total Debt 18.7 1.7
Total Long-Term Liabilities 121.9 65.8
Shareholders' Equity 162.7 141.4
Capital Stock & Warrants 344.1 335.0
SENSITIVITY TO METAL PRICES AND EXCHANGE RATES
Breakwater's cash flow and common share price are highly sensitive to the price
of zinc. The following table illustrates the sensitivity of cash flow to changes
in the various metal prices and in the US$/C$ exchange rate based on production
estimates for 2006 and on a US$/C$ exchange rate of $0.85/$1.00. Each of the
sensitivities assumes the other prices and the exchange rate are held constant.
- -------------------------------------------------------------- -----------------
CHANGE SENSITIVITIES
(C$ million)
- -------------------------------------------------------------- -----------------
Zinc (US$0.01/pound) 1.8
- -------------------------------------------------------------- -----------------
Lead (US$0.01/pound) 0.2
- -------------------------------------------------------------- -----------------
Copper (US$0.01/pound) 0.2
- -------------------------------------------------------------- -----------------
Silver (US$0.10/ounce) 0.1
- -------------------------------------------------------------- -----------------
Gold (US$10.00/ounce) 0.5
- -------------------------------------------------------------- -----------------
Exchange rate (US$0.01/C$1.00)* 1.7
- -------------------------------------------------------------- -----------------
*When the Canadian dollar weakens against the US dollar cash flow would
increase.
SENSITIVITY TO SMELTER TREATMENT CHARGES
Breakwater sells zinc, lead, copper and gold concentrates to smelters in various
parts of the world including Europe, Asia and the Americas. Smelters charge the
Company for treating the zinc, lead, copper and gold concentrates. Treatment
charges vary according to world demand for concentrates. In 2006 the zinc
concentrate market will be undersupplied. Consequently base treatment charges
will decline. However, this reduction will be offset by the effect of
escalators, a form of price participation, built into our smelter contracts. The
net effect is that realized treatment charges are expected to increase in 2006,
assuming metal prices remain strong.
STATEMENT OF OPERATIONS REVIEW - 2005 AND 2004
GROSS SALES REVENUE
Gross sales revenue from the sales of zinc, lead, copper and gold concentrates
increased by 30 percent to $313.0 million. Higher metal prices and increased
concentrate sales, 367,630 tonnes in 2005 compared with 336,901 tonnes in 2004,
accounted for this increase, which was partially offset by the stronger Canadian
dollar and a mark-to-market loss on hedge positions of $2.9 million. The higher
tonnage sold in 2005 was drawn from inventories that built up during 2004 and
the sale of the final concentrate production from the Bouchard-Hebert and
Bougrine mines, both of which closed in 2005.
Total concentrate production in 2005 was 336,896 tonnes compared with 388,736
tonnes in 2004.
The recorded sales of concentrate can fluctuate from period to period due to the
Company's revenue recognition policy (See note 1 to the consolidated financial
statements). The amount of concentrate recorded as sold in a given period can
vary due to production levels, shipping volumes, ship schedules, price
determination, and risk and title transfer terms with our various customers. The
recognition of final sales can be as much as six months after the date of
production.
4
- ------------------------------------------------------------------------ ------------------ -----------------
GROSS SALES REVENUE BY METAL ($ millions) 2005 2004
- ------------------------------------------------------------------------ ------------------ -----------------
Zinc (US) 156.0 136.3
- ------------------------------------------------------------------------ ------------------ -----------------
Copper (US) 39.2 9.2
- ------------------------------------------------------------------------ ------------------ -----------------
Lead (US) 23.5 11.9
- ------------------------------------------------------------------------ ------------------ -----------------
Gold (US) 23.1 16.8
- ------------------------------------------------------------------------ ------------------ -----------------
Silver (US) 18.1 10.4
- ------------------------------------------------------------------------ ------------------ -----------------
Hedging Mark-to-Market (2.5) 0.1
- ------------------------------------------------------------------------ ------------------ -----------------
TOTAL GROSS SALES REVENUE (US$) 257.4 184.7
- ------------------------------------------------------------------------ ------------------ -----------------
Realized exchange rate (C$/US$) yearly average 1.2159 1.3010
- ------------------------------------------------------------------------ ------------------ -----------------
TOTAL GROSS SALES REVENUE (C$) 313.0 240.3
- ------------------------------------------------------------------------ ------------------ -----------------
- ------------------------------------------------------------------------ ------------------ -----------------
SALES BY CONCENTRATE (tonnes) 2005 2004
- ------------------------------------------------------------------------ ------------------ -----------------
Zinc 273,267 292,573
- ------------------------------------------------------------------------ ------------------ -----------------
Lead 40,685 22,087
- ------------------------------------------------------------------------ ------------------ -----------------
Copper 52,441 22,236
- ------------------------------------------------------------------------ ------------------ -----------------
Gold 1,237 5
- ------------------------------------------------------------------------ ------------------ -----------------
TOTAL 367,630 336,901
- ------------------------------------------------------------------------ ------------------ -----------------
- ------------------------------------------------------------------------ ------------------ -----------------
SALES BY PAYABLE METAL 2005 2004
- ------------------------------------------------------------------------ ------------------ -----------------
Zinc - tonnes 120,330 131,831
- ------------------------------------------------------------------------ ------------------ -----------------
Lead - tonnes 23,959 13,256
- ------------------------------------------------------------------------ ------------------ -----------------
Copper - tonnes 11,059 3,194
- ------------------------------------------------------------------------ ------------------ -----------------
Gold - ounces 51,720 40,211
- ------------------------------------------------------------------------ ------------------ -----------------
Silver - ounces 2,505,126 1,600,407
- ------------------------------------------------------------------------ ------------------ -----------------
- ------------------------------------------------------------------------ ------------------ -----------------
REALIZED PRICES & EXCHANGE RATE 2005 2004
- ------------------------------------------------------------------------ ------------------ -----------------
Zinc (US$/tonne) 1,297 1,035
- ------------------------------------------------------------------------ ------------------ -----------------
Lead (US$/tonne) 983 900
- ------------------------------------------------------------------------ ------------------ -----------------
Copper (US$/tonne) 3,543 2,852
- ------------------------------------------------------------------------ ------------------ -----------------
Gold (US$/ounce) 445 414
- ------------------------------------------------------------------------ ------------------ -----------------
Silver (US$/ounce) 7.22 6.52
- ------------------------------------------------------------------------ ------------------ -----------------
Exchange rate (C$/US$) yearly average 1.2159 1.3010
- ------------------------------------------------------------------------ ------------------ -----------------
- ------------------------------------------------------------------------ ------------------ -----------------
AVERAGE LME METAL PRICES & EXCHANGE RATE 2005 2004
- ------------------------------------------------------------------------ ------------------ -----------------
Zinc (US$/tonne) 1,381 1,048
- ------------------------------------------------------------------------ ------------------ -----------------
Lead (US$/tonne) 975 886
- ------------------------------------------------------------------------ ------------------ -----------------
Copper (US$/tonne) 3,678 2,864
- ------------------------------------------------------------------------ ------------------ -----------------
Gold (US$/ounce) 445 409
- ------------------------------------------------------------------------ ------------------ -----------------
Silver (US$/ounce) 7.32 6.65
- ------------------------------------------------------------------------ ------------------ -----------------
Exchange rate (C$/US$) yearly average 1.2111 1.3008
- ------------------------------------------------------------------------ ------------------ -----------------
Breakwater periodically hedges against fluctuations in metal prices and foreign
exchange with the use of forward sales or options. The Company does not apply
hedge accounting. Realized and mark-to-market gains or losses are included in
gross sales revenue at the end of each period. The Company recorded a
mark-to-market loss from hedging of US$2.6 million in 2005 compared with a gain
of US$0.1 million in 2004. These are non-cash amounts that are reversed when the
positions are closed as per the terms of the contract. The table below details
the hedge positions outstanding at December 31, 2005.
- ------------------ --------------------- --------------------- --------------------- -----------------------
METAL POSITION QUANTITY STRIKE PRICE STRIKE DATE
- ------------------ --------------------- --------------------- --------------------- -----------------------
Gold Call 25,000 ounces US$455 Dec 2006
- ------------------ --------------------- --------------------- --------------------- -----------------------
Silver Call 1,050,000 ounces US$7.50 Jan-Jun 2006
- ------------------ --------------------- --------------------- --------------------- -----------------------
NET REVENUE
Net revenue, the value of concentrates sold after deducting treatment charges,
freight and marketing costs, increased by 31 percent to $207.6 million in 2005
from $158.4 million in 2004. Total treatment charges, the amount paid to
smelters for refining concentrates to produce metal, and shipping and marketing
costs
5
were 29 percent higher at $105.4 million in 2005 compared with $81.9 million in
2004. On a per tonne of concentrate basis these costs increased to $287 per
tonne sold in 2005 compared with $243 per tonne in 2004. Despite lower average
base treatment charges in 2005, higher metal prices triggered price escalators
which resulted in higher realized treatment charges. Higher freight rates
contributed to higher unit costs as well. These factors were partially offset by
the stronger Canadian dollar as all these costs are incurred in US dollars.
OPERATING COSTS
Direct operating costs were 42 percent higher in 2005 at $144.3 million compared
with $101.9 million in 2004, as nine percent more tonnes of concentrate were
sold and the average cost per tonne of concentrate sold increased to $393 in
2005 from $303 in 2004. The increase in the average cost per tonne was due to a
greater percentage of higher cost copper and gold concentrates being sold in
2005 compared with 2004, the inclusion of a full year of production from Myra
Falls in 2005 (only half a year in 2004), the loss of almost a full year of
production from Bouchard-Hebert and a general increase in the cost of mine site
labour and consumables.
- --------------------------- ------------------------------------------- -------------------------------------------
DIRECT OPERATING COSTS 2005 2004
- --------------------------- ------------------------------------------- -------------------------------------------
CONCENTRATE COST PER CONCENTRATE COST PER
AGGREGATE SOLD TONNE AGGREGATE SOLD TONNE
($ millions) (tonnes) ($) ($ millions) (tonnes) ($)
- --------------------------- -------------- --------------- ------------ ------------ -------------- ---------------
Myra Falls 67.1 116,139 578 13.0 24,616 528
- --------------------------- -------------- --------------- ------------ ------------ -------------- ---------------
El Mochito 29.8 103,066 289 25.7 85,579 300
- --------------------------- -------------- --------------- ------------ ------------ -------------- ---------------
El Toqui 22.2 59,355 374 13.6 49,294 275
- --------------------------- -------------- --------------- ------------ ------------ -------------- ---------------
Bougrine 14.8 58,255 254 17.6 55,780 315
- --------------------------- -------------- --------------- ------------ ------------ -------------- ---------------
Bouchard-Hebert 10.4 30,815 337 32.0 121,632 263
- --------------------------- -------------- --------------- ------------ ------------ -------------- ---------------
TOTAL 144.3 367,630 393 101.9 336,901 303
- --------------------------- -------------- --------------- ------------ ------------ -------------- ---------------
The total cash cost per pound of payable zinc sold, which includes all mine site
cash costs, treatment charges, ocean freight and other marketing costs, net of
by-product credits, was US$0.39 in 2005 compared with US$0.32 in 2004 (see
non-GAAP reconciliation of the total cash cost per pound of payable zinc sold
below). The increase was due to higher treatment charges and freight costs, the
inclusion of the Myra Falls mine and increased prices for mine site consumables
like fuel and steel grinding media.
RECLAMATION AND CLOSURE COSTS
Reclamation and closure costs in 2005 were $12.1 million compared with $4.9
million in 2004. These costs include the accretion of the Company's estimated
future reclamation obligations and any adjustments to reclamation obligations at
closed mines where better information has caused Breakwater to revise its
previous estimates. In 2005, $8.1 million of adjustments were made to the
obligations related to the Nanisivik mine as the work required was significantly
more than originally anticipated.
OTHER EXPENSES (INCOME)
- -------------------------------------------------------------------------- ----------------- ----------------
OTHER EXPENSES (INCOME) ($ millions) 2005 2004
- -------------------------------------------------------------------------- ----------------- ----------------
General and administrative 8.7 9.5
- -------------------------------------------------------------------------- ----------------- ----------------
Stock-based compensation 0.8 1.3
- -------------------------------------------------------------------------- ----------------- ----------------
Interest and financing 1.3 0.5
- -------------------------------------------------------------------------- ----------------- ----------------
Investment and other income (2.6) (0.8)
- -------------------------------------------------------------------------- ----------------- ----------------
Loss on gold loan 1.8 -
- -------------------------------------------------------------------------- ----------------- ----------------
Other foreign exchange (gain) loss (0.5) 0.4
- -------------------------------------------------------------------------- ----------------- ----------------
Foreign exchange loss on US dollar denominated debt 0.3 1.8
- -------------------------------------------------------------------------- ----------------- ----------------
TOTAL OTHER EXPENSES (INCOME) 9.8 12.7
- -------------------------------------------------------------------------- ----------------- ----------------
Exploration costs 0.5 -
- -------------------------------------------------------------------------- ----------------- ----------------
Write-down of mineral property and fixed assets 0.9 1.2
- -------------------------------------------------------------------------- ----------------- ----------------
Other non-producing property costs 9.0 8.6
- -------------------------------------------------------------------------- ----------------- ----------------
Income and mining taxes (recovery) (7.0) 0.6
- -------------------------------------------------------------------------- ----------------- ----------------
TOTAL EXPENSE (INCOME) 13.2 23.1
- -------------------------------------------------------------------------- ----------------- ----------------
6
GENERAL AND ADMINISTRATIVE
General and administrative costs decreased by $0.8 million to $8.7 million in
2005. The reduction was due to: lower capital taxes of $0.6 million; a reduction
in the executive incentive plan of $0.2 million; lower costs related to the
Company's corporate development activities of $0.2 million; lower shareholder
communications costs of $0.1 million; and lower salaries and benefits of $0.1
million; partially offset by higher audit and consulting fees related to
compliance with the new audit and public reporting requirements ($0.4 million).
STOCK-BASED COMPENSATION
Stock-based compensation was $0.8 million in 2005 compared with $1.3 million in
2004; this non-cash expense was lower in 2005 as fewer stock options were
granted. (See notes 1 and 13 (f) to the consolidated financial statements.)
INTEREST AND FINANCING COSTS
Interest costs were slightly higher in 2005 at $1.3 million compared with $0.5
million in 2004. The 2005 cost included interest and costs for the Red Mile
royalty obligations, the May 2005 concentrate prepayment and the August 2005
gold loan. Costs in 2004 were primarily for interest on the credit facility that
was fully repaid at the end of January 2004.
INVESTMENT AND OTHER INCOME
Investment and other income was $2.6 million in 2005 compared with $0.8 million
in 2004. The increase in 2005 was mainly due to the interest and fees earned on
the Red Mile transactions of $0.2 million, the gain of $0.8 million realized on
the sale of Breakwater's holdings in Yukon Zinc Corporation, the gain realized
from the disposal of various fixed assets of $0.6 million and interest earned on
higher banks balances of $0.2 million.
LOSS ON REMEASUREMENT OF GOLD LOAN
The Company recorded a non-cash charge of $1.8 million related to the
marking-to-market of the gold loan that was drawn in August 2005. The gold loan
is marked-to-market at the end of each quarter to reflect the spot price of
gold. The mark-to-market amount is reversed as the gold is repaid from
Breakwater's gold production.
FOREIGN EXCHANGE (GAIN) LOSS ON US DOLLAR DENOMINATED DEBT
During 2005, the Company recorded a gain of $0.5 million on its US dollar
denominated debt as the Canadian dollar strengthened during the year. In 2004, a
loss of $0.4 million was recorded in January before the US dollar denominated
debt was repaid at the end of that month.
OTHER FOREIGN EXCHANGE LOSS
Breakwater's other foreign exchange loss was $0.3 million in 2005 compared with
a loss of $1.8 million in 2004. This highlights the impact of the appreciation
of the Canadian dollar on the Company's US dollar bank balances. In 2005, the
Company had less funds invested in US dollar accounts and the Canadian dollar
had only marginally strengthened during the year.
7
WRITE-DOWN OF MINERAL PROPERTIES AND FIXED ASSETS
In 2005, the book value of certain fixed assets at Nanisivik was written-down by
$0.7 million. Equipment to be used in the final reclamation activities may be
left at the site if it proves uneconomic to remove it. Accordingly, the
write-down noted above properly values this equipment and its probable resale or
salvage values, if any. The balance of the equipment was shipped out for sale or
transfer to other Company sites in October. In 2004, Breakwater wrote off its
investment of $1.2 million in the exploration properties Heninga Lake in Nunavut
and Bousquet Ferris in Quebec, as there was no further work planned at these
sites.
OTHER NON-PRODUCING PROPERTY COSTS
In 2005, other non-producing property costs were $9.0 million, which included
the care and maintenance costs and holding costs for Caribou ($1.8 million),
Langlois ($0.5 million), Bouchard-Hebert ($3.5 million), Bougrine ($0.8 million)
and Nanisivik ($2.5 million). In 2004, other non-producing property costs were
$8.6 million comprising $1.6 million for Caribou, $0.1 million for Langlois and
$6.8 million for Nanisivik. Costs were higher in 2005 due to the closures of
Bouchard-Hebert and Bougrine. With the closure work at Nanisivik almost complete
and the re-development of Langlois under way other non-producing property costs
should be substantially less in 2006.
CASH PROVIDED FROM OPERATING ACTIVITIES (BEFORE CHANGES IN NON-CASH
WORKING CAPITAL ITEMS) - 2005 AND 2004
Cash provided from operating activities (before changes in non-cash working
capital items) was $19.5 million in 2005 compared with $29.3 million in 2004.
- --------------------------------------------------------------------- ------------------ ----------------
($ millions) 2005 2004
- --------------------------------------------------------------------- ------------------ ----------------
Contribution from mining activities 27.9 25.7
- --------------------------------------------------------------------- ------------------ ----------------
Other (expenses) income (9.8) (12.7)
- --------------------------------------------------------------------- ------------------ ----------------
Other non-producing property (costs) (9.0) (8.6)
- --------------------------------------------------------------------- ------------------ ----------------
Income and mining taxes recovery (expense) 7.0 (0.6)
- --------------------------------------------------------------------- ------------------ ----------------
Exploration (costs) (0.5) 0.0
- --------------------------------------------------------------------- ------------------ ----------------
Write-down of properties (0.9) (1.2)
- --------------------------------------------------------------------- ------------------ ----------------
NET EARNINGS 14.7 2.6
- --------------------------------------------------------------------- ------------------ ----------------
Payment of reclamation and closure cost accruals (25.2) (7.9)
- --------------------------------------------------------------------- ------------------ ----------------
Payment for employee future benefits (2.8) (1.0)
- --------------------------------------------------------------------- ------------------ ----------------
Non-cash expenses 32.8 35.6
- --------------------------------------------------------------------- ------------------ ----------------
CASH PROVIDED FROM OPERATING ACTIVITIES (BEFORE CHANGES IN NON-CASH
WORKING CAPITAL ITEMS) 19.5 29.3
- --------------------------------------------------------------------- ------------------ ----------------
(See non-GAAP reconciliation below)
LIQUIDITY AND FINANCIAL POSITION REVIEW
WORKING CAPITAL
Working capital at the end of 2005 was $44.4 million, a $7.8 million increase
over the $36.6 million at the end of 2004. Current assets in total were
unchanged and current liabilities decreased by $7.8 million during the year.
CURRENT ASSETS
Total current assets were unchanged at $116.9 million at the end of 2005.
Increases in individual line items were offset by decreases in others.
The increases were as follows:
o $6.5 million due to the set up of a future income tax asset
related to El Mochito and El Toqui;
o $6.1 million in cash and cash equivalents reflecting improved
metal prices, the completion of the Red Mile transaction and the
flow-through share issue in December 2005;
8
o $2.9 million in other receivables as the second $3.0 million
payment for the Red Mile transaction was due February 15, 2006;
and
o $0.5 million in restricted cash for additional reclamation
security posted in 2005.
The decreases were as follows:
o $3.6 million and $8.7 million, respectively, in accounts
receivable concentrate and concentrate inventory due to the final
sales of concentrate at both Bougrine and Bouchard-Hebert;
o $2.5 million in materials and supplies inventory with the closure
of Bougrine and Bouchard-Hebert; and,
o $1.1 million in prepaid expenses due mainly to a reduction in
prepaid freight for concentrate shipments.
CURRENT LIABILITIES
Current liabilities decreased by $7.8 million to $72.5 million at the end of
2005.
The decreases were as follows:
o $2.8 million for accounts payable and accrued liabilities, and
$8.1 million for provisional payments for concentrate inventory
shipped, reflecting the closure of Bougrine and Bouchard-Hebert;
and
o $10.9 million for the current portion of reclamation, closure
cost accruals and other environmental obligations as less
reclamation work will be required in 2006 as the majority of the
work at Nanisivik was completed in 2005. Income and mining taxes
payable decreased by $0.3 million.
The decreases were offset by an increase in short-term debt of $14.3
million as the Company entered into a concentrate prepayment facility and a
gold loan facility in 2005.
DEFERRED FINANCING
Deferred financing fees are costs related to both the concentrate prepayment
facility and the gold loan facility that will be expensed over the term of those
facilities.
RESTRICTED CASH AND RECLAMATION DEPOSITS
At December 31, 2005, Breakwater had a total of $10.7 million in restricted cash
($3.9 million) and reclamation deposits ($6.8 million).
Of the restricted cash on deposit, $2.4 million is with the Province of Quebec
and represents funds that will be returned to Breakwater over the next 12 months
as the reclamation work at Bouchard-Hebert, related to those funds, is
completed; $1.3 million is held by Natexis Banques Popularies as a cash reserve
against the outstanding gold loan (this amount will be returned upon the final
gold loan payment scheduled at the end of August 2006) and $0.2 million supports
a letter of credit issued to the Nunavut government related to the operating
permit for the Nanisivik mine.
Of the $6.8 million of reclamation deposits, $0.7 million are additional funds
deposited with the Province of Quebec for security for future reclamation, $6.0
million is held by the Province of New Brunswick as reclamation security for the
Caribou mine (these funds will be returned to the Company on the completion of
the sale of Caribou to Blue Note Metals Inc.), and $0.1 million is held by the
British Columbia government in support of a park use permit at the Myra Falls
mine.
RESTRICTED CASH AND RECLAMATION DEPOSITS
- -------------------------------------- ------------------------------ ------------- ------------------------
JURISDICTION LOCATION $ MILLIONS PURPOSE
- -------------------------------------- ------------------------------ ------------- ------------------------
Province of Quebec Bouchard-Hebert & Langlois 3.1 Reclamation Security
- -------------------------------------- ------------------------------ ------------- ------------------------
Province of New Brunswick Caribou 6.0 Reclamation Security
- -------------------------------------- ------------------------------ ------------- ------------------------
Natexis Banques Popularies Gold Loan 1.3 Cash Reserve
- -------------------------------------- ------------------------------ ------------- ------------------------
Province of British Columbia Myra Falls 0.1 Park Use Permit
- -------------------------------------- ------------------------------ ------------- ------------------------
Dept. of Indian & Northern Affairs Nanisivik 0.2 Operating Permit
- -------------------------------------- ------------------------------ ------------- ------------------------
TOTAL 10.7
- -------------------------------------- ------------------------------ ------------- ------------------------
9
On January 31, 2006, the Company provided a Safe Keeping Agreement supported
with a Guaranteed Investment Certificate in the amount of $13.4 million to the
British Columbia government to satisfy the environmental security requirements
at the Myra Falls mine.
LONG-TERM INVESTMENTS
The Company acquired the Taseko Mines Limited debenture with the purchase of
Boliden Westmin (Canada) Limited. As this is considered a long-term asset it is
carried at cost, $5.6 million, which was the estimated fair value at the time of
acquisition (See note 7 of the consolidated financial statements.)
RESTRICTED PROMISSORY NOTE
The Company held restricted promissory notes at the end of 2005 of $62.5 million
compared with $11.7 million at the end of 2004. The 2005 amount comprises $11.7
million for the restricted promissory note related to the 2004 Red Mile
transaction and $50.5 million for the restricted promissory note related to the
2005 Red Mile transaction. The interest earned and a portion of the principal of
these restricted promissory notes will be used to meet the company's Red Mile
transaction royalty obligation. (See note 10 to the consolidated financial
statements.)
DEFERRED INCOME
Deferred income was $6.8 million at the end of 2005 compared with $1.8 million
at the end of 2004. $5.5 million relates to the indemnity agreement fees and
interest that the Company received in relation to the Red Mile transactions in
2004 and 2005; these amounts will be brought into income over the lives of the
two agreements. (See note 10 to the consolidated financial statements.) The
remaining balance in deferred income is the advance of a non-refundable royalty
payment (US$1.0 million) received on the sale of the Lapa properties in June
2003. This amount will be taken into revenue as earned when the Lapa properties
are put into production.
LONG-TERM LEASE OBLIGATIONS
Long-term lease obligation of $1.0 million at the end of 2005 represents lease
obligations for equipment at the Myra Falls mine.
ROYALTY OBLIGATION
The Royalty Obligation of $62.5 million relates to the royalty amounts received
from the 2004 ($11.7 million) and 2005 ($50.5 million) Red Mile transactions.
(See note 10 to the consolidated financial statements.)
EMPLOYEE FUTURE BENEFITS
With the acquisition of the Myra Falls mine, the Company assumed the obligations
of a defined benefit plan for the employees of that mine. The liability at
December 31, 2005 was $5.4 million down from $6.4 million at the end of 2004.
(See note 12 to the consolidated financial statements.)
DEBT
Total debt was $18.7 million at December 31, 2005, compared with $1.7 million at
the end of 2004. The Company entered into a concentrate prepayment contract (the
"Prepayment Facility") with a customer in May 2005 whereby the customer advanced
the Company US$5.0 million against future deliveries of zinc concentrate. The
Prepayment Facility is repayable in eight equal installments. One installment is
due in each six month period commencing with the July 1, 2005 to December 31,
2005 period. As at December 31, 2005 one repayment had been made.
10
In August 2005, the Company completed a Gold Based Pre-production Advance
Facility (the "Facility"). The lender of the Facility was Natexis Banques
Popularies of France. Under the terms of the Facility, the Company received
US$10.0 million gold equivalent (sufficient gold was borrowed and then sold at
the prevailing spot price of $431 per ounce to provide the dollar value of the
Facility). The term of the Facility is 13 months with six principal payments
commencing October 2005 and ending August 2006. The principal repayments will be
in the form of gold. The interest rate is at the fixed Gold Base Rate of 0.4
percent plus 2.5 percent and paid monthly in arrears in US dollars. The funds
were used for capital investment and working capital requirements at Myra Falls.
Security for the Facility is a charge on Myra Falls' concentrate inventories and
related smelter accounts receivable; an assignment of certain smelting contracts
for the Myra Falls mine production; a cash collateral account; and, unsecured
guarantees of the Company and NVI Holdings Ltd., a wholly-owned subsidiary. As
at December 31, 2005 one repayment had been made, a second repayment was made on
January 3, 2006. (See note 9 to the consolidated financial statements.)
RECLAMATION AND CLOSURE COST ACCRUAL
Reclamation and closure costs represent the Company's obligation for reclamation
and severance costs accrued for its mine sites. At December 31, 2005, total
accrued reclamation and closure costs were $50.3 million compared with $63.8
million at December 31, 2004. Of the $50.3 million, $10.2 million is classified
as current and is expected to be spent over the next 12 months at Nanisivik,
Bouchard-Hebert, Bougrine and Myra Falls. The Company incurred expenditures of
$25.2 million in reclamation and closure costs in 2005 compared with $7.9
million in 2004. Currently the Company is not able to setup a liability for
reclamation at El Mochito as there is no law, regulation or contract related to
this asset's retirement.
RECLAMATION AND CLOSURE COST ACCRUAL AT DECEMBER 31, 2005
- ---------------------------- ------------------------ -------------------------- -------------------------
($ millions) Current Long-term Total
- ---------------------------- ------------------------ -------------------------- -------------------------
Myra Falls 2.0 24.8 26.8
- ---------------------------- ------------------------ -------------------------- -------------------------
El Mochito 0.0 1.3 1.3
- ---------------------------- ------------------------ -------------------------- -------------------------
El Toqui 0.0 3.9 3.9
- ---------------------------- ------------------------ -------------------------- -------------------------
Langlois 0.0 1.3 1.3
- ---------------------------- ------------------------ -------------------------- -------------------------
Bouchard-Hebert 3.3 2.7 6.0
- ---------------------------- ------------------------ -------------------------- -------------------------
Caribou 0.0 5.2 5.2
- ---------------------------- ------------------------ -------------------------- -------------------------
Nanisivik 2.7 0.3 3.0
- ---------------------------- ------------------------ -------------------------- -------------------------
Bougrine 2.2 0.6 2.8
- ---------------------------- ------------------------ -------------------------- -------------------------
TOTAL 10.2 40.1 50.3
- ---------------------------- ------------------------ -------------------------- -------------------------
EQUITY
During 2005, the Company issued 17,761,348 Common Shares for net proceeds of
$9.1 million. Thirteen million of the shares issued were flow through shares for
exploration to be conducted around Breakwater's properties in Quebec. 2,841,000
were issued on the exercise of employee share options, 1,500,000 were issued on
the exercise of banker warrants and 420,348 were issued pursuant to the
Company's employee share purchase plan. At the end of 2005, the Company had
issued and outstanding Common Shares of 380,917,489 compared with 363,156,141 at
the end of 2004.
Shareholders' equity at December 31, 2005, was $162.7 million compared with
$141.4 million at December 31, 2004, an increase of $21.3 million. This reflects
a net profit of $14.7 million for 2005 plus proceeds of $9.1 million from the
issue of Common Shares and warrants, an increase in the contributed surplus of
$0.2 million, offset by a reduction in Cumulative Translation Adjustments of
$2.7 million.
11
CAPITAL EXPENDITURES
The following table sets forth a breakdown of the Company's investment in
mineral properties and fixed assets in 2005 compared with the amounts invested
in 2004.
- ---------------------------------- -------------------------------- --------------------------------
($ millions) 2005 2004
- ---------------------------------- -------------------------------- --------------------------------
Myra Falls 17.8 4.0
- ---------------------------------- -------------------------------- --------------------------------
El Mochito 8.2 6.8
- ---------------------------------- -------------------------------- --------------------------------
El Toqui 7.1 11.0
- ---------------------------------- -------------------------------- --------------------------------
Bougrine 0.1 0.4
- ---------------------------------- -------------------------------- --------------------------------
Bouchard-Hebert 0.6 1.2
- ---------------------------------- -------------------------------- --------------------------------
Langlois 5.2 4.0
- ---------------------------------- -------------------------------- --------------------------------
Other 0.0 0.3
- ---------------------------------- -------------------------------- --------------------------------
TOTAL 39.0 27.7
- ---------------------------------- -------------------------------- --------------------------------
MYRA FALLS
In 2005, of the $17.8 million spent on capital at Myra Falls, $9.1 million was
for mine development (to provide additional access to the known reserves and to
identify new resources and reserves), $2.9 million was for the first phase of
the surface ramp (to provide ventilation, exploration platforms and eventual
access to the western portion of the property which had little exploration to
date), $3.4 million was for mine equipment, $1.4 million was for the new Lynx
tailings facility, and $0.7 million was for mill equipment and the initial work
related to the installation of the lead circuit.
EL MOCHITO
At El Mochito, of the $8.2 million spent on capital in 2005; $4.5 million was
for environment purposes, (primarily on the new tailings facility), $2.1 million
was for ongoing mine development, $1.1 million was for mine equipment and
infrastructure, $0.4 million was primarily for surface infrastructure, and $0.2
million on mill equipment.
EL TOQUI
In 2005, total capital at El Toqui was $7.1 million. Of this amount $3.8 million
related to equipment replacement, $1.5 million to ongoing mine development
(primarily in Estatuas), and $1.8 million to exploration, with the bulk of these
funds being spent on the Concordia deposit.
LANGLOIS
$5.2 million of capital was spent on the initial redevelopment of the mine.
BOUCHARD-HEBERT,
$ 0.6 million was spent on exploration in the immediate vicinity of the mine.
FINANCIAL CAPABILITY
With the existing working capital, the current metal prices and current US$/C$
exchange rate the Company is positioned to carry out its operating, capital and
environmental programs in 2006. The Company's financial capability is sensitive
to metal prices and the US/Canadian dollar exchange rate.
12
OPERATING REVIEW - 2005 AND 2004
Myra Falls' contribution from mining activities improved to $2.4 million in 2005
from a loss of $5.1 million in 2004. As the Company acquired the mine in July of
2004, 2004 results are not comparable. 2005 unit cost of sales at Myra Falls
have been higher than expected due to lower mine production at lower head
grades.
El Mochito's contribution from mining activities was 89 percent higher in 2005
due to more concentrate sold in 2005 than in the same period in 2004 and higher
metal prices.
El Toqui contribution from mining activities was lower in 2005. Although more
concentrate was sold in 2005 and metal prices were higher, these were more than
offset by higher unit production costs.
Bougrine's contribution from mining activities improved significantly in 2005 to
$7.4 million from a loss of $5.2 million in 2004. This improvement was the
result of higher metal prices and of higher lead production due to a better lead
head grade. These factors resulted in more concentrate sold at a lower unit
cost.
Bouchard-Hebert contributed $6.7 million from mining activities on the sale of
30,815 tonnes of concentrate in 2005 but, as the mine ceased production in
February, this result is not comparable with the 2004 results.
- ---------------------------- -------------------------------------------------------------
Operating review for CONCENTRATE TONNES
the year ended
December 31
- ---------------------------- -------------------------------------------------------------
2005 2004
- ---------------------------- ------------------------------ ------------------------------
SOLD PRODUCED SOLD PRODUCED
- ---------------------------- --------------- -------------- -------------- ---------------
Myra Falls 116,139 122,497 24,616 52,305
- ---------------------------- --------------- -------------- -------------- ---------------
El Mochito 103,066 96,625 85,579 91,786
- ---------------------------- --------------- -------------- -------------- ---------------
El Toqui 59,355 60,662 49,294 58,813
- ---------------------------- --------------- -------------- -------------- ---------------
Bougrine 58,255 42,785 55,780 60,648
- ---------------------------- --------------- -------------- -------------- ---------------
Bouchard-Hebert 30,815 14,327 121,632 125,184
- ---------------------------- --------------- -------------- -------------- ---------------
TOTAL 367,630 336,896 336,901 388,736
- ---------------------------- --------------- -------------- -------------- ---------------
- ---------------------------- ------------------- ------------------- -------------------- -------------------
CONTRIBUTION
Operating review for (LOSS) FROM
the year ended MINING CAPITAL
December 31 NET REVENUE ACTIVITIES(1) NON-CASH COSTS(2) EXPENDITURES(4)
- ---------------------------- ------------------- ------------------- -------------------- -------------------
($ millions) 2005 2004 2005 2004 2005 2004 2005 2004
- ---------------------------- --------- --------- -------- ---------- --------- ---------- --------- ---------
Myra Falls 79.1 11.8 2.4 (5.1) 9.5 3.8 17.8 4.0
- ---------------------------- --------- --------- -------- ---------- --------- ---------- --------- ---------
El Mochito 56.0 40.4 19.8 10.5 6.3 4.2 8.2 6.8
- ---------------------------- --------- --------- -------- ---------- --------- ---------- --------- ---------
El Toqui 30.6 23.2 3.9 6.2 4.6 3.5 7.1 11.0
- ---------------------------- --------- --------- -------- ---------- --------- ---------- --------- ---------
Bougrine 26.5 20.8 7.4 (5.2) 4.3 8.4 0.1 0.4
- ---------------------------- --------- --------- -------- ---------- --------- ---------- --------- ---------
Bouchard-Hebert 18.3 62.2 6.7 21.3 1.3 8.9 0.6 1.2
- ---------------------------- --------- --------- -------- ---------- --------- ---------- --------- ---------
Nanisivik 0.0 0.0 (8.6) (0.7) 8.6 0.7 0.0 (0.2)
- ---------------------------- --------- --------- -------- ---------- --------- ---------- --------- ---------
Langlois 0.0 0.0 (0.1) (0.1) 0.1 0.1 5.2 4.0
- ---------------------------- --------- --------- -------- ---------- --------- ---------- --------- ---------
Other (2.9)(3) 0.0(3) (3.5) (1.2) 0.6 1.2 0.0 0.5
- ---------------------------- --------- --------- -------- ---------- --------- ---------- --------- ---------
TOTAL 207.6 158.4 28.0 25.7 35.3 30.8 39.0 27.7
- ---------------------------- --------- --------- -------- ---------- --------- ---------- --------- ---------
(1) After non-cash costs.
(2) Depreciation, depletion and accretion costs.
(3) Net realised from metal hedging activities.
(4) Includes assets under capital lease.
13
PRODUCTION RESULTS
In 2005, Breakwater's production of metals in concentrate was affected by three
major factors. We reported a full year of production from Myra Falls and we
closed Bouchard-Hebert in February 2005 and Bougrine in September 2005.
Consolidated production is set forth in the following table.
- ------------------------------------ ------------------------------------- -------------------------------------
All Mines YEAR ENDED DECEMBER 31 FOURTH QUARTER
------------------------------------- -------------------------------------
2005 2004 2005 2004
==================================== ================== ================== ================== ==================
Ore Milled (tonnes) 2,468,565 2,822,228 540,949 802,040
- ------------------------------------ ------------------ ------------------ ------------------ ------------------
Zinc (%) 6.5 6.8 6.1 6.2
- ------------------------------------ ------------------ ------------------ ------------------ ------------------
Concentrate Production
- ------------------------------------ ------------------ ------------------ ------------------ ------------------
Zinc (tonnes) 268,688 318,206 56,576 82,526
- ------------------------------------ ------------------ ------------------ ------------------ ------------------
Copper (tonnes) 35,361 43,882 7,410 15,702
- ------------------------------------ ------------------ ------------------ ------------------ ------------------
Lead (tonnes) 28,702 21,633 3,741 6,473
- ------------------------------------ ------------------ ------------------ ------------------ ------------------
Gold (tonnes) 4,145 5,015 1,114 1,540
- ------------------------------------ ------------------ ------------------ ------------------ ------------------
Metal in Concentrates
- ------------------------------------ ------------------ ------------------ ------------------ ------------------
Zinc (tonnes) 141,310 169,909 29,521 43,630
- ------------------------------------ ------------------ ------------------ ------------------ ------------------
Copper (tonnes) 8,110 8,363 1,698 3,194
- ------------------------------------ ------------------ ------------------ ------------------ ------------------
Lead (tonnes) 19,196 14,347 2,579 4,205
- ------------------------------------ ------------------ ------------------ ------------------ ------------------
Silver (ounces) 3,059,914 2,538,021 758,008 736,113
- ------------------------------------ ------------------ ------------------ ------------------ ------------------
Gold (ounces) 75,993 56,388 17,521 19,217
- ------------------------------------ ------------------ ------------------ ------------------ ------------------
Total Cash Costs
- ------------------------------------ ------------------ ------------------ ------------------ ------------------
Per lb. payable zinc (US$) 0.40 0.34 0.45 0.43
- ------------------------------------ ------------------ ------------------ ------------------ ------------------
The following table sets forth zinc production at each site for the full year
and the fourth quarter together with the change from the prior period.
- ------------------------------------------- -------------------------------- ------------------------------
YEAR ENDED DECEMBER 31 FOURTH QUARTER
Zinc Production (million pounds of zinc -------------------------------- ------------------------------
contained in concentrate) 2005 2004 % (DELTA) 2005 2004 % (DELTA)
- ------------------------------------------- ----------- -------- ----------- --------- -------- -----------
Myra Falls* 106.0 40.2 164 23.3 19.3 21
- ------------------------------------------- ----------- -------- ----------- --------- -------- -----------
El Mochito 94.1 91.3 3 24.6 24.3 1
- ------------------------------------------- ----------- -------- ----------- --------- -------- -----------
El Toqui 62.5 59.9 4 17.2 13.9 24
- ------------------------------------------- ----------- -------- ----------- --------- -------- -----------
Bouchard-Hebert 13.9 120.9 (89) 0.0 23.8 (100)
- ------------------------------------------- ----------- -------- ----------- --------- -------- -----------
Bougrine 35.0 62.3 (44) 0.0 14.9 (100)
- ------------------------------------------- ----------- -------- ----------- --------- -------- -----------
TOTAL ZINC PRODUCTION 311.5 374.6 (17) 65.1 96.2 (32)
- ------------------------------------------- ----------- -------- ----------- --------- -------- -----------
*Acquired July 2004
Production of copper in concentrate was marginally lower, year over year,
despite the closure of Bouchard-Hebert in the first quarter of 2005. Production
of copper in concentrate during the fourth quarter of 2005 decreased 47 percent
from the same period in 2004 due to the aforementioned closure combined with
lower copper grades and concentrate recoveries at Myra Falls.
- ------------------------------------------- -------------------------------- ------------------------------
YEAR ENDED DECEMBER 31 FOURTH QUARTER
Copper Production (million pounds of -------------------------------- ------------------------------
copper contained in concentrate) 2005 2004 % (DELTA) 2005 2004 % (DELTA)
- ------------------------------------------- -------------------------------- ------------------------------
Myra Falls* 16.8 9.8 71 3.7 4.8 (23)
- ------------------------------------------- ----------- -------- ----------- --------- -------- -----------
Bouchard-Hebert** 1.0 8.6 (89) 0.0 2.3 (100)
- ------------------------------------------- ----------- -------- ----------- --------- -------- -----------
TOTAL COPPER PRODUCTION 17.9 18.4 (3) 3.7 7.0 (47)
- ------------------------------------------- ----------- -------- ----------- --------- -------- -----------
*Acquired July 2004
**Closed February 2005
Production of lead in concentrate increased 34 percent in 2005 due to higher
lead grades at Bougrine and more tonnes milled at El Mochito. In the fourth
quarter of 2005 production of lead in concentrate decreased 39 percent due to
the closure of Bougrine.
14
- ------------------------------------------- -------------------------------- ------------------------------
YEAR ENDED DECEMBER 31 FOURTH QUARTER
Lead Production (million pounds of lead -------------------------------- ------------------------------
contained in concentrate) 2005 2004 % (DELTA) 2005 2004 % (DELTA)
- ------------------------------------------- ----------- -------- ----------- --------- -------- -----------
El Mochito 23.1 19.6 18 5.7 5.1 12
- ------------------------------------------- ----------- -------- ----------- --------- -------- -----------
Bougrine* 19.2 12.1 59 0.0 4.2 (100)
- ------------------------------------------- ----------- -------- ----------- --------- -------- -----------
TOTAL LEAD PRODUCTION 42.3 31.6 34 5.7 9.3 (39)
- ------------------------------------------- ----------- -------- ----------- --------- -------- -----------
*Closed September 2005
Gold in concentrate increased due to higher gold production from the Aserradero
zone at El Toqui and due to metallurgical improvements made in the recovery of
gold in the gravity circuit at Myra Falls. In the fourth quarter of 2005 gold in
concentrate decreased due to the closure of Bouchard-Hebert and lower gold
grades at El Toqui. This was partially offset by increased gold production from
Myra Falls.
- -------------------------------------- ------------------------------------- ------------------------------
YEAR ENDED DECEMBER 31 FOURTH QUARTER
Gold Production (ounces of gold ------------------------------------- ------------------------------
contained in concentrate) 2005 2004 % (DELTA) 2005 2004 % (DELTA)
- -------------------------------------- -------------- ---------- ----------- --------- ---------- ---------
Myra Falls 31,744 11,239 182 8,254 5,171 60
- -------------------------------------- -------------- ---------- ----------- --------- ---------- ---------
El Toqui 41,605 27,865 49 9,267 11,077 (16)
- -------------------------------------- -------------- ---------- ----------- --------- ---------- ---------
Bouchard-Hebert* 2,644 17,284 (85) 0 2,969 (100)
- -------------------------------------- -------------- ---------- ----------- --------- ---------- ---------
TOTAL GOLD PRODUCTION 75,993 56,388 35 17,521 19,217 (9)
- -------------------------------------- -------------- ---------- ----------- --------- ---------- ---------
*Closed February 2005
Silver in concentrate increased 21 percent due to higher silver grades and a
full year's production from Myra Falls. Silver in concentrate increased three
percent in the fourth quarter due to higher grades at Myra Falls and El Mochito
which were partially offset by lower grades at El Toqui and the closure of
Bouchard-Hebert.
- -------------------------------------- ------------------------------------- ------------------------------
YEAR ENDED DECEMBER 31 FOURTH QUARTER
Silver Production (ounces of silver ------------------------------------- ------------------------------
contained in concentrate) 2005 2004 % (DELTA) 2005 2004 % (DELTA)
- -------------------------------------- -------------- ---------- ----------- --------- ---------- ---------
Myra Falls 1,165,056 445,997 161 286,554 212,598 35
- -------------------------------------- -------------- ---------- ----------- --------- ---------- ---------
El Mochito 1,723,825 1,550,232 11 446,445 396,631 13
- -------------------------------------- -------------- ---------- ----------- --------- ---------- ---------
El Toqui 131,020 231,872 (43) 25,009 61,537 (59)
- -------------------------------------- -------------- ---------- ----------- --------- ---------- ---------
Bouchard-Hebert* 40,013 309,920 (87) 0 65,346 (100)
- -------------------------------------- -------------- ---------- ----------- --------- ---------- ---------
TOTAL SILVER PRODUCTION 3,059,914 2,538,021 21 758,008 736,112 3
- -------------------------------------- -------------- ---------- ----------- --------- ---------- ---------
15
MYRA FALLS PRODUCTION
The following table sets forth Myra Falls' production for the periods presented.
- ---------------------------------------- ------------------------------ ---------------------------
YEAR ENDED DECEMBER 31 QUARTERS
------------------------------ ---------------------------
2005 2004 4TH 2005 4TH 2004
======================================== ============== =============== ============== ============
Ore Milled (tonnes) 912,656 381,698 226,962 197,215
- ---------------------------------------- -------------- --------------- -------------- ------------
Zinc (%) 6.1 5.6 5.5 5.3
- ---------------------------------------- -------------- --------------- -------------- ------------
Copper (%) 1.2 1.5 1.0 1.4
- ---------------------------------------- -------------- --------------- -------------- ------------
Silver (g/t) 51 49 50 45
- ---------------------------------------- -------------- --------------- -------------- ------------
Gold (g/t) 1.8 1.7 2.0 1.6
- ---------------------------------------- -------------- --------------- -------------- ------------
Concentrate Production
- ---------------------------------------- -------------- --------------- -------------- ------------
Zinc (tonnes) 90,129 34,155 19,984 16,751
- ---------------------------------------- -------------- --------------- -------------- ------------
Recovery (%) 86.3 85.3 84.4 84.1
- ---------------------------------------- -------------- --------------- -------------- ------------
Grade (%) 53.4 53.3 53.2 52.2
- ---------------------------------------- -------------- --------------- -------------- ------------
Copper (tonnes) 32,333 18,144 7,410 8,908
- ---------------------------------------- -------------- --------------- -------------- ------------
Recovery (%) 69.6 78.1 71.5 78.5
- ---------------------------------------- -------------- --------------- -------------- ------------
Grade (%) 23.6 24.5 22.8 24.4
- ---------------------------------------- -------------- --------------- -------------- ------------
Gold (tonnes) 34.7 5.34 9.9 3.59
- ---------------------------------------- -------------- --------------- -------------- ------------
Recovery (%) 18.3 8.7 15.2 9.8
- ---------------------------------------- -------------- --------------- -------------- ------------
Grade (g/t) 8,741 8,498 6,890 7,268
- ---------------------------------------- -------------- --------------- -------------- ------------
Metal in Concentrates
- ---------------------------------------- -------------- --------------- -------------- ------------
Zinc (tonnes) 48,084 18,218 10,591 8,750
- ---------------------------------------- -------------- --------------- -------------- ------------
Copper (tonnes) 7,640 4,449 1,698 2,170
- ---------------------------------------- -------------- --------------- -------------- ------------
Silver (ounces) 1,165,056 445,997 286,554 212,598
- ---------------------------------------- -------------- --------------- -------------- ------------
Gold (ounces) 31,744 11,239 8,254 5,171
- ---------------------------------------- -------------- --------------- -------------- ------------
Total Cash Costs
- ---------------------------------------- -------------- --------------- -------------- ------------
Per lb. payable zinc sold (US$) 0.47 0.54 0.52 0.59
- ---------------------------------------- -------------- --------------- -------------- ------------
MYRA FALLS OUTLOOK
Work continues on improving mine planning, materials handling and metallurgical
recoveries. Test work to develop a lead concentrate of marketable quality was
carried out during the fourth quarter of 2005. The ultimate goal is to reduce
the quantity of lead and zinc in the copper concentrate. The test work indicated
that copper recoveries could be increased from the current 70 percent range to a
range of 85-90 percent with a dramatic reduction in impurities and zinc
concentrate grades could be increased from the current 53.0 to 53.4 percent
range to 55.0 to 56.0 percent. A lead flash flotation test cell was installed in
the grinding circuit during the month of February and test work with this unit
is in progress. It is anticipated that a revision to the reagent scheme as well
as the installation of zinc conditioner tanks would further improve recoveries
and concentrate grades. A revised flow sheet is being developed for the final
lead circuit and engineering work and procurement has commenced.
Installation of the shaking table in the gold circuit was delayed and should be
completed in the first quarter of 2006. It is expected to improve gold
recoveries and allow for the production of gold dore, thereby eliminating the
need to process a portion of the gold production through high-cost smelting.
Underground exploration, consisting of drift development and diamond drilling is
now concentrated on three prospective areas: the Marshall zone to the northwest;
the Extension zone to the west of Battle-Gap; and the 43 Block to the east of
HW.
The Company continues to review its near-term and long-term plans for the Myra
Falls operation. The goal is to stabilize the operation by maintaining a steady
flow of ore to the mill and to ensure that recoveries of all economic metals are
maximized. The long-term goal is to define orebodies lying adjacent to and west
16
of the current mining areas. The Company will aggressively explore the Myra
Falls area to fully test its potential, which is believed to be excellent. Work
towards this long-term goal has commenced with the Lynx Ramp and the drive
towards the Marshall zone to the west of the Battle-Gap area.
EL MOCHITO PRODUCTION
The following table sets forth El Mochito's production for the periods
presented.
- --------------------------------- ------------------------------ -----------------------------
YEARS ENDED DECEMBER 31 QUARTERS
------------------------------ -----------------------------
2005 2004 4TH 2005 4TH 2004
================================= =============== ============== ============== ==============
Ore Milled (tonnes) 700,190 650,017 185,597 170,560
- --------------------------------- --------------- -------------- -------------- --------------
Zinc (%) 6.7 6.9 6.5 7.0
- --------------------------------- --------------- -------------- -------------- --------------
Lead (%) 1.8 1.7 1.7 1.7
- --------------------------------- --------------- -------------- -------------- --------------
Silver (g/t) 87 84 86 82
- --------------------------------- --------------- -------------- -------------- --------------
Concentrate Production
- --------------------------------- --------------- -------------- -------------- --------------
Zinc (tonnes) 81,296 78,652 21,142 21,083
- --------------------------------- --------------- -------------- -------------- --------------
Recovery (%) 91.7 91.8 92.0 92.2
- --------------------------------- --------------- -------------- -------------- --------------
Grade (%) 52.5 52.7 52.6 52.3
- --------------------------------- --------------- -------------- -------------- --------------
Lead (tonnes) 15,329 13,134 3,741 3,416
- --------------------------------- --------------- -------------- -------------- --------------
Recovery (%) 80.9 80.5 80.1 80.4
- --------------------------------- --------------- -------------- -------------- --------------
Grade (%) 68.4 67.6 68.8 67.9
- --------------------------------- --------------- -------------- -------------- --------------
Metal in Concentrates
- --------------------------------- --------------- -------------- -------------- --------------
Zinc (tonnes) 42,698 41,413 11,147 11,034
- --------------------------------- --------------- -------------- -------------- --------------
Lead (tonnes) 10,488 8,877 2,579 2,319
- --------------------------------- --------------- -------------- -------------- --------------
Silver (ounces) 1,723,825 1,550,232 446,445 396,631
- --------------------------------- --------------- -------------- -------------- --------------
Total Cash Costs
- --------------------------------- --------------- -------------- -------------- --------------
Per lb. payable zinc sold 0.32 0.31 0.20 0.23
(US$)
- --------------------------------- --------------- -------------- -------------- --------------
EL MOCHITO OUTLOOK
During 2005, the Company continued to explore, develop and delineate new mineral
resources and reserves along extensions of the productive Salva Vida and Santo
Nino trends. The projected intersection of these trends is the key exploration
focus at El Mochito, as major orebodies are typically found at structural
intersections in favourable ground.
Surface geological exploration began during the second quarter on several target
areas. During the third quarter, broad element spectrum geochemical surveys were
carried out over zones previously surveyed in the 1960s and 1970s by Rosario and
Asarco to validate these older surveys. During the fourth quarter, NSAMT
geophysical surveys were carried out over promising zones adjacent to mine
workings and target anomalies identified in previous campaigns.
During the quarter, construction continued on the new Soledad tailings storage
facility. Work will continue on this facility until the second quarter 2006 when
Pozo Azul, the current tailings impoundment facility, will be phased out and
reclaimed.
EL TOQUI PRODUCTION
The milled tonnage at El Toqui increased 11 percent in 2005 over 2004 reflecting
the changes made to the grinding circuit in the mill in mid-2004. Despite the
increase in mill throughput zinc grades were lower resulting in a modest four
percent increase in zinc contained in concentrate. The lower zinc grades were
due to mining remnant areas in the Mina Rosa and Mallin-Monica zones with an
unexpectedly lower zinc grades and development delays in the Estatuas deposit
due to the complex geology of the deposit.
17
During the fourth quarter of 2005, gold head grades were 26 percent lower
reflecting an increase in mining from the Estatuas deposit, which doesn't
contain any gold.
- --------------------------------- ------------------------------ -----------------------------
YEARS ENDED DECEMBER 31 QUARTERS
------------------------------ -----------------------------
2005 2004 4TH 2005 4TH 2004
================================= =============== ============== ============== ==============
Ore Milled (tonnes) 519,963 466,953 128,390 116,345
- --------------------------------- --------------- -------------- -------------- --------------
Zinc (%) 6.0 6.4 6.6 6.0
- --------------------------------- --------------- -------------- -------------- --------------
Gold (g/t) 2.9 2.3 2.6 3.5
- --------------------------------- --------------- -------------- -------------- --------------
Concentrate Production
- --------------------------------- --------------- -------------- -------------- -------------
Zinc (tonnes) 56,552 53,804 15,450 12,469
- --------------------------------- --------------- -------------- -------------- -------------
Recovery (%) 90.4 91.0 90.8 89.8
- --------------------------------- --------------- -------------- -------------- -------------
Grade (%) 50.1 50.5 50.4 50.5
- --------------------------------- --------------- -------------- -------------- -------------
Gold (tonnes) 4,110 5,009 1,104 1,536
- --------------------------------- --------------- -------------- -------------- -------------
Recovery (%) 51.4 57.2 49.8 61.3
- --------------------------------- --------------- -------------- -------------- -------------
Grade (%) 221.7 122.0 181.4 164.9
- --------------------------------- --------------- -------------- -------------- -------------
Metal in Concentrates
- --------------------------------- --------------- -------------- -------------- -------------
Zinc (tonnes) 28,347 27,190 7,786 6,295
- --------------------------------- --------------- -------------- -------------- -------------
Gold (ounces) 41,605 27,865 9,267 11,077
- --------------------------------- --------------- -------------- -------------- -------------
Silver (ounces) 131,020 231,872 25,009 61,537
- --------------------------------- --------------- -------------- -------------- -------------
Total Cash Costs
- --------------------------------- --------------- -------------- -------------- -------------
Per lb. payable zinc sold 0.44 0.28 0.29 (0.05)
(US$)
- --------------------------------- --------------- -------------- -------------- -------------
EL TOQUI OUTLOOK
As noted previously, during 2005 it was discovered that the Estatuas deposit is
highly faulted and more difficult to mine than originally planned. Additional
infill drilling was carried out earlier in 2005 to better understand the degree
and nature of the faulting. While we believe Estatuas can be mined economically,
it continues to be the case that short-term problems may occur which could
result in lower than expected tonnages or higher operating costs.
The Company is in the process of exploring the Aserradero deposit to the south
and southeast. Work will also continue at Concordia to develop a feasibility
study by the end of the second quarter of 2006. The Concordia deposit is located
close to the existing mill infrastructure, is relatively shallow allowing for
inexpensive ramp access and hosts zinc grades that are 40 percent higher than
the current reserves with significant lead and silver content. Based on the
drilling carried out to September 2005 an indicated and inferred mineral
resource of 1.87 million tonnes grading 10.2 percent zinc, 5.1 percent lead and
68 grams per tonne silver has been estimated.
Work is currently underway on a regional exploration program on our extensive
land holdings in the Toqui area. Our primary goal is to discover a gold skarn
deposit similar to the Aserradero deposit.
During the fourth quarter, metallurgical testing was completed at El Toqui which
examined the feasibility of treating the gold concentrate onsite with the goal
of producing dore bars. Flotation concentrate samples were leached under
intensive cyanidation conditions using the Gekko Mini Inline Leach Reactor
("ILR"). The procedure used mimics the conditions in a full sized batch ILR
unit. Test results indicated that gold recoveries could reach 88-90 percent.
This process could provide significant cost savings over third party treatment
of the concentrate and provide a more stable cash flow from the mine. In 2005,
over 29,000 ounces of gold were contained in the gold concentrate produced.
Engineering work has commenced on a full size batch ILR unit.
18
LANGLOIS
Langlois, which is situated in north-western Quebec approximately 213 kilometres
north of Val-d'Or, is currently being developed to reach commercial production
in mid-2007.
A feasibility study to reopen the Langlois mine, including a technical solution
for the ore pass problem, was completed by SRK in August 2001, following an
extensive drilling program. The SRK feasibility study was updated in 2003 and
the project economics were reviewed again by Breakwater late in 2005. The 2005
Breakwater review concluded that based on a life-of-mine average price for zinc
of US$0.53 per pound, a copper price of US$1.05 per pound, a silver price of
US$6.59 per ounce and an exchange rate of US$0.80 per C$1.00 the project had an
internal rate of return of 16.6 percent based on mining and milling the proven
and probable mineral reserves of 3.3 million tonnes at the grades and recoveries
set forth in the Proven and Probable Mineral Reserves Production table below.
Proven and Probable Mineral Reserves Production Table
- ----------------------------------------------------------------
Tonnes Milled 3,323,000
- ----------------------------------------------------------------
Head Grade Zn (%) 10.8
Cu (%) 0.8
Au (g/t) 0.1
Ag (g/t) 52.1
Recoveries Zn (%) 93.6
Cu (%) 82.6
Au (%) 29.0
Ag (%) 35.5
Concentrate Grade Zn (%) 54.7
Cu (%) 23.8
Tonnes Concentrate Zn (t) 613,100
Cu (t) 96,300
Contained Metal Zn (t) 335,100
Cu (t) 22,900
Au (oz) 2,600
Ag (oz) 1,961,300
- ----------------------------------------------------------------
The operating plan incorporates several improvements to ensure the reliability
of production and to control costs. These improvements include the elimination
of ore passes for Zone 97, a new, level 9, ore dump and loading pocket,
pre-development of several sublevels in Zone 97 and improvements for the
underground mobile equipment fleet. Additionally, the operating plan includes
continuing the exploration of Zone 97 which remains open to the east and at
depth.
The high-grade mining alternative in the feasibility study does not isolate the
lower grade mineral resources, some of which could be brought into the
production plan under the current economic conditions.
The following table sets forth the mineral resources and mineral reserves as
they have been calculated pursuant to National Instrument 43-101.
Mineral Resources and Mineral Reserves
Category Tonnage Zinc Copper Silver Gold
(%) (%) (g/t) (g/t)
- ----------------------------------------------------------------------------------------------------
Proven & Probable Mineral Reserves
- ----------------------------------------------------------------------------------------------------
Zones 3 and 4 1,203,500 9.49 0.49 39.52 0.07
Zone 97 2,119,200 11.51 1.02 59.28 0.09
- ----------------------------------------------------------------------------------------------------
Total 3,322,700 10.78 0.82 52.13 0.09
- ----------------------------------------------------------------------------------------------------
Measured & Indicated Resources*
- ----------------------------------------------------------------------------------------------------
Zones 3 and 4 1,779,200 9.98 0.53 34.82 0.08
Zone 97 3,201,500 11.80 0.93 64.60 0.09
- ----------------------------------------------------------------------------------------------------
Total 4,980,700 11.15 0.79 53.96 0.09
- ----------------------------------------------------------------------------------------------------
19
- ----------------------------------------------------------------------------------------------------
Inferred
- ----------------------------------------------------------------------------------------------------
Zones 3 and 4 750,500 8.68 0.29 26.04 0.12
Zone 97 504,000 11.24 0.86 60.83 0.17
- ----------------------------------------------------------------------------------------------------
Total 1,254,500 9.71 0.52 40.02 0.14
- ----------------------------------------------------------------------------------------------------
*Measured and Indicated Mineral Resources include Proven and Probable Mineral Reserves
Total Cash Costs
The total cash costs, including smelting, shipping and by-product credits for
copper, silver and gold, is forecast to average US$0.42 per pound of payable
zinc.
Capital Costs
The development capital, including inventory build up, is forecast to be $27.0
million during 2006 and 2007, net of revenue from development ore. The majority
of the capital requirements are related to underground development, with the
mill accounting for only $1.5 million of the total. Total capital required to
extract the above noted tonnages is estimated to be $47.6 million.
BOUGRINE MINE
In accordance with the life-of-mine plan, the Bougrine mine closed permanently
on September 10, 2005, due to exhaustion of the known mineral reserves. The
Company is presently investigating other uses for the Bougrine infrastructure.
Closure of the tailings facility commenced during the fourth quarter.
- --------------------------------------- ---------------------------------- --------------------------------
YEAR ENDED DECEMBER 31 FOURTH QUARTER
---------------------------------- --------------------------------
2005 2004 2005 2004
======================================= =============== ================== ================ ===============
Ore Milled (tonnes) 216,823 330,392 - 84,395
- --------------------------------------- --------------- ------------------ ---------------- ---------------
Zinc (%) 9.1 10.4 - 9.8
- --------------------------------------- --------------- ------------------ ---------------- ---------------
Lead (%) 4.8 2.1 - 2.7
- --------------------------------------- --------------- ------------------ ---------------- ---------------
Concentrate Production
- --------------------------------------- --------------- ------------------ ---------------- ---------------
Zinc (tonnes) 29,412 52,149 - 12,377
- --------------------------------------- --------------- ------------------ ---------------- ---------------
Recovery (%) 80.6 82.2 - 81.7
- --------------------------------------- --------------- ------------------ ---------------- ---------------
Grade (%) 54.0 54.2 - 54.5
- --------------------------------------- --------------- ------------------ ---------------- ---------------
Lead (tonnes) 13,373 8,499 - 3,057
- --------------------------------------- --------------- ------------------ ---------------- ---------------
Recovery (%) 83.9 79.9 - 82.3
- --------------------------------------- --------------- ------------------ ---------------- ---------------
Grade (%) 65.1 64.4 - 61.7
- --------------------------------------- --------------- ------------------ ---------------- ---------------
Metal in Concentrates
- --------------------------------------- --------------- ------------------ ---------------- ---------------
Zinc (tonnes) 15,889 28,265 - 6,748
- --------------------------------------- --------------- ------------------ ---------------- ---------------
Lead (tonnes) 8,708 5,470 - 1,886
- --------------------------------------- --------------- ------------------ ---------------- ---------------
Total Cash Costs
- --------------------------------------- --------------- ------------------ ---------------- ---------------
Per lb. payable zinc sold (US$) 0.36 0.40 (0.01) 0.40
- --------------------------------------- --------------- ------------------ ---------------- ---------------
BOUGRINE MINE OUTLOOK
Reclamation of the Bougrine mine has commenced and is expected to be 90 percent
complete in 2006. The mill building will be kept in place pending the results of
an exploration program on a zinc lead prospect 170 kilometres to the north-west
of the Bougrine mine site. Exploration of this prospect, budgeted at $0.5
million, is expected to commence during the first half of 2006.
20
BOUCHARD-HEBERT PRODUCTION
The Bouchard-Hebert mine closed permanently on February 20, 2005. Reclamation
work, consisting of rock removal and covering the tailings disposal area,
continued during the fourth quarter. The Company explored the area immediately
around the mine, but no economic mineralization was encountered. Based on the
results, the Company removed the mobile equipment and some of the underground
infrastructure, and allowed the mine to flood.
- ---------------------------------------- -------------------------------------- ---------------------------------------
YEAR ENDED DECEMBER 31 FOURTH QUARTER
-------------------------------------- ---------------------------------------
2005 2004 2005 2004
======================================== =================== ================== =================== ===================
Ore Milled (tonnes) 118,933 993,168 - 233,525
- ---------------------------------------- ------------------- ------------------ ------------------- -------------------
Zinc (%) 5.8 6.1 - 5.2
- ---------------------------------------- ------------------- ------------------ ------------------- -------------------
Copper (%) 0.5 0.5 - 0.5
- ---------------------------------------- ------------------- ------------------ ------------------- -------------------
Silver (g/t) 31 29 - 28
- ---------------------------------------- ------------------- ------------------ ------------------- -------------------
Gold (g/t) 1.1 1.0 - 0.8
- ---------------------------------------- ------------------- ------------------ ------------------- -------------------
Concentrate Production
- ---------------------------------------- ------------------- ------------------ ------------------- -------------------
Zinc (tonnes) 11,299 99,446 - 19,846
- ---------------------------------------- ------------------- ------------------ ------------------- -------------------
Recovery (%) 91.1 90.3 - 88.9
- ---------------------------------------- ------------------- ------------------ ------------------- -------------------
Grade (%) 55.7 55.1 - 54.4
- ---------------------------------------- ------------------- ------------------ ------------------- -------------------
Copper (tonnes) 3,028 25,738 - 6,794
- ---------------------------------------- ------------------- ------------------ ------------------- -------------------
Recovery (%) 86.5 82.3 - 83.8
- ---------------------------------------- ------------------- ------------------ ------------------- -------------------
Grade (%) 15.5 15.2 - 15.1
- ---------------------------------------- ------------------- ------------------ ------------------- -------------------
Metal in Concentrates
- ---------------------------------------- ------------------- ------------------ ------------------- -------------------
Zinc (tonnes) 6,292 54,823 - 10,803
- ---------------------------------------- ------------------- ------------------ ------------------- -------------------
Copper (tonnes) 470 3,914 - 1,024
- ---------------------------------------- ------------------- ------------------ ------------------- -------------------
Silver (ounces) 40,013 309,920 - 65,346
- ---------------------------------------- ------------------- ------------------ ------------------- -------------------
Gold (ounces) 2,644 17,284 - 2,969
- ---------------------------------------- ------------------- ------------------ ------------------- -------------------
Total Cash Costs
- ---------------------------------------- ------------------- ------------------ ------------------- -------------------
Per lb. payable zinc sold (US$) 0.30 0.25 - 0.30
- ---------------------------------------- ------------------- ------------------ ------------------- -------------------
BOUCHARD-HEBERT MINE OUTLOOK
The Company will continue to explore for mineral deposits on the 7,982 hectares
of exploration claims surrounding the mining leases. The concentrator building
and equipment will be left intact pending any success in discovering economic
mineralization in the near term.
Exploration commenced in October 2005 to test targets outside the current mine
area. The program, which is to test multiple targets, will continue throughout
2006. In February, 2006 an airborne Megatem survey was carried out over the
Bouchard-Hebert property.
NANISIVIK
Reclamation continued at the site until mid-October when the winter season set
in and the contractor's equipment was shipped off site via the sea-lift. The
major earth moving activities required for closure are now complete.
To date, approximately 2.8 million tonnes of earth have been moved. This
includes covering the tailings area, removing waste rock, backfilling and
covering the open pits, covering the landfill, removing any contaminated soils,
and the backfilling/closure of the mine access ways (with the exception of two
adits which will remain open for backhauling demolition debris in 2006).
The remaining reclamation work will be completed by Wolfden Resources Inc.'s
contractor who has remained on-site to complete its own work, comprising the
dismantling of the mill complex and the concentrate storage facilities. Wolfden
will use the Nanisivik fleet of equipment to finish reclamation of the site
which includes the demolition of the town site accommodations and removal of any
remaining
21
contaminated soil. We expect this will be completed in 2006 and all remaining
salvageable equipment will be shipped off site at that time for sale on the open
market or transfer to other Breakwater properties.
CARIBOU
On July 12, 2004, the Company and its wholly-owned subsidiary CanZinco Ltd.
signed a revised letter of intent ("LOI") with Forest Gate Resources Ltd. and
its wholly-owned subsidiary, Blue Note Metals Inc., regarding the acquisition of
the Caribou and Restigouche mines. Under the terms of the LOI, after raising
sufficient funds, Blue Note will acquire the Caribou and Restigouche mines by
replacing the reclamation deposits of approximately $6.0 million with the New
Brunswick government and issuing to CanZinco a $15 million convertible debenture
with a maturity of five years. In the interim, the Caribou and Restigouche
properties are managed on a care and maintenance basis under a contractual
agreement with Bioteq Environmental Technologies Inc.
FOURTH QUARTER REVIEW
The Company realized net earnings in the fourth quarter of 2005 of $9.8 million
compared with a net loss of $6.3 million in the same period in 2004. The 2005
fourth quarter net earnings included a $6.5 million tax recovery related to the
setup of a tax asset for El Mochito and El Toqui, this is a non-cash gain.
In the fourth quarter ended December 31, 2005, gross sales revenues generated
were seven percent lower despite stronger metal prices due to the sale of 24
percent fewer tonnes of concentrate and a stronger Canadian dollar. Fewer tonnes
were sold because Breakwater had three producing mines in the fourth quarter of
2005 compared with five in the same period of 2004 thereby reducing production.
Treatment charges and freight costs averaged $292 per tonne of concentrate sold
in the fourth quarter of 2005 compared with $250 per tonne in the same period in
2004. Treatment charge escalators were triggered by the higher metal prices and
realized freight rates were higher in 2005. Direct operating costs were higher
in 2005 at $406 per tonne of concentrate sold compared with $357 per tonne in
2004.
- ---------------------------- --------------------------------------------------------------
Operating review for CONCENTRATE TONNES
the fourth quarter ended --------------------------------------------------------------
December 31 2005 2004
- ---------------------------- ------------------------------- ------------------------------
SOLD PRODUCED SOLD PRODUCED
- ---------------------------- ---------------- -------------- -------------- ---------------
Myra Falls 16,710 27,404 17,574 25,663
- ---------------------------- ---------------- -------------- -------------- ---------------
El Mochito 21,834 24,883 11,165 24,499
- ---------------------------- ---------------- -------------- -------------- ---------------
El Toqui 13,643 16,554 10,535 14,005
- ---------------------------- ---------------- -------------- -------------- ---------------
Bougrine 8,204 0 11,408 15,434
- ---------------------------- ---------------- -------------- -------------- ---------------
Bouchard-Hebert 0 0 29,172 26,640
- ---------------------------- ---------------- -------------- -------------- ---------------
TOTAL 60,391 68,841 79,854 106,241
- ---------------------------- ---------------- -------------- -------------- ---------------
- ---------------------------- ------------------- ------------------- -------------------- -------------------
CONTRIBUTION
Operating review for (LOSS) FROM
the fourth quarter ended MINING CAPITAL
December 31 NET REVENUE ACTIVITIES(1) NON-CASH COSTS(2) EXPENDITURES(4)
- ---------------------------- --------- --------- -------- ---------- --------- ---------- --------- ---------
($ millions) 2005 2004 2005 2004 2005 2004 2005 2004
- ---------------------------- --------- --------- -------- ---------- --------- ---------- --------- ---------
Myra Falls 12.5 8.9 0.6 (3.6) 1.4 2.3 5.7 2.9
- ---------------------------- --------- --------- -------- ---------- --------- ---------- --------- ---------
El Mochito 14.9 5.2 6.8 1.5 2.0 1.2 2.3 2.2
- ---------------------------- --------- --------- -------- ---------- --------- ---------- --------- ---------
El Toqui 10.4 10.0 3.3 4.8 1.3 0.9 2.2 4.0
- ---------------------------- --------- --------- -------- ---------- --------- ---------- --------- ---------
Bougrine 4.2 4.2 1.9 (1.2) 0.4 1.8 0.0 (0.2)
- ---------------------------- --------- --------- -------- ---------- --------- ---------- --------- ---------
Bouchard-Hebert 0.0 13.6 0.3 3.2 (0.3) 2.5 0.0 0.1
- ---------------------------- --------- --------- -------- ---------- --------- ---------- --------- ---------
Nanisivik 0.0 0.0 (0.1) (0.2) 0.1 0.2 0.0 0.0
- ---------------------------- --------- --------- -------- ---------- --------- ---------- --------- ---------
Langlois 0.0 0.0 0.0 0.0 0.0 0.0 0.8 1.5
- ---------------------------- --------- --------- -------- ---------- --------- ---------- --------- ---------
Other (2.3)(3) (0.3)(3) (2.5) (0.6) 0.2 0.3 0.0 0.0
- ---------------------------- --------- --------- -------- ---------- --------- ---------- --------- ---------
TOTAL 39.7 41.6 10.3 3.9 5.1 9.2 11.0 10.5
- ---------------------------- --------- --------- -------- ---------- --------- ---------- --------- ---------
(1) After non-cash costs.
(2) Depreciation, depletion and accretion costs.
(3) Net realised from metal hedging activities.
(4) Includes assets under capital lease.
22
General and administrative costs were slightly higher by $0.1 million due mainly
to higher audit and regulatory compliance costs.
Stock based compensation was reduced to $0.2 million in 2005 compared with $0.6
million in 2004 as fewer options were issued in the 2005.
In the fourth quarter of 2005, the Company recorded a mark-to-market loss of
$0.9 million on its gold loan facility, entered into in August 2005, as the
result of the increase in the gold price during the quarter. This is a non-cash
cost that will be reversed as the loan is repaid in physical gold during 2006.
Other non-producing property costs were significantly lower in the fourth
quarter of 2005 at $1.7 million compared with $5.1 million in 2004. The main
reason for the decrease was the $2.1 million write-down of supplies inventory at
the Nanisivik mine and higher than expected holding costs at Nanisivik in 2004.
In the fourth quarter of 2005, a recovery of $6.3 million in income and mining
taxes was recognized compared with an expense of $0.2 million in 2004 as the
Company recorded a future income tax asset of $6.5 million related to tax loss
pools at El Mochito and El Toqui as it is more likely than not that the tax
losses carried forward will be used to reduce taxable income in 2006.
NON-GAAP RECONCILIATIONS
- ----------------------------------------------------------------------- --------------------------------------
NON-GAAP RECONCILIATION OF CASH PROVIDED FROM OPERATING
ACTIVITIES (BEFORE CHANGES IN NON-CASH WORKING CAPITAL ITEMS) TO
CONSOLIDATED FINANCIAL STATEMENTS ($ MILLIONS) 2005 2004 2003
======================================================================= ========== ============= =============
Net Cash Provided By Operations Activities per Consolidated 22.0 24.1 17.9
Statements of Cash Flows
- ----------------------------------------------------------------------- ---------- ------------- -------------
Less changes in non-cash working capital (2.5) 5.2 (2.4)
- ----------------------------------------------------------------------- ---------- ------------- -------------
CASH PROVIDED FROM OPERATING ACTIVITIES (BEFORE CHANGES IN NON-CASH
WORKING CAPITAL ITEMS) 19.5 29.3 15.5
- ----------------------------------------------------------------------- ---------- ------------- -------------
Cash Provided from Operating Activities (before changes in non-cash working
capital items) is furnished to provide additional information and is a non-GAAP
measure. This measure should not be considered in isolation as a substitute for
measures of performance prepared in accordance with generally accepted
accounting principles and are not necessarily indicative of cash provided from
operating activities as determined under generally accepted accounting
principles. This measure intends to provide investors with information about the
cash generating capabilities of the Company's operating activities on a cash
basis in a given period; the Company uses this information for the same purpose.
Mining operations are capital intensive. These measures exclude financing
activities, investing activities and changes in non-cash working capital. These
items are discussed throughout the MD&A and the consolidated financial
statements.
- ------------------------------------------------------------------------ ------------------------------------
NON-GAAP RECONCILIATION OF TOTAL CASH COST PER POUND OF PAYABLE
ZINC SOLD TO CONSOLIDATED FINANCIAL STATEMENTS 2005 2004
- ------------------------------------------------------------------------ ------------------ -----------------
By-Product Credit ($ millions)
- ------------------------------------------------------------------------ ------------------ -----------------
Gross sales revenue per financial statements 313.0 240.3
- ------------------------------------------------------------------------ ------------------ -----------------
Less zinc sales revenue (189.7) (177.6)
- ------------------------------------------------------------------------ ================== =================
123.3 62.7
- ------------------------------------------------------------------------ ================== =================
Treatments & Freight Charges ($ millions)
- ------------------------------------------------------------------------ ================== =================
Per financial statements 105.4 81.9
- ------------------------------------------------------------------------ ================== =================
Direct operating costs ($ millions)
- ------------------------------------------------------------------------ ================== =================
Per financial statements 144.3 101.9
- ------------------------------------------------------------------------ ================== =================
23
- ------------------------------------------------------------------------ ------------------ -----------------
Total cash costs - Canadian ($ millions) 126.4 121.1
- ------------------------------------------------------------------------ ------------------ -----------------
- ------------------------------------------------------------------------ ------------------ -----------------
Exchange rate C$/US$ 1.2111 1.3001
- ------------------------------------------------------------------------ ------------------ -----------------
- ------------------------------------------------------------------------ ------------------ -----------------
Total cash costs - US ($ millions) 104.6 93.2
- ------------------------------------------------------------------------ ------------------ -----------------
- ------------------------------------------------------------------------ ------------------ -----------------
Zinc pounds sold (millions) 265.3 290.6
- ------------------------------------------------------------------------ ------------------ -----------------
- ------------------------------------------------------------------------ ------------------ -----------------
Total cash cost per pound of payable zinc sold (US$)
- ------------------------------------------------------------------------ ------------------ -----------------
By-product credit (0.39) (0.17)
- ------------------------------------------------------------------------ ------------------ -----------------
Treatment and marketing costs 0.33 0.22
- ------------------------------------------------------------------------ ------------------ -----------------
Direct operating costs 0.45 0.27
- ------------------------------------------------------------------------ ------------------ -----------------
TOTAL 0.39 0.32
- ------------------------------------------------------------------------ ------------------ -----------------
Total Cash Costs per Pound of Payable Zinc Sold instead of Total Cash Costs per
Pound of Payable Zinc Produced are furnished to provide additional information
and is a non-GAAP measure. This measure should not be considered in isolation as
a substitute for measures of performance prepared in accordance with GAAP and is
not necessarily indicative of operating expenses as determined under GAAP. This
measure is intended to provide investors with information about the cash
generating capabilities of the Company's mining operations; the Company uses
this information for the same purpose. Mining operations are capital intensive.
These measures exclude capital expenditures. Capital expenditures are discussed
throughout the MD&A and the consolidated financial statements.
SUMMARY OF QUARTERLY RESULTS
- --------------------------------- -------------------------------------------- --------------------------------------------
2004 2005
- --------------------------------- -------------------------------------------- --------------------------------------------
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
- --------------------------------- ----------- ---------- ---------- ---------- ----------- ---------- ---------- ----------
Gross Sales Revenue 60.2 52.5 66.1 61.5 91.3 92.4 71.9 57.4
($ millions)
- --------------------------------- ----------- ---------- ---------- ---------- ----------- ---------- ---------- ----------
Net Earning (Loss) 2.2 4.4 2.4 (6.3) 4.1 2.4 (1.6) 9.8
($ millions)
- --------------------------------- ----------- ---------- ---------- ---------- ----------- ---------- ---------- ----------
Per share - basic $0.01 $0.01 $0.01 ($0.02) $0.01 $0.01 $0.00 $0.03
- --------------------------------- ----------- ---------- ---------- ---------- ----------- ---------- ---------- ----------
Weighted-average number of
Common Shares outstanding
(millions) 343.8 344.5 362.7 363.0 365.7 367.4 369.5 374.2
- --------------------------------- ----------- ---------- ---------- ---------- ----------- ---------- ---------- ----------
Per share - diluted $0.01 $0.01 $0.00 ($0.02) $0.01 $0.01 $0.00 $0.02
- --------------------------------- ----------- ---------- ---------- ---------- ----------- ---------- ---------- ----------
(C$/US$) realized
exchange rate 1.3172 1.3596 1.3127 1.2290 1.2274 1.2429 1.2019 1.1744
- --------------------------------- ----------- ---------- ---------- ---------- ----------- ---------- ---------- ----------
Average realized
zinc price (US$/t) 1,058 1,006 988 1,095 1,256 1,252 1,296 1,502
- --------------------------------- ----------- ---------- ---------- ---------- ----------- ---------- ---------- ----------
Average realized
zinc price (C$/t) 1,394 1,368 1,297 1,345 1,542 1,556 1,558 1,764
- --------------------------------- ----------- ---------- ---------- ---------- ----------- ---------- ---------- ----------
Concentrate tonnes sold 86,031 76,061 94,957 79,854 108,507 118,022 80,196 60,391
- --------------------------------- ----------- ---------- ---------- ---------- ----------- ---------- ---------- ----------
Concentrate tonnes produced 84,590 86,115 111,790 106,241 103,259 88,782 76,014 68,841
- --------------------------------- ----------- ---------- ---------- ---------- ----------- ---------- ---------- ----------
The quantity of concentrate sold directly affects gross sales revenue. The
recognition of revenue from the sale of concentrate can vary from
quarter-to-quarter based on customer agreements, the availability of ships and
compliance with the Company's revenue recognition policy. As all sales are based
in US dollars, the US dollar weakening against the Canadian dollar has reduced
the realized Canadian dollar gross sales revenue.
24
CONTRACTUAL OBLIGATIONS
- ----------------------------------- -------------------------------------------------------------------------
PAYMENTS DUE BY PERIOD
- ----------------------------------- -------------------------------------------------------------------------
CONTRACTUAL OBLIGATIONS (LESS THAN) (GREATER THAN) (GREATER THAN)
($ millions) TOTAL 1 YEAR 1-3 YEARS 4-5 YEARS 5 YEARS
- ----------------------------------- ------------- -------------- --------------- -------------- -------------
Capital Leases 1.7 0.7 0.7 0.3 0.0
- ----------------------------------- ------------- -------------- --------------- -------------- -------------
Operating Leases 3.8 1.1 1.3 1.1 0.3
- ----------------------------------- ------------- -------------- --------------- -------------- -------------
Purchase Obligations 22.3 22.3 0.0 0.0 0.0
- ----------------------------------- ------------- -------------- --------------- -------------- -------------
Other Long-term Obligations 30.9 21.8 6.1 2.5 0.5
- ----------------------------------- ------------- -------------- --------------- -------------- -------------
Reclamation 48.2 9.3 9.2 2.5 27.2
- ----------------------------------- ------------- -------------- --------------- -------------- -------------
Total 106.9 55.2 17.3 6.4 28.0
- ----------------------------------- ------------- -------------- --------------- -------------- -------------
RELATED PARTY TRANSACTIONS
In December 2005, a syndicate of investment dealers comprising Dundee Securities
Corporation ("DSC") and GMP Securities ("GMP") participated in raising $6
million flow through financing for the Company. DSC is related to the
significant shareholder of the Company. The Company paid DSC a commission of
$120,000. The Company accrued expenses of $500,000 for services provided by
Dundee Corporation during the period from October 2001 to December 2003.
CHANGES IN ACCOUNTING POLICIES
In 2005 the Company adopted the following policies:
On January 1, 2005, the Company adopted the Canadian Institute of Chartered
Accountants ("CICA") Accounting Guideline No. 15 - "Consolidation of Variable
Interest Entities" ("AcG-15") which requires that the Company consolidate a
variable interest entity when the Company has a variable interest, or
combination of variable interests, that will absorb a majority of the entity's
expected losses, receive a majority of the entity's expected residual returns,
or both. On October 17, 2005, the CICA issued EIC-157 - "Implicit Variable
Interests Under AcG-15" which clarifies the identification of variable interest
entity under AcG-15. As at December 31, 2005 the Company had no entities which
would qualify as a variable interest entity under AcG-15.
On December 6, 2005, the CICA issued EIC-159 - "Conditional Asset Retirement
Obligations" which clarifies the identification of conditional asset retirement
obligations as used in CICA 3110 - Asset Retirement Obligation. The adoption of
this policy had no impact on the Company's asset retirement obligations.
(See note 1 to the consolidated financial statements.)
CRITICAL ACCOUNTING ESTIMATES
ASSET IMPAIRMENT
The carrying values of producing mineral properties, including properties placed
on care and maintenance and related deferred expenditures, are reviewed
regularly and, where necessary, are written down to the estimated net
recoverable amounts. Estimated future net cash flows, on an undiscounted basis,
are calculated for each property using: estimated recoverable reserves, on the
basis of current proven and probable reserves, except for Langlois mine where
the conversion of resources was considered, taking into account the cost of
conversion; estimated future metal price realization (considering historical and
current prices, price trends and related factors); and estimated operating and
capital cash flows. Estimates of future cash flows are subject to risks and
uncertainties. It is possible that changes could occur that may affect the
recoverability of the carrying value of mineral properties. No write-downs were
required in 2005.
25
RESERVES
Every year the Company estimates its proven and probable mineral reserves (the
"Reserves") in accordance with National Instrument 43-101 ("NI 43-101"), a rule
adopted by Canadian securities administrators as the standard of disclosure for
mineral projects. This estimate is used to determine mine viability, mine life
and amortization rates. The estimation of Reserves is based on drill hole
information, historical mining results, historical metallurgical results,
estimated future operating costs and estimated future metal prices. A "Qualified
Person", as defined by NI 43-101, performs the Reserves estimate. As all of the
Company's operations have had significant operating history the factor that
could have the greatest impact on the Reserves estimate is future metal prices.
AMORTIZATION
The Company uses the units of production method for amortization of Mineral
Properties and some of its Fixed Assets based on the reserves. Any significant
changes in the Reserves could impact the amount of annual amortization.
INVENTORY
The Company values its concentrate inventories at the lower of cost or
realizable value at the end of the reporting period. Costs represent the average
cost, and include direct labour and materials costs, mine site overhead and
depreciation and amortization. Realizable value includes metal prices, net of
treatment charges and freight. Metal prices can be subject to significant change
from period to period. At December 2005 all concentrate inventories were
recorded at cost.
FUTURE TAX ASSETS AND LIABILITIES
Future tax assets and liabilities are calculated using the asset and liability
method. Under the asset and liability method, future tax assets and liabilities
are recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Future tax assets and liabilities
are measured using current tax rates. The effect on future tax assets and
liabilities of a change in tax rates is recognized in income in the period the
change is known. To the extent that the Company considers it to be more likely
than not that a future tax asset will be recovered, a tax asset will be setup,
otherwise it provides a valuation allowance against the excess. It is possible
that changes could occur in the future that may affect the recoverability of the
carrying value of future tax assets and a write-down may be required.
RECLAMATION
The Company provides for the fair value of liabilities and capitalized costs for
asset retirement obligations in the period in which they are incurred. Over
time, the liability is accreted to its present value and the capitalized cost is
amortized over the useful life of the related asset. Asset retirement
obligations are obligations of the Company that arise as a result of an existing
law, regulation or contract related to asset retirements. Estimates of the
liability associated with the retirement of an asset are based on current laws
and regulations and the expected resulting costs, all of which are subject to
change. If actual costs of reclamation exceed the recorded amount Breakwater
will record a loss. Alternatively, if reclamation costs incurred are less than
those recorded the Company will record a gain. Currently the Company is not able
to setup a liability for reclamation at El Mochito as there is no law,
regulation or contract related to this asset's retirement.
RISKS AND UNCERTAINTIES
The most significant risk affecting the profitability and viability of the
Company is the fluctuation of metal prices, particularly zinc, as the Company's
earnings and cash flow are highly sensitive to changes in the realized metal
prices. Low metal prices can impair the Company's liquidity and, if they persist
for an extended period, the Company would be required to look to alternatives
other than cash flow to maintain its liquidity until metal prices recover. Other
risks facing the Company include fluctuations in treatment charges, operating,
geological and environmental risks associated with mining and, due to the varied
geographic locations of the Company's operations, political risks.
26
PRICE RISK
The profitability of any mining operation owned by the Company is significantly
affected by the market price of zinc. It is estimated that each US$0.01 per
pound change in the price of zinc will impact earnings and cash flow by
approximately $1.8 million during 2006. An earlier table shows the approximate
impact on the Company's cash flows of variations in metal prices and the
US/Canadian dollar exchange rate, based on current plans for 2006, and assuming
that the changes remain in effect for the full year.
Fluctuations in metal prices are influenced by numerous factors beyond the
control of the Company. Exchange rates, interest rates, inflation, and the
world's supply and demand for metals can each cause significant fluctuations in
metal prices. Such external economic factors are, in turn, influenced by changes
in international economic growth patterns and political developments.
FOREIGN EXCHANGE RISK
The Company operates using the Canadian dollar and the American dollar as well
as several other currencies, and as such may be affected by fluctuations in
foreign exchange rates. Currency fluctuations may affect the revenues which
Breakwater realizes from its operations, as concentrates are sold in American
dollars, while a significant percentage of its expenses are denominated in
non-American currencies. This exposes the Company to increased volatility in
earnings as reported in Canadian dollars due to fluctuations in foreign exchange
rates. While foreign currencies are generally convertible into Canadian and
American dollars, there is no guarantee that they will continue to be so
convertible or that fluctuations in the value of such currencies will not have
an adverse effect on the Company.
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 where appropriate. Credit risk also relates to
derivative contracts arising from the possibility that a counterparty to an
instrument in which the Company has an unrealized gain fails to perform. The
Company transacts only with counterparties that have strong credit ratings. The
Company does not consider the credit risk associated with these financial
instruments to be significant.
INTEREST RATE RISK
The Company had various operating lines of credit that tie interest payments to
the bank prime or LIBOR lending rates. Therefore, the Company was exposed to
interest rate risk through fluctuations in these interest rates. In addition,
the Gold Loan carries a fixed rate of interest of 2.9%, thus, the Company is
also exposed to interest rate price risk. The Company does not enter into
financial instruments to mange its interest rate risk.
OPERATING, GEOLOGICAL AND ENVIRONMENTAL RISK
The Company maintains high operating standards at all of its operations by
adopting stringent social, safety and operating practices. The Company focuses
on environmental protection, employee training and safety. A program of regular
reviews is structured to continually identify risks and control loss at every
level. Co-operation with the Company's insurers increases the effectiveness of
the Company's loss control programs. Changing environmental laws and regulations
can create uncertainty with regard to future reclamation costs. In addition, the
review process can be lengthy and complex and delay both the commissioning and
decommissioning of projects. To minimize this risk, the Company monitors
environmental issues on an ongoing basis and believes reasonable provisions for
future environmental costs have been made and are reflected in the financial
statements.
ENVIRONMENTAL SECURITY
As at December 31, 2005, the Company had $9.2 million of environmental security
in place. These funds are held to partially fund reclamation requirements at the
Company's various mine sites. The current amounts of these funds are expected to
be returned to the Company as work planned in 2006 is completed.
27
In addition, the Company was obligated to post $13.4 million of security related
to the Myra Falls mine. These funds were posted on January 31, 2006.
- ---------------------------------- -------------------- --------------------- ---------------------
Environmental Security
(million's) Current Long-term TOTAL
- ---------------------------------- -------------------- --------------------- ---------------------
Myra Falls 0.0 0.1 0.1
- ---------------------------------- -------------------- --------------------- ---------------------
Bouchard-Hebert 2.4 0.7 3.1
- ---------------------------------- -------------------- --------------------- ---------------------
Caribou 0.0 6.0 6.0
- ---------------------------------- -------------------- --------------------- ---------------------
TOTAL 2.4 6.8 9.2
- ---------------------------------- -------------------- --------------------- ---------------------
As regulations regarding environmental restoration and the security related
thereto can change from time to time, it is possible that demands may be made on
the Company to provide additional security.
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, restricted cash, accounts receivable, accounts payable and accrued
liabilities, and short-term debt excluding the Gold Loan are carried at cost
which, due to their short-term nature, approximates their fair value. The Gold
Loan is carried at fair value as described in note 8. The fair value of the
long-term debt also approximates its carrying value as set out in note 9.
Such fair value estimates are management's best estimates, not necessarily
indicative of the amounts the Company might pay or receive in actual market
transactions, though the amounts realized in an actual transaction may differ
from these estimates. Potential taxes and other transaction costs have not been
considered in estimating fair value.
OUTSTANDING SHARE DATA AND FULL DILUTION CALCULATION
The Company is authorized to issue an unlimited number of Common Shares and
200,000,000 preferred shares, issueable in series; there are no preferred shares
outstanding. Each Common Share entitles the holder of record thereof to one vote
at all meetings of shareholders of the Corporation, except at meetings at which
only holders of another class or series of shares of the Corporation are
entitled to vote. The table set forth below summarizes the Capital Stock. For a
more complete description of certain elements please refer to note 12 to the
consolidated financial statements of the Company.
- ---------------------------------------------------------------------------------- ----------------------
Common Shares or Securities Convertible into Common Shares March 2, 2006
- ---------------------------------------------------------------------------------- ----------------------
Issued and Outstanding 381,695,510
- ---------------------------------------------------------------------------------- ----------------------
Share Options Outstanding weighted average exercise price $0.89. 10,084,667
- ---------------------------------------------------------------------------------- ----------------------
Dundee Corporation 15,400,705 warrants granted at $0.20, will expire March 2, 30,801,410
2007 and 15,400,705 expire May 2, 2007.
- ---------------------------------------------------------------------------------- ----------------------
Lender Warrants to Dundee Corporation granted at $0.19, expire March 27, 2006. 1,000,000
- ---------------------------------------------------------------------------------- ----------------------
Warrants granted at $1.00, expire January 28, 2009 - traded on TSX 33,571,429
- ---------------------------------------------------------------------------------- ----------------------
FUTURE FULLY DILUTED 457,153,016
- ---------------------------------------------------------------------------------- ----------------------
CONCLUSION RELATING TO DISCLOSURE CONTROLS AND PROCEDURES
An evaluation was performed under the supervision of and with the participation
of management, including the President and Chief Executive Officer and the Chief
Financial Officer, of the effectiveness of the
28
Company's disclosure controls and procedures as defined in the MULTILATERAL
INSTRUMENT 52-109. Based on that evaluation, the President and Chief Executive
Officer and the Chief Financial Officer concluded that the design and operation
of the Company's disclosure controls and procedures were effective as at
December 31, 2005.
OTHER INFORMATION
Additional information regarding the Company is included in the Company's Annual
Information Form filed with the Canadian securities regulators and the United
States Securities and Exchange Commission, a copy of which is posted on the
SEDAR website at www.sedar.com.
CAUTIONARY NOTE ON FORWARD LOOKING STATEMENTS
Certain statements included in this Management's Discussion and Analysis
includes forward-looking statements, which are made pursuant to the "safe
harbor" provisions of the United States Private Securities Litigation Reform Act
of 1995. They include estimates and statements that describe the Company's
future plans, objectives and goals, including words to the effect that the
Company or management expects a stated condition or result to occur. When used
herein, words such as "forecast", "estimate", "expect", "believe", "intend",
"will", "eventual", "ongoing", "anticipated", "explore", "projected", "could",
"continue", "likely", "future", "budget", "plan", "projection" and other similar
expressions are intended to identify forward-looking statements. In particular,
statements relating to the estimated future metal prices, cash flows, expenses,
capital costs, ore production, mine life, financing, development of mines, and
exploration are forward-looking statements. Such forward-looking statements
involve inherent risks and uncertainties and are subject to other factors, many
of which are beyond our control, that may cause the actual results or
performance to differ materially from those expressed or implied by such
forward-looking statements. Such factors include, among others, asset
impairment, metal price volatility, fluctuations in foreign exchange rates,
economic and political events affecting metal supply and demand, fluctuations in
ore grade or ore tonnes milled, geological, operating and environmental risks,
problems during the development, construction and start-up phases of an
underground mine, inadequacy of environmental insurance. For a more
comprehensive review of risk factors, please refer to the Company's most recent
annual report under "Management's Discussion and Analysis of Financial Results",
Annual Information Form and Form 40-F under "Risk Factors" on file with the U.S.
Securities and Exchange Commission and Canadian provincial securities regulatory
authorities filed on SEDAR at www.sedar.com. The Company is under no obligation
and it expressly disclaims any such obligation to update or alter any
forward-looking statements whether as a result of new information, events or
otherwise. Readers are cautioned not to put undue reliance on these
forward-looking statements.
29
MANAGEMENT'S REPORT
Management is responsible for the preparation of the accompanying
consolidated financial statements of Breakwater Resources Ltd. (the "Company")
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.
GEORGE E. PIRIE RICHARD R. GODFREY
President and Vice President, Finance and
Chief Executive Officer Chief Financial Officer
1
- --------------------------------------------------------------------------------
AUDITORS' REPORT
Report of Independent Registered Chartered Accountants
TO THE SHAREHOLDERS OF BREAKWATER RESOURCES LTD.
We have audited the consolidated balance sheets of Breakwater Resources
Ltd. as at December 31, 2005 and 2004 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, 2005. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with Canadian generally accepted
auditing standards and the standards of the Public Company Accounting Oversight
Board (United States). These standards require that we plan and perform an audit
to obtain reasonable assurance whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, these consolidated financial statements present fairly, in
all material respects, the financial position of the Company as at December 31,
2005 and 2004 and the results of its operations and its cash flows for each of
the years in the three-year period ended December 31, 2005 in accordance with
Canadian generally accepted accounting principles.
The Company is not required to have, nor were we engaged to perform, an
audit of its internal control over financial reporting. Our audit included
consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the Company's
internal control over financial reporting. Accordingly we express no such
opinion.
Chartered Accountants
Toronto, Canada
March 2, 2006
COMMENTS BY AUDITOR ON CANADA-UNITED STATES OF AMERICA REPORTING DIFFERENCE
The standards of the Public Company Accounting Oversight Board (United
States) require the addition of an explanatory paragraph (following the opinion
paragraph) when there are changes in accounting principles that have a material
effect on the comparability of the Company's financial statements, such as the
changes described in Note 1 to the consolidated financial statements. Our report
to the Shareholders, dated March 2, 2006, is expressed in accordance with
Canadian reporting standards which do not require a reference to such changes in
accounting principles in the auditors' report when such changes are properly
accounted for and adequately disclosed in the financial statements.
Chartered Accountants
Toronto, Canada
March 2, 2006
2
BREAKWATER RESOURCES LTD.
CONSOLIDATED BALANCE SHEETS
As at December 31, 2005 and December 31, 2004
(Expressed in thousands of Canadian dollars)
- -----------------------------------------------------------------------------------------------------------
2005 2004
===========================================================================================================
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 18,749 $ 12,667
Restricted cash (note 3) 3,929 3,391
Short-term investments (note 4) 2,523 2,633
Accounts receivable - concentrate 3,027 6,622
Other receivables 9,369 6,488
Concentrate inventory 47,501 56,215
Materials and supplies inventory 21,388 23,863
Prepaid expenses and other current assets 3,934 5,022
Future income tax assets (note 14) 6,517 -
- -----------------------------------------------------------------------------------------------------------
116,937 116,901
DEFERRED FINANCING FEES (notes 8 and 9) 344 -
RECLAMATION DEPOSITS (note 5) 6,808 100
MINERAL PROPERTIES AND FIXED ASSETS (note 6) 165,168 153,073
LONG-TERM INVESTMENT (note 7) 5,615 5,615
RESTRICTED PROMISSORY NOTE (note 10) 62,285 11,785
- -----------------------------------------------------------------------------------------------------------
$ 357,157 $ 287,474
===========================================================================================================
LIABILITIES
CURRENT LIABILITIES
Accounts payable and accrued liabilities $ 32,797 $ 35,558
Provisional payments for concentrate inventory shipped and not priced 14,807 22,962
Short-term debt including current portion of long-term debt (note 8) 14,585 256
Income and mining taxes payable 164 441
Current portion of reclamation, closure cost accruals and other
environmental obligations (note 11) 10,165 21,081
- -----------------------------------------------------------------------------------------------------------
72,518 80,298
DEFERRED INCOME (note 10) 6,888 1,848
LONG-TERM LEASE OBLIGATIONS (notes 6 and 20) 984 -
ROYALTY OBLIGATION (note 10) 62,479 11,696
LONG-TERM DEBT (note 9) 4,143 1,424
RECLAMATION, CLOSURE COST ACCRUALS AND OTHER ENVIRONMENTAL
OBLIGATIONS (note 11) 40,099 42,673
EMPLOYEE FUTURE BENEFITS (note 12) 5,379 6,446
FUTURE INCOMETAX LIABILITIES (note 14) 1,921 1,681
- -----------------------------------------------------------------------------------------------------------
194,411 146,066
- -----------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Capital stock (notes 2 and 13) 335,512 326,403
Warrants (notes 2 and 13) 8,561 8,561
Contributed surplus (note 13(j)) 3,300 3,120
Deficit (172,928) (187,667)
Cumulative translation adjustments (11,699) (9,009)
- -----------------------------------------------------------------------------------------------------------
162,746 141,408
- -----------------------------------------------------------------------------------------------------------
$ 357,157 $ 287,474
===========================================================================================================
The accompanying notes form an integral part of these consolidated financial statements.
Approved by the Board of Directors
/s/ Garth A.C. MacRae
DIRECTOR DIRECTOR
3
BREAKWATER RESOURCES LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT
For the Years Ended December 31, 2005, 2004 and 2003
(Expressed in thousands of Canadian dollars except share and per share amounts)
- ------------------------------------------------------------------------------------------------------------
2005 2004 2003
============================================================================================================
Gross sales revenue $ 312,965 $ 240,299 $ 207,591
Treatment and marketing costs 105,391 81,856 83,581
- ------------------------------------------------------------------------------------------------------------
Net revenue 207,574 158,443 124,010
- ------------------------------------------------------------------------------------------------------------
OPERATING COSTS
Direct operating costs 144,297 101,922 103,239
Depreciation and depletion 23,229 25,896 25,964
Reclamation and closure costs 12,093 4,896 3,619
- ------------------------------------------------------------------------------------------------------------
179,619 132,714 132,822
- ------------------------------------------------------------------------------------------------------------
CONTRIBUTION (LOSS) FROM MINING ACTIVITIES 27,955 25,729 (8,812)
- ------------------------------------------------------------------------------------------------------------
OTHER EXPENSES (INCOME)
General and administrative 8,666 9,559 5,087
Stock-based compensation 809 1,253 274
Interest and financing 1,284 509 3,321
Investment and other income (2,595) (843) (405)
Loss on gold loan (note 8) 1,787 - -
Foreign exchange (gain) loss on US dollar denominated debt (492) 431 (11,578)
Other foreign exchange loss (gain) 294 1,809 (206)
- ------------------------------------------------------------------------------------------------------------
9,753 12,718 (3,507)
- ------------------------------------------------------------------------------------------------------------
EARNINGS (LOSS) BEFORE THE FOLLOWING: 18,202 13,011 (5,305)
- ------------------------------------------------------------------------------------------------------------
Exploration costs 535 - -
Write-down of mineral properties and fixed assets (note 6) 879 1,178 279
Other non-producing property costs (income) (note 6) 9,035 8,638 (5,394)
Income and mining (recovery) tax provision (note 14) (6,986) 571 (841)
- ------------------------------------------------------------------------------------------------------------
3,463 10,387 (5,956)
- ------------------------------------------------------------------------------------------------------------
NET EARNINGS 14,739 2,624 651
DEFICIT - BEGINNING OF YEAR (187,667) (190,291) (190,942)
============================================================================================================
DEFICIT - END OF YEAR $ (172,928) $ (187,667) $ (190,291)
- ------------------------------------------------------------------------------------------------------------
BASIC EARNINGS PER COMMON SHARE (note 23) $ 0.04 $ 0.01 $ 0.00
============================================================================================================
DILUTED EARNINGS PER COMMON SHARE (note 23) $ 0.04 $ 0.01 $ 0.00
============================================================================================================
BASIC WEIGHTED-AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING (note 23) 369,190,000 353,508,000 211,411,000
============================================================================================================
The accompanying notes form an integral part of these consolidated financial statements.
4
BREAKWATER RESOURCES LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2005, 2004 and 2003
(Expressed in thousands of Canadian dollars)
=================================================================================================================================
2005 2004 2003
=================================================================================================================================
CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES
Net earnings $ 14,739 $ 2,624 $ 651
- ---------------------------------------------------------------------------------------------------------------------------------
Non-cash items:
Depreciation and depletion 23,229 25,896 25,964
Gain on sale of investment (851) - -
Gain on sale of property (note 6(i)) - - (10,336)
Write-down of mineral properties and fixed assets (note 6) 879 1,178 279
Unrealized loss on gold loan 1,656 - -
Foreign exchange gain on US dollar denominated loans (447) - (3,712)
Other non-cash items (9) (133) (761)
Stock-based compensation (note 13(j)) 809 1,253 274
Deferred income (56) - 1,340
Future income taxes (note 14) (6,277) 1,909 (1,050)
Reclamation closure cost accruals and other environmental obligations 12,093 4,764 2,787
Employee future benefits (note 12) 1,773 553 -
- ---------------------------------------------------------------------------------------------------------------------------------
32,799 35,420 14,785
- ---------------------------------------------------------------------------------------------------------------------------------
Payment of reclamation, closure cost accruals and other environmental obligations (25,162) (7,879) (728)
Payment of employee future benefits (note 12) (2,840) (968) -
Changes in non-cash working capital items (note 22) 2,486 (5,045) 3,179
- ---------------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 22,022 24,152 17,887
- ---------------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Increase in restricted cash (note 3) (538) (3,036) (355)
Proceeds from sale of royalty interest (note 10) 50,500 12,204 -
Issue of common shares for cash (note 13) 8,480 30,407 29,316
Issue of warrants for cash (note 13) - 7,211 -
Deferred Financing fees (344) - -
Deferred income 5,096 - -
Increase (decrease) in short-term debt 11,874 (10,059) (18,711)
Increase (decrease) in long-term debt 3,964 (14,095) (29,821)
- ---------------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 79,032 22,632 (19,571)
- ---------------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Funds advanced on promissory note (note 10) (50,500) (11,785) -
Reclamation deposits (6,708) - 1,287
Acquisition of Boliden Westmin (Canada) Limited, net of cash acquired (note 2) - (886) -
Mineral properties and fixed assets (37,978) (27,689) (10,621)
Proceeds from sale of mineral properties 214 210 10,616
- ---------------------------------------------------------------------------------------------------------------------------------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (94,972) (40,150) 1,282
- ---------------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH 6,082 6,634 (402)
- ---------------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR $ 12,667 $ 6,033 $ 6,435
=================================================================================================================================
CASH AND CASH EQUIVALENTS - END OF YEAR $ 18,749 $ 12,667 $ 6,033
- ---------------------------------------------------------------------------------------------------------------------------------
Supplemental Disclosure of Cash Flow Information
Cash paid for:
Interest $ 437 $ 436 $ 2,681
Income and mining taxes $ 634 $ 358 $ 339
The accompanying notes form an integral part of these consolidated financial statements.
5
(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 all of which are controlled through the ownership of
majority voting interests. All inter-company accounts and transactions have been
eliminated on consolidation.
REVENUE RECOGNITION AND RECEIVABLES
Revenue is recognized following the transfer of title and risk of metal
concentrate and the determination of the final settlement price in accordance
with the contractual arrangements with customers. Title is transferred on
payment by the customer of provisional invoices or in some instances on receipt
of the metal concentrate. Risk is transferred either when the metal concentrate
is delivered to the discharge port or to the load port depending on the terms of
the contract. Under a delivered ex-ship term, risk passes when the concentrate
is delivered to the discharge (destination) port. Under a cost, insurance and
freight term, risk passes when the concentrate is delivered to the load
(departure) port. 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 determination of
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".
By-products such as gold and silver are often contained within concentrate ships
to customers and revenue from these by-products is recognized when all of the
above revenue criteria are meant and when the corresponding major metal is
recognized in revenue.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash and highly liquid investments with
original maturities of three months or less. The Company invests cash in term
deposits maintained in high credit quality institutions.
CONCENTRATE INVENTORY
Concentrate inventory is valued at the lower of cost and net realizable
value. Cost represents the average cost and includes direct labour and material
costs, mine site overhead, depreciation and depletion.
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.
LONG-TERM INVESTMENT
Long-term investment is valued at cost, net of any other than temporary
impairment in value.
EMPLOYEE FUTURE BENEFITS
The employee future benefits plan relates only to the employees at the Myra
Falls mine.
The actuarial determination of the accrued benefit obligations for pensions
and other retirement benefits uses the projected benefit method prorated on
service (which incorporates management's best estimate of the expected future
return of plan assets, cost escalations, retirement ages of employees and other
actuarial factors).
For the purpose of calculating the expected return on plan assets, those
assets are valued at fair value.
Actuarial gains (losses) arise from the difference between actual long-term
rate of return on plan assets for a period and the expected long-term rate of
return on plan assets for that period, or from changes in actuarial assumptions
used to determine the accrued benefit obligation. The excess of the net
accumulated actuarial gain (loss) over 10 percent of the greater of the benefit
obligation and the fair value of plan assets is amortized over the lesser of the
average remaining service period of active employees or to the date that Myra
Falls mine operations are assumed to cease, December 31, 2011. The average
remaining service period of the active employees covered by all plans is 10
years.
Past service costs arising from plan amendments are deferred and amortized
on a straight-line basis over the lesser of the average remaining service period
of employees active at the date of amendment or to the date that mine operations
are assumed to cease, December 31, 2011.
6
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, 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 6(b), 6(d), 6(f), 6(g) and
6(h)) and related deferred expenditures are reviewed regularly to determine if
there is any impairment in the carrying value. An impairment loss would be
recognized when the carrying amount of a long-lived asset is not recoverable and
exceeds its fair value which would be determined based on the present value of
expected future cash flows. Estimated future net cash flows, on an undiscounted
basis, are calculated for each property using: estimated recoverable reserves;
estimated future metal 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. The company reviews these
investments, in accordance with the requirements of EIC 126 - "Accounting by
mining enterprises for exploration costs".
Fixed assets are stated at cost. Fixed assets are depreciated 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.
In accordance with EIC 152 - "Mining Assets - Impairment and Business
Combinations" the Company includes value beyond proven and probable reserves in
its estimate of future cash flows when testing for impairment and determining
fair value.
ASSET RETIREMENT OBLIGATIONS AND ASSET RETIREMENT COSTS
The Company provides for the fair value of liabilities for asset retirement
obligations in the year 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 year, and the capitalized cost is amortized over the
useful life of the related asset.
Asset retirement obligations are provided for obligations that are required
to be settled as a result of an existing law, regulation or contract related to
asset retirements.
Collateral on deposit with third parties to fund reclamation costs is
included in Reclamation Deposits and Restricted Cash on the balance sheet.
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 of 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 into 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 income statement amounts are translated at the historical
rates. Monetary assets and liabilities are translated at actual exchange rates
in effect at the balance sheet date, while 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.
7
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, materials and supplies inventory, mineral properties and
fixed assets, reclamation, closure cost accruals and other environmental
obligations, future income tax assets and future income tax liabilities.
FINANCIAL INSTRUMENTS
The Company enters into derivative financial instrument contracts to manage
certain market risks which result from the underlying nature of its business.
When the Company chooses to apply hedge accounting, 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 recognized. The premiums received at the
inception of written call options are recorded as a liability and 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 are deferred on the designation date and are
recognized in income when the original hedged transaction affects income while
changes in fair value are recorded in current period income. Gains or losses
(realized or unrealized) for derivative contracts which relate to a hedged
transaction that is no longer expected to occur are recorded immediately in
income. Contracts for which hedge accounting has not been applied, are
marked-to-market, and gains and losses are recognized in the relevant period and
included in "Gross sales revenue" on the consolidated statements of operations
and deficit.
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 13. The Company uses the fair value method of accounting to
recognize compensation expense for its stock-based compensation to employees.
Shares issued under the Plan are recorded at the issue price.
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 statement,
carrying amounts and the tax basis 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 combinations, where differences between assigned values and tax basis
of assets acquired and liabilities assumed exist, the Company recognizes the
future income tax assets and liabilities for the tax effects of such
differences, subject to an appropriate valuation allowance. Future withholding
taxes are provided on the unremitted net earnings of foreign subsidiaries, to
the extent that dividends or other repatriations are anticipated in the future
and will be subject to such taxes.
NEW PRONOUNCEMENTS
On January 1, 2005, the Company adopted the Canadian Institute of Chartered
Accountants ("CICA") Accounting Guideline No. 15 - "Consolidation of Variable
Interest Entities" ("AcG-15") which requires that the Company consolidate a
variable interest entity when the Company has a variable interest, or
combination of variable interests, that will absorb the majority of the entity's
expected losses, receive the majority of the entity's expected residual returns,
or both. As at December 31, 2005, the Company had no entities which would
qualify as a variable interest entity under AcG-15.
8
2004 AND 2003 FIGURES
Certain of the 2004 and 2003 figures have been reclassified to conform to
the 2005 presentation.
2. ACQUISITION OF BOLIDEN WESTMIN (CANADA) LIMITED
On July 23, 2004, the Company acquired, through NVI Holdings Ltd., a
wholly-owned subsidiary of the Company, 100% of the outstanding common shares of
Boliden Westmin (Canada) Limited ("BWCL") which operates the Myra Falls Mine, a
zinc, copper and gold mine located on Vancouver Island, British Columbia.
Subsequently, the name of BWCL was changed to NVI Mining Ltd. The purchase price
comprised:
i) Cash of $4,194,000, including out-of-pocket expenses of $569,000
incurred by the Company to effect the acquisition;
ii) 18,000,000 common shares ("Common Shares") of the Company at an
ascribed value of $0.45 per share, for a total of $8,081,000, net of
share issue expenses of $19,000. The value of the Common Shares issued
was determined based on the weighted-average market price of the
Company's Common Shares over the two-day period before and after July
8, 2004, which was the date the terms of the acquisition were agreed
to and announced; and
iii) 5,000,000 warrants exercisable at $1.00 per Common Share with an
expiry date of January 28, 2009. The value ascribed of $0.27 per
warrant, for a total of $1,350,000 was included in the amount for
warrants on the balance sheet for December 31, 2004. The value of the
warrants issued was determined based on the weighted-average market
price of the Company's warrants over the two-day period before and
after the date the terms of the acquisition were agreed to and
announced.
The acquisition was accounted for using the purchase method of accounting
and the results of NVI Mining Ltd. and NVI Holdings Ltd. were consolidated into
the Company's financial statements from July 23, 2004 onwards. The Company's
interest in the net assets acquired was allocated as follows:
($000's)
-----------------------------------------------------------------------
Cash 3,308
Non-cash current assets 15,234
Long-term investment 5,615
Mineral properties and fixed assets 46,146
Current liabilities (16,471)
Reclamation and other environmental obligations (33,155)
Employee future benefits (7,052)
-----------------------------------------------------------------------
Total 13,625
-----------------------------------------------------------------------
Total consideration comprised of:
Cash and out-of-pocket expenses 4,194
Common shares, net of share issue expenses 8,081
Warrants 1,350
-----------------------------------------------------------------------
Total 13,625
-----------------------------------------------------------------------
3. RESTRICTED CASH
The restricted cash balance at December 31, 2005, of $3,929,000, includes
$2,390,000 placed on deposit to cover certain reclamation costs (see note 5),
$250,000 to guarantee an operating lease and $1,289,000 as collateral for the
gold loan (see note 8). The restricted cash balance at December 31, 2004 of
$3,391,000 included $2,625,000 placed on deposit for letters of credit to cover
reclamation security bonds (see note 5), deposits for letters of credit of
$90,000 and $250,000 to guarantee reclamation undertakings and an operating
lease, respectively and a security deposit of $426,000 to guarantee reclamation
undertakings.
4. SHORT-TERM INVESTMENTS
($000's) 2005 2004
---------------------------------------------------------------------------------------------------
Marketable securities (quoted market value - 2005: $421, 2004: $3,886) 218 2,633
Gold bullion, at cost (quoted market value - 2005: $2,313) 2,305 -
---------------------------------------------------------------------------------------------------
2,523 2,633
9
As at December 31, 2005, the Company held 3,867 ounces of gold bullion to
facilitate an instalment payment for the Gold Loan. The payment was made on
January 3, 2006 (see note 8).
5. RECLAMATION DEPOSITS
Cash collateral on deposit at December 31, 2005 of $6,808,000 (2004 -
$100,000) with third parties to fund reclamation costs is shown separately on
the balance sheet as Reclamation Deposits. The Reclamation Deposits at December
31, 2005 are in respect of reclamation costs at the Caribou mine, the
Bouchard-Hebert mine, the Langlois mine and the Myra Falls mine. The Reclamation
Deposit at December 31, 2004 was for reclamation costs at the Caribou mine.
6. MINERAL PROPERTIES AND FIXED ASSETS
($000's) 2005 2004
---------------------------------------------------------------------- ---------------------------------------------
Accumulated Accumulated
Depreciation Net Book Depreciation Net Book
Cost and Depletion Value Cost and Depletion Value
---------------------------------------------------------------------- ---------------------------------------------
Equipment 150,860 (103,465) 47,395 145,453 (104,170) 41,283
Mineral properties,
buildings and
improvements 128,474 (77,112) 51,362 123,437 (69,245) 54,192
Development 101,081 (47,269) 53,812 85,315 (41,409) 43,906
Exploration 15,298 (4,170) 11,128 14,756 (2,939) 11,817
Asset retirement cost 10,481 (9,010) 1,471 10,590 (8,715) 1,875
---------------------------------------------------------------------- ---------------------------------------------
406,194 (241,026) 165,168 379,551 (226,478) 153,073
Development costs are amortized using the unit-of-production method. The
amortization expense for 2005 was $5,860 (2004 - $6,906; 2003 - $4,405)
The following is an analysis of equipment under capital leases:
($000's) Dec.31, 2005 Dec. 31, 2004
------------------------------------------------------------------------------------
Equipment cost 2,416 774
Less: Accumulated amortization (464) (145)
------------------------------------------------------------------------------------
1,952 629
Equipment under capital lease is amortized on a straight-line basis over
its economic life of 5 years.
The amount of amortization charged to expense in 2005 is $319,000 (2004 -
$111,000).
Mineral properties and fixed assets of the Company, net of accumulated
depreciation and depletion, comprise the following:
a) El Mochito Mine $17,424,000 (2004 - $16,078,000)
The El Mochito mine is a zinc, lead and silver mine located in the Republic of
Honduras. Deferred development costs were written down in 2005 by $187,000 (2004
- - $Nil and 2003- $279,000 in respect of deferred exploration costs).
b) Bougrine Mine $2,530,000 (2004 - $4,687,000)
The Bougrine mine is zinc and lead mine located 160 kilometres west of Tunis,
Tunisia. The Bougrine mine ceased operations on September 10, 2005, due to the
exhaustion of the known mineral reserves and is on care and maintenance. Care
and maintenance costs incurred in 2005 of $778,000 are included in "Other
non-producing property costs (income)" on the consolidated statement of
operations and deficit.
c) El Toqui Mine $28,816,000 (2004 - $27,728,000)
The El Toqui mine is a zinc and gold mine located 1,350 kilometres south of
Santiago, Chile.
d) Bouchard-Hebert Mine $3,504,000 (2004 - $5,155,000)
The Bouchard-Hebert mine is a zinc, copper, gold and silver mine located 30
kilometres northeast of Rouyn-Noranda, Quebec, Canada. The Bouchard-Hebert mine
ceased on February 20, 2005, due to the exhaustion of the known mineral reserves
and is on care and maintenance. Care and maintenance costs incurred in 2005 of
$3,468,000 are included in "Other non-producing property costs (income)" on the
consolidated statement of operations and deficit.
10
e) Myra Falls Mine $55,920,000 (2004 - $46,853,000)
The Myra Falls mine is a zinc, copper and gold mine located on Vancouver Island,
British Columbia.
f) Langlois Mine $49,784,000 (2004 - $44,436,000)
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. On November 8, 2005, the Company announced that it
will develop the Langlois mine and it is expected that the mine will be in full
commercial production by mid-2007. Development costs totaled $1,039,000 in 2005
(2004 - $698,000). In addition, pre-production costs and fixed assets, net of
disposals, of $4,309,000 (2004 - $3,009,000) have been capitalized in
anticipation of the mine reopening.
g) Caribou Mine $Nil (2003 - $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. Care and maintenance costs incurred in 2005 of $1,813,000 (2004 -
$1,641,000, 2003 - $1,521,000) are included in "Other non-producing property
costs (income)" on the consolidated statement of operations and deficit.
h) Nanisivik Mine $1,620,000 (2004 - $2,342,000)
The Nanisivik mine was a zinc and silver mine located on Strathcona Sound,
Baffin Island, Nunavut, Canada. The fixed asset carrying value of $1,620,000
(2004 - $2,342,000) as at December 31, 2005, represents the net book value of
plant and equipment located at the Nanisivik mine, which management plans to
transfer to the Company's other mines or sell on the open market. The fixed
assets were written down in 2005 by $692,000 (2004 - $Nil, 2003 - $Nil). The
Nanisivik mine ceased operations on September 30, 2002. Care and maintenance
costs incurred in 2005 of $2,526,000 (2004 - $4,734,000, 2003 - $3,386,000) and,
in 2004, an obsolescence provision of $2,100,000 for materials and supplies
inventory, are included in "Other non-producing property costs (income)" on the
consolidated statement of operations and deficit.
i) Other Properties $5,570,000 (2004 - $5,794,000)
Other Properties comprise exploration properties and other capital assets.
Management reviews the carrying values of these properties annually and in 2005
recorded a write-down of $Nil (2004 - $1,178,000, 2003 - $Nil), which is
included in "Write-down of mineral properties and fixed assets" on the
consolidated statement of operations and deficit.
On June 16, 2003, the Company sold the Lapa exploration properties
consisting of the Tonawanda and Zulapa properties, 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 was deferred and will be included into income when
earned.
The Lapa properties were non-producing properties, and the gain on sale of
$10,336,000 in 2003 was included in "Other non-producing property costs
(income)" on the consolidated statement of operations and deficit.
7. LONG-TERM INVESTMENT
Long-term investment is valued at cost, net of any other than temporary
impairment in value.
($000's) December 31, 2005 December 31, 2004
----------------------------------------------------------------------------------------
Taseko Mines Limited convertible debenture 5,615 5,615
A convertible debenture, with a face value of $17,000,000, from Taseko
Mines Limited ("Taseko") was issued on July 21, 1999, and matures on July 21,
2009. The principal sum does not bear interest and is not secured by any charge
or mortgage on any assets of Taseko.
The debenture is convertible into common shares of Taseko over a ten-year
period from the date of issuance commencing at a price of $3.14 per share
escalating by $0.25 per year thereafter. From the fifth anniversary from the
date of issue until the tenth anniversary, the outstanding principal may, at the
election of Taseko, be converted into common shares of Taseko at the then
prevailing market price. The fair value of the debenture as at December 31,
2005, was $5,203,000 (2004 - $8,055,000) and was calculated using the quoted
market price of Taseko's shares. This decline in the value is considered to be
temporary. Therefore, no impairment charge was recorded in 2005.
11
8. SHORT-TERM DEBT
($000's) 2005 2004
-------------------------------------------------------------------------------------
Gold loan (see note 4) 11,563 -
Prepayment Facility, current portion (note 9) 1,458 -
Reimbursable government assistance, unsecured current portion 1,541 -
(note 9)
Other - interest at floating rates 23 256
-------------------------------------------------------------------------------------
14,585 256
On August 26, 2005, NVI Mining Ltd. ("NVI"), a wholly-owned subsidiary of
the Company, signed a Gold Loan agreement ("Gold Loan") with Natexis Banques
Populaires of France ("Natexis"). Under the terms of the agreement, NVI was
provided with 23,200 ounces of gold bullion valued at $11,889,000
(US$10,000,000). The Gold Loan bears interest at 2.9% payable monthly. The
principal will be repaid in six equal instalments, in the form of gold bullion,
over thirteen months with the first payment made on October 31, 2005. The Gold
Loan will be used to support reclamation, working capital requirements at NVI's
Myra Falls mine and for general corporate purposes. Myra Falls mine's copper,
zinc and gold concentrate inventories and related accounts receivable, a cash
collateral account and unsecured guarantees of the Company and NVI Holdings Ltd.
have been provided as security for the Gold Loan.
The Company has chosen not to apply hedge accounting to this arrangement
and accordingly, the obligation will be remeasured at each balance sheet date
and any gains or losses will be recognized in income. As at December 31, 2005,
19,333 ounces of gold bullion remained outstanding and were marked to market,
which resulted in an unrealized loss on remeasurement of $1,656,000.
As at December 31, 2005, financing fees amounting to $242,000 had been
deferred and are being amortized on a straight-line basis over the life of the
Gold Loan.
Interest expense on short-term debt during 2005 amounted to $74,000 (2004
- -$34,000; 2003 - $797,000).
9. LONG-TERM DEBT
($000's) 2005 2004
-------------------------------------------------------------------------------------
Prepayment Facility 5,101 -
Reimbursable government assistance, unsecured, non-interest
bearing 2,041 1,424
-------------------------------------------------------------------------------------
Total 7,142 1,424
Less current portion 2,999 -
-------------------------------------------------------------------------------------
4,143 1,424
On May 17, 2005, NVI entered into a contract (the "Prepayment Facility")
with a customer whereby the customer made a prepayment of US$5,000,000 against
future deliveries of zinc concentrate for the years 2005 through 2009. The
Prepayment Facility has been assigned to a third party by the customer. Under
the terms of the Prepayment Facility interest is payable at six month LIBOR at
the beginning of the period plus 3.5%. The Company has issued to the third party
as security, eight promissory notes, each for US$625,000, plus interest, payable
on demand if NVI fails to comply with its obligations to deliver the required
amount of zinc concentrate in six-month consecutive periods which began on June
16, 2005. As at December 31, 2005, financing fees amounting to $102,000 had been
deferred and are being amortized on a straight-line basis over the life of the
Prepayment Facility.
The current portion of the reimbursable government assistance of $1,541,000
is due in April 2006. The long term portion of $500,000 is payable when the Zone
97 at the Langlois mine is profitable.
Interest expense on long-term debt during 2005 amounted to $270,000 (2004 -
$38,000, 2003 - $1,432,000).
10. ROYALTY OBLIGATION
a) In December 2005, the Company entered into a Royalty Agreement ("the
Second Agreement") with Red Mile Resources No. 4 Limited Partnership ("Red
Mile") whereby the Company sold a "Basic Royalty" on a portion of the payable
zinc production, over the life of the Myra Falls mine. The Company received cash
of $56,500,000 which included royalty income of $50,500,000, indemnity fees of
$1,141,000, interest of $4,469,000 and prepaid interest income of $390,000.
Under the terms of the Second Agreement, the Company is required to make
Basic Royalty payments at fixed amounts per pound of payable zinc produced,
which escalates from $0.0016 per pound to $0.1373 per pound over the first 12
years of the agreement. In addition, the Company granted Red Mile a Net Smelter
Return of 1.50%, 2.25% or 3.00% in years 2011 through 2015 if the price of zinc
in a given calendar year averages US$2,600, US$2,800 or US$3,000 per tonne,
respectively. $50,500,000 of the cash received was placed with a financial
institution, for which the Company took back a restricted promissory note. The
restricted promissory note earns interest at 6%, payable annually, and matures
on February 15, 2015. The Company received and has deferred $390,000 of prepaid
interest on the note in December 2005. Interest earned from the restricted
promissory note and a portion of the principal must be used to fund the expected
Basic Royalty payments
12
during the first ten years of the Second Agreement. Over the remaining years of
the Second Agreement, interest and principal from the restricted promissory note
will be used to fund the Basic Royalty payments.
Under certain circumstances the Company has the right, by way of a call
option to acquire the partnership units of Red Mile for the lower of market
value or for the outstanding amount of the restricted promissory note at the end
of the tenth year of the Second Agreement.
The balance of the funds of $6,000,000 will be used for working capital and
capital requirements at the Myra Falls mine.
On the balance sheet, the royalty received from Red Mile is included in
"Royalty Obligation". These amounts are treated as debt and attract interest at
a rate of 6% annum which is included in interest expense. The indemnity fee
received of $1,141,000 was deferred and is included in "Deferred Income" on the
balance sheet and is being recognized in income as earned over the life of the
Second Agreement.
b) In December 2004, the Company entered into a Royalty Agreement
("Agreement") with Red Mile Resources No. 5 Limited Partnership ("Red Mile
No.5") whereby the Company sold a "Basic Royalty" on a portion of the payable
zinc production, over the life of the Myra Falls Mine. The Company received cash
of $13,540,000, which included royalty income of $11,979,000, indemnity fees of
$564,000, interest of $520,000 and prepaid interest of $477,000.
Under the terms of the Agreement, the Company is required to make Basic
Royalty payments at fixed amounts per pound of payable zinc produced, which
escalates from $0.003 per pound to $0.016 per pound over the first 12 years of
the agreement. In addition, the Company granted Red Mile No.5 a Net Smelter
Return of 0.4%, 0.5% or 0.7% in years 2010 through 2014 if the price of zinc in
a given calendar year averages US$2,250, US$2,500 or US$2,750 per tonne,
respectively. $11,785,000 of the cash received was placed with a financial
institution, for which the Company took back a restricted promissory note. The
restricted promissory note earns interest at 6%, payable annually, and matures
on December 15, 2014. The Company received and has deferred $477,000 of prepaid
interest on this note in December 2004. Interest earned from the restricted
promissory note must be used to fund the expected Basic Royalty payments during
the first five years of the Agreement. Over the remaining years of the
Agreement, interest and principal from the restricted promissory note will be
used to fund the Basic Royalty payments.
The balance of the funds of $1,755,000 was used for working capital and
capital requirements at the Myra Falls mine.
Under certain circumstances the Company has the right, by way of a call
option to acquire the partnership units of Red Mile No.5 for the lower of market
value or for the outstanding amount of the restricted promissory note.
On the balance sheet, the long-term portion of the royalties received from
Red Mile No.5 of $11,696,000 was shown as "Royalty Obligation" and the current
portion of $283,000 was included in "Accounts payable and accrued liabilities".
These amounts are treated as debt and attract interest at a rate of 6.11% per
annum which is included in interest expense. Of the indemnity fees received,
$508,000 was deferred and as at December 31, 2005, $451,000 is still outstanding
and is included in "Deferred Income" on the balance sheet. The deferred
indemnity fees will be recognized in income as earned over the life of the
Agreement. Interest expense for the year ended December 31, 2005 was $719,000
(2004 - $Nil).
c) In accordance with AcG 15 - "Consolidation of Variable Interest
Entities" and EIC 157 - "Implicit Variable Interests under AcG 15" the Company
has determined that Red Mile and Red Mile No.5 are variable interest entities
for which the Company holds variable interests. However, as the Company is not
the primary beneficiary under these arrangements it is not required to
consolidate these entities.
11. RECLAMATION, CLOSURE COST ACCRUALS AND OTHER ENVIRONMENTAL OBLIGATIONS
The Reclamation, Closure Cost Accruals and Other Environmental Obligations
shown on the balance sheet comprise:
($000's) December 31, 2005 December 31, 2004
--------------------------------------------------------------------------------------------
Asset retirement obligations 41,542 47,221
Closure cost accruals 2,150 4,978
Other environmental obligations (see note below) 6,572 11,555
--------------------------------------------------------------------------------------------
50,264 63,754
Less current portion 10,165 21,081
--------------------------------------------------------------------------------------------
40,099 42,673
Other environmental obligations represent expenditures required to complete
modifications to the tailings facility at the Myra Falls Mine. The Company
expects to complete the work required by 2008. The estimated obligation was
recorded and is being reduced by actual expenditures incurred. The actual
expenditures since acquisition have been $8,292,000. The current portion of
$2,001,000 is included in "Current portion of reclamation, closure cost accruals
and other environmental obligations" on the balance sheet.
13
Asset Retirement Obligations - ($000's)
-------------------------------------------------------------------------------------------
As at December 31, 2004 47,221
Change in cash flow estimate (included in reclamation and closure costs) 7,735
Accretion (included in reclamation and closure costs) 3,483
Expenditures (16,703)
Impact of foreign exchange (194)
-------------------------------------------------------------------------------------------
As at December 31, 2005 41,542
Less: current portion included in Current portion of reclamation,
closure cost accruals and other environmental obligations 7,284
-------------------------------------------------------------------------------------------
34,258
The estimated amount of undiscounted cash flows required to satisfy the
asset retirement obligations as at December 31, 2005, was $114,429,000 (2004 -
$119,649,000). The expected timing of payments of the cash flows ranges from
2006 to 2117, and the credit-adjusted risk-free rates at which the estimated
cash flows have been discounted to arrive at the obligation range from 7.17% to
7.89%. The estimated amount of undiscounted cash flows for December 31, 2005,
includes an amount of $66,329,000 (2004 - $66,329,000), which is for treatment
of water at the Myra Falls Mine, in perpetuity. At the end of the mine life, the
Company has two options to fund the water treatment costs. The first would be to
put on deposit $17,500,000, which amount is expected to generate sufficient cash
flow to fully fund the water treatment costs. The second, subject to the
necessary approvals from the government of British Columbia, would be to connect
the hydroelectric generating facilities located at the Myra Falls mine to the BC
Hydro electrical grid and sell electrical power to the market. The expected
revenue would be more than sufficient to fund the water treatment costs. 12.
14
EMPLOYEE FUTURE BENEFITS
The Company's unionized hourly employees at the Myra Falls mine have a
defined benefit pension plan. The hourly employees' benefits under this plan are
specified by a collective agreement. The pension plan is a flat benefit plan and
there are no indexation features. Actuarial reports valuing this hourly plan are
prepared every three years, with December 31, 2004 being the most recent
valuation. The Company also provides extended health and dental benefits for
certain employees of the Myra Falls mine.
The details of the Company's benefit plans as at December 31, 2005, are as
follows:
Post-retirement
Pension benefits other
benefits than pension Total
-------------------------------------------------------
Expected long-term rate of return on plan assets 7.00% N/A N/A
Discount rate on accrued pension obligations (December
31, 2004 - 6.00%) 5.00% 5.00% N/A
Rate of compensation increase N/A N/A N/A
12% for the first 10
Extended health care rate of expense increase N/A years, 5% thereafter N/A
Dental care rate of expense increase N/A 4.00% N/A
($000's)
-------------------------------------------------------------------------------------------------------------------
Pension expenses:
Current service cost 1,200 17 1,217
Interest cost of accrued benefit obligation 1,910 66 1,976
Expected return on pension fund assets (1,697) - (1,697)
Net amortization, deferrals and other 216 61 277
-------------------------------------------------------------------------------------------------------------------
1,629 144 1,773
===================================================================================================================
Plan assets:
Fair value of plan assets, as at December 31, 2004 23,333 - 23,333
Return on plan assets 2,633 - 2,633
Employer contributions 2,776 64 2,840
Benefits paid (969) (64) (1,033)
-------------------------------------------------------------------------------------------------------------------
Fair value of plan assets, at December 31, 2005 27,773 - 27,773
===================================================================================================================
Accrued benefit obligation:
Accrued benefit obligation, as at December 31, 2004 31,119 1,104 32,333
Current service cost 1,200 17 1,217
Interest cost 1,910 65 1,975
Benefits paid (969) (63) (1,032)
Actuarial loss (gain) 6,244 (328) 5,916
-------------------------------------------------------------------------------------------------------------------
Accrued benefit obligation, at December 31, 2005 39,504 795 40,299
===================================================================================================================
Plan assets 27,773 - 27,773
Accrued benefit obligation 39,504 795 40,299
-------------------------------------------------------------------------------------------------------------------
Funding deficit (11,731) (795) (12,526)
Unamortized actuarial gain (loss) 5,818 (332) 5,486
Unamortized past service costs 1,296 365 1,661
-------------------------------------------------------------------------------------------------------------------
Pension liability (4,617) (762) (5,379)
===================================================================================================================
15
The assumed health care cost trend rates can affect the amounts reported
for the health care plan:
-------------------------------------------------------- -------------------------- -------------------------
$000's 1 Percentage - Point 1 Percentage - Point
increase decrease
-------------------------------------------------------- -------------------------- -------------------------
Effect on service cost 0.5 (0.1)
-------------------------------------------------------- -------------------------- -------------------------
Effect on interest cost 1.3 (1.3)
-------------------------------------------------------- -------------------------- -------------------------
Effect on year-end accrued benefit obligation 17.2 (16.0)
-------------------------------------------------------- -------------------------- -------------------------
PLAN ASSETS
The allocation of plan assets is set forth in the Investment Policy
Statement. The Investment Policy Statement delegates authority to the
Employee Benefits Committee to maintain and establish investment policies
relating to the defined benefit plans. These policies and any changes to
these policies are approved by the Board of Directors of the Company. The
Company has adopted the following standards for the Employee Benefits
Committee to follow when deciding how to invest the plan assets.
ASSETS SHALL BE INVESTED:
(a) in the sole interest of the plan participants and beneficiaries;
(b) with the care, skill, prudence and diligence under the circumstances
then prevailing that a prudent person acting in like capacity and
familiar with such matters would use in the conduct of an enterprise
of a like character and of like aims in compliance with Section 404(A)
of ERISA, and other applicable provisions of ERISA; and
(c) by diversifying the investments so as to minimize the risk of large
losses as well as provide a reasonable rate of return on the assets.
The following table summarizes the pension plan's weighted-average asset
allocation percentages by asset category:
------------------------------------------------- -------------------------
Asset Category 2005
------------------------------------------------- -------------------------
Short-term / Money market 7.0%
------------------------------------------------- -------------------------
Fixed income 38.5%
------------------------------------------------- -------------------------
Canadian equity 33.0%
------------------------------------------------- -------------------------
U.S. equity 11.5%
------------------------------------------------- -------------------------
Non-U.S. Foreign equity 10.0%
------------------------------------------------- -------------------------
The benefit plan assets are managed by a major insurance company and the Company
has chosen to invest in their diversified fund which has a target investment
allocation of 15% - 20% in foreign equity, 20% - 40% in Canadian equity and 40%
- - 60% in fixed income. The diversified fund invests in several of its segregated
funds, which include Canadian and foreign stocks, Canadian bonds and mortgages
to achieve diversification. The performance objective of the diversified fund is
to exceed the median rate of return of a representative sample of comparable
funds over rolling five-year periods. The assumption for the expected long-term
rate of return on plan assets is based on the relative weighting of plan assets,
the historical experience of the portfolio and the review of projected returns
by asset class on broad, publicly traded equity and fixed-income indices.
CONTRIBUTIONS
The Company expects to contribute $2,952,000 to its defined benefit
pension plan and $152,000 for its post-retirement benefit plans in 2006.
ESTIMATED FUTURE BENEFIT PAYMENTS
------------------------------------------------------- ------------------- ------------------
$000's Defined benefit
Pension plan Other Benefits
------------------------------------------------------- ------------------- ------------------
2006 1,300 152
------------------------------------------------------- ------------------- ------------------
2007 1,448 171
------------------------------------------------------- ------------------- ------------------
2008 1,591 184
------------------------------------------------------- ------------------- ------------------
2009 1,779 218
------------------------------------------------------- ------------------- ------------------
2010 2,091 265
------------------------------------------------------- ------------------- ------------------
Aggregate of 5 years thereafter 41,675 252
------------------------------------------------------- ------------------- ------------------
Benefit payments are expected to cease after December 31, 2011, for
the retirement supplement plan and the non-pension post-retirement plan, as
the obligation related to these plans will cease once the Myra Falls mine
ceases
16
operation. The expected payments for the registered pension plan in 2012
reflect the termination of the plan on December 31, 2011, and represent the
pay out of all plan obligations.
13. CAPITAL STOCK
The Company is authorized to issue 200,000,000 preferred shares. No
preferred shares were issued or outstanding on December 31, 2005 (2004 -
Nil).
The Company is authorized to issue an unlimited number of Common Shares.
Common shares issued:
Common shares
(000's) Number of shares Amount
-------------------------------------------------------------------------------------------------
As at December 31, 2003 285,790 $287,790
Common Shares issued for cash (c) 57,143 29,816
Common Shares issued on acquisition of BWCL (see note 2) 18,000 8,081
Exercise of warrants 1,250 242
Adjustment to flow-through share costs 3
Employee share option plan - proceeds of options exercised 493 93
(g)
Value ascribed to options exercised under stock-based
compensation - 125
Employee share purchase plan (d) 480 253
-------------------------------------------------------------------------------------------------
As at December 31, 2004 363,156 326,403
Private placement (a) and (b) 13,000 7,081
Exercise of warrants 1,500 295
Employee share option plan - proceeds of options exercised 2,841 899
(g)
Value ascribed to options exercised under stock-based
compensation - 629
Employee share purchase plan (d) 420 205
-------------------------------------------------------------------------------------------------
As at December 31, 2005 380,917 $335,512
a) In August 2005, the Company issued an aggregate of 3,000,000
flow-through Common Shares by way of private placement at a price of $0.46
per Common Share exclusive of share issuance costs of $4,000 to CMP 2005
Resource Limited Partnership ("CMP") and Canada Dominion Resources 2005
Limited Partnership ("CDR"). The flow-through Common Shares have a four
month hold period. The proceeds are being used to finance exploration
activities in Quebec. CMP and CDR are managed by an affiliate of Dundee
Corporation ("Dundee") which is a significant shareholder of the Company.
b) In December 2005, the Company issued 10,000,000 flow-through Common
Shares by way of private placement at a price of $0.60 per Common Share
exclusive of share issuance costs of $295,000. The flow-through Common
Shares have a four month hold period. The proceeds are being used to
finance exploration activities in Quebec. A director of the Company
purchased 145,586 of the flow-through Common Shares issued pursuant to the
private placement.
c) 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 28,
2009. The fair value of the warrants, issued on completion of the sale in
the amount of $7,211,000, net of costs of issue, was shown on a combined
basis with the warrants issued on the BWCL acquisition, ($1,350,000; see
note 2) within shareholders' equity on the balance sheet as "Warrants".
d) Under the share purchase plan employees of the Company who fall under
a certain classification can contribute up to 10% of their annual basic
salary to purchase Common Shares. All other employees who qualify under the
share purchase plan can contribute up to 5% 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 trust and delivered to employees 12 months following their date of
issue. The Company issued 420,000 Common Shares pursuant to the Share
Purchase Plan during 2005 (2004 - 480,000). The number of shares authorized
for issue and available for issue under the share purchase plan as at
December 31, 2005 was 7,500,000 (2004 - 7,500,000) and 2,431,206 (2004 -
2,851,554) respectively.
17
e) Pursuant to the share option plan, the board of 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 issued after 2003 must be exercised no later than five years after
the date of the grant, and options issued prior to 2003 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.
As at December 31, 2005, the outstanding share options which total
10,085,000 expire at various dates between August 19, 2006 and November 19,
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, 2005, was 23,000,000.
f) The Company has a Share Bonus Plan that permits Common Shares to be
issued as a discretionary bonus to any director, employee (full-time or
part-time), officer or consultant of the Company, or any subsidiary
thereof, who is designated under the Share Bonus Plan from time to time. As
at December 31, 2005, 2004 and 2003, the Company had issued 1,200,000
Common Shares under the Share Bonus Plan. The number of shares authorized
for issue under the share bonus plan as at December 31, 2005, was
4,000,000.
g) Share option transactions were as follows:
Weighted-
Options Average
(000's) Exercise Price
-----------------------------------------------------------------------------------
As at December 31, 2003 8,885 1.25
Granted 6,335 0.64
Exercised (494) 0.19
Forfeited (1,000) 0.67
Expired (56) 0.72
-----------------------------------------------------------------------------------
As at December 31, 2004 13,670 $1.06
Granted 2,250 0.45
Exercised (2,841) 0.32
Forfeited (934) 0.62
Expired (2,060) 2.33
-----------------------------------------------------------------------------------
As at December 31, 2005 10,085 $1.02
The following table summarizes information about the share options
outstanding at December 31, 2005:
Options Outstanding Options Exercisable
--------------------------------------------------------------------------- ------------------------------------
Number Weighted- Number
Outstanding Average Weighted- Exercisable Weighted-
as at Remaining Average as at Average
Range of Dec. 31, 2005 Contractual Exercise Dec. 31, 2005 Exercise
Exercise Prices (000's) Life Price (000's) Price
--------------------------------------------------------------------------- ------------------------------------
$0.18 - $0.50 5,160 5 years 144 days $0.32 3,598 $0.28
$0.51 - $1.49 3,617 3 years 199 days $0.75 2,458 $0.77
$1.50 - $2.99 481 2 years 171 days $2.36 481 $2.36
$3.00 - $8.20 827 2 years 254 days $4.05 828 $4.05
----------------- -----------------
10,085 7,365
i) 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, 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.
j) The Company's share option plan is described in note 13(e).
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. Stock-based compensation of $809,000 (2004 - $1,253,000)
less the proceeds of options exercised of $629,000 (2004 - $124,000) for a
net amount of $180,000 (2004 - $1,129,000), was credited to "Contributed
Surplus" within
18
shareholders' equity on the balance sheet. The proceeds of options
exercised of $629,000 (2004 - $124,000), was credited to "Capital stock"
within 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:
2005 2004
----------------------------------------------------------------------------------------------
Weighted-average exercise price per Common Share $0.45 $0.64
Weighted quoted market price per Common Share at date of grant $0.46 $0.64
Weighted-average grant-date fair value price per Common Share $0.27 $0.39
Expected life (years) 5 3 - 5
Risk free interest rate 3.44% 4.49%
Expected volatility 69% 70%
Dividend yield 0% 0%
k) In consideration for restructuring a debt facility in 2001 and 2002,
the Company granted to the syndicate ("Lenders") warrants to purchase an
aggregate of 1,000,000 Common Shares at $0.21 per share. The warrants were
exercisable until May 8, 2005. No value was ascribed to these warrants on
the date of issue. During the year ended December 31, 2005, 500,000 (2004 -
250,000, 2003 - 250,000) of the warrants issued to the Lenders were
exercised and Nil (2004 - Nil) were cancelled. At December 31, 2005, none
of these warrants remained outstanding.
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. At
December 31, 2005, the 30,801,410 warrants were outstanding.
l) Under an agreement reached on December 23, 2002, with certain lenders
and Dundee, the Company, in consideration for restructuring its existing
credit facilities, granted to these 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. In 2005, 1,000,000 (2004 - 1,000,000) of these warrants were
exercised by these lenders. At December 31, 2005, 1,000,000 of these
warrants remain outstanding.
14. 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, 2005,
of 36% (2004 - 37%, 2003 - 38%) to the net earnings (loss), excluding
income and mining taxes. The differences are summarized as follows:
($000's) 2005 2004 2003
----------------------------------------------------------------------------------------------------------
Tax provision (recovery) at statutory rate 2,812 1,180 2,364
Federal resource allowance 608 (1,035) 119
Unrecognized tax benefit relating to losses 7,806 4,366 916
Different effective tax rates on earnings (losses) in foreign
subsidiaries (5,291) (163) 1,630
Benefit of previously unrecognized losses available for
carry forward (13,231) (5,107) (5,984)
Other 161 108 124
Mining taxes (recovery) 149 1,222 (10)
----------------------------------------------------------------------------------------------------------
(6,986) 571 (841)
19
As at December 31, 2005, the significant components of the Company's
future tax assets (liabilities) were as follows:
($000's) 2005 2004
-------------------------------------------------------------------------------------------------------
Future tax assets
Loss carry forwards 60,420 72,415
Mineral properties and fixed assets 227,435 137,833
Reclamation and closure cost accruals 17,658 21,258
Deferred income 2,518 -
-------------------------------------------------------------------------------------------------------
Future tax assets before valuation allowance 308,031 231,506
Valuation allowance 301,514 231,506
-------------------------------------------------------------------------------------------------------
Future tax assets 6,517 -
Future tax liabilities
Mineral properties - mining tax (1,921) (1,681)
-------------------------------------------------------------------------------------------------------
Net future tax (liabilities) assets 4,596 (1,681)
($000's) 2005 2004 2003
-------------------------------------------------------------------------------------------------------
Income and mining (recovery) tax provision
Current income and mining (recovery) tax provision (709) (148) 208
Future income and mining (recovery) tax provision (6,277) 719 (1,049)
-------------------------------------------------------------------------------------------------------
(6,986) 571 (841)
a) At December 31, 2005, the Company has net operating loss carry
forwards in Canada of approximately $160,200,000, which expire at various
dates through 2015. In addition, the Company has approximately $229,000,000
of resource expenditures that are limited in their deduction to income from
specific properties.
b) At December 31, 2005, the Company has recognized net operating loss
carry forwards in Chile of approximately $22,500,000, which do not expire.
c) At December 31, 2005, the Company has the following loss carry
forwards in Honduras of approximately $1,849,000 relating to operating
losses and $16,530,000 relating to exchange rate losses. These losses will
expire four years from 2005.
15. 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, restricted cash, accounts receivable, accounts payable
and accrued liabilities, and short-term debt excluding the Gold Loan are
carried at cost which, due to their short-term nature, approximates their
fair value. The Gold Loan is carried at fair value as described in note 8.
The fair value of the long-term debt also approximates its carrying value
as set out in note 9.
Such fair value estimates are management's best estimates not
necessarily indicative of the amounts the Company might pay or receive in
actual market transactions, though the amounts realized in an actual
transaction may differ from these estimates. 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 where appropriate.
Credit risk also relates to derivative contracts arising from the
possibility that a counterparty to an instrument in which the Company has
an unrealized gain fails to perform. The Company transacts only with
counterparties that have strong credit ratings. The Company does not
consider the credit risk associated with these financial instruments to be
significant.
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
20
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 when they are designated as hedges are
reported as a component of the related transactions.
The Company had no foreign exchange contracts outstanding at December
31, 2005 and 2004.
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 as hedge accounting has not been
applied, and gains and losses are recognized in the relevant period. The
Company also periodically enters into written call options which are
marked-to-market through income as hedge accounting is not applied. In 2005
and 2004, the Company chose not to apply hedge accounting.
The Company had the following contracts, which were outstanding as at
December 31, 2005:
December 31, 2005 Quantity Average Price (US) Maturity
-------------------------------------------------------------------------------------------------------------
Silver call options 1,050,000 ounces $7.50 per ounce January - June 2006
Gold call options 25,000 ounces $455 per ounce December 2006
As at December 31, 2004 there were no outstanding contracts.
In addition to the commodity risk related to revenues, the Company is
exposed to commodity risk related to its Gold Loan. This risk is mitigated
by the gold produced by the Company as well as ounces of gold purchased by
the Company in advance of loan repayments as described in note 8.
INTEREST RATE RISK
The Company had various operating lines of credit that tie interest
payments to the bank prime or LIBOR lending rates. Therefore, the Company
was exposed to interest rate risk through fluctuations in these interest
rates. In addition, the Gold Loan carries a fixed rate of interest of 2.9%,
thus, the Company is also exposed to interest rate price risk. The Company
does not enter into financial instruments to manage its interest rate risk.
16. RELATED PARTY TRANSACTIONS
All related party transactions are disclosed elsewhere in these
consolidated financial statements (see notes 8 and 12) except for the
following:
a) The Company incurred management fees in 2005 of $Nil (2004 - $Nil,
2003 - $250,000) for services provided by Dundee. As at December 31, 2005,
management fees totaling $500,000, relating to 2003 of $250,000 and 2002 of
$250,000, are outstanding and are included in accounts payable and accrued
liabilities on the balance sheet.
b) For the years ended December 31, 2004 and 2003 the Company provided to
Glencairn Gold Corporation ("Glencairn"), formerly Black Hawk Mining Inc.
("BHK"), a company that is related through common directorship, logistic
and procurement services which enable both companies to reduce costs and
negotiate favourable terms for the purchase of materials and supplies.
For the year ended December 31, 2005, Glencairn was not considered to
be a related party due to the change in the composition of the board of
directors of Glencairn.
Transactions for the year ended December 31, 2004, for sale of
supplies and charges for administrative services to Glencairn totalled
$652,000 (2003 - $574,000). These transactions have been reflected in the
statements of operations as cost recoveries and accordingly, are reflected
as reductions in either direct operating costs or general and
administrative expenses. In addition, the Company did not sell any
equipment to Glencairn in 2004 (2003 - $106,000).
Other accounts receivable at December 31, 2004 included the following
amounts due from Glencairn:
21
($000's) 2004
---------------------------------------------------------------
For:
Supplies 315
Services 18
---------------------------------------------------------------
333
These amounts were collected in full in 2005.
Interest was charged on overdue amounts receivable from BHK at
commercial rates during 2004 and 2003.
17. GUARANTEES
a) As at December 31, 2005, the Company has an outstanding letter of
credit in the amount of $250,000 which is renewable annually and relates to
the operating lease at the Nanisivik mine (see note 6(h)). As at December
31, 2004, the Company had outstanding letters of credit totaling
$2,965,000, of which, $2,715,000 was for security deposits for
rehabilitation and restoration expenses and $250,000 was for the operating
lease at the Nanisivik mine.
b) In consideration for the receipt of an indemnity fee of $1,141,000
from Wilshire Financial Services Inc. ("Wilshire") related to the Second
Agreement (note 10(a)), the Company has indemnified and holds harmless
Wilshire from and against any and all losses based upon, arising out of, or
otherwise in connection with or as a result of any claims relating to a
breach or default by the Company under the Agreement. As at December 31,
2005, the maximum liability was $50,500,000. The indemnity fee of
$1,141,000 was deferred and amortized on a straight-line basis over the
term of the agreement.
c) In consideration for the receipt of an indemnity fee of $564,000 from
Wilshire related to the Agreement (note 10(b)), the Company has indemnified
and holds harmless Wilshire from and against any and all losses based upon,
arising out of, or otherwise in connection with or as a result of any
claims relating to a breach or default by the Company under the Agreement.
As at December 31, 2005, the maximum liability was $11,785,000. The
indemnity fee of $564,000 was deferred and amortized on a straight-line
basis over the term of the agreement.
22
18. RECONCILIATION WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
The consolidated financial statements of the Company have been
prepared in accordance with Canadian generally accepted accounting
principles ("Cdn. GAAP") which are different in some respects from those
applicable in the United States of America ("U.S. GAAP") and from practices
prescribed by the United States Securities and Exchange Commission.
Variations between balance sheet items and statements of operations
items as shown in the consolidated financial statements under Cdn. GAAP and
the amounts determined using U.S. GAAP are as follows:
CONSOLIDATED BALANCE SHEETS
Mineral Accounts
Properties Payable and
(Expressed in thousands and Cash and Cash Short-term Long-term Restricted Intagible Accrued
of Canadian dollars) Fixed Assets Equivalents Investments Investments Cash Assets Liabilities
- ---------------------------------------------------------------------------------------------------------------------------
AS AT DECEMBER 31, 2005
As shown in the consolidated
financial statements under
Cdn. GAAP $165,168 $18,749 $2,523 $5,615 $ 3,929 $ - $32,797
Shares issued to promoters
or shareholders in
exchange (a) (735)
Adjustment relating to
stock-based compensation (l)
Adjustment relating to
stock-based compensation
to non-employee
Adjustment relating to
stock-based compensation
to senior officer
Adjustment relating to
write-down of
El Toqui mine (b) (1,458)
Adjustment relating to
exploration expenditures
(c) (7,602)
Adjustment relating to
unrealized gains on
short-term investments (e) 203
Adjustment relating to
fair value on long-term
investments (f) (412)
Adjustment relating to
flow-through shares (i) (7,406) 7,406 940
Recognition of minimum
pension liability (k) 1,296
Adjustment to reclassify
Cumulative Translation
Adjustment (h)
- ---------------------------------------------------------------------------------------------------------------------------
According to U.S. GAAP $155,373 $11,343 $2,726 $5,203 $11,335 $1,296 $33,737
===========================================================================================================================
(Continued)
Accumulated
Employee Other Cumulative
(Expressed in thousands Future Comprehensive Contributed Translation Capital
of Canadian dollars) Benefits Income Deficit Surplus Adjustment Stock
- -----------------------------------------------------------------------------------------------------------------
AS AT DECEMBER 31, 2005
As shown in the consolidated
financial statements under
Cdn. GAAP $5,379 $ - ($172,928) $3,300 ($11,699) $335,512
Shares issued to promoters
or shareholders in
exchange (a) 13,471 (14,206)
Adjustment relating to
stock-based compensation (l) 458 (28) (430)
Adjustment relating to
stock-based compensation
to non-employee (48) 48
Adjustment relating to
stock-based compensation
to senior officer (156) 156
Adjustment relating to
write-down of
El Toqui mine (b) (1,458)
Adjustment relating to
exploration expenditures
(c) (7,602)
Adjustment relating to
unrealized gains on
short-term investments (e) 203
Adjustment relating to
fair value on long-term
investments (f) (412)
Adjustment relating to
flow-through shares (i) 142 (1,082)
Recognition of minimum
pension liability (k) 7,114 (5,818)
Adjustment to reclassify
Cumulative Translation
Adjustment (h) (11,699) 11,699
- -----------------------------------------------------------------------------------------------------------------
According to U.S. GAAP $12,493 ($17,314) ($168,533) $3,476 $ - $319,794
=================================================================================================================
23
Mineral Accounts
Properties Payable and
(Expressed in thousands and Cash and Cash Short-term Long-term Restricted Intagible Accrued
of Canadian dollars) Fixed Assets Equivalents Investments Investments Cash Assets Liabilities
- ---------------------------------------------------------------------------------------------------------------------------
AS AT DECEMBER 31, 2004
As shown in the consolidated
financial statements
under Cdn. GAAP $153,073 $12,667 $2,633 $5,615 $3,391 $ - $35,558
Shares issued to promoters
or shareholders in
exchange (a) (1,028)
Adjustment relating to
stock-based
compensation (l)
Adjustment relating to
stock-based compensation
to non-employee
Adjustment relating to
stock-based compensation
to senior officer
Adjustment relating to
write-down of
El Toqui mine (b) (1,862)
Adjustment relating to
exploration expenditures
(c) (7,595)
Adjustment relating to
unrealized gains on
short-term investments
(e) 1,253
Adjustment relating to
fair value on long-term
investments (f) 2,440
Adjustment relating to
flow-through shares (i) (742) 742 142
Recognition of minimum
pension liability (k) 1,512
Adjustment to reclassify
Cumulative Translation
Adjustment (h)
- ---------------------------------------------------------------------------------------------------------------------------
According to U.S. GAAP $142,588 $11,925 $3,886 $8,055 $4,133 $1,512 $35,700
===========================================================================================================================
(Continued)
Accumulated
Employee Other Cumulative
(Expressed in thousands Future Comprehensive Contributed Translation Capital
of Canadian dollars) Benefits Income Deficit Surplus Adjustment Stock
- -----------------------------------------------------------------------------------------------------------------
AS AT DECEMBER 31, 2004
As shown in the consolidated
financial statements
under Cdn. GAAP $6,446 $ - ($187,667) $3,120 ($9,009) $326,403
Shares issued to promoters
or shareholders in
exchange (a) 13,178 (14,206)
Adjustment relating to
stock-based
compensation (l) 458 (410) (48)
Adjustment relating to
stock-based compensation
to non-employee (48) 48
Adjustment relating to
stock-based compensation
to senior officer (156) 156
Adjustment relating to
write-down of
El Toqui mine (b) (1,862)
Adjustment relating to
exploration expenditures
(c) (7,595)
Adjustment relating to
unrealized gains on
short-term investments
(e) 1,253
Adjustment relating to
fair value on long-term
investments (f) 2,440
Adjustment relating to
flow-through shares (i) (142)
Recognition of minimum
pension liability (k) 2,022 (510)
Adjustment to reclassify
Cumulative Translation
Adjustment (h) (9,009) 9,009
- -----------------------------------------------------------------------------------------------------------------
According to U.S. GAAP $8,468 ($8,266) ($181,252) $2,914 $ - $312,007
=================================================================================================================
24
CONSOLIDATED STATEMENTS OF OPERATIONS
(Expressed in thousands of Canadian dollars, except for per share 2005 2004 2003
information)
- ----------------------------------------------------------------------------------------------------------
Earnings as shown in the consolidated financial
statements under Cdn. GAAP $14,739 $2,624 $651
Additional (expense) income:
Cumulative effect of change in accounting principle for ARO (m) - - (11,903)
Adjustment to depletion in connection with shares
issued to promoters or shareholders (a) 293 261 279
Adjustment relating to depreciation and depletion (b) 404 268 158
Adjustment relating to write-off of exploration expenditures (c) (7) (807) (837)
Adjustment stock-based compensation (l) - - 274
Adjustment to mark-to-market long-term investment (f) (2,852) - -
Adjustment to mark-to-market embedded option in long-term - 2,348 -
investment (f)
Adjustment for interest on long-term investment - 92 -
Adjustment to reverse write-off of exploration properties under
Cdn. GAAP as these properties were already expensed under
U.S. GAAP (c) - 1,178 -
Adjustment relating to flow-through shares (i) 142 - -
==========================================================================================================
Net earnings (loss) under U.S. GAAP $12,719 $5,964 ($11,378)
==========================================================================================================
Basic earnings (loss) per share under U.S. GAAP $0.03 $0.02 ($0.05)
Diluted earnings (loss) per share under U.S. GAAP $0.03 $0.02 ($0.05)
Effect of U.S. GAAP adjustments on basic earnings (loss) per share ($0.01) $0.01 ($0.05)
CONSOLIDATED STATEMENTS OF OPERATIONS PRESENTATION:
Under U.S. GAAP, the measure "Contribution (Loss) from Mining Activities"
is not a recognized term and would therefore not be presented. "Contribution
(Loss) from Mining Activities" when adjusted for the items in the table below is
comparable to the terminology "Earnings (Loss) from operations" under U.S. GAAP.
The following table reconciles "Contribution (Loss) from Mining Activities
under Cdn. GAAP" to "Earnings (Loss) from operations under U.S. GAAP"
(Expressed in thousands of Canadian dollars) 2005 2004 2003
- ------------------------------------------------------------------------------------------------------------
Contribution (Loss) from Mining Activities under Cdn. GAAP $ 27,955 $ 25,729 $ (8,812)
General and administrative (8,666) (9,559) (5,087)
Stock-based compensation (809) (1,253) (274)
Exploration expense (535) - -
Write-down of mineral properties and fixed assets (879) (1,178) (279)
Other non-producing property costs (9,035) (8,638) (5,394)
Aggregate adjustments for U.S. GAAP (2,162) 3,340 (12,029)
- ------------------------------------------------------------------------------------------------------------
Earnings (Loss) from operations under U.S. GAAP $ 5,869 $ 8,441 $ (31,875)
============================================================================================================
For U.S. GAAP purposes, the components of non-operating income (loss) are as follows:
(Expressed in thousands of Canadian dollars) 2005 2004 2003
- ------------------------------------------------------------------------------------------------------------
Interest and financing $ (1,284) $ (509) $ (3,321)
Investment and other income 2,595 843 405
Loss on gold loan (1,787) - -
Foreign exchange gain (loss) on US dollar denominated debt 492 (431) 11,578
Other foreign exchange (loss) gain (294) (1,809) 206
Adjustment relating to flow-through shares 142 - -
- ------------------------------------------------------------------------------------------------------------
Non-operating income (loss) for U.S. GAAP $ (136) $ (1,906) $ 8,868
============================================================================================================
25
The following table reconciles "Net earnings (loss) under U.S. GAAP" to
"Comprehensive income (loss) under U.S. GAAP".
(Expressed in thousands of Canadian dollars) 2005 2004 2003
------------------------------------------------------------------------------------------------------------
Net Earnings (Loss) under U.S. GAAP $12,719 $5,964 ($11,378)
Change in cumulative translation adjustment account (h) (2,690) (5,688) (17,727)
Adjustment to recognise minimum pension liability (k) (5,818) (510) -
Adjustment relating to unrealized gains on short-term
investments (e) 203 1,253 18
------------------------------------------------------------------------------------------------------------
Comprehensive income (loss) under U.S. GAAP $4,414 $1,019 ($29,087)
============================================================================================================
There are no differences in cash flows provided from operating activities,
financing activities and investing activities as presented in the statements of
cash flows under Cdn. and U.S. GAAP except that, under U.S. GAAP the
determination of cash provided from operating activities would reflect the net
earnings (loss) under U.S. GAAP (as opposed to Cdn. GAAP) with appropriate
adjustments to non-cash items and non-cash working capital items with respect to
adjustments disclosed in the balance sheet and statement of operations schedules
above to arrive at the same cash flow from operating activities amount under
both Cdn. and U.S. GAAP. Also, the sub-total within the caption "Cash provided
from (Used for) operating activities" under "Operating Activities" is not
permitted; therefore the reader should disregard the sub-total of $32,799,000,
$35,420,000 and $13,445,000 for 2005, 2004, and 2003, respectively for U.S. GAAP
purposes. As well, changes in restricted cash would be shown as an investing
activity rather than a financing activity.
DIFFERENCES BETWEEN CDN. GAAP AND U.S. GAAP
a) Transfer of Non-monetary Assets from Promoters or Shareholders in Exchange
for Shares
Under Cdn. GAAP, non-monetary assets acquired in exchange for common shares
of the Company should be valued at the fair value of the consideration given,
unless the fair value of the consideration given is not clearly evident, in
which case the acquisition should be accounted for at the fair value of the net
assets acquired.
The Securities and Exchange Commission's interpretative response to U.S.
Accounting Principles Board Opinion No. 29 requires that non-monetary assets
transferred from promoters or shareholders in exchange for common shares of the
Company be recorded at the transferor's historical cost.
b) Write-down of Mineral Properties and Fixed Assets
Following an evaluation of the Company's mineral properties and fixed
assets on the basis set out in Note 1 of the Company's 2005 consolidated
financial statements, the Company determined that no write-down was required in
2005, 2004 and 2003 as a result of applying SFAS 144, "Accounting for the
Impairment or Disposal of Long-lived Assets". In 2002, differences in the amount
of write-down arose, reflecting the requirement under U.S. GAAP to discount
future cash flows from impaired properties to measure impairment. Under Cdn.
GAAP at the time, future cash flows from properties were not discounted in
determining the magnitude of any impairment. As a consequence of the difference
in impairment write-downs, under U.S. GAAP, depreciation and depletion would be
reduced in 2005 by $404,000 ($268,000 in 2004, and $158,000 in 2003).
c) Exploration Expenditures
Under Cdn. GAAP, the Company defers certain exploration expenditures. When
the properties are brought into commercial production, the deferred costs are
amortized on the unit-of-production basis. If the properties are abandoned, the
deferred expenditures are expensed at that time. The Securities and Exchange
Commission published interpretations with respect to the extractive industry and
has stated that under U.S. GAAP exploration expenditures during the exploration
stage prior to determination of the existence of commercially mineable ore
bodies are required to be expensed as incurred. Under U.S. GAAP, the Company
expenses exploration costs of non-producing properties as incurred.
d) Comprehensive Income (Loss)
Under SFAS No. 130, "Reporting Comprehensive Income", all components of
comprehensive income (loss) are to be reported in the period in which they are
recognized. It requires that an entity classify items of other comprehensive
income by their nature in a financial statement and disclose the accumulated
balance of other comprehensive income separately from retained earnings
(deficit) and additional paid in capital.
26
e) Short-term Investments
Under Cdn. GAAP, short-term investments are recorded at the lower of cost
and quoted market value. Under U.S. GAAP, unrealized gains (losses) on
short-term investments classified as available for sale securities are recorded
in other comprehensive income, until realized.
f) Long-term Investment
Long-term investment consists of a non-interest bearing convertible
debenture from Taseko Mines Limited, which under Cdn. GAAP, is recorded at cost,
net of any impairment in value. Under Cdn. GAAP the Company has not recorded any
interest income or unrealized gains (losses) on this investment. Under U.S.
GAAP, unrealized holding gains and losses on trading securities are recognized
in earnings, in accordance with SFAS 115 "Accounting for Certain Investments in
Debt and Equity Securities." In the current year, the Company has recorded a
mark-to-market loss on the investment of $2,852,000.
g) Derivative Instruments and Hedging Activities
The Company applies Financial Accounting Standards Board ("FASB") Statement
No.133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"), and the corresponding amendments under FASB Statement No.138 ("SFAS
138"). SFAS 133 requires that all derivative financial instruments be recognized
in the financial statements and measured at fair value regardless of the purpose
or intent for holding them. Changes in the fair value of derivative financial
instruments are either recognized periodically in income or in shareholders'
equity (as a component of other comprehensive income), depending on whether the
derivative is being used to hedge changes in the fair values or cash flows. SFAS
138 amended certain provisions of SFAS 133 to clarify four areas of
implementation.
Under both Cdn. and U.S. GAAP, the Company has marked to market its derivative
instruments and the resulting unrealized gains (losses) have been charged to
income in the relevant year.
h) Cumulative Translation Adjustment Account
Under Cdn. GAAP, the unrealized translation gains and losses on the
Company's net investment in self-sustaining operations translated using the
current rate method accumulate in a separate component of shareholders' equity
described as "Cumulative translation adjustment" on the consolidated balance
sheet. Under U.S. GAAP, such unrealized foreign exchange gains and losses would
not accumulate in a separate component of shareholders' equity but rather as an
adjustment to other comprehensive income.
i) Flow-through Shares
Under Canadian income tax legislation, a company is permitted to issue
shares whereby the company agrees to incur qualifying expenditures and provide
the related income tax deductions to the investors. The Company has accounted
for the issue of flow-through shares using the deferral method in accordance
with Cdn. GAAP. At the time of issue, the funds received are recorded as share
capital. When the company renounces its rights to the related tax deductions,
the resulting future income tax liability ("FITL") is debited to share capital,
and any related decrease of the valuation allowance against future income tax
assets would be credited to income. Prior to 2004, Canadian GAAP did not require
the FITL to be charged to share capital. For U.S. GAAP, the premium paid in
excess of the market value of $940,000 (2004 - $Nil, 2003 - $142,000) is
credited to accounts payable and accrued liabilities and will be included in
income when the company renounces the deductions and the related FITL is charged
to income. Qualifying expenditures were incurred in 2005 of $417,000 (2004 -
$742,000, 2003 - $Nil) relating to the 2003 flow-through shares and the premium
of $142,000 was brought into income in 2005. The flow-through fund, which is
equivalent to the total unexpended proceeds of $7,406,000 (2004 - $742,000, 2003
- - $742,000), and is considered to be restricted and is not considered to be cash
or cash equivalents under U.S. GAAP.
27
j) Accounts Payable and Accrued Liabilities
Included in accounts payable and accrued liabilities are amounts for
accounts payable and accrued expenses, respectively, as follows:
($000's) 2005 2004
- --------------------------------------------------------------------------------
Accounts payable $16,266 $24,946
Payroll and severance accrual 8,129 4,931
Utilities cost accrual 632 873
Management fees accrual 500 500
Mark-to-market of metal forward sale and call options 3,552 315
Capital lease - current portion 657 375
Capital tax accrual 144 130
Premium paid on flow-through shares 940 142
Other accruals 2,917 3,488
- --------------------------------------------------------------------------------
$33,737 $35,700
k) Minimum Pension Liability
Under U.S. GAAP, if the accumulated pension plan benefit obligation which
is the same as the accrued benefit obligation exceeds the market value of plan
assets, a minimum pension liability for the excess is recognized to the extent
that the liability recorded in the balance sheet is less than the minimum
liability. Any portion of this additional liability that relates to unrecognized
prior service cost is recognized as an intangible asset while the remainder is
charged to Other Comprehensive Income. Cdn. GAAP does not require the Company to
record a minimum pension liability and does not have the concept of Other
Comprehensive Income. In 2005, the Company recorded a minimum pension liability
of $7,114,000 (2004 - $2,022,000), an unrecognized prior service cost of
$1,296,000 (2004 - $1,512,000), classified as "Intangible Asset" on the U.S.
GAAP balance sheet, and a loss charged to Other Comprehensive Income of
$5,818,000 (2004 - $510,000).
l) Stock Based Compensation
Under both Cdn. GAAP and U.S. GAAP, effective January 1, 2004, the Company
recorded an expense for employee stock-based compensation using the fair value
based method in accordance with the transitional provisions of Section 3870 and
SFAS 123 as amended by SFAS 148. As a result of applying the modified
prospective method for U.S. GAAP the stock-based compensation recognized under
Cdn. GAAP for 2003 and 2002 has been reversed against contributed surplus and
capital stock as, under US GAAP, recognition is not required for options granted
before January 1, 2004.
The fair value at grant date of stock options is estimated using the
Black-Scholes option-pricing model. Compensation expense is recognized over the
stock option vesting period.
Under U.S. GAAP, options granted to non-employees would be fair valued and
accounted as compensation expense. Under present Cdn. GAAP, effective January 1,
2002, options can be valued under either the intrinsic value method or the fair
value method. In accordance with Cdn. GAAP in effect prior to January 1, 2002,
the Company did not recognize compensation expense for options granted to
non-employees. For purposes of determining compensation expense under U.S. GAAP,
the fair value of each option grant has been estimated on the balance sheet date
using Black-Scholes option-pricing model with assumptions of a 1.58 year
expected life, risk free interest rate of 5.25%, an expected volatility of 136%
and a dividend yield of 0%.
During 2001 as part of an employment agreement with a former senior
personnel, the Company had granted stock options to this individual, which fully
vested on the date of the grant.
Under Cdn. GAAP, the Company has accounted for the options in accordance
with the Company's Accounting Policy for stock options. Under U.S. GAAP the
direct award of stock would be accounted for at the fair value of the stock on
the date of the award. The fair value of each option grant is estimated on the
balance sheet date using Black-Scholes option-pricing model with assumptions of
a 3-year expected life, risk free interest rate of 5.25%, an expected volatility
of 136% and a dividend yield of 0%.
m) Asset Retirement Obligations
Effective January 1, 2004, under Cdn. GAAP the Company adopted Section
3110, "Accounting for Asset Retirement Obligations" which requires that the fair
value of liabilities for asset retirement obligations associated with tangible
long-lived assets be recognized in the period in which they are incurred. This
Section harmonizes Cdn. GAAP with U.S. GAAP (SFAS 143) for the accounting for
asset retirement obligations. There are no GAAP differences between Cdn. GAAP
and U.S. GAAP related to the accounting for asset retirement obligations on a
prospective basis. Under Section 3110, the
28
transition provisions required the prior year comparatives to be restated.
However, U.S. GAAP required a cumulative effect of accounting change to be
recorded in the period of adoption for SFAS 143, which was recorded by the
Company for the year ended December 31, 2003. The restatements under Cdn. GAAP
have been reversed in 2002 and a cumulative adjustment has been recorded in 2003
under U.S. GAAP.
n) Variable Interest Entities
In December 2003, the FASB issued FIN 46R, which provides guidance on the
identification and reporting for entities over which control is achieved through
means other than voting rights. FIN 46R defines such entities as variable
interest entities ("VIEs"). Application of this revised interpretation was
required in financial statements for companies that have interests in VIEs or
potential VIEs for periods ending after December 15, 2003. Application for all
other types of entities is required in financial statements for periods ending
after March 15, 2004. The adoption of this accounting standard did not have a
material impact on the financial statements of the Company.
p) Recent Accounting Pronouncements
U.S. STANDARDS
In December 2004, the FASB issued SFAS 153, "Exchanges of Nonmonetary
Assets - an Amendment of APB Opinion No. 29". The guidance in APB Opinion No.
29, "Accounting for Nonmonetary Transactions", is based on the principle that
exchanges of nonmonetary assets should be based on the fair value of the assets
exchanged. The guidance in that Opinion, however, included certain exceptions to
that principle. SFAS 153 amends Opinion No. 29 to eliminate the exception for
nonmonetary exchanges of similar productive assets and replaces it with a
general exception for exchanges of nonmonetary assets that do not have
commercial substance. A nonmonetary exchange has commercial substance if the
future cash flows of the entity are expected to change significantly as a result
of the exchange. The provisions of SFAS 153 are effective for nonmonetary
exchanges occurring in fiscal periods beginning after June 15, 2005. Early
adoption is permitted and companies must apply the standard prospectively. The
adoption of this standard is not expected to have a material effect on the
Company's results of operations or financial position.
In March 2005, the FASB issued FIN 47, "Accounting for Conditional Asset
Retirement Obligations, an interpretation of FASB Statement No. 143" ("FIN 47"),
which requires an entity to recognize a liability for the fair value of a
conditional asset retirement obligation when incurred if the liability's fair
value can be reasonably estimated. FIN 47 was adopted by the Company during the
year. The adoption of this standard did not have a material effect on the
Company's results of operations, financial position or cash flows.
The Financial Accounting Standards Board (FASB) has issued FASB Statement
No. 151, Inventory Costs, an amendment of ARB No. 43, Chapter 4. The amendments
made by Statement 151 will improve financial reporting by clarifying that
abnormal amounts of idle facility expense, freight, handling costs, and wasted
materials (spoilage) should be recognized as current-period charges and by
requiring the allocation of fixed production overheads to inventory based on the
normal capacity of the production facilities. The guidance is effective for
inventory costs incurred during fiscal years beginning after June 15, 2005.
Earlier application is permitted for inventory costs incurred during fiscal
years beginning after November 23, 2004. The provisions of Statement 151 should
be applied prospectively. The Company does not expect the standard will have any
impact on its financial statements.
In December 2004, the FASB issued SFAS No. 123 (Revised 2004), "Share-Based
Payments" ("SFAS 123R"), which requires all share-based payments to employees,
including grants of employee stock options, to be recognized as compensation
expense in the consolidated financial statements based on their fair values.
SFAS 123R also modifies certain measurement and expense recognition provisions
of SFAS 123, that will impact the Company, including the requirement to estimate
employee forfeitures each period when recognizing compensation expense, and
requiring that the initial and subsequent measurement of the cost of
liability-based awards each period be based on the fair value (instead of the
intrinsic value) of the award. This statement is effective for the Company as of
January 1, 2006. SAB 107, "Share Based Payment" ("SAB 107") was issued by the
SEC in March 2005, and provides supplemental SFAS 123R application guidance
based on the views of the SEC. As described in "Accounting Changes" above, the
Company is expensing stock-based compensation using the fair value method
prospectively for all awards granted or modified on or after January 1, 2002 for
Canadian GAAP, which is similar to SFAS 123R. This change is not expected to
have a material impact on the calculated compensation expense and as a result,
the adoption of SFAS No. 123R is not expected to have an impact on the Company's
results of operations and financial condition.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections" ("SFAS 154"), which relates to the accounting for and reporting of
a change in accounting principles and applies to all voluntary changes in
29
accounting principles. The reporting of corrections of an error by restating
previously issued financial statements is also addressed by this statement. SFAS
154 applies to pronouncements in the event they do not include specific
transition provisions. When a pronouncement includes specific transition
provisions, those provisions should be followed. SFAS 154 requires retroactive
application to prior periods' financial statements of changes in accounting
principle, unless the period specific effects or cumulative effects of an
accounting change are impracticable to determine, in which case the new
accounting principle is required to be applied to the assets and liabilities as
of the earliest period practicable, with a corresponding adjustment made to
opening retained earnings. Prior to SFAS 154, most accounting changes were
recorded effective at the beginning of the year of change, with the cumulative
effect at the beginning of the year of change recorded as a charge or credit to
earnings in the period a change was adopted. SFAS 154 will be effective on
accounting changes and corrections of errors beginning in 2006. SFAS does not
change the transition provisions of any existing accounting pronouncements,
including those that are in the transition phase as of the effective date of
SFAS 154.
CANADIAN STANDARDS
The terms "proven and probable reserves", "development" and "production"
have the same meaning under both U.S. and Cdn. GAAP. In addition, mining related
costs are only capitalized after proven and probable reserves have been
designated under both U.S. and Cdn. GAAP.
19. CONTINGENCIES AND COMMITMENTS
CONTINGENCIES
a) On October 10, 2002, the Nunavut Water Board ("NWB") issued to
CanZinco Ltd. ("Canzinco"), 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 water license
renewal was a requirement that the Company guarantee the financial security
required by the license. The NWB established that the amount of security
required by the license was $17,600,000. Of that amount $5,000,000 had been
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.
In February 2003, the Company delivered to the Department of Indian
Affairs and Northern Development ("DIAND"), the federal government agency
responsible for the administration of financial security matters related to
any water license issued by the NWB, an unsecured promissory note in the
amount of $1,000,000 in order to satisfy the full requirement for financial
security set out in the expired water license. On July 31, 2003, the
indemnity bond in place in the amount of $5,000,000 to satisfy the previous
water license expired, and it too was replace by an unsecured promissory
note issued by the Company. These two unsecured promissory notes, taken in
concert, satisfied the full requirement for financial security set out in
the previous water license.
Following the issuance of the new water license in October 2002,
protracted discussions were held with DIAND regarding the form of security
to be adopted to satisfy the financial security requirements of the new
water license. Those discussions culminated in March 2005, when another
unsecured promissory note was issued by the Company in the amount of
$11,600,000 to satisfy the balance of the financial security requirement.
With that transaction, the full amount of the financial security required,
being $17,600,000, has been satisfied using unsecured promissory notes.
b) In 2003, Kalwea Financial Corp., BVI ("Kalwea") commenced an action
against the Company and CanZinco, 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 was mediated on March 23, 2004, but the parties did not reach a
definitive resolution. While the Company has preserved its legal rights, it
continues to negotiate the terms of settlement with the plaintiff.
c) Taseko Mines Limited ("Taseko"), the parent of Gibraltar Mines Ltd.
("Gibraltar"), has notified Boliden Westmin (Canada) Limited ("BWCL") (now
NVI Mining, ("NVI"), a wholly owned subsidiary of the Company) in 2001
about indemnification claims made by Gibraltar pursuant to the purchase
agreement entered into in 1999, whereby Gibraltar acquired certain assets
from BWCL on July 21, 1999. The claims are (a) latent tax liabilities
estimated to be $3,750,000 relating to the environmental reclamation
deposit that was transferred to Gibraltar as a result of the purchase
agreement; (b) potential tax liabilities with respect to an employee
severance trust, which is in excess of $500,000. If this claim is
30
successful, it exposes NVI to further direct liabilities which have not
been quantified; and (c) a claim for tax loss deductions in the amount of
$54,000,000 as a result of delays in signing a mineral exploration
cumulative expenditure account. The Company believes, based on
correspondence between Taseko and BWCL, that this claim may no longer be
outstanding. No legal proceedings have been commenced with respect to any
of these claims.
The Alberta Energy Utilities Board has notified BWCL, now NVI, that it
is required to post $280,000 as security for reclamation of a number of
closed gas wells in Alberta. The notice is pursuant to the Licensee
Liability Rating Program of the Alberta Energy and Utilities Board. NVI
must also address non-compliance issues such as removal of vegetation. The
Company believes that this estimated figure might be higher than required
because some prior remediation work was carried out in 2000 by the
predecessor company. No legal proceedings have been commenced with respect
to this matter.
NVI is involved in certain other legal actions. It is the opinion of the
Company that these legal matters will be resolved without a material effect
on the Company's financial position or results of operations.
e) Tusk Energy Inc, Acanthus Resources Ltd., Bounty Developments Ltd.,
Cabre Exploration Ltd., Sunoma Energy Corp. and Trans World Oil & Gas Ltd.
have filed a claim against multiple defendants including, Nanisivik Mines
Ltd. ("Nanisivik"), a subsidiary of CanZinco, AEC West Ltd., Gulf Canada
Resources Limited, et al. The claim arises from ownership or ownership
interest of the Plaintiffs and Defendants in oil and gas producing
properties in the Meekwap area of Alberta. It is alleged that Gulf Canada
was responsible for measurement and processing of the plaintiffs' gas and
natural gas liquids and failed to accurately measure and account for the
plaintiffs' contributions from January 1990 to June, 1996, thereby
resulting in allocations to all other defendants, including Nanisivik, in
excess of their proper share and therefore have been unjustly enriched. The
total claim against all defendants is approximately $6,000,000. It is not
possible at this time to assess what portion, if any, of the
misallocations, were actually received by Nanisivik. The action is subject
to a standstill agreement, which expired on March 31, 2005. The plaintiffs
are determining if they intend to pursue the action further.
f) The Company is also involved in other 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.
g) 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.
20. LEASE COMMITMENTS
The Company is committed to operating leases for business premises and
equipment as follows:
($000's)
----------------------------------------------------
2006 979
2007 698
2008 590
2009 399
2010 354
2011 and thereafter 29
The following is a schedule of future minimum lease payments under the
capital lease expiring September 27, 2010 together with the balance of the
obligation under capital lease.
($000's)
-----------------------------------------------------------------------
2006 725
2007 542
2008 303
2009 146
2010 109
-----------------------------------------------------------------------
Total minimum lease payments 1,825
Less: amount representing interest at
rates ranging from 5.9% -9.0% (183)
-----------------------------------------------------------------------
Balance of the obligation 1,642
31
SEGMENT INFORMATION
The Company operates 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, 2005
($000's)
- ------------------------------------------------------------------------------------------------------------------------------------
Corporate Consoli-
Geographic location Latin America Canada Tunisia and Other dated
- ------------------------------------------------------------------------------------------------------------------------------------
El El Myra Bouchard
Mochito Toqui Nanisivik Caribou Falls -Hebert Langlois Bougrine
Operating Segment Mine Mine Total Mine Mine Mine Mine Mine Total Mine
- ------------------------------------------------------------------------------------------------------------------------------------
Gross sales revenue 85,418 49,634 135,052 - - 113,725 25,129 - 138,854 41,976 (2,917) 312,965
Treatment and
marketing costs (29,439) (18,989) (48,428) - - (34,674) (6,853) - (41,527) (15,436) - (105,391)
--------------------------------------------------------------------------------------------------------------
Net revenue 55,979 30,645 86,624 - - 79,051 18,276 - 97,327 26,436 (2,917) 207,574
Direct operating
costs (29,814) (22,197) (52,011) - - (67,125) (10,334) - (77,459) (14,827) - (144,297)
Depreciation and
depletion (5,711) (4,308) (10,109) - - (8,135) (1,000) - (9,135) (3,895) (180) (23,229)
Reclamation and
closure costs (648) (295) (943) (8,578) (394) (1,371) (283) (92) (10,718) (432) - (12,093)
--------------------------------------------------------------------------------------------------------------
Contribution (loss)
from mining
activities 19,806 3,845 23,651 (8,578) (394) 2,420 6,659 (92) 15 7,386 (3,097) 27,955
General and
administrative - - - - - - - - - - (8,666) (8,666)
Stock-based
compensation - - - - - - - - - - (809) (809)
Interest and
financing - - - - - - - - - - (1,284) (1,284)
Investment and other
income - - - - - - - - - - 2,595 2,595
Loss on remeasurement
of gold loan - - - - - (1,787) - - (1,787) - - (1,787)
Foreign exchange
gain on US dollar
denominated debt - - - - - - - - - - 492 492
Other foreign
exchange loss - - - - - - - - - - (294) (294)
Exploration costs - - - - - - (535) - (535) - - (535)
Write-down of mineral
properties and
fixed assets (187) - (187) (692) - - - - (692) - - (879)
Other non-producing
property costs - - - (2,526) (1,813) - (3,468) (466) (8,273) (778) 16 (9,035)
Income and mining
(taxes) recovery 5,453 1,003 6,456 72 - (105) (248) 27 (254) - 784 6,986
--------------------------------------------------------------------------------------------------------------
Net earnings (loss) 25,072 4,848 29,920 (11,724) (2,207) 528 2,408 (531) (11,526) 6,608 (10,263) 14,739
--------------------------------------------------------------------------------------------------------------
Capital expenditures 8,202 7,095 15,297 (30) - 17,795 571 5,216 23,552 68 45 38,962
Identifiable assets 37,711 44,684 82,395 3,622 1,227 168,138 4,373 51,990 229,350 6,294 39,118 357,157
Capital expenditures for Myra Falls mine include fixed assets purchased through
capital leases of $984,000.
INFORMATION ABOUT MAJOR CUSTOMERS
Of the Company's total consolidated net revenue for the year ended December 31,
2005, revenue from one customer of $37,959,000 originated from the Myra Falls
mine, revenue from a second customer of $28,312,000 consisted of $15,162,000
that originated from the El Toqui mine, $6,443,000 that originated from the
Bougrine mine and $6,707,000 that originated from the El Mochito mine, revenue
from a third customer of $27,591,000 consisted of $18,088,000 that originated
from the El Mochito mine, $3,312,000 that originated from the Bougrine mine,
$3,239,000 that originated from the El Toqui mine and $2,952,000 that originated
from the Myra Falls mine, and revenue from a fourth customer of $24,390,000
consisted of $19,604,000 that originated from the El Mochito mine and $4,786,000
that originated from the Myra Falls mine.
32
SEGMENT INFORMATION
For the Year Ended December 31, 2004
($000's)
- ------------------------------------------------------------------------------------------------------------------------------------
Corporate Consoli-
Geographic location Latin America Canada Tunisia and Other dated
- ------------------------------------------------------------------------------------------------------------------------------------
El El Myra Bouchard
Mochito Toqui Nanisivik Caribou Falls -Hebert Langlois Bougrine
Operating Segment Mine Mine Total Mine Mine Mine Mine Mine Total Mine
- ------------------------------------------------------------------------------------------------------------------------------------
Gross sales revenue 62,005 38,670 100,675 - - 18,012 88,112 - 106,124 33,449 51 240,299
Treatment and
marketing costs (21,547) (15,463) (37,010) - - (6,262) (25,937) - (32,199) (12,647) - (81,856)
--------------------------------------------------------------------------------------------------------------
Net revenue 40,458 23,207 63,665 - - 11,750 62,175 - 73,925 20,802 51 158,443
Direct operating
costs (25,684) (13,589) (39,273) - - (13,007) (32,034) - (45,041) (17,608) - (101,922)
Depreciation and
depletion (3,599) (3,161) (6,760) - - (3,290) (7,255) - (10,545) (7,716) (875) (25,896)
Reclamation and
closure costs (605) (294) (899) (715) (365) (542) (1,625) (86) (3,333) (664) - (4,896)
--------------------------------------------------------------------------------------------------------------
Contribution (loss)
from mining
activities 10,570 6,163 16,733 (715) (365) (5,089) 21,261 (86) 15,006 (5,186) (824) 25,729
General and
administrative - - - - - - - - - - (9,559) (9,559)
Stock-based
compensation - - - - - - - - - - (1,253) (1,253)
Interest and
financing - - - - - - - - - - (509) (509)
Investment and
other income - - - - - - - - - - 843 843
Foreign exchange
loss on US dollar
denominated debt - - - - - - - - - - (431) (431)
Other foreign
exchange loss - - - - - - - - - - (1,809) (1,809)
Write-down of
mineral properties
and fixed assets - - - - - - - - - - (1,178) (1,178)
Other non-producing
property costs - - - (6,834) (1,641) - - (108) (8,583) - (55) (8,638)
Income and mining
(taxes) recovery (91) - (91) - - - (1,234) 11 (1,223) - 743 (571)
--------------------------------------------------------------------------------------------------------------
Net earnings (loss) 10,479 6,163 16,642 (7,549) (2,006) (5,089) 20,027 (183) 5,200 (5,186)(14,030) 2,624
--------------------------------------------------------------------------------------------------------------
Capital expenditures 6,762 10,981 17,743 (200) - 3,997 1,219 4,008 9,024 428 494 27,689
Identifiable assets 38,165 43,756 81,921 6,954 1,210 97,825 14,351 46,189 166,529 16,320 22,704 287,474
INFORMATION ABOUT MAJOR CUSTOMERS
Of the Company's total consolidated net revenue for the year ended December 31,
2004, revenue from one customer of $53,966,000 was generated from the
Bouchard-Hebert mine and revenue from a another customer of $23,307,000
consisted of $13,290,000 that was generated from the El Mochito Mine, $5,099,000
that was generated from the El Toqui Mine, $3,099,000 that was generated from
the Myra Falls mine and $1,819,000 that was generated from the Bougrine mine.
33
SEGMENT INFORMATION
For the Year Ended December 31, 2003
($000's)
(Restated - note 1)
- -----------------------------------------------------------------------------------------------------------------------------
Corporate Consoli-
Geographic location Latin America Canada Tunisia and Other dated
- -----------------------------------------------------------------------------------------------------------------------------
El El Bouchard
Mochito Toqui Nanisivik Caribou -Hebert Langlois Bougrine
Operating Segment Mine Mine Total Mine Mine Mine Mine Total Mine
- -----------------------------------------------------------------------------------------------------------------------------
Gross revenue 53,940 34,290 88,230 11,454 - 75,677 - 87,131 33,350 (1,120) 207,591
Treatment and
marketing costs (21,352) (16,896) (38,248) (5,794) - (26,391) - (32,185) (13,148) (83,581)
-------------------------------------------------------------------------------------------------------
Net revenue 32,588 17,394 49,982 5,660 - 49,286 - 54,946 20,202 (1,120) 124,010
Direct operating
costs (23,951) (16,594) (40,545) (5,860) - (38,918) - (44,778) (17,916) - (103,239)
Depreciation and
depletion (4,025) (2,220) (6,245) - - (10,725) - (10,725) (8,595) (399) (25,964)
Reclamation and
closure costs (680) (293) (973) (667) (338) (1,251) - (2,256) (390) - (3,619)
-------------------------------------------------------------------------------------------------------
(Loss) contribution
from mining
activities 3,932 (1,713) 2,219 (867) (338) (1,608) - (2,813) (6,699) (1,519) (8,812)
General and
administrative - - - - - - - - - (5,087) (5,087)
Stock-based
compensation - - - - - - - - - (274) (274)
Interest and
financing - - - - - - - - - (3,321) (3,321)
Investment and
other income - - - - - - - - - 405 405
Foreign exchange
gain on US dollar
denominated debt - - - - - - - - - 11,578 11,578
Other foreign
exchange gain - - - - - - - - - 206 206
Write-down of mineral
properties and
fixed assets (279) - (279) - - - - - - - (279)
Other non-producing
property income
(costs) - - - (3,386) (1,521) - (83) (4,990) - 10,384 5,394
Income and mining
taxes (recovery) (83) - (83) - - (141) 5 (136) 145 915 841
Net earnings (loss) 3,570 (1,713) 1,857 (4,253) (1,859) (1,749) (78) (7,939) (6,554) 13,287 651
Capital expenditures 2,586 5,748 8,334 (36) - 27 1,659 1,650 606 31 10,621
Identifiable assets 35,332 35,111 70,443 7,266 1,499 22,117 42,268 73,150 24,974 11,026 179,593
INFORMATION ABOUT MAJOR CUSTOMERS
Of the Company's total consolidated net revenue for the year ended December 31,
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 Bougrine mine and $7,407,000 that
originated from the El Toqui mine.
34
22. ANALYSIS OF CHANGES IN NON-CASH WORKING CAPITAL ITEMS
($000's)
-------------------------------------------
2005 2004 2003
-------------------------------------------
Accounts receivable - concentrate 3,161 583 8,376
Other receivables (2,881) (282) 1,271
Concentrate inventory 8,590 (31,784) 708
Materials and supplies inventory 2,049 2,251 1,833
Short-term investments 961 30 20
Prepaid expenses and other current assets 1,308 752 (165)
Provisional payments for concentrate inventory
shipped and not priced (8,220) 21,779 (6,105)
Accounts payable and accrued liabilities (2,205) 1,437 (2,630)
Income and mining taxes payable (277) 189 (129)
-------------------------------------------
2,486 ($5,045) 3,179
-------------------------------------------
23. EARNINGS PER SHARE
Basic Earnings 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 2003, as the
exercise of options would not have been dilutive in the year.
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
2005 was $0.48 (2004 - $0.53, 2003 - $0.32).
2005 2004 2003
----------------------------------------------------------------------------------------------------------
Earnings per share $0.04 $0.01 $0.00
Diluted earnings per share $0.04 $0.01 N/A
Basic weighted-average number of shares outstanding (000's) 369,190 353,508 211,411
Incremental shares on assumed exercise of options and
warrants (000's) 20,300 23,292 10,259
----------------------------------------------------------------------------------------------------------
Weighted-average number of Common Shares used for diluted
earnings per share (000's) 389,490 376,800 221,670
----------------------------------------------------------------------------------------------------------
24. SUBSEQUENT EVENT
On January 31, 2006, the Company completed negotiations for a loan
facility of US$12,000,000 (the "Facility") from Standard Bank PLC, an
English and Welsh bank. The Facility bears an interest rate of LIBOR plus
2.0% per annum and has been secured by, and will be repaid from, deliveries
of concentrate to a customer between January 31, 2006 and July 31, 2007.
The funds were used to satisfy certain obligations to the government
of British Columbia in connection with environmental security requirements
for the Myra Falls mine.
35
CORPORATE INFORMATION
DIRECTORS
GARTH A. C. MACRAE (1), (3)
Chairman
DONALD K. CHARTER (2)
GRANT A. EDEY (1)
JONATHAN C. GOODMAN
NED GOODMAN
GEORGE E. PIRIE
A. MURRAY SINCLAIR, JR. (1), (2)
(1) Member of Audit Committee
(2) Member of Compensation Committee
(3) Member of Hedging Committee
CORPORATE AND
REGISTERED OFFICE
95 Wellington Street West
Suite 950
Toronto, ON
M5J 2N7
Tel: (416) 363-4798
Fax: (416) 363-1315
E-MAIL:
investorinfo@breakwater.ca
SHARES AND WARRANTS
Toronto Stock Exchange (TSX)
Symbols - BWR & BWR.WT
WEBSITE
www.breakwater.ca
OFFICERS
GEORGE E. PIRIE
President and Chief Executive Officer
WILLIAM M. HEATH
Executive Vice President
RICHARD R. GODFREY
Vice President, Finance and Chief Financial Officer
BERT BOIVIN
Vice President, Canada
ROBERT L. BYRD, JR.
Vice President, Latin America
ROBERT R. CARREAU
Vice President, Environment
DR. ROBERT H. CUTTRISS
Vice President, Technical Services
J. STEVEN HAYES
Vice President, Commercial
TORBEN JENSEN
Vice President, Engineering
E. ANN WILKINSON
Vice President, Investor Relations
PRIYA PATIL
Corporate Counsel and Corporate Secretary
LEROY A. FONG
Controller
TRANSFER AGENT AND REGISTRAR
COMPUTERSHARE TRUST COMPANY OF CANADA
100 University Ave.,
9th Floor
Toronto, ON
M5J 2Y1
NORTH AMERICA TOLL-FREE
Tel: (800) 564-6253
Fax: (888) 453-0330
INTERNATIONAL
Tel: (514) 982-7555
Fax: (416) 263-9524
E-MAIL:
service@computershare.com
www.computershare.com
CO-TRANSFER AGENTS
COMPUTERSHARE TRUST COMPANY OF CANADA
510 Burrard Street
2nd Floor
Vancouver, BC
V6C 3B9
COMPUTERSHARE TRUST COMPANY INC.
350 Indiana Street,
Suite 800
Golden, Colorado
U.S.A. 80401
Tel: (303) 262-0600
Fax: (303) 262-0603
Printed in Canada on recycled paper using vegetable based inks.
Production
Walter J. Mishko & Co. Inc.
Design
Goodhoofd Inc.
WWW.BREAKWATER.CA
THIS REPORT INCLUDES CERTAIN FORWARD-LOOKING STATEMENTS REGARDING THE INTENT,
BELIEF OR CURRENT EXPECTATIONS OF THE COMPANY AND MEMBERS OF ITS SENIOR
MANAGEMENT TEAM, INCLUDING, WITHOUT LIMITATION, EXPECTATIONS REGARDING
PROSPECTIVE PERFORMANCE AND OPPORTUNITIES. INVESTORS ARE CAUTIONED THAT ANY SUCH
FORWARD-LOOKING STATEMENTS ARE NOT GUARANTEES OF FUTURE PERFORMANCE AND INVOLVE
RISKS AND UNCERTAINTIES, AND THAT ACTUAL RESULTS AND FUTURE EVENTS MAY DIFFER
MATERIALLY FROM THOSE ANTICIPATED IN SUCH STATEMENTS.