UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 40-F
[ ] REGISTRATION STATEMENT PURSUANT TO SECTION 12 OF THE
SECURITIES EXCHANGE ACT OF 1934
OR
[x] ANNUAL REPORT PURSUANT TO SECTION 13(a) OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: December 31, 2006 Commission File Number: 0-13979
BREAKWATER RESOURCES LTD.
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(Exact name of Registrant as specified in its charter)
Canada
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(Province or other jurisdiction of incorporation or organization)
1000
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(Primary Standard Industrial Classification Code Number (if applicable))
950-95 Wellington Street West, Toronto, Ontario, Canada, M5J 2N7
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(Address and telephone number of Registrant's principal executive offices)
CT Corporation System
1015-15th Street
Washington D.C. 20005
(202) 572-3100
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(Name, address (including zip code) and telephone number (including area
code) of agent for service in the United States)
Securities registered or to be registered
pursuant to Section 12(b) of the Act: None
Securities registered or to be registered pursuant
to Section 12(g) of the Act.
Common Shares
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(Title of Class)
Securities for which there is a reporting obligation
pursuant to Section 15(d) of the Act: None
For annual reports, indicate by check mark the information filed with this Form:
[x] Annual information form [x] Audited annual financial statements
Indicate the number of outstanding shares of each of the issuer's classes of
capital or common stock as of the close of the period covered by the annual
report.
385,846,534 Common Shares
Indicate by check mark whether the Registrant by filing the information
contained in this Form is also thereby furnishing the information to the
Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934
(the "Exchange Act"). If "Yes" is marked, indicate the file number assigned to
the Registrant in connection with such Rule.
[ ] Yes [x] No
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12
months (or for such shorter period that the Registrant was required to file such
reports) and (2) has been subject to such filing requirements for the past 90
days.
[x] Yes [ ] No
DOCUMENTS FILED UNDER COVER OF THIS FORM
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Document No. 1: Annual Information Form for the financial year ended December
31, 2006.
Document No. 2: Audited Financial Statements and notes thereto for the
financial year ended December 31, 2006 including U.S. GAAP
Reconciliation included in Note 25 to the Audited Financial
Statements for the financial year ended December 31, 2006.
Document No. 3: Management's Discussion and Analysis of Financial Condition
and Results of Operations for the financial year ended
December 31, 2006.
Document No. 4: Deloitte & Touche LLP's Auditors' Report for the financial
years ended December 31, 2005 and December 31, 2004.
Document No. 1
ANNUAL INFORMATION FORM
OF
BREAKWATER RESOURCES LTD.
YEAR ENDED DECEMBER 31, 2006
Date: March 29, 2007
TABLE OF CONTENTS
NOMENCLATURE.............................................................. 3
PRELIMINARY NOTES......................................................... 3
GLOSSARY OF TERMS ........................................................ 5
UNITS OF MEASUREMENT CONVERSION........................................... 7
CURRENCY.................................................................. 7
ITEM 1 CORPORATE STRUCTURE..................................... 8
1.1 NAME, ADDRESS AND INCORPORATION......................... 8
1.2 SIGNIFICANT INTER-CORPORATE RELATIONSHIPS............... 8
ITEM 2 GENERAL DEVELOPMENT OF THE BUSINESS..................... 8
2.1 THREE YEAR HISTORY...................................... 8
2.2 SIGNIFICANT ACQUISITIONS............................... 11
ITEM 3 DESCRIPTION OF THE BUSINESS............................ 11
3.1 GENERAL................................................ 11
3.2 OPERATIONS OF THE COMPANY.............................. 11
3.3 SUMMARY OF NUMBER OF EMPLOYEES......................... 12
3.4 RISK FACTORS........................................... 13
3.5 QUALIFIED PERSONS...................................... 20
3.6 SUMMARY OF MINERAL RESERVES AND MINERAL RESOURCES...... 20
3.6 OPERATING MINES........................................ 23
A) MYRA FALLS MINE............................... 23
B) EL MOCHITO MINE............................... 30
C) EL TOQUI MINE................................. 35
D) LANGLOIS MINE................................. 40
3.7 NON-OPERATING MINES.................................... 46
A) BOUGRINE MINE................................. 46
B) BOUCHARD-HEBERT MINE.......................... 48
C) CARIBOU MINE.................................. 50
D) NANISIVIK MINE................................ 50
ITEM 4 DIVIDENDS.............................................. 52
ITEM 5 DESCRIPTION OF CAPITAL STRUCTURE....................... 52
ITEM 6 MARKET FOR SECURITIES.................................. 53
6.1 TRADING PRICE AND VOLUME............................... 53
ITEM 7 DIRECTORS AND OFFICERS................................. 54
7.1 NAME, OCCUPATION AND SECURITY HOLDING.................. 54
7.2 CEASE TRADE ORDERS, BANKRUPTCIES,
PENALTIES OR SANCTIONS................................. 57
7.3 CONFLICTS OF INTEREST.................................. 57
7.4 INTEREST OF MANAGEMENT AND OTHERS
IN THE MATERIAL TRANSACTIONS........................... 58
ITEM 8 LEGAL PROCEEDINGS...................................... 58
ITEM 9 TRANSFER AGENTS AND REGISTRARS......................... 58
ITEM 10 INTERESTS OF EXPERTS................................... 58
10.1 NAMES OF EXPERTS....................................... 58
ITEM 11 AUDIT COMMITTEE........................................ 59
ITEM 12 ADDITIONAL INFORMATION................................. 65
Breakwater Resources Ltd. - 2006 Annual Information Form Page 2 of 65
NOMENCLATURE
Unless the context indicates otherwise, a reference to the "Company" in this
Annual Information Form means Breakwater Resources Ltd. and its subsidiaries
and other entities owned or controlled, directly or indirectly, by Breakwater
Resources Ltd.
PRELIMINARY NOTES
Cautionary Note Regarding Forward Looking Statements
This annual information form (this "Annual Information Form") of Breakwater
Resources Ltd. (the "Company") for the financial year ended December 31, 2006
and documents incorporated by reference contain forward-looking information
and statements ("forward looking statements") as defined in applicable
securities laws. These statements relate to future events or future
performance. All statements other than statements of historical fact are
forward-looking statements. When used in this Annual Information Form, the
words "anticipate", "believe", "intend", "estimate", "plan", "continue",
"project", "expect", "will", "budget", "could", "may", "predict", "potential",
"should" and similar expressions are intended to identify forward-looking
statements, but the absence of such a word does not mean that the statement is
not forward-looking. These statements involve known and unknown risks,
uncertainties and other factors that may cause actual results or events to
differ materially from those anticipated in such forward-looking statements.
These statements speak only as of the date of this Annual Information Form, or
as of any other date specified in it or in the documents incorporated by
reference, as the case may be. These forward-looking statements include but
are not limited to, statements concerning:
o prices and price volatility for zinc, copper, lead, gold and other
primary metals;
o long-term demand for and supply of zinc, copper, lead, gold and other
primary metals and minerals;
o sensitivity of financial results to changes in metal prices;
o treatment and refining charges;
o strategies and objectives;
o interest and other expenses;
o tax position and applicable tax rates;
o political unrest or instability in countries such as Honduras and Chile
and its impacts on our foreign assets, including our interest in the El
Mochito and El Toqui mines;
o timing of decisions regarding the timing and costs of construction and
production with respect to, and the issuance of the necessary permits and
other authorizations required for, development and expansion projects;
o interpretation of drill results and estimates of the quantity and quality
of mineral reserves and resources;
o planned capital expenditures and estimates of reclamation and other costs
related to environmental protection;
o future capital and mine production costs and production levels, including
the costs and potential impact of complying with existing and proposed
environmental laws and regulations in the operation and closure
operations (including without limitation laws or regulations intended to
address climate change or the effects of global warming);
o cost reduction and other financial and operating objectives;
o exploration, environmental, health and safety initiatives;
o availability of qualified employees;
o resolution of labour disputes and the satisfactory negotiation of
collective agreements with unionized employees, including at the Myra
Falls mine, the El Mochito mine and the El Toqui mine;
o the outcome of legal proceedings and other disputes;
Breakwater Resources Ltd. - 2006 Annual Information Form Page 3 of 65
o general business and economic conditions; and
o dividend policy.
Inherent in forward-looking statements are risks and uncertainties beyond the
ability of the Company to predict or control, including risks that may affect
operating or capital plans including risks generally encountered in the
development of mineral properties such as unusual or unexpected geological
formations, unanticipated metallurgical difficulties, ground control problems,
adverse weather conditions (including without limitation adverse weather
caused or influenced by climate change or the effects of global warming),
accidents, process upsets and equipment malfunctions; risks associated with
labour disturbances and unavailability of skilled labour; fluctuations in the
market price of principal commodities which are cyclical and subject to
substantial price fluctuations; risks created through competition for mining
properties; risk associated with lack of available market information as to
expected supply from and demand for zinc and copper in China; risks posed by
fluctuations in exchange rates and interest rates, as well as general economic
conditions; risks associated with environmental compliance and changes in
environmental legislation and regulation; risks associated with dependence on
third parties for the provision of transportation and other critical services,
including without limitation ocean transport of concentrate and the
availability of ships and satisfactory contracts for such transport; risks
associated with non-performance by contractual counterparties; risks
associated with aboriginal title claims and other title risks; social and
political risks associated with operations in foreign countries; risks of
changes in tax laws or their interpretation; and risks associated with tax
assessments and legal proceedings.
Actual results and developments are likely to differ, and may differ
materially, from those expressed or implied by the forward-looking statements
contained in this Annual Information Form. Such statements are based on a
number of assumptions which may prove to be incorrect, including, but not
limited to, assumptions about:
o general business and economic conditions;
o interest rates and foreign exchange rates;
o the supply and demand for, deliveries of, and the level and volatility of
prices of zinc, copper, lead and gold and other primary metals;
o the timing of receipt of regulatory and governmental approvals for
development projects and other operations;
o availability of financing for development projects on reasonable terms;
o costs of production and production and productivity levels, as well as
those of our competitors;
o power prices;
o ability to secure adequate transportation for our products;
o ability to procure mining equipment and operating supplies (including
without limitation haul truck and loader tires) in sufficient quantities
and on a timely basis;
o ability to attract and retain skilled staff;
o impact of changes in Canadian-US dollar and other foreign exchange rates
on our costs and results;
o engineering and construction timetables and capital costs for development
and expansion projects;
o costs of closure of various operations;
o market competition;
o the accuracy of our reserve estimates (including with respect to size,
grade and recoverability) and the geological, operational and price
assumptions on which these are based;
o tax benefits and tax rates;
o the resolution of proceedings or disputes; and
o ongoing relations with employees and business partners and joint
venturers.
Breakwater Resources Ltd. - 2006 Annual Information Form Page 4 of 65
The reader is cautioned that the foregoing list of important factors and
assumptions is not exhaustive. Events or circumstances could cause actual
results to differ materially from those estimated or projected and expressed
in, or implied by, these forward-looking statements. You should also carefully
consider the matters discussed under "Risk Factors" in this Annual Information
Form. We undertake no obligation to update publicly or otherwise revise any
forward-looking statements or the foregoing list of factors, whether as a
result of new information or future events or otherwise.
GLOSSARY OF TERMS
The following is a glossary of certain words and terms used in this Annual
Information Form.
"Assay" means the chemical test of rock samples to determine the metal
content.
"Common Shares" means the common shares of Breakwater Resources Ltd.
"concentrate" means a product containing the valuable metal and from which
most of the waste material in the ore has been eliminated.
"feasibility study" means a comprehensive study of a deposit in which all
geological, engineering, operating, economic and other relevant factors are
considered in sufficient detail that it could reasonably serve as the basis
for a final decision by a financial institution to finance the development of
the deposit for mineral production.
"flotation" means a milling process by which some mineral particles are
induced to become attached to bubbles of froth and float, and others to sink,
so that the valuable minerals are concentrated and separated from the gangue.
"indicated mineral resource" means that part of a mineral resource for which
quantity, grade or quality, densities, shape and physical characteristics, can
be estimated with a level of confidence sufficient to allow the appropriate
application of technical and economic parameters, to support mine planning and
evaluation of the economic viability of the deposit. The estimate is based on
detailed and reliable exploration and testing information gathered through
appropriate techniques from locations such as outcrops, trenches, pits,
workings and drill holes that are spaced closely enough for geological and
grade continuity to be reasonably assumed.
"inferred mineral resource" means that part of a mineral resource for which
quantity and grade or quality can be estimated on the basis of geological
evidence and limited sampling and reasonably assumed, but not verified,
geological and grade continuity. The estimate is based on limited information
and sampling gathered through appropriate techniques from locations such as
outcrops, trenches, pits, workings and drill holes.
"measured mineral resource" means that part of a mineral resource for which
quantity, grade or quality, densities, shape, and physical characteristics are
so well established that they can be estimated with confidence sufficient to
allow the appropriate application of technical and economic parameters, to
support production planning and evaluation of the economic viability of the
deposit. The estimate is based on detailed and reliable exploration, sampling
and testing information gathered through appropriate techniques from locations
such as outcrops, trenches, pits, workings and drill holes that are spaced
closely enough to confirm both geological and grade continuity.
Breakwater Resources Ltd. - 2006 Annual Information Form Page 5 of 65
"mineral reserve" means the economically mineable part of a measured or
indicated mineral resource demonstrated by at least a preliminary feasibility
study. This study must include adequate information on mining, processing,
metallurgical, economic and other relevant factors that demonstrate, at the
time of reporting, that economic extraction can be justified. A mineral
reserve includes diluting materials and allowances for losses that may occur
when the material is mined.
"mineral resource" means a concentration or occurrence of diamonds, natural
solid inorganic material, or natural solid fossilized organic material
including base and precious metals, coal, and industrial minerals in or on the
Earth's crust in such form and quantity and of such a grade or quality that it
has reasonable prospects for economic extraction. The location, quantity,
grade, geological characteristics and continuity of a mineral resource are
known, estimated or interpreted from specific geological evidence and
knowledge.
"net smelter royalty" or "NSR" means a royalty based on the gross proceeds
received from the sale of minerals less the cost of smelting, refining,
freight and other related costs.
"ounce" or "oz." means a troy ounce or 20 pennyweights or 480 grains or
31.1035 grams.
"preliminary feasibility study" and "pre-feasibility study" each mean a
comprehensive study of the viability of a mineral project that has advanced to
a stage where the mining method, in the case of underground mining, or the pit
configuration, in the case of an open pit, has been established and an
effective method of mineral processing has been determined, and includes a
financial analysis based on reasonable assumptions of technical, engineering,
legal, operating, economic, social, and environmental factors and the
evaluation of other relevant factors which are sufficient for a Qualified
Person, acting reasonably, to determine if all or part of the mineral resource
may be classified as a mineral reserve.
"probable mineral reserve" means the economically mineable part of an
Indicated and, in some circumstances, a measured mineral resource demonstrated
by at least a preliminary feasibility study. This study must include adequate
information on mining, processing, metallurgical, economic, and other relevant
factors that demonstrate, at the time of reporting, that economic extraction
can be justified.
"proven mineral reserve" means the economically mineable part of a measured
mineral resource demonstrated by at least a preliminary feasibility study.
This study must include adequate information on mining, processing,
metallurgical, economic, and other relevant factors that demonstrate, at the
time of reporting, that economic extraction is justified.
"qualified person" means an individual who is an engineer or geoscientist with
at least five years of experience in mineral exploration, mine development or
operation or mineral project assessment, or any combination of these; has
experience relevant to the subject matter of the mineral project and the
technical report; and is a member or licensee in good standing of a
professional association.
"SEDAR" means System for Electronic Document Access and Retrieval at
www.sedar.com.
"semi-autogenous mill ("SAG mill")" means a large diameter grinding mill
utilizing steel balls and large rock pieces to grind mineralized material from
a coarse feed size to a relatively small particle size. The semi-autogenous
mill replaces the equipment normally used for fine crushing and rod milling.
"tailing" means material rejected from a mill after the recoverable valuable
minerals have been extracted.
"total cash costs" means all cash costs incurred and expensed at the mine
site, plus treatment charges, shipping and marketing costs, net of by-product
credits.
Breakwater Resources Ltd. - 2006 Annual Information Form Page 6 of 65
"Tradeable Warrants" means the warrants issued by the Company on January 28,
2004 and July 23, 2004, each such whole warrant being exercisable for one
Common Share at an exercise price of $1.00 until January 28, 2009.
UNITS OF MEASUREMENT CONVERSION
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Imperial Units Multiply By Equals Metric Units
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Acres 0.404686 Hectares
Feet 0.30480 Metres
Miles 1.609344 Kilometres
Troy ounces 31.1035 Grams
Short tons 0.907185 Tonnes
Troy ounces per ton 34.2857 Grams per tonne
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CURRENCY
All dollar amounts in this Annual Information Form are in Canadian dollars,
except where otherwise indicated.
Breakwater Resources Ltd. - 2006 Annual Information Form Page 7 of 65
ITEM 1 CORPORATE STRUCTURE
1.1 Name, Address and Incorporation
The Company was incorporated under the laws of the Province of British
Columbia under the name "Gambier Exploration Ltd." on October 15, 1979.
Effective June 23, 1981, the name of the Company was changed to "Breakwater
Resources Ltd.". The Company was continued under the Canada Business
Corporations Act effective May 11, 1992. By articles of amendment dated June
8, 1995, the issued Common Shares of the Company were consolidated on a
one-for-400 basis and then immediately subdivided on a 20-for-one basis
resulting in a one-for-20 consolidation. Except as otherwise expressly stated,
all references in this Annual Information Form to numbers and prices of Common
Shares are after giving effect to the foregoing articles of amendment.
The registered and principal office of the Company is located at Suite 950, 95
Wellington Street West, Toronto, Ontario, Canada M5J 2N7.
1.2 Significant Inter-corporate Relationships
The following table sets forth the name of material subsidiaries of the
Company and the jurisdiction of incorporation and the direct or indirect
percentage ownership by the Company of each such subsidiary.
Name of Subsidiary Jurisdiction of Percentage
Incorporation Ownership
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American Pacific Honduras S.A. de C.V. Honduras 100%
NVI Mining Ltd. Canada 100%
Sociedad Contractual Minera El Toqui Chile 100%
ITEM 2 GENERAL DEVELOPMENT OF THE BUSINESS
2.1 Three Year History
Major developments in the Company's business in each of the financial years
ended December 31, 2004 to December 31, 2006 were as follows:
Highlights from 2006
o The Company realized net earnings of $156.5 million or $0.41 per share in
2006 compared with $14.0 million or $0.04 per share in 2005, a $142.5
million increase.
o The contribution from mining activities was $168.5 million in 2006
compared with $29.6 million in 2005.
o Net cash provided by operating activities increased by $139.8 million to
$158.5 million in 2006 and was primarily used for $75.7 million of
capital expenditures and $16.6 million of debt repayment.
o At December 31, 2006, cash and cash equivalents were $81.4 million and
total debt was $2.7 million.
o Gross sales revenue increased by 44.5% to $452.2 million in 2006 from
$313.0 million in 2005.
o Development of the Langlois mine is on track to commence commercial
production by mid-2007.
o Mineral reserves at Langlois increased by 10% and mineral resources
increased by 14% through the addition of the Grevet B deposit.
o Exploration success at Langlois prompted the Company to stake an
additional 4,000 hectares surrounding the Company's land package.
o Development of El Toqui's Concordia deposit is on track and production is
anticipated by mid-2007.
Breakwater Resources Ltd. - 2006 Annual Information Form Page 8 of 65
o On the Coulon joint venture with Virginia Mines Inc., exploration carried
out during 2006 led to the discovery of two new significant polymetallic
lenses, bringing the total known lenses to five, and confirmed the
vertical continuity of lens 9-25 to a depth of 365 metres.
o On August 1, 2006, it was announced that the Company had completed the
sale of the Caribou and Restigouche mines to Blue Note Metals Inc. ("Blue
Note").
Highlights from 2005
o The Company realized net earnings of $14.0 million or $0.04 per share in
2005 compared with $3.3 million or $0.01 per share in 2004, a $10.7
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 $29.6 million compared with
$28.5 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 The Company 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. The Company 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 the Company 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 US$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 (the
"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 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).
Breakwater Resources Ltd. - 2006 Annual Information Form Page 9 of 65
Highlights from 2004
o Gross sales revenue increased by 16% to $240.3 million on 336,896 tonnes
of concentrate sold in 2004.
o Contribution from mining activities increased to $28.5 million in 2004.
o Metals prices were significantly stronger in 2004, as the Company
realized an average zinc price of US$1,035 per tonne. The improved metals
prices were offset to some degree by the stronger Canadian dollar which
averaged $1.3010 per US$ in 2004, compared with $1.4115 in 2003 (see
metal price table).
o Net earnings increased to $3.3 million in 2004. Excluding net earnings
gain of $10.3 million from the sale of the Lapa properties and $11.6
million from a foreign exchange gain on US dollar denominated debt, 2004
resulted in an improvement in net income of $24.5 million from 2003. The
acquisition of the Myra Falls mine negatively impacted the Company's
earning by $5.1 million. The Company continues to effect change at this
newly acquired operation with improvements expected in the latter half of
2005.
o Total concentrate production increased to 388,736 tonnes in 2004 from
356,913 tonnes in 2003 due mainly to the acquisition of the Myra Falls
mine.
o Total cash cost per pound of payable zinc increased in 2004 to US$0.34
from US$0.32. This increase was due to the inclusion of the higher cost
Myra Falls mine in the Company's production profile in 2004, higher than
expected unit costs at the Bougrine mine, higher treatment charges and
freight costs and the stronger Canadian dollar.
o The bank debt was fully repaid and the credit facility agreement
cancelled in 2004.
o On January 28, 2004, the Company completed the sale of 57,142,858 units
for net proceeds of $37.0 million. Each unit consisted of one Common
Share and one-half of one Common Share purchase warrant. On July 23,
2004, as part of the consideration for the Myra Falls mine, the Company
issued 5,000,000 Common Share purchase warrants exercisable at $1.00 per
Common Share. Each whole Tradeable Warrant entitles the holder to acquire
one Common Share at a price of $1.00 at any time until January 28, 2009.
The Company used $16 million of the proceeds to retire the debt, $16.4
million was targeted for use to continue the development of the Langlois
mine of which $4 million was spent in 2004 and $4.6 million was used for
working capital and general corporate purposes.
o The Company completed the acquisition of the Myra Falls mine on July 23,
2004, adding significantly to the Company's production profile.
Annualized zinc and copper concentrate from Myra Falls is expected to be
over 110,000 tonnes and 35,000 tonnes, respectively. The acquisition was
accounted for as a purchase transaction in accordance with CICA Handbook
Section 1581, Business Combinations.
o In December 2004, the Company entered into a royalty agreement (the
"Agreement") with Red Mile Resources No. 5 Limited Partnership ("Red
Mile") whereby the Company sold a basic royalty on a portion of the
payable zinc production, over the life of the Myra Falls mine. The
Company received cash of $13.5 million, which included a royalty of $12
million and fees and interest of $1.5 million. Under the terms of the
Agreement the Company is required to make basic royalty payments at fixed
amounts per pound of payable zinc produced, which amounts escalate from
$0.003 per pound to $0.016 per pound over the first 12 years of the
agreement. In addition, the Company granted Red Mile a net smelter return
of 0.4%, 0.5% or 0.7% in years 2010 through 2014 if the price of zinc in
a given calendar year in that period averages US$2,250, US$2,500 or
US$2,750 per tonne, respectively. $11.8 million of the cash received was
placed with a financial institution for which the Company received an
interest bearing promissory note. Interest earned from the promissory
note will be used to fund the expected basic royalty payments during the
first five years of the Agreement. Over the remaining years of the
Agreement, interest and principal from the promissory note will be used
to fund the basic royalty payments.
Breakwater Resources Ltd. - 2006 Annual Information Form Page 10 of 65
The balance of the funds received, $1.7 million will be used for working
capital and capital requirements at the Myra Falls mine. Under certain
circumstances the Company has the right under the terms of a call option to
acquire the partnership units of Red Mile for the lower of fair market value
or the balance outstanding under the promissory note.
Metal Price Table
Realized Prices
2006 2005 2004
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Zinc (US$/tonne) 3,199 1,297 1,035
Copper (US$/tonne) 7,217 3,543 2,852
Lead (US$/tonne) 1,297 983 900
Gold (US$/ounce) 559 445 414
Silver (US$/ounce) 10.28 7.22 6.52
Exchange rate (C$/US$1.00)
yearly average 1.1362 1.2154 1.3010
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2.2 Significant Acquisitions
No significant acquisition or material acquisition was made in 2006.
ITEM 3 DESCRIPTION OF THE BUSINESS
3.1 General
The Company is a resource company engaged in mining base metal deposits in the
Americas. The Company owns or has the exploration rights to base metal and
gold exploration properties in Canada, Chile, Honduras and Tunisia. The
Company is engaged in the acquisition, exploration and development of base and
precious metals deposits globally. The Company is currently developing its
Langlois mine near Lebel-Sur-Quevillon, Quebec with commercial production
expected by mid-2007.
The Company's principal product is zinc concentrate. It also produces copper,
lead and gold concentrates and silver by-products. The Company sells
concentrates to smelters located in Canada, Europe, Asia and South America and
to resellers who sell the concentrates to smelters throughout the world. The
Company sells a portion of the concentrate it produces under long-term supply
agreements. A portion is also sold by tender as well as into the spot market.
During 2006, the Company's concentrate production was derived from two mines
located in Canada, one each in British Columbia and Quebec; and a mine located
in each of Chile and Honduras.
3.2 Operations of the Company
Three Year History of Production
The Company's production in 2006 came from two mines in Canada and a mine
located in each of Chile and Honduras. The Canadian mines are the Myra Falls
mine in British Columbia and the Langlois mine in Quebec. The following table
summarizes the Company's production for the three years ended December 31,
2004, December 31, 2005 and December 31, 2006.
Breakwater Resources Ltd. - 2006 Annual Information Form Page 11 of 65
Historical Production Table
Milled Tonnes Metal in Concentrates
- -------------------------------------------------------------------------
Zinc Copper Lead Gold Silver
tonnes tonnes tonnes ounces ounces
- -------------------------------------------------------------------------
Myra Falls
- -------------------------------------------------------------------------
2006 714,443 33,708 4,885 - 20,231 857,662
2005 912,656 48,084 7,640 - 31,744 1,165,056
2004(1) 381,698 18,218 4,449 - 11,239 445,997
- -------------------------------------------------------------------------
El Mochito
- -------------------------------------------------------------------------
2006 690,243 37,646 - 11,775 - 1,769,456
2005 700,190 42,698 - 10,488 - 1,723,825
2004 650,017 41,41 - 8,877 - 1,550,232
- -------------------------------------------------------------------------
El Toqui
- -------------------------------------------------------------------------
2006 539,803 31,725 - - 36,795 71,703
2005 519,963 28,347 - - 41,605 131,020
2004 466,953 27,190 - - 27,865 231,872
- -------------------------------------------------------------------------
Langlois
- -------------------------------------------------------------------------
2006(4) 59,373 4,057 208 - 205 22,855
2005 - - - - - -
2004 - - - - -
- -------------------------------------------------------------------------
Bougrine
- -------------------------------------------------------------------------
2006 - - - - - -
2005(2) 216,823 15,889 - 8,708 - -
2004 330,392 28,265 - 5,470 - -
- -------------------------------------------------------------------------
Bouchard-Hebert
- -------------------------------------------------------------------------
2006 - - - - - -
2005(3) 118,933 6,292 470 - 2,644 40,013
2004 993,168 54,823 3,914 - 17,284 309,920
- -------------------------------------------------------------------------
(1) For the period July 24, 2004 to December 31, 2004.
(2) Production up to September 10, 2005.
(3) Production up to February 20, 2005.
(4) For the period November 2006 to December 2006.
For financial information relating to the production of the Company, please
refer to the "Management's Discussion and Analysis of Financial Condition and
Results of Operation" for the financial year ended December 31, 2006 filed on
SEDAR at www.sedar.com.
3.3 Summary of Number of Employees
The following table summarizes the number of salaried and hourly employees as
well as contractors and temporary employees at each of the mines as at January
31, 2007:
Breakwater Resources Ltd. - 2006 Annual Information Form page 12 of 65
Summary of Number of Employees
- ------------------------------------------------------------------------------------------
Salaried Hourly Temporary
Property Employees Employees Expatriates Contractors Employees Total
- ------------------------------------------------------------------------------------------
Myra Falls (1) 99 351 - 22 6 478
El Toqui (2) 366 - 4 282 46 698
El Mochito (3) 155 479 23 114 62 833
Bougrine (4) 13 9 2 - 3 27
Langlois (5) 44 65 - 190 3 302
Bouchard-Hebert (6) 6 - - 14 - 20
Nanisivik 1 - - 6 1 8
Corporate & other 24 - - 1 - 25
- ------------------------------------------------------------------------------------------
Total 708 904 29 629 121 2,391
- ------------------------------------------------------------------------------------------
(1) Represented by Canadian Auto Workers Union Local 3019. The labour agreement
will expire on March 31, 2008.
(2) Sindicato de Trabajadores de Sociedad Contractual Minera El Toqui
represents 212 employees. The collective agreement will expire in September
2007. All except two employees are at the mine site. Santiago office is
staffed by two employees.
(3) Unionized employees. Union agreement will expire in September 2007.
(4) Represented by an employees' union which reviews the remuneration package
on an annual basis.
(5) Represented by a union with a collective agreement which expires in January
2012.
(6) As of December 31, 2006.
3.4 Risk Factors
Before making an investment decision, the reader should carefully consider the
risks and uncertainties described below as well as the other information
contained and incorporated by reference in this Annual Information Form. These
risks and uncertainties are not the only ones facing the Company. Additional
risks and uncertainties currently not known to the Company or that the Company
considers immaterial may also impair the business operations of the Company.
If any of such risks or uncertainties actually occur, the Company's business,
prospects, financial condition, cash flows and operating results could be
materially harmed.
Risks Inherent in the Mining and Metals Business
The business of exploring for minerals is inherently risky. Few properties
that are explored are ultimately developed into producing mines. The business
involves significant financial risks over a significant period of time for
which even a combination of careful evaluation, experience and knowledge may
not eliminate. It is impossible to ensure that the Company's current or
proposed exploration programs will result in commercially viable mining
operations.
Commercial viability of developing a mineral reserve depends on a number of
factors, such as, size and grade of the deposit, proximity to infrastructure,
financing costs and governmental regulations that include regulations relating
to prices, taxes, royalties, infrastructure, land use, importing and exporting
of minerals and environmental protection. The effect of these factors cannot
be accurately predicted, but the combination of these factors may result in
the Company not receiving an adequate return on invested capital.
Mineral properties are often non-productive for reasons that cannot be
anticipated in advance. Even after the commencement of mining operations, such
operations may be subject to risks and hazards, including environmental
hazards, industrial accidents, unusual or unexpected geological formations or
conditions,
Breakwater Resources Ltd. - 2006 Annual Information Form Page 13 of 56
unanticipated metallurgical difficulties, labour disruptions,
unavailability of materials and equipment on a timely basis or at all, weather
conditions (including historically unforeseen and unpredictable changes in
weather patterns such as significantly increased severity of adverse
conditions that may be brought about by the phenomenon of global warming or
climate change), rock bursts, cave-ins or other ground control problems,
seismic activity, flooding, water conditions and mineral or concentrate
losses. The occurrence of any of the foregoing could result in damage to or
destruction of mineral properties or production facilities, personal injuries,
environmental damage, delays or interruption of production, increases in
production costs, monetary losses, legal liability and adverse government
action.
Insurance Risks
The Company maintains insurance to cover some of these risks and hazards. The
insurance is maintained in amounts that are believed to be reasonable
depending on the circumstances surrounding each identified risk. No assurance
can be given that such insurance will cover every risk, or continue to be
available, or that it will be available at economically feasible premiums, or
that the Company will maintain such insurance. Our property, business
interruption and liability insurance may not provide sufficient coverage for
losses related to these other hazards. Insurance against certain risks,
including certain liabilities for environmental pollution, may not be
available to the Company or other companies within the industry. Any such
event could have a material adverse effect on the Company's business.
Employee Relations and Recruitment
Most of our employees are employed under collective bargaining agreements. The
collective bargaining agreements at the El Mochito mine and the El Toqui mine
are scheduled to expire in September, 2007. The collective agreements at the
Myra Falls mine and Langlois mine are scheduled to expire in March, 2008 and
January, 2012 respectively. The Company could be subject to labour unrest or
other labour disturbances including strikes as a result of any failure of
negotiations on new collective agreements which could, while ongoing, have a
material adverse effect on the Company's business.
Currently, the mining industry is generally facing a significant shortage of
skilled labour. The Company competes with other mining companies to attract
and retain key executives and employees. If the Company is unable to hire and
retain sufficient skilled employees or to secure suitable mining equipment,
its ability to operate optimally will be impaired which may adversely affect
its business.
Commodity Price Fluctuations and Hedging
The results of our operations are significantly affected by the market price
of base metals and gold and silver which are cyclical and subject to
substantial price fluctuations. Our earnings are particularly sensitive to the
change in market price of zinc. Market prices can be affected by numerous
factors beyond our control, including levels of supply and demand for a broad
range of industrial products, substitution of new or different products in
critical applications for our existing products, expectations with respect to
the rate of inflation, the relative strength of the US dollar and of certain
other currencies, interest rates, global or regional political or economic
crises and sales of gold and base metals by holders in response to such
factors. If prices should decline below the Company's cash costs of production
and remain at such levels for any sustained period, the Company may determine
that it is not economically feasible to continue commercial production at any
or all of our mines and may also be required to look for alternatives other
than cash flow to maintain its liquidity until metal prices recover.
The profitability of the Company is directly related to the market price of
metals produced. The Company may from time to time undertake hedging programs,
with an intention to reduce the risk of a commodity's market price while
optimizing upside participation, to maintain adequate cash flows and
Breakwater Resources Ltd. - 2006 Annual Information Form page 14 of 65
profitability to contribute to the long-term viability of the business. There
are, however, risks associated with hedging programs including, among other
things, an increase in the world price of the commodity, an increase in gold
lease rates (in the case of gold hedging), an increase in interest rates,
rising operating costs, counter-party risks and production interruption
events. There can be no assurance that the Company will or will not undertake
hedging programs or that if hedging programs are undertaken, that the Company
will be able to achieve realized prices for metals in excess of average London
Metal Exchange prices as a result.
Price Fluctuations of Consumed Commodities
Prices and availability of commodities consumed or used in connection with
exploration and development and mining such as natural gas, diesel, oil and
electricity, also fluctuate and these fluctuations affect the costs of
production at various operations. These fluctuations can be unpredictable, can
occur over short periods of time and may have a materially adverse impact on
our operating costs or the timing and costs of various projects.
Shortage of Mining Equipment and Supplies
The growth in global mining activities has created a demand for mining
equipment and related supplies that exceeds supply. For example, there is a
global shortage of haulage truck tires which is expected to continue into
2008. Consequently, if equipment or other supplies cannot be procured on a
timely basis, expansion activities, production, development or operations
could be negatively affected.
Competition for Mining Properties
Because the life of a mine is limited by its ore reserves, the Company is
continually seeking to replace and expand its reserves through the exploration
of existing properties as well as through acquisitions of interests in new
properties or of interests in companies which own such properties. We
encounter strong competition from other mining companies in connection with
the acquisition of properties. This competition may increase the cost of
acquiring suitable properties, should such properties become available to us.
The Company cannot assure that it will continue to be able to successfully
compete with its competitors in acquiring attractive properties.
Market Access and Competition for Product Markets
Access to markets for our products may be subject to ongoing interruptions and
trade barriers due to policies and tariffs of individual countries, and the
actions of certain interest groups to restrict the import of certain
commodities. There can be no assurance that our access to these markets will
not be curtailed or restricted entirely in the future.
The mining industry in general is intensely competitive and even if commercial
quantities of mineral resources are developed, a profitable market may not
exist for sale of such minerals. We must sell base metals, metal concentrates,
by-product metals and concentrate, and gold and silver at prices determined by
world markets over which we have no influence or control. Our competitive
position is determined by our costs in comparison to those of other producers
in the world. If our costs increase due to our locations, grade and nature of
materialized minerals, or our operating and management skills, our revenues
may be affected. We have to compete with larger companies that have greater
assets and financial and human resources than we do, and which may be able to
sustain larger losses than us to develop or continue business.
Breakwater Resources Ltd. - 2006 Annual Information Form page 15 of 65
Mineral Reserve and Resource Estimates
Disclosed reserve estimates should not be interpreted as assurances of mine
life or of the profitability of current or future operations. We estimate our
mineral reserves in accordance with the requirements of the applicable
Canadian securities regulatory authorities and established mining standards.
Where used by the Company, figures for mineral reserves and mineral resources
are estimates and no assurance can be given that the anticipated tonnages and
grades will be achieved or that the indicated level of recovery will be
realized. Market fluctuations in the price of zinc and/or other metals and/or
a fluctuation in currency exchange rates may render certain mineral reserves
and mineral resources uneconomical. Prolonged declines in the market price of
zinc may also render mineral reserves and mineral resources containing
relatively lower grades of zinc mineralization uneconomic to exploit. Such
price fluctuations could materially reduce the Company's reported mineral
reserves and mineral resources. Should such reductions occur, material
write-downs of its investment in mining properties or the discontinuation of
development or production might be required, and there could be material
delays in the development of new projects, increased net losses and reduced
cash flow. Moreover, short-term operating factors relating to mineral
reserves, such as the need for orderly development of the mineral deposit or
the processing of new or different mineral grades, may cause a mining
operation to be unprofitable in any particular accounting period.
The SEC does not permit mining companies in their filings with the SEC to
disclose estimates other than mineral reserves. However, because we prepare
this Annual Information Form in accordance with Canadian disclosure
requirements, we incorporate estimates of mineral resources. Mineral resources
are concentrations or occurrences of minerals that are judged to have
reasonable prospects for economic extraction, but for which the economics of
extraction cannot be assessed, whether because of insufficiency of geological
information or lack of feasibility analysis, or for which economic extraction
cannot be justified at the time of reporting. Consequently, mineral resources
are of a higher risk and are less likely to be accurately estimated or
recovered than mineral reserves.
Certain of our mineral reserves and resources are estimated by persons who are
employees of the respective operating company for each of our operations under
the supervision of our employees. These individuals are not "independent" for
purposes of applicable securities legislation.
Exploration and Development
We must continually replace mining reserves depleted by production to maintain
production levels over the long term. This is done by expanding known mineral
reserves or by locating new mineral deposits. There is, however, a risk that
depletion of reserves will not be offset by future discoveries of mineral
reserves. Exploration for minerals is highly speculative in nature and the
projects involve many risks. Many projects are unsuccessful and there are no
assurance that current or future exploration programs will be successful.
Further, significant costs are incurred to establish mineral reserves and to
construct mining and processing facilities. Development projects have no
operating history upon which to base estimates of future cash flow and are
subject to the successful completion of feasibility studies, obtaining
necessary government permits, obtaining title to or other land rights and
availability of financing.
Currency Fluctuations, Foreign Exchange and Interest Rate Risk
The Company operates using the Canadian dollar, the United States dollar and
other currencies, and as such may be negatively affected by fluctuations in
foreign exchange rates. Currency fluctuations may affect the revenues which
the Company realizes from its operations, as concentrates are sold in the
world market in United States dollars while a significant percentage of the
Company's expenses are
Breakwater Resources Ltd. - 2006 Annual Information Form Page 16 of 65
denominated in non-US dollars. This exposes the Company to increased volatility
in earnings due to fluctuations in foreign exchange rates. While foreign
currencies are generally convertible into Canadian and US dollars, there is no
guarantee that they will continue to be so convertible or that fluctuations in
the value of such currencies will not have an adverse effect on the Company.
Our exposure to changes in interest rates results from investing and borrowing
activities undertaken to manage our liquidity and capital requirements. There
can be no assurance that we will not be materially adversely affected by
interest rate changes in the future. In addition, our use of interest rate
swaps exposes us to the risk of default by the counterparties to such
arrangements. Any such default could have a material adverse effect on our
business.
Credit Risk
The Company is subject to credit risk through trade receivables. The Company
manages this risk through evaluation and monitoring processes. The Company
believes its customers to be established and creditworthy. Credit risk is
further mitigated through the use of provisional payment arrangements and the
use of letters of credit and other financial instruments, where appropriate.
Credit risk also relates to derivative contracts arising from the possibility
that a counterparty to an instrument in which the Company has an unrealized
gain fails to perform. The Company transacts only with counterparties it
considers to be highly-rated. The Company does not consider the credit risk
associated with these financial instruments to be significant. Nonetheless
there can be no guarantee that all customers of the Company will be able to
fulfill its obligations, which could have an adverse effect on the Company.
Environment, Health and Safety Regulations
Environmental, health and safety legislation affects nearly all aspects of our
operations including mine development, worker safety, waste disposal, emission
controls and protection of endangered and protected species. Compliance with
environmental, health and safety legislation can require significant
expenditures and failure to comply with environmental, health and safety
legislation may result in the imposition of fines and penalties, the temporary
or permanent suspension of operations, clean-up costs arising out of
contaminated properties, damages and the loss of important permits. Exposure
to these liabilities arises not only from our existing operations, but from
operations that have been closed or sold to third parties. We are required to
reclaim properties after mining is completed and specific requirements vary
among jurisdictions. In some cases, we may be required to provide financial
assurances as security for reclamation costs, which may exceed our estimates
for such costs. Our historical operations have generated significant
environmental contamination. We could also be held liable for worker exposure
to hazardous substances and for accidents causing injury or death. There can
be no assurances that we will at all times be in compliance with all
environmental, health and safety regulations or that steps to achieve
compliance would not materially adversely affect our business.
Environmental, health and safety laws and regulations are evolving in all
jurisdictions where we have activities. We are not able to determine the
specific impact that future changes in environmental, health and safety laws
and regulations may have on our operations and activities, and our resulting
financial position; however, we anticipate that capital expenditures and
operating expenses will increase in the future as a result of the
implementation of new and increasingly stringent environment, health and
safety regulation. For example, emissions standards are poised to become
increasingly stringent as are laws relating to the use and production of
regulated chemical substances. Further changes in environmental, health and
safety laws, new information on existing environmental, health and safety
conditions or other events, including legal proceedings based upon such
conditions or an inability to obtain necessary permits, could require
increased financial reserves or compliance expenditures or otherwise have a
Breakwater Resources Ltd. - 2006 Annual Information Form Page 17 of 65
material adverse effect on us. Changes in environmental, health and safety
legislation could also have a material adverse effect on product demand,
product quality and methods of production and distribution. In the event that
any of our products were demonstrated to have negative health effects, we
could be exposed to workers compensation and product liability claims which
could have a material adverse affect on our business.
Transportation Risks
Due to the geographical location of our mining properties and locations, we
are highly dependent on third parties for the provision of rail and port
services. We negotiate prices for the provision of these services in
circumstances where we may not have viable alternatives to using specific
providers, or have access to regulated rate setting mechanisms. Contractual
disputes, demurrage charges, rail and port capacity issues, availability of
vessels and rail cars, weather problems or other factors can have a material
adverse effect on our ability to transport materials according to schedules
and contractual commitments.
Aboriginal Title Claims
Recent Canadian jurisprudence requires governments to consult with aboriginal
peoples with respect to grants of mineral rights and the issuance or amendment
of project authorizations. This may affect our ability to acquire, either
within a reasonable time frame or at all, effective mineral titles in Canada
in which aboriginal title is claimed. The risk of unforeseen aboriginal title
claims also exists in foreign jurisdictions and also could affect existing
operations as well as development projects and future acquisitions. These
legal requirements may affect our ability to expand or transfer existing
operations or to develop new projects.
Foreign Activities
Our business currently operates in Chile, Honduras and Tunisia, and may
operate in other foreign countries in the future, where there are added risks
and uncertainties due to the different economic, cultural and political
environments. Some of these risks include nationalization and expropriation,
social unrest and political instability, uncertainties in perfecting mineral
titles, trade barriers and exchange controls and material changes in taxation.
There is no assurance that future political and economic conditions in the
countries in which we operate will not result in their governments adopting
different policies respecting foreign development and ownership of mineral
resources. In Honduras, there have been recent political initiatives to amend
the 1998 General Mining Act (the "Mining Act") which is the principal
legislation governing mining in Honduras. As it relates to the Company, these
initiatives, if undertaken as presently understood, are most likely to affect
environmental, fiscal and taxation matters and result in increased operating
costs. While it is not expected that these mining law reform initiatives will
have a material adverse impact on the Company's business, such an impact
cannot be ruled out given that developments are not within the control of the
Company.
Any changes in policy may result in changes in laws affecting ownership of
assets, taxation, rates of exchange, concentrate sales, environmental
protection, labour relations, repatriation of income and return of capital,
which may affect both the ability of the Company to undertake exploration and
development activities in respect of future properties in the manner then
currently contemplated, as well as its ability to continue to explore, develop
and operate those properties in respect of which the Company has obtained
exploration, development and operating rights.
Further, developing country status or an unfavorable political climate may
make it difficult for us to obtain financing for projects in some countries.
Breakwater Resources Ltd. - 2006 Annual Information Form Page 18 of 65
Greenhouse Gas Emissions
The primary source of greenhouse gas emissions in Canada is the use of
hydrocarbon energy. Our operations depend significantly on hydrocarbon energy
sources to conduct daily operations, and there are currently no economic
substitutes for these forms of energy. The federal and provincial governments
have not finalized any formal regulatory programs to control greenhouse gases
and it is not yet possible to reasonably estimate the nature, extent, timing
and cost of any programs proposed or contemplated, or their potential effects
on operations.
Accounting Policies and Internal Controls
We prepare our financial reports in accordance with accounting policies and
methods prescribed by Canadian generally accepted accounting principles. In
preparation of financial reports, management may need to rely upon
assumptions, make estimates or use their best judgment in determining the
financial condition of the Company. Significant accounting policies are
described in more detail in our Consolidated Financial Statements. In order to
have a reasonable level of assurance that financial transactions are properly
authorized, assets are safeguarded against unauthorized or improper use and
transactions are properly recorded and reported, we have implemented and
continue to analyze our internal control systems for financial reporting.
Although we believe our financial reporting and financial statements are
prepared with reasonable safeguards to ensure reliability, we cannot provide
absolute assurance.
Legal Proceedings
The nature of our business subjects us to numerous regulatory investigations,
claims, lawsuits and other proceedings in the ordinary course of our business.
The Company is currently subject to litigation and may be involved in disputes
with other parties in the future which may result in litigation. The outcome
of these legal proceedings cannot be predicted with certainty. There can be no
assurances that these matters will not have a material adverse effect on our
business.
Regulatory and Environmental Risks
The Company's mining, processing operations and exploration activities are
subject to various laws and regulations governing the protection of the
environment, exploration, development, production, exports, taxes, labour
standards, occupational health, waste disposal, toxic substances, mine safety
and other matters. New laws and regulations, amendments to existing laws and
regulations or more stringent implementation of existing laws and regulations
could have a material adverse impact on the Company, increase costs, cause a
reduction in levels of production and/or delay or prevent the development of
new mining properties. The Company believes it is currently in compliance in
all material respects with all applicable environmental laws and regulations.
Such compliance requires significant expenditures and increases mine
development and operating costs.
Mining is subject to potential risks and liabilities associated with pollution
of the environment and the disposal of waste products occurring as a result of
mineral exploration and production. Environmental liability may result from
mining activities conducted by others prior to the Company's ownership of a
property. To the extent the Company is subject to uninsured environmental
liabilities, the payment of such liabilities would reduce the Company's
otherwise available earnings and could have a material adverse effect on the
Company. Should the Company be unable to fully fund the cost of remedying an
environmental problem, it might be required to suspend operations or enter
into interim compliance measures pending completion of the required remedy,
which could have a material adverse effect on the
Breakwater Resources Ltd. - 2006 Annual Information Form Page 19 of 65
Company. In addition, the Company does not have coverage for certain
environmental losses and other risks, as such coverage cannot be purchased at a
commercially reasonable cost.
Licenses and Permits
The Company's operations require licenses and permits from various
governmental authorities. The Company believes it holds all material licenses
and permits required under applicable laws and regulations and believes it is
presently complying in all material respects with the terms of such licenses
and permits. However, such licenses and permits are subject to change in
various circumstances. There can be no guarantee that the Company will be able
to obtain or maintain all necessary licenses and permits that may be required
to explore and develop its properties, commence construction or operation of
mining facilities and properties under exploration or development or to
maintain continued operations that economically justify the cost.
Royalties
The Company's mining properties are subject to various royalty and land
payment agreements. Failure by the Company to meet its payment obligations
under these agreements could result in the loss by the Company of its related
property interests.
Title to Properties
The validity of the mining claims that constitute most of the Company's
property holdings can be uncertain and may be contested. Although the Company
has attempted to acquire satisfactory title to its properties, some risk
exists that such titles, particularly title to undeveloped properties, may be
defective.
3.5 Qualified Persons
The effective date of the Company's mineral reserves and mineral resources
estimate is December 31, 2006. The 2006 estimated measured and indicated
mineral resource and the estimated inferred mineral resource were prepared
under the supervision of Torben Jensen, P.Eng., who is employed by the Company
as VP, Engineering and who is a qualified person. The qualified person
responsible for the Myra Falls mineral reserve and mineral resource estimates
is Ken Atkin, P.Geo. (BC), Chief Geologist. The qualified person responsible
for the Langlois mineral reserve and mineral resource estimates for Zones 3
and 4 is Donald Gervais, member of l'Ordre des geologues du Quebec, Chief
Geologist. The qualified person responsible for the Langlois mineral reserve
and mineral resource estimates for Zone 97 is Jean-Francois Couture, P.Geo. of
SRK Consulting ("SRK"). The qualified person responsible for the Grevet B
mineral resource estimate is Bernard Salmon, Ing. of Scott Wilson RPA. The
qualified person responsible for the El Mochito mineral reserve and mineral
resource estimates is Renaud Adams, P.Eng., General Manager, El Mochito mine.
The qualified person responsible for the El Toqui mineral reserve and mineral
resource estimates is Robert McGuire, P.Eng., General Manager, El Toqui mine.
3.6 Summary of Mineral Reserves and Mineral Resources
The following table summarizes the Company's mineral reserves and mineral
resources estimates as at December 31, 2006.
Breakwater Resources Ltd. - 2006 Annual Information Form Page 20 of 65
Mineral Reserves and Mineral Resources Table
Proven and Probable Reserves
December 31, 2006 December 31, 2005
Tonnes Zn Pb Cu Ag Au Tonnes Zn Pb Cu Ag Au
(000's) (%) (%) (%) (g/t) (g/t) (000's) (%) (%) (%) (g/t) (g/t)
- -------------------------------------------------------------------------------------------
Myra Falls 6,134 5.7 0.5 1.0 41 1.2 6,000 6.4 0.5 1.1 46 1.3
El Mochito 2,899 6.1 2.7 - 89 - 2,413 6.6 2.2 - 87 -
El Toqui 2,869 8.2 - - - 1.3 2,591 7.8 - - - 2.1
Langlois 3,658 10.1 - 0.8 49 0.1 3,323 10.8 - 0.8 52 0.1
- -------------------------------------------------------------------------------------------
Total 15,560 7.3 - - - - 14,327 7.7 - - - -
- -------------------------------------------------------------------------------------------
Measured and Indicated Resources*
December 31, 2006 December 31, 2005
Tonnes Zn Pb Cu Ag Au Tonnes Zn Pb Cu Ag Au
(000's) (%) (%) (%) (g/t) (g/t) (000's) (%) (%) (%) (g/t) (g/t)
- -------------------------------------------------------------------------------------------
Myra Falls 7,224 7.2 0.6 1.2 55 1.7 8,647 7.8 0.7 1.4 64 1.8
El Mochito 3,199 6.7 2.8 - 97 - 3,195 8.2 2.8 - 111 -
El Toqui 3,597 8.9 - - - 1.3 3,420 8.4 - - - 1.9
Langlois 5,699 10.7 - 0.8 51 0.1 4,981 11.1 - 0.8 54 .01
- -------------------------------------------------------------------------------------------
Total 19,719 8.4 - - - - 20,243 8.8 - - - -
- -------------------------------------------------------------------------------------------
*Includes proven and probable reserves but excludes inferred resources.
Inferred Resources
December 31, 2006 December 31, 2005
Tonnes Zn Pb Cu Ag Au Tonnes Zn Pb Cu Ag Au
(000's) (%) (%) (%) (g/t) (g/t) (000's) (%) (%) (%) (g/t) (g/t)
- -------------------------------------------------------------------------------------------
Myra Falls 4,431 6.9 0.8 1.0 81 2.0 2,241 4.8 0.6 0.9 45 1.4
El Mochito 2,480 5.7 2.3 - 75 - 2,174 7.2 4.3 - 131 -
El Toqui 4,626 8.5 - - - 0.5 3,012 7.9 - - - 0.5
Langlois 1,808 8.8 - 0.5 39 0.1 1,255 9.7 - 0.5 40 0.1
- -------------------------------------------------------------------------------------------
Total 13,345 7.5 - - - - 8,860 7.1 - - - -
- -------------------------------------------------------------------------------------------
Metal Price Assumptions
For the December 31, 2006 mineral reserves estimates, metal prices, including
premiums, used to determine economic viability were US$1.12/lb. zinc, C$/US$
exchange rate of 1.09, US$600/oz. gold, US$12/oz. silver, US$2.55/lb. copper and
US$0.54/lb. lead. For Grevet B, the satellite deposit at Langlois, the metal
prices used were US$1.45/lb. zinc, C$/US$ exchange rate of 1.09, US$12/oz.
silver and US$3.27/lb. copper. Higher prices were used on this deposit as it is
expected that it will be mined over the next two years.
For the December 31, 2005 mineral reserves, the following metal price
assumptions were used for the various mineral reserve/mineral resource
estimates.
Breakwater Resources Ltd. - 2006 Annual Information Form Page 21 of 65
Mineral reserves and mineral resources at Myra Falls were based on an NSR
cut-off of $65/tonne for the HW deposit and $70/tonne for all other deposits.
Prices used for the mineral reserve/mineral resource estimates were
US$0.80/lb. zinc, US$1.80/lb. copper, US$7.50/oz. silver, US$500/oz. gold and
a C$/US$ exchange rate of $1.18.
For both El Mochito and El Toqui, long term metal prices and exchange rates
were first assigned in 1998. Prices used for the mineral reserve/mineral
resource estimates were US$0.55/lb. zinc, US$0.25/lb. lead, US$5/oz. silver,
US$275/oz. gold and a C$/US$ exchange rate of $1.43. Prior to 2006, no
modification of these prices had been made since that time. Both operations
use a specific cut-off grade which has been applied annually since that time.
Mineral resources at El Mochito are based on a grade cut-off of 3.0 to 5.0%
zinc depending on the deposit. Mineral resources at El Toqui are based on a
grade cut-off of 4.75% zinc for all deposits.
At Langlois, the NSR values used to outline mineral reserves were based on
US$0.50/lb. zinc US$0.80/lb. copper, US$5/oz. silver, US$343/oz. gold and a
C$/US$ exchange rate of $1.43 for Zone 97 and US$0.55/lb. zinc, US$0.90/lb.
copper, US$5/oz. silver, US$275/oz. gold and a C$/US$ exchange rate of $1.55 for
Zones 3 and 4.
Scientific and Technical Data
The Company is reporting mineral resource and reserve estimates in accordance
with the CIM Definition Standards For Mineral Resources and Mineral Reserves
(the "CIM Guidelines") for the estimation, classification and reporting of
resources and reserves.
The Canadian Securities Administrators' National Instrument 43-101 ("NI
43-101") requires mining companies to disclose reserves and resources using
the subcategories of "proven" reserves, "probable" reserves, "measured"
resources, "indicated" resources and "inferred" resources in accordance with
the meanings ascribed to those terms in the CIM Guidelines. Mineral resources
that are not mineral reserves do not have demonstrated economic viability.
A mineral reserve is the economically mineable part of a measured or indicated
resource demonstrated by at least a preliminary feasibility study. This study
must include adequate information on mining, processing, metallurgical,
economic and other relevant factors that demonstrate, at the time of
reporting, that economic extraction can be justified. A mineral reserve
includes diluting materials and allows for losses that may occur when the
material is mined. A proven mineral reserve is the economically mineable part
of a measured mineral resource demonstrated by at least a preliminary
feasibility study. This study must include adequate information on mining,
processing, metallurgical, economic, and other relevant factors that
demonstrate, at the time of reporting, that economic extraction is justified.
A mineral resource is a concentration or occurrence of natural, solid,
inorganic or fossilized organic material in or on the earth's crust in such
form and quantity and of such a grade or quality that it has reasonable
prospects for economic extraction. The location, quantity, grade, geological
characteristics and continuity of a mineral resource are known, estimated or
interpreted from specific geological evidence and knowledge.
A measured mineral resource is that part of a mineral resource for which
quantity, grade or quality, densities, shape, physical characteristics, can be
estimated with a level of confidence sufficient to allow the appropriate
application of technical and economic parameters, to support production
planning and evaluation of the economic viability of the deposit. The estimate
is based on detailed and reliable exploration, sampling and testing
information gathered through appropriate techniques from locations
Breakwater Resources Ltd. - 2006 Annual Information Form Page 22 of 65
such as outcrops, trenches, pits, workings and drill holes that are spaced
closely enough to confirm both geological and grade continuity.
An indicated mineral resource is that part of a mineral resource for which
quantity, grade or quality, densities, shape and physical characteristics can
be estimated with a level of confidence sufficient to allow the appropriate
application of technical and economic parameters, to support production
planning and evaluation of the economic viability of the deposit. The estimate
is based on detailed and reliable exploration and testing information gathered
through appropriate techniques from locations such as outcrops, trenches,
pits, workings and drill holes that are spaced closely enough for geological
and grade continuity to be reasonably assumed.
An inferred mineral resource is that part of a mineral resource for which
quantity and grade or quality can be estimated on the basis of geological
evidence and limited sampling and reasonably assumed, but not verified,
geological and grade continuity. The estimate is based on limited information
and sampling gathered through appropriate techniques from locations such as
outcrops, trenches, pits, workings and drill holes. Mineral resources which
are not mineral reserves do not have demonstrated economic viability.
3.6 Operating Mines
A) MYRA FALLS MINE
Project Description and Location
The Company owns and operates, through its subsidiary, NVI Mining Ltd., the Myra
Falls zinc/copper/lead/gold/silver mine located near Campbell River, British
Columbia. Effective July 23, 2004, the Company acquired all of the outstanding
shares of Boliden Westmin (Canada) Limited ("BWCL"), the owner of the Myra Falls
mine from Boliden Limited ("Boliden") for consideration consisting of 18 million
Common Shares and Tradeable Warrants to purchase 5 million Common Shares at an
exercise price of $1.00 expiring on January 28, 2009. Subsequently, the Company
changed the name of BWCL to NVI Mining Ltd.
Accessibility, Climate, Local Resources, Infrastructure and Physiography
The Myra Falls mine is located in Strathcona-Westmin Provincial Park in central
Vancouver Island, British Columbia. The mine is linked by a 90 kilometre paved
road to the port of Campbell River on the east coast of Vancouver Island and
also by paved road to the west coast of Vancouver Island via the town of Gold
River. Campbell River is an important local centre, which is connected by road
to the provincial capital, Victoria, and has air links to Vancouver.
The mine and other installations are located on the floor of Myra valley at an
elevation of approximately 275 metres above sea level. On both sides of the
valley are steep, rugged mountains rising to approximately 1,850 metres above
sea level. The lower slopes are covered by forest composed of fir, hemlock and
cedar. Alpine meadow occurs at higher elevations and the summits are bare rock
with local glacial ice.
Precipitation is high, reaching the equivalent of 2,500 millimetres of rain per
year, which may include up to three metres of snow in winter. The temperature
ranges from 28(degree)C in summer to -18(degree)C in winter.
The Myra Falls mine facilities include an underground mine and a conventional
milling facility which produces separate zinc and copper concentrates. Other
facilities include a headframe and hoist building,
Breakwater Resources Ltd. - 2006 Annual Information Form Page 23 of 65
which houses the compressors that provide compressed air for the underground
mine and ancillary functions, a hydraulic backfill plant and a concentrate
loadout facility located in Campbell River. Electrical power is provided by two
hydro-electric power stations producing 11.2 megawatts. As well, there is a 12
megawatt diesel generating plant which supplies any additional power required.
The mine property covers 2,209.97 hectares held under mining leases, 317.62
hectares held under freehold title to minerals and 1,110 hectares held under
two post mining claims. The leases are valid for varying terms and, upon
expiry, may be renewed by formal application to the applicable governmental
authorities.
History
1918 James Cross and Associates staked claims in the Myra Falls/Buttle Lake
area discovering H-W, Lynx, Price and Myra mines.
1920's Following the discovery of the Lynx mineralization, Paramount Mining
Co. of Toronto started first development work in the area but
inconclusive findings along with the remoteness of the area and
depressed metal prices resulted in little work being done.
1959 Reynolds Syndicate acquired the claims.
1961 Western Mines Limited acquired the claims.
1966 The Lynx mine started as an open pit operation.
1967 Lynx mine producing 860 tonnes per day and diamond drilling
established underground mineral reserves.
1969 Myra mine deposits discovered.
1972 Myra mine in production. Brascan Resources Ltd. acquired a controlling
interest in Western Mines Limited.
1975 Lynx open pit mine was completed. The Lynx underground mine produced
approximately 8,500 tonnes per month.
1976 Aggressive exploration program initiated to offset the decline in the
Lynx and Myra mineral reserves.
1979 Exploration program successful in locating the large massive sulphide
deposit now known as the H-W deposit.
1981 Western Mines Limited merged with Brascan Resources Ltd. to become
Westmin Resources Ltd.
1982 Over three years a new tailings disposal facility was installed and
commissioned.
1985 Following additional drilling, development and feasibility studies at
the new H-W mine, a shaft and headframe was completed. After
completion of a conveyor to the new mill, initial production averaged
2,700 tonnes per day.
1986 Myra mine operations closed.
1989 Mill production at the H-W mine increased to 3,650 tonnes per day.
1991 The Battle and Gap deposits were discovered.
1993 Lynx operations suspended.
1995 Marshall deposit discovered.
1996 Mining in the Battle-Gap zone commenced.
1998 Boliden Limited acquired the Myra Falls mine through take-over of
Westmin Resources Ltd. and subsequently transferred the Myra Falls
assets to its wholly-owned subsidiary, Boliden Westmin (Canada)
Limited ("BWCL"). Mining operations temporarily suspended at Myra
Falls. An action plan was put in place to deal with difficult ground
conditions.
1999 Mining resumed at Myra Falls.
2001 Myra Falls shut down for four months as the organization was
restructured to adjust to falling metal prices.
2004 The Company purchased all the outstanding shares of BWCL from Boliden
Limited. BWCL name changed to NVI Mining Ltd.
Breakwater Resources Ltd. - 2006 Annual Information Form Page 24 of 65
Geological Setting and Mineralization
Volcanic hosted massive sulphide ("VHMS") deposits on Vancouver Island,
including those at Myra Falls, are hosted by ancient island arc systems of the
Paleozoic Sicker Group. The Sicker Group is exposed on Vancouver Island in
several fault-bounded uplifts.
At Myra Falls, the Devonian to Mississippian aged Sicker Group volcanic rocks
are conformably overlain by limestone of the Permian aged Buttle Lake
Formation. In order of decreasing age, the Sicker Group comprises the basement
Price Formation andesite, Myra Formation felsic to mafic volcanic rocks,
Thelwood Formation mafic fine-grained volcaniclastic rocks, Flower Ridge
Formation mafic breccias and sills, and Buttle Lake limestone.
Sulphide mineralogy at Myra Falls is typical of most VHMS deposits. The common
sulphide minerals present in order of decreasing abundance are pyrite,
sphalerite, chalcopyrite, and galena. Less common sulphides are pyrrhotite,
arsenopyrite and the copper-rich sulphides bornite, renierite, and anilite.
The VHMS deposits are hosted by the Myra Formation and are associated with two
rhyolite horizons, the at-depth H-W Horizon and the near-surface
Lynx-Myra-Price ("L-M-P") Horizon.
Deposits within the H-W Horizon are primarily classified as a zinc-copper type
and include the H-W deposit and its adjacent lenses. The Battle and Gap
deposits also fall within the zinc-copper group in spite of their high lead
and zinc values relative to other deposits on the property.
VHMS mineralization associated with the H-W Horizon is typically at or
proximal to the Price Formation andesite contact. VHMS deposits immediately
overlying the Price Formation andesite contact are the 22 million tonne H-W
deposit and the six million tonne Battle deposit. The H-W Horizon also has
subordinate but economically significant mineralization within stacked lenses
located ten to 70 metres above the larger deposits. In mine terminology these
stacked lenses are known as Upper Zone mineralization. In the Battle deposit
area, Upper Zone mineralization is hosted by felsic volcaniclastic rocks
proximal to the base of or within quartz feldspar porphyry flow-dome
complexes.
VHMS mineralization in the L-M-P Horizon is located in the upper portion of
the Myra Formation. These deposits were the first to be exploited on the
property due to their surface exposure. The near surface L-M-P Horizon has a
7.2 million tonne pre-mining mineral resource with an average deposit size of
2.4 million tonnes.
There are a number of smaller sulphide lenses between and beyond the main
deposits. These include the Extension and the 43 Block, which represent part
of the current mineral reserve, as well as more outlying bodies such as the
Trumpeter, Marshall and Ridge Zones which already contribute to the mineral
resource.
Mineral Resource and Mineral Reserve Estimation Methodology
The mineral resource and mineral reserve estimates for the Myra Falls mine are
developed using Gemcom modelling software. Separate block models are
maintained for the H-W, Battle-Gap, Extension, Lynx Level 6, Ridge, and
Marshall zones.
The block model mineral resources are classified into measured, indicated and
inferred categories based on the distance of a block from its nearest
composite.
Mineral resources comprise mineralized areas which:
Breakwater Resources Ltd. - 2006 Annual Information Form Page 25 of 65
i) have been drilled and/or otherwise sampled to the knowledge level of
measured or indicated mineral resources;
ii) are considered accessible and extractable from currently-active mine
workings and are included in the current mining plan; and
iii) have an NSR value equal to or exceeding a predetermined cut-off value.
A separate extraction factor and dilution rate is applied to each mining area
to estimate mineral reserve tonnages and grades. The result is regarded as a
mineral reserve with proven and probable status.
A summary of mineral reserves and mineral resources is set out in the mineral
reserves and mineral resources table in Paragraph 3.6 entitled "Summary of
Mineral Reserves and Resources" in this Annual Information Form.
Mining Operations
Myra Falls currently operates two underground mines: the H-W mine which
commenced production in 1985 and the Battle-Gap mine which commenced
significant production in 1997. The H-W mine is accessed by a 716 metre deep,
six-compartment vertical shaft serviced by a 49 metre high headframe. The
shaft is linked to the production areas by 14 kilometres of ramps and lateral
development. The Battle-Gap mine is linked to the H-W shaft by a 1.8 kilometre
long drift on the 18 level. The mine operates on two ten hour shifts per day.
All workers and materials are transported to and from both mines via the H-W
shaft.
Mining in the H-W mine is now mainly restricted to the recovery of pillars.
Most primary stopes have been mined out and backfilled with cement-stabilized
hydraulic backfill material. The main production method in the H-W mine is
sublevel stoping with longhole drilling.
Mining in the Battle-Gap includes sublevel stoping and drift-and-fill mining
techniques according to the ground conditions. Opened in 1997, this mine is
focused on primary production. Hydraulic backfilling is applied here as well.
Up to 55% of tailings generated by the mill are returned underground as fill
material in H-W and Battle-Gap zones.
Loaded by rubber-tired diesel scoop-trams and hauled to ore-passes, the
blasted material falls by gravity to the main haulage level (24 level).
Mineralized material is transported by electric locomotives to the primary jaw
crusher located underground on 25 level in the H-W mine. Trains are loaded and
sent to the crusher according to specific tramming schedules designed, where
possible, to even out grade variations. Mineralized material is crushed to
less than 150 millimetres (six inches) in a 1.2 metre by 1.1 metre jaw crusher
and hoisted to the surface in two counterbalanced 10.5 tonne-capacity skips to
a 100 tonne storage bin in the headframe. From there the mineralized material
is transported by a 1.4 kilometre long conveyor to a 3,600 tonne coarse ore
storage bin at the concentrator.
Ground control is achieved by means of rockbolts, screening, shotcreting and
tight filling of voids. In the Battle-Gap zone, high rock pressures arising
from the mine's location under Mount Phillips, demand vigilance.
The Phillips Reach-surface ramp was started in 2005. The ramp was completed to
the top of the Level 14 ventilation raise at the end of 2006. The raise was
drilled off but not blasted until January 2007. The ramp will continue to the
Levels 14 and 15 in the Lynx mine in 2007. This will provide both service
access to the upper levels of the Lynx mine as well as ventilation to the west
end of the Battle-Gap mine.
Breakwater Resources Ltd. - 2006 Annual Information Form Page 26 of 65
Underground exploration work consisting of drift development to the Marshall
zone on the 24-level track drift and diamond drilling continued during 2006.
Diamond drilling was concentrated on the Marmot Trough located below and to
the south of the Battle-Gap mine. Drilling in 2007 will focus on a wider range
of targets.
Metallurgical Processing
The Myra Falls concentrator has a rated capacity of 1.4 million tonnes per
year and produces zinc, copper and precious metals concentrates. The original
Myra Falls concentrator, constructed in 1966, was replaced in 1985 by the
current concentrator that has been progressively modernized since that time.
In 1990, the zinc and copper flotation circuits were streamlined by adding
column cells and reducing the re-circulation load which resulted in improved
zinc recovery. In 1992, a Knelson gravity concentrator was added to each
grinding circuit to improve gold recovery. In 2006, the copper and zinc
flotation circuits were refurbished and extra cells were added to enable
production of a separate lead concentrate when required.
At surface, the mineralized material is transported from the H-W mine
headframe to the mill by a 1.4 kilometre long conveyor belt. This conveyor
belt discharges into a 3,600 tonne coarse ore bin at the concentrator.
Secondary and tertiary cone crushing and screening reduces the mill feed to
less than 16 millimetre by 28 millimetre size. Two 3,500 tonne fine ore bins
receive this crushed material.
The concentrator has two parallel grinding circuits, each capable of treating
2,000 tonnes per day. Rod mill discharge is pumped to a pair of Krebs D20LB
cyclones operating in closed circuit with the ball mill. Cyclone underflow,
containing 80 - 85% solids, returns to the ball mill. Part of the cyclone
underflow stream is passed through a Knelson gold concentrator to recover
coarse free gold. Gold and silver recoveries are about 53% and 74%,
respectively. The gold circuit was modified in 2006 to include further gold
concentration using a vibratory gold shaking table.
Cyclone overflow is fed to the copper flotation circuit; particle size is 75 -
80% finer than 75 microns (200 mesh). Copper minerals are recovered in a
conventional rougher-scavenger circuit followed by three cleaning stages.
During 2006, mechanical cells replaced the column cell that previously
operated as the final cleaner. The final concentrate reports to the 9.8 metre
diameter copper concentrate thickener. The thickened concentrate is dewatered
by pressure filtration and discharged to the load-out bay.
The copper scavenger tails and copper first cleaner tails are combined and
pumped to the zinc flotation circuit.
The feed to zinc flotation is conditioned for approximately ten minutes ahead
of rougher flotation. Lime is added to raise the pH and assist in iron (mainly
pyrite) depression and copper sulfate is added to reactivate the zinc mineral.
Collector is added to the conditioner discharge. Zinc rougher concentrate is
pumped to a regrind mill ahead of three stages of cleaning. During 2006
mechanical flotation cells replaced the column cell that previously functioned
as the final cleaner. The zinc final concentrate reports to the 9.8 metre
diameter zinc concentrate thickener. The thickened concentrate is further
dewatered by pressure filtration and discharged to the load-out bay.
Zinc and copper recoveries during 2006 were 86.5% and 73.0% respectively.
The dewatered concentrates are transported from the property in 38 tonne
truck/trailer units 90 kilometres to Discovery Terminal, a deep-sea docking
facility located in Campbell River where they are loaded onto barge or ship.
Breakwater Resources Ltd. - 2006 Annual Information Form Page 27 of 65
Flotation tailing is pumped from the mill to a cyclone plant where the
particles are classified into a coarse sand fraction that is returned
underground as hydraulic backfill, and a fine slurry that is pumped to a paste
tailings plant.
In the paste tailings plant, the fine solids are flocculated and settle in a
high-capacity thickener. The thickener overflow (clear process water) is
recycled to the milling process. The thickener underflow slurry, contains
around 55% solids and a portion of this stream is pumped to a vacuum disc
filter where it is further dewatered to produce a filter cake of 85% solids.
The filter cake is recombined with thickener underflow slurry at a ratio of
60:40 in a paddle mixer. The resulting "paste" then discharges from the paddle
mixer into a positive-displacement pump. The paste tailings are pumped to a
deposition site along the northern perimeter of the tailings pond.
During the fourth quarter of 2005, metallurgical test work was carried out to
investigate the feasibility of producing a lead concentrate of marketable
quality, with the ultimate goal of reducing the quantity of lead and zinc
reporting to the copper concentrate. The test work was positive, indicating
that copper recoveries could be improved by 30 to 40% with a dramatic
reduction in impurities and zinc concentrate grades could be improved by 11%.
A mill flowsheet was developed and the flotation circuits were modified along
with the reagent additions to improve zinc and lead rejection in the copper
circuit and improve zinc concentrate grade. The components were installed to
float off a lead concentrate and this portion of the circuit will be
commissioned in early 2007. During the fourth quarter of 2006, zinc recoveries
were 88.2% and copper recoveries were 71.20% during the circuit commissioning.
A summary of three year production information is set out in the Historical
Production Table in Paragraph 3.2 entitled "Operations of the Company" in this
Annual Information Form.
Environmental Management and Permitting
The Myra Falls mine is located within Strathcona-Westmin Provincial Park. The
park was established as a Class B park inside the boundaries of Strathcona
Provincial Park, which is a larger Class A park and covers a total area of
231,000 hectares. The Class B park designation was established in 1989 to
allow mining interests to continue as industrial development is not permitted
within a Class A provincial park.
Although the Company's mineral claims cover more than 3,600 hectares, the
surface area affected by the Myra Falls mine is less than 170 hectares.
The surface tailings disposal facility ("TDF") is a 43 hectare "side-hill"
impoundment created by upstream dam raises of fill. The crescent shaped dam is
approximately 1,400 metres long and 28 metres high. Drainage from the facility
reports to a water treatment system with a series of settling ponds before
being released to Myra Creek. The TDF receives up to 50% of the whole tailings
stream and the balance reports underground as cemented hydraulic fill (via the
backfill plant).
In 1997, a geotechnical audit of the TDF by independent experts, indicated
that the facility did not satisfy the British Columbia guidelines for dam
seismic standards (a one-in-475 year earthquake event for an operating mine).
Several alternatives for strengthening the facility were reviewed and a
proposal was finally selected that will enable the TDF to exceed the
recommended operating design standard and meet the recommended closure
standard of a one-in-1,000 year earthquake event. The proposal was approved by
the British Columbia government and construction of the upgrade is in progress
and scheduled to be completed in 2008.
As of January 1, 2007, approximately 18 months of storage space remains
available for tailings in the TDF. The storage available is considerably more
than was reported last year and this has been confirmed
Breakwater Resources Ltd. - 2006 Annual Information Form Page 28 of 65
by the Geotechnical Consultant, AMEC Earth and Environmental Inc. While the
storage space is being consumed, a new facility in the Lynx Pit is being
constructed and is expected to have sufficient storage capacity to accommodate
tailings for an additional 11 years.
Mining and milling activities at Myra Falls are conducted pursuant to various
environmental permits, including waste water and air emission permits issued
under the British Columbia Waste Management Act, mining and reclamation
permits issued under the British Columbia Mines Act (the "Mines Act") and park
use permits issued under the British Columbia Park Act. Operations at Myra
Falls are conducted in substantial compliance with all of these permits.
The Myra Falls mine holds Park Use Permits issued by the British Columbia
Ministry of Parks for mining and power generation. The permits are valid for a
period of 27 years commencing June 1, 1985 (expiring on May 31, 2012) and are
renewable.
The Myra Falls site currently operates under a Reclamation Permit (M-26) (the
"Reclamation Permit") issued by the British Columbia Ministry of Energy and
Mines ("MEM"). The Reclamation Permit contains the MEM's reclamation
requirements including financial security obligations by the permittee.
An updated conceptual closure plan for the Myra Falls mine was filed with the
Chief Inspector of Mines of the MEM on December 22, 2003 to meet the
requirements under the British Columbia Mines Act and Reclamation Code. The
report details closure techniques and methods for all site components complete
with cost estimates to implement the plan. The updated reclamation and closure
costs are estimated at $10.3 million. A continued annual operating cost of
$0.6 million is also expected for long term treatment of site drainage after
closure.
The Reclamation Permit contains conditions for the posting of reclamation and
security requirements. The Company has fulfilled its obligations by posting an
aggregate of $13.4 million of which a sum of $10.8 million was for reclamation
and closure costs and $2.6 million for the TDF upgrade program.
Exploration
Since the opening of the Lynx mine in 1966, there have been four subsequent
phases of exploration, development and mining ("E-D-M") from four past and
current producing mines. Each cycle has taken about a decade to run its
course, with some minor overlap. Initiation of each cycle commenced with the
need to discover new resources as existing resources were being depleted.
Diamond drilling for new undiscovered VHMS deposits has yet to be successful
during the current E-D-M cycle. Based on financial constraints over the past
four years, an interim decision has curtailed development of strategically
positioned underground diamond drill platforms for targets on the western and
northern portions of the property. Development of diamond drill platforms is
essential as the western half of the property lies under the 1,520 metre high
Phillips Ridge. The Company commenced development of the Phillips Reach ramp
from surface in the Lynx mine area to the west during 2005. This ramp will
provide new underground diamond drill platforms. Diamond drilling from the
Phillips Reach ramp commenced during 2006. The diamond drill contractor
mobilized in the fourth quarter and set up on surface to drill the extension
of the Marshall zone.
Definition diamond drilling is currently delineating the Extension Zone and
the 43 Block. The Extension Zone is located between the H-W and Battle-Gap
mines and extends over a one kilometre strike length. The 43 Block definition
diamond drilling is nearing completion; mining of initial stoping blocks on
this structurally deformed lens commenced in 2001. Near surface mineral
resources of the high-grade Lynx deposit S-Zone of the L-M-P Horizon have also
been outlined.
Breakwater Resources Ltd. - 2006 Annual Information Form Page 29 of 65
B) EL MOCHITO MINE
Project Description and Location
The Company owns and operates the El Mochito zinc/lead/silver mine located in
Honduras through American Pacific Honduras S.A. de C.V. ("AMPAC"). Except for a
short duration in 1987, the mine has been in production for 58 years.
The El Mochito mine is located in northwest Honduras, near the town of Las
Vegas, approximately 88 kilometres southwest of San Pedro Sula and 220
kilometres northwest of the capital city, Tegucigalpa. The concentrate
produced at El Mochito is shipped to the port city of Puerto Cortes, which is
35 kilometres north of San Pedro Sula.
The El Mochito mine consists of an underground zinc/lead/silver mine and a
2,300 tonne per day concentrator. The El Mochito property includes 53
exploitation concessions totalling 10,835 hectares of mineral rights. AMPAC
has sole title to the exploitation concessions, which are 40 year concessions
expiring in 2027. In addition, AMPAC has legal title to extensive surface
lands covering a portion of the El Mochito zone of claim concessions; these
surface lands are necessary for worker camps, surface mine and mill
facilities, present and future tailings dams, exploration activity and water
springs.
Accessibility, Climate, Local Resources, Infrastructure and Physiography
Access to the mine from San Pedro Sula is by a paved highway. Located in the
Province of Santa Barbara, the mine, town site and industrial facilities are
situated on the slopes of mountains overlooking Las Vegas, a rural community
of 25,000 people.
The mine is located at an elevation of 1,000 metres in a mild, semi-tropical
climate. Maximum daily temperatures range from 23(degree)C to 29(degree)C and
average rainfall per annum is 2,300 millimetres. Due to its tropical location
and varied topography, Honduras enjoys a variety of climates. The temperatures
are warm all year around but the patterns of rainfall, humidity and tropical
vegetation vary depending on the altitude, prevailing winds, the location in
relation to the coasts, and to what extent the mountains block the passage of
clouds.
Electrical Power at El Mochito is supplied by National Grid belonging to the
Honduran Government. The mine has an on-site diesel power plant that has the
capacity to cover all aspects of the mine (mill excluded) operation with the
exception of the hoisting operation.
History
1938 El Mochito mine discovered.
1943 New York and Honduras Mining Corporation (later Rosario Resources
Corporation "Rosario") purchased the property.
1948 Production began with the initial zinc product being jig concentrates
containing native silver, a bulk flotation concentrate and a silver
product.
1960 Zinc concentrate became economic to produce.
1978 Amax, Inc. acquired Rosario.
1987 The mine was closed due to high taxes, labour problems and high
operating costs. American Pacific Mining Corporation, Inc. ("American
Pacific") purchased the mine. Mine reopened.
1990 The Company acquired American Pacific by way of an amalgamation of
American Pacific with a wholly-owned subsidiary of the Company now
named Santa Barbara Mining Company, Inc.
Breakwater Resources Ltd. - 2006 Annual Information Form Page 30 of 65
Geological Setting and Mineralization
Zinc/lead/silver mineralization at El Mochito occurs in sedimentary rocks of
the Cretaceous age and belongs to the economically important class of
high-temperature replacement zinc/lead deposits in carbonates. Carbonates are
particularly susceptible to replacement by acid hydrothermal solutions which,
in the case of El Mochito, have deposited skarn minerals such as garnet,
epidote and pyroxene together with sulphides of iron, zinc and lead.
The replacement deposits can take two shapes: some follow the essentially flat
bedding of their host rock ("mantos") while others cut across the rocks
("chimneys" or "pipes"). At El Mochito, both of the replacement deposits are
prominently developed, with mantos forming at the lower contact of the
Cretaceous Atima limestone, where upwelling solutions emerged from the
underlying Todos Santos siltstone package. Mantos also formed at the lower
contact of the Mochito shale, a 150 metre thick limy siltstone unit some 550
metres above the base of Atima limestone. In many cases, a chimney-type
connection between the lower and upper mantos is present, the largest of which
is the San Juan pipe, now largely mined out. Others are the Nacional, Salva
Vida, Yojoa, Nina Blanca and Nueva pipes. Overall, some 70% of the total known
tonnage at El Mochito occurs in the chimney/pipe setting.
There is also a tendency for the formation of manto-like bodies immediately
above the Mochito shale from which a number of individual pipes rise into the
450 metres of the overlying upper Atima limestone where a number of high grade
pipes or chimneys sustained the mine in its earlier history. The known
mineralization at El Mochito occurs within a rock volume measuring some 2.5
kilometres east-west and 600 metres north-south, with a vertical
(stratigraphic) extent of more than one kilometre. Within these dimensions,
the known mineralized bodies occupy 0.3% of the overall volume.
El Mochito has a pronounced overall vertical metal zoning. It is generally
accepted that a set of pre-existing faults guided the ascent of the
mineralizing fluids. Of particular importance are the sub-parallel, generally
east-northeast trending Porvenir, Main and Nacional/Salva Vida faults. All of
the major mineralized bodies discovered to date at El Mochito are localized by
the intersection of these faults with north-northeast trending "N" style
faults.
Post-mineralization faulting is ubiquitous. A prominent set strikes
northeasterly and has steep dips, with the hanging-wall side moving down.
While the offsets along these faults are generally small, they create poor
ground conditions. Knowledge of their location in space is required for
detailed mine layout.
The high-grade Port Royal zone discovered in 1999 and the Barbasco zone
discovered in 2001 are similar to smaller high-grade zones mined decades ago;
however, they occur over 770 metres west of similar structures previously
mined and confirm the continuing exploration potential of these structures.
Mineral Resource and Mineral Reserve Estimation Methodology
The mineral resource and mineral reserve estimates for the El Mochito mine are
developed using Gemcom modelling software. The method used in the December 31,
2006 mineral resource and mineral reserve estimation was different from the
previous years in several aspects. This year, the cut-off grade was changed to
5% zinc equivalent grade from a 5% zinc grade. Secondly, a true grade block
model was created using an inverse distance (1/D(2)) interpolation method
rather than the traditional polygonal method. And lastly, treatment of planned
dilution in mining was modified. All other parameters, such as drill spacing,
specific gravity, sampling method, geochemical analysis, and mining method and
factors, are the same as preceding estimates.
Breakwater Resources Ltd. - 2006 Annual Information Form Page 31 of 65
A summary of mineral reserves and mineral resources is set out in the mineral
reserves and mineral resources table in Paragraph 3.6 entitled "Summary of
Mineral Reserves and Resources" in this Annual Information Form.
Mining Operations
All the present mineralized bodies are mined employing a "post and pillar" cut
and fill method. Using pneumatic jumbos with hydraulic backfill yielding
approximately 84% recovery of the reserves. This method is ideally suited for
the mine's variable geometry, grade distribution and rock conditions. Good
control over grade and dilution is achieved. The mine functions well within
the constraints of small shafts and has consistently improved over the years.
Mineralized material in the Nacional and Lower San Juan is loaded by 2.7 cubic
metre capacity load haul dump vehicles into 15 tonne trucks for transport to
an ore-pass which feeds an underground crusher and then a 0.9 metre-wide
conveyor. The material is then conveyed upgrade to chutes on the shaft-access
rail system where it is transported to the shaft ore-pass system. Material is
hoisted via ten tonne skips to surface, where it is conveyed to the surface
crushing circuit and subsequently to storage in a surface ore bin.
Metallurgical Processing
The mill at El Mochito is a conventional, differential sulphide flotation mill
capable of processing 2,300 tonnes per day, producing separate zinc and lead
concentrates. The process consists of crushing, grinding, flotation,
concentrate dewatering and tailings disposal.
Mineralized material from underground is crushed in a three stage surface
facility (jaw and cone crushers with vibrating screens) prior to trucking to
the ore bin at the mill site. The grinding circuit consists of parallel open
circuit rod mills, the discharges of which are combined and passed through two
stages of ball milling. Each stage of ball milling is in closed circuit with
cyclones. The ground ore is conditioned with reagents and then subjected to
differential flotation in roughing and cleaning flotation circuits to produce
saleable lead concentrate and zinc concentrate. These concentrates are
separately thickened and then vacuum filtered before they are conveyed to
storage sheds at the mill site.
The flotation tailings are pumped to the mine backfill facility where the
tailings, upon demand, are subjected to cycloning to produce hydraulic
backfill for the mine or bypassed to the tailings impoundment area. No
tailings effluent is recycled to the mill, but it is treated and discharged.
The concentrates are hauled to a storage shed at Puerto Cortes via truck for
subsequent export to smelters.
Since opening in 1948, the El Mochito mine has processed over 19.1 million
tonnes with an average grade of 7.4% zinc, 3.5% lead and 233 grams of silver
per tonne. Concentrate grades are in the 52% range for zinc and in the 70%
range for lead (containing approximately 2,500 grams of silver per tonne). The
high silver content in the lead concentrate combined with the good grade of
lead makes this concentrate readily marketable.
A summary of three year production information is set out in the Historical
Production Table in Paragraph 3.2 entitled "Operations of the Company" in this
Annual Information Form.
Breakwater Resources Ltd. - 2006 Annual Information Form Page 32 of 65
Environmental Management
The El Mochito mine operates under the Honduras Law of the Environment (1993).
This law has a very limited section referring specifically to mining, for
which the standards are, for the most part, World Bank standards. The Company
believes that the mine meets relevant North American standards which are used
by the Company as guidelines for its mining practices. In 1998, a new Mining
Code was published which calls for the creation of a "Manual of Environmental
Policy" for establishing environmental standards. This manual was recently
published in draft form and is now undergoing review by all stakeholders. The
mining industry is participating in the review through its mining association
in Honduras.
Mill tailings that are not used for mine backfill are discharged to the Pozo
Azul tailings facility ("Pozo Azul") where they are hydro-cycloned into coarse
and fine fractions. Coarse material is used for upstream dam construction
while the fine fraction reports to the reservoir portion of the pond. The
reservoir portion of Pozo Azul provides retention time to naturally treat
water prior to discharge to the Quebrada Raices, and subsequently to Lake
Yojoa.
Dam construction and geotechnical evaluations are contracted to an independent
consulting firm. Dam inspection reports prepared annually by the independent
consulting firm do not indicate any significant stability issues associated
with the dams on site.
Stage two of a two-stage dam construction schedule has been completed. Stage
two has sufficient capacity to contain tailings until the end of 2007. To
accommodate reserves past this date, a new tailings disposal facility
("Soledad") has been engineered and approved by the Honduran authorities and
construction began in 2004. During 2006, storm damage necessitated a repair to
the geomembrane liner which delayed commissioning into the third quarter of
2007. Once complete, Soledad is expected to have capacity for seven years at
current production rates and the current tailings impoundment facility, Pozo
Azul, will be reclaimed.
The Company has prepared a conceptual reclamation and closure plan for the El
Mochito mine. The reclamation and closure plan focuses on the decommissioning
of mine and surface infrastructure and the reclamation of the tailings
facilities. Progressive reclamation of the Pozo Azul tailings facility will
begin once the Soledad facility is commissioned. Final and long-term
reclamation of El Bosque tailings facility was practically completed at the
end of 2006 and consists mainly of geotechnical stabilization and erosion
protection. The only remaining work is to construct a surface drainage
spillway which will be designed in 2007 and constructed in 2008.
Closure and reclamation costs for El Mochito are estimated to be $4.6 million.
The Honduran government does not require security to be posted.
Exploration
During 2006, Western Mining Services LLC. ("WMS") was contracted by the
Company to give technical support in defining the geological potential and
preparing an aggressive three year exploration program for all the Company's
operations, including El Mochito.
i) Underground Exploration and Delineation Drilling
For the year 2006, 43,847 metres of delineation and exploration diamond
drilling was performed at El Mochito of which roughly 72% of the drilling was
delineation drilling. Resources were upgraded and reserves were added in the
Santo Nino, San Jose, and La Leona areas of the mine.
Breakwater Resources Ltd. - 2006 Annual Information Form Page 33 of 65
At San Jose, a total of 8,212 metres of delineation drilling was completed,
along 236 metres of the manto trend, along 15 metre spaced sections on the
2450 Level. On the east side of San Jose, 1,458 metres of exploration drilling
has confirmed the continuation of the San Jose manto into the Santo Nino area.
From the 2790 Level in the Santo Nino area, 8,850 metres of exploration
drilling successfully tested 152 metres of the manto trend. An additional
5,076 metres of exploration drilling from the 2790 Level further demonstrated
the connection between the San Jose and Santo Nino mantos. In addition 1,514
metres of delineation drilling was completed along 15 metre sections on the
Santo Nino manto. The Santo Nino manto is open to the northwest.
On the 1850 Level, in the far western portion of the mine, 1,829 metres of
drilling added 61 metres to the length to the La Leona manto. This manto is
open to the west.
Exploration drilling in the Imperial area was of limited success. Drilling
failed to show a connection between Imperial and the Barbasco Extension.
In the near future, exploration drilling will focus on the eastern portions of
the mine. This area includes the Deep East target, the Santo Nino NW manto,
the Santo Nino chimney, the Santa Blanca, and the Santa Paula mantos.
Delineation drilling in 2007 will continue to focus on developing resources
and adding reserves in the Santo Nino, San Jose, and La Leona manto areas.
ii) Surface Exploration
Two soil sample grids, covering an area of 3.5 square kilometres and totalling
1,528 samples, were completed in 2006 in the Mochito area. The soil grids
covered the 21 de Octubre and Arandanos areas.
The sample spacing on all grids is a 50 metre by 50 metre pattern. All the
samples are sent to independent laboratories and analyzed for 31 elements
using ICPMS.
In the 21 de Octubre grid, which is centered in the immediate vicinity of the
El Mochito mine, a total of 705 samples were collected from an area of 1.6
square kilometres. The grid over the Arandanos area, which is northwest of the
mine district, covered an area of 1.9 square kilometres and contained 823
samples.
A third soil sample grid was started in 2006 and will be completed in February
2007. This grid, called Enlace, covers the ground between the two completed
grids. It is designed to cover 6.1 square kilometres and have about 2,560
samples.
Geochemical anomalies noted in the results from the 21 de Octubre soil sample
grid, centered on the mine area, are useful reference parameters for
exploration in the district. An interesting geochemical anomaly, with
dimensions and values similar to those observed at 21 de Octubre area, was
found in the Arandanos grid area.
In 2006, ten diamond surface drill holes totalling 5,543 metres tested three
areas. These areas were the San Juan Arriba, Bonanza, and Caliche.
In San Juan Arriba, an area located above the San Juan deposit, five diamond
drill holes totalling 2,371 metres were completed. The drilling targeted a
strong Natural Source Audio-frequency Magnetotelluric Imaging ("NSAMT")
geophysical anomaly in this area. Drilling intersected a skarn zone with weak
Breakwater Resources Ltd. - 2006 Annual Information Form Page 34 of 65
mineralization in the Mochito Shale above the San Juan deposit. Drilling
failed to find any mineralization extending above the Mochito Shale.
At the Bonanza area, located about 300 metres southeast of the San Juan Arriba
area, two diamond drill holes totalling 961 metres were drilled. A magnetic
anomaly was tested with this drilling. The second hole intersected 77 metres
of strong skarn alteration in the Mochito Shale. It is believed that this
intersection may represent a mineralized zone lying between the San Juan and
Nispero Superior deposit. This new area is called Santa Paula.
The third area, Caliche, is located roughly three kilometres northeast of the
mine. Three diamond drill holes, totalling 2,211 metres, were drilled on a
geochemical anomaly. Drilling failed to find any mineralization and the
drilling results suggest the Mochito Shales are absent in Atima limestone in
this area.
Geological mapping was completed on the Arandanos area at a scale of 1:5000 in
2006. The mapping results clarified questions concerning the stratigraphy and
helped recognize important structural features in the area. The target of
Todos Santos/Lower Atima contact in this area is inferred not to be deep and
may be only 600 metres below the surface.
At the end of 2006, WMS reprocessed the AeroDat airborne magnetic geo-physical
survey data collected in 1997. Using a GMSYS-3D magnetic and gravity modelling
software process, they were able to sharpen and refine the 3D details of
various anomalies of exploration interest.
Of interest was the improved resolution over the Arandanos and Big Fuzzy
exploration areas. In the Arandanos area, three anomalies are noted with one
coincident to the geochemical anomaly. At the Big Fuzzy area, four,
well-defined, finger shaped apophyses are noted protruding upward from the
broad anomaly at depth. Arandanos and Big Fuzzy are planned to be drill tested
in 2007.
C) EL TOQUI MINE
Project Description and Location
The Company owns and operates the El Toqui zinc/gold mine in Chile through its
wholly-owned subsidiary, Sociedad Contractual Minera El Toqui ("El Toqui").
Except for the year 1986 and a brief period in 1998, the El Toqui mine has
been in continuous production since 1983.
In August 1997, the Company purchased all of the outstanding common shares of
El Toqui for $18.7 million, including $7.8 million for working capital, and a
net smelter return royalty. The royalty is 1% when the LME price of zinc
exceeds US$0.50 per pound and increases to a maximum of 3% when the LME price
of zinc is equal to or greater than US$0.60 per pound.
The El Toqui mine is located in Chile's Region XI, approximately 1,350
kilometres south of Santiago. The site is situated approximately 120
kilometres by road north of the regional capital, Coyhaique and an equal
distance northeast from the port town of Chacabuco.
The El Toqui mine operates under various Chilean permits and authorities
related to the environment. Site discharge waters are regulated under Decreto
No. 90 (Republica de Chile, 2000), which establishes water quality limits for
all effluents to surface waters.
Breakwater Resources Ltd. - 2006 Annual Information Form Page 35 of 65
Accessibility, Climate, Local Resources, Infrastructure and Physiography
The property is accessed by paved road to within 17 kilometres of the mine and
then by an all weather gravel road. The mine is located in the Andes Mountains
within the El Toqui river valley (southern slope) between 600 and 1,000 metres
above sea level.
Southern Chile tends to be wet all year round, featuring frequent disturbed,
changeable weather. Annual precipitation can be as high as 1,200mm, much of
which falls as snow farther south and on the higher mountains. On the coast,
winters are rarely very cold, however summers are cool and cloudy.
The El Toqui property covers approximately 1,200 square kilometres of
mountainous terrain and includes the currently producing Dona Rosa zinc-gold
mining area, the Aserradero gold-zinc mining area, the Estatuas zinc mining
area, the new Concordia zinc-lead-silver mining area, and the former producing
San Antonio and Mallin-Monica zinc/lead mines and a 1,500 tonnes per day
concentrating plant.
The El Toqui operation mines and processes material containing zinc, gold,
silver, and lead. The concentrates produced by the plant are transported to a
deep-water port in Puerto Chacabuco for export. El Toqui owns and operates a
dedicated hydroelectric power generating plant as well as a diesel generating
plant. The property includes a concentrator, mine and maintenance offices, a
laboratory, service buildings, catering facilities, accommodation modules,
housing, and a ship loader in Puerto Chacabuco.
History
1970's El Toqui deposit was discovered and owned by Ignacio Walker, a Chilean
entrepreneur, who then signed a joint venture agreement with
Metallgesellschaft AG to explore the district.
1983 El Toqui commenced production in November.
1987 Lac Minerals acquired a majority interest.
1989 Lac Minerals acquired the remaining 15% minority interest to become
the sole owner.
1994 Barrick Gold Corporation acquired Lac Minerals.
1997 The Company purchased all outstanding common shares of El Toqui from
Compania Minera Barrick Ltda. and Sociedad Contractual Minera Barrick,
wholly-owned subsidiaries of Barrick Gold Corporation.
2004 The Company increased the mill capacity to 520,000 tonnes per annum.
2006 The Company installed a Gekko intensive leaching plant to recover gold
and silver from the Aserradero deposit.
Geological Setting and Mineralization
The El Toqui property is situated in an area of Jurassic-Cretaceous volcanic
and volcano-sedimentary rocks, which are intruded by intermediate to felsic
porphyritic bodies of Upper Cretaceous to Tertiary age. The volcanic and
volcano-sedimentary rocks have flat to shallow dips in the El Toqui area.
Structurally, the area of the property is characterized by block faulting. The
dominant strike direction is west-northwest to north, but northeast faults of
secondary importance are also present.
The El Toqui property can be divided into two sectors in terms of
mineralization, namely zinc and zinc/gold, with some areas, such as Concordia,
having high lead and silver. Zinc and zinc/gold mineralization is present in
the western part of the property within a west-northwest trending area
approximately eight kilometres by 30 kilometres. The El Toqui mining district
occupies a small part of
Breakwater Resources Ltd. - 2006 Annual Information Form Page 36 of 65
this sector, about ten kilometres by four kilometres. It appears to represent a
horst bounded by west-northwest faults.
Mineralization at El Toqui occurs as manto deposits hosted by a five metre to
12 metre thick bed of fossiliferous limestone, known as the Main Manto unit.
The Main Manto unit, or Coquina bed, occurs within a sequence of
volcano-sedimentary rocks in the lower part of the Coyhaique Formation.
Sulphides, mainly sphalerite and pyrrhotite, selectively replace the matrix of
the fossil shells, and in places the fossil shells themselves, in the Main
Manto unit. Other sulphides present in lesser quantities include pyrite,
galena, chalcopyrite and arsenopyrite.
The Main Manto unit is not mineralized throughout the property. Vertically,
the Main Manto unit contains economic grades in the mining areas with
thicknesses from a few metres to 12 metres. Normally, a porphyry sill forms
the footwall to the Main Manto. Locally, apophyses from this sill extend up
through the Main Manto unit.
The three original deposits at El Toqui, Dona Rosa, Mallin-Monica and San
Antonio adjoin each other but are separated by faults. They were likely part
of the same mineralized body, but are now at different elevations due to block
faulting. The Dona Rosa deposit, the most westerly, is faulted down 40 metres
to 50 metres from the Mallin-Monica deposit, which in turn is stepped down by
faulting from the San Antonio, the most easterly body. Some faults are
occupied by porphyry dikes. Since 2000, exploration activity identified the
new deposits of Estatuas, San Antonio East, Aserradero, Mallin-sur, and
Concordia, all believed to be part of the original mineralized body but now at
different elevations due to faulting.
Mineral Resource and Mineral Reserve Estimation Methodology
The estimation of mineral resources and mineral reserves at El Toqui is a
two-stage process.
First, all mineral resources are estimated for the main manto unit at a
minimum width and cutoff grade based upon metal prices, costs, recovery and
other considerations. Second, mineral reserves are estimated by applying a
series of factors and dilution to the mineral resources. The use of a
polygonal-block-based method combined with regularly spaced drill holes, is
believed to provide a reasonably accurate estimate of the mineral resources.
To convert mineral resources to mineral reserves, the following assumptions
are made:
(a) Dilution is added to all resource tonnages at a rate of 10% at zero
grade, which is based upon a normal over-break of 0.2 metres on the
roof and floor for a typical four metre high room.
(b) Room and pillar mining results in a general recovery factor of 80%
before dilution and pillar recovery. A 50% recovery factor is used
for the pillars. Specific areas are designed differently if rock
quality is low or other issues exist. Geo-mechanical studies are in
process to improve recoveries further.
A summary of mineral reserves and mineral resources is set out in the mineral
reserves and mineral resources table in Paragraph 3.6 entitled "Summary of
Mineral Reserves and Resources" in this Annual Information Form.
Mining Operations
The El Toqui deposits are amenable to room and pillar mining. The Dona Rosa,
Estatuas, and Concordia mining areas are accessed via adits. Mining is
normally carried out in a single horizon from flat lying
Breakwater Resources Ltd. - 2006 Annual Information Form Page 37 of 65
mineralization varying in thickness from four to 12 metres, except where
localized faulting may offset the manto into smaller stopes accessed via mine
ramps. In Estatuas, there is a lower secondary manto which has economic zinc
grades and is being mined.
A room and pillar extraction method is used with 11 metre rooms around eight
metre pillars. Generally, ground conditions are good and roof support consists
of friction split set bolts installed in a 1.5 metre by 1.5 metre pattern. In
more highly faulted zones such as in Estatuas, mesh and shotcreting are used,
especially at drift intersections and where intersecting and low lying faults
exist. Part of the mine plan is partial pillar recovery, normally 50% of the
design size.
The mine operations are well staffed. Daily production is achieved with six
metre by six metre drift development mining, slashing and some pillar mining.
There are four jumbos and four eight yard load haul dump scooptrams, two rock
bolters, three 50 tonne trucks, one 40 tonne truck, and three utility vehicles
used for loading of explosives and services installation. The underground
mobile equipment is being replaced starting in 2007. The mining areas, which
are situated well above the valley bottom, are relatively dry. Rainfall in the
area is high and some localized water inflow occurs that is collected and
pumped out. Mine water inflow volumes are small and submersible pumps feed
small fixed base pumps which pump water to surface from each mining area.
Metallurgical Processing
The mill at El Toqui is a conventional, differential sulphide flotation mill
capable of processing 1,500 tonnes per day to produce two separate
concentrates. The process consists of crushing, grinding, flotation,
concentrate dewatering and tailings disposal.
Mineralized material from underground is trucked to the surface crushing plant
or adjacent stockpiles where it is stored pending the scheduled milling
campaign for each mineral type.
Crushing is performed in three stages (jaw and cone crushers with vibrating
screens) to reduce the material to 80% minus eight millimetres. Grinding is
done in two stages of ball milling with the final stage in closed circuit with
cyclones. Conventional differential flotation including rougher and cleaner
flotation circuits produce gold/lead concentrates and zinc concentrates. The
zinc circuit also includes a regrind stage.
The flotation circuits are operated in various configurations, depending on
the mineral type being processed. Low grade lead material from the Estatuas
and Dona Rosa deposits yields only zinc concentrate, and the lead circuit is
bypassed when this material is treated. With Aserradero gold/zinc mineralized
material, the lead circuit is used to produce a gold flotation concentrate
(with some sphalerite and arsenopyrite) and the zinc circuit produces a
"high-gold" zinc concentrate. In mid-2007, the higher lead grade Concordia
deposit will begin production and both circuits will then be operated in
conventional lead-zinc configuration.
Concentrates are separately thickened and filtered on pressure filters before
being dumped to a storage area in the mill. Both the zinc concentrate and the
lead concentrate are trucked 120 kilometres to Puerto Chacabuco for subsequent
export to custom smelters for refining.
During 2006, the Company installed an intensive leaching plant from Gekko
Systems (Australia) to leach the gold concentrate and produce gold dore on
site. The production of metal dore is expected to result in a significant
increase in the realized value by eliminating the treatment charge and the
penalties associated with treatment of gold in zinc concentrate or in gold
concentrate. This plant will be commissioned in early 2007.
Breakwater Resources Ltd. - 2006 Annual Information Form Page 38 of 65
A summary of three year production information is set out in the Historical
Production Table in Paragraph 3.2 entitled "Operations of the Company" in this
Annual Information Form.
Environmental Management
Mill tailings are discharged to the Confluencia tailings impoundment where
they are separated via hydro-cyclone into coarse and fine fractions. The
coarse fraction is utilized to construct the tailings dam in a centre line
configuration in accordance with Chilean regulations. The fine fraction
reports to the interior of the pond where it is deposited subaqueously.
Reclaimed water is pumped back to the mill for mineral processing while any
excess is discharged via two sedimentation ponds to the Toqui River.
The Confluencia impoundment was expanded in 2004 to accommodate an additional
five years of production. Meanwhile, an independent consulting firm has been
contracted to assist in evaluating potential new tailings disposal areas.
Geotechnical evaluations are on-going. The new site will require environmental
permitting and SCMET is assembling the required data to support the permitting
application.
A Closure Plan for the Confluencia tailings impoundment is also being
prepared.
There are three additional tailings facilities that are out of service and at
various stages of reclamation. These are included in the Company's conceptual
Reclamation and Closure Plan for the El Toqui mine. Removal of all hazardous
waste materials is carried out on an ongoing basis as per Chilean law.
The Reclamation and Closure Plan will be updated periodically.
Exploration
Exploration potential in the El Toqui district is considered excellent for
identifying additional resources and reserves. The Company has placed renewed
emphasis on exploration in the Toqui District in southern Chile. Since
acquiring the El Toqui mine in 1997, the Company has systematically explored
the region and has identified several areas which have expanded the mineral
reserves and resources in the area of the mine. The company has planned a
significant exploration and infill diamond drilling program for 2007.
New targets identified following extensive geochemical surveying over the past
few years are now being diamond drilled. All of these targets are within an
area of about ten kilometres by four kilometres known to host zinc
mineralization at El Toqui.
One area, Concordia, three kilometres northwest of the present mining areas,
was discovered by diamond drilling from 2003 to 2005. This area is now being
developed for mine production. This area has high zinc, lead, and silver
grades. Further infill drilling and extension drilling will be carried out in
2007 and onwards.
The Aserradero area, 250 metres south of the existing Dona Rosa mine, hosts
zinc and gold mineralization has been in production for three years. Recent
additional diamond drilling is expanding the reserves and resources in this
area.
The newly discovered Porvenir deposit continues to be diamond drilled with the
goal of increasing mineral resources. Porvenir is located 400 metres to the
southwest of Aserradero. The drilling continues to intercept strong
mineralized manto. The drill program has been highly successful in defining
the zone
Breakwater Resources Ltd. - 2006 Annual Information Form Page 39 of 65
and extending it to the southeast and the northwest, both of which remain open.
Drilling to the end of 2006 has outlined a new inferred mineral resource of 1.6
million tonnes grading 9.6% zinc and 0.34g/t gold.
Other areas of exploration activity are; Southeast Aserradero, Altazor to the
east of Dona Rosa, BK zone to the southwest of Porvenir, and San Antonio East
extension towards Altazor.
Underground exploration areas include south, southwest and northwest of
Estatuas to expand the resources and reserves in this mining area, extension
drilling in the Concordia mining area, and extension drilling in San Antonio
East and Aserradero Southeast.
New exploration targets to be investigated will be the Melchor target east of
Altazor, the Terryuno target southwest of Estatuas, Dona Rosa deep drilling,
and in the area of the Concordia deposit.
D) LANGLOIS MINE
Project Description and Location
The Company acquired the Langlois zinc/copper mine effective May 1, 2000 for
US$19.8 million, which included approximately US$0.9 million of working
capital. The Langlois mine is located in northwestern Quebec, approximately 48
kilometres northeast of the town of Lebel-Sur-Quevillon and 213 kilometres
northeast of Val d'Or. Lebel-Sur-Quevillon has a population of approximately
3,500.
The property is held through a 133 hectare mining lease granted until the year
2015. The lease, upon expiry, may be renewed by formal application to the
applicable governmental authorities. In addition, there are 248 claims
surrounding the lease covering 4,682 hectares in Grevet and Mountain
Townships. In 2006, 223 claims covering 4,062 hectares were added on the
northern boundary bringing the property total to 471 claims (8,744 hectares)
in Grevet and Mountain townships. Another block of 208 claims was recently
staked on the Wedding River property bringing the total land area to 10,245
hectares in Grevet, Mountain, Franquet and Verneuil townships. There are no
royalties payable on mineral production from the Langlois mine.
In 2006, the Company entered into a joint venture with Metco Resources Inc.
("Metco") on adjacent properties covering 185 claims (3,402 hectares) located
in the Grevet, Mountain and Ruette townships.
The mine operates under required Certificates of Authorization issued by the
Quebec Ministry of Environment under the Loi sur la qualite de l'environnement
(L.R.Q., chapter Q-2). In addition, all approvals/leases required for land use
(tailings pond, quarries and pits) have been issued by the Quebec Ministry of
Natural Resources pursuant to the Loi sur les mines (L.R.Q., chapter M-13.1).
Accessibility, Climate, Local Resources, Infrastructure and Physiography
The mine is accessed via a gravel road jointly maintained by the Company and a
forest products company which has recently stopped its operation for an
undefined period of time.
The climate in northwestern Quebec includes long cold winters followed by
short temperate summers. Temperatures in winter can reach -45(Degree)C.
and summer temperatures can reach +33(Degree)C. Average precipitation
is 690 millimetres per year.
The mine facilities include a headframe, a paste backfill plant, mechanical
and electrical shops, a service building, a zinc/copper concentrator and a
tailings pond. The mine produces zinc and copper
Breakwater Resources Ltd. - 2006 Annual Information Form Page 40 of 65
concentrates, which are sold and shipped to smelters for further processing.
From such processing, gold and silver creditsare obtained as by-products.
The mine is equipped with a 902 metre deep four-compartment shaft. There are
two hoists, a three metre diameter double drum hoist for skipping and a 2.4
metre diameter double drum service hoist. Two seven tonne skips are used to
hoist the blasted material to surface. At present, there is a crusher station
at the bottom level of the mine. However, due to severe ore-pass wall erosion,
constant plugging and consequent dilution, an additional loading facility was
established on the Level 11. Other loading facilities are currently being
installed on Levels 9 and 13 to overcome the ore-pass problems which plagued
previous operations.
History
1989 Deposit (known as the Grevet Project) discovered by Serem-Quebec Inc
(50%) and VSM Exploration Inc. (50%).
1992 Cambior Inc. ("Cambior") acquired its initial 50% interest by
acquiring VSM Exploration Inc.
1993 Cambior acquired the remaining 50% interest from Serem-Quebec Inc.
1996 Commercial production began. Production halted in December due to
significant dilution problems.
1997 Dilution problems rectified and production resumed.
2000 The Company purchased the mine and suspended operations in late
November due to operating problems with the main ore-pass system and
low zinc prices.
2001 SRK issued a full feasibility study incorporating the latest drill
results of Zone 97 and a complete rework of the mine design and plan.
2002 Initiated drill program totalling 7,935 metres.
2003 SRK issues an updated feasibility study incorporating latest drill
results.
2005 The Company announced its plans to develop the Langlois mine.
2006 The Company resumed the development of the Langlois mine, the
development of the Grevet B project and initialized a major
exploration program on the properties.
Geological Setting
The Langlois mine produces zinc (along with lesser values of copper, silver
and gold) from narrow, tabular VMS bodies. The bodies are hosted within mafic
to intermediate volcanic and volcanoclastic units in the central-east portion
of the northern Archean volcanic belt of the Abitibi Sub-province or, more
precisely, within the Miquelon segment. The lithologies in the area
predominately consist of a succession of mafic to intermediate lava flows and
volcanoclastic with less abundant felsic volcanic and sedimentary units. The
rock sequence has been affected by a regional deformation, which forms
sub-vertical isoclinal folds. The predominant structure in the area is the
Cameron shear zone, which trends 120 degrees and extends for more than 80
kilometres along strike and is up to five kilometres thick. The massive
sulphide horizons at the Langlois mine are hosted by the strongly schistosed
rocks of the Cameron shear zone.
The Langlois mine contains four zinc-rich deposits consisting of zones of
massive sulphides, primarily pyrite and sphalerite, occurring within a thick,
highly deformed felsic volcanic sequence injected by numerous barren mafic
dikes. Each massive sulphide body is relatively thin (one to eight metres),
but with considerable vertical and lateral extensions (more than 500 metres in
either direction).
The massive sulphide zones trend easterly with a near vertical dip,
sub-parallel to the regional structural fabric. The zones are stacked across
the felsic sequence along a narrow corridor slightly oblique to the main
structural trend. From southwest to northeast the zones are: Zone 5 (small
economic lens near
Breakwater Resources Ltd. - 2006 Annual Information Form Page 41 of 65
surface), Zone 4, Zone 3 and Zone 97. In longitudinal section, each massive
sulphide zone portrays an elongated lensoid shape, whose long axis plunges
moderately towards the southeast, parallel to the plunge of the regional
stretching lineation. In addition, the centre of gravity of each lens becomes
progressively deeper moving along the stacking corridor toward the northeast.
Consequently, the top of Zone 97 is located at approximately 300 metres below
surface. Production at the Langlois mine has historically come exclusively from
two zones, namely Zones 3 and 4, while Zone 97 discovered in 1994 was not fully
defined until recently.
Mafic dikes cut the mineralized zones in many areas and have historically been
a major contributor to dilution. In addition, the well-foliated, chloritic
volcanic host rocks have contributed to ground-control problems and often
excessive dilution.
Mineral Resource and Mineral Reserve Estimation Methodology
The mineral resources and mineral reserves at Langlois for Zones 3 and 4 are
estimated utilizing two-dimensional polygons on cross-section, using the
information from core drilling and underground chip sampling across
development faces. Two-dimensional kriging and polygons on longitudinal
section have also been used to a lesser degree, typically in areas where there
is less available data.
From the borehole database coded by the Company, SRK extracted intercept data
for three sulphide-bearing zones (North, Main and South) comprised within Zone
97 and constructed solid bodies for each sulphide zone. Limits of each zone
were determined visually on vertical sections based on geology, sulphide
abundance and mineralogy and not based on an arbitrary lower zinc cut-off.
Assay data for zinc, copper, silver and gold were density-weighted and
composited over the true thickness of each zone. Variography analysis and
kriging was completed on the product of the composited density-weighted grades
and the true thickness. Grade for individual blocks in the model were derived
by dividing the resulting interpolated grade/thickness by the true thickness
of each block. In this way the true thickness and density variability are
considered during grade interpolation, something that is not possible with
polygonal sectional interpolation. Capping of the zinc grades was not deemed
to be necessary because it is appropriately accounted for during kriging.
Drill holes intersecting the mineralized zone at an angle less than 15 degrees
were discarded, as well as those holes or underground samples that did not
intersect the entire width of the mineralized zone.
Scott Wilson RPA carried out mineral resource estimation for the Grevet B
deposit using 3D block modelling. A total of six lenses were interpreted,
namely #1, #2, #2 North, #3, #3 North and #3 South. The Grevet B
mineralization contains significant values for three elements: zinc, copper
and silver. An NSR value was determined by the Company for each metal unit.
These metal units were then used to calculate the NSR value of each sample
interval while defining the resource envelopes, and of each mineralized block
while determining the resource estimates. zinc, copper and silver grades of
each sample have been converted into dollar values based on the smelter
parameter. The minimum mining width used for interpretation of the lenses is
two metres. The lenses were interpreted from drill holes projected on level
plans at every ten metres from Elevation 2,980 metres to Elevation 2,820
metres, over a strike length of about 300 metres. The 3D solid of each lens
was created by adding tie lines to plan views in order to create 3D tins.
A summary of mineral reserves and mineral resources is set out in the mineral
reserves and mineral resources table in Paragraph 3.6 entitled "Summary of
Mineral Reserves and Resources" in this Annual Information Form.
Breakwater Resources Ltd. - 2006 Annual Information Form Page 42 of 65
Mining Operations
The mining method initially implemented in 1996 at the Langlois mine was
transverse longhole stoping using 114 millimetre ITH drills with subsequent
paste backfill. The level spacing was 60 metres and mining blocks were 20
metres along strike and four to five metres thick. Remote operated scooptrams
were used for mucking. Once terminated, the stopes were filled with
high-density paste backfill containing 78% solids.
From the beginning, the mining operation experienced excessive dilution. This
excessive dilution stemmed from the height of the stopes, the sericitization
and chloritization of the joint sets and the wall erosion from the ore-passes.
In 1997, Cambior, the original operator, made a decision to stop the operation
and convert the 60 metre high stopes into smaller 15 metre or 30 metre high
stopes depending on the width of the mineralization.
The revised mining method used by the Company saw the block sizes reduced to
20 metres high and 20 metres long (15 metres between sublevels). Where widths
were over three metres, sublevels were spaced at 30 metres. Smaller production
drill holes were employed in order to reduce the blast damage (54 millimetre
diameter). Remote operated scoops that ranged from three to 3.5 cubic yards
were used in mucking.
Production drilling in the 30 metre high stopes was carried out using a GMS
360 ITH drill, drilling 102 millimetre holes. Casings of 75 millimetre
diameter were inserted in all the holes to prevent hole blockage and to reduce
stope wall blast damage. Two other production drills were used for production
drilling and cable bolting. In the 20 metre high stopes, a standard
carrier-mounted top-hammer longhole rig was used for drilling 64 millimetre
diameter holes. Hole lengths were approximately 15 metres on a drill pattern
of 1.4 metres by 1.6 metres.
The stope and drift rounds are blasted using ANFO. Most of the holes are
drilled down except in the extremities of the zone where no access is
available above. A gradual conversion of the production drilling to 64
millimetres from 54 millimetre diameter holes is occurring in order to reduce
the blast damage caused by the larger diameter holes. All the blasting is done
centrally.
The mine is trackless. In general, where the mineralized width is over three
metres, a ramp access to the sublevel is made. All broken material from the
stopes is then hauled to a short ore-pass system or to a loading station.
All backs and walls are screened with wire mesh. 2.1 metre long rebars are
placed in the back on a 1.2 metre by 1.2 metre pattern. Resin bolts are used
in the back to avoid corrosion of the ground support due to mildly acid mine
water. The walls were bolted with 1.5 metre long split set bolts.
During operation, approximately 60% of the tailings are used as paste
backfill. The paste backfill plant thickens and filters the mill tailings and
then mixes these tailings with cement and water to make a paste that flows
underground by gravity to Zone 3. The Company plans to install a pump to
deliver paste backfill to Zones 4 and 97 by the end of 2007. The actual
capacity of the paste backfill plant is 75 tonnes per hour using only one of
the two available disc filters.
A main ventilation raise supplies 220,000 cubic feet per minute of fresh air
to the mine. Exhaust is through the main production shaft and through a raise
bore-hole in Zone 97.
Primary dewatering pumps are multistage Mather and Platts. The average pumping
rate is 100 US gallons per minute. The main pump stations are located on
Levels 13 and 16.
Breakwater Resources Ltd. - 2006 Annual Information Form Page 43 of 65
During 2006, 3,170 metres of development was done mostly to access Zone 97 on
Levels 4, 9 and 13 and to develop the infrastructure referred to in the SRK
feasibility study. Production also resumed gradually and a total of 60,117
tonnes of mineralized material was blasted and hoisted to surface and
stockpiled.
In March 2006, the Company performed a small drilling program over the Grevet
B deposit to verify past drilling and to better establish the continuity in
the mineralization. Following the success of this program, the company decided
to extract a 15,000 tonne bulk sample to prove spatial relationship and grade.
The development of the Grevet B project was initiated starting mid-2006. Total
project development at the end of 2006 was 843 metres including infrastructure
development on Levels 25 and 54. In 2006, a total of 9,738 tonnes of
mineralized material was extracted as part of a 15,000 tonne bulk sample
program.
Metallurgical Processing
During operation, the Langlois mill processes less than 2,000 tonnes per day,
five days per week. However, it has a nominal capacity of 2,570 tonnes per
day. During operation, zinc and copper concentrates are produced by
differential flotation, with payable gold and silver recovered in the copper
concentrate.
Mineralized material is crushed in a primary jaw crusher installed on surface
and then sent to the grinding circuit, which consists of an open circuit SAG
mill and a ball mill in closed circuit with cyclones. The grinding circuit
cyclone overflow feeds the copper flotation circuit, where SO2 is added to
modify the pH and to depress the pyrite. The copper flotation circuit includes
a conventional rougher, scavenger and three cleaner flotation stages with a
regrind mill to maximize the copper or zinc concentrate grade. The final
copper concentrate is then pumped to the copper thickener and stock tank.
The copper first cleaner tailings and copper scavenger tailings are pumped to
the zinc flotation circuit where they are conditioned in two tanks with lime
to increase pH and depress the pyrite. The zinc flotation circuit includes
roughers, scavengers and three cleaner flotation stages. The tailings from the
zinc scavenger and zinc first cleaner scavenger constitute the final mill
tailings and are pumped to the tails thickener to be used as backfill
underground. The zinc third cleaner concentrate is pumped to the zinc
thickener.
During operation, underflows from the zinc and copper thickeners are
separately pumped to storage tanks and then batch filtered. The filtered
concentrates are then conveyed to their respective loading areas. A storage
building is annexed to the filter area/loading station for storage of final
concentrates and loaded using a front-end loader when railcars are received.
Most of the tailings pond effluent overflow is recycled as mill process water.
The zinc concentrate is loaded on CN railcars directly at the mine site and
transported to Xstrata Plc.'s ("Xstrata") CEZ smelter in Valleyfield, Quebec
or to the HudBay Minerals Inc. smelter in Flin-Flon, Manitoba. Copper
concentrate is sent by rail to Xstrata's Horne smelter in Rouyn-Noranda,
Quebec.
Milling resumed in November 2006. A total of 59,373 tonnes were processed
during the last two months of 2006. All this material was from Zones 3 and 4
except for 3,256 tonnes from Grevet B. In 2006, shipments of zinc and copper
concentrates were respectively 7,096 and 909 dry tonnes.
Breakwater Resources Ltd. - 2006 Annual Information Form Page 44 of 65
Environmental Management and Permitting
There are two surface dumps for the storage of waste rock. One dump is for the
storage of non-acid generating rock and the other is for material with a low
potential for acid generation.
The mill tailings not used for paste backfill underground are discharged
subaqueously at a 91.88 square kilometre tailings impoundment. Retaining dykes
are constructed of sand and gravel mass with slope protection composed of
clean, non-acid generating mine rockfill. Seepage control within the dykes is
achieved with a low permeability geosynthetic clay liner (thin layer of
bentonite sandwiched between two layers of geotextile). The pond is located
three kilometres away from the mine site and has the capacity to store all the
tailings to be produced from the currently known mineral reserves and
resources.
A portion of the tailings pond effluent (from rainfall and snow melt) is
released to the Wedding River after treatment, if required, with caustic or
lime to maintain pH levels in accordance with regulations.
Langlois holds a restoration plan (the "Plan") that received approval from the
Quebec Ministry of Natural Resources after consultation with the Quebec
Ministry of the Environment in August 1996. The Plan was subsequently updated,
as required, and resubmitted in 2005. This Plan consists of the following main
elements:
o placing non-acid generating waste rock underground and placing the
acid-generating waste rock under one metre of water in the tailings pond
to avoid acid generation;
o following closure of the tailings pond, directing surplus water through
the emergency discharge and building an alternate discharge point on the
southeastern side of the pond;
o dismantling all the buildings and infrastructure, moving equipment to
another mining operation and disposing of any remaining hazardous
materials off-site; and,
o re-vegetating the site.
The cost to reclaim the mine site is currently estimated to be approximately
$1.7 million.
Exploration
The Company's land holdings around the Langlois mine include several mining
properties that cover in excess of 10,000 hectares in 679 claims. In 2006, a
50/50 joint venture agreement with Metco as the operator added new ground
around Langlois mine. All properties now extend over more than 27 kilometres
laterally and are underlain by the same stratigraphic rock sequence that hosts
the massive sulphide zones at the Langlois mine. The massive sulphide horizons
at the Langlois mine are elongated and narrow.
Extensive exploration conducted by Cambior and its predecessor companies in
the area located several scattered mineralized horizons that carry anomalous
zinc values. These horizons are predominately located along the general
elongated trends or parallel to Zones 3, 4 and 97 and, to a lesser extent,
Zone 5 and Grevet B.
In 2006, an airborne Megatem survey was conducted over the entire property.
Several conductors were outlined and are presently being reviewed. The
magnetic mapping of the entire property lead to some promising targets for
finding new VMS bodies. An aggressive drilling program commenced to verify
these targets, mainly scattered on the east side of the Langlois mine. In
2006, more than 24,600 metres were drilled on the property. Drilling revealed
some interesting anomalies, without economic significance. At the end of 2006,
some electro-magnetic anomalies identified by down-hole geophysical surveys
remain unexplained. The 2007 drilling program will focus on investigating
these anomalies
Breakwater Resources Ltd. - 2006 Annual Information Form Page 45 of 65
further. In 2007, a full scale GoCAD model will be built over all the properties
including the Metco joint venture to assist in the optimization of a deep
exploration strategy.
During the fourth quarter of 2006, Metco announced that a pre-feasibility
study will be conducted on the Orphee deposit during the first half of 2007.
The Orphee deposit is located six kilometres away from the Langlois mill.
Should the results of the pre-feasibility be positive, then the Orphee deposit
could become a source of additional mill feed for Langlois, which currently
has excess mill capacity.
3.7 Non-Operating Mines
A) BOUGRINE MINE
The Bougrine mine ceased operation on September 10, 2005 due to the exhaustion
of known mineral reserves. During the Company's ownership, the Bougrine mine
processed 2.9 million tonnes between May 1998 and September 10, 2005. Closure
activities have commenced and are expected to be completed during 2007. The
Company is presently investigating other uses for the Bougrine infrastructure.
A description of the closure activities is set out below under the subheading
"Environmental Management".
Project Description and Location
The Company owns and operated the Bougrine zinc/lead mine located in Tunisia
through its wholly-owned subsidiary, Breakwater Tunisia S.A. The Bougrine mine
is located in the province of Le Kef, some 160 kilometres southwest of Tunis,
the capital of Tunisia. Tunisia is a north African country located south of
the Mediterranean Sea. The Company closed the Bougrine mine in September 2005
due to depletion of mineral reserves.
In September 1997, the Company acquired the Bougrine mine and related assets
for $26.8 million. The Company spent $10.7 million in pre-production capital
costs in 1997 and 1998 to ready the mine for production. Operations commenced
on May 2, 1998 and the mine was considered to be in commercial production
commencing June 1, 1998.
The Bougrine mine operated under an environmental agreement entered into in
August 1991 (the "Environmental Agreement") with the Tunisian Environmental
Protection Agency, which stipulated operational guidelines and closure
requirements for the tailings pond.
History
Zinc and lead deposits have been mined in the region since Roman times.
1930's Some small-scale development took place at Bougrine.
1980's A drilling program by ONM (an exploration division of the Tunisian
government) resulted in the discovery of the F2 and F3 zones at
depth. Late in the 1980's Metallgesellschaft AG was awarded a
license to develop the mine at Bougrine. Metallgesellschaft AG
transferred its interest in the property to Metall Mining
Corporation (subsequently renamed Inmet Mining Corporation) which,
with a group of Tunisian banks, established Societe Miniere de
Bougrine ("SMB").
1992 Construction of the Bougrine facility.
1994 Production commenced.
1996 Operations suspended due to low zinc prices and financial constraints.
1997 The Company purchased the Bougrine mine assets from SMB.
1998 Commercial production commences.
Breakwater Resources Ltd. - 2006 Annual Information Form Page 46 of 65
2005 The Bougrine mine ceases production due to depletion of known mineral
reserves.
2006 The Company progresses through its closure plan for Bougrine and
proceeds with its regional exploration program.
Environmental Management
With the scheduled cessation of mining and milling in September 2005, an
intensive progressive reclamation effort was maintained leading up to closure.
This activity included the completion of a Phase II Environmental Site
Assessment to characterize and delineate reclamation targets, and the
concurrent removal of surface waste rock, contaminated soils and
decommissioned infrastructure.
After closure in 2005, waste rock, contaminated soils and demolition debris
were disposed of in the underground workings. All access ways to the
underground mine were "tight filled" and recontoured to blend in with the
surrounding topography. A top soil dressing was applied in these areas,
utilizing terracing and windrows to accommodate tree planting and discourage
erosion.
Other 2005 reclamation activities included the recontouring of borrow areas
and quarries, as well as recontouring the mine water basin and polishing pond,
with the construction of an engineered cover over these graded surfaces.
Stabilization studies are complete for the surface tailings impoundment and an
engineered cover was applied over 40% of the 25 hectare surface area by the
end of 2006.
In 2006, the site cleaning of contaminated material continued. Progress for
the cleaning phase of the project is estimated at more than 90% complete and
areas left to be cleaned are the old powder magazine and the fields at the
southern limits on the site.
The Bougrine mine is situated in a semi-arid climate zone with a high rate of
water evaporation. Water from the tailings facility will continue to seep into
the underground mine workings and into the shallow groundwater system after
closure. Groundwater in the area is saline, therefore not used as a potable or
irrigation water source by area residents. As the tailings facility dries out,
seepage from the facility is expected to cease. With the planned covering and
surface run-off control, mobilization of metals outside of the tailings
facility during the post-closure period is not expected.
The host rock in the mine is limestone and therefore has acid neutralizing
properties. Acid drainage issues, therefore, are not expected from any waste
rock that may be on surface or from the underground workings after closure.
Sampling and geochemical characterization of surface waste rock was conducted
in preparation for closure planning.
Tunisia does not have specific mine closure requirements, however, the Company
is following reclamation practices which are consistent with Canadian
regulations. The Company is currently exploring other mining ventures in the
country and is therefore leaving some of the processing equipment and
infrastructure in place while this continues. In the event that no other
economic opportunities are identified, the Company will demobilize the
facility and rehabilitate the footprint.
The closure and reclamation costs for the Bougrine mine are estimated to be $3
million. The Tunisian Government does not require security to be posted.
Exploration
In 2006, the Company started a surface exploration program on the El Aguiba
and Aun Allega permits near Tabarka located approximately 170 kilometres north
of the Bougrine mine. A gravity and electro-magnetic geophysical campaign was
carried out on El Aguiba property followed by 2,000 metres of
Breakwater Resources Ltd. - 2006 Annual Information Form Page 47 of 65
diamond drilling. All analysis results had been received by the end of
September. No economic mineralization was identified.
A second geophysical campaign on El Aguiba and Aun Allega permits was
completed by the end of November with a total of eight IP profiles being
performed on both permits. Final results were still pending at the end of
2006.
A second drilling program commenced in early 2007.
B) BOUCHARD-HEBERT MINE
The Bouchard-Hebert mine ceased operations during February 2005 due to the
exhaustion of known mineral reserves. During the Company's ownership,
commencing in May 2000, the Bouchard-Hebert mine processed 4.8 million tonnes
until its closure in February 2005. Closure activities have commenced, which
are described below under the subheading "Environmental Management".
Project Description and Location
The Company owns 100% of and operated the Bouchard-Hebert
zinc/copper/gold/silver mine located 30 kilometres northeast of Rouyn-Noranda
in Dufresnoy Township, Quebec. On May 1, 2000, the Company acquired the
Bouchard-Hebert mine and the Langlois mine from Cambior for US$40.3 million.
The purchase price allocated to the Bouchard-Hebert mine was US$20.5 million
which included approximately US$1.1 million of working capital.
The mine property covers 107 hectares including two mining leases, one granted
until 2008 and the other until 2015. Surrounding the mining leases are 215
claims covering 7,982 hectares. The leases, upon expiry, may be renewed by
formal application to the applicable governmental authorities.
The Company operated the Bouchard-Hebert mine under required Certificates of
Authorization issued by the Quebec Ministry of Environment under the Loi sur
la qualite de l'environnement (L.R.Q., chapter Q-2). In addition, all
approvals/leases required for land use (tailings pond, quarries and pits) have
been issued by the Quebec Ministry of Natural Resources in conformity with the
Loi sur les mines (L.R.Q., chapter M-13.1).
History
1955 Rio Algom discovered the "Main Lens" of the Mobrun deposit.
1984 Falconbridge Copper Corporation ("FCC") acquired the property subject
to an NSR retained by Mobrun Copper, a wholly-owned subsidiary of Rio
Algom.
1985 Option Agreement between Mobrun Copper and Audrey Resources Inc.
("Audrey"). Audrey acquired 70% interest.
1986 Open pit mining at 1,000 tonnes per day began with material treated at
FCC's Norbec Mill. FCC restructured and renamed Minnova Inc.
("Minnova").
1987 Audrey built a 1,100 tonnes per day mill at mine site because "1100
Lens" was discovered at depth and 250 metres southeast of Main Lens.
1992 Operation interrupted due to reserve depletion. Cambior acquired 65%
of Audrey. An exploration and delineation program was initiated at
1100 Lens.
1993 Metall Mining Corporation ("MMC") acquired Minnova.
1994 MMC was renamed Inmet Mining Corporation ("Inmet"). Cambior purchased
4% NSR from Inmet. Cambior acquired remaining 35% of Audrey and Mobrun
mine renamed Bouchard-Hebert. Commercial production from 1100 Lens
began.
Breakwater Resources Ltd. - 2006 Annual Information Form Page 48 of 65
1999 Audrey merged into its parent, Cambior.
2000 The Company agreed, effective as of May 1, 2000, to purchase the
Bouchard-Hebert and Langlois mines from Cambior.
2005 The Bouchard-Hebert mine ceases production due to depletion of known
mineral reserves.
2006 The Company continues to execute its closure plan on the site and its
surface exploration program.
Environmental Management
A closure plan in respect of the Bouchard-Hebert mine was approved by the
Quebec Ministry of Environment and the Quebec Ministry of Natural Resources.
Key elements of the closure plan include:
o All buildings and infrastructure will be decommissioned, piping will be
removed and all mine openings secured. All recyclable materials will be
recycled while non-recyclable materials will be accumulated in excavations
left by the foundations, and then buried with benign covering materials.
Hazardous waste removal will be contracted to specialists in this field.
o Non-acid generating waste rock dumps will be sloped at 25% to provide
permanent stability. Acid generating waste material will be excavated
(stripped) and dumped into the open pit. The pit will subsequently be
flooded to eliminate further oxidation and release of metals.
o The tailings deposit will be contoured as a "hill" to facilitate runoff
with a 2% slope on the south face and a 10% slope on the north face. The
entire area will then be covered with an engineered cover acting as an
oxygen diffusion barrier to prevent the occurrence of acid mine drainage.
o The water holding ponds will be dredged of solids and spillways will be
modified to restore natural drainage. Dykes will be contoured and the
entire area will be re-vegetated.
Due to continuing exploration efforts of identified "near-field" targets, the
reclamation effort will be a staged undertaking over several years. Stage one,
which began in the second quarter of 2005 (concurrent with exploration
drilling), included removal of acid generating waste rock, the closure of the
underground workings and the commencement of the tailings cover construction.
Stage two was carried out in 2006 and included partial installation of the
engineered tailings cover. The remaining reclamation will be deferred until
drilling determinations are complete. If a viable mineralized material is
identified through exploration, the operation will be reactivated within the
existing footprint, with the additional requirement to build a new tailings
impoundment. If, however, exploration is unsuccessful, the final stage of the
reclamation efforts will be triggered and the remaining elements listed above
will be completed. A five year post closure monitoring period is included in the
closure plan.
In 2006, a total of 391,000m(2) of the tailings dam were covered with
materials as agreed with the Quebec Ministry of Environment. The covering of
the tailings dam will be completed early in 2007. The backfill plant and the
headframe were taken down and removed from the site.
Exploration
In 2006, the company conducted an airborne Megatem survey over the entire
property and two Titan-24 surveys were conducted over the old Bouchard-Hebert
mine vicinity and over the most promising deep targets. A complete GoCAD model
is being built with all available geological data as well as geophysical data.
The model will be operational in the first quarter of 2007 to optimize the
Company's deep exploration strategy.
In 2006, more than 26,300 metres of diamond drilling was completed to verify
various targets, both shallow and deep. Nothing of economic interest was
discovered from the drilling campaign.
Breakwater Resources Ltd. - 2006 Annual Information Form Page 49 of 65
C) CARIBOU MINE
The Company owned the Caribou zinc/lead/silver mine located in New Brunswick.
The Caribou mine was placed on care and maintenance due to poor metal
recoveries and low metal prices from August 1998 until the sale to Blue Note
in August 2006.
The Caribou mine consisted of an underground mine and mill located in
Restigouche County in northeastern New Brunswick, 50 kilometres west of
Bathurst, New Brunswick and an open pit mine (formerly known as the
Restigouche property) located approximately 80 kilometres west of Bathurst and
30 kilometres from the Caribou mill.
On October 3, 2004, the Company signed a letter of intent with Blue Note, at
that time a subsidiary of Forest Gate Resources Inc. ("Forest Gate"), relating
to a possible sale of the Caribou mine. The October 3, 2004 letter of intent
was terminated in its entirety without further obligations. The Company signed
a revised letter of intent with Blue Note and Forest Gate on July 5, 2005. The
proposed transaction was conditional upon and subject to a number of
conditions precedent including, among other things, Blue Note securing
financing sufficient for the project, execution of a definitive agreement,
approval of the directors and shareholders of all relevant parties and receipt
of all required regulatory and third party approvals and consents, and
releases by relevant third parties.
On August 1, 2006, it was announced that the Company had completed the sale of
the Caribou and Restigouche mines to Blue Note. Under the terms of the
agreement, Blue Note acquired the Caribou and Restigouche mines by replacing
the Company's reclamation deposits of approximately $5.9 million with the
Government of New Brunswick for environmental rehabilitation and by issuing to
the Company a $15.0 million unsecured subordinated convertible debenture with
a maturity of five years. The Company has the right to convert the debenture
into a direct 20% property interest following commencement of commercial
production and the expenditure by Blue Note of at least $1.5 million of
exploration on the properties. The Company will receive a one to two percent
net smelter return royalty on zinc metal production provided the price of zinc
is above US$0.65 per pound as determined by the London Metals Exchange.
Following the expiration of the conversion period, if the Company has not
converted the debenture, Blue Note may redeem the debenture for cash or its
shares at its option.
D) NANISIVIK MINE
The Company owns the Nanisivik zinc/lead/silver mine located on Strathcona
Sound, Baffin Island, Nunavut. During the Company's ownership, the Nanisivik
mine processed 5.3 million tonnes between 1996 and 2002. The Company
permanently closed the Nanisivik mine in September 2002 due to exhaustion of
known mineral reserves and reclamation activities are ongoing.
In July 1996, the Company acquired Nanisivik Mines Ltd. from AEC West Limited
for $44.2 million. The purchase price included working capital of $39.4
million, composed principally of zinc concentrate. In 1997, the mine was sold
to CanZinco Ltd.
Breakwater Resources Ltd. - 2006 Annual Information Form Page 50 of 65
Environmental Management and Permitting
The operating license for the Nanisivik mine is an industrial water license
issued by the Nunavut Water Board ("NWB") and administered by the Department
of Indian Affairs and Northern Development ("DIAND"). The license sets
parameters for water use and waste disposal during the closure and reclamation
period. The current license was granted in October 2002 and expires in May
2008. It is expected that all reclamation work and post-closure monitoring
will be completed within the current license period, although the duration of
the post-closure monitoring period has not yet been decided by the NWB.
During operations, tailings from the mill were pumped to the 60 hectare West
Twin disposal area ("WTDA"). The WTDA is made up of a surface cell, a
reservoir and a polishing pond. Tailings were deposited both sub-aerially and
subaqueously.
The WTDA internal dykes are of frozen core construction and were last
inspected in August 2005 by an independent consulting firm. No significant
stability issues were identified during the inspection.
The Nanisivik Closure and Reclamation Plan (the "Nanisivik Plan") was approved
by the Nunavut Water Board in July 2004. The Nanisivik Plan details the
remediation work required to reach the required objective of "returning the
land to its pre-mining use". The reclamation is scheduled to be completed in
2007.
To date, approximately 2.5 million tonnes of material has been handled as part
of reclamation. This includes:
1. Placement of a geothermal cover of shale (one metre) and armour (0.25
metres) over exposed tailings to ensure that the tailings remain frozen and
isolated from the environment. Geothermal modelling was conducted under
worst-case prediction scenarios for climate warming.
2. Provision of one metre water cover over subaqueous tailings to prevent
oxidation of tailings from affecting water quality.
3. Construction of an engineered outflow spillway from the covered tailings
area designed for the probable maximum flood.
4. Relocation of surface mineralized waste rock to the underground mine or to
open pits where backfilling is required.
5. Contouring and backfilling of open pits and placement of a geothermal
cover. Cover thickness for waste rock has been designed at 1.95 metres
shale plus 0.25 metres of armour (76% thicker than tailings cover to
reflect differences in physical properties of waste).
6. Placement of a thermal insulation cover of shale (1.95 metres) and armour
(0.25 metres) over the landfill facility.
7. Dismantling of industrial and residential buildings and salvage components
of economic value for shipment off site or for sale locally.
8. Disposal of non-hazardous demolition debris and residual scrap materials in
the underground mine or in open pits where backfilling is required.
9. Remediation of contaminated soils by covering in-place or by excavation and
disposal in either the underground mine or in open pits that require
backfilling.
10. Installation of additional monitoring instruments to monitor ground
temperature and depth of thaw in reclaimed areas.
Breakwater Resources Ltd. - 2006 Annual Information Form Page 51 of 65
Total cost of work completed to date is $16 million with an estimated $2.4
million remaining under the asset retirement obligation.
Post closure monitoring of the mine site is scheduled for a period of five
years following reclamation. This will include water quality, ground
temperatures, general reclamation inspections and geotechnical inspections.
The results of the monitoring program will be reported to the Nunavut Water
Board quarterly and any maintenance work that may be identified will be
completed. At the end of the five year period, the effectiveness of the
reclamation work will be evaluated through a Comprehensive Performance Review,
and a determination will be made regarding the need for continued monitoring
or return of the property to the government.
Under the terms of the water license, the Company is required to post security
for reclamation in an aggregate amount of $17.6 million. The Company has
provided an unsecured promissory note to DIAND to cover the total security
requirement of $17.6 million.
ITEM 4 DIVIDENDS
The Company has not paid dividends during the last five years and has no fixed
dividend policy. The amount and timing of any dividends is within the
discretion of the Company's Board of Directors and is determined from time to
time based upon the cash requirements of operating assets, exploration and
development activities, as well as potential expansions or acquisitions,
combined with the current and projected financial position of the Company.
The ability of the Company to pay dividends on its outstanding Common Shares
is subject to limitations imposed by the Canada Business Corporations Act
relating to asset and liquidity conditions.
ITEM 5 DESCRIPTION OF CAPITAL STRUCTURE
The Company is authorized to issue an unlimited number of Common Shares and
200,000,000 preferred shares. As of March 29, 2007, the Company had
417,505,735 Common Shares outstanding. There are no preferred shares
outstanding.
Common Shares
The holders of Common Shares are entitled:
(i) to vote at any meetings of shareholders, except meetings at which
only holders of shares of a specified class or series of shares are
entitled to vote;
(ii) subject to the rights, privileges, restrictions and conditions
attaching to shares of any other class or series of shares of the
Company, to receive any dividend declared by the Company on the
Common Shares; and
(iii) subject to the rights, privileges, restrictions and conditions
attaching to shares of any other class or series of shares of the
Company, to receive the remaining property of the Company upon its
dissolution.
Breakwater Resources Ltd. - 2006 Annual Information Form Page 52 of 65
Preferred Shares
The preferred shares can be issued in series, rank in priority to Common
Shares in respect of the return of capital and are non-voting except at
meetings where the holders of such shares would be entitled by law to vote
separately as a class. The Board of Directors of the Company are entitled to
determine other specific designations, rights, privileges, restrictions and
conditions attaching to preferred shares.
ITEM 6 MARKET FOR SECURITIES
6.1 Trading Price and Volume
The Common Shares are listed on The Toronto Stock Exchange (the "TSX") under
the symbol "BWR". The following table sets forth the monthly high, low and
closing prices and volume of the Common Shares for the year ended December 31,
2006.
Month High $ Low $ Close $ Volume
- --------------------------------------------------------------------------------
Jan-2006 0.93 0.64 0.90 69,972,621
Feb-2006 1.22 0.80 0.99 85,285,236
Mar-2006 1.45 0.97 1.31 72,744,987
Apr-2006 1.69 1.35 1.43 58,918,220
May-2006 1.66 0.99 1.31 74,259,305
Jun-2006 1.29 1.01 1.24 48,612,114
Jul-2006 1.44 1.16 1.28 37,244,782
Aug-2006 1.41 1.18 1.30 48,718,148
Sep-2006 1.39 0.92 1.04 86,832,634
Oct-2006 1.59 0.96 1.57 60,882,371
Nov-2006 1.95 1.46 1.90 87,227,553
Dec-2006 2.13 1.75 1.84 64,155,771
- --------------------------------------------------------------------------------
The Tradeable Warrants are listed on the TSX under the symbol "BWR.WT". Each
such Tradeable Warrant being exercisable for one Common Share at an exercise
price of $1.00 until January 28, 2009. The following table sets forth the
monthly high, low and closing prices and volume of the Tradeable Warrants for
the year ended December 31, 2006.
Month High $ Low $ Close $ Volume
- --------------------------------------------------------------------------------
Jan-2006 0.41 0.24 0.38 5,174,709
Feb-2006 0.56 0.35 0.40 9,194,252
Mar-2006 0.71 0.39 0.65 7,625,538
Apr-2006 0.91 0.66 0.75 4,737,725
May-2006 0.90 0.52 0.64 5,664,820
Jun-2006 0.69 0.45 0.69 3,414,775
Jul-2006 0.74 0.55 0.71 1,410,920
Aug-2006 0.74 0.60 0.66 2,109,840
Sep-2006 0.75 0.44 0.52 2,580,340
Breakwater Resources Ltd. - 2006 Annual Information Form Page 53 of 65
Oct-2006 0.84 0.46 0.82 3,365,087
Nov-2006 1.10 0.71 1.07 7,309,963
Dec-2006 1.26 0.96 1.07 3,406,486
- --------------------------------------------------------------------------------
ITEM 7 DIRECTORS AND OFFICERS
7.1 Name, Occupation and Security Holding
Directors are elected at the Company's annual meeting of shareholders for a
one year term. If a director's office is vacated during the year, such vacancy
is filled in accordance with the by-laws of the Company.
The following table sets out information regarding the directors and officers
of the Company, their jurisdiction of residence and principal occupation as at
March 29, 2007:
Directors
- ------------------------------------------- ------------------------------------------------------------ ------------
Name and Jurisdiction of Residence Director
Principal Occupation Since
- ------------------------------------------- ------------------------------------------------------------ ------------
Garth A.C. MacRae (1)(5)(6)(7)(9) Chairman of the Board 1993
Ontario, Canada Also, a Governor of Dynamic Mutual Funds and a director of
Dundee Corporation, GeneNews Ltd. (formerly, "ChondroGene
Limited"); Dundee Precious Metals Inc., Dundee Wealth
Management Inc., Eurogas Corporation, Torque Energy Inc.,
Great Plains Exploration Inc. and Uranium Participation
Corporation
- ------------------------------------------- ------------------------------------------------------------ ------------
George E. Pirie (3)(7)(8) President and Chief Executive Officer of the Company 2005
Ontario, Canada Also, a director of Paladin Resources Ltd.
- ------------------------------------------- ------------------------------------------------------------ ------------
Ned Goodman(2) Director, President and Chief Executive Officer, Dundee 1993
Ontario, Canada and Quebec, Canada Corporation; Director, Chairman, President and Chief
Executive Officer, Dundee Wealth Management Inc.; Chairman
of Goodman & Company, Investment Counsel Ltd. and Chairman
Goodman Private Wealth Management. He is also Chairman,
Emiritus of the Canadian Council of Christians and Jews, a
Governor of Junior Achievement of Canada and a director of
Dundee Precious Metals Inc., Dundee Realty Corporation,
Eurogas Corporation, Valdez Gold Inc. and Cogitore
Resources Inc. (formerly, "Woodruff Capital") and Chairman
of the Board of Trustees of Dundee REIT
- ------------------------------------------- ------------------------------------------------------------ ------------
Jonathan C. Goodman(8) Director, President and Chief Executive Officer of Dundee 2001
Ontario, Canada Precious Metals Inc.; a director of Dundee Corporation,
Dundee Resources Limited, Eurogas Corporation, Odyssey
Breakwater Resources Ltd. - 2006 Annual Information Form Page 54 of 65
Resources Ltd., Major Drilling Group International, Inc.,
Tahera Diamond Corporation (formerly, "Tahera
Corporation"), Frontier Pacific Mining Corporation and
Cogitore Resources Inc. (formerly, "Woodruff Capital")
- ------------------------------------------- ------------------------------------------------------------ ------------
Donald K. Charter (4)(5)(9) Mr. Charter is Corporate Director and President of 3Cs 1999
Ontario, Canada Corporation. He is also a director of IAMGold Corporation,
Great Plains Exploration Inc., Glencairn Gold
Corporation, Dundee REIT, EuroZinc Mining Corporation and
subsequently Lundin Mining Corporation
- ------------------------------------------- ------------------------------------------------------------ ------------
Grant A. Edey (6)(8) Chief Financial Officer of IAMGOLD Corporation. Also a 2005
Ontario, Canada director of Khan Resources Inc.
- ------------------------------------------- ------------------------------------------------------------ ------------
A. Murray Sinclair, Jr. (5)(6)(9) The Managing Director of Quest Capital Corp. and also a 1992
British Columbia, Canada director of the following companies: Arapaho Capital
Corp., Bannockburn Resources Limited, Choice Resources
Corp., Dexit Inc., Gabriel Resources Ltd., General
Minerals Corporation, GTO Resources Inc.; Jura Energy
Corporation, Pearl Exploration and Production Ltd.,
Premier Gold Mines Limited, Quest Capital Corp., Western
Geopower Corp. and Wolfden Resources Inc.
- ------------------------------------------- ------------------------------------------------------------ ------------
(1) Mr. MacRae was reappointed as the Chairman of the Board on June 8, 2006 and
has been Chairman since June 23, 2005. He was previously Chairman from
September 6, 1993 to August 1, 1997 and November 30, 2001 to November 29,
2004. He was also interim President and Chief Executive Officer from
December 23, 2004 to June 23, 2005; Chief Executive Officer from September
6, 1993 to November 12, 1993 and Vice-Chairman from August 1, 1997 to
November 30, 2001.
(2) Mr. Goodman was previously a director from May 21, 1993 to June 19, 2001
and was re-elected November 29, 2004. He was also the Chairman from
November 29, 2004 to June 23, 2005.
(3) Mr. Pirie was appointed as a director on June 23, 2005 and the President
and Chief Executive Officer of the Company on June 23, 2005. Prior to
joining the Company on July 4, 2005, was an Executive Vice President with
Placer Dome Inc. and the President and Chief Executive Officer of Place
Dome Canada until December 31, 2004.
(4) Mr. Charter resigned as a director of the Company on March 29, 2007.
Prior to December 2005, was an Executive Vice President of Dundee
Corporation and Dundee Wealth Management Inc. and the Chairman, President
and Chief Executive Officer of Dundee Securities Corporation and Dundee
Private Investors. Prior to joining the Dundee Group of Companies in
1996, he was a partner in the law firm of Smith, Lyons LLP now
incorporated under the practice of Gowlings LLP.
(5) Member of the Compensation Committee.
(6) Member of the Audit Committee.
(7) Member of the Hedging Committee.
(8) Member of Environmental, Health and Safety Committee.
(9) Member of Corporate Governance and Nominating Committee.
Breakwater Resources Ltd. - 2006 Annual Information Form Page 55 of 65
Officers
- --------------------------------------- ------------------------------------------------------------
Name and Jurisdiction of Residence Office Held
- --------------------------------------- ------------------------------------------------------------
Garth A.C. MacRae (A) Chairman
Ontario, Canada
- --------------------------------------- ------------------------------------------------------------
George E. Pirie (B) President and Chief Executive Officer
Ontario, Canada
- --------------------------------------- ------------------------------------------------------------
David C. Langille (C) Vice President, Finance and Chief Financial Officer
Ontario, Canada
- --------------------------------------- ------------------------------------------------------------
William M. Heath(D) Executive Vice President
Ontario, Canada
- --------------------------------------- ------------------------------------------------------------
Jason C. Stevens (E) Executive Vice-President, Legal and Corporate Affairs &
Ontario, Canada Secretary
- --------------------------------------- ------------------------------------------------------------
Bertrand Boivin (F) Vice President, Canada
Quebec, Canada
- --------------------------------------- ------------------------------------------------------------
Robert Carreau (G) Vice President, Environment
Ontario, Canada
- --------------------------------------- ------------------------------------------------------------
Robert Cuttriss (H) Vice President, Technical Services
British Columbia, Canada
- --------------------------------------- ------------------------------------------------------------
Daniel Goffaux (I) Vice-President, Latin America
Quebec, Canada
- --------------------------------------- ------------------------------------------------------------
J. Steven Hayes Vice President, Commercial
Ontario, Canada
- --------------------------------------- ------------------------------------------------------------
Torben Jensen (J) Vice President, Engineering
Ontario, Canada
- --------------------------------------- ------------------------------------------------------------
G. Wesley Roberts (K) Vice-President, Corporate Development
Ontario, Canada
- --------------------------------------- ------------------------------------------------------------
E. Ann Wilkinson (L) Vice President, Investor Relations and Assistant
Ontario, Canada Secretary
- --------------------------------------- ------------------------------------------------------------
Leroy A. Fong Controller
Ontario, Canada
- --------------------------------------- ------------------------------------------------------------
Each of the officers of the Company has held the position set out opposite
their name or other executive or equivalent management functions with his or
her present employer or its predecessor or affiliates during the last five
years except:
(A) Mr. MacRae was appointed as the interim President and Chief Executive
Officer from December 23, 2004 to June 23, 2005.
(B) Mr. Pirie, prior to joining the Company on July 4, 2005, was an Executive
Vice President with Placer Dome Inc. and the President and Chief Executive
Officer of Place Dome Canada until December 31, 2004.
(C) Mr. Langille, prior to joining the Company on June 5, 2006 was Senior Vice
President and Chief Financial Officer of Lindsey Morden Group Inc. (now
Cunningham Lindsey Group Inc.) and, prior thereto, Executive Vice-President
and Chief Financial Officer of Capital Environmental Resources Inc. (now
Waste Services, Inc.).
(D) Mr. Heath, prior to March 29, 2006, was Vice-President, Administration.
(E) Mr. Stevens, prior to joining the Company on September 1, 2006, was General
Counsel, Projects of Placer Dome Inc. until May 1st, 2006, prior thereto
was Vice-President & General Counsel of Placer Dome Canada from November,
2002 and prior thereto in 2001 was Senior Legal Counsel of Placer Dome Inc.
(F) Mr. Boivin, prior to November 8, 2005, was the President, Director General
of Breakwater Tunisia S.A., a subsidiary of the Company.
(G) Mr. Carreau, prior to May 10, 2005, was the Manager, Environmental Affairs
of the Company.
(H) Mr. Cuttriss was Manager, Research for Placer Dome Inc. from July 2003 to
October 2005. Prior to that was Managing Partner of Interpro Zinc LLC, a
private Colorado corporation developing zinc recycling technology.
Breakwater Resources Ltd. - 2006 Annual Information Form Page 56 of 65
(I) Mr. Goffaux, prior to rejoining the Company on October 5, 2006, was a
Senior Mining Engineer at Micon International, prior thereto, was a General
Mine Manager of the Company and, prior thereto, Vice-President Corporate
Development of Black Hawk Mining Inc.
(J) Mr. Jensen, prior to December 2003, was Manager, Engineering and North
American Exploration of the Company.
(K) Mr. Roberts, prior to joining the Company on May 29, 2006, was a
self-employed mining consultant.
(L) Ms. Wilkinson, prior to November 2005, was Corporate Secretary of the
Company.
Shareholdings of Directors and Officers
To our knowledge, as at March 29, 2007, the directors and executive officers
of the Company as a group, beneficially owned, directly or indirectly, or
exercised control or direction over 2,329,077 or less than 1% of 417,505,735
issued and outstanding common shares and no director or executive officer of
the Company beneficially owned or controlled voting securities of any of the
Company's subsidiaries.
7.2 Cease Trade Orders, Bankruptcies, Penalties or Sanctions
A. Murray Sinclair Jr.
- ----------------------
PetroFalcon Corporation (formerly Pretium Industries Inc.)
- ----------------------------------------------------------
On February 27, 2002 the British Columbia Securities Commission delivered an
order relating to an application by Mercury Partners & Company Inc. to
overturn a decision of the Canadian Venture Exchange Inc. (as it then was),
namely an approval to close a private placement of 4,000,000 common shares of
the corporation which was completed in November 2001 (the "BCSC Order").
Subsequent to the private placement, Mr. A. Murray Sinclair was appointed a
director of PetroFalcon Corporation. Pursuant to the BCSC Order, PetroFalcon
Corporation was required to place the matter before its shareholders and, in
order that the status quo be maintained to the greatest extent possible until
the occurrence of the shareholders meeting, the British Columbia Securities
Commission considered it to be in the public interest to remove the
applicability of exemptions from prospectus and registration requirements for
PetroFalcon until the shareholders meeting was held. In addition, the British
Columbia Securities Commission, during that time period, removed the
applicability of exemptions from prospectus and registration requirements for
Quest Ventures Ltd. (as subscriber to the private placement referred to above)
in respect of the 4,000,000 common shares received pursuant to the private
placement referred to above. During this time, A. Murray Sinclair was also a
principal of Quest Ventures Ltd. The approval of shareholders was sought and
received in May 2002 at a meeting of shareholders.
Katanga Mining Limited (formerly Balloch Resources Ltd. and New Inca Gold Ltd.)
- ------------------------------------------------------------------------------
A. Murray Sinclair, Jr. was a director of Balloch Resources Ltd. from May 1,
1998 to July 10, 2006. On February 25, 2002 New Inca Gold Ltd. was issued a
cease trade order from the British Columbia Securities Commission, the Alberta
Securities Commission and the Ontario Securities Commission for failure to file
financial statements within the prescribed period of time and pay the filing
fees. New Inca Gold Ltd. has since filed the financial statements and paid the
filing fees as required by those securities commissions. Effective October 21,
2003, trading of the securities of New Inca Gold Ltd. resumed. The Alberta Order
was rescinded on October 23, 2003 and the Ontario Order was rescinded on March
6, 2003 and the British Columbia Order was rescinded on October 21, 2003.
7.3 Conflicts of Interest
Three directors of the Company, namely Messrs. Garth MacRae, Ned Goodman and
Jonathan Goodman are directors and/or officers of Dundee Corporation
("Dundee") and/or certain of its affiliates. Mr. Donald Charter was an officer
of Dundee and/or officer and director of certain of its affiliates. As at
March 14, 2007, Dundee owned, directly or indirectly or exercised control or
direction over 101,880,061 Common Shares representing approximately 24.4% of
the outstanding Common Shares.
Breakwater Resources Ltd. - 2006 Annual Information Form Page 57 of 65
7.4 Interest of Management and Others in the Material Transactions
The only material transactions entered into since January 1, 2004 that have
affected or are expected to materially affect the Company or any of the
affiliates of the Company involving an officer or director of the Company, the
principal shareholder of the Company or any associate or affiliate of any such
persons or companies are as follows:
a) 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 the
syndicate a commission of $240,000 of which DSC earned $120,000.
b) In 2004, DSC participated in the syndicate of underwriters in connection
with the offering of 57,142,858 Units of the Company each consisting of
one Common Share and one half of a Tradeable Warrants to purchase a
Common Share for gross proceeds of $40 million and received a portion of
the commission paid by the Company to the underwriters in connection with
the underwriting.
ITEM 8 LEGAL PROCEEDINGS
The disclosure with respect to legal proceedings in the Management Discussion
and Analysis and financial statements for the year ended December 31, 2006 is
hereby incorporated by reference.
ITEM 9 TRANSFER AGENTS AND REGISTRARS
The transfer agent and registrar for the Common Shares and the Tradeable
Warrants of the Company is Computershare Investor Services Inc. at its
principal office located at 100 University Avenue, 9th Floor, Ontario, Canada
M5J 2Y1.
ITEM 10 INTERESTS OF EXPERTS
10.1 Names of Experts
The following persons and firms have prepared or certified a statement, report
or valuation described or included in a filing or referred to in a filing made
by the Company under National Instrument 51-102 as follows during or relating
to, the financial year of the Company ended December 31, 2006:
PricewaterhouseCoopers LLP, Chartered Accountants, are the Company's
auditors and such firm has prepared an opinion with respect to the
Corporation's financial statements as at and for the fiscal year ended
December 31, 2006. PricewaterhouseCoopers LLP, Chartered Accountants
have reported that they are independent of the Company in accordance
with the rules of professional conduct of the Institute of Chartered
Accountants of Ontario.
Breakwater Resources Ltd. - 2006 Annual Information Form Page 58 of 65
ITEM 11 AUDIT COMMITTEE
Audit Committee Charter
1. Policy Statement
----------------
It is the policy of Breakwater Resources Ltd. (the "Corporation") to establish
and maintain an audit committee (the "Audit Committee") to assist the
directors (individually a "Director" and collectively the "Board") of the
Corporation in carrying out the Board's oversight responsibility for the
internal controls, financial reporting and risk management processes of the
Corporation. The Audit Committee will be provided with resources commensurate
with the duties and responsibilities assigned to it by the Board including
appropriate administrative support. If determined appropriate by the Audit
Committee, it will have the discretion to institute investigations of
improprieties, or suspected improprieties within the scope of its
responsibilities, including the standing authority to retain special counsel
or other experts.
2. Composition of Committee
------------------------
(a) The Audit Committee shall consist of a minimum of three Directors, at
least half of whom shall be resident Canadians. The Board shall
appoint the members of the Audit Committee and may seek the advice and
assistance of the Corporate Governance and Nominating Committee in
identifying qualified candidates. The Board may appoint one member of
the Audit Committee to be the Chairman of the Audit Committee or
delegate such authority to appoint the Chairman of the Audit Committee
to the Audit Committee. The Chairman of the Audit Committee shall have
such accounting or related financial management expertise as the Board
may determine in their business judgement.
(b) Each member of the Audit Committee must be a Director who is
independent and financially literate to the extent required by (and
subject to the exemptions and other provisions set out in) applicable
laws, rules and regulations, and stock exchange requirements
(collectively "Applicable Laws"). In this Charter, the terms
"independent" and "financially literate" have the meaning ascribed to
such terms by Applicable Laws, and include the meanings given to
similar terms by Applicable Laws.
(c) A Director appointed by the Board to the Audit Committee shall be a
member of the Audit Committee until replaced by the Board or until his
or her resignation.
3. Meetings of the Committee
-------------------------
(a) The Audit Committee shall convene a minimum of four times each year at
such times and places as may be acceptable to the Chairman of the
Audit Committee and whenever a meeting is requested by the Board, a
member of the Audit Committee, the auditors or senior management of
the Corporation. Scheduled meetings of the Audit Committee shall
correspond with the review of the quarterly and year-end financial
statements and management discussion and analysis.
(b) Notice of each meeting of the Audit Committee shall be given to each
member of the Audit Committee and to the auditors of the Corporation,
who shall be entitled to attend each meeting of the Audit Committee
and shall attend whenever requested to do so by a member of the Audit
Committee.
Breakwater Resources Ltd. - 2006 Annual Information Form Page 59 of 65
(c) Notice of a meeting of the Audit Committee shall:
(i) be in writing, which includes electronic communication
facilities;
(ii) state the nature of the business to be transacted at the
meeting in reasonable detail;
(iii) to the extent practicable, be accompanied by a copy of any
documentation to be considered at the meeting; and
(iv) be given at least two business days prior to the time
stipulated for the meeting or such shorter period as the
members of the Audit Committee may permit.
(d) A quorum for the transaction of business at a meeting of the Audit
Committee shall consist of a majority of the members of the Audit
Committee. However, it shall be the practice of the Audit Committee to
require review, and, if necessary, approval of important matters by
all members of the Audit Committee.
(e) A member or members of the Audit Committee may participate in a
meeting of the Audit Committee by means of such telephonic, electronic
or other communication facilities as permits all persons participating
in the meeting to communicate with each other. A member participating
in such a meeting by any such means is deemed to be present at the
meeting.
(f) In the absence of the Chairman of the Audit Committee, the members of
the Audit Committee shall choose one of the members present to be
chairman of the meeting. In addition, the members of the Audit
Committee shall choose one of the persons present to be the secretary
of the meeting.
(g) The Audit Committee may invite such persons to attend meetings of the
Audit Committee as the Audit Committee considers appropriate, except
to the extent exclusion of certain persons is required pursuant to
this Charter or by Applicable Laws.
(h) The Audit Committee may invite the external auditors to be present at
any meeting of the Audit Committee and to comment on any financial
statements, or on any of the financial aspects, of the Corporation.
(i) The Audit Committee (i) shall meet with the external auditors
separately from individuals other than the Audit Committee and (ii)
may meet separately with management of the Corporation.
(j) Minutes shall be kept of all meetings of the Audit Committee and shall
be signed by the chairman and the secretary of the meeting.
4. Duties and Responsibilities of the Committee
--------------------------------------------
(a) The primary duties and responsibilities of the Audit Committee are to:
Breakwater Resources Ltd. - 2006 Annual Information Form Page 60 of 65
(i) identify and monitor the management of the principal risks that
could impact the financial reporting of the Corporation;
(ii) monitor the integrity of the Corporation's financial reporting
process and system of internal controls regarding financial
reporting and accounting compliance;
(iii) monitor the independence and performance of the external
auditors;
(iv) deal directly with the external auditors to approve external
audit plans, other services (if any) and fees;
(v) directly oversee the external audit process and results (in
addition to items described in subsection 4(d) below);
(vi) provide an avenue of communication between the external
auditors, management and the Board;
(vii) review annually with management of the Corporation the
anti-fraud and risk assessment programs of the Corporation; and
(viii) carry out a review designed to ensure that an effective
"whistle blowing" procedure exists to permit stakeholders to
express any concerns regarding accounting or financial matters
to an appropriately independent individual.
(b) The Audit Committee shall have the authority to:
(i) inspect any and all of the books and records of the Corporation
and its subsidiaries;
(ii) discuss with the management of the Corporation and its
subsidiaries, any affected party and the external auditors,
such accounts, records and other matters as any member of the
Audit Committee considers appropriate;
(iii) engage independent counsel and other advisors as it determines
necessary to carry out its duties; and
(iv) set and pay the compensation for any advisors engaged by the
Audit Committee.
(c) The Audit Committee shall, at the earliest opportunity after each
meeting, report to the Board the results of its activities and any
reviews undertaken and make recommendations to the Board as considered
appropriate.
(d) The Audit Committee shall:
(i) review the audit plan with the external auditors and with
management;
(ii) discuss with management and the external auditors any proposed
changes in major accounting policies or principles, the
presentation and impact of material
Breakwater Resources Ltd. - 2006 Annual Information Form Page 61 of 65
risks and uncertainties and key estimates and judgements of
management that may be material to financial reporting;
(iii) review with management and with the external auditors material
financial reporting issues arising during the most recent
financial period and the resolution or proposed resolution of
such issues;
(iv) review any problems experienced or concerns expressed by the
external auditors in performing any audit, including any
restrictions imposed by management or any material accounting
issues on which there was a disagreement with management;
(v) review with senior management the process of identifying,
monitoring and reporting the principal risks affecting
financial reporting;
(vi) review the audited annual financial statements (including
management discussion and analysis) and related documents in
conjunction with the report of the external auditors and obtain
an explanation from management of all material variances
between comparative reporting periods;
(vii) consider and review with management, the internal control
memorandum or management letter containing the recommendations
of the external auditors and management's response, if any,
including an evaluation of the adequacy and effectiveness of
the internal financial controls of the Corporation and
subsequent follow-up to any identified weaknesses;
(viii) review with financial management and the external auditors the
quarterly unaudited financial statements and management
discussion and analysis before release to the public;
(ix) before release, review and if appropriate, recommend for
approval by the Board, all public disclosure documents
containing audited or unaudited financial information,
including any prospectuses, annual reports, annual information
forms, management discussion and analysis and press releases;
and
(x) oversee the financial affairs of the Corporation and its
subsidiaries, and, if deemed appropriate, make recommendations
to the Board, external auditors or management.
(e) The Audit Committee shall:
(i) evaluate the independence and performance of the external
auditors and annually recommend to the Board the appointment of
the external auditors or the discharge of the external auditor
when circumstances are warranted and the compensation of the
external auditor;
(ii) consider the recommendations of management in respect of the
appointment of the external auditors;
Breakwater Resources Ltd. - 2006 Annual Information Form Page 62 of 65
(iii) pre-approve all non-audit services to be provided to the
Corporation or its subsidiaries by its external auditors, or
the external auditors of subsidiaries of the Corporation in
accordance with the Audit Committee Policy on the Review and
Pre-Approval of Auditors' Fees for Audit and Non-Audit
Services, subject to the overriding principle that the external
auditors not be permitted to be retained by the Corporation to
perform internal audit outsourcing services or financial
information systems services; provided that notwithstanding the
above, the foregoing pre-approval of non-audit services may be
delegated to a member of the Audit Committee, with any
decisions of the member with the delegated authority reporting
to the Audit Committee at the next scheduled meeting;
(iv) approve the engagement letter for non-audit services to be
provided by the external auditors or affiliates thereof
together with estimated fees, and consider the potential impact
of such services on the independence of the external auditors;
(v) when there is to be a change of external auditors, review all
issues and provide documentation related to the change,
including the information to be included in the notice of
change of auditors and documentation required pursuant to the
then current legislation, rules, policies and instruments of
applicable regulatory authorities and the planned steps for an
orderly transition period; and
(vi) review all reportable events, including disagreements,
unresolved issues and consultations, as defined by Applicable
Laws, on a routine basis, whether or not there is to be a
change of the external auditors.
(f) The Audit Committee shall enquire into and determine the appropriate
resolution of any conflict of interest in respect of audit or
financial matters which are directed to the Audit Committee by any
member of the Board, a shareholder of the Corporation, the external
auditors or senior management.
(g) The Audit Committee shall periodically review with management the need
for an internal audit function.
(h) The Audit Committee shall review the accounting and reporting of
costs, liabilities and contingencies of the Corporation.
(i) The Audit Committee shall establish and maintain procedures for:
(i) the receipt, retention and treatment of complaints received by
the Corporation regarding accounting controls or auditing
matters; and
(ii) the confidential, anonymous submission by employees of the
Corporation of concerns regarding questionable accounting or
audit matters.
(j) The Audit Committee shall review and approve the Corporation's hiring
policies regarding employees and former employees of the present and
former external auditors.
Breakwater Resources Ltd. - 2006 Annual Information Form Page 63 of 65
(k) The Audit Committee shall review with the Corporation's legal counsel,
on no less than an annual basis, any legal matter that could have a
material impact on the Corporation's financial statements and any
enquiries received from regulators or government agencies.
(l) The Audit Committee shall assess, on an annual basis, the adequacy of
this Charter and the performance of the Audit Committee.
Composition of the Audit Committee
The members of the Company's Audit Committee are: Grant A. Edey (Chairman),
Garth A.C. MacRae and A. Murray Sinclair, Jr. Each of Messrs. Edey, MacRae and
Sinclair are independent and financially literate within the meaning of
Multilateral Instrument 52-110 - Audit Committees.
Relevant Education and Experience
Set out below is a description of the education and experience of each audit
committee member that is relevant to the performance of his responsibilities
as an audit committee member:
Grant A. Edey Mr. Edey has served as a director of the Company since 2005. Mr. Edey graduated
from Queen's University in 1971 with a B.Sc. in mining engineering and
subsequently held mine engineering positions with Inco Limited. He graduated
from the University of Western Ontario in 1975 with an MBA and worked in the
corporate planning department of Rio Algom Limited until mid-1977. In 1977, Mr.
Edey joined Eldorado Nuclear Limited where he was responsible for various
functions including corporate planning and development, operations management,
and financial planning. In 1989, Mr. Edey joined Trans-Canada Pipelines Limited
as a financial manager. In 1990, Mr. Edey joined Strathcona Mineral Services and
Nanisivik Mines Limited where he was responsible for economic valuations,
treasury, marketing and corporate secretarial functions. From January 1996 to
January 2003, Mr. Edey was Vice President, Finance and Chief Financial Officer
of Repadre Capital Corporation. With the acquisition of Repadre by IAMGOLD
Corporation in 2003, Mr. Edey became Chief Financial Officer of IAMGOLD
Corporation.
Garth A.C. MacRae Mr. MacRae, Chartered Accountant, has served as a director of the Company since
1993 and served as Chairman from June 2005. Mr. MacRae has over 16 years of
public accounting experience and has held executive positions with Dundee
Corporation, Hudson Bay Mining, Brinco Limited and Denison Mines Limited. Mr.
MacRae is a member of several public company boards and audit committees.
A. Murray Sinclair, Jr. Mr. Sinclair holds a Bachelor of Commerce from Queen's University, Kingston,
Ontario and has served as a director of the Company since 1992. He is also the
Managing Director of Quest Capital Corp., a merchant bank listed on the Toronto
(TSX), London (AIM) and United States (AMEX) stock exchanges that provides
financial services to small and mid-cap companies operating primarily in North
America. Mr. Sinclair is also a director and/or officer of other reporting
companies.
Breakwater Resources Ltd. - 2006 Annual Information Form Page 64 of 65
Pre-Approval Policies and Procedures
The Audit Committee's charter has a policy for pre-approval titled "Audit
Committee Policy on Review and Pre-Approval of Auditors Fees for Audit and
Non-Audit Services" which sets out the responsibilities regarding the
provision of non-audit services by the Company's external auditors. This
policy, in conjunction with the Audit Committee charter, encourages
consideration of whether the provision of services other than audit services
is compatible with maintaining the auditor's independence and requires Audit
Committee pre-approval of permitted audit and audit-related services.
External Auditor Service Fees
The following provides disclosure of fees charged by the auditor during the
2006 and 2005 fiscal years:
Audit Fees: The aggregate fees, including expenses reimbursed for
professional services rendered for the audit of the
consolidated financial statements of the Company and its
subsidiaries, for the reviews of the Company's quarterly
financial statements, and services that generally only
the independent auditor can reasonably provide such as
statutory audits, consents, and assistance and review of
documents filed with Securities and Exchange Commission
and Canadian Securities regulatory authorities billed by
PricewaterhouseCoopers LLP ("PWC") in fiscal year 2006
were $800,868 and billed by Deloitte & Touche LLP ("D&T")
in fiscal year 2005 were $833,920.
Audit Related Fees: The aggregate fees, including expenses reimbursed,
billed by PWC for fiscal year 2006 were $11,585
and billed by D&T for fiscal year 2005 were $38,000.
These fees relate to Sarbanes-Oxley Act of 2002
readiness assistance and the audit of the pension plan
financial statements.
Tax Fees: The aggregate fees, including expenses reimbursed,
billed by PWC for fiscal year 2006 were nil and billed by
D&T for fiscal year 2005 were $29,105. These fees include
assistance relating to tax compliance.
All Other Fees: The aggregate fees, including expenses
reimbursed for services rendered to the Company and its
subsidiaries, other than for the services described
above, billed by PWC for fiscal year 2006 were nil and
billed by D&T for fiscal year 2005 were nil.
ITEM 12 ADDITIONAL INFORMATION
Additional information relating to the Company is available on SEDAR under the
Company's name at www.sedar.com. Further additional information, including
directors' and officers' remuneration and indebtedness, if any, principal
holders of the Company's securities, and securities authorized for issuance
under the share incentive plan can be found in the Company's Management
Information Circular dated May 8, 2006 furnished in connection with its annual
and special meeting of shareholders held on June 8, 2006. The management
information circular for the 2007 shareholder meeting to be held for the
purpose of, among other things, the election of directors, will be available
on SEDAR in accordance with the time prescribed by law. The Company's
consolidated financial statements and the management's discussion and analysis
for the fiscal year ended December 31, 2006 can be found on SEDAR at
www.sedar.com and at the Company's website www.breakwater.ca.
Breakwater Resources Ltd. - 2006 Annual Information Form Page 65 of 65
Document No. 2
Management's Responsibility for Financial Reporting
The accompanying consolidated financial statements of Breakwater Resources Ltd.
(the "Company") and all of the information contained in the Annual Report are
the responsibility of management and have been approved by the Company's Board
of Directors.
The consolidated financial statements have been prepared by management in
accordance with Canadian generally accepted accounting principles ("Cdn.
GAAP"). When alternative accounting methods exist, management has chosen those
it deems most appropriate in the circumstances. Financial statements are not
precise since they include certain amounts based on estimates and judgments.
Management has determined such amounts on a reasonable basis in order to ensure
that the consolidated financial statements are presented fairly, in all
material respects. Management has prepared the financial information presented
elsewhere in the Annual Report and has ensured that it is consistent with that
in the consolidated financial statements.
The Company maintains a system of internal accounting and administrative
controls designed to provide reasonable assurance that the financial
information is relevant, reliable and accurate and that the Company's assets
are appropriately accounted for and adequately safeguarded. This system of
internal control includes an organizational arrangement with clearly defined
lines of responsibility. PricewaterhouseCoopers LLP, the independent auditors
appointed by the shareholders to audit the consolidated financial statements,
have full and unrestricted access to the Audit Committee. During the course of
their audit, PricewaterhouseCoopers LLP reviewed the Company's system of
internal control to the extent necessary to render their opinion on the
consolidated financial statements.
The Audit Committee is appointed by the Company's Board of Directors and all
its members are outside directors. The Audit Committee meets periodically with
management, as well as the independent auditors to discuss internal controls
over the financial reporting process, auditing matters and financial reporting
issues, to satisfy itself that each party is properly discharging its
responsibilities and to review the consolidated financial statements and the
independent auditors' report. The Company's Audit Committee reports its
findings to the Company's Board of Directors for consideration when approving
the consolidated financial statements for issuance to shareholders. The
Company's Audit Committee also considers, for review by the Company's Board of
Directors and the approval by the shareholders, the engagement or reappointment
of independent auditors.
The consolidated financial statements as at December 31, 2006 and for the year
then ended have been audited by PricewaterhouseCoopers LLP, the independent
auditors, in accordance with Canadian generally accepted auditing standards on
behalf of the shareholders.
The consolidated financial statements as at December 31, 2005 and for the years
ended December 31, 2005 and 2004 were audited by other auditors, in accordance
with Canadian generally accepted auditing standards and the standards of the
Public Company Accounting Oversight Board (United States) on behalf of the
shareholders. The other auditors had full and free access to the Audit
Committee.
Management's Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate control
over financial reporting. Management conducted an evaluation of the
effectiveness of internal control over financial reporting based on "Internal
Control - Integrated Framework" issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on this evaluation, management
concluded that the Company's internal control over financial reporting was
effective as at December 31, 2006.
/s/ George E. Pirie /s/ David C. Langille
George E. Pirie David C. Langille
President and Vice President, Finance and
Chief Executive Officer Chief Financial Officer
1
_______________________________________________________________________________
Auditors' Report
To the Shareholders of Breakwater Resources Ltd.
We have audited the consolidated balance sheet of Breakwater Resources Ltd. as
at December 31, 2006 and the consolidated statements of operations and retained
earnings (deficit) and cash flow for the year then ended. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with Canadian generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the Company as at December 31,
2006 and the results of its operations and its cash flow for the year then
ended in accordance with Canadian generally accepted accounting principles.
The consolidated financial statements as at December 31, 2005 and for the years
ended December 31, 2005 and 2004, prior to the adjustment for the change in
accounting policy for exploration expenditures as described in Note 2, were
audited by other auditors who expressed an opinion without reservation on those
consolidated financial statements in their report dated March 2, 2006. We have
audited the adjustments to the 2005 and 2004 consolidated financial statements
and in our opinion, such adjustments, in all material respects, are appropriate
and have been properly applied.
/s/ PricewaterhouseCoopers LLP
Chartered Accountants
Toronto, Canada
March 21, 2007
Comments by Auditor for US Readers on Canada-US Reporting Differences
In the United States, reporting standards for auditors require the addition of
an explanatory paragraph (following the opinion paragraph) when there is a
change in accounting principles that has a material effect on the comparability
of the company's financial statements, such as the change described in Note 2
to these consolidated financial statements. Our report to the shareholders
dated March 21, 2007 is expressed in accordance with Canadian reporting
standards which do not require a reference to such change in accounting
principles in the Auditors' report when the change is properly accounted for
and adequately disclosed in the financial statements.
/s/ PricewaterhouseCoopers LLP
Chartered Accountants
Toronto, Canada
March 21, 2007
2
Breakwater Resources Ltd.
Consolidated Balance Sheets
(Expressed in thousands of Canadian dollars)
- ------------------------------------------------------------------------------------------------------------------
As at December 31 2006 2005
- ------------------------------------------------------------------------------------------------------------------
Assets (restated-see
note 2)
Current
Cash and cash equivalents 81,412 18,749
Restricted cash (note 3) 1,178 3,929
Short-term investments (note 4) 4,120 2,523
Accounts receivable - concentrate 12,687 3,027
Other receivables 12,676 9,369
Concentrate inventory (note 5) 43,686 47,501
Materials and supplies inventory 22,904 21,388
Prepaid expenses and other current assets 4,029 3,934
Future income tax assets (note 16) 14,745 6,517
- ------------------------------------------------------------------------------------------------------------------
Total current assets 197,437 116,937
Deferred financing fees (notes 9 and 10) - 344
Future income tax asset, long-term (note 16) 13,440 -
Reclamation deposits (note 6) 13,543 6,808
Mineral properties and fixed assets (notes 2 and 7) 207,884 150,637
Long-term investments (note 8) 14,704 5,615
Restricted promissory notes (note 11) 62,285 62,285
- ------------------------------------------------------------------------------------------------------------------
509,293 342,626
- ------------------------------------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Current
Accounts payable and accrued liabilities 43,128 32,797
Provisional payments for concentrate inventory shipped and not priced (note 5) 24,246 14,807
Short-term debt including current portion of long-term debt (note 9) 2,169 14,585
Income and mining taxes payable 9,798 164
Current portion of reclamation, closure cost accruals and other
environmental obligations (note 12) 8,267 10,165
- ------------------------------------------------------------------------------------------------------------------
Total current liabilities 87,608 72,518
Deferred income (note 11) 6,277 6,888
Long-term lease obligations (notes 7 and 20) 501 984
Royalty obligations (note 11) 62,479 62,479
Long-term debt (note 10) - 4,143
Reclamation, closure cost accruals and other environmental obligations (note 12) 32,293 40,099
Employee future benefits (note 13) 4,493 5,379
Future income tax liabilities (note 16) 7,089 1,921
- ------------------------------------------------------------------------------------------------------------------
Total liabilities 200,740 194,411
Shareholders' equity (note 14) 308,553 148,215
- ------------------------------------------------------------------------------------------------------------------
509,293 342,626
- ------------------------------------------------------------------------------------------------------------------
Contingencies and commitments (note 20).
The accompanying notes form an integral part of these consolidated financial statements.
Approved by the Board
/s/ Garth A.C. MacRae /s/ George E. Pirie
Garth A.C. MacRae George E. Pirie
Director Director
3
Breakwater Resources Ltd.
Consolidated Statements of Operations and Retained Earnings (Deficit)
(Expressed in thousands of Canadian dollars except share and per share amounts)
- -------------------------------------------------------------------------------------------------------------------------
Years ended December 31 2006 2005 2004
- -------------------------------------------------------------------------------------------------------------------------
(restated - (restated -
see note 2) see note 2)
Gross sales revenue 452,233 312,965 240,299
Treatment and marketing costs 127,847 105,391 81,856
- -------------------------------------------------------------------------------------------------------------------------
Net revenue 324,386 207,574 158,443
- -------------------------------------------------------------------------------------------------------------------------
Operating costs
Direct operating costs 134,572 144,297 101,922
Depreciation and depletion 17,558 21,565 23,087
Reclamation and closure costs 3,723 12,093 4,896
- -------------------------------------------------------------------------------------------------------------------------
155,853 177,955 129,905
- -------------------------------------------------------------------------------------------------------------------------
Contribution from mining activities 168,533 29,619 28,538
- -------------------------------------------------------------------------------------------------------------------------
Other expenses (income)
General and administrative 14,047 9,475 10,812
Interest and financing 4,990 1,284 509
Investment and other income (8,162) (2,595) (843)
Loss on gold loan (note 9) 1,232 1,787 -
Foreign exchange (gain) loss on US dollar denominated debt (313) (492) 431
Other foreign exchange loss 1,074 294 1,809
- -------------------------------------------------------------------------------------------------------------------------
12,868 9,753 12,718
- -------------------------------------------------------------------------------------------------------------------------
Earnings before the following: 155,665 19,866 15,820
- -------------------------------------------------------------------------------------------------------------------------
Exploration expenditures (note 2) 9,973 2,915 2,097
Write-down of mineral properties and fixed assets (note 7) - 879 1,178
Other non-producing property (income) costs (note 15) (9,581) 9,035 8,638
Income and mining tax (recovery) provision (note 16) (1,257) (6,986) 571
- -------------------------------------------------------------------------------------------------------------------------
(865) 5,843 12,484
- -------------------------------------------------------------------------------------------------------------------------
Net earnings 156,530 14,023 3,336
Deficit, beginning of year (189,663) (203,686) (207,022)
Reduction in stated share capital and contributed surplus (note
14(f)) 172,928 - -
- -------------------------------------------------------------------------------------------------------------------------
Retained earnings (deficit), end of year 139,795 (189,663) (203,686)
- -------------------------------------------------------------------------------------------------------------------------
Basic earnings per Common Share (note 23) $ 0.41 $ 0.04 $ 0.01
Diluted earnings per Common Share (note 23) $ 0.37 $ 0.04 $ 0.01
Basic weighted-average number of Common Shares
outstanding (000's) (note 23) 383,748 369,190 353,508
- -------------------------------------------------------------------------------------------------------------------------
The accompanying notes form an integral part of these consolidated financial statements.
4
Breakwater Resources Ltd.
Consolidated Statements of Cash Flow
Years ended December 31
(Expressed in thousands of Canadian dollars)
2006 2005 2004
- --------------------------------------------------------------------------------------------------------------------------
Operating Activities (restated - (restated
see note 2) - see note 2)
Net earnings 156,530 14,023 3,336
- --------------------------------------------------------------------------------------------------------------------------
Items not affecting cash:
Depreciation and depletion 17,558 21,565 23,087
Gain on sale of investment - (851) -
Gain on sale of properties (note 15) (13,818) - -
Write-down of mineral properties and fixed assets (note 7) - 879 1,178
Unrealized loss on gold loan - 1,656 -
Foreign exchange gain on US dollar denominated loans - (447) -
Other non-cash items (579) (7) (132)
Stock-based compensation (note 14(d)) 1,608 809 1,253
Issue of Common Shares to settle litigation (notes 15 and 20(b)) 848 - -
Unrealized deferred income (611) (56) -
Future income taxes (note 16) (18,845) (6,277) 1,909
Reclamation, closure cost accruals and other environmental obligations 3,723 12,093 4,764
Employee future benefits (note 13) 2,139 1,773 553
- --------------------------------------------------------------------------------------------------------------------------
(7,977) 31,137 32,612
- --------------------------------------------------------------------------------------------------------------------------
Payment of reclamation, closure cost accruals and other environmental obligations (7,439) (25,162) (7,879)
Payment of employee future benefits (note 13) (3,025) (2,840) (968)
Changes in non-cash working capital items (note 22) 20,459 1,524 (5,075)
- --------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 158,548 18,682 22,026
- --------------------------------------------------------------------------------------------------------------------------
Investing Activities
Funds advanced on promissory note (note 11) - (50,500) (11,785)
Reclamation deposits (6,735) (6,708) -
Short-term investments (1,207) 961 30
Acquisition, net of cash acquired - - (886)
Mineral properties and fixed assets (75,653) (35,599) (25,593)
Proceeds from sale of mineral properties and fixed assets 335 214 210
- --------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (83,260) (91,632) (38,024)
- --------------------------------------------------------------------------------------------------------------------------
Financing Activities
Decrease (increase) in restricted cash (note 3) 2,751 (538) (3,036)
Proceeds from sale of royalty interest (note 11) - 50,500 12,204
Issue of Common Shares for cash (note 14) 1,892 8,480 30,407
Issue of warrants for cash (note 14(h)) - - 7,211
Deferred financing fees (223) (344) -
Deferred income - 5,096 -
Decrease in long-term lease obligations (483) - -
(Decrease) increase in short-term debt (12,919) 11,874 (10,059)
(Decrease) increase in long-term debt (3,643) 3,964 (14,095)
- --------------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by financing activities (12,625) 79,032 22,632
- --------------------------------------------------------------------------------------------------------------------------
Net increase in cash during the year 62,663 6,082 6,634
Cash and cash equivalents, beginning of year 18,749 12,667 6,033
- --------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year 81,412 18,749 12,667
- --------------------------------------------------------------------------------------------------------------------------
Supplemental Information
Cash interest paid 644 437 436
Cash income and mining taxes paid 8,337 634 358
- --------------------------------------------------------------------------------------------------------------------------
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 Breakwater Resources Ltd.
(the "Company") have been prepared in accordance with Canadian generally
accepted accounting principles ("Cdn. GAAP"). The more significant of the
accounting policies are summarized as follows:
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.
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 United States ("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
exchange rates in effect at the balance sheet date, while revenues and
expenses, other than those related to non-monetary items, 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 rate of exchange at
the balance sheet date. Non-monetary assets and liabilities are translated at
historical rates. Revenues and expenses are translated at the average rate of
exchange for the year. Exchange gains and losses are included in income for the
year.
Use of estimates
The preparation of financial statements, in accordance with generally
accepted accounting principles, requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the year.
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, long-term investments, 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
the hedge transaction. 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 may use 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. 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 flow on the derivative contracts is expected to offset
the cash flow of the underlying position or
6
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 retained
earnings (deficit).
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.
Short-term investments
Short-term investments are carried at the lower of cost and quoted
market value.
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.
Mineral properties and fixed assets
The Company records its interest in mineral properties at cost and
capitalizes development expenditures. When the properties are brought into
commercial production, the capitalized costs are amortized on a
units-of-production basis using current reserve estimates. If the properties
are abandoned, the cost of the mineral property and any capitalized
expenditures are written-down to fair value at that time. Administrative costs
are expensed as incurred.
The carrying values of producing mineral properties and fixed assets,
including properties placed on a care and maintenance basis (note 15) are
reviewed when events or changes in circumstances arise that may result in
impairments in the carrying value of those assets. An impairment loss would be
recognized when the carrying amount of a long-lived asset is not recoverable
and exceeds the assets' fair value which is based on the present value of
expected future net cash flow. Estimated future net cash flow, on an
undiscounted basis, is calculated for each property using: estimated
recoverable reserves; estimated future metal price realization (considering
historical and current prices, price trends and related factors); and,
estimated operating, capital and other cash flow. Estimates of future cash flow
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.
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 units-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 two 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 flow when testing for impairment and determining
fair value.
Development costs
Development costs involve the preparation of identified reserves for
production once the technical feasibility and commercial viability of the
mineral deposit is established. These costs are capitalized. For a new mine,
the development phase begins after the completion of a feasibility study and
ends upon the commencement of commercial production. Development costs are
amortized over the life of the area of interest from the date that commercial
production of the related mineral occurs. Commercial production is deemed to
have commenced when the Company determines that the
7
completion of operational commissioning of major mine and plant components is
completed, operating results are being achieved consistently for a period of
time and there are indicators that these operating results will be continued.
Long-term investments
Long-term investments are recorded at cost, net of any other than
temporary impairment in value.
Asset retirement obligations and asset retirement costs
The Company records 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 recorded and then depreciated over
the life of the asset. Over time, the liability is accreted to its present
value each year.
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 consolidated balance sheets.
Employee future benefits
The employee future benefits plan relates only to the employees at the
Company's Myra Falls mine.
The actuarial determination of the accrued benefit obligations for
pensions and other retirement benefits uses the projected accrued benefit
method prorated on service (which incorporates management's best estimate of
the expected future return on 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 the 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% 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, which is currently December
31, 2011. The average remaining service period of the active employees covered
by all plans is 6 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.
Revenue recognition
Revenue is recognized following the transfer of title and risk of
ownership and the determination of the final settlement price in accordance
with contractual arrangements with customers. Title is generally transferred on
receipt of provisional payment from the customer. 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" on the consolidated balance sheets. The
Company produces zinc, copper, lead and gold concentrates. By-products such as
gold and silver are often contained within concentrate shipped to customers and
revenue from these by-products is recognized when all of the above revenue
criteria are met and when the corresponding major metal is recognized in
revenue. All concentrate and by-product revenues are recorded in gross revenue
on the consolidated statements of operations and retained earnings (deficit).
Exploration and evaluation expenditures
The Company expenses all exploration and evaluation expenditures until
the Company determines that the mineral deposit is deemed commercially viable,
at which time all subsequent costs are capitalized.
8
Exploration and evaluation expenditures on properties which do not
have any known mineral deposits are expensed as incurred until a final
feasibility study has been completed, after which, future development costs are
capitalized if the final feasibility study demonstrates that future economic
benefits are probable.
Exploration and evaluation expenditures on properties adjacent to
mineral deposits which are already being mined or developed are expensed until
the Company is able to conclude that a future economic benefit is probable
through the completion of a pre-feasibility study, after which the expenditure
is capitalized as a mine development cost.
Expenditures related to extensions of mineral deposits which are
already being mined or developed, including expenditures on the definition of
mineralization of such mineral deposits, is capitalized as a mine development
cost following the completion of an economic evaluation which is equivalent to
the completion of a pre-feasibility study.
Properties purchased are recorded at fair value on the date of
acquisition and are included in "Mineral properties and fixed assets" on the
consolidated balance sheets.
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.
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.
Share incentive plan
The Company has a share incentive plan (the "Plan"), which consists of
a share purchase plan ("Share Purchase Plan"), a share option plan ("Share
Option Plan") and a share bonus plan ("Share Bonus Plan"), which is
administered by the directors of the Company. The Plan provides that eligible
persons thereunder include any director, full-time or part-time employee,
officer or consultant of the Company or any subsidiary thereof. The Plan is
described in note 14. The Company uses the fair value method of accounting to
recognize an expense for stock-based compensation issued to employees through
the Share Option Plan. The expense is recognized over the options vesting
period. Common Shares issued under the Plan are recorded at the issue price.
New pronouncements not adopted
The Canadian Institute of Chartered Accountants issued the following
accounting standards effective for the fiscal years beginning on or after
October 1, 2006: Accounting Standards Section 1530 "Comprehensive Income";
Accounting Standards Section 3855 "Financial Instruments - Recognition and
Measurement"; Accounting Standards Section 3861 "Financial Instruments -
Presentation and Disclosure"; and, Accounting Standards Section 3865 -
"Hedges". These sections require certain financial instruments and hedge
positions to be recorded at fair value. The standards also introduce the
concept of comprehensive income and accumulated other comprehensive income.
Adoption of these standards will be effective from January 1, 2007 on
a prospective basis without retroactive restatement of prior periods, except
for the reclassification of equity balances to reflect "Accumulated other
comprehensive income" which will include foreign currency translation
adjustments.
Under the new standard, financial instruments designated as
"held-for-trading" and "available-for-sale" will be carried at their fair value
while financial instruments such as "loans and receivables", "financial
liabilities" and those classified as "held-to-maturity" will be carried at
their amortized cost. All derivatives will be carried on the consolidated
balance sheets at their fair value, including derivatives designated as hedges.
Unrealized gains and losses on effective cash flow hedges will be carried in
"Accumulated other comprehensive income", a component of "Shareholders' equity"
on the consolidated balance sheets, while any gains or losses on ineffective
hedges will be recognized in earnings.
Variable interest entities
On January 1, 2005, the Company adopted the Canadian Institute of Chartered
Accountants 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 a
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, 2006 and 2005, the Company had no entities which
would qualify as a variable interest entity under AcG-15.
2005 and 2004 figures
Certain of the 2005 and 2004 figures have been reclassified to conform
to the 2006 presentation.
9
2. Change in Accounting Policy for Exploration Expenditures
In the fourth quarter of 2006, the Company changed its accounting
policy for exploration expenditures. Under the new policy, which has been
retroactively applied, all exploration expenditures are expensed as incurred
until the mineral deposit is deemed commercially recoverable, at which time all
subsequent development costs are capitalized.
The effect of this change on the consolidated financial statements is
as follows:
Increase (decrease) in the consolidated statements of operations and
retained earnings (deficit) and balance sheet amounts for the years ended
December 31:
($000's except per share amounts) 2006 2005 2004
- -----------------------------------------------------------------------------------------------------------
Depreciation and depletion (1,843) (1,664) (2,809)
Exploration expenditures 5,534 2,380 2,097
Net earnings (3,691) (716) 712
Deficit, beginning of year (16,735) (16,019) (16,731)
Retained earnings (deficit), end of year (20,426) (16,735) (16,019)
- -----------------------------------------------------------------------------------------------------------
Basic earnings per Common Share $(0.01) $0.00 $0.00
Diluted earnings per Common Share $(0.01) $0.00 $0.00
- -----------------------------------------------------------------------------------------------------------
Mineral properties and fixed assets (18,315) (14,531) (14,215)
Cumulative translation adjustments 2,111 2,204 1,804
3. Restricted Cash
The restricted cash balance at December 31, 2006, of $1,178,000 (2005
- - $3,929,000), includes $928,000 (2005 - $2,390,000) placed on deposit to cover
certain reclamation costs (see note 6) and $250,000 (2005 - $250,000) to
guarantee an operating lease.
4. Short-term Investments
($000's) 2006 2005
--------------------------------------------------------------------------------------------------
Marketable securities (quoted market value: 2006 - $5,501; 2005 - $421) 4,120 218
Gold bullion, at cost (quoted market value: 2005 - $2,313) - 2,305
--------------------------------------------------------------------------------------------------
4,120 2,523
As at December 31, 2005, the Company held 3,867 ounces of gold bullion
to facilitate an instalment payment for a gold loan. The gold loan instalment
was paid on January 3, 2006 and the final gold loan instalment was made on
August 31, 2006 (note 9).
5. Concentrate Inventory
Concentrate inventory as at December 31, 2006 includes an amount of
$20,245,000 (2005 - $23,880,000) for shipments where title and risk of
ownership have been transferred to the customer but the final settlement price
has not been determined. These shipments will be recognized as revenue in
accordance with the Company's revenue recognition policy set out in note 1.
6. Reclamation Deposits
Cash collateral on deposit at December 31, 2006 of $13,543,000 (2005 -
$6,808,000), related to future reclamation activities, are held by third
parties to fund reclamation costs. The reclamation deposits at December 31,
2006 are in respect of future reclamation costs at the Langlois and the Myra
Falls mines. On sale of the Caribou and Restigouche mines in 2006, the Company
was reimbursed for outstanding reclamation deposits on these properties (note
15).
10
7. Mineral Properties and Fixed Assets
($000's) 2006 2005
(restated - see note 2)
-----------------------------------------------------------------------------------------------------------------------
Accumulated Accumulated
depreciation Net book depreciation Net book
Cost and depletion value Cost and depletion value
-----------------------------------------------------------------------------------------------------------------------
Equipment 155,045 104,757 50,288 149,858 103,093 46,765
Mineral properties,
buildings and improvements 128,222 70,576 57,646 126,919 76,799 50,120
Development 125,679 26,578 99,101 75,257 22,976 52,281
Asset retirement cost 9,997 9,148 849 10,481 9,010 1,471
-----------------------------------------------------------------------------------------------------------------------
418,943 211,059 207,884 362,515 211,878 150,637
Development costs are amortized using the unit-of-production method.
The amortization expense for 2006 was $4,657,000 (2005 - $5,860,000; 2004 -
$6,906,000).
Equipment under capital leases at December 31 were:
($000's) 2006 2005
-----------------------------------------------------------------------
Equipment cost 2,416 2,416
Less: Accumulated amortization (947) (464)
-----------------------------------------------------------------------
1,469 1,952
Equipment under capital lease is amortized on a straight-line basis
over its economic life of five years. The amount of equipment lease costs that
were amortized in 2006 is $483,000 (2005 - $319,000; 2004 - $111,000).
In 2005, $879,000 (2004 - $1,178,000) of mineral properties and fixed
assets were written down and included in "Write-down of mineral properties and
fixed assets" on the consolidated statements of operations and retained
earnings (deficit). The $879,000 write-down in 2005 consisted of $187,000 of
development costs at the El Mochito mine and $692,000 of fixed asset
write-downs at the Nanisivik property. The $1,178,000 write-down in 2004
related to other exploration properties in the corporate and other segments.
8. Long-term Investments
Long-term investments are valued at cost, net of other than temporary
impairments in value, and relate to two convertible debentures.
($000's) 2006 2005
-----------------------------------------------------------------------------------------------
Blue Note Metals Inc. unsecured convertible debenture 9,089 -
Taseko Mines Limited unsecured convertible debenture (fair
market value: 2006 - $10,569; 2005 - $5,203) 5,615 5,615
-----------------------------------------------------------------------------------------------
14,704 5,615
The unsecured subordinated convertible debenture from Blue Note Metals
Inc. ("Blue Note") was issued on August 1, 2006 (note 15) in the amount of
$15,000,000 and matures on August 1, 2011. The note does not bear interest and
is unsecured. The debenture is convertible into common shares of Blue Note at
the option of the Company, any time after the Caribou and Restigouche mines
have been in commercial production for at least a twelve-month period (the
"Redemption Date") and prior to the maturity date, at a price of $0.36 per
share. Blue Note has the option to redeem the debenture any time after the
Redemption Date and up to and including the maturity date by a cash payment or
on maturity by issuing common shares at a price of $0.36 per share. Management
determined the fair value of the debenture on acquisition to be $9,089,000.
The unsecured convertible debenture from Taseko Mines Limited
("Taseko") was issued on July 21, 1999, for $17,000,000 and matures on July 21,
2009 and does not bear interest. 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 each year thereafter. From the
fifth anniversary date until the tenth anniversary, the outstanding principal
may, at the election of Taseko, be converted into common shares at the then
prevailing share price.
11
9. Short-term Debt
($000's) 2006 2005
---------------------------------------------------------------------------------------------------
Reimbursable government assistance, unsecured, non-interest bearing 2,041 1,541
Gold loan (note 4) - 11,563
Prepayment facility, current portion (note 10) - 1,458
Other 128 23
---------------------------------------------------------------------------------------------------
2,169 14,585
Reimbursable government assistance relates to the Langlois mine with
$500,000 related to Zone 97 and being payable when Zone 97 is profitable. The
remaining balance relates to the installation of a hydro line at the Langlois
mine and is payable in April 2007.
On August 26, 2005, the Company entered into a gold loan agreement.
Under the terms of the agreement, the Company borrowed 23,200 ounces of gold
bullion valued at $11,889,000 (US$10,000,000). The gold loan bore interest at
2.9% per annum with principal gold bullion repayments in six equal instalments
over 13 months. The final gold bullion principal repayment was made on August
31, 2006. The Company did not apply hedge accounting to the gold loan and
accordingly, the gold loan was re-measured at each balance sheet date and any
gains or losses were recognized in income. As at December 31, 2006, nil (2005 -
19,333) ounces of gold bullion remained outstanding. As at December 31, 2005,
financing fees amounting to $242,000 had been deferred and were being amortized
on a straight-line basis over the life of the gold loan.
10. Long-term Debt
($000's) 2006 2005
----------------------------------------------------------------------------------------------
Reimbursable government assistance, unsecured, non-interest
bearing (note 9) 2,041 2,041
Prepayment facility - 5,101
----------------------------------------------------------------------------------------------
Total 2,041 7,142
Less current portion 2,041 2,999
----------------------------------------------------------------------------------------------
- 4,143
On May 17, 2005, the Company entered into a contract 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 with interest
payable at six month LIBOR plus 3.5%. This prepayment facility was repaid in
May 2006 prior to scheduled maturity and the related deferred financing fee of
$102,000 at December 31, 2005 was included in "Interest and financing" on the
consolidated statement of operations and retained earnings (deficit).
11. Royalty Obligation
In December 2005, the Company entered into a royalty agreement ("2005
Second Royalty Agreement") with Red Mile Resources No. 4 Limited Partnership
("Red Mile No.4") whereby the Company sold a basic royalty ("Second 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 fee income of $1,141,000, interest income of
$4,469,000 and prepaid interest income of $390,000.
In December 2004, the Company entered into a royalty agreement ("2004
First Royalty Agreement") with Red Mile Resources No. 5 Limited Partnership
("Red Mile No.5") whereby the Company sold a basic royalty ("First 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 fee income of $564,000, interest income of
$520,000 and prepaid interest income of $477,000.
Under the terms of the 2005 Second Royalty Agreement (2004 First
Royalty Agreement), the Company is required to make Second Basic Royalty (First
Basic Royalty) payments at fixed amounts per pound of payable zinc produced,
which escalates from $0.0016 per pound to $0.1373 per pound (First Basic
Royalty from $0.003 per pound to $0.016 per pound) over the first 12 years of
the agreement. In addition, for the years 2011 through 2015 (Red Mile No.5
years 2010 through 2014), the Company granted Red Mile No.4 a net smelter
return of 1.50%, 2.25% or 3.00% (Red Mile No.5 a net smelter return of 0.4%,
0.5% or 0.7%) if the average price of zinc in a given calendar year exceeds
US$2,600,
12
US$2,800 or US$3,000 per tonne (Red Mile No.5 average zinc prices of US$2,250,
US$2,500 or US$2,750 per tonne), respectively.
The Red Mile No.4 royalty income component of the cash received of
$50,500,000 (Red Mile No.5 - $11,785,000) was placed with a financial
institution for which the Company received a restricted promissory note. The
restricted promissory note earns interest at 6% (Red Mile No.5 - 6%) per annum
which is recorded in "Investment and other income" on the consolidated
statements of operations and retained earnings (deficit) and matures on
February 15, 2015 (Red Mile No.5 - December 15, 2014). Pursuant to the 2005
Second Royalty Agreement and the 2004 First Royalty Agreement, interest earned
from the restricted promissory notes and a portion of the principal must be
used to fund the expected basic royalty payments during the first ten years of
each agreement.
Under certain circumstances, the Company has the right, by way of a
call option, to acquire the partnership units of Red Mile No.4 and Red Mile
No.5 for the lower of market value or the outstanding amount of the restricted
promissory note at the end of the tenth year of the respective royalty
agreements.
The royalty income received from Red Mile No.5 and Red Mile No.4 is
accounted for as debt. The long-term portion is included in "Royalty
obligation" and the current portion is included in "Accounts payable and
accrued liabilities" on the consolidated balance sheets. The deemed interest
rate for these amounts under the 2005 Second Royalty Agreement and the 2004
First Royalty Agreement are 6.00% and 6.11% per annum respectively and the
charges are included in "Interest and financing" on the consolidated statements
of operations and retained earnings (deficit).
The prepaid interest income and the indemnity fee received under the
2005 Second Royalty Agreement and the 2004 First Royalty Agreement have been
recorded in "Deferred income" on the consolidated balance sheets and are being
amortized into income over the life of the respective agreements reflected in
"Investment and other income" on the consolidated statements of operations and
retained earnings (deficit). As at December 31, 2006, prepaid interest income
and the deferred indemnity fee totalled $3,575,000 and $1,362,000 respectively
(2005 - $4,022,000 and $1,526,000 respectively). Total interest expense for the
year ended December 31, 2006 was $3,793,000 (2005 - $719,000; 2004 - $Nil) and
total interest income for the year ended December 31, 2006 was $4,240,000 (2005
- - $715,000; 2004 - $Nil).
12. Reclamation, Closure Cost Accruals and Other Environmental Obligations
($000's) 2006 2005
------------------------------------------------------------------------------------------
Asset retirement obligations 33,015 41,542
Closure cost accruals 2,059 2,150
Other environmental obligations 5,486 6,572
------------------------------------------------------------------------------------------
40,560 50,264
Less current portion 8,267 10,165
------------------------------------------------------------------------------------------
32,293 40,099
Other environmental obligations represent expenditures required to
complete modifications to the tailings facility at the Myra Falls mine. The
Company expects to complete the required work by 2008. The estimated obligation
was recorded and is being reduced by actual expenditures incurred. As at
December 31, 2006, the expenditures since acquisition have been $9,378,000
(2005 - $8,292,000). The current portion of $2,001,000 (2005 - $2,001,000) is
included in "Current portion of reclamation, closure cost accruals and other
environmental obligations" on the consolidated balance sheets.
Asset Retirement Obligations
($000's)
--------------------------------------------------------------------------------------
As at December 31, 2005 41,542
Reduction on disposal of Caribou and Restigouche mines (note 15) (5,485)
Change in timing of cash flow (483)
Accretion (included in reclamation and closure costs) 2,894
Expenditures (5,432)
Impact of foreign exchange (21)
--------------------------------------------------------------------------------------
As at December 31, 2006 33,015
Less: current portion included in Current portion of reclamation,
closure cost accruals and other environmental obligations 5,646
--------------------------------------------------------------------------------------
27,369
13
The estimated amount of undiscounted cash flow required to satisfy the
asset retirement obligations as at December 31, 2006, was $101,094,000 (2005 -
$114,429,000). The expected timing of payments ranges from 2007 to 2119, and
the credit-adjusted risk-free rates at which the estimated cash flow has been
discounted to arrive at the obligation, ranges from 7.17% to 7.89% (2005 -
7.17% to 7.89%). The estimated amount of undiscounted cash flow for December
31, 2006, includes an amount of $66,329,000 (2005 - $66,329,000) which is for
water treatment at the Myra Falls mine in perpetuity.
13. Employee Future Benefits
The Company's unionized hourly employees at the Myra Falls mine have a
defined benefit pension plan with the employees' benefits under this plan
specified by a collective agreement. The pension plan is a flat benefit plan
and there are no indexation features. The Company also provides extended health
and dental benefits for certain employees and former employees of the Myra
Falls mine. The Company measures its accrued benefit obligations and the fair
value of plan assets for accounting purposes as at December 31 of each year.
Actuarial reports valuing this hourly plan are prepared every three years using
the projected accrued benefit method, with December 31, 2004 being the most
recent valuation and December 31, 2007 being the next required valuation.
The details of the Company's benefit plans as at December 31 are as
follows:
Pension Benefit Plans Other Benefit Plans
($000's) 2006 2005 2006 2005
-----------------------------------------------------------------------------------------------------------------------------
Expected long-term rate of return on plan assets 7.0% 7.0% N/A N/A
Discount rate on accrued pension obligations 5.25% 5.0% 5.25% 5.0%
Rate of compensation increase N/A N/A N/A N/A
Assumed health care cost trend rates at December 31:
Initial health care cost trend rate 12.0% 12.0%
Cost trend rate declines to 5.0% 5.0%
Year that the rate reaches the rate it is assumed to remain at 2015 2015
Dental care rate of expense increase 4.0% 4.0%
-----------------------------------------------------------------------------------------------------------------------------
Pension Benefit Plans Other Benefit Plans
($000's) 2006 2005 2006 2005
-----------------------------------------------------------------------------------------------------------------------------
Pension expense
Current service cost 1,463 1,200 18 17
Interest cost on accrued benefit obligation 2,013 1,910 38 66
Expected return on pension fund assets (1,998) (1,697) - -
Amortization of experience gains/losses 370 216 (42) 61
Amortization of past service cost 216 - 61 -
-----------------------------------------------------------------------------------------------------------------------------
2,064 1,629 75 144
-----------------------------------------------------------------------------------------------------------------------------
Accrued benefit obligations
Balance, beginning of year 39,504 31,119 795 1,104
Current service cost 1,463 1,200 18 17
Interest cost 2,013 1,910 39 65
Benefits paid (1,403) (969) (95) (63)
Actuarial (gain) loss (1,354) 6,244 69 (328)
-----------------------------------------------------------------------------------------------------------------------------
Balance, end of year 40,223 39,504 826 795
-----------------------------------------------------------------------------------------------------------------------------
Plan assets
Fair value, beginning of year 27,773 23,333 - -
Actual return on plan assets 3,495 2,633 - -
Employer contributions 2,930 2,776 95 64
Benefits paid (1,403) (969) (95) (64)
-----------------------------------------------------------------------------------------------------------------------------
Fair value, end of year 32,795 27,773 - -
-----------------------------------------------------------------------------------------------------------------------------
14
Pension Benefit Plans Other Benefit Plans
($000's) 2006 2005 2006 2005
-----------------------------------------------------------------------------------------------------------------------------
Funded Status
Fair value of plan assets 32,795 27,773 - -
Accrued benefit obligations 40,223 39,504 826 795
-----------------------------------------------------------------------------------------------------------------------------
Plan deficit (7,428) (11,731) (826) (795)
Unamortized actuarial loss (gain) 2,597 5,818 (220) (332)
Unamortized past service costs 1,080 1,296 304 365
-----------------------------------------------------------------------------------------------------------------------------
Pension liability (3,751) (4,617) (742) (762)
The assumed health care cost trend rates can affect the amounts
reported for the health care plan:
2006 2005
1 Percentage 1 Percentage 1 Percentage 1 Percentage
- Point - Point - Point - Point
($000's) increase decrease increase decrease
-----------------------------------------------------------------------------------------------------------------------
Effect on service cost 0.3 (0.2) 0.5 (0.1)
Effect on interest cost 0.9 (0.8) 1.3 (1.3)
Effect on year-end accrued benefit obligation 19.5 (29.5) 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; 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:
($000's) 2006 2005
----------------------------------------------------------------------------------------
Money market 9.0% 7.0%
Fixed income 42.0% 38.5%
Equity 49.0% 54.5%
----------------------------------------------------------------------------------------
Total 100.0% 100.0%
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 $1,130,000 to its defined benefit
pension plan and $490,000 for its post-retirement benefit plans in 2007.
15
Estimated future benefit payments
Defined benefit
($000's) pension plan Other benefits
-------------------------------------------------------------------------------------------------
2007 1,130 490
2008 1,256 513
2009 1,345 589
2010 1,491 642
2011 1,743 716
Aggregate of five years thereafter 38,125 0
-------------------------------------------------------------------------------------------------
At the December 31, 2004 actuarial report date, it was assumed that
the mine would cease operations on December 31, 2011. Benefit payments are
assumed to cease after December 31, 2011, for the retirement supplement plan,
the voluntary early retirement allowance, and the other benefit plans, as the
obligation related to these plans will cease once the Myra Falls mine ceases
operation. No change was made to the defined benefit pension plan assumptions
as pension payments are assumed to continue after the mine ceases operations.
14. Shareholders' Equity
Shareholders' equity consists of the following:
($000's) 2006 2005
(restated -
see note 2)
- ---------------------------------------------------------------------------------------------------
Capital stock 167,093 335,512
Warrants (h) 8,561 8,561
Contributed surplus 793 3,300
Retained earnings (deficit) 139,795 (189,663)
Cumulative translation adjustments (7,689) (9,495)
- ---------------------------------------------------------------------------------------------------
308,553 148,215
The Company is authorized to issue 200,000,000 preferred shares and an
unlimited number of common shares ("Common Shares"). No preferred shares were
issued or outstanding on December 31, 2006 and 2005.
Common shares issued:
Number of
(000's) shares Amount $
----------------------------------------------------------------------------------------------------------
As at December 31, 2004 363,156 326,403
Private placement (a) 13,000 7,081
Exercise of warrants (b) and (c) 1,500 295
Employee share option plan - proceeds of options exercised (d) 2,841 899
Value ascribed to options exercised under stock-based compensation (d) - 629
Employee share purchase plan (e) 420 205
----------------------------------------------------------------------------------------------------------
As at December 31, 2005 380,917 335,512
Reduction of stated capital (f) - (169,628)
Renunciation of flow-through share value (a) - (2,346)
Issue of Common Shares to settle a liability (g) 750 848
Exercise of warrants (c) 1,000 190
Employee share option plan - proceeds of options exercised (d) 2,805 1,538
Value ascribed to options exercised under stock-based compensation (d) - 815
Employee share purchase plan (e) 174 164
----------------------------------------------------------------------------------------------------------
As at December 31, 2006 385,646 167,093
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 had a four-month hold
period. The proceeds were 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.
16
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
had a four-month hold period. The proceeds were 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.
In February 2006, the Company renounced $7,380,000 in Canadian
exploration expenses to investors of flow-through common shares in 2005. The
tax value of the renunciation has been recorded as a liability and charged
against share capital. Since the Company has a valuation allowance, which
reduces the future income tax assets, the valuation allowance has been reduced
and an income tax recovery has been recognized in the consolidated statements
of operation and retained earnings (deficit).
b) In consideration for restructuring a debt facility in 2001 and
2002, the Company granted warrants to a bank syndicate to purchase an aggregate
of 1,000,000 Common Shares at $0.21 per Common 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) of these warrants were exercised and, at December 31, 2005, none were
outstanding.
In consideration for restructuring a debt facility in 2001 and 2002,
Dundee received warrants to purchase an aggregate of 30,801,410 Common Shares
at $0.20 per Common 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, 2006, the
30,801,410 warrants were outstanding.
c) In consideration for restructuring certain credit facilities, the
Company - pursuant to an agreement dated December 23, 2002 - granted warrants
to certain lenders and Dundee to purchase an aggregate of 2,000,000 and
1,000,000 Common Shares respectively, at $0.19 per Common Share with an expiry
date of March 27, 2006. In 2006, 1,000,000 of these warrants were exercised by
Dundee and, in 2005, 1,000,000 of these warrants were exercised by certain
lenders. At December 31, 2006, none (2005 - 1,000,000) of these warrants were
outstanding.
d) Share option transactions were as follows:
Options Weighted-average
(000's) exercise price
----------------------------------------------------------------------------------------------
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 $0.88
Granted 3,545 1.21
Exercised (2,805) 0.55
Forfeited (478) 0.82
Expired (812) 2.20
----------------------------------------------------------------------------------------------
As at December 31, 2006 9,535 $1.00
As at December 31, 2006:
Options Outstanding Options Exercisable
--------------------------------------------------------------------------------------------------------------------
Range of Shares Weighted-average Weighted- Shares Weighted-
Exercise outstanding remaining average exercisable average
Prices (000's) contractual life exercise price (000's) exercise price
--------------------------------------------------------------------------------------------------------------------
$0.19 - $0.50 3,689 4 years 131 days $0.32 3,128 $0.31
$0.51 - $1.50 4,324 3 years 207 days $0.98 2,543 $0.89
$1.51 - $3.00 939 4 years 41 days $1.72 483 $1.91
$3.01 - $8.20 583 1 year 160 days $4.23 583 $4.23
--------------------------------------------------------------------------------------------------------------------
9,535 6,737
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 Toronto Stock Exchange ("TSX") on the trading day
immediately preceding the date of the grant of such option.
17
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 Board of Directors of the Company determines otherwise.
One third of the options become exercisable on each of: the date of granting
such options; the first anniversary date of the date of granting such options;
and, the second anniversary date of the date of granting such options.
The outstanding share options at December 31, 2006 expire at various
dates between February 13, 2007 and August 11, 2013. The number of shares
available for grants of options under the share option plan as at December 31,
2006, was 22,624,800.
On or after January 1, 2002, compensation expense for the stock-based
compensation plan for employees under the Company's Share Option Plan has been
determined based upon the fair value of awards granted. Stock-based
compensation of $1,608,000 (2005 - $809,000) less the initial fair value of
options exercised of $815,000, (2005 - $629,000), for a net amount of $793,000
was credited to "Contributed surplus" within shareholders' equity on the
consolidated balance sheets (2005 - $180,000). The proceeds of options
exercised noted above were credited to "Capital stock" within shareholders'
equity on the consolidated balance sheets.
The fair value of each option grant has been estimated using the
Black-Scholes option-pricing model with the following weighted-average
assumptions:
2006 2005
-----------------------------------------------------------------------------------------------
Weighted-average exercise price per Common Share $1.21 $0.45
Weighted quoted market price per Common Share at date of grant $1.21 $0.45
Weighted-average grant-date fair value price per Common Share $0.73 $0.27
Expected life (years) 5 5
Risk free interest rate 4.32% 3.44%
Expected volatility 69% 69%
Dividend yield 0% 0%
e) 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 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 174,000 Common Shares pursuant to the
Share Purchase Plan during 2006 (2005 - 420,000). The number of shares
authorized for issue and available for issue under the share purchase plan as
at December 31, 2006 was 8,500,000 (2005 - 7,500,000) and 3,220,393 (2005 -
2,431,206) respectively.
f) At the annual and special meeting held on June 8, 2006, the
shareholders approved a special resolution to reduce the stated capital of the
Company by an amount of $172,928,000, which was equal to the accumulated
deficit as at December 31, 2005 prior to the change in accounting policy (note
2). Capital stock was reduced by $169,628,000, contributed surplus was reduced
by $3,300,000 and the deficit was reduced by $172,928,000.
At the annual and special meeting held on June 8, 2006, the
shareholders approved a special resolution to amend the Plan to increase the
maximum number of Common Shares of the Company that may be reserved for
issuance for all purposes under the Plan from 34,500,000 to 54,500,000. The
increase of 20,000,000 Common Shares was allotted as follows: (i) the number of
Common Shares reserved for issuance under the Share Purchase Plan was increased
by 1,000,000 (December 31, 2006 maximum 8,500,000); (ii) the number of Common
Shares reserved for issuance under the Share Option Plan was increased by
18,000,000 (December 31, 2006 maximum 41,000,000); and, (iii) the number of
Common Shares reserved for issuance under the Share Bonus Plan was increased by
1,000,000 (December 31, 2006 maximum 5,000,000).
The Company's Share Bonus Plan permits Common Shares to be issued as a
discretionary bonus to any director, full-time or part-time employee, 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, 2006, 2005 and
2004, the Company had issued 1,200,000 Common Shares under the Share Bonus Plan
and had available but un-issued at December 31, 2006 3,800,000 Common Shares
(2005 - 2,800,000 Common Shares).
g) On June 12, 2006, the Company issued 750,000 Common Shares at a
price of $1.13 per share to settle an outstanding lawsuit (notes 15 and 20(b)).
18
h) 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 of $7,211,000, net of costs of issue, is included in shareholders'
equity on the consolidated balance sheets as "Warrants".
On July 23, 2004, the Company acquired the Myra Falls mine for
consideration which included 5,000,000 warrants exercisable at $1.00 per Common
Share with an expiry date of January 28, 2009. The fair value ascribed to the
warrants of $1,350,000 is included in shareholders' equity on the consolidated
balance sheets as "Warrants".
The above warrants are listed on the TSX and as at December 31, 2006
entitled warrants holders to acquire 33,571,429 (December 31, 2005 -
33,571,429) Common Shares of the Company.
15. Other Non-producing Property (Income) Costs
Other non-producing property income of $9,581,000 for the year ended
December 31, 2006 includes: (i) On August 1, 2006, the Company sold the Caribou
and Restigouche mines including certain assets and reclamation liabilities to
Blue Note. Under the terms of the agreement, Blue Note replaced the Company's
reclamation deposit of $5,852,000 with the Government of New Brunswick and
issued to the Company a $15,000,000 unsecured subordinated convertible
debenture with a maturity of five years (note 8). The Company will also receive
a 1 to 2% net smelter return royalty payable quarterly on zinc metal production
provided the average price of zinc for the quarter as determined by the London
Metal Exchange is above US$0.65 per pound. The gain of $13,818,000 on sale of
the Caribou and Restigouche mines was included in other non-producing property
(income) costs and (ii) a charge of $1,330,000 to settle a claim against the
Company and CanZinco Ltd., a wholly-owned subsidiary of the Company, by Kalwea
Financial Corp., BVI, ("Kalwea") (note 20).
Due to the depletion of mineral reserves, the Company closed the
Nanisivik, Bouchard-Hebert and Bougrine mines in September 2002, February 2005
and September 2005 respectively. The Company also suspended operations at the
Caribou and Langlois mine in 1998 and 2000 respectively. In 2006, in addition
to the amounts in (i) and (ii) above, $2,907,000 (2005 - $9,035,000; 2004 -
$8,638,000) of care and maintenance costs were incurred on the Nanisivik,
Bouchard-Hebert, Bougrine and Caribou mines. Prior to November 2005, the
Langlois mine was held on a care and maintenance basis.
16. 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, 2006 of
37% (2005 - 36%; 2004 - 37%) to net earnings, excluding income and mining
taxes. The differences are summarized as follows:
($000's) 2006 2005 2004
--------------------------------------------------------------------------------------------------------------------
Tax provision (recovery) at statutory rate 57,598 2,812 1,180
Federal resource allowance (1,548) 608 (1,035)
Unrecognized tax benefit relating to losses 4,633 7,806 4,366
Current year losses recognized (20,232) - -
Reduction in valuation allowance (2,345) - -
Different effective tax rates on earnings (losses)
in foreign subsidiaries (13,034) (5,291) (163)
Benefit of previously unrecognized losses available
for carry forward (25,777) (13,231) (5,107)
Other (6,516) 161 108
Mining taxes 5,964 149 1,222
---------------------------------------------------------------------------------------------------------------------
(1,257) (6,986) 571
19
As at December 31, 2006, the significant components of the Company's
future tax assets (liabilities) were as follows:
($000's) 2006 2005
---------------------------------------------------------------------------------------------------
Future tax assets
Loss carry forwards 26,540 60,420
Mineral properties and fixed assets 213,237 227,435
Reclamation and closure cost accruals 12,721 17,658
Deferred income 2,104 2,518
---------------------------------------------------------------------------------------------------
Future tax assets before valuation allowance 254,602 308,031
Valuation allowance 226,417 301,514
---------------------------------------------------------------------------------------------------
Future tax assets 28,185 6,517
Future tax liabilities
Mineral properties - mining tax (7,089) (1,921)
---------------------------------------------------------------------------------------------------
Net future tax assets 21,096 4,596
($000's) 2006 2005 2004
---------------------------------------------------------------------------------------------------------------------
Income and mining tax provision (recovery)
Current income and mining tax provision (recovery) 14,209 (709) (148)
Future income and mining tax (recovery) provision (15,466) (6,277) 719
---------------------------------------------------------------------------------------------------------------------
(1,257) (6,986) 517
At December 31, 2006, the Company has net operating loss carry
forwards in Canada of approximately $80,000,000, which expire at various dates
through 2016.
17. 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 Company's formal risk management policy
approved by the Board of Directors and managed by the Company's Hedge
Committee. The Company does not hold or issue derivative contracts for
speculative 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 are carried at cost which, due to
their short-term nature, approximates their fair value.
These fair value estimates are management's best estimates and are not
necessarily indicative of the amounts the Company might pay or receive in
actual market transactions. 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. 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 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 may be negatively affected by fluctuations in foreign exchange
rates. The Company manages this risk by minimizing the number of transactions
that result in the settlement currency differing from the currency of the
initial transaction. In addition, the Company's sales are denominated primarily
in US dollars, while a significant percentage of its expenses are denominated
in non-US dollars. This exposes the Company to increased volatility in earnings
due to fluctuations in foreign exchange rates. The Company periodically uses
forward foreign exchange contracts to hedge the exchange rates on identifiable
foreign currency exposures. Gains and losses on these contracts when they are
designated as hedges are reported as a component of the related transactions.
20
The Company had no foreign exchange contracts outstanding at December
31, 2006 and 2005.
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 used 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 and written call
options to effectively provide a minimum price for a portion of inventories and
future production. In 2006 and 2005, the Company chose not to apply hedge
accounting. As a result, outstanding derivative contracts were marked-to-market
and gains and losses were recognized through earnings each period.
The Company had no commodity hedges outstanding at December 31, 2006.
At December 31, 2005, the Company had 1,050,000 ounces of silver call options
with an average strike price of US$7.50 per ounce maturing from January to June
2006 and 25,000 ounces of gold call options with an average strike price of
US$455 per ounce maturing in December 2006.
18. Related Party Transactions
All related party transactions are disclosed elsewhere in these
consolidated financial statements (note 14) except for the following:
a) As at December 31, 2005, management fees payable to Dundee
totalling $500,000 relating to $250,000 in each of 2003 and 2002 are
outstanding and are included in "Accounts payable and accrued liabilities" on
the consolidated balance sheets.
b) For the year ended December 31, 2004, the Company provided to
Glencairn Gold Corporation ("Glencairn"), formerly Black Hawk Mining Inc., a
company that was 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. Due to the change in the
composition of the Board of Directors of Glencairn, for the years ended
December 31, 2006 and 2005, Glencairn was not considered to be a related party.
For the year ended December 31, 2004, sale of supplies and charges for
administrative services to Glencairn totalled $652,000. This amount has been
reflected in the consolidated statements of operations and retained earnings
(deficit) as a cost recovery and accordingly, is reflected as a reduction in
either "Direct operating costs" or "General and administrative expenses".
19. Guarantees
a) At December 31, 2006 and 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 (note 6).
b) In consideration for the receipt of indemnity fees of $564,000 and
$1,141,000 from Wilshire Financial Services Inc. ("Wilshire") related to the
2004 First Royalty Agreement (note 11) and the 2005 Second Royalty Agreement
(note 11) respectively, 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 2004 First Royalty Agreement and the 2005 Second Royalty
Agreement. As at December 31, 2006, the maximum liability was $11,785,000 (2005
- - $11,785,000) and $50,500,000 (2005 - $50,500,000) under the 2004 First
Royalty Agreement and the 2005 Second Royalty Agreement respectively. The
indemnity fees were deferred and are being amortized on a straight-line basis
over the term of the respective agreements.
20. Contingencies and Commitments
a) On October 10, 2002, the Nunavut Water Board ("NWB") issued to 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
21
$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 replaced by an unsecured promissory note issued by the Company.
These two unsecured promissory notes 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 commenced an action against the Company for damages
in the amount of $560,000 plus additional annual minimum royalty payments of
$70,000 each quarter on October 1, January 1, April 1, and July 1,
sequentially. Kalwea claimed a transfer of certain mining claims in Restigouche
County, New Brunswick. The Company and Kalwea signed a settlement agreement on
June 12, 2006 whereby the claims were dismissed (note 15).
c) Taseko and Gibraltar Mines Ltd. ("Gibraltar") had notified Boliden
Westmin (Canada) Limited ("BWCL") (now a wholly-owned subsidiary of the
Company) and others in 2001 about indemnification claims made by Gibraltar
pursuant to the asset purchase agreement entered into in 1999, whereby
Gibraltar acquired certain assets from BWCL on July 21, 1999. The claims were
described as (a) latent tax liabilities estimated to be $3,750,000 relating to
an environmental reclamation deposit that was transferred to Gibraltar, (b)
potential tax liability estimated to be in excess of $500,000 with respect to
an employee severance trust (if this claim is successful, it exposes the
Company to further direct liabilities which have not been quantified), and (c)
a claim for the potential loss of credits under the British Columbia Mineral
Tax Act in the amount of $54,000,000 as a result of alleged delays in signing
an election and transfer form.
In June 2006, Taseko and Gibraltar served a statement of claim on the
Company and Boliden Ltd. (former parent corporation of BWCL). In December 2006,
the Company filed a statement of defense on its own behalf and on behalf of
Boliden Ltd. in accordance with the indemnification obligations pursuant to the
share exchange agreement dated July 8, 2004 between the Company and Boliden
Ltd. While a final outcome cannot be determined at this early stage, the
Company believes at this time that the claims are without substantial merit and
that liability, if any, is not likely to have a material effect on the
Company's financial position.
Regarding claim (c) noted above, based on previous correspondence from
Taseko and the exclusion of this claim from the statement of claim, the Company
believes this claim has been withdrawn.
d) 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 flow of the Company.
e) 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.
f) Lease Commitments
The Company is committed to payments for operating leases for business
premises and equipment and future minimum lease payments under capital leases
as follows:
22
Operating Future
Lease Minimum Lease
($000's) Payments Payments
---------------------------------------------------------------------------------------------------------------
2007 791 545
2008 641 300
2009 443 146
2010 361 121
2011 34 -
2012 and thereafter - -
---------------------------------------------------------------------------------------------------------------
Sub-total 2,270 1,112
Less: amount representing interest at rates ranging from 4.1% to 9.0% N/A (117)
---------------------------------------------------------------------------------------------------------------
2,270 995
21. Segment Information
The Company operates in the mining industry and has operating mines in
Honduras (El Mochito), Chile (El Toqui) and Canada (Myra Falls) and has a mine
under development in Canada (Langlois) as well. The Company has three mines
which have been closed and are undergoing reclamation, two in Canada (Nanisivik
and Bouchard-Hebert) and one in Tunisia (Bougrine). During 2006, the Company
disposed of the Canadian Caribou and Restigouche mines which were on care and
maintenance at the time of sale. The Company's operations produce a variety of
concentrates for sale which are dependant on the particular mineralized
deposits at each location and include zinc, copper, lead and gold concentrates
some of 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 (note 1). 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.
23
Segment Information
For the Year Ended December 31, 2006
($000's)
- ---------------------------------------------------------------------------------------------------------------------------------
El El Myra Bouchard- Corporate
Operating Mochito Toqui Falls Langlois Bougrine Hebert Nanisivik Caribou and Consoli-
Segment Mine Mine Mine Mine Total Mine Mine Mine Mine Total Other dated
- ---------------------------------------------------------------------------------------------------------------------------------
Gross sales
revenue 157,051 99,776 199,758 - 456,585 (52) - - - (52) (4,300) 452,233
Treatment and
marketing
costs (40,477) (30,277) (57,161) - (127,915) 68 - - - 68 - (127,847)
- ---------------------------------------------------------------------------------------------------------------------------------
Net revenue 116,574 69,499 142,597 - 328,670 16 - - - 16 (4,300) 324,386
Direct operating
costs (31,765) (18,941) (83,866) - (134,572) - - - - - - (134,572)
Depreciation and
depletion (5,639) (2,812) (8,929) - (17,380) - - - - - (178) (17,558)
Reclamation and
closure costs (770) (298) (1,473) (100) (2,641) (208) (414) (219) (241) (1,082) - (3,723)
- ---------------------------------------------------------------------------------------------------------------------------------
Contribution
(loss) from
mining
activities 78,400 47,448 48,329 (100) 174,077 (192) (414) (219) (241) (1,066) (4,478) 168,533
General and
administrative - - - - - - - - - - (14,047) (14,047)
Interest and
financing - - - - - - - - - - (4,990) (4,990)
Investment and
other income - - - - - - - - - - 8,162 8,162
Loss on gold loan - - (1,232) - (1,232) - - - - - - (1,232)
Foreign exchange
gain on US
dollar denominated
debt - - - - - - - - - - 313 313
Other foreign
exchange loss - - - - - - - - - - (1,074) (1,074)
Exploration
expenditures (1,235) (4,145) (617) - (5,997) (762) (3,227) - - (3,989) 13 (9,973)
Other non-
producing
property
income
(costs) - - - - - (889) (781) 81 11,226 9,637 (56) 9,581
Income and
mining tax
(provision)
recovery (20,365) (1,781) 26,202 (5,167) (1,111) - - - - - 2,368 1,257
- ----------------------------------------------------------------------------------------------------------------------------------
Net earnings (loss) 56,800 41,522 72,682 (5,267) 165,737 (1,843) (4,422) (138) 10,985 4,582 (13,789) 156,530
- ----------------------------------------------------------------------------------------------------------------------------------
Capital
expenditures 9,603 8,363 16,596 39,535 74,097 1 (1) - - - 1,556 75,653
Mineral properties
and fixed assets 21,502 24,669 64,844 89,410 200,425 1,709 2,830 1,218 - 5,757 1,702 207,884
Identifiable
assets 40,248 51,504 203,110 93,904 388,766 2,201 5,030 2,371 15 9,617 110,910 509,293
- ---------------------------------------------------------------------------------------------------------------------------------
Information about major customers - Summary of net revenue from major
customers for the year ended December 31, 2006.
- -------------------------------------------------------------------------------
Revenue Source Revenue Generated From
- -------------------------------------------------------------------------------
($000's) Myra Falls El Mochito El Toqui Total
- -------------------------------------------------------------------------------
Customer 1 62,635 - 5,037 67,672
Customer 2 50,905 8,635 1,564 61,104
Customer 3 7,946 1,593 24,236 33,775
- -------------------------------------------------------------------------------
24
Segment Information
For the Year Ended December 31, 2005
($000's) (restated - see note 2)
- ----------------------------------------------------------------------------------------------------------------------------------
El El Myra Bouchard-
Operating Mochito Toqui Falls Hebert Bougrine Langlois Nanisivi Caribou Corporate Consoli-
Segment Mine Mine Mine Mine Mine Total Mine Mine Mine Total and Other dated
- ----------------------------------------------------------------------------------------------------------------------------------
Gross sales
revenue 85,418 49,634 113,725 25,129 41,976 315,882 - - - - (2,917) 312,965
Treatment and
marketing
costs (29,439) (18,989) (34,674) (6,853) (15,436) (105,391) - - - - - (105,391)
- ----------------------------------------------------------------------------------------------------------------------------------
Net revenue 55,979 30,645 79,051 18,276 26,540 210,491 - - - - (2,917) 207,574
Direct operating
costs (29,814) (22,197) (67,125) (10,334) (14,827) (144,297) - - - - - (144,297)
Depreciation and
depletion (5,711) (3,041) (8,135) (603) (3,895) (21,385) - - - - (180) (21,565)
Reclamation
and closure
costs (648) (295) (1,371) (283) (432) (3,029) (92) (8,578) (394) (9,064) - (12,093)
- ----------------------------------------------------------------------------------------------------------------------------------
Contribution
(loss) from
mining
activities 19,806 5,112 2,420 7,056 7,386 41,780 (92) (8,578) (394) (9,064) (3,097) 29,619
General and
administrative - - - - - - - - - - (9,475) (9,475)
Interest and
financing - - - - - - - - - - (1,284) (1,284)
Investment and
other income - - - - - - - - - - 2,595 2,595
Loss on
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
expenditures (229) (1,904) - (795) - (2,928) - - - - 13 (2,915)
Write-down of
mineral
properties and
fixed assets (187) - - - - (187) - (692) - (692) - (879)
Other non-
producing
property costs - - - (3,468) (778) (4,246) (466) (2,526) (1,813) (4,805) 16 (9,035)
Income and
mining tax
(provision)
recovery 5,453 1,003 (105) (248) - 6,103 27 72 - 99 784 6,986
- ----------------------------------------------------------------------------------------------------------------------------------
Net earnings
(loss) 24,843 4,211 528 2,545 6,608 38,735 (531) (11,724) (2,207) (14,462) (10,250) 14,023
- ----------------------------------------------------------------------------------------------------------------------------------
Capital
expenditures 7,974 5,191 17,795 311 68 31,339 5,216 (30) - 5,186 58 36,583
Mineral
properties and
fixed assets 16,931 20,445 55,920 3,504 2,530 99,330 49,287 1,620 - 50,907 400 150,637
Identifiable
assets 37,218 36,313 168,138 4,373 6,294 252,336 51,492 3,622 1,227 56,341 33,949 342,626
- ----------------------------------------------------------------------------------------------------------------------------------
Capital expenditures for the Myra Falls mine include fixed assets purchased
through capital leases of $984,000.
Information about major customers - Summary of net revenue from major
customers for the year ended December 31, 2005.
- -------------------------------------------------------------------------------
Revenue Source Revenue Generated From
- -------------------------------------------------------------------------------
($000's) Myra Falls El Mochito El Toqui Bougrine Total
- -------------------------------------------------------------------------------
Customer 1 37,959 - - - 37,959
Customer 2 - 6,707 15,162 6,443 28,312
Customer 3 2,952 18,088 3,239 3,312 27,591
Customer 4 4,786 19,604 - - 24,390
- -------------------------------------------------------------------------------
25
Segment Information
For the Year Ended December 31, 2004
($000's)
(restated - see note 2)
- ----------------------------------------------------------------------------------------------------------------------------------
El El Myra Bouchard-
Operating Mochito Toqui Falls Hebert Bougrine Langlois Nanisivi Caribou Corporate Consoli-
Segment Mine Mine Mine Mine Mine Total Mine Mine Mine Total and Other dated
- ----------------------------------------------------------------------------------------------------------------------------------
Gross sales
revenue 62,005 38,670 18,012 88,112 33,449 240,248 - - - - 51 240,299
Treatment and
marketing
costs (21,547) (15,463) (6,262) (25,937) (12,647) (81,856) - - - - - (81,856)
- ----------------------------------------------------------------------------------------------------------------------------------
Net revenue 40,458 23,207 11,750 62,175 20,802 158,392 - - - - 51 158,443
Direct operating
costs (25,684) (13,589) (13,007) (32,034) (17,608) (101,922) - - - - - (101,922)
Depreciation and
depletion (3,599) (2,051) (3,290) (5,555) (7,715) (22,210) (2) - - (2) (875) (23,087)
Reclamation
and closure
costs (605) (294) (542) (1,625) (664) (3,730) (86) (715) (365) (1,166) - (4,896)
- ----------------------------------------------------------------------------------------------------------------------------------
Contribution
(loss) from
mining
activities 10,570 7,273 (5,089) 22,961 (5,185) 30,530 (88) (715) (365) (1,168) 824 28,538
General and
administrative - - - - - - - - - - (10,812) (10,812)
Interest and
financing - - - - - - - - - - (509) (509)
Investment and
other income - - - - - - - - - - 843 843
Foreign exchange
gain on US
dollar denominated
debt - - - - - - - - - - (431) (431)
Other foreign
exchange loss - - - - - - - - - - (1,809) (1,809)
Exploration
expenditures (109) (2,415) - (842) - (3,366) 86 - - 86 1,183 (2,097)
Write-down of
mineral
properties and
fixed assets - - - - - - - - - - (1,178) (1,178)
Other non-
producing
property costs - - - - - - (108) (6,834) (1,641) (8,583) (55) (8,638)
Income and
mining tax
(provision)
recovery (91) - - (1,234) - (1,325) 11 - - 11 743 (571)
- ----------------------------------------------------------------------------------------------------------------------------------
Net earnings
(loss) 10,370 4,858 (5,089) 20,885 (5,185) 25,839 (99) (7.549) (2,006) (9,654) (12,849) 3,336
- ----------------------------------------------------------------------------------------------------------------------------------
Capital
expenditures 6,653 8,566 3,997 377 428 20,021 4,094 (200) - 3,894 1,678 25,593
Mineral
properties and
fixed assets 15,796 19,720 46,853 5,017 4,687 92,073 43,938 2,342 - 46,280 505 138,858
Identifiable
assets 37,883 35,747 97,825 14,213 16,320 201,988 45,691 6,954 1,210 53,855 17,415 273,258
- ----------------------------------------------------------------------------------------------------------------------------------
Information about major customers - Summary of net revenue from major
customers for the year ended December 31, 2004.
- ---------------- --------------------------------------------------------------
Revenue Source Revenue Generated From
- ------------ ------------------------------------------------------------------
Myra Bouchard- El El
($000's) Falls Hebert Mochito Toqui Bougrine Total
- ------------ ------------- ----------- ---------- -------- ---------- ---------
Customer 1 - 53,966 - - - 53,966
Customer 2 3,099 - 13,290 5,099 1,819 23,307
- ------------ ------------- ----------- ---------- -------- ---------- ---------
26
22. Analysis of Changes in Non-Cash Working Capital Items
($000's) 2006 2005 2004
--------------------------------------------------------------------------------------
Accounts receivable - concentrate (8,187) 3,161 3,693
Other receivables (3,307) (2,881) (282)
Concentrate inventory 4,228 8,590 (31,784)
Materials and supplies inventory (1,478) 2,048 2,251
Prepaid expenses and other current assets 82 1,308 (2,358)
Accounts payable and accrued liabilities 10,070 (2,205) 1,437
Provisional payments for concentrate inventory
shipped and not priced 9,471 (8,220) 21,779
Income and mining taxes payable 9,580 (277) 189
--------------------------------------------------------------------------------------
20,459 1,524 (5,075)
23. Earnings per Common Share
Basic earnings per Common Share ("EPS") has been calculated using the
weighted-average number of shares outstanding during the year. The calculation
of diluted earnings per Common 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 Common Share as the effect is anti-dilutive. The average
quoted market price of the Common Shares during 2006 was $1.30 (2005 - $0.48;
2004 - $0.53).
2006 2005 2004
---------------------------------------------------------------------------------------------------------------------------
(restated - (restated -
see note 2) see note 2)
Basic earnings per Common Share $0.41 $0.04 $0.01
Diluted earnings per Common Share $0.37 $0.04 $0.01
Basic weighted-average number of Common Shares outstanding (000's) 383,748 369,190 353,508
Incremental Common Shares on assumed exercise of options and warrants (000's) 37,757 20,300 23,292
---------------------------------------------------------------------------------------------------------------------------
Weighted-average number of Common Shares used for diluted earnings per Common
Share (000's) 421,505 389,490 376,800
24. Subsequent Event
On March 2, 2007, Dundee exercised 15,400,705 warrants to purchase
15,400,705 Common Shares at $0.20 per Common Share (note 14(b)). On March 14,
2007, Dundee exercised 15,400,705 warrants to purchase 15,400,705 Common Shares
at $0.20 per Common Share (note 14(b)).
25. Reconciliation with United States Generally Accepted Accounting Principles
The consolidated financial statements of the Company have been
prepared in accordance with 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
("SEC").
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:
27
Consolidated Balance Sheets
(Expressed in thousands of Canadian dollars)
As at December 31, 2006 As at December 31, 2005
- -------------------------------------------------------------------------------------------------------------------------------
(restated - note 2)
Note 25 Note 25
Cdn. GAAP Adjustments Reference U.S. GAAP Cdn. GAAP Adjustments Reference U.S. GAAP
- -------------------------------------------------------------------------------------------------------------------------------
Assets
Cash and cash equivalents 81,412 - 81,412 18,749 (7,406) (c) 11,343
Restricted cash 1,178 - 1,178 3,929 7,406 (c) 11,335
Short-term investments 4,120 983 (d) 5,103 2,523 203 (d) 2,726
Concentrate inventory 43,686 6,452 (b) 50,138 47,501 - 47,501
Other current assets 67,041 - 67,041 44,235 - 44,235
Mineral properties and fixed
assets 207,884 (6,136) (b) 199,960 150,637 (735) (e) 148,444
(592) (e) (1,458) (f)
(1,196) (f)
Long-term investments 14,704 20,273 (g) 34,977 5,615 (412) (g) 5,203
Other long-term assets 89,268 - 89,268 69,437 - 69,437
Intangible assets - - - - 1,296 (h) 1,296
- -------------------------------------------------------------------------------------------------------------------------------
509,293 19,784 529,077 342,626 (1,106) 341,520
- -------------------------------------------------------------------------------------------------------------------------------
Liabilities and Shareholders'
Equity
Accounts payable and accrued
liabilities 43,128 - 43,128 32,797 940 (c) 33,737
Other current liabilities 44,480 - 44,480 39,721 - 39,721
Employee future benefits 4,493 3,761 (h) 8,254 5,379 7,114 (h) 12,493
Other long-term liabilities 108,639 - 108,639 116,514 - 116,514
Capital stock 167,093 169,628 (a) 321,177 335,512 (1,082) (c) 319,794
(1,082) (c) (14,206) (e)
(14,206) (e) (430) (i(1))
(458) (i(1))
(2) (i(1))
48 (i(2))
156 (i(3))
Warrants 8,561 - 8,561 8,561 - 8,561
Contributed surplus 793 3,300 (a) 3,959 3,300 (28) (i(1)) 3,476
(134) (i(1)) 48 (i(2))
156 (i(3))
Retained earnings (deficit) 139,795 (172,928) (a) (7,224) (189,663) 142 (c) (177,666)
316 (b) 13,471 (e)
1,082 (c) (1,458) (f)
(17) (d) (412) (g)
13,614 (e) 458 (i(1))
(1,196) (f) (48) (i(2))
11,720 (g) (156) (i(3))
458 (i(1))
136 (i(1))
(48) (i(2))
(156) (i(3))
Cumulative translation
adjustments (7,689) 7,689 (j) - (9,495) 9,495 (j) -
Accumulated other
comprehensive income - 1,000 (d) (1,897) - 203 (d) (15,110)
8,553 (g)
(3,761) (h) (5,818) (h)
(7,689) (j) (9,495) (j)
- ---------------------------------------------------------------------------------------------------------------------------------
509,293 19,784 529,077 342,626 (1,106) 341,520
- ---------------------------------------------------------------------------------------------------------------------------------
28
Consolidated Statements of Operations
(Expressed in thousands of Canadian dollars, except for per share
information) 2006 2005 2004
- ----------------------------------------------------------------------------------------------------------
(restated - (restated -
note 2) note 2)
Net earnings as shown in the consolidated financial
statements under Cdn. GAAP 156,530 14,023 3,336
Additional (expense) income:
Adjustment to recognize revenue net of costs at Langlois mine (b) 349 - -
Adjustment for depreciation and depletion at Langlois mine (b) (33) - -
Adjustment relating to flow-through shares (c) 940 142 -
Adjustment to mark-to-market short-term investments (d) (17) - -
Adjustment to depletion in connection with shares
issued to promoters or shareholders (e) 143 293 261
Adjustment relating to depreciation and depletion (f) 262 404 268
Adjustment to mark-to-market long-term investments (g) - (2,852) -
Adjustment to mark-to-market embedded option in long-term 12,132 - 2,348
investments (g)
Adjustment for interest on long-term investments (g) - - 92
Adjustment stock-based compensation (i(1)) 136 - -
- ----------------------------------------------------------------------------------------------------------
Net earnings (loss) under U.S. GAAP 170,442 12,010 6,305
- ----------------------------------------------------------------------------------------------------------
Basic earnings (loss) per share under U.S. GAAP $0.44 ($0.03) $0.02
Diluted earnings per share under U.S. GAAP $0.40 $0.03 $0.02
Effect of U.S. GAAP adjustments on basic earnings (loss) per share $0.07 ($0.01) $0.01
Consolidated Statements of Operations Presentation
Under U.S. GAAP, the measure "Contribution from mining activities" is
not a recognized term and would therefore not be presented. "Contribution from
mining activities" when adjusted for the items in the table below is comparable
to the terminology "Earnings from operations" under U.S. GAAP.
The following table reconciles "Contribution from mining activities
under Cdn. GAAP" to "Earnings from operations under U.S. GAAP".
(Expressed in thousands of Canadian dollars) 2006 2005 2004
- -----------------------------------------------------------------------------------------------------------------
(restated - (restated -
note 2) note 2)
Contribution from mining activities under Cdn. GAAP 168,533 29,619 28,538
General and administrative (14,047) (9,475) (10,812)
Exploration costs (9,973) (2,915) (2,097)
Write-down of mineral properties and fixed assets - (879) (1,178)
Other non-producing property income (costs) 9,581 (9,035) (8,638)
Aggregate adjustments for U.S. GAAP (excluding adjustment
relating to flow-through shares 12,972 (2,155) 2,969
- -----------------------------------------------------------------------------------------------------------------
Earnings from operations under U.S. GAAP 167,066 5,160 8,782
For U.S. GAAP purposes, the components of non-operating income (loss)
are as follows:
(Expressed in thousands of Canadian dollars) 2006 2005 2004
- ---------------------------------------------------------------------------------------------------------------
Interest and financing (4,990) (1,284) (509)
Investment and other income 8,162 2,595 843
Loss on gold loan (1,232) (1,787) -
Foreign exchange gain (loss) (761) 198 (2,240)
Adjustment relating to flow-through shares (c) 940 142 -
- ----------------------------------------------------------------------------------------------------------------
Non-operating income (loss) for U.S. GAAP 2,119 (136) (1,906)
29
The following table reconciles "Net earnings under U.S. GAAP" to
"Comprehensive income under U.S. GAAP".
(Expressed in thousands of Canadian dollars) 2006 2005 2004
---------------------------------------------------------------------------------------------------------------------
(restated - (restated -
note 2) note 2)
Net earnings under U.S. GAAP 170,442 12,010 6,305
Adjustment relating to unrealized gains on short-term investments (d) 1,000 203 1,253
Adjustment relating to unrealized gains on long-term investments (g) 8,553 - -
Change in cumulative translation adjustment account (j) 1,806 (2,289) (4,817)
Adjustment to recognise pension and other post-retirement
liabilities (h) - (5,818) (510)
----------------------------------------------------------------------------------------------------------------------
Comprehensive income under U.S. GAAP 181,801 4,106 2,231
There are no differences in cash flow provided from operating
activities, financing activities and investing activities as presented in the
statements of cash flow under Cdn. and U.S. GAAP except as follows. 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 "Non-cash items" under "Operating Activities" is not permitted;
therefore the reader should disregard the sub-total of ($7,977,000),
$31,137,000 and $32,612,000 for 2006, 2005 and 2004, 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) Reduction in share capital
Under Cdn. GAAP, a company is permitted to eliminate or reduce its
deficit against contributed surplus and share capital. The Company reduced its
deficit by $172,928,000, which was equal to the accumulated deficit as at
December 31, 2005 prior to the change in accounting policy (note 2). Also,
capital stock was reduced by $169,628,000 and contributed surplus was reduced
by $3,300,000. For U.S. GAAP purposes the elimination of the deficit was
reversed as this is not permitted under U.S. GAAP.
b) Langlois mine
Under Cdn. GAAP, the Langlois mine is considered to be in
preproduction and all costs and revenue were capitalized. For U.S. GAAP, the
Langlois mine is deemed to be in commercial production on the commencement of
milling operations which was in November 2006. Accordingly, for U.S. GAAP,
mineral properties and fixed assets decreased by $6,136,000, concentrate
inventory increased by $6,452,000, and net income increased by $316,000.
c) Flow-through shares
Under Canadian income tax legislation, a company is permitted to issue
flow-through shares whereby the company agrees to incur qualifying expenditures
and provide the related income tax deductions to 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 were
recorded as share capital. When the Company renounced its rights to the related
tax deductions, the resulting deferred future income tax liability ("DFITL")
was debited to share capital. Prior to 2004, Canadian GAAP did not require the
DFITL to be charged to share capital. For U.S. GAAP, the premium paid in excess
of the market value of $Nil (2005 - $940,000) was credited to accounts payable
and accrued liabilities and is included in income upon the renunciation of the
deductions and the related DFITL was charged to income. Qualifying expenditures
were incurred in 2006 of $6,955,000 (2005 - $451,000) relating to the 2005
flow-through shares and the premium of $940,000 (2005 - $142,000; 2004 - $Nil)
was recorded in earnings in 2006. The flow-through funds, which are equivalent
to the total unexpended proceeds of $Nil (2005 - $7,406,000), was considered to
be restricted and was not considered to be cash or cash equivalents under U.S.
GAAP.
d) Short-term investments
Under Cdn. GAAP, short-term investments are recorded at the lower of
cost and quoted market value. Under U.S. GAAP, short-term investments
classified as held-for-trading and available-for-sale securities are recorded
at fair value with unrealized gains and losses recorded through earnings and
other comprehensive income, respectively. For U.S. GAAP, short-term investments
are increased by $983,000 (2005 - $203,000), unrealized loss of $17,000 (2005
and 2004 - $Nil) is recorded to income and unrealized gain of $1,000,000 (2005
- - $203,000; 2004 - $1,253,000) is recorded in comprehensive income.
30
e) 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 SEC'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. For U.S. GAAP, mineral properties were reduced by
$592,000 (2005 - $735,000), retained earnings was increased by $13,614,000
(2005 - $13,471,000), capital stock was reduced by $14,206,000 (2005 -
$14,206,000) and income was increased by $143,000 (2005 - $293,000; 2004 -
$261,000).
f) 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, the Company has determined that no
write-down is required as a result of applying SFAS 144, "Accounting for the
Impairment or Disposal of Long-lived Assets". In 2002, management determined
that certain mineral properties were impaired and as a result recorded an asset
impairment charge. A difference between Cdn. and U.S. GAAP arose as under U.S.
GAAP, the impairment charge is based on discounted future cash flow whereas
under Cdn. GAAP at the time, future cash flow from properties were not
discounted in determining the magnitude of an impairment. As a result, the
difference in the impairment charge was $2,287,000. Accordingly, under U.S.
GAAP, depreciation and depletion would be reduced in 2006 by $262,000 (2005 -
$404,000; 2004 - $268,000).
g) Long-term investments
For Cdn. GAAP, long-term investments are recorded at cost, net of
any impairment in value. In 2006 and 2004, the long-term investments were
classified as available for sale and under US GAAP, the Company recorded a
mark-to-market gain on the long-term investments of $20,685,000 (2004 -
$2,348,000). The mark-to-market gain includes $12,132,000 for the valuation of
the conversion rights which is recorded through earnings, and $8,553,000 (2004
- - $2,348,000) for the increase in fair value of the debentures which is
recorded in other comprehensive income. Interest income on the debenture of
$Nil (2004 - $92,000) is recorded in earnings. Under U.S. GAAP, in 2005, the
long-term investment was classified as a trading security and the Company
recorded a mark-to-market loss of $2,852,000 in accordance with SFAS 115
"Accounting for Certain Investments in Debt and Equity Securities" which
required that unrealized holding gains and losses on trading securities be
recognized in earnings.
h) Pension and other post-retirement liabilities
FAS 158 "Employers' Accounting for Defined Benefit Pension and Other
Post-retirement Plans" issued in September 2006, requires recognition of the
funded status of a benefit plan on the balance sheet, measured as the
difference between plan assets at fair value and the benefit obligation. For a
pension plan, the benefit obligation is the projected benefit obligation; for
any other post-retirement benefit plan, the benefit obligation is the
accumulated post-retirement benefit obligation. FAS 158 also requires
recognition, as a component of other comprehensive income, net of tax, of the
gains or losses and prior service costs or credits that arise during the period
but are not recorded as components of net periodic benefit cost. Amounts
recorded in accumulated other comprehensive income are adjusted as they are
subsequently recorded as components of net periodic cost. Prior to September
2006, under U.S. GAAP, if the accumulated pension plan benefit obligation,
which is the same as the accrued benefit obligation, exceeded the market value
of plan assets, a minimum pension liability for the excess was recognized to
the extent that the liability recorded in the balance sheet was less than the
minimum liability. Any portion of the additional liability that related to
unrecognized prior service cost was recognized as an intangible asset while the
remainder was 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 2006, the Company recorded an
additional pension liability of $3,761,000 to recognize the underfunded status
of the plan. In 2005, the Company recorded a minimum pension liability of
$7,114,000, and a loss charged to "Other comprehensive income" of $5,818,000
(2004 - $510,000). In 2005, an unrecognized prior service cost of $1,296,000
was also recorded and classified as "Intangible asset" on the U.S. GAAP balance
sheet.
i) Stock-based compensation
Under both Cdn. and U.S. GAAP, effective January 1, 2004, the Company
began to record 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.
(1) As a result of applying the modified prospective method for U.S.
GAAP, the stock-based compensation recognized under Cdn. GAAP
prior to 2004 of $458,000 has been reversed against contributed
surplus by
31
$410,000 and capital stock by $48,000 as, under U.S. GAAP,
recognition is not required for options granted before January
1, 2004. In 2006, the value of options exercised of $28,000
(2005 - $382,000) was transferred from contributed surplus to
capital stock. As permitted under Cdn. GAAP the Company chooses
not to estimate forfeitures at the grant date when calculating
the stock-based compensation expense. For U.S. GAAP an
estimated forfeiture of 10.9% was used to calculate the
stock-based compensation expense. Accordingly, the Company
recorded an increase in earnings of $136,000 (2005 and 2004 -
$Nil), a reduction of contributed surplus of $134,000 (2005 -
$Nil) and a reduction of capital stock of $2,000 (2005 -$Nil).
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
(2) 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 the
compensation expense under U.S. GAAP, the fair value of the
options of $48,000 was estimated on the balance sheet date using
Black-Scholes option-pricing model.
(3) 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. The
Company accounted for the options in accordance with the
Company's Accounting Policy for stock options at that time. Under
U.S. GAAP the direct award of the stock was accounted for at the
fair value of $156,000 on the date of the award using
Black-Scholes option-pricing model.
j) 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, these 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.
k) Accounts payable and accrued liabilities
Included in accounts payable and accrued liabilities under U.S. GAAP
are amounts for accounts payable and accrued expenses, respectively, as
follows:
($000's) 2006 2005
- ---------------------------------------------------------------------------
Accounts payable 24,105 16,266
Payroll and severance accrual 8,462 8,129
Interest payable 4,511 764
Mark-to-market of metal forward sale and call options - 3,552
Premium paid on flow-through shares - 940
Other accruals 6,050 4,086
- ---------------------------------------------------------------------------
43,128 33,737
l) 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. An entity must 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. The accumulated comprehensive loss for 2006 is
$1,897,000 (2005 - $15,110,000) and the other comprehensive income for 2006 is
$181,801,000 (2005 - $4,106,000; 2004 - $2,231,000).
Effective January 1, 2007 Cdn. GAAP under S1530 will adopt a similar
standard to SFAS No. 130, see note 1.
m) Income and mining taxes
For Cdn. GAAP the income tax valuation allowance applied to deferred
tax assets is $226,417,000. Under U.S. GAAP the tax effect of the changes to
earnings reduces the income tax valuation allowance by $5,030,000 (2005 - $Nil)
to $221,387,000.
32
n) Recent accounting pronouncements
U.S. Standards
--------------
FIN 48, "Accounting for Uncertainty in Income Taxes", clarifies
accounting for income taxes by prescribing a minimum recognition threshold a
tax benefit is required to meet before being recognized. A company would be
required to recognize the best estimate of a tax position if that position is
more likely than not of being sustained upon examination, based solely on the
technical merits of the position. This change is effective beginning in 2007.
The Company has not yet determined the impact of adopting FIN 48.
SFAS 157, "Fair Value Measurements" ("FAS 157") issued in September
2006 defines fair value, establishes a framework for measuring fair value of
assets and liabilities, and expands disclosures about fair value measurements.
FAS 157 applies whenever other standards require or permit assets or
liabilities to be measured at fair value. FAS 157 does not expand the use of
fair value in any new circumstances. FAS 157 is effective for fiscal years
beginning after November 15, 2007 and should be applied prospectively. The
Company has not yet determined the impact of adopting SFAS 157.
33
Document No. 3
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This management's discussion and analysis of financial condition and results of
operations ("MD&A") of Breakwater Resources Ltd. (the "Company") should be read
in conjunction with the Company's audited consolidated financial statements for
the year ended December 31, 2006, and related notes thereto which have been
prepared in accordance with Canadian generally accepted accounting principles
("GAAP"). Unless otherwise indicated, this MD&A has been prepared as of March
21, 2007. The reporting currency is Canadian dollars and all amounts disclosed
are in Canadian dollars unless otherwise indicated. Unless the context indicates
otherwise, a reference to the "Company" in this MD&A means Breakwater Resources
Ltd. and its subsidiaries and other entities owned or controlled, directly or
indirectly, by the Company.
The Company is a mining, exploration and development company which produces
zinc, copper, lead and gold concentrates. During 2006, the Company's concentrate
production was derived from mines located in Canada, Chile and Honduras. The
Company also owns base metal and gold exploration properties in Canada,
Honduras, Tunisia and Chile. The Bouchard-Hebert mine, located in Canada, was
closed in February 2005 and the Bougrine mine, located in Tunisia, was closed in
September 2005. Both the Bouchard-Hebert and the Bougrine mines were closed due
to the depletion of mineral reserves. The closure of the Bouchard-Hebert and
Bougrine mines in 2005 affect all aspects of the Company's financial results
which makes comparisons between years difficult.
HIGHLIGHTS
o The Company realized net earnings of $156.5 million or $0.41 per share in
2006 compared with $14.0 million or $0.04 per share in 2005, a $142.5
million increase
o The contribution from mining activities was $168.5 million in 2006 compared
with $29.6 million in 2005
o Net cash provided by operating activities increased by $139.8 million to
$158.5 million in 2006 and was primarily used for $75.7 million of capital
expenditures and $16.6 million of debt repayment
o At December 31, 2006, cash and cash equivalents were $81.4 million and
total debt was $2.7 million
o Gross sales revenue increased by 44.5% to $452.2 million in 2006 from
$313.0 million in 2005
o Development of the Langlois mine is on track to commence commercial
production by mid-2007
o Mineral reserves at Langlois increased by 10% and mineral resources
increased by 14% through the addition of the Grevet B deposit
o Exploration success at Langlois prompted the Company to stake an additional
4,000 hectares surrounding the Company's land package
o Development of El Toqui's Concordia deposit is on track and production is
anticipated by mid-2007
o On the Coulon joint venture with Virginia Mines Inc., exploration carried
out during 2006 led to the discovery of two new significant polymetallic
lenses, bringing the total known lenses to five, and confirmed the vertical
continuity of lens 9-25 to a depth of 365 metres
Reserves and Resources
On February 22, 2007, the Company released its 2006 mineral reserve and mineral
resource statement to the public. References in this MD&A to 2006 mineral
reserves and resources should be read in conjunction with that news release.
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management is responsible for establishing and maintaining adequate control over
financial reporting. Management conducted an evaluation of the effectiveness of
internal control over financial reporting based on "Internal Control -
Integrated Framework" issued by the Committee of Sponsoring Organizations of the
Treadway Commission. Based on this evaluation, management concluded that the
Company's internal control over financial reporting was effective as at December
31, 2006.
OUTLOOK
In 2007, the Company plans to:
o Invest in capital projects to increase the productivity, efficiency and
effectiveness of the Company's operations
o Substantially increase the investment in overall exploration
o Advance mine exploration and development to significantly increase reserves
and resources, both quantitatively and qualitatively, specifically at
Langlois and El Toqui
o Commence commercial production at the Langlois mine and Concordia deposit
o Acquire value added projects or assets
The Company's projected payable metals production for 2007 is:
- -----------------------------------
Zinc 121,700 tonnes
Copper 8,000 tonnes
Lead 12,500 tonnes
Silver 2,002,000 ounces
Gold 43,000 ounces
- -----------------------------------
These projections are based on the following:
All
Myra Falls El Mochito El Toqui Langlois(1) Operations
- ------------------------------------------------------------------------------------------------------
Ore Milled (tonnes) 856,000 607,000 537,000 394,000 2,394,000
Zinc (%) 5.9 5.9 6.8 9.0 6.6
Copper (%) 1.0 n/a n/a 0.5 n/a
Lead (%) 0.5 1.9 0.7 n/a n/a
Gold (g/t) 1.3 n/a 2.2 n/a n/a
Silver (g/t) 48.2 84.6 18.6 n/a n/a
- ------------------------------------------------------------------------------------------------------
Payable Metal
Zinc (tonnes) 38,100 27,500 27,800 28,300 121,700
Copper (tonnes) 6,700 n/a n/a 1,300 8,000
Lead (tonnes) 900 8,900 2,700 n/a 12,500
Silver (ounces) 659,000 1,121,000 101,000 121,000 2,002,000
Gold (ounces) 17,000 n/a 26,000 n/a 43,000
(1) Includes both pre-production and commercial production at Langlois.
Capital Expenditures
Capital expenditures for the Company's operations are planned to be $94.3
million in 2007. Of this amount, the bulk of funds are related to the
development of Langlois and the satellite Grevet B deposit, improvements to the
El Mochito and Myra Falls' mines and upgrading mobile equipment at all the
operations.
Capital Expenditures 2007 Projection
($ millions)
- ------------------------------------------------
Myra Falls 18.7
El Mochito 21.5
El Toqui 14.8
Langlois 39.3
- ------------------------------------------------
Total Capital 94.3
Exploration
It is expected that the Company will spend $27.0 million on exploration
expenditures in 2007 with the objective of substantially increasing the proven
and probable mineral reserves at Langlois and El Toqui and the mineral resources
(both measured and indicated and inferred) at El Mochito and Myra Falls as well
as
2
advancing a number of greenfield exploration targets. The breakdown of
exploration expenditures is set forth in the following table.
($ millions)
- ---------------------------------------------------
El Toqui 10.7
Langlois 6.2
Myra Falls 3.7
El Mochito 3.2
Tunisia 0.5
Bouchard-Hebert 0.2
Others 2.5
- ---------------------------------------------------
Exploration Expenditures 27.0
Reclamation Expenditures
Cash required for reclamation work in 2007 is expected to be $5.6 million,
significantly less than in 2006 as the bulk of the work at the Company's closed
sites has been completed.
SENSITIVITY TO METAL PRICES, ZINC SMELTER TREATMENT CHARGES AND EXCHANGE RATES
The Company's cash flow and net earnings are sensitive to the price of zinc,
smelter treatment charges for zinc and the US$/C$ exchange rate. The following
table provides the Company's estimates of the sensitivity of cash flow to
changes in the various metal prices, smelter treatment charges for zinc and
US$/C$ exchange rate movements based on projections for 2007. The Company's
projection for 2007 is based on a US$/C$ exchange rate of $0.91/$1.00. The
sensitivity table assumes that all other prices and/or the exchange rate are
held constant.
Variable Change Sensitivity
($000's)
-----------------------------------------------------------------------
Zinc US$0.01/pound 2,100
Lead US$0.01/pound 200
Copper US$0.01/pound 200
Silver US$0.10/ounce 200
Gold US$10/ounce 400
Exchange rate US$0.01/C$1.00 3,300
Zinc smelter treatment charges 5% 3,800
SELECTED ANNUAL INFORMATION
Statement of Operations and Retained Earnings (Deficit) and Years ended December 31,
Statement of Cash Flow Data
- --------------------------------------------------------------------------------------------------------
($ millions except for share and per share numbers) 2006 2005 2004
- --------------------------------------------------------------------------------------------------------
Gross sales revenue 452.2 313.0 240.3
Treatment and marketing costs 127.8 105.4 81.9
Net revenue 324.4 207.6 158.4
Total operating costs 155.9 178.0 129.9
Contribution from mining activities 168.5 29.6 28.5
Net earnings 156.5 14.0 3.3
Basic earnings per Common Share 0.41 0.04 0.01
Diluted earnings per Common Share 0.37 0.04 0.01
Net cash provided by operating activities 158.5 18.7 22.0
Capital expenditures 75.7 35.6 25.6
- --------------------------------------------------------------------------------------------------------
Basic weighted-average number of Common Shares outstanding (000's) 383,748 369,190 353,508
Number of Common Shares outstanding (000's) 385,646 380,917 363,156
3
Balance Sheet Data As at December 31,
- --------------------------------------------------------------------------------
($ millions) 2006 2005
- --------------------------------------------------------------------------------
Cash and cash equivalents 81.4 18.7
Working capital 109.8 44.4
Total assets 509.3 342.6
Total debt 2.7 19.7
Total long-term liabilities 113.1 121.9
Shareholders' equity 308.6 148.2
CHANGE IN ACCOUNTING POLICY
In the fourth quarter of 2006, the Company changed its accounting policy for
exploration expenditures. Under the new policy, which has been retroactively
applied, all exploration expenditures are expensed as incurred until the mineral
deposit is deemed commercially recoverable, at which time all subsequent
development costs are capitalized. The Company believes this policy provides
more reliable and relevant information aligning the Company's policy with a
significant majority of large and mid-size mining companies globally and
therefore will make peer and industry comparisons easier. Also see notes 1 and 2
to the consolidated financial statements.
STATEMENT OF OPERATIONS REVIEW - 2006 AND 2005
Gross Sales Revenue
Gross sales revenue from the sale of zinc, copper, lead, and gold concentrates
increased by 44% to $452.2 million. Higher metal prices accounted for this
increase, which was partially offset by decreased concentrate sales - 261,749
tonnes in 2006 compared with 367,630 tonnes in 2005, a stronger Canadian dollar
and hedging losses of $4.3 million (2005 - $2.9 million). The lower tonnage of
concentrate sold in 2006 was due to the closure of the Bouchard-Hebert and
Bougrine mines in 2005 and lower concentrate sales from all other operations.
Sales of concentrate fluctuate period to period due to production levels,
shipping volumes, ship schedules, price determination terms, and risk and title
transfer terms with the Company's various customers. The recognition of sales
can be as much as six months after the date of concentrate production. The
Company's sales are primarily denominated in United States dollars ("US$").
Gross Sales Revenue by Metal
($ millions) 2006 2005
- --------------------------------------------------------------------------------
Zinc (US$) 300.4 156.0
Copper (US$) 39.3 39.2
Lead (US$) 13.7 23.5
Gold (US$) 23.5 23.1
Silver (US$) 21.3 18.1
Hedging mark-to-market and other (0.2) (2.5)
- --------------------------------------------------------------------------------
Total gross sales revenue (US$) 398.0 257.4
Realized exchange rate (C$/US$) yearly average 1.1362 1.2159
- --------------------------------------------------------------------------------
Total gross sales revenue (C$) 452.2 313.0
Sales by Concentrate 2006 2005
(tonnes)
- --------------------------------------------------------------------------------
Zinc 217,346 273,267
Copper 25,120 52,441
Lead 16,556 40,685
Gold 2,727 1,237
- --------------------------------------------------------------------------------
Total 261,749 367,630
4
Sales by Payable Metal 2006 2005
- --------------------------------------------------------------------------------
Zinc (tonnes) 93,897 120,330
Copper (tonnes) 5,442 11,059
Lead (tonnes) 10,611 23,959
Gold (ounces) 42,210 51,720
Silver (ounces) 2,070,612 2,505,126
Realized Prices 2006 2005
- --------------------------------------------------------------------------------
Zinc (US$/tonne) 3,199 1,297
Copper (US$/tonne) 7,217 3,543
Lead (US$/tonne) 1,297 983
Gold (US$/ounce) 559 445
Silver (US$/ounce) 10.28 7.22
Average LME Metal Prices & Foreign Exchange Rate 2006 2005
- --------------------------------------------------------------------------------
Zinc (US$/tonne) 3,275 1,381
Copper (US$/tonne) 6,720 3,678
Lead (US$/tonne) 1,289 975
Gold (US$/ounce) 605 445
Silver (US$/ounce) 11.57 7.32
Exchange rate (C$/US$) yearly average 1.1341 1.2111
The Company has a relatively conservative revenue recognition policy which,
among other things, requires final pricing of concentrate inventories prior to
recognition of revenue. Using commodity prices and exchanges rates prevailing at
December 31, 2006, the following schedule provides details regarding inventories
shipped but not recognized for revenue purposes and the related provisional
payments.
Weighted-
Net smelter Inventory Earnings Provisional average
Concentrate return value before taxes payments months to
(DMT) ($000's) ($000's) ($000's) ($000's) settlement
- -------------------------------------------------------------------------------------------------------
Zinc 19,489 25,443 10,689 14,754 23,551 1.3
Copper 5,652 10,429 8,506 1,923 - 3.0
Gold 358 2,437 1,050 1,387 695 1.1
- -------------------------------------------------------------------------------------------------------
25,499 38,309 20,245 18,064 24,246
As at December 31, 2005, the Company estimated that inventories shipped but not
recognized for revenue purposes had earnings before tax of $7.3 million
consisting of $31.2 million of net smelter return less $23.9 million of
inventory value.
The Company periodically hedges against fluctuations in metal prices and foreign
exchange rates with the use of forward sales or options. The Company has not
applied hedge accounting historically; therefore, mark-to-market gains or losses
have been included in gross sales revenue at the end of each period. The Company
did not have any commodity or foreign exchange hedges as at December 31, 2006.
At December 31, 2005, the Company had 1,050,000 ounces of silver call options
with an average strike price of US$7.50 per ounce maturing from January to June
2006 and had 25,000 ounces of gold call options with an average strike price of
US$455 per ounce maturing in December 2006.
Net Revenue
Net revenue, the value of concentrates sold after deducting treatment charges
and freight and marketing costs, increased by 56% to $324.4 million in 2006 from
$207.6 million in 2005. Total treatment charges, the amount paid to smelters for
refining concentrates to produce metal, and shipping and marketing costs were
21% higher at $127.8 million in 2006 compared with $105.4 million in 2005. On a
per tonne of concentrate sold basis, total treatment charges increased to $488
per tonne in 2006 compared with $287 per tonne in 2005.
5
Direct Operating Costs
Direct operating costs were 7% lower in 2006 at $134.6 million compared with
$144.3 million in 2005, as 29% fewer tonnes of concentrate were sold and the
average cost per tonne of concentrate sold increased to $514 in 2006 from $393
in 2005. The increase in the average direct operating cost per tonne sold was
due to the closure of the lower cost Bougrine and Bouchard-Hebert mines in 2005
and significant increases in direct operating costs per tonne at Myra Falls and
El Mochito partially offset by a decrease in direct operating costs per tonne
sold at El Toqui.
Direct Operating Costs 2006 2005
- -------------------------------------------------------------------------------------------------------------------
Concentrate Cost per Concentrate Cost per
Aggregate sold tonne Aggregate sold tonne
($ millions) (tonnes) ($) ($ millions) (tonnes) ($)
- -------------------------------------------------------------------------------------------------------------------
Myra Falls 83.9 111,603 751 67.1 116,139 578
El Mochito 31.8 95,272 333 29.8 103,066 289
El Toqui 18.9 54,874 345 22.2 59,355 374
Bougrine 0.0 0 - 14.8 58,255 254
Bouchard-Hebert 0.0 0 - 10.4 30,815 337
- -------------------------------------------------------------------------------------------------------------------
Total 134.6 261,749 514 144.3 367,630 393
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$0.65 in 2006 compared with US$0.39 in 2005 (see
non-GAAP reconciliation). The increase was primarily due to unfavourable
movements in treatment and marketing costs, the foreign exchange rate, Myra
Falls direct operating costs per tonne, and pounds of zinc sold partially offset
by higher by-product credits and reduced aggregate direct operating costs at
other operations.
Depreciation and Depletion
Depreciation and depletion decreased by $4.0 million to $17.6 million primarily
due to reduced depreciation and amortization related to the Bougrine and
Bouchard-Hebert mines which were closed in 2005.
Reclamation and Closure Costs
Reclamation and closure costs in 2006 were $3.7 million compared with $12.1
million in 2005. These costs include the accretion of the Company's estimated
future reclamation obligations and adjustments to reclamation obligations at
closed mines where better information has caused the Company 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) in 2006 increased by $3.1 million to $12.9 million. The
increase in other expense (income) was primarily due to: increased general and
administrative and interest and financing expenses; partially offset by
increased investment and other income.
Exploration Expenditures
Exploration expenditures in 2006 increased by $7.1 million to $10.0 million
compared with $2.9 million in 2005. These increased expenditures reflect recent
successes in target identification and a strategic effort to address past
underinvestment in exploration of the Company's assets.
Other Non-Producing Property (Income) Costs
Other non-producing property income of $9.6 million for the year ended December
31, 2006 includes: (i) a gain on sale of $13.8 million on disposal of the
Caribou and Restigouche mines on August 1, 2006 to Blue Note Metals Inc. ("Blue
Note"); and, (ii) a charge of $1.3 million to settle a claim against the Company
by Kalwea Financial Corp., BVI. Under the terms of the agreement, Blue Note
replaced the Company's reclamation deposit of $5.9 million and issued to the
Company a $15.0 million unsecured subordinated convertible debenture with a
maturity of five years. The Company will also receive a 1 to 2% net smelter
6
return royalty payable quarterly on zinc metal production provided the average
price of zinc as determined by the London Metal Exchange is above US$0.65 per
pound.
In addition to the amounts in (i) and (ii) noted above, $2.9 million (2005 -
$9.0 million) of care and maintenance and holding costs were incurred in 2006
and related to the Caribou, Bougrine and Bouchard-Hebert mines. In 2005, other
non-producing property costs of $9.0 million related to the Bouchard-Hebert,
Nanisivik, Caribou, Bougrine and Langlois mines.
Due to the depletion of mineral reserves, the Company closed the Nanisivik,
Bouchard-Hebert and Bougrine mines in September 2002, February 2005 and
September 2005 respectively. Prior to November 2005, the Langlois mine was on a
care and maintenance basis.
Income and Mining Taxes (Recovery) Provision
Income and mining taxes recovery decreased to $1.3 million in 2006 compared with
$7.0 million in 2005. The $5.7 million decrease in income and mining tax
recovery in 2006 compared with 2005 was primarily due to increased tax
provisions at El Mochito and El Toqui, partially offset by an income tax
recovery for Myra Falls. During the year, the Company determined that the Myra
Falls mine would generate future taxable income which will be offset by
available loss carry forwards. As a result, the Company set up a future income
tax asset of $27.0 million and recorded a corresponding income tax recovery.
This determination was based on the Company's five-year operating and capital
plan and used the forward metal prices. This income tax asset will be drawn down
and charged to income as actual taxable income is earned.
LIQUIDITY AND FINANCIAL POSITION REVIEW
Working Capital
Working capital at the end of 2006 was $109.8 million compared with $44.4
million at the end of 2005, an increase of $65.4 million.
Current Assets
Total current assets increased by $80.5 million to $197.4 million as at December
31, 2006 compared with December 31, 2005. The main components of current asset
changes were as follows:
o Cash and cash equivalents increased by $62.7 million reflecting improved
cash flow generated by stronger metal prices
o Accounts receivable - concentrate increased by $9.7 million primarily due
to a greater volume of production shipped in late 2006 for which revenue
was recognized but final payments had not yet been received compared with
December 31, 2005
o The current portion of future income tax assets increased by $8.2 million
primarily due to the set up of a $13.6 million current future income tax
asset for the Myra Falls mine (long-term portion $13.4 million) partially
offset by a $5.5 million future tax asset drawdown at El Mochito
Current Liabilities
Current liabilities increased by $15.1 million to $87.6 million at December 31,
2006 compared with December 31, 2005. The main components of the current
liabilities changes were as follows:
o Accounts payable increased by $10.3 million primarily due to amounts
associated with the ongoing development at the Langlois mine
o Provisional payments for concentrate inventory shipped and not priced
represent payments received for concentrate shipments that were not
recognized as revenue. The balance as at December 31, 2006 was $24.2
million. Please refer to the table in Gross Sales Revenue section of this
MD&A for additional details. The December 31, 2005 balance of $14.8 million
was for payments for zinc concentrate shipments from the Myra Falls mine
o Short-term debt decreased by $12.4 million primarily due to the repayment
of the gold loan outstanding at December 31, 2005
o Income and mining taxes payable increased by $9.6 million primarily due to
full utilization of loss carry forwards at El Mochito and El Toqui mines
resulting in tax provisions being required in 2006
7
Reclamation Deposits
At December 31, 2006, the Company had reclamation deposits of $13.5 million, an
increase of $6.7 million from December 31, 2005. The increase was primarily due
to $13.4 million of reclamation deposits held under a safe keeping agreement in
support of reclamation requirements at Myra Falls entered into in the first
quarter of 2006 partially offset by reimbursement of $5.9 million for
reclamation deposits previously held as reclamation security on the Caribou and
Restigouche mines which were sold in August 2006.
Long-term Investments
At December 31, 2006, long-term investments increased by $9.1 million to $14.7
million from $5.6 million at December 31, 2005. As part of the consideration
received on the sale of the Caribou and Restigouche mines on August 1, 2006, the
Company received a convertible debenture in Blue Note in the amount of $15.0
million which the Company valued at $9.1 million. At December 31, 2006 and 2005,
also included in long-term investments was a $17.0 million convertible debenture
of Taseko Mines Limited that is carried at a cost of $5.6 million which was the
estimated fair value at the time of acquisition.
Restricted Promissory Note
The Company held restricted promissory notes at the end of 2006 and 2005 of
$62.3 million. The balance consists of restricted promissory notes related to
the Red Mile transactions(1) in 2004 and 2005. The interest earned and a portion
of the principal of these restricted promissory notes will be used to meet the
Company's royalty obligation.
Deferred Income
Deferred income of $6.3 million at December 31, 2006 consisted of (i) deferred
indemnity agreement fees and prepaid interest income received in relation to the
Red Mile transactions in 2004 and 2005 which will be taken into income over the
lives of the two agreements (see note 11 to the 2006 audited consolidated
financial statements) and (ii) a non-refundable royalty payment received on the
sale of the Lapa properties in 2003 (US$1.0 million) which will be taken into
revenue as earned when the Lapa properties are put into production.
Royalty Obligation
The royalty obligation of $62.5 million relates to the royalty amounts received
from the 2004 and 2005 Red Mile transactions.
Total Debt
Total debt at December 31, 2006 was $2.7 million, a reduction of $17.0 million
compared with $19.7 million at the end of 2005.
In the first and second quarters of 2006, the Company obtained loans of US$1.4
million and US$1.5 million to restructure certain gold forward and option
positions. These loans were repaid in full in 2006. In August 2005, by way of a
gold loan, the Company borrowed US$10.0 million. The gold loan had six scheduled
principal repayments and, in August 2006, the final principal repayment was
made. In May 2005, the Company entered into a concentrate prepayment contract
with a customer whereby the Company received US$5.0 million against future
deliveries of zinc concentrate. The Company elected to repay this concentrate
prepayment contract in May 2006.
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, 2006, total
accrued reclamation and closure costs were $40.6 million compared with $50.3
million at December 31, 2005. Of the $40.6 million, $8.3 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
$7.4 million in reclamation and closure costs in 2006 compared with $25.2
million in 2005. As there is no law, regulation or contract in Honduras related
___________________________
(1) For further information on the Red Mile transactions please see the
Company's most recent Annual Report filed on SEDAR or available at the Company's
website at www.breakwater.ca.
8
to reclamation and closure costs, GAAP does not permit the Company to set up a
liability for reclamation at the El Mochito mine.
Reclamation and Closure Cost Accrual at December 31, 2006
($ millions) Current Long-term Total
---------------------------------------------------------------
Myra Falls 2.2 25.0 27.2
El Mochito 0.0 1.4 1.4
El Toqui 0.0 3.8 3.8
Langlois 0.0 1.3 1.3
Bouchard-Hebert 2.4 0.1 2.5
Nanisivik 2.3 0.4 2.7
Bougrine 1.4 0.3 1.7
---------------------------------------------------------------
Total 8.3 32.3 40.6
Future Income Tax Liabilities
As at December 31, 2006, future tax liabilities were $7.1 million, an increase
of $5.2 million from December 31, 2005. The increase in future tax liabilities
was primarily due to establishing an additional mining duties liability related
to the Langlois mine.
Shareholders' Equity
Shareholders' equity at December 31, 2006 was $308.6 million compared with
$148.2 million at December 31, 2005, an increase of $160.3 million primarily due
to net earnings of $156.5 million in 2006.
Retained Cumulative Total
Shareholders' Equity Capital Contributed earnings translation shareholders'
($000's) stock Warrants surplus (deficit) adjustments equity
- -------------------------------------------------------------------------------------------------------------------
As at December 31, 2005 335,512 8,561 3,300 (189,663) (9,495) 148,215
Reduction of stated capital (169,628) - (3,300) 172,928 - -
Value ascribed to options
exercised under stock-based
compensation 815 - (815) - - -
Employee share option plan -
proceeds of options 1,538 - - - - 1,538
exercised
Employee share purchase plan 163 - - - - 163
Exercise of warrants 190 - - - - 190
Settlement of liability 848 - - - - 848
Renunciation of flow-through
share value (2,345) - - - - (2,345)
Stock-based compensation - - 1,608 - - 1,608
Net earnings - - - 156,530 - 156,530
Cumulative translation
adjustments - - - - 1,806 1,806
- -------------------------------------------------------------------------------------------------------------------
As at December 31, 2006 167,093 8,561 793 139,795 (7,689) 308,553
At the annual and special meeting held on June 8, 2006, the shareholders
approved a special resolution to reduce the stated capital of the Company by an
amount of $172.9 million, which was equal to the accumulated deficit as at
December 31, 2005 prior to the change in accounting policy. As a result, capital
stock was reduced by $169.6 million, contributed surplus was reduced by $3.3
million and deficit was reduced by $172.9 million.
In 2006, the Company issued the following Common Shares: 2,804,899 following the
exercise of employee share options; 173,823 pursuant to the Company's employee
share purchase plan; 1,000,000 pursuant to warrants exercised; and, 750,000 in
settlement of an outstanding lawsuit.
9
On March 2, 2007, Dundee Corporation ("Dundee") exercised 15,400,705 warrants to
purchase 15,400,705 Common Shares at $0.20 per Common Share. On March 14, 2007,
Dundee exercised 15,400,705 warrants to purchase 15,400,705 Common Shares at
$0.20 per Common Share.
Capital Expenditures
The Company invested $75.7 million in mineral properties and fixed assets in
2006.
In 2006, the $39.5 million of capital expenditure at Langlois primarily
consisted of: development and extraction of a bulk sample from the Grevet B
deposit; drifting to access Zone 97; building and equipment; and other
underground work partially offset by preproduction revenues.
Myra Falls' capital expenditures of $16.6 million in 2006 consisted primarily
of: surface ramp advances; underground development; installation of a lead
circuit; tailings dam construction; and information systems and
telecommunication system upgrades.
In 2006, the $9.6 million of capital expenditures at El Mochito consisted
primarily of: Soledad and Pozo Azul tailings pond construction and upgrades
respectively; underground development; and equipment purchases.
El Toqui capital expenditures in 2006 of $8.4 million consisted primarily of:
ramp development; Gekko intense leach reactor construction and installation;
Concordia deposit development; deferred development; and capital equipment.
Financial Capability
With the existing working capital, the current metal prices and current US$/C$
exchange rate, the Company is well positioned to carry out its operating,
capital, exploration and environmental programs in 2007. The Company's financial
capability is sensitive to metal prices, smelter treatment charges and the
US$/C$ exchange rate.
OPERATING REVIEW - YEARS ENDED DECEMBER 31, 2006 AND 2005
Depreciation,
Contribution (loss) depletion,
Net revenue from mining reclamation and Capital
activities(1) closure costs expenditures(3)
- -------------------------------------------------------------------------------------------------------------
($ millions) 2006 2005 2006 2005 2006 2005 2006 2005
- -------------------------------------------------------------------------------------------------------------
Myra Falls 142.6 79.1 48.3 2.4 10.4 9.5 16.6 17.8
El Mochito 116.6 56.0 78.4 19.8 6.4 6.3 9.6 8.0
El Toqui 69.5 30.6 47.4 5.1 3.1 4.6 8.4 5.2
Langlois(a) 0.0 0.0 (0.1) (0.1) 0.1 0.1 39.5 5.2
Bougrine(b) 0.0 26.5 (0.2) 7.4 0.2 4.3 0.0 0.1
Bouchard-Hebert(c) 0.0 18.3 (0.4) 7.1 0.4 1.3 0.0 0.3
Nanisivik(d) 0.0 0.0 (0.2) (8.6) 0.2 8.6 0.0 0.0
Other (4.3)(2) (2.9)(2) (4.7) (3.5) 0.4 0.6 1.6 0.0
- -------------------------------------------------------------------------------------------------------------
Total 324.4 207.6 168.5 29.6 21.2 33.7 75.7 36.6
(1) After non-cash costs. (a) First concentrate shipped
(2) Net realised from metal hedging activities. November 2006.
(3) Includes assets under capital lease. (b) Closed September 2005.
(c) Closed February 2005.
(d) Remediation and closure
on-going.
10
Production Results
Consolidated production is set forth in the following table.
Year ended December 31 Fourth Quarter
- ----------------------------------------------------------------------------------------------------------------
All Mines 2006 2005 2006 2005
- ----------------------------------------------------------------------------------------------------------------
Ore Milled (tonnes) 2,003,862 2,468,565 528,237 540,949
Zinc (%) 6.0 6.5 6.0 6.1
Concentrate Production (tonnes)
Zinc 209,133 268,688 55,856 56,576
Copper 21,866 35,361 4,647 7,410
Lead 17,263 28,702 5,239 3,741
Gold 4,251 4,145 1,316 1,114
Metal in Concentrates
Zinc (tonnes) 107,136 141,310 28,252 29,521
Copper (tonnes) 5,093 8,110 1,027 1,698
Lead (tonnes) 11,775 19,196 3,564 2,579
Silver (ounces) 2,721,676 3,059,914 698,628 758,008
Gold (ounces) 57,231 75,993 13,469 17,521
Aggregate production of zinc in concentrate in 2006 was 236.2 million pounds
compared with 311.5 million pounds in 2005, a 24% reduction. The closure of the
Bouchard-Hebert and the Bougrine mines in 2005 accounted for 16% of the
reduction with the balance related to lower zinc head grades at Myra Falls and
El Mochito and lower milled tonnes at Myra Falls, offset by production at
Langlois.
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.
Zinc Production (million pounds of zinc Year ended December 31 Fourth Quarter
contained in concentrate)
- -----------------------------------------------------------------------------------------------------------
2006 2005 % 2006 2005 %
- -----------------------------------------------------------------------------------------------------------
Myra Falls 74.3 106.0 (30) 14.7 23.3 (37)
El Mochito 83.0 94.1 (12) 21.1 24.6 (14)
El Toqui 70.0 62.5 12 17.6 17.2 2
Langlois(a) 8.9 0.0 - 8.9 0.0 -
Bouchard-Hebert(b) 0.0 13.9 - 0.0 0.0 -
Bougrine(c) 0.0 35.0 - 0.0 0.0 -
- -----------------------------------------------------------------------------------------------------------
Total zinc production 236.2 311.5 (24) 62.3 65.1 (4)
(a) First concentrate shipped November 2006.
(b) Closed February 2005.
(c) Closed September 2005.
Production of copper in concentrate decreased 37% in 2006 from the same period
in 2005 due to lower milled tonnes and lower copper grades at Myra Falls as well
as the closure of the Bouchard-Hebert mine in February 2005.
Copper Production (million pounds of Year ended December 31 Fourth Quarter
copper contained in concentrate)
- -----------------------------------------------------------------------------------------------------------
2006 2005 % 2006 2005 %
- -----------------------------------------------------------------------------------------------------------
Myra Falls 10.8 16.8 (36) 1.8 3.7 (51)
Langlois(a) 0.5 0.0 - 0.5 0.0 -
Bouchard-Hebert(b) 0.0 1.1 - 0.0 0.0 -
- -----------------------------------------------------------------------------------------------------------
Total copper production 11.3 17.9 (37) 2.3 3.7 (38)
(a) First concentrate shipped November 2006.
(b) Closed February 2005.
Despite higher lead production at El Mochito, production of lead in concentrate
for 2006 decreased 39% year-over-year due to the closure of Bougrine in
September 2005.
11
Lead Production (million pounds of lead Year ended December 31 Fourth Quarter
contained in concentrate)
- -----------------------------------------------------------------------------------------------------------
2006 2005 % 2006 2005 %
- -----------------------------------------------------------------------------------------------------------
El Mochito 26.0 23.1 13 7.9 5.7 39
Bougrine(a) 0.0 19.2 - 0.0 0.0 -
- -----------------------------------------------------------------------------------------------------------
Total lead production 26.0 42.3 (39) 7.9 5.7 39
(a) Closed September 2005.
Silver in concentrate decreased 11% year-over-year due to lower tonnes milled
and lower silver grades from Myra Falls and lower silver production at El Toqui
as well as the closure of the Bouchard-Hebert mine in February 2005.
Silver Production (ounces of silver Year ended December 31 Fourth Quarter
contained in concentrate)
- -----------------------------------------------------------------------------------------------------------
2006 2005 % 2006 2005 %
- -----------------------------------------------------------------------------------------------------------
Myra Falls 857,775 1,165,056 (26) 172,701 286,554 (40)
El Mochito 1,769,456 1,723,825 3 482,227 446,445 8
El Toqui 71,703 131,020 (45) 20,802 25,009 (17)
Langlois(a) 22,855 0 - 22,855 0 -
Bouchard-Hebert(b) 0 40,013 - 0 0 -
- -----------------------------------------------------------------------------------------------------------
Total silver production 2,721,789 3,059,914 (11) 698,585 758,008 (8)
(a) First concentrate shipped November 2006.
(b) Closed February 2005.
Gold in concentrate decreased 25% in 2006 from the same period in 2005 due to
lower milled tonnes at Myra Falls and less gold production from El Toqui as well
as the closure of the Bouchard-Hebert mine in February 2005.
Gold Production (ounces of gold Year ended December 31 Fourth Quarter
contained in concentrate)
- -----------------------------------------------------------------------------------------------------------
2006 2005 % 2006 2005 %
- -----------------------------------------------------------------------------------------------------------
Myra Falls 20,231 31,744 (36) 3,454 8,254 (58)
El Toqui 36,795 41,605 (12) 9,810 9,267 6
Langlois(a) 205 0 - 205 0 -
Bouchard-Hebert(b) 0 2,644 - 0 0 -
- -----------------------------------------------------------------------------------------------------------
Total gold production 57,231 75,993 (25) 13,469 17,521 (23)
(a) First concentrate shipped November 2006.
(b) Closed February 2005.
12
Myra Falls Production
The following table sets forth Myra Falls' production for the periods presented.
Year ended December 31 Fourth Quarter
--------------------------------------------------------
2006 2005 2006 2005
- ---------------------------------------------------------------------------------------------
Ore Milled (tonnes) 714,443 912,656 166,188 226,962
Zinc (%) 5.5 6.1 4.6 5.5
Copper (%) 0.9 1.2 0.7 1.0
Silver (g/t) 48 51 41 50
Gold (g/t) 1.5 1.8 1.2 2.0
Concentrate Production
Zinc (tonnes) 64,902 90,129 12,950 19,984
Recovery (%) 86.5 86.3 88.2 84.4
Grade (%) 51.9 53.4 51.2 53.2
Copper (tonnes) 20,788 32,333 3,569 7,410
Recovery (%) 73.0 69.6 70.9 71.5
Grade (%) 23.5 23.6 22.9 22.8
Gold (tonnes) 14.1 34.7 1.4 9.9
Recovery (%) 11.5 18.3 9.8 15.2
Grade (g/t) 9,489 8,741 32,714 6,890
Metal in Concentrates
Zinc (tonnes) 33,708 48,084 6,651 10,591
Copper (tonnes) 4,885 7,640 819 1,698
Silver (ounces) 857,775 1,165,056 172,701 286,554
Gold (ounces) 20,231 31,744 3,454 8,254
Total Cash Costs (US$)
Per lb. payable zinc sold (US$) 0.81 0.47 1.44 0.52
Zinc head grades were lower in 2006 from the same period in 2005 due to
increased mining in the lower grade HW Zone. Milled tonnage decreased during
2006 compared with 2005. Production was hindered during the year due to the lack
of working areas underground, delays in improving the Battle-Gap underground
infrastructure and problems with underground equipment availability.
Additionally, ventilation requirements in the western extensions of the mine
slowed production improvements. The ventilation raise connecting the surface
ramp to the underground operation was completed in January 2007. The mill
upgrades are on schedule and on budget. The new copper and zinc circuits have
been commissioned resulting in improved recoveries and a reduction in the
penalty elements in the copper concentrate.
During the fourth quarter, operations at Myra Falls were suspended for a 10 day
period due to damage to the bridge over Thelwood Creek on the road leading to
Myra Falls, which necessitated the temporary closure of this bridge to vehicular
traffic. The damage to the bridge was sustained during a one in 200 year storm
event on Vancouver Island on November 15th. Installation of a temporary bridge
was completed on November 24th and normal operations resumed the following day.
Myra Falls Outlook
While the issue of ventilation has largely been addressed, production will be
constrained by the number of available working faces and the haulage distances
underground. The track development out to the Marshall zone for exploration
continues on the 24 level. Underground diamond drilling is scheduled during the
first half of 2007 in this area. Current drilling is focused on the Marmot
Trough, a drill target developed last year following a reinterpretation of
certain drill holes completed in the 1990's. The significance of the Marmot
Trough as a target is that it is directly below current mine workings and, in
the event of significant mineralization, is accessible from the current mine
infrastructure.
Diamond drilling from the surface ramp commenced during 2006. The diamond drill
contractor mobilized in the fourth quarter and set up on surface to drill the
extension of the Marshall zone.
13
El Mochito Production
The following table sets forth El Mochito's production for the periods
presented.
Years ended December 31 Fourth Quarter
- ----------------------------------------------------------------------------------------------
2006 2005 2006 2005
- ----------------------------------------------------------------------------------------------
Ore Milled (tonnes) 690,243 700,190 171,369 185,597
Zinc (%) 6.0 6.7 6.2 6.5
Lead (%) 2.1 1.8 2.6 1.7
Silver (g/t) 92 87 101 86
Concentrate Production
Zinc (tonnes) 72,413 81,296 18,726 21,142
Recovery (%) 90.4 91.7 89.9 92.0
Grade (%) 52.0 52.5 51.2 52.6
Lead (tonnes) 17,263 15,329 5,239 3,741
Recovery (%) 81.0 80.9 81.0 80.1
Grade (%) 68.2 68.4 68.0 68.8
Metal in Concentrates
Zinc (tonnes) 37,646 42,698 9,578 11,147
Lead (tonnes) 11,775 10,488 3,564 2,579
Silver (ounces) 1,769,456 1,723,825 482,227 446,445
Total Cash Costs (US$)
Per lb. payable zinc sold 0.43 0.32 0.62 0.20
Zinc head grades were slightly lower in 2006 from 2005 due to the recovery of
mineral reserves in the lower grade skarn areas such as Salva Vida and La Leona
which are economic at current metal prices.
El Mochito Outlook
During 2006, the Company continued to explore, develop and delineate new mineral
resources and reserves along extensions of the productive Salva Vida and Santo
Nino trends. Drilling also continued on the Barbasco trend which continues to
show a possible connection with the Imperial zone to the north. During the
fourth quarter, the Company initiated exploration between Santo Nino and the
manto of Yojoa Norte. As of the beginning of March 2007, results show the
presence of low grade skarn and a possible connection between the two trends.
Exploration and delineation drilling of the La Leona deposit also continued to
show promising results with increases expected in resources and reserves in this
area.
During 2006, the Company continued its surface exploration program at El
Mochito. The Company acquired a larger diamond drill capable of drilling deeper
targets. This drill was initially set up to deepen existing holes at Caliche in
order to investigate below the Mochito shales. Geological mapping completed in
2006 to the east on the Big Fuzzy target and to the west over the Santa Barbara
mountain or Arandanos anomaly will be drill tested in 2007 and reported on later
in the year. As well, geological mapping carried out over two new targets, ML2
and ML3, will be investigated in 2007 by surface diamond drilling. These target
areas are located at the projected intersections of fault zones located to the
north of the current underground workings.
During 2006, the Company experienced a delay in commissioning the new tailings
facility Soledad. Storm damage necessitated a repair to the geomembrane liner
which delayed commissioning of Soledad into 2007. Soledad is scheduled to be
commissioned in the third quarter of 2007. Once complete, Soledad is expected to
have capacity for seven years at current production rates and the current
tailings impoundment facility, Pozo Azul, will be reclaimed.
14
El Toqui Production
The following table sets forth El Toqui's production for the periods presented.
Years ended December 31 Fourth Quarter
- ----------------------------------------------------------------------------------------------
2006 2005 2006 2005
- ----------------------------------------------------------------------------------------------
Ore Milled (tonnes) 539,803 519,963 131,307 128,390
Zinc (%) 6.5 6.0 6.6 6.6
Gold (g/t) 2.4 2.9 2.7 2.6
Concentrate Production
Zinc (tonnes) 63,617 56,552 15,979 15,450
Recovery (%) 91.0 90.4 91.9 90.8
Grade (%) 49.9 50.1 49.9 50.4
Gold (tonnes) 4,237 4,110 1,315 1,104
Recovery (%) 68.5 51.4 66.3 49.8
Grade (g/t) 192.1 221.7 160.5 181.4
Metal in Concentrates
Zinc (tonnes) 31,725 28,347 7,966 7,786
Silver (ounces) 71,703 131,020 20,802 25,009
Gold (ounces) 36,795 41,605 9,810 9,267
Total Cash Costs (US$)
Per lb. payable zinc sold 0.63 0.44 0.69 0.29
The milled tonnage at El Toqui increased in 2006 compared with the same period
in 2005 due to a higher number of available working areas at the Estatuas and
Dona Rosa deposits. The decrease in gold head grade during 2006 is due to a
decision to stockpile Aserradero material until commissioning of the Gekko
intense leach reactor commences during the first quarter of 2007. The Aserradero
deposit has high gold grades with the mill producing a gold concentrate as well
as a zinc concentrate.
El Toqui Outlook
During 2006, ramp development to access the Concordia deposit continued with a
total of 566 metres of development completed to the end of the year. The
Concordia deposit is on schedule with production expected by mid-2007.
During 2007, drilling will continue on the Porvenir deposit to increase the
inferred resources, which currently stand at 1.6 million tonnes of 9.62% Zn and
0.34 g/t Au and to attempt to delineate the outline of the deposit which is
currently open to the north-west and south-east. Altazor, Terrunyo and Melchor
will be the main targets for exploration at El Toqui in 2007.
If the exploration programs are successful in increasing the mineral reserves
and resources at El Toqui, the Company will conduct a feasibility study to
determine the optimal size and location of a mill to increase production
throughput.
Langlois Production
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.
Development drifts are currently being driven between Zone 3, Zone 4 and Zone 97
to the east on Levels 4, 9 and 13. Production has commenced in Zones 3 and 4
with a total of 59,374 tonnes milled during the fourth quarter of 2006.
During the fourth quarter of 2006, excavation of the bulk sample was carried out
on the Grevet B deposit, located three kilometres south-east of the Langlois
mine. The bulk sample was milled in the first quarter of 2007 and gave positive
metallurgical results. The results of the Grevet B bulk sample have proven
successful, therefore processing at Langlois mill is expected to increase during
2007 and 2008.
15
The Company currently has five diamond drills operating on the property on
surface, three for exploration and two focused on the upper portion of Zone 97
for definition drilling.
Year and Quarter ended December 31 2006
-------------------------------------------------------------
Ore Milled (tonnes) 59,373
Zinc (%) 8.3
Copper (%) 0.5
Silver (g/t) 41
Gold (g/t) 0.3
Concentrate Production
Zinc (tonnes) 8,201
Recovery (%) 82.2
Grade (%) 49.5
Copper (tonnes) 1,078
Recovery (%) 72.1
Grade (%) 19.3
Metal in Concentrates
Zinc (tonnes) 4,057
Copper (tonnes) 208
Silver (ounces) 22,855
Gold (ounces) 205
Langlois Outlook
During the fourth quarter of 2006, a diamond drill program commenced to
investigate the upper portions of Zones 4 between the current mining areas and
surface. As of the beginning of March 2007, 32 holes totalling 6,200 metres have
been drilled. All 32 holes intersected semi to massive sulphide zones. Based on
this drilling, the Company is planning a ramp from surface which will be able to
access these zones for mining and will eventually connect with the current
underground workings at Langlois, thus facilitating the movement of equipment,
material and manpower between surface and the mine.
During the fourth quarter of 2006, Metco Resources Inc. announced that a
pre-feasibility study will be conducted during the first half of 2007 on the
Orphee Deposit (50% the Company, 50% Metco Resources Inc.). The Orphee deposit
is located only six kilometres away from the Langlois mill. Should the results
of the pre-feasibility be positive, then the Orphee deposit could become a
source of additional mill feed for Langlois, which currently has excess mill
capacity.
During the first quarter of 2006, the Company completed an airborne Megatem
geophysical survey over the Langlois property. The survey identified several
anomalies in the immediate area surrounding the Langlois mine, both on the
existing land package as well as open ground. The Company has acquired
additional claims totalling 4,000 hectares which cover the anomalies and is in
the process of investigating them with ground geophysical surveys and diamond
drilling.
Virginia Mines Inc. - Coulon Project
On May 8, 2006, the Company announced the signing of an agreement with Virginia
Mines Inc. ("Virginia") on the Coulon project, located in the James Bay region
of the Province of Quebec. In accordance with the agreement, the Company has the
option to acquire a 50% interest in the Coulon property in return for C$6.5
million in exploration expenditures and cash payments totalling C$180,000 over
an 8-year period. Virginia will be the operator until the completion of a
positive pre-feasibility study. The Coulon project, located 15 kilometres from
the Fontanges airport, lies in an unexplored volcanic belt and is characterized
by a geological assemblage typical of belts hosting volcanogenic,
massive-sulphide deposits that have made north western Quebec and north eastern
Ontario one of the world's richest regions of polymetallic deposits.
16
The Coulon project is the host to polymetallic, massive-sulphide lenses, which
returned values of up to 15.39% Zn, 3.12% Pb, 117 g/t Ag and 0.46% Cu over 10.5
metres (lens 16-17), on the Dom zone, 2.91% Zn, 1.12% Cu, 34.25 g/t Ag and 0.3
g/t Au over 21.8 metres (lens 9-25) and 12.65% Zn, 1.36% Cu, 1.54% Pb,125 g/t Ag
and 0.3 g/t Au over 4.70 metres (lens 08).
The exploration program carried out during the summer and fall of 2006 led to
the discovery of two new important polymetallic lenses (lenses 43 and 44),
bringing the total of known lenses to five, and confirmed the vertical
continuity of lens 9-25 to a depth of 365 metres. Furthermore, this recent work
brought to light many new priority drill targets on the property. The Company is
very encouraged by the results of the 2006 campaign. All these lenses remain
open and the potential to increase their tonnage is excellent. Many other
priority targets were also defined within this fertile volcanic belt that now
presents mineralized showings and alteration along a lateral distance of over 20
kilometres. Virginia plans to begin a new campaign composed of geophysical
surveying and diamond drilling during the first quarter of 2007 and mobilization
of a second drill rig on the project in order to accelerate the exploration
work.
Other Properties
The reclamation work is largely complete at the Bouchard-Hebert, Bougrine and
Nanisivik properties, with Nanisivik to be fully reclaimed in 2007. The mills at
Bouchard-Hebert and Bougrine remain intact pending exploration results in the
immediate vicinity or elsewhere throughout the Company's properties.
FOURTH QUARTER REVIEW
The Company realized net earnings in the fourth quarter of 2006 of $50.4 million
compared with $9.3 million in the same period in 2005.
In the fourth quarter ended December 31, 2006, gross sales revenue increased by
$101.0 million to $158.3 million primarily due to significantly higher zinc and
other metal prices and a 21% increase in tonnes of concentrate sold partially
offset by a stronger Canadian dollar.
Treatment and marketing costs increased by 173% in the fourth quarter of 2006 to
$657 per tonne of concentrate sold compared with $292 per tonne in the same
period in 2005. Higher metal prices in the fourth quarter of 2006 triggered
treatment charge escalators which significantly increased aggregate treatment
costs. Direct operating costs were higher in 2006 at $501 per tonne of
concentrate sold compared with $406 per tonne in 2005.
Contribution Depreciation,
Operating review for the (loss) from depletion,
fourth quarter ended mining reclamation and Capital
December 31 Net revenue activities(1) closure costs expenditures(3)
- -------------------------------------------------------------------------------------------------------------
($ millions) 2006 2005 2006 2005 2006 2005 2006 2005
- -------------------------------------------------------------------------------------------------------------
Myra Falls 30.6 12.5 9.5 0.6 3.3 1.4 3.3 5.7
El Mochito 47.9 14.9 34.5 6.8 2.1 2.0 2.2 2.1
El Toqui 32.3 10.4 23.2 3.4 1.4 1.0 0.8 1.2
Bougrine 0.0 4.2 0.0 1.9 0.0 0.4 0.0 0.0
Bouchard-Hebert 0.0 0.0 (0.1) 0.3 0.1 (0.3) 0.0 0.0
Nanisivik 0.0 0.0 (0.1) (0.1) 0.1 0.1 0.0 0.0
Langlois 0.0 0.0 0.0 0.0 0.0 0.0 20.4 0.8
Other (0.5)(2) (2.3)(2) (0.6) (2.6) 0.2 0.2 0.2 0.0
- -------------------------------------------------------------------------------------------------------------
Total 110.3 39.7 66.4 10.3 7.2 4.8 26.9 9.8
(1) After non-cash costs.
(2) Net realised from metal hedging activities.
(3) Includes assets under capital lease.
Other expense (income) in the fourth quarter of 2006 decreased by $0.9 million
to $3.3 million primarily due to an increase in investment and other income and
a decrease in loss on gold loan partially offset by increased general and
administrative costs and other foreign exchange loss. Investment and other
income increased by $3.1 million in the fourth quarter of 2006 compared with the
same period in 2005 primarily
17
due to additional interest and indemnity fee income associated with the 2005 Red
Mile transaction, more interest earned on higher cash balances and gains on the
sale of certain short-term investments. The gold loan was repaid in 2006 and
therefore the loss on gold loan in the fourth quarter of 2005 did not recur.
General and administrative costs were higher by $0.7 million in the fourth
quarter of 2006 primarily due to higher consulting fees associated with
Sarbanes-Oxley compliance and corporate development activities and higher
capital tax accruals partially offset by certain stock-based compensation costs
which were allocated to the mines in the fourth quarter of 2006. Other foreign
exchange loss increased by $1.6 million in the fourth quarter of 2006 compared
with the fourth quarter of 2005 primarily due to the impact of foreign exchange
rate movements on significantly higher US dollar cash positions in 2006.
Exploration expenditures in the fourth quarter of 2006 increased by $1.8 million
primarily due to increased expenditures at El Toqui and Myra Falls compared with
the same period in 2005.
Other non-producing property (income) costs decreased by $1.1 million in the
fourth quarter of 2006 compared with the same period in 2005 primarily due to
reduced costs at Bougrine and the impact of the disposal of the Caribou and
Restigouche mines in 2006.
Income tax provisions increased by $15.5 million in the fourth quarter of 2006
compared with 2005 due to higher tax provisions at El Mochito and El Toqui
partially offset by an income tax recovery at Myra Falls. The El Mochito and El
Toqui tax provisions increased by $18.7 million in the fourth quarter of 2006
because future tax assets established for these mines in the fourth quarter of
2005 did not recur and both mines became taxable in 2006 resulting in tax
provisions being established. The increase in income tax recovery at Myra Falls
was due to the establishment of a future tax asset for that operation in 2006.
NON-GAAP RECONCILIATIONS
Total cash costs per pound of payable zinc sold is furnished to provide
additional information and is a non-GAAP measure. This measure should not be
considered in isolation as a substitute for measures of performance prepared in
accordance with GAAP and is not necessarily indicative of cash provided from
operating activities or operating expenses as determined under GAAP. This
measure is intended to provide investors with information about the cash
generating capabilities of the Company's operating activities in a given period
which is the same purpose that the Company uses this information. This MD&A and
the 2006 audited consolidated financial statements discuss the components not
included in this non-GAAP measure.
Non-GAAP reconciliation of total cash cost per pound of payable zinc
sold to consolidated financial statements 2006 2005
- -------------------------------------------------------------------------------------------------------
By-product credit ($ millions)
Gross sales revenue per financial statements (452.2) (313.0)
Less zinc sales revenue 341.3 189.7
- -------------------------------------------------------------------------------------------------------
(110.9) (123.3)
Treatments and marketing charges ($ millions) per financial statements 127.8 105.4
Direct operating costs ($ millions) per financial statements 134.6 144.3
- -------------------------------------------------------------------------------------------------------
Total cash costs - Canadian ($ millions) 151.5 126.4
Exchange rate C$/US$ 1.1330 1.2111
- -------------------------------------------------------------------------------------------------------
Total cash costs - US$ ($ millions) 133.7 104.6
Zinc pounds sold (millions) 207.0 265.3
Total cash cost per pound of payable zinc sold (US$)
By-product credit (0.47) (0.39)
Treatment and marketing costs 0.55 0.33
Direct operating costs 0.57 0.45
- -------------------------------------------------------------------------------------------------------
Total 0.65 0.39
18
SUMMARY OF QUARTERLY RESULTS
2005 2006
- ---------------------------------------------------------------------------------------------------------------------------
(restated - see note 2)
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
- ---------------------------------------------------------------------------------------------------------------------------
Gross sales revenue
($ millions 91.3 92.4 71.9 57.4 80.7 101.2 112.0 158.3
Net earning (loss)
($ millions) 3.8 2.1 (1.2) 9.3 38.3 28.6 39.2 50.4
Basic earnings per share $0.01 $0.01 $0.00 $0.02 $0.10 $0.08 $0.10 $0.13
Weighted-average number of
Common Shares outstanding
(millions) 365.7 367.4 369.5 374.2 382.0 383.8 384.3 385.0
Diluted earnings per share $0.01 $0.01 $0.00 $0.02 $0.09 $0.07 $0.09 $0.12
C$/US$ realized exchange rate 1.2274 1.2429 1.2019 1.1744 1.1559 1.1239 1.1187 1.1422
Average realized zinc price
(US$/t) 1,256 1,252 1,296 1,502 2,221 2,895 3,363 4,227
Average realized zinc price
(C$/t) 1,542 1,556 1,558 1,764 2,567 3,226 3,762 4,828
Concentrate tonnes sold 109,012 118,022 80,205 60,391 67,355 59,779 61,385 73,230
Concentrate tonnes produced 103,259 88,782 76,014 68,841 66,129 59,906 59,420 67,058
The quantity and mix of concentrates sold directly affects gross sales revenue.
The recognition of revenue from the sale of concentrate can vary from quarter to
quarter for the reasons discussed in the "Gross Sales Revenue" section of this
MD&A. As all sales are based in US dollars, the US dollar's general weakening
against the Canadian dollar over the past eight quarters has reduced the
realized Canadian dollar gross sales revenue.
CONTRACTUAL OBLIGATIONS
Contractual Obligations Payments Due by Period
($ millions)
- -------------------------------------------------------------------------------------------------------------
< 1 year > 1-3 years 4-5 years > 5 years Total
- -------------------------------------------------------------------------------------------------------------
Capital Leases 545 567 - - 1,112
Operating Leases 791 1,445 34 - 2,270
Debt 2,169 - - - 2,169
Employee future benefits(a) 1,130 4,092 1,743 38,125 45,090
Reclamation 8,267 4,597 3,903 23,793 40,560
Royalty obligations(a) - - - 62,479 62,479
- -------------------------------------------------------------------------------------------------------------
Total 12,902 10,701 5,680 124,397 153,680
(a) Employee future benefits and royalty obligations have funding sources from
pension plan assets ($32.8 million) and restricted promissory notes ($62.3
million) respectively. See financial statements for additional details.
CRITICAL ACCOUNTING ESTIMATES
Asset Impairment
The carrying values of producing mineral properties, including properties placed
on a care and maintenance basis and related deferred expenditures, are reviewed
when events or changes in circumstances arise that may result in impairments in
the carrying value of those assets. Estimated future net cash flow, 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 estimated
operating, capital and other cash flow. Estimates of future cash flow 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.
No write-downs were required in 2006 or 2005.
19
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 31, 2006 and 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 set up,
otherwise the Company 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 the Company
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 set up a liability for reclamation at El Mochito as there is no law,
regulation or contract related to this asset's retirement.
RISKS, UNCERTAINTIES AND OTHER INFORMATION
Readers are encouraged to read and consider the risk factors, and additional
information regarding the Company, included in its most recent Annual Report and
Form 40-F/Annual Information Form filed with the Canadian securities regulators
and the United States Securities and Exchange Commission (the "SEC"), as
applicable, a copy of which is posted on the SEDAR website at www.sedar.com
and/or the SEC's website at www.sec.gov.
20
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 Company, except at meetings at which only
holders of another class or series of shares of the Company are entitled to
vote. The table set forth below summarizes the Capital Stock. For a more
complete description of certain elements please refer to note 14 to the
consolidated financial statements of the Company.
Common Shares or Securities Convertible into Common Shares March 21, 2007
- -----------------------------------------------------------------------------------------------
Issued and outstanding 417,150,735
Share options outstanding weighted-average exercise price $0.88 9,355,636
Warrants granted at $1.00, expire January 28, 2009 - traded on TSX 33,571,429
- -----------------------------------------------------------------------------------------------
Future fully diluted 460,077,800
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 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, 2006.
CAUTION ON FORWARD-LOOKING INFORMATION
This report contains certain statements which constitute forward-looking
information. These forward-looking statements are not descriptive of historical
matters and may refer to management's expectations or plans. These statements
include but are not limited to statements concerning the Company's business
objectives and plans; future trends in the Company's industry; future production
costs and volumes; mineral grades, reserve and resource estimates and types;
sales volumes and realized prices; capital spending plans; exploration plans;
expansion plans; expected market fundamentals and prices; availability of
equipment and supplies; expected plant availability; success of process changes;
the Company's processing technologies; global economic growth and industrial
demand; production of base metal concentrates by the Company's operations;
future metal prices and treatment charges; future royalties payable; changes in
global metal and concentrate inventories; currency exchange rates; costs of
energy, materials and supplies; the outcome of disputes and legal proceedings in
which the Company is involved; future effective tax rates; and future benefits
costs.
Inherent in forward-looking statements are risks and uncertainties beyond the
Company's ability to predict or control, including risks that may affect the
Company's operating or capital plans, including risks generally encountered in
the development and operation of mineral properties and processing facilities
such as unusual or unexpected geological formations, unanticipated metallurgical
difficulties, ground control problems, process upsets and equipment
malfunctions; risks associated with labour disturbances and unavailability of
skilled labour; fluctuations in the market prices of the Company's principal
products, which are cyclical and subject to substantial price fluctuations;
risks created through competition for mining properties; risks associated with
lack of access to markets; risks associated with mineral and resource estimates,
including the risk of errors in assumptions or methodologies; risks posed by
fluctuations in exchange rates and interest rates, as well as general economic
conditions; risks associated with environmental compliance and permitting,
including those created by changes in environmental legislation and regulation;
risks associated with the Company's dependence on third parties in the provision
of transportation and other critical services; risks associated with aboriginal
title claims and other title risks; social and political risks associated with
operations in foreign countries; and risks associated with legal proceedings.
21
Actual results and developments are likely to differ, and may differ materially,
from those expressed or implied by the forward-looking statements contained in
this MD&A. Such statements are based on a number of assumptions which may prove
to be incorrect, including, but not limited to, the following assumptions: that
there is no material deterioration in general business and economic conditions;
that there is no unanticipated fluctuation of interest rates and foreign
exchange rates; that the supply and demand for, deliveries of, and the level and
volatility of prices of zinc, copper, gold, lead and silver and the Company's
other primary metals and minerals develop as expected; that the Company receives
regulatory and governmental approvals for its development projects and other
operations on a timely basis; that the Company is able to obtain financing for
its development projects on reasonable terms; that there is no unforeseen
deterioration in the Company's costs of production or production and
productivity levels; that the Company is able to continue to secure adequate
transportation for its products; that the Company is able to procure mining
equipment and operating supplies (including tires) in sufficient quantities and
on a timely basis; that engineering and construction timetables and capital
costs for the Company's development and expansion projects are not incorrectly
estimated or affected by unforeseen circumstances; that costs of closure of
various operations are accurately estimated; that there are no unanticipated
changes to market competition; that the Company's reserve estimates are within
reasonable bounds of accuracy (including with respect to size, grade and
recoverability) and that the geological, operational and price assumptions on
which these are based are reasonable; that environmental and other proceedings
or disputes are satisfactorily resolved; and that the Company maintains its
ongoing relations with its employees and with its business partners and joint
venturers.
Readers are cautioned that the foregoing list of important factors and
assumptions is not exhaustive. Forward-looking statements are not guarantees of
future performance. Events or circumstances could cause the Company's actual
results to differ materially from those estimated or projected and expressed in,
or implied by, these forward-looking statements. Readers should also carefully
consider the matters discussed under "Risk Factors" in the Company's Annual
Information Form. The Company undertakes no obligation to update publicly or
otherwise revise any forward-looking statements or the foregoing list of
factors, whether as a result of new information or future events or otherwise,
except as may be required under applicable laws.
22
Document No. 4
To the Shareholders of Breakwater Resources Ltd.
We have audited the consolidated balance sheet of Breakwater Resources Ltd.
as at December 31, 2005 and the consolidated statements of operations and
deficit and of cash flows for each of the years in the two-year period ended
December 31, 2005 (prior to the effects of the restatement as described in note
2 to the 2006 financial statements). 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 the results of its operations and its cash flows for each of the years
in the two-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.
/s/ Deloitte & Touche LLP
Independent Registered Chartered Accountants
Toronto, Canada
March 2, 2006
Comments by Independent Registered Chartered Accountants 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
change 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.
/s/ Deloitte & Touche LLP
Independent Registered Chartered Accountants
Toronto, Canada
March 2, 2006
In this annual report on Form 40-F ("Annual Report"), unless the context
otherwise requires, references to "we", "us", "our" or similar terms, as well as
references to the "Company" or the "Registrant", refer to Breakwater Resources
Ltd.
A. DISCLOSURE CONTROLS AND PROCEDURES
As of the end of the period covered by this Annual Report, the Registrant
conducted an evaluation (under the supervision and with the participation of the
Registrant's management, including the chief executive officer and chief
financial officer), pursuant to Rule 13a-15 promulgated under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), of the effectiveness of
the design and operation of the Registrant's disclosure controls and procedures.
Based on this evaluation, the Registrant's chief executive officer and chief
financial officer concluded that as of the end of the period covered by this
Annual Report such disclosure controls and procedures were effective.
B. MANAGEMENT'S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The following report is provided by management in respect of the Company's
internal control over financial reporting:
1. Management of the Company is responsible for establishing and
maintaining adequate internal control over financial reporting for the
Company.
2. Management of the Company has used the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) framework to evaluate
the effectiveness of the Company's internal control over financial
reporting. Management believes that the COSO framework is a suitable
framework for its evaluation of the Company's internal control over
financial reporting because it is free from bias, permits reasonable
consistent qualitative and quantitative measurements of the Company's
internal controls, is sufficiently complete so that those relevant
factors that would alter a conclusion about the effectiveness of the
Company's internal controls are not omitted, and is relevant to an
evaluation of internal control over financial reporting.
3. Management of the Company has assessed the effectiveness of the
Company's internal control over financial reporting, as at December
31, 2006, and has concluded that such internal control over financial
reporting is effective. There are no material weaknesses in the
Company's internal control over financial reporting that have been
identified by management.
4. PricewaterhouseCoopers LLP, which has audited the consolidated
financial statements of the Company for the year ended December 31,
2006, has not issued an attestation report on management's assessment
of the Company's internal control over financial reporting. Please see
Section C, Attestation Report of the Registered Public Accounting Firm
of this Annual Report.
C. ATTESTATION REPORT OF THE REGISTERED PUBLIC ACCOUNTING FIRM
This Annual Report does not include an attestation report of the company's
registered public accounting firm regarding internal control over financial
reporting. Management's report was not subject to attestation by the company's
registered public accounting firm pursuant to temporary rules of the Securities
and Exchange Commission (the "SEC") that permit the company to provide only
management's report in this Annual Report.
D. CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
During the period covered by this Annual Report, there have been no changes
in the Registrant's internal controls over financial reporting that have
materially affected, or are reasonably likely to materially affect, the
Registrant's internal control over financial reporting.
E. NOTICE OF PENSION FUND BLACKOUT PERIOD
The Registrant was not required by Rule 104 of Regulation BTR to send any
notice to any of its directors or executive officers during the fiscal year
ended December 31, 2006.
F. AUDIT COMMITTEE FINANCIAL EXPERT
The board of directors of the Registrant has determined that the Chair of
the Audit Committee, Grant A. Edey, qualifies as an "audit committee financial
expert" within the meaning of General Instruction B(8)(b) of Form 40-F under the
Exchange Act and is "independent" within the meaning of applicable SEC
regulations and the listing standards of the Nasdaq Stock Market, Inc.
("NASDAQ").
G. CODE OF ETHICS
The Company has a code of ethics, entitled Code of Business Conduct and
Ethics, which is applicable to all its employees including the Chief Executive
Officer, Chief Financial Officer and other senior officers. The Company's code
of ethics can be viewed on its website at
http://www.breakwater.ca/corpResp/ethicsCode.cfm
H. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Auditor's fees
The table below shows the fees that PricewaterhouseCoopers LLP, the
Registrant's current external Auditors and principal Accountant, for fiscal
2006, and Deloitte & Touche LLP, the Company's external auditor for fiscal 2005
(collectively, the "Auditors") billed to the Registrant and its subsidiaries for
various services during each of the past two fiscal years.
Fiscal year ended Fiscal year ended
December 31, 2006 (C$) December 31, 2005 (C$)
Audit fees 800,868 833,920
Audit-related fees 11,585 38,000
Tax fees Nil 29,105
All other fees Nil Nil
Total 812,453 901,025
Audit fees
The aggregate fees billed by the Auditors for the fiscal years ended
December 31, 2005 and 2006, for professional services rendered by it for the
audit of the Registrant's annual financial statements and for services that are
normally provided by it in connection with statutory and regulatory filings or
engagements for such years were C$833,920 and C$800,868, respectively. These
fees include professional services provided by the Auditors for the review of
the interim financial statements, statutory audits of the annual financial
statements, consulting on financial accounting and reporting standards, other
regulatory audits and filings and translation services.
Audit-related fees
The aggregate fees billed by the Auditors for the fiscal years ended
December 31, 2005 and 2006 for assurance and related services rendered by it
that are reasonably related to the performance of the audit or review of the
Registrant's financial statements and are not reported above as audit fees were
C$38,000 and $11,585, respectively. These fees relate to Sarbanes-Oxley Act of
2002 readiness assistance and the audit of the employee pension plan financial
statements.
Tax fees
The aggregate fees billed by the Auditors for the fiscal years ended
December 31, 2005 and 2006 for professional services rendered by it for tax
compliance, tax advice and tax planning were C$29,105 and nil, respectively.
These fees include assistance relating to tax compliance.
All Other Fees
Other than the audit fees, audit-related fees and tax fees described above,
the aggregate fees billed by the Auditors for the fiscal years ended December
31, 2005 and 2006 were nil and nil, respectively.
I. AUDIT COMMITTEE PRE-APPROVAL POLICIES AND PROCEDURES
The Audit Committee's charter has a policy for pre-approval titled "Audit
Committee Policy on Review and Pre-Approval of Auditors Fees for Audit and
Non-Audit Services" which sets out the responsibilities regarding the provision
of non-audit services by the Company's external auditors. This policy, in
conjunction with the Audit Committee charter, encourages consideration of
whether the provision of services other than audit services is compatible with
maintaining the auditor's independence and requires Audit Committee pre-approval
of all permitted audit and audit-related services. All audit and non-audit
services performed by the Registrant's principal accountants for the years ended
December 31, 2005 and December 31, 2006 were pre-approved by the Audit Committee
of the Registrant.
J. TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS
See the section entitled "Contractual Obligations" in the Management's
Discussion and Analysis of Financial Condition and Results of Operations for the
financial year ended December 31, 2006, included as Document No. 3 in this
Annual Report.
K. IDENTIFICATION OF AUDIT COMMITTEE
The Registrant has an Audit Committee comprised of three individuals: Grant
A. Edey (Chair), Garth A.C. MacRae and A. Murray Sinclair, Jr. Each of the
members of the Audit Committee is "independent" within the meaning of applicable
SEC regulations and the listing standards of NASDAQ.
L. CRITICAL ACCOUNTING POLICIES
See the section entitled "Critical Accounting Estimates" in the
Management's Discussion and Analysis of Financial Condition and Results of
Operations for the financial year ended December 31, 2006, included as Document
No. 3 in this Annual Report.
UNDERTAKING AND CONSENT TO SERVICE OF PROCESS
A. Undertaking
The Registrant undertakes to make available, in person or by telephone,
representatives to respond to inquiries made by the Commission staff, and to
furnish promptly, when requested to do so by the Commission staff, information
relating to: the securities in relation to which the obligation to file an
annual report on Form 40-F arises; or transactions in said securities.
B. Consent to Service of Process
The Registrant has previously filed with the Commission a Form F-X in
connection with its common shares.
SIGNATURES
Pursuant to the requirements of the Exchange Act, the Registrant certifies
that it meets all of the requirements for filing on Form 40-F and has duly
caused this annual report to be signed on its behalf by the undersigned, thereto
duly authorized.
BREAKWATER RESOURCES LTD.
Date: March 30, 2007 By: /s/ George E. Pirie
----------------------------------------
President and Chief Executive Officer
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- ------------------ -----------------------------------------------------------------------------------------------------------
23.1 Consent of PricewaterhouseCoopers LLP
- ------------------ -----------------------------------------------------------------------------------------------------------
23.2 Consent of Deloitte & Touche LLP
- ------------------ -----------------------------------------------------------------------------------------------------------
31.1 Certification of the President and Chief Executive Officer pursuant to Section 302 of Sarbanes-Oxley Act
of 2002.
- ------------------ -----------------------------------------------------------------------------------------------------------
31.2 Certification of the Chief Financial Officer pursuant to Section 302 of Sarbanes-Oxley Act of 2002.
- ------------------ -----------------------------------------------------------------------------------------------------------
32.1 Certifications of the Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
- ------------------ -----------------------------------------------------------------------------------------------------------