Languishing zinc sinks Breakwater

Weak zinc prices pushed Breakwater Resources (BWR-T) to a net loss of $19.9 million in 2002.

The loss translates into 12 per share and compares with a loss of $111.1 million, or 92 per share, in the previous year.

The 2001 loss included a non-cash charge of $70.3 million, which reflected $53.4 million for reducing to nil the carrying value of the Caribou mine in New Brunswick, a $11.3-million reduction in the carrying value of the Nanisivik mine on Baffin Island, and $5.6 million for the carrying value of other exploration and non-producing properties.

Revenue in 2002 was little-changed, at $305.4 million. However, cash flow from operations (before changes in non-cash working capital items) rebounded to $8.6 million, compared with $9.4 million consumed in 2001.

Production of zinc-in-concentrate in 2002 climbed by 2% over 2001 levels to 216,681 tonnes, while total cash costs fell 11% to US32 per lb. (US$700 per tonne), thanks to lower treatment charges. Production at the Bouchard-Hbert and El Toqui mines, in Quebec and Chile, respectively, increased by 24% and 10%, more than making up for lower production at the Nanisivik, El Mochito (in Honduras) and Bougrine (in Tunisia) mines. (Nanisivik was closed in September 2002.)

The company’s copper production was off 877 tonnes for the year, at 6,055 tonnes. Also, lead production slipped 481 tonnes, to 12,693 tonnes; silver output climbed 16,861 oz., to 2.96 million oz.; and gold was 13,696 oz. lower, at 38,500 oz.

On the sales side, Breakwater realized an average of US35.2 per lb. (US$777 per tonne) for its zinc, down from US40.2 per lb. (US$886 per tonne) in 2001. The average zinc price in 2002 was the lowest since 1986.

Looking ahead, Breakwater plans to expand the El Toqui mine and reopen the Langlois mine (in Quebec) to offset the effect of the expected closure of Bouchard-Hbert.

In 2002, zinc production from El Toqui climbed 10%, as metallurgical improvements pushed zinc recoveries and concentrate grades to record levels. Recoveries reached 92.1% (compared with 89.9% in 2001), while concentrate grade climbed by 1% to 50.8%.

At the suspended Langlois mine, Breakwater is in the midst of a 7,935-metre infill drilling campaign aimed at upgrading resources to reserves in Zone 97.

In early February 2003, Breakwater released preliminary results from nine holes of the $650,000 program. Highlights included hole 9-567, which returned 3 metres running 8.6% zinc and 1.1% copper, plus 90.4 grams silver per tonne. The hole represents the deepest underground intersection in the zone so far.

Also, hole 9-567A, drilled 70 metres above hole 9-567, returned its own 3-metre section grading 12.5% zinc, 1% copper and 53.5 grams silver.

The Quebec Ministry of Natural Resources is covering $225,000 worth of the 2-phase drill program.

Langlois was closed in 2001, owing to an ore-pass problem and weak zinc prices.

Once drilling wraps up, SRK Consulting will update a 2001 feasibility study that indicated a net pretax cash flow of $60.9 million based on a zinc price of US50 per lb., a copper price of US80 per lb. and a silver price of US$5 per oz.

The internal rate of return was pegged at 24%, while the net present value (at an 8% discount) came in at $26.4 million.

The total capital cost of reaching production is pegged at $25.7 million; another $7.5 million will be required during the initial year of full production.

Breakwater does not expect to be able to meet payments on its (already-extended) US$45.1 million syndicated credit facility. Instead, it will look to negotiate another extension or restructure the facility prior to maturity.

At the end of 2002, Breakwater had cash and equivalents totalling $6.4 million; total debt stood at $78.7 million.