TORONTO, ONTARIO--(Marketwire - Feb. 28, 2008) - Breakwater Resources Ltd. (TSX:BWR) -
The reporting currency is Canadian dollars ("C$" or "$") and all amounts disclosed are in Canadian dollars unless otherwise indicated.
The Company is a mining, exploration and development company which produces zinc, copper, lead and gold concentrates. During 2007, 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 Langlois mine, located in Canada, began production in November 2006 and commenced commercial production for accounting purposes on July 1, 2007. The start-up of the Langlois mine affects all aspects of the Company's financial results which makes comparisons between years difficult.
HIGHLIGHTS
Fourth Quarter
The Company realized a loss of $38.3 million or $0.09 per share in the fourth quarter of 2007 compared with net earnings of $50.4 million or $0.13 per share in the fourth quarter of 2006. The main items affecting the movement to a loss were:
- $28.5 million write-down of Myra Falls, comprising a $16.0 million write-down relating to the value of the mineral properties and fixed assets and a $12.5 million write-down of future tax assets related to the impairment write-down following a review triggered by lower metal prices and higher operating costs
- $11.3 million of unrealized losses due to the valuation of conversion rights in certain convertible debentures held by the Company primarily due to lower share prices and the marking to market of available-for-trade securities
- $3.2 million provision for tailings facility modification at Myra Falls
- $22.9 million (US$3.1 million) lower gross sales revenue, despite 40% greater tonnes of concentrate sold, were largely due to 38% and 12% lower zinc and copper prices respectively and a 13% appreciation in the C$ in 2007
- Sales of concentrate in the fourth quarter of 2007 increased to 102,415 tonnes from 73,231 in the fourth quarter of 2006 primarily due to Langlois and greater sales at Myra Falls and Toqui
- $15.1 million lower treatment and marketing costs primarily due to lower prices realized, higher zinc base prices resulting in lower escalators (the upside price participation by smelters) and the impact of a weaker US$
- $37.3 million higher direct operating costs primarily due to increased sales, higher costs at Myra Falls and the addition of sales from Langlois, currently a relatively high cost operation
- $3.3 million increase in exploration expenses
- $7.5 million reduction of income tax at Mochito
At December 31, 2007, the Company estimated that inventories shipped but not recognized for revenue purposes had earnings before tax of $8.0 million on 51,100 tonnes of concentrate compared with earnings before tax of $29.4 million on 70,519 tonnes of concentrate at September 30, 2007. Concentrate produced in the fourth quarter of 2007 increased to 72,470 tonnes from 67,057 tonnes primarily due to Langlois, increased production at Myra Falls and Toqui offset by lower production at Mochito.
Successfully renegotiated new three year contracts at Toqui and Mochito and overcame a breach at a newly commissioned tailings impoundment at Mochito to resume normal production.
The Company entered into a $20.0 million qualifying environmental trust to fully fund estimated reclamation and closure obligations at Myra Falls and issued $12.0 million of flow-through shares to fund a portion of the 2008 exploration program.
The Company also commenced a pre-feasibility study at Toqui to support a 1.0 million tonne per year mill and earned a 50% interest in the Coulon joint venture property.
Year
The Company realized net earnings of $23.4 million or $0.06 per share in 2007 compared with $156.5 million or $0.41 per share in 2006, the $133.1 million decrease was primarily due to:
- $35.0 million write-down of Myra Falls, comprising $16.0 million impairment write-down and a $19.0 million write-down of future tax assets related to the impairment write-down for Myra Falls
- $7.6 million of unrealized losses due to the valuation of conversion rights in certain convertible debentures held by the Company primarily due to lower share prices and the marking to market of available-for-trade securities
- $13.8 million gain on sale of the Caribou property in 2006
- $47.9 million (US$16.6 million) lower gross sales revenue primarily due to a 7% decrease in concentrate sold, a 7% appreciation of the C$ and a 4% decrease in the realized prices of each of zinc and copper in 2007 compared with 2006
- $27.0 million increase in direct operating costs primarily due to similar aggregate costs at Myra Falls and Mochito despite 31% and 22% fewer tonnes sold respectively and the impact of Langlois
- $7.0 million increase in exploration expenses
- a $15.5 million future tax asset for Langlois established in 2007
Aggregate production increased to 288,083 tonnes from 252,513 tonnes primarily due to Langlois and increased production at Toqui partially offset by lower production at Myra Falls and Mochito.
Reserves and Resources
On February 28, 2008, the Company released its 2007 mineral reserve and mineral resource statement to the public. References in this news release to 2007 mineral reserves and resources should be read in conjunction with that news release.
OUTLOOK
On February 28, 2008, the Company released its 2008 projections for tonnes milled, metal grades, concentrate produced, payable metals, capital expenditures and exploration expenses to the public. References to production outlooks in this news release should be read in conjunction with that news release.
SELECTED ANNUAL INFORMATION
Statement of Operations and Statement
of Cash Flow Data Years ended December 31,
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($ millions except for share and per share numbers) 2007 2006
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Gross sales revenue 404.3 452.2
Treatment and marketing costs 100.3 127.8
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Net revenue 304.0 324.4
Total operating costs 191.3 155.9
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Contribution from mining activities 112.7 168.5
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Net earnings 23.4 156.5
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Basic earnings per Common Share 0.06 0.41
Diluted earnings per Common Share 0.05 0.37
Net cash provided by operating activities 79.1 158.5
Capital expenditures 113.8 75.7
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Basic weighted-average number of Common
Shares outstanding (000's) 413,681 383,748
Number of Common Shares outstanding (000's) 425,700 385,646
Balance Sheet Data As at December 31,
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($ millions) 2007 2006
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Cash and cash equivalents 62.9 81.4
Working capital 82.6 109.9
Total assets 607.4 509.3
Total debt 2.3 2.7
Total long-term liabilities 132.0 113.1
Shareholders' equity 364.4 308.6
STATEMENT OF OPERATIONS REVIEW - 2007 AND 2006
Gross Sales Revenue
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 Company has a relatively conservative revenue recognition policy (see below) and 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$").
Fourth Quarter Year
Concentrate Sold (tonnes) 2007 2006 2007 2006
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Zinc:
Mochito 27,801 27,734 58,426 78,962
Toqui 26,241 18,393 67,825 51,926
Myra Falls 15,960 20,745 50,243 86,458
Langlois(1) 15,562 - 17,817 -
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85,564 66,872 194,311 217,346
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Copper
Myra Falls 11,300 - 26,523 25,120
Langlois(1) 2,407 - 2,846 -
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13,707 - 29,369 25,120
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Lead
Mochito 1,878 4,921 16,054 16,310
Toqui - - - 246
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1,878 4,921 16,054 16,556
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Gold
Toqui 1,266 1,438 4,313 2,703
Myra Falls - - 3 24
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1,266 1,438 4,316 2,727
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All Metals 102,415 73,231 244,050 261,749
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(1) Langlois entered commercial production on July 1, 2007. Net cash flow
from concentrate produced at Langlois prior to July 1, 2007 reduced
preproduction capital expenditures.
Fourth Quarter 2007
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Concentrate Realized Gross sales
sold Payable price(1) revenue
(tonnes) metal(1) (US$) ($000s)
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Zinc 85,564 36,692 2,608 95,678
Copper 13,707 2,939 6,755 19,852
Lead 1,878 1,123 3,328 3,737
Gold 1,266 13,807 790 10,908
Silver n.a. 518,218 14.00 7,254
Other(2) n.a. (1,798)
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102,415
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Gross sales revenue in US$ 135,631
Exchange rate 0.9987
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Gross sales revenue in C$ 135,455
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Fourth Quarter 2006
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Concentrate Realized Gross sales
sold Payable price(1) revenue
(tonnes) metal(1) (US$) ($000s)
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Zinc 66,872 28,629 4,227 121,015
Copper n.a. (4) 7,649 (34)
Lead 4,921 3,182 1,648 5,245
Gold 1,438 10,603 749 7,946
Silver n.a. 475,625 15.06 7,164
Other(2) n.a. (2,638)
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73,231
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Gross sales revenue in US$ 138,698
Exchange rate 1.1416
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Gross sales revenue in C$ 158,336
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(1) Payable metal and realized prices for zinc, copper and lead are per
tonne and for gold and silver are per ounce.
(2) Other gross sales revenue represents revaluations of prior period
concentrate receivables.
Concentrate sold increased 40% in the fourth quarter of 2007 compared with the fourth quarter of 2006. The 29,184 tonne increase in 2007 was due to increases of 31% at Myra Falls and 39% at Toqui and sales of 17,969 tonnes of concentrate at the recently commissioned Langlois mine partially offset by 9% fewer tonnes sold at Mochito.
In payable metal terms, zinc sold increased by 28%, copper sold increased by 2,943 tonnes from nil in 2006, gold increased by 30% and silver rose by 9% while lead sales dropped by 65% in the fourth quarter of 2007 compared with the fourth quarter of 2006.
Realized zinc, copper and silver prices, denominated in US$, decreased by 38%, 12% and 7% respectively in the fourth quarter of 2007 while lead and gold prices realized increased by 102% and 5% respectively. Gold and silver hedging gains of US$1.5 million (US$137 per ounce) and US$1.1 million (US$2.23 per ounce) respectively were included in the fourth quarter 2006 prices realized. The Company periodically hedges against fluctuations in metal prices and foreign exchange rates using 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. There were no hedges in place in 2007 and accordingly no hedging gains or losses.
Gross sales revenue decreased by US$3.1 million or 2% in the fourth quarter of 2007. Additionally, a stronger C$ resulted in an increase in the average US$/C$ exchange rate of 13% in the fourth quarter of 2007. In C$ terms, gross sales revenue decreased $22.9 million or 14% in the fourth quarter of 2007 compared with the fourth quarter of 2006.
Year 2007
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Concentrate Realized Gross sales
sold Payable price(1) revenue
(tonnes) metal(1) (US$) ($000s)
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Zinc 194,311 82,661 3,075 254,154
Copper 29,369 6,207 6,959 43,193
Lead 16,054 10,162 2,508 25,481
Gold 4,316 44,508 702 31,225
Silver n.a. 2,127,277 13.36 28,429
Other(2) n.a. (1,011)
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244,050
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Gross sales revenue in US$ 381,471
Exchange rate 1.0599
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Gross sales revenue in C$ 404,335
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Year 2006
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Concentrate Realized Gross sales
sold Payable price(1) revenue
(tonnes) metal(1) (US$) ($000s)
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Zinc 217,346 93,897 3,199 300,399
Copper 25,120 5,442 7,217 39,270
Lead 16,556 10,611 1,297 13,757
Gold 2,727 42,210 559 23,578
Silver n.a. 2,070,612 10.28 21,287
Other(2) n.a. (207)
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261,749
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Gross sales revenue in US$ 398,084
Exchange rate 1.1360
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Gross sales revenue in C$ 452,233
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(1) Payable metal and realized prices for zinc, copper and lead are per
tonne and for gold and silver are per ounce.
(2) Other gross sales revenue represents revaluations of prior period
concentrate receivables.
Concentrate sold in 2007 decreased 7% to 244,050 tonnes. The 17,699 tonne decrease was due to decreases of 31% at Myra Falls and 22% at Mochito which more than offset 31% higher sales at Toqui and sales of 20,663 tonnes at Langlois.
In payable metal terms, copper, gold and silver sales were 14%, 5% and 3% higher respectively while zinc and lead sales declined by 12% and 4% respectively.
Lead, gold and silver prices, denominated in US$, increased by 93%, 26% and 30% respectively in 2007 compared with 2006 while prices for zinc and copper sales decreased by 4% each. Gold and silver hedging losses of US$1.4 million (US$33 per ounce) and US$2.4 million (US$1.18 per ounce) respectively were included in the 2006 prices. There were no hedges in place in 2007 and accordingly no hedging gains or losses.
Gross sales revenues decreased US$16.6 million or 4% in 2007 compared with 2006. A rising C$ resulted in an increase in the average exchange rate of the US$/C$ of 7% in 2007 compared with 2006. In C$ terms, gross sales revenue decreased $47.9 million or 11% in 2007 compared with 2006.
The Company's revenue recognition policy requires that, among other things, final pricing of concentrate inventories be known prior to the recognition of revenue. Using commodity prices and exchanges rates prevailing at December 31, 2007, the following schedule provides details regarding inventories shipped but not recognized for revenue purposes and the related provisional payments.
Net Earnings Pro- Weighted-
smelter Inventory before visional average
Concentrate return value taxes payments months to
(DMT) ($000's) ($000's) ($000's) ($000's) settlement
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Zinc 38,831 25,659 22,015 3,644 19,829 1.7
Copper 5,970 8,928 8,839 89 1,115 1.1
Lead 5,345 10,190 7,408 2,782 11,304 2.0
Gold 954 3,014 1,121 1,893 - 2.8
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51,100 47,791 39,383 8,408 32,248
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As at December 31, 2006, the Company estimated that inventories shipped but not recognized for revenue purposes had earnings before tax of $18.1 million consisting of $38.3 million of net smelter return less $20.2 million of inventory value on 25,499 tonnes of concentrate.
The following table provides the average base and precious metal prices and exchange rates for the periods indicated.
Average Metal Prices & Exchange Rate Fourth Quarter Year
2007 2006 2007 2006
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Zinc (US$/tonne) 2,621 4,204 3,242 3,275
Copper (US$/tonne) 7,178 7,065 7,114 6,720
Lead (US$/tonne) 3,209 1,626 2,578 1,289
Gold (US$/ounce) 788 614 697 605
Silver (US$/ounce) 14.22 12.62 13.40 11.57
C$/US$ exchange rate 0.9821 1.1393 1.0736 1.1341
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Treatment and Marketing Costs
Despite more tonnes of concentrate sold, treatment and marketing costs decreased 31% to $33.0 million in the fourth quarter of 2007 from $48.1 million in the fourth quarter of 2006. Treatment and marketing costs for the fourth quarter of 2007 were 24% of gross revenue compared with 30% in 2006. The overall decrease in treatment charges was primarily due to lower zinc and copper prices in the fourth quarter of 2007 compared with 2006 and, to a lesser extent, the weakness of the US$. A reduction in zinc prices results in lower escalators (the upside price participation by smelters) and therefore lower treatment charges. Additionally, the escalators were reduced by a higher base zinc price used in the calculation of treatment charges in the fourth quarter of 2007 compared with 2006. Higher treatment and marketing costs at Toqui as a percentage of gross sales revenue were primarily due to a 40% increase in freight costs per tonne shipped.
Treatment and Marketing Costs
Fourth Quarter 2007 Fourth Quarter 2006
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Cost Cost
Gross per Gross per
sales tonne sales tonne
Aggregate revenue sold Aggregate revenue sold
($ millions) (%) ($) ($ millions) (%) ($)
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Mochito 9.9 26% 333 20.1 30% 616
Toqui 10.6 31% 385 12.2 27% 616
Myra Falls 7.8 19% 289 15.8 34% 760
Langlois(1) 4.7 22% 260 n.a. n.a. n.a
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Total 33.0 24% 322 48.1 30% 657
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(1) First concentrate shipped November 2006 and commenced commercial
production on July 1, 2007.
Treatment and marketing costs decreased 22% to $100.3 million in 2007 from $127.8 million in 2006 while 7% fewer tonnes of concentrate were sold. Treatment and marketing costs as a percentage of gross sales revenue in 2007 were 25% compared with 28% in 2006. The decrease in treatment and marketing costs as a percentage of revenue was primarily due to lower zinc and copper prices which resulted in lower escalators and therefore lower treatment charges. Additionally, the escalators were reduced by the higher base zinc price used in the calculation of treatment costs in 2007 compared with 2006. Higher treatment and marketing costs as a percentage of gross sales revenue at Toqui in 2007 were due to increases in freight costs while at Mochito the lower percentage was due to certain concentrate sales which had flat treatment charges with no escalators.
Treatment and Marketing Costs
2007 2006
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Cost Cost
Gross per Gross per
sales tonne sales tonne
Aggregate revenue sold Aggregate revenue sold
($ millions) (%) ($) ($ millions) (%) ($)
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Mochito 23.3 18% 312 40.5 26% 425
Toqui 40.3 35% 558 30.3 30% 552
Myra Falls 31.3 23% 408 57.0 29% 512
Langlois(1) 5.4 22% 263 n.a. n.a. n.a.
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Total 100.3 25% 411 127.8 28% 488
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(1) First concentrate shipped November 2006 and commenced commercial
production on July 1, 2007.
Direct Operating Costs
Direct operating costs were 102% higher in the fourth quarter of 2007 at $73.9 million compared with $36.7 million in the fourth quarter of 2006. The increased costs were primarily due to higher concentrate sales at Myra Falls and Toqui, higher operating costs at Myra Falls and Mochito, the mix of concentrates sold and the impact of new production at Langlois. On a cost per tonne of concentrate sold basis, direct operating costs increased to $722 in the fourth quarter of 2007 from $501 in 2006. The increase was primarily due to a greater proportion of sales from Myra Falls and Langlois which are relatively higher cost operations. Also see details of direct operating costs under each mine's Expenses in the Production Results section of this news release.
Direct Operating Costs
Fourth Quarter 2007 Fourth Quarter 2006
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Cost Cost
Gross per Gross per
sales tonne sales tonne
Aggregate revenue sold Aggregate revenue sold
($ millions) (%) ($) ($ millions) (%) ($)
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Mochito 13.6 36% 458 11.2 16% 343
Toqui 10.3 30% 374 7.6 17% 385
Myra Falls 34.7 82% 1,273 17.9 38% 860
Langlois(1) 15.3 73% 855 n.a. n.a. n.a.
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Total 73.9 55% 722 36.7 23% 501
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(1) First concentrate shipped November 2006 and commenced commercial
production on July 1, 2007.
Direct operating costs were 20% higher in 2007 at $161.6 million compared with $134.6 million in 2006, as 7% fewer tonnes of concentrate were sold and the average cost per tonne of concentrate sold increased to $662 in 2007 from $514 in 2006. The increase in the average direct operating cost per tonne sold was primarily due to similar aggregate costs at Myra Falls and Mochito despite 31% and 22% fewer tonnes sold respectively, higher costs at Toqui on greater sales and the impact of Langlois sales.
Direct Operating Costs
2007 2006
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Cost Cost
Gross per Gross per
sales tonne sales tonne
Aggregate revenue sold Aggregate revenue sold
($ millions) (%) ($) ($ millions) (%) ($)
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Mochito 32.5 25% 437 31.8 20% 333
Toqui 28.3 25% 392 18.9 19% 345
Myra Falls 83.7 62% 1,090 83.9 42% 751
Langlois(1) 17.1 69% 830 n.a. n.a. n.a.
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Total 161.6 40% 662 134.6 30% 514
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(1) First concentrate shipped November 2006 and commenced commercial
production on July 1, 2007.
Depreciation and Depletion
Depreciation and depletion increased $4.6 million and $5.2 million in the fourth quarter of 2007 and in the year respectively compared with the corresponding periods in 2006. Langlois, which commenced commercial production effective July 1, 2007, was primarily responsible for the increases with depreciation and depletion of $4.5 million and $5.0 million in the fourth quarter of 2007 and in the year respectively.
Reclamation and Closure
Reclamation and closure costs increased by $3.3 million in both the fourth quarter of 2007 and the year compared with the corresponding periods in 2006. The increases were due to a $3.2 million provision for completion of modifications of the tailings facility at Myra Falls taken in the fourth quarter of 2007.
General and Administrative
General and administrative expenses increased by $0.8 million in the fourth quarter of 2007 compared with 2006. The increase was primarily due to: an allocation of stock based compensation in 2006 from administration to certain operations which did not recur in 2007; increased salaries and severance; funding for technical training in Honduras; and, higher insurance costs partially offset by lower audit, internal control and corporate development consulting fees and reduced legal costs related to the sale of the Caribou and Restigouche properties in 2006.
General and administrative expenses increased by $1.7 million in 2007 compared with 2006. The increase was primarily due to: increased salaries and severance; higher corporate development consulting fees; higher travel and accommodation costs; the impact of a 2006 under accrual of bonuses; and, higher insurance costs partially offset by lower audit and internal control consulting fees and a refund of a deposit to purchase shares of Jascan Resources Inc. ("Jascan") in 2000.
Interest and Financing
Interest and financing costs increased by $1.0 million in the fourth quarter of 2007 compared with 2006 primarily due to $1.0 million of fees paid in relation to the qualifying environmental trust at Myra Falls. For 2007, interest and financing costs increased modestly as the $1.0 million fee to establish the qualifying environmental trust at Myra Falls was partially offset by interest costs related to loans which were repaid in the first half of 2006.
Investment and Other Expense (Income)
Investment and other expense (income) was an expense of $8.4 million in the fourth quarter of 2007 compared with income of $2.9 million in 2006. For 2007, investment and other income was $5.0 million lower than 2006 at $3.1 million. The decrease was due to the valuation of conversion rights in certain convertible debentures held by the Company, which are considered embedded derivatives, primarily due to lower share prices and the marking to market of available-for-trade securities. Any unrealized gains or losses are recorded through earnings.
Foreign Exchange and Other Expense (Income)
Foreign exchange and other expense (income) was a gain of $0.2 million in the fourth quarter of 2007 compared with a loss of $1.6 million in 2006. The foreign exchange gain was primarily due to the repayment of certain provisional payments for inventory shipped at a lower exchange rate but not priced, followed by a subsequent strengthening of the C$. For 2007, foreign exchange and other expense (income) was $7.8 million higher at $9.8 million. The increased foreign exchange loss was primarily due to the impact of the strengthening C$ on US$ cash and cash equivalents.
Exploration
Exploration expenses increased by $3.3 million in the fourth quarter of 2007 compared with 2006. Increased expenses at the Company's joint ventures and at Langlois were partially offset by reduced expenses at Toqui and Bouchard-Hebert. For 2007, exploration expenses increased 71% to $17.0 million compared with 2006 primarily due to increases at Langlois, Myra Falls, Mochito and the Company's joint venture properties partially offset by reduced expenses at Bouchard-Hebert and Toqui.
Please refer to the exploration section of each mine and the project sections for details of the exploration activities in 2007.
Exploration Expenses Fourth Quarter Year
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2007 2006 2007 2006
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Mochito 0.6 0.4 2.9 1.2
Toqui 0.3 1.7 2.7 4.2
Myra Falls 0.4 0.3 3.3 0.6
Langlois 1.8 - 4.3 -
Non-operating 0.1 0.5 0.8 4.0
Corporate 3.0 - 3.0 -
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Total 6.2 2.9 17.0 10.0
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Write-down of Mineral Properties and Fixed Assets
At December 31, 2007, the carrying value of the mineral properties and fixed assets at Myra Falls were written-down by $16.0 million as the net book value exceeded the fair value. Fair value was determined by using estimated future cash flow which included; estimated recoverable reserves; future metal prices and foreign exchange rates; and, estimated operating and capital costs. The write-down of $16.0 million was allocated against the fixed assets of Myra Falls on a prorata basis, based on the net book value before the write-down.
Other Non-Producing Property Costs (Income)
In 2006, the Company recorded a gain on sale of its Caribou property of $13.8 million and a charge of $1.3 million to settle a claim against the Company. Both these amounts were included in other non-producing property costs in 2006. Excluding the above amounts, other non-producing property costs were similar in 2007 and 2006.
Income and Mining Tax Provision (Recovery)
In the fourth quarter of 2007, income and mining tax provision increased by $2.2 million primarily due to an increase of $15.3 million for Myra Falls comprising a $12.5 million write-down of the future tax assets relating to an impairment write-down in 2007 and a recovery of $3.1 million in 2006 partially offset by $7.5 million and $0.5 million reductions at Mochito and Toqui respectively and $1.9 million of tax recoveries related to other comprehensive losses.
The income and mining tax provision increased to $26.6 million from a recovery of $1.3 million in 2006, a $27.9 million change. The increase was primarily due to a $27.0 million future tax asset for Myra Falls which was set-up in 2006, a $19.0 million write-down of the Myra Falls future tax asset in 2007 related to an impairment review and recognition of $5.2 million of Quebec mining duties in 2006 partially offset by a $15.5 million future tax asset for Langlois established in 2007, a renunciation of the tax benefit of flow-through shares in 2006 of $2.3 million and $1.9 million of tax recoveries related to other comprehensive losses.
LIQUIDITY AND FINANCIAL POSITION REVIEW
Working Capital
Working capital at the end of 2007 was $82.6 million compared with $109.9 million at the end of 2006, a decrease of $27.3 million.
Current Assets
Total current assets decreased by $3.9 million to $193.6 million at December 31, 2007 compared with December 31, 2006. The main components of current asset changes were:
- Cash and cash equivalents decreased by $18.5 million reflecting lower cash flow from operating activities and higher expenditures on mineral properties and fixed assets
- Accounts receivable concentrate decreased by $9.1 million primarily due to the timing of revenue recognition and lower metal prices reducing receivables at Myra Falls and Toqui
- Other accounts receivable increased by $4.3 million primarily due to sales tax receivables at Langlois and accrued interest income at Myra Falls
- Concentrate inventory increased by $21.1 million primarily due to the tonnes of concentrate in inventory increasing by 22,954 tonnes to 84,544 tonnes at December 31, 2007. Of the increased tonnes, 15,524 tonnes related to Langlois.
- Materials and supplies inventory increased by $6.2 million primarily due to increased material in transit and higher costs and quantities of inventory at Mochito together with inventory at Langlois related to the commencement of commercial production
- Prepaid expenses and other current assets increased by $3.5 million primarily due to a $3.4 million deferral of stripping costs at Myra Falls related to the Lynx pit
- The current portion of future tax assets decreased by $13.3 million primarily due to a write-down in the current portion of the Myra Falls future tax assets of $12.5 million in the fourth quarter of 2007.
Current Liabilities
Current liabilities increased by $23.4 million to $111.0 million at December 31, 2007 compared with December 31, 2006. The main components of the current liabilities changes were:
- Provisional payments for concentrate inventory shipped and not priced, which represent payments received for concentrate shipments that were not recognized as revenue, increased by $8.0 million. The balance at December 31, 2007 was $32.2 million compared with $24.2 million at December 31, 2006. Refer to the table in Gross Sales Revenue section of this news release for additional details.
- Accounts payable and accrued liabilities increased by $18.9 million primarily due to a $5.9 million build-up at Langlois related to the commencement of commercial production, $6.1 million of provisional payments returnable to customers related to a fall in metal prices from the time the initial provisional payment was received to December 31, 2007, a $3.6 million increase in accounts payable and accrued liabilities at Myra Falls due to contractors employed on various capital and development projects and $2.2 million at Mochito primarily related to equipment and supplies in transit.
Long-term Investments
At December 31, 2007, long-term investments were $32.9 million, up $18.2 million from $14.7 million at December 31, 2006. The increase was primarily due to new accounting requirements for financial instruments and comprehensive income required by the Canadian Institute of Chartered Accountants ("CICA") and adopted by the Company on January 1, 2007.
Reclamation Deposits
At December 31, 2007, the Company had reclamation deposits of $33.5 million, an increase of $20.0 million from December 31, 2006. The increase was due to a $20.0 million qualifying environmental trust established in December 2007 for Myra Falls. The $13.5 million and $20.0 million of reclamation deposits are held under a safe keeping agreement and a trust indenture respectively to fund future reclamation requirements at Myra Falls.
Restricted Promissory Note
The Company held two restricted promissory notes at December 31, 2007 and December 31, 2006 of $62.3 million 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 obligations.
(1) For further information on the Red Mile transactions please see the Company's most recent Annual Information Form filed on SEDAR or available at the Company's website at www.breakwater.ca.
Deferred Income
Deferred income of $5.7 million at December 31, 2007 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; 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 Obligations
The royalty obligations of $82.5 million relate to the royalty amounts received from the 2004 and 2005 Red Mile transactions and $20.0 million related to the qualifying environmental trust. See restricted promissory note and reclamation deposits above.
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, 2007, total accrued reclamation and closure costs were $39.7 million compared with $40.6 million at December 31, 2006. During 2007, a provision for modifications to the tailings facility at Myra Falls was increased by $3.2 million for additional costs estimated to complete the modifications and was included in reclamation and closure costs.
Of the $39.7 million, $6.5 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 $6.8 million in reclamation and closure costs in 2007 compared with $7.4 million in 2006. As there is currently no law, regulation or contract in Honduras related to reclamation and closure costs, GAAP does not permit the Company to set up a liability for reclamation at the El Mochito mine.
Reclamation and Closure Cost Accrual at December 31, 2007
($ millions) Current Long-term Total
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Myra Falls 1.8 26.6 28.4
Mochito(1) 0.0 1.1 1.1
Toqui 0.0 3.5 3.5
Langlois 0.0 1.4 1.4
Bouchard-Hebert 1.8 0.0 1.8
Nanisivik 2.3 0.4 2.7
Bougrine 0.6 0.2 0.8
----------------------------------------------------------------------------
Total 6.5 33.2 39.7
----------------------------------------------------------------------------
(1)Reclamation and closure cost accruals for Mochito relate to accrued
severances.
The Company spent $1.7 million in reclamation and closure costs in the fourth quarter of 2007 compared with $1.6 million in the fourth quarter of 2006.
Shareholders' Equity
Shareholders' equity at December 31, 2007 was $364.4 million compared with $308.6 million at December 31, 2006. The increase of $55.8 million was primarily due to net earnings of $23.4 million, the issuance of $12.0 million of flow-through shares, the exercise of $6.2 million of warrants and the impact of adopting new accounting policies as required by the CICA of $17.7 million.
Shareholders' Equity Capital Contributed Retained
($000's) stock Warrants surplus earnings
----------------------------------------------------------------------------
----------------------------------------------------------------------------
As at December 31, 2006 167,093 8,561 793 139,795
Adjustment of opening
balance on adoption of
CICA accounting policy - - - 5,706
Value ascribed to
options exercised
under stock-based
compensation 1,124 - (1,124) -
Flow-through share sale 11,988 - - -
Employee share option
plan - proceeds
of options exercised 2,114 - - -
Employee share purchase
plan 353 - - -
Exercise of warrants and
transfer of fair value 6,265 (21) - -
Stock-based compensation - - 2,149 -
Cancellation of shares (211) - 211 -
Other comprehensive loss - - - -
Net earnings - - - 23,407
----------------------------------------------------------------------------
As at December 31, 2007 188,726 8,540 2,029 168,908
----------------------------------------------------------------------------
Other Cumulative Total
Shareholders' Equity comprehensive translation shareholders'
($000's) income adjustments equity
----------------------------------------------------------------------------
As at December 31, 2006 - (7,689) 308,553
Adjustment of opening
balance on adoption of
CICA accounting policy 4,291 7,689 17,686
Value ascribed to options
exercised under stock-based
compensation - - -
Flow-through share sale - - 11,988
Employee share option plan
- proceeds of options exercised - - 2,114
Employee share purchase plan - - 353
Exercise of warrants and
transfer of fair value - - 6,244
Stock-based compensation - - 2,149
Cancellation of shares - - -
Other comprehensive loss (8,345) - (8,108)
Net earnings - - 23,407
----------------------------------------------------------------------------
As at December 31, 2007 (3,817) - 364,386
----------------------------------------------------------------------------
In 2007, the Company issued the following Common Shares: 3,002,289 following the exercise of employee share options; 165,453 pursuant to the Company's employee share purchase plan; 30,884,510 pursuant to warrants exercised; and, 6,122,449 for flow-through of exploration expenses on properties. Additionally, in 2007 the Company cancelled 120,747 unclaimed Common Shares related to the acquisition of Jascan in 2000.
Capital Expenditures
The Company invested $113.8 million in mineral properties and fixed assets in 2007. At mining operations, $23.1 million, $26.7 million, $35.1 million and $21.4 million were spent at Mochito, Toqui Myra Falls and Langlois respectively. For details of these expenditures, please refer to the financial results discussion for each mine. Corporate capital expenditures of $7.5 million were primarily related to earn-in payments made on certain joint venture properties including Coulon in Quebec.
Financial Capability
With the existing working capital, the current metal prices and current US$/C$ exchange rate, the Company expects to be able to carry out its operating, capital, exploration and environmental programs in 2008. The Company's financial capability is sensitive to metal prices, smelter treatment charges and the US$/C$ exchange rate.
PRODUCTION RESULTS
The table below contains the Company's production for the periods presented. Production results include the production from Langlois since January 2007. For accounting purposes, production from Langlois was not recognized on the income statement until the commencement of commercial production - July 1, 2007.
Fourth Quarter Year
2007 2006 2007 2006
----------------------------------------------------------------------------
Ore Milled (tonnes) 584,361 528,237 2,294,000 2,003,862
Zinc (%) 5.7 6.0 5.9 6.0
Concentrate Production (tonnes)
Zinc:
Mochito 11,656 18,726 56,205 72,413
Toqui 17,813 15,979 65,322 63,617
Myra Falls 13,599 12,950 56,978 64,902
Langlois(1) 13,935 8,201 54,184 8,201
----------------------------------------------------------------------------
57,003 55,856 232,689 209,133
----------------------------------------------------------------------------
Copper:
Myra Falls 7,825 3,569 27,181 20,788
Langlois(1) 2,060 1,078 6,492 1,078
----------------------------------------------------------------------------
9,885 4,647 33,673 21,866
----------------------------------------------------------------------------
Lead:
Mochito 3,527 5,239 15,470 17,263
----------------------------------------------------------------------------
Gold:
Toqui 2,055 1,315 6,251 4,237
Myra Falls - - - 14
----------------------------------------------------------------------------
2,055 1,315 6,251 4,251
----------------------------------------------------------------------------
C$ operating costs, production
basis ($000s) 61,651 35,745 178,397 126,922
C$ operating cost per tonne milled
(production basis) 105 76 85 65
(1) First concentrate shipped November 2006 and considered to be at
commercial production levels effective July 1, 2007.
The table below contains the Company's metal contained in concentrate,
before smelting deductions, for periods presented.
Metal in Concentrate Fourth Quarter Year
2007 2006 % 2007 2006 %
-------------------------------------------------------
Zinc (tonnes)
Mochito 6,117 9,578 (36.1%) 29,211 37,646 (22.4%)
Toqui 8,722 7,966 9.5% 32,191 31,725 1.5%
Myra Falls 7,159 6,651 7.6% 29,845 33,708 (11.5%)
Langlois(1) 7,332 4,057 80.7% 28,327 4,057 598.2%
------------------ --------------------
29,330 28,252 3.8% 119,574 107,136 11.6%
------------------ --------------------
Copper (tonnes)
Myra Falls 1,739 819 112.3% 6,086 4,885 24.6%
Langlois(1) 403 208 93.8% 1,315 208 532.2%
------------------ --------------------
2,142 1,027 108.6% 7,401 5,093 45.3%
------------------ --------------------
Lead (tonnes)
Mochito 2,311 3,564 (35.2%) 10,215 11,775 (13.2%)
------------------ --------------------
Gold (ounces)
Toqui 8,786 9,810 (10.4%) 37,021 36,795 0.6%
Myra Falls 3,607 3,454 4.4% 18,880 20,231 (6.7%)
------------------ --------------------
12,393 13,264 (6.6%) 55,901 57,026 (2.0%)
------------------ --------------------
Silver (ounces)
Mochito 398,918 482,227 (17.3%) 1,732,755 1,769,456 (2.1%)
Toqui 63,506 20,802 205.3% 155,890 71,703 117.4%
Myra Falls 133,383 172,701 (22.8%) 811,353 857,775 (5.4%)
Langlois(1) 51,748 22,855 126.4% 159,672 22,855 598.6%
------------------ --------------------
647,555 698,585 (7.3%) 2,859,670 2,721,789 5.1%
------------------ --------------------
(1) First concentrate shipped November 2006 and considered to be at
commercial production levels effective July 1, 2007.
Fourth Quarter
Aggregate production of zinc in concentrate in the fourth quarter of 2007 was 3.8% higher at 29,330 tonnes. The increase was due to production from Langlois partially offset by lower production at Mochito. Production of copper in concentrate rose 108.6% in the fourth quarter of 2007 due to increased production from Myra Falls and Langlois. Production of lead in concentrate fell 35.2% during the fourth quarter of 2007 due to fewer tonnes milled at Mochito with a lower lead grade. Gold in concentrate decreased 6.6% in the fourth quarter of 2007 from the same period in 2006 due to lower grades at Myra Falls partially offset by more tonnes milled. Silver in concentrate decreased 7.3%, quarter over quarter due to lower production at Myra Falls and Mochito, related to lower grades and lower mill throughput partially offset by higher grades at Toqui and a full quarter of production at Langlois.
Year
Aggregate production of zinc in concentrate in 2007 was 11.6% higher at 119,574 tonnes. The increased zinc was primarily due to production from Langlois partially offset by lower production at Mochito and Myra Falls. Production of copper in concentrate increased 45.3% in 2007 from 2006 due to Langlois, which commenced production in the fourth quarter of 2006 and increased production from Myra Falls. Production of lead in concentrate decreased 13.2% in 2007 due to a decrease in production at Mochito. Gold in concentrate decreased 2.0% year over year due to lower grades at Myra Falls partially offset by more tonnes milled and higher gold grades at Toqui. Silver in concentrate increased 5.1%, year over year primarily due to higher silver grades at Toqui and a full year of production at Langlois.
Mochito
(i) Mochito Financial Results
Fourth Quarter Year
2007 2006 2007 2006
--------------------------------------------
Gross sales revenue 37,820 67,956 130,005 157,051
Treatment and marketing costs (9,891) (20,101) (23,252) (40,477)
--------------------------------------------
Net revenue 27,929 47,855 106,753 116,574
Direct operating costs (13,590) (11,205) (32,540) (31,765)
Depreciation and depletion (1,656) (1,824) (4,374) (5,639)
Reclamation and closure costs (353) (318) (1,099) (770)
--------------------------------------------
Contribution from mining activities 12,330 34,508 68,740 78,400
Exploration (642) (408) (2,919) (1,235)
--------------------------------------------
11,688 34,100 65,821 77,165
Income and mining tax provision (3,393) (10,857) (19,132) (20,365)
--------------------------------------------
Net earnings 8,295 23,243 46,689 56,800
--------------------------------------------
--------------------------------------------
Capital expenditures 7,122 2,145 23,130 9,603
--------------------------------------------
--------------------------------------------
Revenue:
The following tables and discussion provide details of Mochito's gross sales
revenue for the periods indicated:
Fourth Quarter 2007
----------------------------------------------------------------------------
Concentrate Realized Gross sales
sold Payable price(1) revenue
(tonnes) metal(1) (US$) ($000s)
----------------------------------------------------------------------------
Zinc 27,801 12,103 2,552 30,892
Lead 1,878 1,123 3,328 3,737
Silver n.a. 257,139 13.96 3,589
--------- ---------
29,679
---------
---------
Gross sales revenue in US$ 38,218
Exchange rate 0.9896
---------
Gross sales revenue in C$ 37,820
---------
---------
Fourth Quarter 2006
----------------------------------------------------------------------------
Concentrate Realized Gross sales
sold Payable price(1) revenue
(tonnes) metal(1) (US$) ($000s)
----------------------------------------------------------------------------
Zinc 27,734 12,163 4,007 48,736
Lead 4,921 3,182 1,648 5,245
Silver n.a. 448,312 12.77 5,724
--------- ---------
32,655
---------
---------
Gross sales revenue in US$ 59,705
Exchange rate 1.1382
---------
Gross sales revenue in C$ 67,956
---------
---------
(1) Payable metal and realized prices for zinc and lead are per tonne and
for silver is per ounce.
Concentrate sold in the fourth quarter of 2007 was 9% lower than in the fourth quarter of 2006 due to lower lead concentrate sales. A 36% lower zinc price and lower payable lead, partially offset by a 102% increase in the realized price of lead, resulted in a 36% decrease in gross sales revenues in US$ terms. A 13% higher exchange rate resulted in gross sales revenue in C$ terms being 44% lower in 2007.
Year 2007
----------------------------------------------------------------------------
Concentrate Realized Gross sales
sold Payable price(1) revenue
(tonnes) metal(1) (US$) ($000s)
----------------------------------------------------------------------------
Zinc 58,426 25,307 3,079 77,920
Lead 16,054 10,162 2,507 25,481
Silver n.a. 1,395,766 13.29 18,550
--------- ---------
74,480
---------
---------
Gross sales revenue in US$ 121,951
Exchange rate 1.0660
---------
Gross sales revenue in C$ 130,005
---------
---------
Year 2006
----------------------------------------------------------------------------
Concentrate Realized Gross sales
sold Payable price(1) revenue
(tonnes) metal(1) (US$) ($000s)
----------------------------------------------------------------------------
Zinc 78,962 34,789 3,097 107,742
Lead 16,310 10,501 1,300 13,651
Silver n.a. 1,467,874 11.48 16,851
--------- ---------
95,272
---------
---------
Gross sales revenue in US$ 138,244
Exchange rate 1.1360
---------
Gross sales revenue in C$ 157,051
---------
---------
(1) Payable metal and realized prices for zinc and lead are per tonne and
for silver is per ounce.
Concentrate sales in 2007 were 22% lower than in 2006 primarily due to 26% less zinc sold. Lower payable metals were partially offset by higher lead (93%) and silver (16%) prices resulting in 12% lower gross sales revenue in US$ terms. A 6% increase in the exchange rate resulted in 17% lower gross sales revenue in C$ in 2007.
Expenses:
Treatment and marketing costs were lower than in 2006 both in aggregate terms and on a per tonne sold basis primarily due to lower zinc prices and, to a lesser extent, fewer tonnes of concentrate sold and the weakening of the US$ as noted in the table above and in the Treatment and Marketing Cost section of the Statement of Operations Review in this news release. Additionally, in 2007 Mochito sold some concentrate which had flat treatment charges and no escalators.
Direct operating costs increased due to increased power consumption and fuel surcharges as well as due to a switch to an improved, more expensive method of ground control and support. Upgrades to the electrical system and other major initiatives and upgrades also added to direct operating costs.
Reclamation and closure costs in the fourth quarter and for the 2007 year increased from the comparable 2006 periods primarily due to increased accruals for severance payments in 2007 compared with 2006.
Exploration expenses increased in the fourth quarter of 2007 and for the 2007 year compared with the same periods in 2006 due to the expanded exploration program in 2007. Please refer to the exploration section below for additional details.
The decreases in the income and mining tax provisions at Mochito for the fourth quarter and for 2007, from the same periods in 2006, were due to lower earnings before tax.
Capital Expenditures:
At Mochito, $23.1 million was primarily spent as follows: $4.7 million for tailings facilities; $4.6 million for mobile equipment; $3.6 million for mine development; $5.4 million for the mill, buildings and services; $1.9 million for equipment; $1.9 million for deferred development; and, $0.9 million of capitalized exploration.
(ii) Mochito Production
Mochito's production is set out in the following table.
Fourth Quarter Year
--------------------------------------------
2007 2006 2007 2006
----------------------------------------------------------------------------
Ore Milled (tonnes) 151,149 171,369 607,583 690,243
Zinc (%) 4.6 6.2 5.4 6.0
Lead (%) 1.9 2.6 2.1 2.1
Silver (g/t) 94 101 102 92
Concentrate Production
Zinc (tonnes) 11,656 18,726 56,205 72,413
Recovery (%) 87.2 89.9 88.9 90.4
Grade (%) 52.6 51.2 52.0 52.0
Lead (tonnes) 3,527 5,239 15,470 17,263
Recovery (%) 77.1 81.0 78.6 81.0
Grade (%) 65.5 68.0 66.0 68.2
Metal in Concentrates
Zinc (tonnes) 6,117 9,578 29,211 37,646
Lead (tonnes) 2,311 3,564 10,215 11,775
Silver (ounces) 398,918 482,227 1,732,755 1,769,456
US$ operating costs, production
basis ($000s) 9,171 7,611 31,656 26,329
US$ operating cost per tonne
milled (production basis) 61 44 52 38
As planned, milled tonnage was lower during the fourth quarter of 2007 compared with the same period in 2006 and accordingly, less zinc and lead in concentrate was produced due to fewer tonnes milled as well as lower zinc and lead grades. The lower head grades were due to a shortage of backfill for the most productive stopes due to the temporary suspension of milling operations resulting in the mine having to rely on lower grade stopes to maintain production. Additionally, planned mining of a higher grade portion in the Barbasco area was delayed due to backfill and ground stability issues which occurred causing mining of the lower grade mantos in Nacional, La Leona and Salva Vida instead.
Despite the temporary suspension of milling operations during the fourth quarter of 2007, as described below more fully, the Company reached forecasted throughput. Payable zinc production was lower than forecast while silver and lead were both higher. Mining activities were focused on developing new production areas as well as developing exploration headings.
On October 18, 2007, the Company announced that it had discovered a discharge of water from the newly commissioned Soledad tailings impoundment area which necessitated a temporary suspension of milling at Mochito. It was determined that recommissioning the Pozo Azul tailings impoundment area, for which permitting remained in place, would be the quickest method of returning Mochito to full production. Mining continued throughout this period and construction is underway at Pozo Azul to increase the capacity of this tailings impoundment area to hold up to 24 months of additional material while plans are being formulated to repair Soledad. On December 6, 2007, the Company announced that milling operations had returned to normal levels and the Company is currently depositing tailings in the Pozo Azul tailings impoundment area.
Earlier in 2007, a bank of flotation cells was added to the lead circuit for use when lead grades exceed 2.0%. These new flotation cells are being used exclusively while the existing cells undergo maintenance.
The collective bargaining agreement at Mochito was renewed for three years effective October 1, 2007.
(iii) Mochito Exploration
The Company continued drilling to identify new mineral resources in several areas of the mine as well as validating the prospectivity of other areas with older drill information. Drilling commenced during the fourth quarter of 2007 in the Santo Nino manto area with the objective of upgrading resources and validating older drill information related to both reserves and resources.
In the eastern area of the Mochito mine, the Deep North area was drilled during the fourth quarter of 2007. Drilling has encountered two areas of chimney-style mineralization as well as an area of manto-style mineralization. This campaign is expected to continue throughout 2008.
Exploration drilling continues to confirm the existence of manto-style mineralization of economic interest north of the Salva Vida and San Jose areas as well as the areas between the Salva Vida, San Jose and Yojoa deposits.
During the fourth quarter of 2007, exploration drilling at Nacional SW intercepted two zones with economic mineralization. One of these zones correlates with La Leona mineralization and the other one relates to the southern extension of manto-style mineralization in the Nacional area.
Drilling at Yojoa manto has tested areas with older information that required validation of the data. Drilling in the area of the Santo Nino Chimney was postponed due to mine development requirements in the area. Drilling will be carried out during 2008.
Surface exploration continues to test the Big Fuzzy target. During the fourth quarter of 2007, a total of 1,419 metres were drilled. Strong evidence of skarn alteration as well as mineralization was intercepted within Hole BF-06, which is a step-out hole towards the west. A 20 square kilometre soil geochemical survey centered on the main Mochito graben area was initiated during the fourth quarter with a total of 336 soil samples collected. The soil survey will be completed during the first quarter of 2008.
(iv) Mochito Outlook
During 2008 Breakwater plans to conduct a total of 35,000 metres of exploration diamond drilling both on surface and underground. Several underground targets will be investigated that, if successful, could deliver significant new resources. A sound underground exploration program is in place to develop and validate new extensional targets. On surface, exploration drilling will continue to investigate the Big Fuzzy target where strong evidence of skarn alteration as well as mineralization has been encountered. During the second quarter, an aerial photo survey will be carried out in order to produce a topographic map which will greatly aid in exploration of the entire Mochito graben. Geological mapping will be carried out during the year with particular emphasis on surface structural mapping. Soil geochemical surveys will be continued with the objective of covering the entire Mochito land package. The above work will improve the geological and exploration database to generate district targets.
Production levels will return to more normal levels during 2008. There is an extensive capital improvement plan in place for 2008 which includes equipment replacement and infrastructure upgrades. Orders have been placed for four new scooptrams, three underground haulage trucks, a drill jumbo, personnel carriers, a lube truck and a scissor lift. Programs are underway to increase pumping capacity, improve underground electrical power distribution and to improve the ventilation system.
Construction work on increasing the capacity of the Pozo Azul tailings facility is on schedule and should provide ample capacity while repairs are made to the Soledad facility. Repairs to Soledad are scheduled to begin during the next dry season with completion anticipated late in 2009.
The Company is investigating the placement of thickened tailings as an alternative to the present tailings disposal methodology. Should this prove feasible, then one further possibility is converting the underground backfill system to a paste backfill system.
Toqui
(i) Toqui Financial Results
Fourth Quarter Year
--------------------------------------------
2007 2006 2007 2006
--------------------------------------------
Gross sales revenue 34,395 44,498 114,785 99,776
Treatment and marketing costs (10,588) (12,212) (40,245) (30,277)
--------------------------------------------
Net revenue 23,807 32,286 74,540 69,499
Direct operating costs (10,292) (7,636) (28,262) (18,941)
Depreciation and depletion (1,285) (1,358) (4,311) (2,812)
Reclamation and closure costs (63) (75) (276) (298)
--------------------------------------------
Contribution from mining
activities 12,167 23,217 41,691 47,448
Exploration (264) (1,683) (2,734) (4,145)
--------------------------------------------
11,903 21,534 38,957 43,303
Income and mining tax provision (944) (1,429) (5,919) (1,781)
--------------------------------------------
Net earnings 10,959 20,105 33,038 41,522
--------------------------------------------
--------------------------------------------
Capital expenditures 9,606 1,166 26,738 8,363
--------------------------------------------
--------------------------------------------
Revenue:
The following tables and discussion provide details of Toqui's gross sales
revenue for the periods indicated:
Fourth Quarter 2007
----------------------------------------------------------------------------
Concentrate Realized Gross sales
sold Payable price(1) revenue
(tonnes) metal(1) (US$) ($000s)
----------------------------------------------------------------------------
Zinc 26,241 10,716 2,652 28,419
Gold 1,266 8,396 796 6,686
Silver n.a. 2,596 14.26 37
--------- ---------
27,507
---------
---------
Gross sales revenue in US$ 35,142
Exchange rate 0.9787
---------
Gross sales revenue in C$ 34,395
---------
---------
Fourth Quarter 2006
----------------------------------------------------------------------------
Concentrate Realized Gross sales
sold Payable price(1) revenue
(tonnes) metal(1) (US$) ($000s)
----------------------------------------------------------------------------
Zinc 18,393 7,543 4,387 33,087
Gold 1,438 9,668 611 5,906
Silver n.a. 588 12.30 7
--------- ---------
19,831
---------
---------
Gross sales revenue in US$ 39,000
Exchange rate 1.1410
---------
Gross sales revenue in C$ 44,498
---------
---------
(1) Payable metal and realized prices for zinc is per tonne and for gold and
silver are per ounce.
Total concentrate sold in the fourth quarter of 2007 was 39% higher than in the fourth quarter of 2006 primarily due to a 43% increase in zinc sold. More payable zinc was more than offset by 40% lower zinc prices resulting in a 10% decrease in gross sales revenue in US$ terms. A 14% increase in the exchange rate resulted in 23% lower gross sales revenue in C$ terms in 2007.
Year 2007
----------------------------------------------------------------------------
Concentrate Realized Gross sales
sold Payable price(1) revenue
(tonnes) metal(1) (US$) ($000s)
----------------------------------------------------------------------------
Zinc 67,825 27,642 3,143 86,879
Gold 4,313 28,209 703 19,831
Silver n.a. 5,770 13.60 78
Lead n.a. n.a. n.a. n.a.
--------- ---------
72,138
---------
---------
Gross sales revenue in US$ 106,788
Exchange rate 1.0749
---------
Gross sales revenue in C$ 114,785
---------
---------
Year 2006
----------------------------------------------------------------------------
Concentrate Realized Gross sales
sold Payable price(1) revenue
(tonnes) metal(1) (US$) ($000s)
----------------------------------------------------------------------------
Zinc 51,926 21,236 3,485 74,007
Gold 2,703 23,599 589 13,900
Silver n.a. 8,289 10.95 91
Lead 246 11 964 11
--------- ---------
54,875
---------
---------
Gross sales revenue in US$ 88,009
Exchange rate 1.1337
---------
Gross sales revenue in C$ 99,776
---------
---------
(1) Payable metal and realized prices for zinc and lead is per tonne and for
gold and silver are per ounce.
Concentrate sales increased by 31% in 2007 compared with 2006 primarily due to 31% and 60% increases in zinc and gold concentrate sales respectively. Increased payable metals and 19% higher realized prices for gold were partially offset by 10% lower realized zinc prices resulting in a 21% increase in gross sales revenue in US$ terms. A 5% increase in the exchange rate resulted in gross sales revenue increasing 15% in C$ terms in 2007.
Expenses:
Despite higher concentrate sales, treatment and marketing costs were lower in the fourth quarter of 2007 compared with 2006 primarily due to lower zinc prices and the weakening of the US$. Treatment and marketing costs decreased on a per tonne of concentrate sold basis but increased as a percentage of gross sales revenue primarily due to a 40% increase in freight costs and lower metal prices. For the full year, treatment and marketing costs in the aggregate and as a percentage of gross revenue were higher compared with 2006 primarily due to significantly more tonnes of concentrate sold, higher freight costs and lower zinc prices partially offset by lower treatment charge escalators and the effects of exchange rate changes.
Direct operating costs increased primarily due to significantly higher concentrate sales in 2007 compared with 2006. Higher labour costs related to the union agreement settlement, wage inflation indexing and addition manpower for special projects also contributed to higher direct operating costs. Additionally, increases in the cost of consumables such as tires, mill grinding media, reagents and fuel as well as an unfavourable movement in exchange rates negatively impacted direct operating costs.
Depreciation and depletion costs increased in the fourth quarter of 2007 and for the 2007 year primarily due to the higher concentrate sold and lower exchange rates compared with the same periods in 2006.
Exploration expenses decreased in the fourth quarter of 2007 and for the 2007 year compared with the same periods in 2006 due to expenditures related to Concordia and Porvenir. Expenditures associated with these deposits were capitalized in 2007 and expensed in 2006. Please refer to the exploration section below for additional details.
For the fourth quarter of 2007, the income and mining tax provision for 2007 decreased primarily due to lower earnings before tax compared with 2007. In 2007, the income and mining tax provision increased due to the remaining tax loss carry forwards from 2006 being utilized and the establishment of a future tax liability in 2007.
Capital Expenditures:
Toqui capital expenditures of $26.7 million consisted primarily of $14.0 million for development (including $9.2 million for Concordia and Porvenir), $3.3 million for mine equipment, $1.8 million for capitalized exploration, $4.1 million for mill equipment and modifications and $3.5 million for service and infrastructure upgrades.
(ii) Toqui Production
Toqui's production is set out in the following table.
Fourth Quarter Year
----------------------------------
2007 2006 2007 2006
--------------------------------------------------------------------------
Ore Milled (tonnes) 132,489 131,307 522,082 539,803
Zinc (%) 7.3 6.6 6.9 6.5
Gold (g/t) 2.6 2.7 2.7 2.4
Concentrate Production
Zinc (tonnes) 17,813 15,979 65,322 63,617
Recovery (%) 90.1 91.9 90.0 91.0
Grade (%) 51.2 49.9 49.9 49.9
Gold (tonnes) 2,055 1,315 6,251 4,237
Recovery (%) 43.0 66.3 51.4 68.5
Grade (g/t) 87.2 160.5 120.1 192.1
Metal in Concentrates
Zinc (tonnes) 8,722 7,966 32,191 31,725
Gold (ounces) 8,786 9,810 37,021 36,795
Silver (ounces) 63,506 20,802 155,890 71,703
US$ operating costs, production
basis ($000s) 8,278 7,148 24,171 20,325
US$ operating cost per tonne milled
(production basis) 62 54 46 38
Production of zinc in concentrate increased during the fourth quarter of 2007 compared with the same period in 2006 due to milling more tonnes and higher grades while the Company produced less gold due to lower grades and less recovery in the gold concentrates. Zinc grades increased during the quarter as more Concordia material was mined.
During 2007, the mining plan was modified due to ground control issues at Aserradero. This change resulted in the Company mining fewer tonnes from Aserradero and more tonnes from the higher zinc grade Concordia deposit. The ground issues at Aserradero have been resolved and production has returned to normal. Production continues in Concordia North and decline development is proceeding towards Concordia South. The Concordia deposits will be an integral part of production in 2008.
Underground programs, of about $5.0 million for capital development and $4.0 million for underground mobile equipment replacements, are both on schedule. The new surface mine shop, a new administration office and a new supervisors' accommodation were all nearly complete at the end of 2007. Higher capital expenditures than forecast were primarily due to acceleration of the development of Concordia and Porvenir and related mobile and lead flotation circuit equipment requirements, paste fill plant preliminary engineering and tailings dam closure work.
A mining contractor continues to develop the accesses to Porvenir. By year end, a total of 320 metres of development had been completed. Development of Porvenir is expected to take 16 months with production to begin early in 2009.
(iii) Toqui Exploration
A $10 million exploration budget for 2007 included drilling as a major component to test some high-priority regional targets outside of the defined deposits within a distinct NW-SE anomalous trend. Exploration during 2007 resulted in a net 49% increase in Toqui's measured and indicated resources. Included is a net 64% increase in the proven and probable reserves, principally due to the addition of the Porvenir deposit, for which a production decision has been made. The additions to all resource categories are expected to extend the mine life well beyond 2020 at current mine output and support the recent decision to commence a pre-feasibility study for a 1.0 million tonne per annum mill. Toqui is constrained by the capacity of its mill which runs at 1,475 tonnes per day or approximately 540,000 tonnes per annum.
To the end of the fourth quarter of 2007, Toqui had completed 58.8 kilometres of drilling in more than 190 holes which resulted in the discovery of new mineralized zones aligned along the known NW-SE anomalous trend that crosses through the Toqui district as well as confirming the shape and continuity of Porvenir and Concordia.
During the fourth quarter of 2007, four diamond drills carried out 15.5 kilometres of extensional and exploration drilling at Toqui. Fifty-three holes were drilled on the north-west and south-east extensions of the Porvenir deposit, due south of Aserradero, and extensions towards the south-east of Concordia, located north-west of Estatuas. Exploration drilling also tested new areas south-east of Concordia and at Cerro Elefantes in the north-west of the Toqui property.
At Porvenir, the Company has proven that mineralization is continuous along a NW-SE anomalous trend as well as down dip. Recent intercepts in holes PDT-91 and PDT-98 are confirming the occurrence of a gold skarn system towards the south-east of Porvenir that could be structurally related to the gold skarn system of Aserradero. PDT-91 intercepted 11.5 metres (core length) of economic grade gold skarn while PDT-98 (the most south-east intercept) intercepted 4.5 metres (core length) of economic grade gold skarn with almost no zinc values. These recent results indicate that the south-east extension of Porvenir is one of the most promising untested areas in the district.
To the north-west of Porvenir, drilling continues with the goal of discovering the extensions of the Porvenir deposit as well as establishing a connection with the Estatuas deposit located 1.5 kilometres towards the north-west. The latest drill results from north-west of Porvenir indicate that there is a potential for a much larger mineralized system in this area. Hole PNW-03 intercepted 4.6 metres of economic grade zinc within a package of 26.5 metres of fossiliferous coquina. Following the alteration zonation model, it is expected that mineralization will continue towards the main Don Amado feeder located west of PNW-03.
Exploration drilling has shown encouraging results in other areas of the district, including an area located 300 metres south-east of the Concordia deposit. A soil geochemical survey and geological mapping over the area have highlighted a multi-element response of underlying mineralization at the Concordia South-East area. The area of Concordia East has indications from exploration drilling that mineralization remains open down dip and in all directions aligned along certain specific structures that control mineralization.
Additional exploration drilling has tested an area known as Cerro Elefantes which is one of the distinctive geophysical (low resistivity) anomalies in the north-western area of Toqui that also coincides with a soil geochemical anomaly. A three dimensional magnetic anomaly beneath Cerro Elefantes is part of a larger magnetic body that extends to the north-west. An interpretation of the magnetic data indicates that the conductor extends to the north-west and below cretaceous rocks.
Strong pyrite-silica/chalcopyrite/molybdenite stockwork mineralization was encountered within a 1,000 metres thick vertical package of Jurassic volcanic rocks. Significant alteration and mineralization was detected that could be interpreted as being part of a large porphyry system. This result is encouraging and in the future the Company is planning to explore underneath the volcanic sequence with the aim of discovering a high grade copper skarn deposit hosted in the underlying Paleozoic marbles.
Exploration diamond drilling is now under way on the Catedral Project, a 2.5 kilometre by 1.0 kilometre area that connects the Concordia deposit with the north and north-west sectors of the former producing Dona Rosa mine. Initial exploration drilling has returned encouraging results and this program will continue in 2008.
The collective bargaining agreement at Toqui was renewed for three years effective October 1, 2007. Management's goal was to secure a three-year agreement to ensure that there is labour harmony during any construction period related to the possible construction of a new mill at El Toqui.
(iv) Toqui Outlook
The new lead flotation circuit expansion is expected to be operational in the first quarter of 2008 which is expected to improve lead concentrate production.
New mine offices and mobile equipment shops were commissioned during the fourth quarter of 2007, while a new change house, general offices and a new warehouse will be operational during the first quarter of 2008.
Engineering studies continue for the construction of a paste backfill plant as well as for a new tailings impoundment area, based on paste tails deposition. Other projects are in progress in an effort to ensure that the appropriate infrastructure is in place to allow efficient construction of a new mill, should the pre-feasibility study be positive. The engineering consultants retained for the study expect to deliver their final report by mid-year.
Myra Falls
(i) Myra Falls Financial Results
Fourth Quarter Year
-----------------------------------
2007 2006 2007 2006
-----------------------------------
Gross sales revenue 42,123 46,398 134,666 199,758
Treatment and marketing costs (7,868) (15,765) (31,347) (57,161)
-----------------------------------
Net revenue 34,255 30,633 103,319 142,597
Direct operating costs (34,689) (17,847) (83,667) (83,866)
Depreciation and depletion (3,383) (2,952) (8,839) (8,929)
Reclamation and closure costs (3,635) (349) (4,840) (1,473)
-----------------------------------
Contribution from mining activities (7,452) 9,485 5,973 48,329
Foreign exchange and other - (101) - (1,232)
Exploration (360) (290) (3,328) (617)
Write-down of mineral properties and
fixed assets (16,000) - (16,000) -
-----------------------------------
(23,812) 9,094 (13,355) 46,480
Income and mining tax
recovery (provision) (12,205) 3,136 (18,890) 26,202
-----------------------------------
Net earnings (loss) (36,017) 12,230 (32,245) 72,682
-----------------------------------
-----------------------------------
Capital expenditures 2,450 3,339 21,362 16,596
-----------------------------------
-----------------------------------
Revenue:
The following tables and discussion provide details of Myra Falls' gross
sales revenue for the periods indicated:
Fourth Quarter 2007
------------------------------------------------------
Gross
Concentrate Realized sales
sold Payable price(1) revenue
(tonnes) metal(1) (US$) ($000s)
--------------------------------------------------------------
Zinc 15,960 7,067 2,694 19,042
Copper 11,300 2,462 6,664 16,407
Gold n.a. 5,126 782 4,007
Silver n.a. 206,546 14.15 2,922
-------- -------
27,260
--------
--------
Gross sales revenue in US$ 42,378
Exchange rate 0.9940
-------
Gross sales revenue in C$ 42,123
-------
-------
Fourth Quarter 2006
------------------------------------------------------
Gross
Concentrate Realized sales
sold Payable price(1) revenue
(tonnes) metal(1) (US$) ($000s)
--------------------------------------------------------------
Zinc 20,745 8,923 4,392 39,192
Copper n.a. (4) 7,649 (34)
Gold n.a. 935 625 585
Silver n.a. 26,725 14.03 375
-------- -------
20,745
--------
--------
Gross sales revenue in US$ 40,118
Exchange rate 1.1565
-------
Gross sales revenue in C$ 46,398
-------
-------
(1) Payable metal and realized prices for zinc and copper are per tonne
and for gold and silver are per ounce.
Concentrate sold in the fourth quarter of 2007 was 31% higher than in the fourth quarter of 2006. Despite the significant increase in concentrate sold, a 39% fall in the price of zinc resulted in revenues for the quarter increasing by only 6% higher in US$ terms. A 14% higher exchange rate resulted in gross sales revenue declining 9% in C$ terms, to $42.1 million.
Year 2007
---------------------------------------------------------
Gross
Concentrate Realized sales
sold Payable price(1) revenue
(tonnes) metal(1) (US$) ($000s)
-----------------------------------------------------------------
Zinc 50,243 21,890 3,156 69,085
Copper 26,523 5,654 6,928 39,171
Gold 3 15,967 698 11,145
Silver n.a. 663,245 13.52 8,967
------------- --------
76,769
-------------
-------------
Gross sales revenue in US$ 128,368
Exchange rate 1.0491
--------
Gross sales revenue in C$ 134,666
--------
--------
Year 2006
---------------------------------------------------------
Gross
Concentrate Realized sales
sold Payable price(1) revenue
(tonnes) metal(1) (US$) ($000s)
-----------------------------------------------------------------
Zinc 86,458 37,872 3,132 118,615
Copper 25,120 5,442 7,217 39,275
Gold 24 18,611 595 11,074
Silver n.a. 594,450 11.43 6,795
------------- --------
111,602
-------------
-------------
Gross sales revenue in US$ 175,759
Exchange rate 1.1365
--------
Gross sales revenue in C$ 199,758
--------
--------
(1) Payable metal and realized prices for zinc and copper are per tonne
and for gold and silver are per ounce.
Concentrate sales in 2007 were 31% lower than in 2006 with 42% less zinc sold partially offset by 6% higher copper sales. Except for copper, all metal prices realized in 2007 were higher than those in 2006 but did not offset generally lower payable metal resulting in a 27% decrease in gross sales revenue in US$ terms. Additionally, an 8% reduction in the exchange rate resulted in 33% lower gross sales revenue in C$ terms.
Expenses:
Despite higher concentrate sales, treatment and marketing costs were lower in the fourth quarter of 2007 compared with 2006 primarily due to lower zinc prices and the weakening of the US$. A reduction in zinc prices resulted in lower escalators. In the fourth quarter of 2007, treatment and marketing costs decreased on a per tonne of concentrate sold basis and as a percentage of gross sales revenue primarily due to the factors noted above. Treatment and marketing costs in the aggregate, per tonne concentrate sold and as a percentage of gross revenue were all lower in 2007 compared with 2006 primarily due to significantly fewer tonnes of concentrate sold, lower zinc prices, lower escalators and exchange rate impacts noted above.
Direct operating costs in the fourth quarter of 2007 increased significantly due to a combination of higher concentrate sales and higher unit costs as well as due to delays accessing Lynx 5, delays in the Price mine, increased safety and training initiatives and extreme weather which caused some flooding and reduced underground production levels and ore from the higher cost Lynx pit. Despite higher tonnages milled in 2007, aggregate direct operating costs were flat while concentrate sales were 31% lower than in 2006 resulting in a significant increase in costs per tonne sold. Lower concentrate sales were primarily due to lower grades for zinc, gold and silver in 2007 partially offset by higher copper grades. Lower production from underground due to delays accessing ore, weather related challenges and inefficiencies were partially offset by ore from the Lynx pit. Also see the tables in the Direct Operating Costs section of the Statement of Operating Results in this news release.
Reclamation and closure costs in the fourth quarter and for the 2007 year increased from the comparable 2006 periods primarily due to a $3.2 million expense in the fourth quarter of 2007 related to a revised estimate of the cost to complete upgrades to the existing tailings facility.
Exploration expense increased in the fourth quarter of 2007 and for the 2007 year compared with the same periods in 2006 due to an expanded exploration program in 2007. Please refer to the exploration section below for additional details.
At December 31, 2007, the Company reviewed Myra Falls for impairment due to the losses generated in the third and fourth quarters of 2007 which were primarily due to high direct operating costs, lower metal prices and higher exploration expenses. A life of mine cash flow forecast was prepared based on: (i) the reserves at December 31, 2007 including conversion of certain resources into reserves; (ii) estimated capital expenditures for sustaining capital and to bring reserves into production; (iii) estimated future operating costs; and, (iv) anticipated metal prices, treatment and marketing costs, freight costs and US$/C$ exchange rates. A sensitivity analysis was performed on the forecast which indicated that the cash f |