TORONTO, ONTARIO -- (MARKET WIRE) -- 07/31/08 --
Breakwater Resources Ltd. (TSX: BWR) reports the financial and operating results for the three and six month periods ended June 30, 2008. 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. The Company's concentrate production is derived from mines located in Canada, Chile and Honduras. 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 periods difficult.
HIGHLIGHTS
The Company realized net earnings of $8.1 million or $0.02 per share in the second quarter of 2008 compared with $38.7 million or $0.09 per share in the second quarter of 2007. The main items affecting the decrease in net earnings quarter over quarter were:
- $11.7 million higher gross sales revenue primarily due to the impact of Langlois sales, higher concentrate sales at Mochito and Toqui and higher prices for copper, gold and silver partially offset by a 41% reduction in the realized zinc price and a 7% appreciation in the C$ in 2008. In US$ terms, gross sales revenue was US$19.3 million higher
- Sales of concentrate in the second quarter of 2008 increased 87% to 96,536 tonnes primarily due to 17,435 tonnes from Langlois and 8,375 and 19,526 tonnes of greater sales at Mochito and Toqui respectively
- $20.4 million higher direct operating costs primarily due to increased concentrate sales, the addition of sales from Langlois and higher costs for fuel, labour and supplies at Mochito and Toqui
- An increase of $1.5 million in investment and other income primarily due to a realized gain on sale of investments of $7.0 million offset by a lower valuation of conversion rights in certain convertible debentures held by the Company and lower interest income
- $1.5 million increased exploration expenses primarily due to $2.2 million greater exploration expenses at the corporate level related to joint ventures
- An increase of $7.3 million income tax provision due primarily to a $13.1 million reduction in a tax recovery at Langlois offset by a decrease in the tax provisions for Mochito and Toqui
Concentrate produced in the second quarter of 2008 increased by 15% to 86,856 tonnes due to increased production at Langlois, Mochito and Toqui offset by lower production at Myra Falls.
The Company estimated that inventories shipped but not recognized for revenue purposes, at June 30, 2008, had earnings before tax of $5.2 million on 42,493 tonnes of concentrate compared with earnings before tax of $8.4 million on 51,100 tonnes of concentrate at December 31, 2007.
On April 10, 2008, the Company purchased a 3% net smelter return royalty, established in December 2007 at the Myra Falls mine in conjunction with the creation of a qualifying environmental trust, for 13,518,739 Common Shares.
On April 15, 2008, the Company issued 7.0 million Common Shares to acquire Metco Resources Inc. ("Metco") to consolidate its land position in Lebel-sur-Quevillion and to acquire a large under explored land package in the prolific Matagami camp.
Successfully negotiated a new eighteen month contract at Myra Falls in July 2008.
OUTLOOK
Mochito
The mine rehabilitation program, commenced to address ground control problems experienced late in 2007 and in the first few months of 2008, continued with the installation of improved ground support media throughout the mine. This initiative is expected to be complete in the third quarter and is not expected to impact on previous production guidance.
Construction work to increase the capacity of the Pozo Azul tailings facility is largely complete and is expected to provide ample capacity while repairs are made to the Soledad facility. Repairs to Soledad are ongoing with completion anticipated late in 2009.
Toqui
The mill capital cost portion of the prefeasibility study was received in late June and the estimated capital cost was significantly higher than originally expected. The study examined the economics related to a new concentrator installation to process 3,000 tonnes per day (essentially double the current mill capacity). Several lower cost alternatives will be evaluated including installing the grinding mills from Bougrine in Tunisia which was closed in September 2005. These mills would increase the milling capacity by approximately 50% and would provide more operational flexibility.
A project to increase hydro generation is being investigated and includes engineering for a third turbine and application for additional water rights. The Company expects Toqui to meet its production targets as previously disclosed.
Myra Falls
During the first quarter of 2008, the Company announced a non-permanent layoff of 132 people. The layoffs took effect late in the second quarter and in the first week of July and resulted in a total mine site workforce of 287. This will bring, at least in the short-term, manpower levels more in line with operating requirements. Collective bargaining continued throughout the quarter and an agreement was reached in early July which was subsequently ratified by the union membership. The agreement lasts for a term of eighteen months, ending in September 2009, and includes a wage increase of 4.5%.
The new senior management team, installed early in the second quarter of 2008, has revised the mine plan for the remainder of the year in order to reduce costs and increase efficiencies. Accordingly, the Company hereby revises its 2008 projected metals production for Myra Falls as follows:
Metal in Concentrate Contained Payable
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Zinc (tonnes) 34,200 29,000
Copper (tonnes) 4,900 4,700
Gold (ounces) 15,600 11,600
Silver (ounces) 698,000 416,000
The capacity of the new tailings facility has been re-evaluated and there is sufficient capacity to use the facilities through 2008 without an additional dam raise.
Langlois
Ramp-up of production continued during the second quarter of 2008. Zinc head grades are forecast to reach targeted values with the commencement, late in the second quarter, of mining in the higher grade Zone 97. Based on results to-date, it is anticipated that Langlois will meet the 2008 guidance numbers.
The establishment of the paste backfill system for Zones 4 and 97 is on target and filling of the first stopes in Zone 97 will commence in August.
STATEMENT OF OPERATIONS REVIEW - THREE AND SIX MONTHS ENDED JUNE 30, 2008 AND 2007
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$").
Concentrate Second Quarter First Six Months
Sold (tonnes) 2008 2007 2008 2007
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Zinc
Mochito 23,137 11,830 23,137 21,154
Toqui 25,684 9,192 46,686 27,815
Myra Falls 17,882 18,020 27,590 20,129
Langlois(1) 14,888 - 30,342 -
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81,591 39,042 127,755 69,098
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Copper
Myra Falls 4,692 4,907 9,326 10,558
Langlois(1) 2,547 - 4,205 -
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7,239 4,907 13,531 10,558
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Lead
Mochito 3,736 6,668 9,339 9,468
Toqui 1,418 - 1,418 -
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5,154 6,668 10,757 9,468
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Gold
Toqui 2,552 936 3,704 1,760
Myra Falls - - - 3
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2,552 936 3,704 1,763
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All Metals 96,536 51,553 155,747 90,887
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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.
Second Quarter 2008 Second Quarter 2007
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Concen- Gross Concen- Real- Gross
trate Realized sales trate ized sales
sold Payable price(1) revenue sold Payable price(1) revenue
(tonnes) metal(1) (US$) ($000s) (tonnes) metal(1) (US$) ($000s)
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Zinc 81,591 35,075 2,205 77,339 39,042 16,522 3,710 61,305
Copper 7,239 1,465 7,837 11,482 4,907 1,024 7,460 7,640
Lead 5,154 3,031 2,007 6,082 6,668 4,325 2,058 8,901
Gold(3) 2,552 9,544 902 8,609 936 10,413 668 6,952
Silver n.a. 603,022 17.09 10,305 n.a. 718,370 13.37 9,601
Other(2) n.a. 191 n.a. 343
------ ---------------- -------
96,536 51,553
------ -------
------ -------
114,008 94,742
1.0100 1.0914
-------- -------
115,149 103,401
-------- -------
-------- -------
(1) Payable metal and realized prices for zinc, copper and lead are per
tonne and for gold and silver are per ounce.
(2) Other gross sales revenue represents revaluations of prior period
concentrate receivables.
(3) Tonnes of gold concentrate sold are from Toqui, while payable metal is
from all operations.
Concentrate sold increased 87% in the three month period ended June 30, 2008 (the "second quarter of 2008") compared with the three month period ended June 30, 2007 (the "second quarter of 2007"). The 44,983 tonne increase in 2008 was due to sales of 17,435 tonnes of concentrate at Langlois mine and increased sales of 45% at Mochito and 192% at Toqui which were partially offset by 2% fewer tonnes sold at Myra Falls.
In payable metal terms, zinc and copper increased by 112% and 43% respectively in the second quarter of 2008 while lead, gold and silver sold decreased by 30%, 8% and 16% respectively compared with the second quarter of 2007. Realized zinc and lead prices, denominated in US$, decreased by 41% and 2% respectively while copper, gold and silver prices realized increased by 5%, 35% and 28% respectively in the second quarter of 2008.
Gross sales revenue increased by US$19.3 million or 20% in the second quarter of 2008. A stronger C$ resulted in a decrease in the average C$/US$ exchange rate of 7%. In C$ terms, gross sales revenue increased $11.8 million or 11% in the second quarter of 2008 compared with the second quarter of 2007.
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 June 30, 2008, the following schedule provides details regarding inventories shipped but not recognized for revenue purposes and the related provisional payments.
Net Earnings Weighted-
smelter Inventory before Provisional average
Concentrate return value taxes payments months to
(DMT)($000's) ($000's) ($000's) ($000's) settlement
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Zinc 31,390 16,392 15,281 1,111 20,742 1.4
Copper 7,606 16,468 14,878 1,590 15,128 3.7
Lead 1,880 4,135 2,688 1,447 4,269 1.0
Gold 1,617 3,160 2,158 1,002 2,286 1.3
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42,493 40,155 35,005 5,150 42,425
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As at June 30, 2007, the Company estimated that inventories shipped but not recognized for revenue purposes had earnings before tax of $20.7 million consisting of $51.3 million of net smelter return less $30.6 million of inventory value on 43,245 tonnes of concentrate.
The following table provides the average base and precious metal prices and exchange rates for the periods indicated.
Average Metal Prices & Foreign
Exchange Rate Second Quarter First Six Months
2008 2007 2008 2007
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Zinc (US$/tonne) 2,113 3,664 2,272 3,560
Copper (US$/tonne) 8,444 7,639 8,119 6,785
Lead (US$/tonne) 2,305 2,174 2,603 1,979
Gold (US$/ounce) 896 668 912 659
Silver (US$/ounce) 17.17 13.34 17.43 13.33
C$/US$ exchange rate 1.0099 1.0981 1.0073 1.1347
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Treatment and Marketing Costs
Despite 87% more tonnes of concentrate sold, treatment and marketing costs only increased by 63% to $41.2 million in the second quarter of 2008 from $25.3 million in the second quarter of 2007. Treatment and marketing costs for the second quarters of 2008 and 2007 were 36% and 24% of gross sales revenue respectively. The increase in aggregate treatment charges in the second quarter of 2008 was primarily due to the impact of new concentrate sales at Langlois, increased sales at Mochito and Toqui, higher base zinc treatment charges and higher shipping costs partially offset by lower zinc prices and the weakness of the US$. Also refer to each mine's financial results section in this news release.
Direct Operating Costs
Direct operating costs were 68% higher in the second quarter of 2008 at $50.6 million up from $30.2 million in the second quarter of 2007. The increased costs were primarily due to the impact of new production at Langlois and greater concentrate sales at Mochito and Toqui. Also see details of direct operating costs under each mine's financial results section in this news release.
Depreciation and Depletion
Depreciation and depletion increased $5.8 million in the second quarter of 2008 compared with the corresponding period in 2007. Langlois, which commenced commercial production effective July 1, 2007, was primarily responsible for the increase with depreciation and depletion of $3.3 million in the second quarter of 2008 along with the impact of a higher quantity of concentrate sales at Mochito and Toqui.
General and Administrative
General and administrative expenses increased by $0.7 million to $4.1 million in the second quarter of 2008 compared with 2007. The increase was primarily due to severance costs associated with the acquisition of Metco, a deposit refund in 2007 related to the acquisition of Jascan Resources Inc. in 2000 and higher salaries partially offset by lower corporate development expenses, reduced stock-based compensation and reduced travel.
Investment and Other Income
Investment and other income increased by $1.5 million to $6.4 million in the second quarter of 2008 compared with 2007. The change was primarily due to: a realized gain on sale of investments of $7.0 million plus $0.9 million of royalty income offset by a $5.5 million increase in an unrealized loss on the valuation of conversion rights in a convertible debenture held by the Company and mark-to-market losses on certain equities in public companies, primarily due to lower share prices and $1.0 million lower interest income on lower cash balances.
Foreign Exchange and Other
Foreign exchange and other was a gain of $0.8 million in the second quarter of 2008 compared with a loss of $6.3 million in 2007. The $7.1 million change was primarily due to the impact of an appreciation in the Canadian dollar on high US$ cash balances in 2007, which did not recur in 2008, and fluctuations of the Chilean peso exchange rate versus the US$ in 2008 and 2007.
Exploration
Exploration expenses increased by $1.5 million in the second quarter of 2008. Increased expenses were primarily due to expenses incurred on the Company's joint ventures and at Langlois. These expenditures were partially offset by reduced expenses at Toqui and Myra Falls.
Refer to the exploration section of each mine and the projects section for details of the exploration activities in 2008 and to Note 1 of the Company's 2007 audited consolidated financial statements for the accounting treatment of exploration expenditures.
Exploration Expenses Second Quarter First Six Months
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($ millions) 2008 2007 2008 2007
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Mochito 0.5 0.8 1.0 1.2
Toqui 0.2 0.9 0.7 2.1
Myra Falls 0.6 1.0 1.0 1.8
Langlois 0.6 0.0 2.7 0.0
Non-operating 0.3 0.2 0.4 0.5
Corporate 2.2 0.0 3.1 0.0
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Total 4.4 2.9 8.9 5.6
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Income and Mining Tax Provision (Recovery)
In the second quarter of 2008 the Company recorded an income and mining tax provision of $2.1 million compared with a recovery of $4.7 million in the second quarter of 2007. The $6.8 million increase was primarily due to a $13.1 million reduction in an income and mining tax recovery at Langlois in 2007 offset by reduced tax provisions at Mochito of $4.8 million and at Toqui of $2.0 million in 2008.
LIQUIDITY AND FINANCIAL POSITION REVIEW
Working Capital
Working capital at June 30, 2008 was $74.0 million compared with $82.6 million at December 31, 2007, a decrease of $8.6 million.
Current Assets
Total current assets increased by $0.9 million to $194.5 million as at June 30, 2008 compared with $193.6 million at December 31, 2007. The main components of current asset change were:
- Cash and cash equivalents decreased by $18.8 million reflecting lower cash flow from operating activities, expenditures on mineral properties and fixed assets and changes in working capital as described in this section and in the current liabilities section below partially offset by the sale of certain long-term investments
- Concentrate inventory increased by $11.0 million due to 5,535 more tonnes of concentrate in inventory, primarily copper concentrate, which has a higher cost per tonne than other concentrates produced
- Prepaid expenses and other current assets increased by $2.5 million due to an increase of $3.0 million in prepaid exploration for Coulon, $1.3 million of prepaid insurance and $1.1 million of prepaid freight partially offset by decreased stripping costs of $3.4 million
Current Liabilities
Current liabilities increased by $9.5 million to $120.5 million at June 30, 2008 compared with $111.0 million at December 31, 2007. The main components of the current liabilities changes were:
- Provisional payments for concentrate inventory shipped and not priced increased by $10.2 million primarily due to $6.2 million received on a swap contract and a greater quantity of copper concentrate shipped
- Income and mining taxes payable decreased by $5.0 million primarily due to decreased payables of $3.1 million and $2.0 million at Mochito and Toqui respectively
Long-term Investments
At June 30, 2008, long-term investments were $11.1 million, $21.8 million lower than the $32.9 million at December 31, 2007. The decrease was due to sales of certain equities and the marking to market of the conversion rights in a convertible debenture.
On April 2, 2008, the Company gave notice to convert the $17.0 million unsecured convertible debenture from Taseko Mines Limited ("Taseko") for 3,307,393 common shares at a conversion price of $5.14 per share. Taseko issued 2,612,971 freely tradable common shares valued at $13.4 million and withheld 694,422 common shares with a value of $3.6 million as a set off, as set out in a statement of claim, described in note 21(c) of the annual consolidated financial statements for the period ended December 31, 2007. On April 18, 2008, the Company filed an action with the Supreme Court of British Columbia seeking an order that Taseko pay to the Company $3,569,000, being the cash equivalent of the 694,422 shares withheld at a conversion price of $5.14 per share. In May 2008, the Company sold the 2,612,971 shares for $13.4 million net of commission and realized a gain on sale of $8.9 million which comprises $7.7 million which is recognized in the current year and $1.2 million which was recorded in income in prior periods as unrealized gains. The realized gain for the current year includes an amount of $6.5 million of unrealized gains that was included in OCI. The 694,422 shares are included in short-term investments available for sale and are carried at fair value.
Restricted Reclamation Investments
At June 30, 2008 and December 31, 2007, the Company had restricted reclamation investments of $33.5 million. Restricted reclamation investments of $13.5 million and $20.0 million 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 June 30, 2008 and December 31, 2007 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.
Royalty Obligations
The royalty obligations of $62.5 million at June 30, 2008 relate to the royalty amounts received from the 2004 and 2005 Red Mile transactions. In the second quarter of 2008, the $20.0 million reduction in royalty obligations was due to shares issued to acquire a 3% net smelter return interest at Myra Falls. See restricted promissory note and restricted reclamation investments 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 June 30, 2008, total accrued reclamation and closure costs were $38.5 million compared with $39.7 million at December 31, 2007.
Of the $38.5 million, $5.9 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 $1.0 million in reclamation and closure costs in the second quarter of 2008 compared with $1.1 million in the second quarter of 2007. As there is currently no law, regulation or contract in Honduras related to reclamation and closure costs, GAAP does not permit the Company to set up a liability for reclamation at the El Mochito mine.
(1) For further information on the Red Mile transactions please see the
Company's most recent Financial Report filed on SEDAR or available at the
Company's website at www.breakwater.ca.
Reclamation and Closure Cost Accrual at June 30, 2008
($ millions) Current Long-term Total
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Myra Falls 1.8 27.2 29.0
Mochito(1) 0.0 1.2 1.2
Toqui 0.0 2.5 2.5
Langlois 0.0 1.0 1.0
Bouchard-Hebert 1.2 0.1 1.3
Nanisivik 2.3 0.4 2.7
Bougrine 0.6 0.2 0.8
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Total 5.9 32.6 38.5
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(1) Reclamation and closure cost accruals for Mochito relate to accrued
severances.
Shareholders' Equity
Shareholders' equity at June 30, 2008 was $387.2 million compared with $364.4 million at December 31, 2007. The increase of $22.8 million was primarily due to net earnings of $1.2 million, the issuance of 7.0 million shares on the acquisition of Metco and the issuance of approximately 13.5 million Common Shares on the acquisition of a 3% royalty at Myra Falls partially offset by the renunciation of $2.2 million of flow-through share value and $4.4 million other comprehensive loss.
Other Total
Contri- compre- share-
Shareholders' Equity Capital buted Retained hensive holders'
($000's) stock Warrants surplus earnings income equity
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As at December
31, 2007 188,726 8,540 2,029 168,908 (3,817) 364,386
Shares issued on
acquisition of
Metco, net of
expenses 7,264 - - - - 7,264
Share issued on
acquisition of
the Myra Falls
royalty, net of
expenses 18,146 - 1,820 - - 19,966
Value ascribed to
options exercised
under stock-based
compensation 15 - (15) - - -
Adjustment to
flow through
share costs (27) - - - - (27)
Renunciation of
flow through
share value (2,160) - - - - (2,160)
Exercise of
warrants 8 (2) - - - 6
Employee share
option plan -
proceeds of
options exercised 26 - - - - 26
Employee share
purchase plan 182 - - - - 182
Stock-based
compensation - - 710 - - 710
Other comprehensive
Income - - - - (4,383) (4,383)
Net earnings - - - 1,218 - 1,218
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As at June 30, 2008 212,180 8,538 4,544 170,126 (8,200) 387,188
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In the first six months of 2008, the Company issued the following Common Shares: 7,000,000 on the acquisition of Metco; 13,518,739 on the acquisition of the Myra Falls royalty; 6,480 on exercise of warrants; 46,667 following the exercise of employee share options and 111,969 pursuant to the Company's employee share purchase plan.
Capital Expenditures
The Company invested $48.7 million in mineral properties and fixed assets in the first six months of 2008. At mining operations, $14.0 million, $14.1 million, $3.0 million and $16.8 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 $0.8 million related to $2.0 million of earn-in payments made on joint venture properties in Quebec including Coulon, Trieste, Gayote, Gatineau, Weedon and Kaminak were offset by a tax credit of $1.2 million received related to Coulon.
Financial Capability
With the existing working capital, the current metal prices and current US$/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 operating performance, metal prices, smelter treatment charges and the US$/C$ exchange rate.
PRODUCTION RESULTS
The table below contains the Company's production for 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.
Second Quarter First Six Months
2008 2007 2008 2007
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Ore Milled (tonnes) 622,834 592,301 1,189,300 1,139,716
Zinc (%) 6.5 5.8 6.3 5.8
Concentrate Production (tonnes)
Zinc:
Mochito 14,488 13,927 27,368 30,275
Toqui 16,990 14,806 33,280 30,798
Myra Falls 16,912 16,799 34,351 30,498
Langlois(1) 20,210 13,616 34,132 22,375
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68,600 59,148 129,131 113,946
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Copper:
Myra Falls 7,652 9,532 13,035 14,934
Langlois(1) 3,219 1,305 5,246 2,117
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10,871 10,837 18,281 17,051
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Lead:
Mochito 4,931 4,130 9,010 8,684
Toqui 1,379 - 2,840 -
---------------------------------------------------------------------------
6,310 4,130 11,850 8,684
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Gold:
Toqui 1,075 1,481 1,075 2,810
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Total 86,856 75,596 160,337 142,491
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C$ operating costs,
production basis ($000s) 52,454 35,713 110,286 68,957
C$ operating cost
per tonne milled (production basis) 84 74 93 72
(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 produced, before smelting deductions, for periods presented.
Metal in
Concentrate Second Quarter First Six Months
2008 2007 % 2008 2007 %
Zinc (tonnes)
Mochito 7,634 7,165 7 14,398 15,543 (7)
Toqui 8,247 7,323 13 16,410 15,191 8
Myra Falls 9,392 8,915 5 18,488 15,868 17
Langlois(1) 10,835 7,196 51 18,208 11,531 58
------------------ --------------------
36,108 30,599 18 67,504 58,133 16
------------------ --------------------
Copper (tonnes)
Myra Falls 1,793 2,196 (18) 3,072 3,389 (9)
Langlois(1) 580 288 101 971 447 117
------------------ --------------------
2,373 2,484 (4) 4,043 3,836 5
------------------ --------------------
Lead (tonnes)
Mochito 3,231 2,662 21 5,925 5,796 2
Toqui 648 - - 1,363 - -
------------------ --------------------
3,879 2,662 46 7,288 5,796 26
------------------ --------------------
Gold (ounces)
Toqui 8,217 6,542 26 9,610 20,423 (53)
Myra Falls 4,128 5,175 (20) 8,128 11,491 (29)
Langlois 445 165 170 733 299 145
------------------ --------------------
12,790 11,882 8 18,471 32,213 (43)
------------------ --------------------
Silver (ounces)
Mochito 516,686 459,829 12 983,369 908,215 8
Toqui 85,775 27,226 215 164,510 49,472 233
Myra Falls 183,762 185,433 (1) 366,571 515,583 (29)
Langlois(1) 100,341 39,963 151 166,534 59,048 182
------------------ --------------------
886,564 712,451 24 1,680,984 1,532,318 10
------------------ --------------------
(1) First concentrate shipped November 2006 and considered to be at
commercial production levels effective July 1, 2007.
Aggregate production of zinc in concentrate in the second quarter of 2008 was 18% higher at 36,108 tonnes. The increase was primarily due to more tonnes milled at Mochito, Toqui and Langlois partially offset by fewer tonnes milled at Myra Falls. Copper in concentrate produced decreased 4% due to fewer tonnes from Myra Falls partially offset by higher tonnes at Langlois. Production of lead in concentrate rose 46% due to the resumption of lead production at Toqui as well as more tonnes milled at Mochito. Gold in concentrate increased 8% in the second quarter of 2008 from the same period in 2007 due to the processing of the gold-rich Aserradero material at Toqui partially offset by fewer tonnes milled at Myra Falls. Silver in concentrate increased 24% quarter over quarter due to more tonnes milled and higher grades at Mochito, Toqui and Langlois partially offset by lower production at higher silver grades at Myra Falls.
Mochito
(i) Mochito Financial Results
Second Quarter First Six Months
-----------------------------------
2008 2007 2008 2007
-----------------------------------
Gross sales revenue 34,311 38,590 51,177 61,532
Treatment and marketing costs (11,748) (5,745) (13,499) (7,764)
-----------------------------------
Net revenue 22,563 32,845 37,678 53,768
Direct operating costs (10,585) (7,584) (16,651) (12,412)
Depreciation and depletion (2,440) (1,207) (3,778) (1,918)
Reclamation and closure costs (244) (99) (532) (421)
-----------------------------------
Contribution from mining activities 9,294 23,955 16,717 39,017
Exploration (531) (765) (967) (1,203)
-----------------------------------
8,763 23,190 15,750 37,814
Income and mining tax provision (2,498) (7,292) (3,992) (10,708)
-----------------------------------
Net earnings 6,265 15,898 11,758 27,106
-----------------------------------
-----------------------------------
Capital expenditures 9,492 6,575 13,956 9,848
-----------------------------------
-----------------------------------
Revenue:
The following tables and discussion provide details of Mochito's gross
sales revenue for the periods indicated:
Second Quarter 2008
----------------------------------------------
Gross
Concentrate Realized sales
sold Payable price(1) revenue
(tonnes) metal(1) (US$) ($000s)
----------------------------------------------
Zinc 23,137 10,234 2,147 21,974
Lead 3,736 2,330 2,050 4,777
Silver n.a. 409,557 17.06 6,988
Other(2) n.a. 277
---------- -------
26,873
----------
----------
Gross sales revenue in US$ 34,016
Exchange rate 1.0087
-------
Gross sales revenue in C$ 34,311
-------
-------
Second Quarter 2007
----------------------------------------------
Gross
Concentrate Realized sales
sold Payable price(1) revenue
(tonnes) metal(1) (US$) ($000s)
----------------------------------------------
Zinc 11,830 5,107 3,832 19,571
Lead 6,668 4,325 2,058 8,901
Silver n.a. 490,403 13.37 6,557
Other(2) n.a. (404)
---------- -------
18,498
----------
----------
Gross sales revenue in US$ 34,625
Exchange rate 1.1145
--------
Gross sales revenue in C$ 38,590
--------
--------
(1) Payable metal and realized prices for zinc and lead are per
tonne and for silver is per ounce.
(2) Other gross sales revenue represents revaluations of prior
period concentrate receivables.
Zinc sales virtually doubled over the second quarter of 2007 due to certain first quarter 2008 shipments of zinc concentrate being recognized in the second quarter of 2008 as pricing became known pursuant to our revenue recognition policy. This resulted in an increase in total concentrate sold of 45%. The dramatic increase in zinc sales was partially offset by lower lead sales. Notwithstanding the significant increase in zinc sales, total gross sales revenues in US$ terms declined by 2% due to a 44% decline in zinc prices realized and the lower lead sales noted above. In C$ terms gross sales revenue declined 11% due to the weakening US$.
Expenses:
Treatment and marketing costs were higher in the second quarter of 2008 in aggregate terms due to greater zinc concentrate sales, the weakening US$, higher base zinc treatment charges and higher freight costs due to fuel surcharges levied in response to the soaring price of crude oil. Treatment and marketing costs per tonne of concentrate sold in the second quarter of 2008 increased primarily due to higher base zinc treatment charges and certain concentrate sales in the second quarter of 2007 which had flat treatment charges.
Aggregate direct operating costs increased 40% due to the significant increase in tonnes of concentrate sold combined with increased fuel costs, the use of contract miners, the cost of improved ground support and additional safety initiatives. Refer to the discussion of US$ operating costs on a production basis discussed in the production section below.
Exploration expenses in the second quarter of 2008 decreased by $0.2 million to $0.5 million. Refer to the exploration section below for additional details.
Capital Expenditures:
For the first six months of 2008, $14.0 million was spent on capital at Mochito primarily as follows: $3.7 million for mobile equipment; $2.3 million for tailings facilities; $1.1 million for electrical upgrades; $3.1 million for mine development; $0.3 million for definition drilling; and, $3.5 million for various infrastructure projects.
(ii) Mochito Production
Mochito's production is set out in the following table.
Second Quarter First Six Months
----------------------------------
2008 2007 2008 2007
---------------------------------------------------------------------------
Ore Milled (tonnes) 171,808 151,219 324,335 306,403
Zinc (%) 5.0 5.3 5.0 5.7
Lead (%) 2.3 2.3 2.2 2.4
Silver (g/t) 107 110 107 107
Concentrate Production
Zinc (tonnes) 14,488 13,927 27,368 30,275
Recovery (%) 88.5 88.7 88.8 89.1
Grade (%) 52.7 51.5 52.6 51.4
Lead (tonnes) 4,931 4,130 9,010 8,684
Recovery (%) 82.1 78.4 82.0 78.8
Grade (%) 65.6 64.5 65.8 66.8
Metal in Concentrates
Zinc (tonnes) 7,634 7,165 14,398 15,543
Lead (tonnes) 3,231 2,662 5,925 5,796
Silver (ounces) 516,686 459,829 983,369 908,215
C$ operating costs, production basis
($000s) 9,036 7,845 17,651 15,992
US$ operating costs, production basis
($000s) 8,949 7,140 17,523 14,093
C$ operating cost per tonne milled
(production basis) 53 52 54 52
US$ operating cost per tonne milled
(production basis) 52 47 54 46
Zinc and lead in concentrate produced increased by 7% and 21% respectively in the second quarter of 2008 compared with the same period in 2007 primarily due to milling more tonnes at slightly lower grades. The increase in the tonnes milled for each of the first two quarter of 2008 is due to the focus on production mining as opposed to the necessary focus on development mining in 2007. The lower grades were due to a number of ground control issues experienced during the first and second quarters which required rehabilitation of the affected areas and delayed mining of some higher grade stopes. The ground rehabilitation program put in place during the first quarter continues on high priority areas with dedicated crews to complete this work.
Silver in concentrate increased by 12% due to more tonnes milled at slightly lower grades.
Operating costs on a production basis increased 25% to US$8.9 million in the second quarter of 2008. The US$1.8 million increase was primarily due to: more ore milled; greater power consumption at higher rates; an improved, more expensive method of ground control; higher diesel and lubricant costs; major equipment and mill component overhauls and repairs; new reagents required to extend the capacity of Pozo Azul; and, increased safety training, supervisor training and employee benefits.
During the second quarter, programs initiated earlier in the year to increase pumping capacity, improve underground electrical power distribution and improve the ventilation system, continued.
(iii) Mochito Exploration
The Company continued drilling to identify new mineral resources in several areas of the mine as well as to validate the prospectivity of other areas with older drill information.
Drilling continued during the second quarter in the Santo Nino manto area with the objective of upgrading resources and validating older drill information related to both reserves and resources. Drilling in the second quarter of 2008 in the area of the Santo Nino Chimney continued with a number of drill holes encountering several bands of economic chimney-style mineralization. Likewise, in the eastern area of the Mochito mine, drilling of the Deep North and Deep East areas encountered two areas of chimney-style mineralization as well as an area of manto-style mineralization. This campaign is expected to continue throughout 2008. Drilling at Yojoa Manto continued and economic skarn mineralization was encountered. A number of exploration drill holes at Raton West encountered several bands of economic skarn mineralization. Drilling also commenced on the 2450 level of Salva Vida with a number of drill holes encountering several bands of economic skarn mineralization.
Surface exploration of the Big Fuzzy target has been deferred while the Company continues to refine the exploration model for the Big Fuzzy target. During the first quarter of 2008, strong evidence of skarn alteration as well as mineralization was intercepted within Hole BF-06, which is a step-out hole towards the west. BF-06 represents the first intercept of economic grades and thickness within the Mochito district outside of the area of the mine.
Progress continued on the collection and compilation of basic surface geologic data for the entire Mochito district. First-pass geologic mapping over much of the district has been completed and a detailed soil geochemistry grid across the district - currently in progress -should be completed by the end of the third quarter. At the end of the second quarter, the soil grid was 87% complete with 1,578 samples left to collect. Additional soil geochemical sampling is planned to the east of the current sampling area in light of the recent discovery of old geological information. This extended area could provide important information combined with the BF-06 intercept. An aerial photogrammetric survey of the entire district has been postponed until later in the year due to delays in acquiring Government permission to conduct the flights. The resulting orthorectified aerial photography and detailed topography will assist completion of the geologic mapping and assist in developing a new structural interpretation for the district.
(iv) Mochito Outlook
The mine rehabilitation program, commenced to address ground control problems experienced late in 2007 and in the first few months of 2008, continued with the installation of improved ground support media throughout the mine. This initiative is expected to be complete in the third quarter and is not expected to impact on previous production guidance.
Construction work to increase the capacity of the Pozo Azul tailings facility is largely complete and is expected to provide ample capacity while repairs are made to the Soledad facility. Repairs to Soledad are ongoing with completion anticipated late in 2009.
Toqui
(i) Toqui Financial Results
Second Quarter First Six Months
------------------------------------
2008 2007 2008 2007
------------------------------------
Gross sales revenue 32,193 19,194 59,102 56,420
Treatment and marketing costs (13,742) (7,057) (23,239) (21,457)
------------------------------------
Net revenue 18,451 12,137 35,863 34,963
Direct operating costs (9,521) (2,945) (17,683) (11,176)
Depreciation and depletion (2,326) (589) (3,974) (2,590)
Reclamation and closure costs (44) (71) 994 (146)
------------------------------------
Contribution from mining activities 6,560 8,532 15,200 21,051
Exploration (225) (916) (686) (2,100)
------------------------------------
6,335 7,616 14,514 18,951
Income and mining tax (provision)
recovery 405 (1,600) (2,407) (3,159)
------------------------------------
Net earnings 6,740 6,016 12,107 15,792
------------------------------------
------------------------------------
Capital expenditures 6,128 6,080 14,074 10,057
------------------------------------
------------------------------------
Revenue:
The following tables and discussion provide details of Toqui's gross sales
revenue for the periods indicated:
Second Quarter 2008
----------------------------------------------
Gross
Concentrate Realized sales
sold Payable price(1) revenue
(tonnes) metal(1) (US$) ($000s)
----------------------------------------------
Zinc 25,684 10,544 2,251 23,732
Lead 1,418 701 1,863 1,305
Gold 2,552 6,888 899 6,196
Silver n.a. 42,794 16.98 727
Other(2) n.a. (66)
------------- --------
29,654
-------------
-------------
Gross sales revenue in US$ 31,894
Exchange rate 1.0094
-------
Gross sales revenue in C$ 32,193
-------
-------
Second Quarter 2007
----------------------------------------------
Gross
Concentrate Realized sales
sold Payable price(1) revenue
(tonnes) metal(1) (US$) ($000s)
----------------------------------------------
Zinc 9,192 3,772 3,564 13,444
Lead n.a. n.a. n.a. n.a.
Gold 936 5,422 663 3,597
Silver n.a. 1,858 13.15 25
Other(2) n.a. 746
------------- --------
10,128
-------------
-------------
Gross sales revenue in US$ 17,812
Exchange rate 1.0776
-------
Gross sales revenue in C$ 19,194
-------
-------
(1) Payable metal and realized prices for zinc is per tonne and
for gold and silver are per ounce.
(2) Other gross sales revenue represents revaluations of prior
period concentrate receivables.
Total concentrate sold in the second quarter of 2008 was 193% higher than in the second quarter of 2007. The dramatic increase in sales of all metals more than offset the significant reduction in zinc prices resulting in a 77% increase in gross sales revenue in US$ terms. The weakening US$ resulted in the increase in gross sales revenue in C$ terms being slightly less at 68%.
Expenses:
Treatment and marketing costs were higher on an aggregate basis due to the significant increase in the quantity of concentrate sold and higher freight costs offset by lower zinc prices, a higher base zinc price at which to calculate the treatment charges and the weakening US$. Treatment and marketing costs declined on a per tonne of concentrate sold basis due to lower zinc prices realized and higher zinc base prices. As a percentage of gross sales revenue, treatment and marketing costs increased to 43% of revenue from 37% in the same period in 2007 primarily due to the lower zinc prices realized.
Direct operating costs in the second quarter of 2008 were higher than in the same period in 2007 primarily due to higher concentrate sales. Direct operating costs as a percentage of gross sales revenue increased to 30% in the second quarter of 2008 from 15% in 2007 due to a lower zinc price partially offset by higher gold and silver prices. On a cost per tonne sold basis, second quarter 2008 costs increased to $321 from $291 in 2007 primarily due to higher costs for fuel and labour. Refer to the discussion of US$ operating costs on a production basis in the production section below.
Depreciation and depletion costs increased in the second quarter of 2008 due to the sale of more tonnes of concentrate.
Exploration expenses decreased in the second quarter of 2008 compared with the same period in 2007 due to reduced expenses related to Concordia and Porvenir. Please refer to the exploration section below for additional details.
The second quarter 2008 income and mining tax was a recovery of $0.4 million compared with an expense of $1.6 million in the second quarter 2007.
Capital Expenditures:
Toqui capital expenditures of $14.1 million in the first six months of 2008 consisted primarily of: $2.7 million for development of Porvenir, Concordia, Estatuas and Aserradero; $3.8 million for mine equipment and buildings; $2.5 million for capitalized exploration at Porvenir, Aserradero North and Concordia East, $1.9 million for a lead flotation circuit, a ball mill overhaul and a thickened tailings plant study; $1.0 million for definition drilling; $0.4 million for the mill pre-feasibility study, and; $0.3 million for housing and a new dry.
(ii) Toqui Production
Toqui's production is set out in the following table.
Second Quarter First Six Months
-----------------------------------
2008 2007 2008 2007
-------------------------------------------------------------
Ore Milled (tonnes) 132,720 128,837 259,813 258,470
Zinc (%) 7.0 6.3 7.1 6.5
Lead (%) 0.8 - 0.9 -
Gold (g/t) 2.4 2.0 1.5 3.0
Silver (g/t) 27 9 27 9
Concentrate Production
Zinc (tonnes) 16,990 14,806 33,280 30,798
Recovery (%) 88.7 88.8 89.1 90.0
Grade (%) 48.5 49.5 49.3 49.3
Lead (tonnes) 1,379 - 2,840 -
Recovery (%) 47.0 - 48.0 -
Grade (%) 64.1 - 59.7 -
Gold (tonnes) 1,075 1,481 1,075 2,810
Recovery (%) 55.8 61.8 55.8 59.4
Grade (g/t) 144.0 89.6 144.0 145.6
Metal in Concentrates
Zinc (tonnes) 8,247 7,323 16,410 15,191
Lead (tonnes) 648 - 1,363 -
Gold (ounces) 8,217 6,542 9,610 20,423
Silver (ounces) 85,775 27,226 164,510 49,472
C$ operating costs,
production basis ($000s) 6,212 5,830 12,826 11,531
US$ operating costs,
production basis ($000s) 6,150 5,296 12,733 10,162
C$ operating cost per
tonne milled
(production basis) 47 45 49 45
US$ operating cost per
tonne milled
(production basis) 46 41 49 39
Production of zinc in concentrate increased 13% during the second quarter of 2008 compared with the same period in 2007 as more tonnes were milled at higher grades. Zinc grades increased quarter over quarter as higher zinc grade Estatuas material is being blended with higher lead grade Concordia material. Silver head grades also increased due to the addition of Concordia material. The new lead flotation circuit expansion was operational in the second quarter of 2008 and, as expected, improved lead concentrate production.
Production continues in Concordia North and commenced at Concordia South during the second quarter. The Concordia deposits will be an integral part of production in 2008. Development of the accesses for the Porvenir deposit continued.
In the second quarter of 2008, a new change house was commissioned.
Operating costs on a US$ production basis increased 16% to US$6.2 million in the second quarter of 2008. On a cost per tonne milled basis, costs increased by 12% in the second quarter of 2008. The US$0.9 million increase in production costs are primarily due to a 13% increase in the Chilean peso against the US$; a 12% in increase in labour costs associated with the new collective agreement including an 11% inflation indexing adjustment; and, higher power costs due to a 27% increase in diesel costs; and, more diesel generated power due to dryer weather conditions reducing hydro power capacity.
(iii) Toqui Exploration
During the second quarter of 2008, the diamond drill program at Toqui continued with a total of 7,694 metres drilled in 47 holes at the Mina Profunda (or "deeper mine") project and the area west and south of the Estatuas mine. Exploration drilling is a major component of a $4.0 million program for 2008. In total during 2008, 18,950 metres of drilling in more than 109 drill holes have been completed which has resulted in the discovery of new mineralized zones aligned along the known north-west - south-east trend that crosses through the Toqui district as well as confirming the shape of the new Porvenir and Concordia deposits.
At Mina Profunda, two surface diamond drills carried out extensional drilling while one underground drill continued with in-fill drilling in 38 holes totaling 7,064 metres. The drilling to-date continues to confirm the existence of an underlying, 500 metre long by 100 metre wide, north-west/south-east trending gold-cobalt-zinc skarn system hosted within a favourable calcareous sandstone horizon. Mina Profunda is located approximately 60 metres beneath and adjacent to the known deposits of Dona Rosa and Aserradero.
The latest round of drill results from the Mina Profunda project has outlined that the deposit is located between horizons of fluid tuffs - underneath an intrusive rhyolitic sill - containing higher gold grades and lower zinc grades (similar to Aserradero) continuous along a north-west - south-east trend confined between two major north-west striking fault structures. It appears that gold mineralization follows a chemical control. Several studies are currently being carried out to determine relationships with the pre-existing base metal skarn system and to provide guidance for future exploration for these types of deposits within the Toqui district.
Exploration and in-fill drilling has also reported encouraging results in several areas towards the west and south of the Estatuas mine. A total of 630 metres were drilled at the Estatuas mine from underground in nine holes.
(iv) Toqui Outlook
The mill capital cost portion of the prefeasibility study was received in late June and the estimated capital cost was significantly higher than originally expected. The study examined the economics related to a new concentrator installation to process 3,000 tonnes per day (essentially double the current mill capacity). Several lower cost alternatives will be evaluated including installing the grinding mills from Bougrine in Tunisia which was closed in September 2005. These mills would increase the milling capacity by approximately 50% and would provide more operational flexibility.
A project to increase hydro generation is being considered with engineering for a third turbine and application for additional water rights being investigating. The Company expects Toqui to meet its production targets as previously disclosed.
A new warehouse is expected to be commissioned during the third quarter.
Myra Falls
(i) Myra Falls Financial Results
Second Quarter First Six Months
--------------------------------------
2008 2007 2008 2007
--------------------------------------
Gross sales revenue 28,622 45,617 47,136 63,396
Treatment and marketing costs (8,188) (12,509) (13,143) (16,010)
--------------------------------------
Net revenue 20,434 33,108 33,993 47,386
Direct operating costs (18,674) (19,658) (37,064) (30,192)
Depreciation and depletion (1,674) (2,194) (2,794) (3,535)
Reclamation and closure costs (427) (402) (861) (804)
--------------------------------------
Contribution from mining
activities (341) 10,854 (6,726) 12,855
Exploration (614) (1,058) (978) (1,793)
--------------------------------------
(955) 9,796 (7,704) 11,062
Income and mining tax provision (1,921) (1,331) (2,867) (3,009)
--------------------------------------
Net (loss) earnings (2,876) 8,465 (10,571) 8,053
--------------------------------------
--------------------------------------
Capital expenditures 887 5,277 2,967 11,789
--------------------------------------
--------------------------------------
Revenue:
The following tables and discussion provide details of Myra Falls' gross
sales revenue for the periods indicated:
Second Quarter 2008
---------------------------------------------
Gross
Concentrate Realized sales
sold Payable price(1) revenue
(tonnes) metal(1) (US$) ($000s)
-----------------------------------------------------
Zinc 17,882 7,851 2,205 17,309
Copper 4,692 1,003 7,572 7,597
Gold n.a. 2,379 908 2,160
Silver n.a. 75,373 16.69 1,258
Other(2) n.a. n.a.
----------- --------
22,574
-----------
-----------
Gross sales revenue in US$ 28,324
Exchange rate 1.0105
--------
Gross sales revenue in C$ 28,622
--------
--------
Second Quarter 2007
---------------------------------------------
Gross
Concentrate Realized sales
sold Payable price(1) revenue
(tonnes) metal(1) (US$) ($000s)
---------------------------------------------
Zinc 18,020 7,642 3,702 28,290
Copper 4,907 1,024 7,460 7,640
Gold n.a. 4,991 672 3,354
Silver n.a. 226,109 13.36 3,020
Other(2) n.a. 1
----------- --------
22,927
-----------
-----------
Gross sales revenue in US$ 42,305
Exchange rate 1.0783
--------
Gross sales revenue in C$ 45,617
--------
--------
(1) Payable metal and realized prices for zinc and copper 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 the second quarter of 2008 was 2% lower than in the second quarter of 2007. Gross sales revenues for the second quarter of 2008 decreased 33% in US$ terms as a result of the 40% fall in the realized price of zinc. In C$ terms gross sales revenue fell 37% to $28.6 million due to the weakness in the US$.
Expenses:
Treatment and marketing costs were lower in the second quarter of 2008 compared with 2007 primarily due to lower zinc prices which resulted in lower escalators and accordingly lower treatment charges. In the second quarter of 2008, treatment and marketing costs decreased on a per tonne of concentrate sold basis due to lower zinc prices which generate a lower treatment and marketing cost per tonne compared with 2007. As a percentage of gross sales revenue, treatment and marketing costs remained unchanged quarter over quarter.
Direct operating costs in the second quarter of 2008 decreased by $1.0 million or 5% primarily due to lower tonnes of concentrate sold partially offset by higher operating costs. Refer to the discussion of operating costs in a production basis in the production section below.
Exploration expense decreased in the second quarter of 2008 compared with the same period in 2007. Refer to the exploration section below for additional details.
The income and mining tax provision increased by $0.6 million in the second quarter of 2008 primarily due to a $1.7 million reduction of a future tax asset in 2008 compared with a $1.0 million reduction in the second quarter of 2007.
Capital Expenditures:
Myra Falls' capital expenditures of $3.0 million in the first six months of 2008 consisted primarily of $1.1 million for development at Price, $1.5 million for a new tailings disposal area and $0.3 million for mining equipment.
(ii) Myra Falls Production
Myra Falls' production is set out in the following table.
First Six
Second Quarter Months
---------------------------------
2008 2007 2008 2007
------------------------------------------------------------------------
Ore Milled (tonnes) 164,707 202,930 334,889 388,326
Zinc (%) 6.7 5.1 6.4 4.8
Copper (%) 1.4 1.4 1.2 1.1
Gold (g/t) 1.3 1.2 1.2 1.4
Silver (g/t) 44 35 43 49
Concentrate Production
Zinc (tonnes) 16,912 16,799 34,351 30,498
Zinc Recovery (%) 86.2 85.4 86.7 85.6
Zinc Grade (%) 55.5 53.0 53.8 52.0
Gold Recovery (%) 23.9 20.2 25.4 20.3
Gold Grade (g/t) 2.9 3.0 3.0 3.7
Copper (tonnes) 7,652 9,532 13,035 14,934
Copper Recovery (%) 77.0 80.0 75.3 77.7
Copper Grade (%) 23.4 23.0 23.6 22.7
Gold Recovery (%) 36.7 41.5 36.2 43.1
Gold Grade (g/t) 10.2 11.1 11.4 15.9
Metal in Concentrates
Zinc (tonnes) 9,392 8,915 18,488 15,868
Copper (tonnes) 1,793 2,196 3,072 3,389
Gold (ounces) 4,128 5,175 8,128 11,491
Silver (ounces) 183,762 185,433 366,571 515,583
C$ operating costs, production basis
($000s) 21,606 22,038 50,046 41,434
C$ operating cost per tonne milled
(production basis) 131 109 149 107
Production of zinc in concentrate was 5% higher in the second quarter of 2008 compared with the same period in 2007 as a 29% higher zinc grade and higher recoveries were partially offset by 19% fewer tonnes milled. Copper concentrate production in the second quarter of 2008 was lower than the same period in 2007 due to fewer tonnes milled at the same copper grade.
Despite 19% fewer tonnes milled, operating costs on a production basis decreased by only $0.4 million or 2% in the second quarter of 2008. The decreased costs were primarily due to lower tonnes milled partially offset by higher costs associated with mining the final portions of the Lynx pit, higher costs due to reduced hydro generation and higher diesel costs.
Milled material was lower in the second quarter of 2008 from the same period in 2007 due to a revision of the mine plan in order to reflect the reduced manpower, minimize dilution and provide higher grade material to the mill.
(iii) Myra Falls Exploration
Hole MR15-0015 on the Marshall Zone intersected 7.5 metres grading 6.47% Zn, 0.46% Cu, 0.36% Pb, 1.1 g/t Au, and 83.6 g/t Ag. The hole confirms that the Marshall Zone extends to the west of current drilling. Future exploration plans for the Marshall zone are being evaluated. Long holes such as MR15-0015 require a great deal of time to drill and are too costly to be used to upgrade the existing resource.
Other drilling activities focused on those areas close to existing workings. The Gopher, Gnu West, and Upper HW East Zones were all extended along strike. The Gap North orebody was discovered and defined in the second quarter. It is a smaller zone of moderate grade situated approximately 100 metres to the north of the Gap orebody and is open on both ends. Drilling will continue to focus on identifying additional reserves in the immediate vicinity of mine workings.
(iv) Myra Falls Outlook
During the first quarter of 2008, the Company announced a non-permanent layoff of 132 people. The layoffs took effect late in the second quarter and in the first week of July and resulted in a total mine site workforce of 287. This will bring, at least in the short-term, manpower levels more in line with operating requirements. Collective bargaining continued throughout the quarter and an agreement was reached in early July which was subsequently ratified by the union membership. The agreement lasts for a term of eighteen months, ending in September 2009, and includes a wage increase of 4.5%.
The new senior management team, installed early in the second quarter of 2008, has revised the mine plan for the remainder of the year in order to reduce costs and increase efficiencies. Accordingly, the Company hereby revises its 2008 projected metals production for Myra Falls as follows:
Metal in Concentrate Contained Payable
-------------------------------------------------------------
Zinc (tonnes) 34,200 29,000
Copper (tonnes) 4,900 4,700
Gold (ounces) 15,600 11,600
Silver (ounces) 698,000 416,000
The capacity of the new tailings facility has been re-evaluated and there is sufficient volume to use the facilities through 2008 without an additional dam raise. Work on the under drain system will proceed later in 2008.
Langlois
(i) Langlois Financial Results
First Six
Second Quarter Months
-------------------------------------
2008 2007 2008 2007
-------------------------------------
Gross sales revenue 20,023 - 39,590 -
Treatment and marketing costs (7,489) - (12,302) -
-------------------------------------
Net revenue 12,534 - 27,288 -
Direct operating costs (11,817) - (27,165) -
Depreciation and depletion (3,336) - (6,414) -
Reclamation and closure costs (20) (27) (40) (54)
-------------------------------------
Contribution from mining
activities (2,639) (27) (6,331) (54)
Exploration (568) - (2,703) -
-------------------------------------
(3,207) (27) (9,034) (54)
Income and mining tax recovery 1,709 14,825 4,716 14,342
-------------------------------------
Net earnings (loss) (1,498) 14,798 (4,318) 14,288
-------------------------------------
-------------------------------------
Capital expenditures 6,240 13,330 16,825 22,763
-------------------------------------
-------------------------------------
Revenue:
Langlois was considered to be in commercial production effective July 1, 2007. For accounting purposes, revenue from concentrate produced and sold after commencement of commercial production is included in the income statement. Net cash flow from concentrate produced prior to July 1, 2007 reduced preproduction capital expenditures when sold.
The following tables and discussion provide details of Langlois' gross sales revenue for the period indicated:
Second Quarter 2008
------------------------------------------------
Gross
Concentrate Realized sales
sold Payable price(1) revenue
(tonnes) metal(1) (US$) ($000s)
------------------------------------------------
Zinc 14,888 6,447 2,222 14,324
Copper 2,547 462 8,411 3,885
Silver n.a. 75,298 17.70 1,332
Gold n.a. 277 914 253
Other(2) n.a. (20)
----------- -------
17,435
-----------
-----------
Gross sales revenue in US$ 19,774
Exchange rate 1.0126
-------
Gross sales revenue in C$ 20,023
-------
-------
(1) Payable metal and realized prices for zinc and copper are
per tonne and for gold and silver are per ounce.
(2) Other gross sales revenue represents revaluations of prior
period concentrate receivables.
Expenses:
For the second quarter of 2008, treatment and marketing costs were $7.5 million or 37% of gross sales revenue and $430 per tonne of concentrate sold. Direct operating costs in the second quarter of 2008 were $11.8 million or 59% of gross sales revenue and $678 per tonne of concentrate sold.
Depreciation and depletion were $3.3 million in the second quarter of 2008. The carrying value of Langlois is higher than the Company's other mines and therefore depreciation and depletion will tend to be higher.
Prior to the commencement of commercial production, exploration expenditures were capitalized. In the second quarter of 2008 a $0.6 million exploration expense was incurred. Refer to the exploration section below for additional details.
Income and mining tax recovery of $1.7 million in the second quarter of 2008 primarily relates a $1.4 million tax reduction in the Quebec mining duty liability and $0.3 million increase in future tax assets.
Capital Expenditures:
At Langlois, $16.8 million was on capital expenditures in the first six months of 2008 consisting primarily on: $7.9 million of lateral development for Zones 97, 4 and 3; $1.8 million of horizontal and other development at Zone 4, $1.7 million of ramp and horizontal development at Grevet B; $2.9 million for underground equipment; $0.6 million for housing; $0.6 million for underground paste backfill infrastructure; and, $0.4 million for a road for the paste backfill line to Zone 97.
(ii) Langlois Production
Langlois' production is set out in the following table,
Second Quarter First Six
Months
-------------------------------------------------------------------------
2008 2007 2008 2007
-------------------------------------------------------------------------
Ore Milled (tonnes) 153,599 109,315 270,263 186,517
Zinc (%) 7.6 7.2 7.3 6.9
Copper (%) 0.5 0.4 0.5 0.4
Silver (g/t) 39 32 36 30
Concentrate Production
Zinc (tonnes) 20,210 13,616 34,132 22,375
Recovery (%) 92.7 91.4 92.5 89.8
Grade (%) 53.6 52.6 53.4 51.4
Copper (tonnes) 3,219 1,305 5,246 2,117
Recovery (%) 76.6 67.8 76.8 65.1
Grade (%) 18.0 22.1 18.5 21.1
Metal in Concentrates
Zinc (tonnes) 10,835 7,196 18,208 11,531
Copper (tonnes) 580 288 971 447
Gold (ounces) 445 165 733 299
Silver (ounces) 100,341 39,963 166,534 59,048
C$ operating costs, production basis
($000s) 15,600 n.a. 29,763 n.a.
C$ operating cost per tonne milled
(production basis) 102 n.a. 110 n.a.
Zinc and copper metal in concentrate production increased by 51% and 101% respectively in the second quarter of 2008 compared with the same period in 2007 primarily due to a 41% increase in tonnes milled and increased grades and recoveries for both zinc and copper.
During April 2008, the development of the Zone 4 surface ramp was halted to reduce costs and because mineralized material in the upper portions of Zone 4 that was originally to be accessed using the ramp had not been included in the production plans in either 2008 or 2009.
Production continued during the quarter at Grevet B. Water inflow problems have been mitigated. The development of the ramp to access the bottom portion of the Grevet B deposit was halted during the first quarter. The ramp development will be re-evaluated during the fourth quarter of 2008. Should zinc prices improve by that time, it is estimated that it will take approximately two months to complete the ramp development and access the remaining ore.
(iii) Langlois Exploration
During the second quarter of 2008, one drill rig, operating from underground, focused on delineating the mineralization limit below level 134 at Grevet B. A total of 737 metres were completed prior to a general cessation of drilling that was instituted early in the second quarter. Results show the mineralization envelope more or less where it was expected. Due to this, the drilling program at Grevet B has been stopped.
For the third quarter for 2008, two underground drill rigs are planned to be active in Langlois mine (from 13 level) in order to infill drill in the central part of Zone 97 where the economic part of the north vein is located. This will enable an evaluation of the mining opportunities for the Zone 97 main and north areas.
During the second quarter of 2008, one drill operated on surface and focused on delineating new resources at Orphee. On the Orphee lens, 525 metres were drilled in two holes. The holes were focused on delineating the western part of the lens. During the quarter, the Company completed the acquisition of Metco. Consequently, Metco's data is being merged with the Company's in order to be able to assess the quality of the Orphee system. A complete resource estimate, including the recent calculation carried out by Scott Wilson Roscoe Postle over the part of the lens previously owned by Metco, is scheduled for delivery during the third quarter of 2008.
On Zone 5, new drilling is warranted to enable a proper assessment of the full potential of the zone. Additional diamond drilling is scheduled for the third quarter of 2008 to delineate the bulk sampling area near surface and a resource estimate will then be performed.
(iv) Langlois Outlook
Ramp-up of production continued during the second quarter of 2008. Zinc head grades are forecast to reach targeted values with the commencement, late in the second quarter, of mining in the higher grade Zone 97. Based on results to-date, it is anticipated that Langlois will meet the 2008 guidance numbers.
The establishment of the paste backfill system for Zones 4 and 97 is on target and filling of the first stopes in Zone 97 will commence in August.
During the first quarter of 2008, a miner training school was established in Lebel-sur-Quevillion in conjunction with Employment Quebec and the Baie James School Board. The initial enrolment totals 16 students who are participating in a 26 week common core miner training program. The underground portions of the training are being conducted at the Langlois mine. The first group of students are expected to complete the course by early August. At that time, a second group of 20 trainees will commence their course with a third group of 32 trainees scheduled for early 2009. Once they graduate, the trainees will have training as development and stope miners and will be eligible to continue to work at Langlois under the supervision of experienced miners. The eventual goal is to provide a fully trained workforce for the Langlois operation which will eventually replace the contract miners currently on site.
On April 15, 2008, the Company purchased 100% of Metco for 7.0 million Common Shares of the Company. The transaction enabled the Company to consolidate its land position in the Lebel-sur-Quevillion camp, gain entry into a large and prospective land package in the Matagami camp and also secure potential additional feed for the Langlois mill.
Coulon Project
During the second quarter of 2008, Virginia Mines Inc. ("Virginia") continued drilling on the Coulon property, located in the James Bay region of Quebec which the Company owns 50% of through a joint venture agreement. The Coulon joint venture property consists of 3,266 claims covering more than 90 kilometres of the prospective Coulon volcanic belt. Three deep drilling rigs and a fourth heliborne rig continue to focus on delineating additional resources within lenses 43, 08-44 and 9-25 as well as exploring for new drill targets on a regional scale.
Drill results released by Virginia in 2008 indicated continuity of the Coulon mineralized system over more than 20 kilometres along strike. Lens 8 has been confirmed over a lateral distance of 250 metres and a vertical depth of 700 metres and is still open at depth. Recent drilling has proven the presence of a new lens at depth. This seventh new lens at Coulon, named 08W, is located nearly 150 metres to the west of lens 8 and at a vertical depth of 750 to 800 metres. Lens 08W has been traced over a lateral distance of 200 metres and a vertical depth of 300 metres. The exact relationship with Lens 8 is not yet defined. Accordingly, this will be the target of additional drilling in 2008.
Lens 9-25 has also been the focus of additional drilling. Recent drilling has enhanced the known mineralization by 60 metres to the north and at depth. Lens 9-25 has been confirmed over a lateral distance of 275 metres and a vertical depth of more than 600 metres and is still open at depth. It will be the focus of additional drilling in 2008.
The exact relationship between lenses 08, 08W and 9-25 is not well understood, up to the point that Lens 9-25 dips very steeply (85 degrees) to the west and Lens 08 dips vertically to very steeply (85 degrees) to the east. Lens 08W seems to be dipping vertically.
During the third quarter, the main focus will be to verify the relationship at depth between lenses 08, 08W, 9-25 and 44.
Gayot Project
During the second quarter of 2008, Virginia started its reconnaissance and geological mapping of the Lac Gayot property, located in the James Bay region of Quebec. Under an agreement reached in 2007, the Company has the sole and exclusive right and option to earn a 50% interest in the property in exchange for $10 million in exploration work over a 9-year period and payments totalling $170,000 on or before the 4th anniversary of the agreement. Virginia will be the operator until the completion of a positive pre-feasibility study. This agreement is subject to a 1% NSR in favour of Billiton Resources Canada.
The Lac Gayot property consists of 116 claims covering 4,947.12 hectares and three mining exploration permits covering a surface area of 15,437 hectares. The property entirely covers the Venus Archean greenstone belt which consists dominantly of ultramafic MgO-rich sills and flows. This ultramafic sequence is the host to twelve nickel-platinum-palladium mineralized zones distributed over a strike length of 25 kilometres.
A new camp was constructed in the second quarter of 2008 to permit field operations for a long duration. Surface mapping and prospecting was conducted during the second quarter as well as relogging of some of the old core.
Trieste Project
During the first and second quarter of 2008, Virginia carried out ground geophysical surveys on the Trieste property in order to pinpoint past airborne EM anomalies. The interpretation of the survey is still in progress. Under an agreement reached in 2007, the Company has the sole and exclusive right and option to earn a 50% interest in the property in exchange for $1 million in exploration work over a four year period and payments totalling $50,000 on or before the 1st anniversary of the agreement. Virginia will be the operator until the completion of a positive pre-feasibility study.
The Trieste property is located within the La Grande Archean volcano-sedimentary belt and covers an assemblage of mafic to felsic volcanics, iron formations, and a synvolcanic intrusion. Many electromagnetic (EM) conductors remain unexplained and VMS-type, mineralized showings returned values of up to 2.6% Zn within the volcanic sequence. An arsenopyrite-rich boulder also returned 20 g/t Au. The property consists of 290 claims covering more than 14,000 hectares.
Gatineau Project
In 2007, the Company signed a letter agreement with Midland Exploration Inc. ("Midland") for the Gatineau zinc properties, which are currently held 100% by Midland. The properties are located approximately 200 kilometres northwest of the city of Montreal. The Company has the option to acquire 50% of Midland's interest by funding $4.5 million in exploration expenditures and by making payments totalling $250,000 over four years. Midland will be the operator until the completion of a positive pre-feasibility study. Upon acquiring a 50% interest, the Company will have the option to acquire an additional 15% interest by delivering a bankable feasibility and by paying to Midland $40,000 per year and by having minimum work expenditures on the property of $200,000 per year until the delivery of the bankable feasibility study.
Midland's large land position, including 19 new properties, covers 347.6 km2 distributed in the Gatineau Area. The area is known to host many significant zinc occurrences and prospects in metamorphosed Middle-Proterozoic marbles of the Grenville Supergroup. The interest for this area is that those zinc occurrences share many similarities with significant zinc deposits which are also hosted in Grenville metamorphosed limestones. The most prolific zinc deposits of this type are those of the Balmat-Edwards district in the United States, located only 60 kilometres south of the Gatineau properties area. This active mining district, in production since 1915, is known to host a combined 43 million tonnes at near 10% zinc including other commodities.
During the second quarter of 2008, a follow up on the geochemical survey results obtained last fall was undertake by Midland. On the soil samples collected over the Wallace, Venosta, Kazabazua, St-Germain, Kilmar, Ski, Davis and Leitch claim blocks, an examination of the assays has identified several first-order strong zinc and lead anomalies on Leitch, Wallace, Ski and St-Germain properties. A field check program is scheduled during the summer.
Also, the VTEM coverage of the property continued during the quarter. The results are presently being processed and a report should be available during the third quarter.
Weedon Project
In 2007, the Company signed a letter agreement with Midland for the Weedon property, which is currently held 100% by Midland. The property is located in the Eastern Townships area, about 120 kilometres south of Quebec City.
The Weedon property consists of 340 claims totalling 163 km2 and covers more than 30 kilometres of the Ascot-Weedon volcano-sedimentary belt. The Ascot-Weedon belt hosts several mined out volcanogenic massive sulphide (VMS) deposits, including former mines Cuprad'Estrie (2.43 Mt at 2.74% Cu, 3.28% Zn, 38 g/t Ag and 0.5 g/t Au), Solbec (2.06 Mt at 1.57% Cu, 4.57% Zn, 0.68% Pb, 48.6 g/t Ag and 0.61 g/t Au) and Weedon (1.6 Mt at 2.33% Cu, 0.86% Zn and 0.56 g/t Au). The belt is composed of Lower Ordovician mafic and felsic volcanic rocks of mixed tholeiitic and calc-alkaline affinity. Many similarities can be established between this belt and other prolific VMS mining camps, namely Bathurst in New Brunswick and Buchans in Newfoundland.
The Company may acquire 50% of Midland's interest by funding $3.0 million in exploration expenditures and by making payments totalling $200,000 over three years. Midland will be the operator until a positive pre-feasibility study is completed. Upon acquiring a 50% interest, the Company may acquire an additional 15% interest by delivering a bankable feasibility study and by paying Midland $40,000 per year. Additionally, the Company needs to spend a minimum of $200,000 per year in exploration work on the property until the bankable feasibility study is delivered.
During the second quarter of 2008, a VTEM airborne survey was carried out designed to delineate, at close spacing, the new conductive zones previously identified with the first VTEM survey performed last fall. These new conductors were detected on several flight lines and have a good magnetic association, typical of most massive sulphide deposits, and will be verified by diamond drilling. Planned drill holes should test these targets at vertical depths ranging from 100 to 200 metres. One hole will also be drilled along the southwestern extension of the former Weedon mine to test an iron formation horizon along the favourable contact, at about 200 metres vertical depth.
The drilling campaign will continue through out the third quarter.
Other Properties
The reclamation work is largely complete at Bouchard-Hebert and Bougrine with Nanisivik expected to be largely reclaimed by the end of 2008. The crushing and grinding circuits and certain other components at Bougrine remain intact and dismantling of the mill at Bouchard-Hebert is continuing.
NON-GAAP RECONCILIATIONS
Operating cost per tonne milled on a production basis is a performance indicator. It is a non-GAAP measure and because there is no standard method for calculating it, operating costs per tonne milled on a production basis is not a reliable way to compare the Company against other companies. It can however allow an understanding of how production costs have changed from year to year and the impact on cash flows.
Three month period ended
June 30, 2008 Myra
($000s) Mochito Toqui Falls Langlois Total
--------------------------------------------------------------------------
Direct operating costs per
financial statements 10,585 9,521 18,674 11,817 50,597
Adjustment to production
basis (1,544) (2,945) 3,045 3,801 2,357
Less: stock-based
compensation (5) (40) (113) (18) (176)
Less: royalties n.a. (324) n.a. n.a. (324)
----------------------------------------------
Operating costs on a
production basis (C$) 9,036 6,212 21,606 15,600 52,454
----------------------------------------------
Average exchange rate 1.0097 1.0100 1.0106 1.0096 1.0101
Operating costs on
production basis (US$) 8,949 6,150 21,379 15,452 51,930
----------------------------------------------
----------------------------------------------
Tonnes milled, production
basis 171,808 132,720 164,707 153,599 622,834
----------------------------------------------
Operating cost per tonne
milled - US$ 52 46 130 101 83
Operating cost per tonne
milled - C$ 53 47 131 102 84
Three month period
ended June 30, 2007
($000s) Mochito Toqui Falls Langlois(1) Total
--------------------------------------------------------------------------
Direct operating costs
per financial
statements 7,584 2,945 19,658 n.a. 30,187
Adjustment to
production basis 295 3,463 2,486 n.a. 6,244
Less: stock-based
compensation (34) (41) (106) n.a. (181)
Less: royalties n.a. (537) n.a. n.a. (537)
---------------------------------------------------
Operating costs on
production basis (C$) 7,845 5,830 22,038 n.a. 35,713
---------------------------------------------------
Average exchange rate 1.0988 1.1008 1.1041 n.a. 1.1021
Operating costs on a
production basis (US$) 7,140 5,296 19,960 n.a. 32,396
---------------------------------------------------
Tonnes milled 151,219 128,837 202,930 109,315 592,301
Less: preproduction
tonnes n.a. n.a. n.a. 109,315 109,315
---------------------------------------------------
Tonnes milled,
production basis 151,219 128,837 202,930 n.a. 482,986
---------------------------------------------------
Operating cost per
tonne milled - US$ 47 41 98 n.a. 67
Operating cost per
tonne milled - C$ 52 45 109 n.a. 74
(1) First concentrate shipped November 2006 and commenced commercial
production on July 1, 2007.
Myra
Six month period ended Mochito Toqui Falls Langlois Total
June 30, 2008 ($000s)
--------------------------------------------------------------------------
Direct operating costs
per financial statements 16,651 17,683 37,064 27,165 98,563
Adjustment to production
basis 1,035 (4,082) 13,187 2,630 12,770
Less: stock-based
compensation (35) (99) (205) (32) (371)
Less: royalties n.a. (676) n.a. n.a. (676)
------------------------------------------------
Operating costs on a
production basis (C$) 17,651 12,826 50,046 29,763 110,286
------------------------------------------------
Average exchange rate 1.0073 1.0073 1.0073 1.0073 1.0073
Operating costs on
production basis (US$) 17,523 12,733 49,683 29,547 109,486
------------------------------------------------
Tonnes milled, production
basis 324,335 259,813 334,889 270,263 1,189,300
------------------------------------------------
Operating cost per tonne
milled - US$ 54 49 148 109 92
Operating cost per tonne
milled - C$ 54 49 149 110 93
Six month period ended Myra
June 30, 2007 ($000s) Mochito Toqui Falls Langlois(1) Total
---------------------------------------------------------------------------
Direct operating costs
per financial statements 12,412 11,176 30,192 n.a. 53,780
Adjustment to production
basis 3,685 1,622 11,569 n.a. 16,876
Less: stock-based
compensation (105) (140) (327) n.a. (572)
Less: royalties n.a. (1,127) n.a. n.a. (1,127)
-------------------------------------------------
Operating costs on
production basis (C$) 15,992 11,531 41,434 n.a. 68,957
-------------------------------------------------
Average exchange rate 1.1347 1.1347 1.1347 n.a. 1.1347
Operating costs on a
production basis (US$) 14,093 10,162 36,515 n.a. 60,770
-------------------------------------------------
Tonnes milled 306,403 258,470 388,326 186,517 1,139,716
Less: preproduction tonnes n.a. n.a. n.a. 186,517 186,517
-------------------------------------------------
Tonnes milled, production
basis 306,403 258,470 388,326 n.a. 953,199
-------------------------------------------------
Operating cost per tonne
milled - US$ 46 39 94 n.a. 64
Operating cost per tonne
milled - C$ 52 45 107 n.a. 72
(1) First concentrate shipped November 2006 and commenced commercial
production on July 1, 2007.
SUMMARY OF QUARTERLY RESULTS
2006 2007 2008
Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2
Gross sales
revenue 112.0 158.3 77.9 103.4 87.5 135.5 81.9 115.1
($ millions)
Net earning
(loss) 39.2 50.4 15.3 38.7 7.8 (35.4) (6.9) 8.1
($ millions)
Basic
earnings
(loss) per
share $0.10 $0.13 $0.04 $0.09 $0.02 $ (0.08) $ (0.02) $0.02
Weighted-
average number
of Common
Shares
outstanding
(millions) 384.3 384.3 396.4 418.0 418.7 421.6 425.8 446.4
Diluted
earnings
(loss) per
share $0.09 $0.12 $0.04 $0.09 $0.02 $(0.08) $(0.02) $0.02
C$/US$
realized
exchange
rate 1.1187 1.1422 1.1683 1.0914 1.0374 0.9987 1.0047 1.0100
Average
realized
zinc price
(US$/t) 3,363 4,227 3,434 3,710 3,200 2,608 2,409 2,205
Average
realized
zinc price
(C$/t) 3,762 4,828 4,012 4,049 3,320 2,605 2,420 2,227
Concentrate
tonnes
sold(1) 61,385 73,231 39,333 51,553 50,748 102,415 59,210 96,536
Concentrate
tonnes
produced(1) 59,420 67,057 66,895 75,596 73,122 72,470 73,481 86,856
(1) Langlois commenced commercial production effective July 1, 2007.
Included in concentrate produced in Q4 2006, Q1 2007 and Q2 2007 were
4,255, 9,571 and 14,921 tonnes respectively which are not included in
concentrate tonnes sold.
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 news release. As all sales are based in US$, the US$'s general weakening against the C$ over the past eight quarters has reduced the realized C$ gross sales revenue.
ACCOUNTING POLICIES AND CRITICAL ACCOUNTING ESTIMATES
The notes to the Company's December 31, 2007 audited consolidated financial statements outline the Company's significant accounting policies. Note 2 to the unaudited consolidated second quarter 2008 financial statements describes changes to the Company's accounting policies. Pages 32 and 33 of the 2007 Financial Report contain a discussion of certain accounting estimates that are considered particularly important, as they require management to make significant judgments, some of which relate to matters that are inherently uncertain. Readers are encouraged to refer to the 2007 Financial Report to review that discussion.
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 Information Form filed with the Canadian securities regulators, a copy of which is posted on the SEDAR website at www.sedar.com.
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 2007 audited consolidated financial statements of the Company.
Common Shares or Securities Convertible into Common Shares July 31, 2008
---------------------------------------------------------------------------
Issued and outstanding 446,384,020
Share options outstanding weighted-average exercise price
$1.22 7,804,474
Warrants granted at $1.00, expire January 28, 2009 - traded
on TSX 33,481,849
---------------------------------------------------------------------------
Future fully diluted 487,670,343
---------------------------------------------------------------------------
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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.
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 news release. 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.
ACCOUNTING CHANGES
On January 1, 2008, the Company adopted the Canadian Institute of Chartered Accountants' new accounting requirements for inventories and financial instruments disclosure and presentation. Adoption of those requirements did not have a significant impact. For details of the specific accounting changes and related impacts, refer to note 2 of the Company's unaudited consolidated financial statements for the period ended June 30, 2008.
BREAKWATER RESOURCES LTD.
Consolidated Balance Sheets
(Expressed in thousands of Canadian dollars)
(Unaudited)
June 30, December
2008 31, 2007
--------------------------------------------------------------------------
Assets
Current
Cash and cash equivalents 44,088 62,934
Restricted cash 579 629
Short-term investments 4,480 6,532
Accounts receivable -- concentrate 2,730 3,585
Other receivables 16,503 17,025
Concentrate inventory 75,782 64,775
Materials and supplies inventory 31,938 29,096
Prepaid expenses and other current assets 10,077 7,541
Future income tax assets 8,326 1,491
--------------------------------------------------------------------------
Total current assets 194,503 193,608
Future income tax assets, long-term 10,929 19,915
Restricted reclamation investments 33,500 33,500
Mineral properties and fixed assets 307,629 267,462
Long-term investments 11,085 32,922
Restricted promissory notes 62,285 62,285
--------------------------------------------------------------------------
619,931 609,692
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Current
Accounts payable and accrued liabilities 65,559 62,020
Provisional payments for concentrate inventory shipped
and not priced 42,425 32,248
Short-term debt including current portion of long-term
debt 1,532 190
Income and mining taxes payable 5,116 10,078
Current portion of reclamation, closure cost accruals
and other environmental obligations 5,868 6,486
--------------------------------------------------------------------------
Total current liabilities 120,500 111,022
Deferred income 5,361 5,666
Long-term lease obligations 230 267
Royalty obligations 62,479 82,479
Long-term debt 4,407 1,851
Reclamation, closure cost accruals and other
environmental obligations 32,654 33,262
Employee future benefits 1,817 2,817
Future income tax liabilities 5,295 7,942
--------------------------------------------------------------------------
Total liabilities 232,743 245,306
Shareholders' equity 387,188 364,386
--------------------------------------------------------------------------
619,931 609,692
--------------------------------------------------------------------------
--------------------------------------------------------------------------
BREAKWATER RESOURCES LTD.
Consolidated Statements of Operations and Retained Earnings
(Expressed in thousands of Canadian dollars except share and per share
amounts)
(Unaudited)
Three Months Ended Six Months Ended
For the periods ended June 30 2008 2007 2008 2007
--------------------------------------------------------------------------
Gross sales revenue 115,149 103,401 197,005 181,348
Treatment and marketing costs 41,167 25,311 62,183 45,231
--------------------------------------------------------------------------
Net revenue 73,982 78,090 134,822 136,117
--------------------------------------------------------------------------
Direct operating costs 50,597 30,187 98,563 53,780
Depreciation and depletion 9,817 4,042 17,047 8,144
Reclamation and closure costs 831 769 633 1,722
--------------------------------------------------------------------------
61,245 34,998 116,243 63,646
--------------------------------------------------------------------------
Contribution from mining activities 12,737 43,092 18,579 72,471
--------------------------------------------------------------------------
General and administrative 4,132 3,431 7,727 7,394
Interest and financing 962 977 1,947 2,133
Investment and other income (6,402) (4,952) (5,039) (6,642)
Foreign exchange and other (807) 6,338 (846) 6,629
Exploration 4,425 2,920 8,907 5,591
Other non-producing property costs 295 411 807 906
--------------------------------------------------------------------------
2,605 9,125 13,503 16,011
--------------------------------------------------------------------------
Earnings before income and mining tax
provision 10,132 33,967 5,076 56,460
Income and mining tax provision
(recovery) 2,050 (4,712) 3,858 2,491
--------------------------------------------------------------------------
Net earnings 8,082 38,679 1,218 53,969
Retained earnings, beginning of
period 162,044 160,791 168,908 139,795
Changes in accounting policy - - - 5,706
--------------------------------------------------------------------------
Retained earnings, end of period 170,126 199,470 170,126 199,470
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Basic earnings per Common Share $0.02 $0.09 $0.00 $0.13
Diluted earnings per Common Share $0.02 $0.09 $0.00 $0.12
Basic weighted-average number of
Common Shares outstanding (000's) 446,382 417,982 436,080 407,211
--------------------------------------------------------------------------
--------------------------------------------------------------------------
BREAKWATER RESOURCES LTD.
Consolidated Statements of Accumulated Other Comprehensive Loss
(Expressed in thousands of Canadian dollars)
(Unaudited)
December
June 30, 2008 31, 2007
---------------------------------------------------------------------------
Accumulated other comprehensive loss, beginning
of period (3,817) (7,689)
Remeasurement of available-for-sale securities at
January 1, 2007 - 11,980
Other comprehensive loss (4,383) (8,108)
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Accumulated other comprehensive loss, end of
period (8,200) (3,817)
---------------------------------------------------------------------------
---------------------------------------------------------------------------
BREAKWATER RESOURCES LTD.
Consolidated Statements of Other Comprehensive (Loss) Income
(Expressed in thousands of Canadian dollars)
(Unaudited)
Three Months Ended Six Months Ended
For the periods ended June 30 2008 2007 2008 2007
--------------------------------------------------------------------------
Net earnings 8,082 38,679 1,218 53,969
--------------------------------------------------------------------------
Other comprehensive income (loss),
net of income taxes:
Unrealized (losses) gains on
translating financial statements of
self sustaining foreign operations (102) (4,321) 2,193 (4,937)
Unrealized (loss) gain on short-term
available-for-sale securities,
net of income tax provision for the
3 months of $0.5 (2007 - $4)
and 6 months of $1( 2007 - $41) 2 (43) (5) (210)
Unrealized (loss) gain on long-term
available-for-sale securities,
net of income tax provision for the
3 months of $59 (2007 - $27)
and 6 months of $27 (2007 - $87) (313) 148 172 444
Reclassification of gains on sale of
available-for-sale securities to
income (6,743) - (6,743) -
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Other comprehensive loss, net of
income taxes (7,156) (4,216) (4,383) (4,703)
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Comprehensive income (loss) 926 34,463 (3,165) 49,266
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BREAKWATER RESOURCES LTD.
Consolidated Statements of Cash Flow
(Expressed in thousands of Canadian dollars)
(Unaudited)
Three Months Ended Six Months Ended
For the periods ended June 30 2008 2007 2008 2007
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Operating Activities
Net earnings 8,082 38,679 1,218 53,969
Items not affecting cash:
Depreciation and depletion 9,817 4,042 17,047 8,144
Gain on sale of investments (6,976) - (6,976) (306)
Unrealized loss (gain) on
investments 3,342 (2,628) 5,849 (5,235)
Other non-cash items 1,177 (303) 2,372 (203)
Stock-based compensation 346 552 711 1,081
Unrealized deferred income (152) (153) (305) (306)
Future income taxes (1,856) (14,507) (2,692) (6,789)
Reclamation, closure cost accruals
and other environmental
obligations 831 769 633 1,722
Employee future benefits 355 371 709 766
Payment of reclamation, closure cost
accruals and other environmental
obligations (1,019) (1,142) (1,547) (2,377)
Payment of employee future benefits (821) (772) (1,709) (1,512)
Changes in non-cash working capital
items 17,919 17,407 (6,377) 20,601
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Net cash provided by
operating activities 31,045 42,315 8,933 69,555
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Investing Activities
Decrease in restricted cash 50 (21) 50 167
Short-term investments 3,448 - 3,448 1,033
Long-term investments 13,350 - 13,350 -
Issue of common shares to purchase
Myra Falls Limited Partnership (34) - (34) -
Acquisition of Metco Resources Inc.,
net of cash acquired 23 - 23 -
Mineral properties and fixed assets (22,474) (33,358) (48,647) (57,036)
Proceeds from sale of mineral
properties and fixed assets 1 272 28 290
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Net cash used in investing
activities (5,636) (33,107) (31,782) (55,546)
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Financing Activities
Issue of common shares for cash 104 1,020 187 7,777
Decrease in long-term lease
obligations - (67) (37) (143)
Increase(decrease) in short-term
debt 505 (387) 831 (125)
Increase in long-term debt 3,022 - 3,022 -
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Net cash provided by financing
activities 3,631 566 4,003 7,509
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Net increase (decrease) in cash
during the period 29,040 9,774 (18,846) 21,518
Cash and cash equivalents, beginning
of period 15,048 93,156 62,934 81,412
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Cash and cash equivalents, end of
period 44,088 102,930 44,088 102,930
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Supplemental Information
Cash interest paid 26 28 61 235
Cash income and mining taxes paid 10 12,292 10 12,292
Cash interest received 57 218 371 218
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Contacts:
Breakwater Resources Ltd.Dave Langille
Vice President, Finance and Chief Financial Officer
(416) 363-4798 Ext. 236
Breakwater Resources Ltd.Ann Wilkinson
Vice President, Investor Relations
(416) 363-4798 Ext. 277
Website: www.breakwater.ca
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