Breakwater Resources Ltd.'s 2007 Year-End and Fourth Quarter Financial and Operating Results
Posted on: Thursday, 28 February 2008, 21:00 CST
Breakwater Resources Ltd. (TSX: BWR) -
The reporting currency is Canadian dollars ("C$" or "$") and all amounts disclosed are in Canadian dollars unless otherwise indicated.
The Company is a mining, exploration and development company which produces zinc, copper, lead and gold concentrates. During 2007, the Company's concentrate production was derived from mines located in Canada, Chile and Honduras. The Company also owns base metal and gold exploration properties in Canada, Honduras, Tunisia and Chile. The Langlois mine, located in Canada, began production in November 2006 and commenced commercial production for accounting purposes on July 1, 2007. The start-up of the Langlois mine affects all aspects of the Company's financial results which makes comparisons between years difficult.
HIGHLIGHTS
Fourth Quarter
The Company realized a loss of $38.3 million or $0.09 per share in the fourth quarter of 2007 compared with net earnings of $50.4 million or $0.13 per share in the fourth quarter of 2006. The main items affecting the movement to a loss were:
- $28.5 million write-down of Myra Falls, comprising a $16.0 million write-down relating to the value of the mineral properties and fixed assets and a $12.5 million write-down of future tax assets related to the impairment write-down following a review triggered by lower metal prices and higher operating costs
- $11.3 million of unrealized losses due to the valuation of conversion rights in certain convertible debentures held by the Company primarily due to lower share prices and the marking to market of available-for-trade securities
- $3.2 million provision for tailings facility modification at Myra Falls
- $22.9 million (US$3.1 million) lower gross sales revenue, despite 40% greater tonnes of concentrate sold, were largely due to 38% and 12% lower zinc and copper prices respectively and a 13% appreciation in the C$ in 2007
- Sales of concentrate in the fourth quarter of 2007 increased to 102,415 tonnes from 73,231 in the fourth quarter of 2006 primarily due to Langlois and greater sales at Myra Falls and Toqui
- $15.1 million lower treatment and marketing costs primarily due to lower prices realized, higher zinc base prices resulting in lower escalators (the upside price participation by smelters) and the impact of a weaker US$
- $37.3 million higher direct operating costs primarily due to increased sales, higher costs at Myra Falls and the addition of sales from Langlois, currently a relatively high cost operation
- $3.3 million increase in exploration expenses
- $7.5 million reduction of income tax at Mochito
At December 31, 2007, the Company estimated that inventories shipped but not recognized for revenue purposes had earnings before tax of $8.0 million on 51,100 tonnes of concentrate compared with earnings before tax of $29.4 million on 70,519 tonnes of concentrate at September 30, 2007. Concentrate produced in the fourth quarter of 2007 increased to 72,470 tonnes from 67,057 tonnes primarily due to Langlois, increased production at Myra Falls and Toqui offset by lower production at Mochito.
Successfully renegotiated new three year contracts at Toqui and Mochito and overcame a breach at a newly commissioned tailings impoundment at Mochito to resume normal production.
The Company entered into a $20.0 million qualifying environmental trust to fully fund estimated reclamation and closure obligations at Myra Falls and issued $12.0 million of flow-through shares to fund a portion of the 2008 exploration program.
The Company also commenced a pre-feasibility study at Toqui to support a 1.0 million tonne per year mill and earned a 50% interest in the Coulon joint venture property.
Year
The Company realized net earnings of $23.4 million or $0.06 per share in 2007 compared with $156.5 million or $0.41 per share in 2006, the $133.1 million decrease was primarily due to:
- $35.0 million write-down of Myra Falls, comprising $16.0 million impairment write-down and a $19.0 million write-down of future tax assets related to the impairment write-down for Myra Falls
- $7.6 million of unrealized losses due to the valuation of conversion rights in certain convertible debentures held by the Company primarily due to lower share prices and the marking to market of available-for-trade securities
- $13.8 million gain on sale of the Caribou property in 2006
- $47.9 million (US$16.6 million) lower gross sales revenue primarily due to a 7% decrease in concentrate sold, a 7% appreciation of the C$ and a 4% decrease in the realized prices of each of zinc and copper in 2007 compared with 2006
- $27.0 million increase in direct operating costs primarily due to similar aggregate costs at Myra Falls and Mochito despite 31% and 22% fewer tonnes sold respectively and the impact of Langlois
- $7.0 million increase in exploration expenses
- a $15.5 million future tax asset for Langlois established in 2007
Aggregate production increased to 288,083 tonnes from 252,513 tonnes primarily due to Langlois and increased production at Toqui partially offset by lower production at Myra Falls and Mochito.
Reserves and Resources
On February 28, 2008, the Company released its 2007 mineral reserve and mineral resource statement to the public. References in this news release to 2007 mineral reserves and resources should be read in conjunction with that news release.
OUTLOOK
On February 28, 2008, the Company released its 2008 projections for tonnes milled, metal grades, concentrate produced, payable metals, capital expenditures and exploration expenses to the public. References to production outlooks in this news release should be read in conjunction with that news release.
SELECTED ANNUAL INFORMATION Statement of Operations and Statement of Cash Flow Data Years ended December 31, ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- ($ millions except for share and per share numbers) 2007 2006 ---------------------------------------------------------------------------- Gross sales revenue 404.3 452.2 Treatment and marketing costs 100.3 127.8 ------------------------ Net revenue 304.0 324.4 Total operating costs 191.3 155.9 ------------------------ Contribution from mining activities 112.7 168.5 ------------------------ ------------------------ Net earnings 23.4 156.5 ------------------------ ------------------------ Basic earnings per Common Share 0.06 0.41 Diluted earnings per Common Share 0.05 0.37 Net cash provided by operating activities 79.1 158.5 Capital expenditures 113.8 75.7 ---------------------------------------------------------------------------- Basic weighted-average number of Common Shares outstanding (000's) 413,681 383,748 Number of Common Shares outstanding (000's) 425,700 385,646 Balance Sheet Data As at December 31, ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- ($ millions) 2007 2006 ---------------------------------------------------------------------------- Cash and cash equivalents 62.9 81.4 Working capital 82.6 109.9 Total assets 607.4 509.3 Total debt 2.3 2.7 Total long-term liabilities 132.0 113.1 Shareholders' equity 364.4 308.6
STATEMENT OF OPERATIONS REVIEW - 2007 AND 2006
Gross Sales Revenue
Sales of concentrate fluctuate period to period due to production levels, shipping volumes, ship schedules, price determination terms, and risk and title transfer terms with the Company's various customers. The Company has a relatively conservative revenue recognition policy (see below) and the recognition of sales can be as much as six months after the date of concentrate production. The Company's sales are primarily denominated in United States dollars ("US$").
Fourth Quarter Year Concentrate Sold (tonnes) 2007 2006 2007 2006 ---------------------------------------------------------------------------- Zinc: Mochito 27,801 27,734 58,426 78,962 Toqui 26,241 18,393 67,825 51,926 Myra Falls 15,960 20,745 50,243 86,458 Langlois(1) 15,562 - 17,817 - ---------------------------------------------------------------------------- 85,564 66,872 194,311 217,346 ---------------------------------------------------------------------------- Copper Myra Falls 11,300 - 26,523 25,120 Langlois(1) 2,407 - 2,846 - ---------------------------------------------------------------------------- 13,707 - 29,369 25,120 ---------------------------------------------------------------------------- Lead Mochito 1,878 4,921 16,054 16,310 Toqui - - - 246 ---------------------------------------------------------------------------- 1,878 4,921 16,054 16,556 ---------------------------------------------------------------------------- Gold Toqui 1,266 1,438 4,313 2,703 Myra Falls - - 3 24 ---------------------------------------------------------------------------- 1,266 1,438 4,316 2,727 ---------------------------------------------------------------------------- All Metals 102,415 73,231 244,050 261,749 ---------------------------------------------------------------------------- (1) Langlois entered commercial production on July 1, 2007. Net cash flow from concentrate produced at Langlois prior to July 1, 2007 reduced preproduction capital expenditures. Fourth Quarter 2007 ---------------------------------------------------------------------------- Concentrate Realized Gross sales sold Payable price(1) revenue (tonnes) metal(1) (US$) ($000s) ---------------------------------------------------------------------------- Zinc 85,564 36,692 2,608 95,678 Copper 13,707 2,939 6,755 19,852 Lead 1,878 1,123 3,328 3,737 Gold 1,266 13,807 790 10,908 Silver n.a. 518,218 14.00 7,254 Other(2) n.a. (1,798) --------- --------- 102,415 --------- --------- Gross sales revenue in US$ 135,631 Exchange rate 0.9987 --------- Gross sales revenue in C$ 135,455 --------- --------- Fourth Quarter 2006 ---------------------------------------------------------------------------- Concentrate Realized Gross sales sold Payable price(1) revenue (tonnes) metal(1) (US$) ($000s) ---------------------------------------------------------------------------- Zinc 66,872 28,629 4,227 121,015 Copper n.a. (4) 7,649 (34) Lead 4,921 3,182 1,648 5,245 Gold 1,438 10,603 749 7,946 Silver n.a. 475,625 15.06 7,164 Other(2) n.a. (2,638) --------- --------- 73,231 --------- --------- Gross sales revenue in US$ 138,698 Exchange rate 1.1416 --------- Gross sales revenue in C$ 158,336 --------- --------- (1) Payable metal and realized prices for zinc, copper and lead are per tonne and for gold and silver are per ounce. (2) Other gross sales revenue represents revaluations of prior period concentrate receivables.
Concentrate sold increased 40% in the fourth quarter of 2007 compared with the fourth quarter of 2006. The 29,184 tonne increase in 2007 was due to increases of 31% at Myra Falls and 39% at Toqui and sales of 17,969 tonnes of concentrate at the recently commissioned Langlois mine partially offset by 9% fewer tonnes sold at Mochito.
In payable metal terms, zinc sold increased by 28%, copper sold increased by 2,943 tonnes from nil in 2006, gold increased by 30% and silver rose by 9% while lead sales dropped by 65% in the fourth quarter of 2007 compared with the fourth quarter of 2006.
Realized zinc, copper and silver prices, denominated in US$, decreased by 38%, 12% and 7% respectively in the fourth quarter of 2007 while lead and gold prices realized increased by 102% and 5% respectively. Gold and silver hedging gains of US$1.5 million (US$137 per ounce) and US$1.1 million (US$2.23 per ounce) respectively were included in the fourth quarter 2006 prices realized. The Company periodically hedges against fluctuations in metal prices and foreign exchange rates using forward sales or options. The Company has not applied hedge accounting historically; therefore, mark-to-market gains or losses have been included in gross sales revenue at the end of each period. There were no hedges in place in 2007 and accordingly no hedging gains or losses.
Gross sales revenue decreased by US$3.1 million or 2% in the fourth quarter of 2007. Additionally, a stronger C$ resulted in an increase in the average US$/C$ exchange rate of 13% in the fourth quarter of 2007. In C$ terms, gross sales revenue decreased $22.9 million or 14% in the fourth quarter of 2007 compared with the fourth quarter of 2006.
Year 2007 ---------------------------------------------------------------------------- Concentrate Realized Gross sales sold Payable price(1) revenue (tonnes) metal(1) (US$) ($000s) ---------------------------------------------------------------------------- Zinc 194,311 82,661 3,075 254,154 Copper 29,369 6,207 6,959 43,193 Lead 16,054 10,162 2,508 25,481 Gold 4,316 44,508 702 31,225 Silver n.a. 2,127,277 13.36 28,429 Other(2) n.a. (1,011) --------- --------- 244,050 --------- --------- Gross sales revenue in US$ 381,471 Exchange rate 1.0599 --------- Gross sales revenue in C$ 404,335 --------- --------- Year 2006 ---------------------------------------------------------------------------- Concentrate Realized Gross sales sold Payable price(1) revenue (tonnes) metal(1) (US$) ($000s) ---------------------------------------------------------------------------- Zinc 217,346 93,897 3,199 300,399 Copper 25,120 5,442 7,217 39,270 Lead 16,556 10,611 1,297 13,757 Gold 2,727 42,210 559 23,578 Silver n.a. 2,070,612 10.28 21,287 Other(2) n.a. (207) --------- --------- 261,749 --------- --------- Gross sales revenue in US$ 398,084 Exchange rate 1.1360 --------- Gross sales revenue in C$ 452,233 --------- --------- (1) Payable metal and realized prices for zinc, copper and lead are per tonne and for gold and silver are per ounce. (2) Other gross sales revenue represents revaluations of prior period concentrate receivables.
Concentrate sold in 2007 decreased 7% to 244,050 tonnes. The 17,699 tonne decrease was due to decreases of 31% at Myra Falls and 22% at Mochito which more than offset 31% higher sales at Toqui and sales of 20,663 tonnes at Langlois. In payable metal terms, copper, gold and silver sales were 14%, 5% and 3% higher respectively while zinc and lead sales declined by 12% and 4% respectively.
Lead, gold and silver prices, denominated in US$, increased by 93%, 26% and 30% respectively in 2007 compared with 2006 while prices for zinc and copper sales decreased by 4% each. Gold and silver hedging losses of US$1.4 million (US$33 per ounce) and US$2.4 million (US$1.18 per ounce) respectively were included in the 2006 prices. There were no hedges in place in 2007 and accordingly no hedging gains or losses.
Gross sales revenues decreased US$16.6 million or 4% in 2007 compared with 2006. A rising C$ resulted in an increase in the average exchange rate of the US$/C$ of 7% in 2007 compared with 2006. In C$ terms, gross sales revenue decreased $47.9 million or 11% in 2007 compared with 2006.
The Company's revenue recognition policy requires that, among other things, final pricing of concentrate inventories be known prior to the recognition of revenue. Using commodity prices and exchanges rates prevailing at December 31, 2007, the following schedule provides details regarding inventories shipped but not recognized for revenue purposes and the related provisional payments.
Net Earnings Pro- Weighted- smelter Inventory before visional average Concentrate return value taxes payments months to (DMT) ($000's) ($000's) ($000's) ($000's) settlement ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Zinc 38,831 25,659 22,015 3,644 19,829 1.7 Copper 5,970 8,928 8,839 89 1,115 1.1 Lead 5,345 10,190 7,408 2,782 11,304 2.0 Gold 954 3,014 1,121 1,893 - 2.8 ---------------------------------------------------------------------------- 51,100 47,791 39,383 8,408 32,248 ----------------------------------------------------------------------------
As at December 31, 2006, the Company estimated that inventories shipped but not recognized for revenue purposes had earnings before tax of $18.1 million consisting of $38.3 million of net smelter return less $20.2 million of inventory value on 25,499 tonnes of concentrate.
The following table provides the average base and precious metal prices and exchange rates for the periods indicated.
Average Metal Prices & Exchange Rate Fourth Quarter Year 2007 2006 2007 2006 ---------------------------------------------------------------------------- Zinc (US$/tonne) 2,621 4,204 3,242 3,275 Copper (US$/tonne) 7,178 7,065 7,114 6,720 Lead (US$/tonne) 3,209 1,626 2,578 1,289 Gold (US$/ounce) 788 614 697 605 Silver (US$/ounce) 14.22 12.62 13.40 11.57 C$/US$ exchange rate 0.9821 1.1393 1.0736 1.1341 ----------------------------------------------------------------------------
Treatment and Marketing Costs
Despite more tonnes of concentrate sold, treatment and marketing costs decreased 31% to $33.0 million in the fourth quarter of 2007 from $48.1 million in the fourth quarter of 2006. Treatment and marketing costs for the fourth quarter of 2007 were 24% of gross revenue compared with 30% in 2006. The overall decrease in treatment charges was primarily due to lower zinc and copper prices in the fourth quarter of 2007 compared with 2006 and, to a lesser extent, the weakness of the US$. A reduction in zinc prices results in lower escalators (the upside price participation by smelters) and therefore lower treatment charges. Additionally, the escalators were reduced by a higher base zinc price used in the calculation of treatment charges in the fourth quarter of 2007 compared with 2006. Higher treatment and marketing costs at Toqui as a percentage of gross sales revenue were primarily due to a 40% increase in freight costs per tonne shipped.
Treatment and Marketing Costs Fourth Quarter 2007 Fourth Quarter 2006 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Cost Cost Gross per Gross per sales tonne sales tonne Aggregate revenue sold Aggregate revenue sold ($ millions) (%) ($) ($ millions) (%) ($) ---------------------------------------------------------------------------- Mochito 9.9 26% 333 20.1 30% 616 Toqui 10.6 31% 385 12.2 27% 616 Myra Falls 7.8 19% 289 15.8 34% 760 Langlois(1) 4.7 22% 260 n.a. n.a. n.a ---------------------------------------------------------------------------- Total 33.0 24% 322 48.1 30% 657 ---------------------------------------------------------------------------- (1) First concentrate shipped November 2006 and commenced commercial production on July 1, 2007.
Treatment and marketing costs decreased 22% to $100.3 million in 2007 from $127.8 million in 2006 while 7% fewer tonnes of concentrate were sold. Treatment and marketing costs as a percentage of gross sales revenue in 2007 were 25% compared with 28% in 2006. The decrease in treatment and marketing costs as a percentage of revenue was primarily due to lower zinc and copper prices which resulted in lower escalators and therefore lower treatment charges. Additionally, the escalators were reduced by the higher base zinc price used in the calculation of treatment costs in 2007 compared with 2006. Higher treatment and marketing costs as a percentage of gross sales revenue at Toqui in 2007 were due to increases in freight costs while at Mochito the lower percentage was due to certain concentrate sales which had flat treatment charges with no escalators.
Treatment and Marketing Costs 2007 2006 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Cost Cost Gross per Gross per sales tonne sales tonne Aggregate revenue sold Aggregate revenue sold ($ millions) (%) ($) ($ millions) (%) ($) ---------------------------------------------------------------------------- Mochito 23.3 18% 312 40.5 26% 425 Toqui 40.3 35% 558 30.3 30% 552 Myra Falls 31.3 23% 408 57.0 29% 512 Langlois(1) 5.4 22% 263 n.a. n.a. n.a. ---------------------------------------------------------------------------- Total 100.3 25% 411 127.8 28% 488 ---------------------------------------------------------------------------- (1) First concentrate shipped November 2006 and commenced commercial production on July 1, 2007.
Direct Operating Costs
Direct operating costs were 102% higher in the fourth quarter of 2007 at $73.9 million compared with $36.7 million in the fourth quarter of 2006. The increased costs were primarily due to higher concentrate sales at Myra Falls and Toqui, higher operating costs at Myra Falls and Mochito, the mix of concentrates sold and the impact of new production at Langlois. On a cost per tonne of concentrate sold basis, direct operating costs increased to $722 in the fourth quarter of 2007 from $501 in 2006. The increase was primarily due to a greater proportion of sales from Myra Falls and Langlois which are relatively higher cost operations. Also see details of direct operating costs under each mine's Expenses in the Production Results section of this news release.
Direct Operating Costs Fourth Quarter 2007 Fourth Quarter 2006 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Cost Cost Gross per Gross per sales tonne sales tonne Aggregate revenue sold Aggregate revenue sold ($ millions) (%) ($) ($ millions) (%) ($) ---------------------------------------------------------------------------- Mochito 13.6 36% 458 11.2 16% 343 Toqui 10.3 30% 374 7.6 17% 385 Myra Falls 34.7 82% 1,273 17.9 38% 860 Langlois(1) 15.3 73% 855 n.a. n.a. n.a. ---------------------------------------------------------------------------- Total 73.9 55% 722 36.7 23% 501 ----------------------------------------------------------------------------(1) First concentrate shipped November 2006 and commenced commercial production on July 1, 2007.
Direct operating costs were 20% higher in 2007 at $161.6 million compared with $134.6 million in 2006, as 7% fewer tonnes of concentrate were sold and the average cost per tonne of concentrate sold increased to $662 in 2007 from $514 in 2006. The increase in the average direct operating cost per tonne sold was primarily due to similar aggregate costs at Myra Falls and Mochito despite 31% and 22% fewer tonnes sold respectively, higher costs at Toqui on greater sales and the impact of Langlois sales.
Direct Operating Costs 2007 2006 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Cost Cost Gross per Gross per sales tonne sales tonne Aggregate revenue sold Aggregate revenue sold ($ millions) (%) ($) ($ millions) (%) ($) ---------------------------------------------------------------------------- Mochito 32.5 25% 437 31.8 20% 333 Toqui 28.3 25% 392 18.9 19% 345 Myra Falls 83.7 62% 1,090 83.9 42% 751 Langlois(1) 17.1 69% 830 n.a. n.a. n.a. ---------------------------------------------------------------------------- Total 161.6 40% 662 134.6 30% 514 ---------------------------------------------------------------------------- (1) First concentrate shipped November 2006 and commenced commercial production on July 1, 2007.
Depreciation and Depletion
Depreciation and depletion increased $4.6 million and $5.2 million in the fourth quarter of 2007 and in the year respectively compared with the corresponding periods in 2006. Langlois, which commenced commercial production effective July 1, 2007, was primarily responsible for the increases with depreciation and depletion of $4.5 million and $5.0 million in the fourth quarter of 2007 and in the year respectively.
Reclamation and Closure
Reclamation and closure costs increased by $3.3 million in both the fourth quarter of 2007 and the year compared with the corresponding periods in 2006. The increases were due to a $3.2 million provision for completion of modifications of the tailings facility at Myra Falls taken in the fourth quarter of 2007.
General and Administrative
General and administrative expenses increased by $0.8 million in the fourth quarter of 2007 compared with 2006. The increase was primarily due to: an allocation of stock based compensation in 2006 from administration to certain operations which did not recur in 2007; increased salaries and severance; funding for technical training in Honduras; and, higher insurance costs partially offset by lower audit, internal control and corporate development consulting fees and reduced legal costs related to the sale of the Caribou and Restigouche properties in 2006.
General and administrative expenses increased by $1.7 million in 2007 compared with 2006. The increase was primarily due to: increased salaries and severance; higher corporate development consulting fees; higher travel and accommodation costs; the impact of a 2006 under accrual of bonuses; and, higher insurance costs partially offset by lower audit and internal control consulting fees and a refund of a deposit to purchase shares of Jascan Resources Inc. ("Jascan") in 2000.
Interest and Financing
Interest and financing costs increased by $1.0 million in the fourth quarter of 2007 compared with 2006 primarily due to $1.0 million of fees paid in relation to the qualifying environmental trust at Myra Falls. For 2007, interest and financing costs increased modestly as the $1.0 million fee to establish the qualifying environmental trust at Myra Falls was partially offset by interest costs related to loans which were repaid in the first half of 2006.
Investment and Other Expense (Income)
Investment and other expense (income) was an expense of $8.4 million in the fourth quarter of 2007 compared with income of $2.9 million in 2006. For 2007, investment and other income was $5.0 million lower than 2006 at $3.1 million. The decrease was due to the valuation of conversion rights in certain convertible debentures held by the Company, which are considered embedded derivatives, primarily due to lower share prices and the marking to market of available-for-trade securities. Any unrealized gains or losses are recorded through earnings.
Foreign Exchange and Other Expense (Income)
Foreign exchange and other expense (income) was a gain of $0.2 million in the fourth quarter of 2007 compared with a loss of $1.6 million in 2006. The foreign exchange gain was primarily due to the repayment of certain provisional payments for inventory shipped at a lower exchange rate but not priced, followed by a subsequent strengthening of the C$. For 2007, foreign exchange and other expense (income) was $7.8 million higher at $9.8 million. The increased foreign exchange loss was primarily due to the impact of the strengthening C$ on US$ cash and cash equivalents.
Exploration
Exploration expenses increased by $3.3 million in the fourth quarter of 2007 compared with 2006. Increased expenses at the Company's joint ventures and at Langlois were partially offset by reduced expenses at Toqui and Bouchard-Hebert. For 2007, exploration expenses increased 71% to $17.0 million compared with 2006 primarily due to increases at Langlois, Myra Falls, Mochito and the Company's joint venture properties partially offset by reduced expenses at Bouchard-Hebert and Toqui.
Please refer to the exploration section of each mine and the project sections for details of the exploration activities in 2007.
Exploration Expenses Fourth Quarter Year ---------------------------------------------------------------------------- 2007 2006 2007 2006 ---------------------------------------------------------------------------- Mochito 0.6 0.4 2.9 1.2 Toqui 0.3 1.7 2.7 4.2 Myra Falls 0.4 0.3 3.3 0.6 Langlois 1.8 - 4.3 - Non-operating 0.1 0.5 0.8 4.0 Corporate 3.0 - 3.0 - ---------------------------------------------------------------------------- Total 6.2 2.9 17.0 10.0 ----------------------------------------------------------------------------
Write-down of Mineral Properties and Fixed Assets
At December 31, 2007, the carrying value of the mineral properties and fixed assets at Myra Falls were written-down by $16.0 million as the net book value exceeded the fair value. Fair value was determined by using estimated future cash flow which included; estimated recoverable reserves; future metal prices and foreign exchange rates; and, estimated operating and capital costs. The write-down of $16.0 million was allocated against the fixed assets of Myra Falls on a prorata basis, based on the net book value before the write-down.
Other Non-Producing Property Costs (Income)
In 2006, the Company recorded a gain on sale of its Caribou property of $13.8 million and a charge of $1.3 million to settle a claim against the Company. Both these amounts were included in other non-producing property costs in 2006. Excluding the above amounts, other non-producing property costs were similar in 2007 and 2006.
Income and Mining Tax Provision (Recovery)
In the fourth quarter of 2007, income and mining tax provision increased by $2.2 million primarily due to an increase of $15.3 million for Myra Falls comprising a $12.5 million write-down of the future tax assets relating to an impairment write-down in 2007 and a recovery of $3.1 million in 2006 partially offset by $7.5 million and $0.5 million reductions at Mochito and Toqui respectively and $1.9 million of tax recoveries related to other comprehensive losses.
The income and mining tax provision increased to $26.6 million from a recovery of $1.3 million in 2006, a $27.9 million change. The increase was primarily due to a $27.0 million future tax asset for Myra Falls which was set-up in 2006, a $19.0 million write-down of the Myra Falls future tax asset in 2007 related to an impairment review and recognition of $5.2 million of Quebec mining duties in 2006 partially offset by a $15.5 million future tax asset for Langlois established in 2007, a renunciation of the tax benefit of flow-through shares in 2006 of $2.3 million and $1.9 million of tax recoveries related to other comprehensive losses.
LIQUIDITY AND FINANCIAL POSITION REVIEW
Working Capital
Working capital at the end of 2007 was $82.6 million compared with $109.9 million at the end of 2006, a decrease of $27.3 million.
Current Assets
Total current assets decreased by $3.9 million to $193.6 million at December 31, 2007 compared with December 31, 2006. The main components of current asset changes were:
- Cash and cash equivalents decreased by $18.5 million reflecting lower cash flow from operating activities and higher expenditures on mineral properties and fixed assets
- Accounts receivable concentrate decreased by $9.1 million primarily due to the timing of revenue recognition and lower metal prices reducing receivables at Myra Falls and Toqui - Other accounts receivable increased by $4.3 million primarily due to sales tax receivables at Langlois and accrued interest income at Myra Falls
- Concentrate inventory increased by $21.1 million primarily due to the tonnes of concentrate in inventory increasing by 22,954 tonnes to 84,544 tonnes at December 31, 2007. Of the increased tonnes, 15,524 tonnes related to Langlois.
- Materials and supplies inventory increased by $6.2 million primarily due to increased material in transit and higher costs and quantities of inventory at Mochito together with inventory at Langlois related to the commencement of commercial production
- Prepaid expenses and other current assets increased by $3.5 million primarily due to a $3.4 million deferral of stripping costs at Myra Falls related to the Lynx pit
- The current portion of future tax assets decreased by $13.3 million primarily due to a write-down in the current portion of the Myra Falls future tax assets of $12.5 million in the fourth quarter of 2007.
Current Liabilities
Current liabilities increased by $23.4 million to $111.0 million at December 31, 2007 compared with December 31, 2006. The main components of the current liabilities changes were:
- Provisional payments for concentrate inventory shipped and not priced, which represent payments received for concentrate shipments that were not recognized as revenue, increased by $8.0 million. The balance at December 31, 2007 was $32.2 million compared with $24.2 million at December 31, 2006. Refer to the table in Gross Sales Revenue section of this news release for additional details.
- Accounts payable and accrued liabilities increased by $18.9 million primarily due to a $5.9 million build-up at Langlois related to the commencement of commercial production, $6.1 million of provisional payments returnable to customers related to a fall in metal prices from the time the initial provisional payment was received to December 31, 2007, a $3.6 million increase in accounts payable and accrued liabilities at Myra Falls due to contractors employed on various capital and development projects and $2.2 million at Mochito primarily related to equipment and supplies in transit.
Long-term Investments
At December 31, 2007, long-term investments were $32.9 million, up $18.2 million from $14.7 million at December 31, 2006. The increase was primarily due to new accounting requirements for financial instruments and comprehensive income required by the Canadian Institute of Chartered Accountants ("CICA") and adopted by the Company on January 1, 2007.
Reclamation Deposits
At December 31, 2007, the Company had reclamation deposits of $33.5 million, an increase of $20.0 million from December 31, 2006. The increase was due to a $20.0 million qualifying environmental trust established in December 2007 for Myra Falls. The $13.5 million and $20.0 million of reclamation deposits are held under a safe keeping agreement and a trust indenture respectively to fund future reclamation requirements at Myra Falls.
Restricted Promissory Note
The Company held two restricted promissory notes at December 31, 2007 and December 31, 2006 of $62.3 million related to the Red Mile transactions(1) in 2004 and 2005. The interest earned and a portion of the principal of these restricted promissory notes will be used to meet the Company's royalty obligations.
(1) For further information on the Red Mile transactions please see the Company's most recent Annual Information Form filed on SEDAR or available at the Company's website at www.breakwater.ca.
Deferred Income
Deferred income of $5.7 million at December 31, 2007 consisted of: (i) deferred indemnity agreement fees and prepaid interest income received in relation to the Red Mile transactions in 2004 and 2005 which will be taken into income over the lives of the two agreements; and, (ii) a non-refundable royalty payment received on the sale of the Lapa properties in 2003 (US$1.0 million) which will be taken into revenue as earned when the Lapa properties are put into production.
Royalty Obligations
The royalty obligations of $82.5 million relate to the royalty amounts received from the 2004 and 2005 Red Mile transactions and $20.0 million related to the qualifying environmental trust. See restricted promissory note and reclamation deposits above.
Reclamation and Closure Cost Accrual
Reclamation and closure costs represent the Company's obligation for reclamation and severance costs accrued for its mine sites. At December 31, 2007, total accrued reclamation and closure costs were $39.7 million compared with $40.6 million at December 31, 2006. During 2007, a provision for modifications to the tailings facility at Myra Falls was increased by $3.2 million for additional costs estimated to complete the modifications and was included in reclamation and closure costs.
Of the $39.7 million, $6.5 million is classified as current and is expected to be spent over the next 12 months at Nanisivik, Bouchard-Hebert, Bougrine and Myra Falls. The Company incurred expenditures of $6.8 million in reclamation and closure costs in 2007 compared with $7.4 million in 2006. As there is currently no law, regulation or contract in Honduras related to reclamation and closure costs, GAAP does not permit the Company to set up a liability for reclamation at the El Mochito mine.
Reclamation and Closure Cost Accrual at December 31, 2007 ($ millions) Current Long-term Total ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Myra Falls 1.8 26.6 28.4 Mochito(1) 0.0 1.1 1.1 Toqui 0.0 3.5 3.5 Langlois 0.0 1.4 1.4 Bouchard-Hebert 1.8 0.0 1.8 Nanisivik 2.3 0.4 2.7 Bougrine 0.6 0.2 0.8 ---------------------------------------------------------------------------- Total 6.5 33.2 39.7 ---------------------------------------------------------------------------- (1)Reclamation and closure cost accruals for Mochito relate to accrued severances.
The Company spent $1.7 million in reclamation and closure costs in the fourth quarter of 2007 compared with $1.6 million in the fourth quarter of 2006.
Shareholders' Equity
Shareholders' equity at December 31, 2007 was $364.4 million compared with $308.6 million at December 31, 2006. The increase of $55.8 million was primarily due to net earnings of $23.4 million, the issuance of $12.0 million of flow-through shares, the exercise of $6.2 million of warrants and the impact of adopting new accounting policies as required by the CICA of $17.7 million.
Shareholders' Equity Capital Contributed Retained ($000's) stock Warrants surplus earnings ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- As at December 31, 2006 167,093 8,561 793 139,795 Adjustment of opening balance on adoption of CICA accounting policy - - - 5,706 Value ascribed to options exercised under stock-based compensation 1,124 - (1,124) - Flow-through share sale 11,988 - - - Employee share option plan - proceeds of options exercised 2,114 - - - Employee share purchase plan 353 - - - Exercise of warrants and transfer of fair value 6,265 (21) - - Stock-based compensation - - 2,149 - Cancellation of shares (211) - 211 - Other comprehensive loss - - - - Net earnings - - - 23,407 ---------------------------------------------------------------------------- As at December 31, 2007 188,726 8,540 2,029 168,908 ---------------------------------------------------------------------------- Other Cumulative Total Shareholders' Equity comprehensive translation shareholders' ($000's) income adjustments equity ---------------------------------------------------------------------------- As at December 31, 2006 - (7,689) 308,553 Adjustment of opening balance on adoption of CICA accounting policy 4,291 7,689 17,686 Value ascribed to options exercised under stock-based compensation - - - Flow-through share sale - - 11,988 Employee share option plan - proceeds of options exercised - - 2,114 Employee share purchase plan - - 353 Exercise of warrants and transfer of fair value - - 6,244 Stock-based compensation - - 2,149 Cancellation of shares - - - Other comprehensive loss (8,345) - (8,108) Net earnings - - 23,407---------------------------------------------------------------------------- As at December 31, 2007 (3,817) - 364,386 ----------------------------------------------------------------------------
In 2007, the Company issued the following Common Shares: 3,002,289 following the exercise of employee share options; 165,453 pursuant to the Company's employee share purchase plan; 30,884,510 pursuant to warrants exercised; and, 6,122,449 for flow-through of exploration expenses on properties. Additionally, in 2007 the Company cancelled 120,747 unclaimed Common Shares related to the acquisition of Jascan in 2000.
Capital Expenditures
The Company invested $113.8 million in mineral properties and fixed assets in 2007. At mining operations, $23.1 million, $26.7 million, $35.1 million and $21.4 million were spent at Mochito, Toqui Myra Falls and Langlois respectively. For details of these expenditures, please refer to the financial results discussion for each mine. Corporate capital expenditures of $7.5 million were primarily related to earn-in payments made on certain joint venture properties including Coulon in Quebec.
Financial Capability
With the existing working capital, the current metal prices and current US$/C$ exchange rate, the Company expects to be able to carry out its operating, capital, exploration and environmental programs in 2008. The Company's financial capability is sensitive to metal prices, smelter treatment charges and the US$/C$ exchange rate.
PRODUCTION RESULTS
The table below contains the Company's production for the periods presented. Production results include the production from Langlois since January 2007. For accounting purposes, production from Langlois was not recognized on the income statement until the commencement of commercial production - July 1, 2007.
Fourth Quarter Year 2007 2006 2007 2006 ---------------------------------------------------------------------------- Ore Milled (tonnes) 584,361 528,237 2,294,000 2,003,862 Zinc (%) 5.7 6.0 5.9 6.0 Concentrate Production (tonnes) Zinc: Mochito 11,656 18,726 56,205 72,413 Toqui 17,813 15,979 65,322 63,617 Myra Falls 13,599 12,950 56,978 64,902 Langlois(1) 13,935 8,201 54,184 8,201 ---------------------------------------------------------------------------- 57,003 55,856 232,689 209,133 ---------------------------------------------------------------------------- Copper: Myra Falls 7,825 3,569 27,181 20,788 Langlois(1) 2,060 1,078 6,492 1,078 ---------------------------------------------------------------------------- 9,885 4,647 33,673 21,866 ---------------------------------------------------------------------------- Lead: Mochito 3,527 5,239 15,470 17,263 ---------------------------------------------------------------------------- Gold: Toqui 2,055 1,315 6,251 4,237 Myra Falls - - - 14 ---------------------------------------------------------------------------- 2,055 1,315 6,251 4,251 ---------------------------------------------------------------------------- C$ operating costs, production basis ($000s) 61,651 35,745 178,397 126,922 C$ operating cost per tonne milled (production basis) 105 76 85 65 (1) First concentrate shipped November 2006 and considered to be at commercial production levels effective July 1, 2007. The table below contains the Company's metal contained in concentrate, before smelting deductions, for periods presented. Metal in Concentrate Fourth Quarter Year 2007 2006 % 2007 2006 % ------------------------------------------------------- Zinc (tonnes) Mochito 6,117 9,578 (36.1%) 29,211 37,646 (22.4%) Toqui 8,722 7,966 9.5% 32,191 31,725 1.5% Myra Falls 7,159 6,651 7.6% 29,845 33,708 (11.5%) Langlois(1) 7,332 4,057 80.7% 28,327 4,057 598.2% ------------------ -------------------- 29,330 28,252 3.8% 119,574 107,136 11.6% ------------------ -------------------- Copper (tonnes) Myra Falls 1,739 819 112.3% 6,086 4,885 24.6% Langlois(1) 403 208 93.8% 1,315 208 532.2% ------------------ -------------------- 2,142 1,027 108.6% 7,401 5,093 45.3% ------------------ -------------------- Lead (tonnes) Mochito 2,311 3,564 (35.2%) 10,215 11,775 (13.2%) ------------------ -------------------- Gold (ounces) Toqui 8,786 9,810 (10.4%) 37,021 36,795 0.6% Myra Falls 3,607 3,454 4.4% 18,880 20,231 (6.7%) ------------------ -------------------- 12,393 13,264 (6.6%) 55,901 57,026 (2.0%) ------------------ -------------------- Silver (ounces) Mochito 398,918 482,227 (17.3%) 1,732,755 1,769,456 (2.1%) Toqui 63,506 20,802 205.3% 155,890 71,703 117.4% Myra Falls 133,383 172,701 (22.8%) 811,353 857,775 (5.4%) Langlois(1) 51,748 22,855 126.4% 159,672 22,855 598.6% ------------------ -------------------- 647,555 698,585 (7.3%) 2,859,670 2,721,789 5.1% ------------------ -------------------- (1) First concentrate shipped November 2006 and considered to be at commercial production levels effective July 1, 2007.
Fourth Quarter
Aggregate production of zinc in concentrate in the fourth quarter of 2007 was 3.8% higher at 29,330 tonnes. The increase was due to production from Langlois partially offset by lower production at Mochito. Production of copper in concentrate rose 108.6% in the fourth quarter of 2007 due to increased production from Myra Falls and Langlois. Production of lead in concentrate fell 35.2% during the fourth quarter of 2007 due to fewer tonnes milled at Mochito with a lower lead grade. Gold in concentrate decreased 6.6% in the fourth quarter of 2007 from the same period in 2006 due to lower grades at Myra Falls partially offset by more tonnes milled. Silver in concentrate decreased 7.3%, quarter over quarter due to lower production at Myra Falls and Mochito, related to lower grades and lower mill throughput partially offset by higher grades at Toqui and a full quarter of production at Langlois.
Year
Aggregate production of zinc in concentrate in 2007 was 11.6% higher at 119,574 tonnes. The increased zinc was primarily due to production from Langlois partially offset by lower production at Mochito and Myra Falls. Production of copper in concentrate increased 45.3% in 2007 from 2006 due to Langlois, which commenced production in the fourth quarter of 2006 and increased production from Myra Falls. Production of lead in concentrate decreased 13.2% in 2007 due to a decrease in production at Mochito. Gold in concentrate decreased 2.0% year over year due to lower grades at Myra Falls partially offset by more tonnes milled and higher gold grades at Toqui. Silver in concentrate increased 5.1%, year over year primarily due to higher silver grades at Toqui and a full year of production at Langlois.
Mochito (i) Mochito Financial Results Fourth Quarter Year 2007 2006 2007 2006 -------------------------------------------- Gross sales revenue 37,820 67,956 130,005 157,051 Treatment and marketing costs (9,891) (20,101) (23,252) (40,477) -------------------------------------------- Net revenue 27,929 47,855 106,753 116,574 Direct operating costs (13,590) (11,205) (32,540) (31,765) Depreciation and depletion (1,656) (1,824) (4,374) (5,639) Reclamation and closure costs (353) (318) (1,099) (770) -------------------------------------------- Contribution from mining activities 12,330 34,508 68,740 78,400 Exploration (642) (408) (2,919) (1,235) -------------------------------------------- 11,688 34,100 65,821 77,165 Income and mining tax provision (3,393) (10,857) (19,132) (20,365) -------------------------------------------- Net earnings 8,295 23,243 46,689 56,800 -------------------------------------------- -------------------------------------------- Capital expenditures 7,122 2,145 23,130 9,603 -------------------------------------------- -------------------------------------------- Revenue: The following tables and discussion provide details of Mochito's gross sales revenue for the periods indicated: Fourth Quarter 2007 ---------------------------------------------------------------------------- Concentrate Realized Gross sales sold Payable price(1) revenue (tonnes) metal(1) (US$) ($000s) ---------------------------------------------------------------------------- Zinc 27,801 12,103 2,552 30,892 Lead 1,878 1,123 3,328 3,737 Silver n.a. 257,139 13.96 3,589 --------- --------- 29,679 --------- --------- Gross sales revenue in US$ 38,218 Exchange rate 0.9896 --------- Gross sales revenue in C$ 37,820 --------- --------- Fourth Quarter 2006 ---------------------------------------------------------------------------- Concentrate Realized Gross sales sold Payable price(1) revenue (tonnes) metal(1) (US$) ($000s) ---------------------------------------------------------------------------- Zinc 27,734 12,163 4,007 48,736 Lead 4,921 3,182 1,648 5,245 Silver n.a. 448,312 12.77 5,724 --------- --------- 32,655 --------- --------- Gross sales revenue in US$ 59,705 Exchange rate 1.1382 --------- Gross sales revenue in C$ 67,956 --------- --------- (1) Payable metal and realized prices for zinc and lead are per tonne and for silver is per ounce.
Concentrate sold in the fourth quarter of 2007 was 9% lower than in the fourth quarter of 2006 due to lower lead concentrate sales. A 36% lower zinc price and lower payable lead, partially offset by a 102% increase in the realized price of lead, resulted in a 36% decrease in gross sales revenues in US$ terms. A 13% higher exchange rate resulted in gross sales revenue in C$ terms being 44% lower in 2007.
Year 2007 ---------------------------------------------------------------------------- Concentrate Realized Gross sales sold Payable price(1) revenue (tonnes) metal(1) (US$) ($000s) ---------------------------------------------------------------------------- Zinc 58,426 25,307 3,079 77,920 Lead 16,054 10,162 2,507 25,481 Silver n.a. 1,395,766 13.29 18,550 --------- --------- 74,480 --------- --------- Gross sales revenue in US$ 121,951 Exchange rate 1.0660 --------- Gross sales revenue in C$ 130,005 --------- --------- Year 2006 ---------------------------------------------------------------------------- Concentrate Realized Gross sales sold Payable price(1) revenue (tonnes) metal(1) (US$) ($000s) ---------------------------------------------------------------------------- Zinc 78,962 34,789 3,097 107,742 LeadSource: MARKET WIRE
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