Breakwater sheds gold royalties amidst low zinc prices

Breakwater Resources (BWR-T) continues to shed assets in an effort to weather the current lows in the base metals marktet.

Just a week after announcing the sale of its portion of a joint venture in Quebec, the base metal producer said it was selling two royalties on properties that both lie within Agnico-Eagle Mines’ (AEM-T, AEM-N) Lapa project in Quebec.

Agnico is paying $6.25 million for Breakwater’s 1% net smelter royalty (NSR) on gold production from the Tonawanda property and its 0.5% NSR on gold production from the Zulapa property at Lapa.

Lapa is currently under construction with initial production expected by mid-year of 2009. The project sits in the Abitibi region of northwestern Quebec, just 11-km east of Agnico’s flagship mine LaRonde. Lapa has 3.8 million tonnes of probable reserves grading 8.9 grams gold per tonne for 1.1 million ounces of gold.

Annual gold production is expected to average 125,000 oz. annually at total cash costs of $300 per ounce.

Lapa was once wholly owned by Breakwater but after optioning the project to Agnico back in 2002, it sold its remaining 20% interest to the company a year later for $9.93 million.

As part of that deal Breakwater kept the two NSRs.

Agnico optioned the property from Breakwater for just $200,000 and $3.5 million in work commitments. That brought it a 60% stake and it was able to raise it to 70% by paying Breakwater another $1 million. It then moved to an 80% stake by funding a feasibility study on the project.

The sale of the royalties comes as part of Breakwater’s recent moves to sure up its balance sheet.

“The challenge is going to be to face what the market hands us,” says Anne Wilkinson, Breakwater’s vice president of investor relations. “We don’t know how long the zinc price will be down and we want to make sure we survive through these difficult conditions.”

It has been anything but a banner year for Breakwater. The Toronto-based company announced a third quarter loss of $36 million, comparing unfavourably to a year earlier when it reported profits of $7.8 million for the same period.

Losses mounted with the collapse in the zinc price. The downward movement meant two of its mines, Langlois in Quebec and Myria Falls on Vancouver Island were no longer economical and the company had to take a $20 million hit thanks to a write down of future tax assets at the two mines.

Shortly after announcing third quarter results Breakwater put both mines on care and maintanence for an indefinte period.

Then on Dec. 11 Breakwater announced it was selling its 50% interest in the Coulon joint venture to its partner at the project Virginia Mines (VGQ-T). Coulon — which lies in the James Bay region of Quebec — was sold for roughly 1.67 million shares of Virginia.

Virginia shares have been trading in the $3.00 range since the announcement was made. Coulon is a copper, zinc and lead property that is expected to have a resource estimate completed on it in the first quarter of 2009.

Breakwater derives its current production of zinc, copper, lead and gold concentrates from three mines in Chile, Honduras and Canada

In Toronto on Dec. 19 Agnico shares were trading roughly 10% or $5.21 higher at $58.00 on 3.7 million shares traded. Breakwater shares were off roughly 6% to 7 cents on roughly 2 million shares traded. The company shares had closed at at high of $3.54 back in July of last year.