Breakwater Resources struggles to stay above water

Breakwater Resources (BWR-T) posted a net loss of C$88.3 million or C$0.20 per share in 2008 compared with net earnings of C$23.4 million or C$0.06 per share in 2007.

The news sent Breakwater’s shares down 1.5¢ or 12.5% to 10.5¢ apiece in early afternon trading, with 1.9 million shares changing hands. Over the last year Breakwater’s shares have traded in a range of 6¢-$1.63 per share.

Breakwater, which produces zinc, copper, lead and gold concentrates from mines in Canada, Chile and Honduras, posted very bleak fourth quarter results, with a net quarterly loss of C$53.5 million or C$0.12 per share.

Declining commodity prices in October forced Breakwater to temporarily suspend operations at its Langlois mine in Quebec and scale back at Myra Falls in British Columbia.

Cessation of operations at Langlois took full effect by Nov. 2, 2008. At Myra Falls, the company extended the notice period and the operation continues to produce but on a reduced scale with a smaller workforce.

“The temporary suspension of Langlois affects all aspects of the company’s financial results, which makes comparisons between years difficult,” Breakwater said in a press release announcing its financial results for the fourth quarter and the full year.

The Myra Falls zinc, lead, silver, gold and copper mine is in a provincial park in central Vancouver Island in British Columbia, about 90 km from the port of Campbell River. The Langlois zinc-copper mine is in northwestern Québec, about 48 km northeast of the town of Lebel-Sur-Quévillon and 213 km northeast of Val d’Or.

Gross sales revenues decreased US$7.5 million or 2% in 2008 compared with 2007. In Canadian dollar terms, gross sales revenue decreased $6.2 million in 2008 compared with 2007.

Working capital at the end of 2008 totaled $29.2 million compared with $82.6 million at the end of 2007, a drop of $53.4 million.

Concentrate sales in 2008 increased 42% to 346,605 tonnes. The 102,555 tonne increase was due to increases of 2% at Mochito, 18% at Toqui, 20% at Myra Falls and 353% at Langlois.

The El Mochito zinc, lead and silver mine is in northwest Honduras, near the town of Las Vegas about 88 km south of San Pedro Sula, the country’s commercial center. The Toqui zinc, copper, lead, silver and gold mine is about 1,350 km south of Santiago and 120 km northeast of Coyhaique.

In payable metal terms, zinc, copper, lead and silver sales in 2008 were 48%, 20%, 60% and 24% higher respectively while gold sales were 16% lower than in 2007.

Zinc, copper and lead prices decreased by 39%, 13% and 23% respectively in 2008 compared with 2007, while realized prices for gold and silver increased by 24% and 10% respectively.

The Toronto-headquartered company is exploring options to raise funding including equity and debt financing, sales of non-core assets and striking strategic partnerships.

Breakwater’s ability to continue operations “in the normal course of business is dependent upon its ability to achieve and sustain profitable operations,” it stated. “Thus far in 2009, metal prices remain low and the company continues to experience operating losses and the company’s cash has been significantly reduced.”

In terms of asset sales, the company’s total current assets decreased by C$92.2 million year-on-year to C$101.3 million as at Dec. 31, 2008.

In December, Breakwater sold its 50% interest in the Coulon joint-venture property to Virginia Mines (VGQ-T). Virginia purchased
the interest by issuing 1.7 million shares.

Breakwater also sold its 1% net smelter royalty on all gold production from the Tonawanda property, and its 0.5% NSR on all gold production from the Zulapa property to Agnico-Eagle Mines (AEM-T, AEM-n) for $6.25 million.

The company also entered into a royalty agreement late last year with Red Mile Resources. Breakwater sold a basic royalty on a portion of the payable zinc production, over the life of its Myra Falls mine.

On the acquisition side, Breakwater issued 7 million shares to pick up Metco Resources in April. The acquisition is designed to consolidate Breakwater’s land position in the Lebel-sur-Quevillon area and acquire a large under-explored land package in the prolific Matagami camp.

Looking ahead, Breakwater says it expects base zinc treatment charges will decline this year from 2008 levels and forecasts copper treatment and refining charges are likely to increase in 2009, while ocean freight rate levels will fall significantly from levels in 2008.

Breakwater has earmarked about C$2.5 million for exploration this year in order to increase mineral resources at Mochito and Toqui. But if market conditions deteriorate further, the company said it “may curtail or eliminate” exploration expenses.

Based on current market conditions, Breakwater also plans to spend C$17.3 million on capital with the bulk of the funds related to Mochito and Toqui, but again this depends on market conditions and whether they decline further.

In addition to its financial results, Breakwater announced a decrease in its mineral reserve and resource estimates for the year ended Dec. 31.

Mineral reserves were estimated at 17.2 million tonnes grading 6.9% zinc, a year-on-year decrease of 18%.

Reserves at Langlois fell by 36% and were down by 29% at Toqui, primarily because of increases in cut-off grades due to higher operating costs and lower metal price assumptions.

Measured and indicated resource estimates totaled 20.9 million tonnes grading 8.1% zinc, a 13% fall, as a result of decreases at Mochito, Langlois and Toqui, despite an increase at Myra Falls.

Inferred mineral resources have been estimated at 11.1 million tonnes, representing a 12% decrease year-over-year.

For the Dec. 31, 2008 mineral reserve estimates, metal prices used to determine economic viability were US$1 per lb. zinc, a Canadian/US dollar exchange rate of C$-US$ $1.20, US$600 per oz. gold, US$11 per oz. silver, US$2.50 per lb. copper and US$0.70 per lb. lead.  (Those metal prices represent approximately the historical five-year average for each metal from 2004 to 2008.)

The company has 447.7 million shares outstanding.