Breakwater in red despite production gains

Low metal prices and operational problems kept Breakwater Resources (BWR-T) in the red during 1998, despite increases in both zinc and lead production.

With property writedowns totalling $32.4 million, Breakwater incurred a net loss of $53.9 million (or 77 cents per share) on revenue of $176.1 million, compared with earnings of $10.1 million (16 cents per share) on revenue of $172.6 million in 1997.

In the fourth quarter of 1998, Breakwater lost $39.8 million (57 cents per share) on revenue of $42.3 million, compared with a loss of $3.2 million (5 cents per share) on $42.2 million in the corresponding period of 1997.

The writedowns comprise $2.3 million for exploration properties abandoned or sold plus another $30 million for the disappointing Caribou mine in New Brunswick. Caribou, with its difficult metallurgy, never reached commercial production in 1998 and is now carried on Breakwater’s books at $76.9 million.

In 1998, Breakwater’s realized metal prices were US46 cents per lb. for zinc, US24 cents per lb. for lead and US$5.03 per oz. for silver, compared with 1997 prices of US56 cents per lb. zinc, US26 cents per lb. lead and US$5.21 per oz. silver. The company estimates its 1998 earnings would have been $26.7 million higher had metal prices remained at 1997 levels.

Breakwater’s best performer in 1998 was the Nanisivik zinc-silver mine on Baffin Island, which milled 792,383 tonnes of ore grading 7.2% zinc and 27.7 grams silver per tonne, producing 55,244 tonnes of zinc in concentrate and 511,945 oz. silver in concentrate. Production was slightly higher than in 1997. The highlight was a drop in operating costs per pound of payable zinc to US39 cents from US45 cents.

In commercial production since June 1998, Breakwater’s Bougrine zinc-lead mine in Tunisia milled 276,114 tonnes of 11.4% zinc and 1.8% lead, producing 25,465 tonnes of zinc in concentrate and 3,467 tonnes of lead in concentrate at a cash cost of US42 cents per lb. of payable zinc in concentrate.

The El Mochito zinc-lead-silver mine in Honduras milled 569,476 tonnes of 7.1% zinc and 1% lead, producing 36,639 tonnes zinc in concentrate, 4,329 tonnes lead in concentrate plus 1.4 million oz. silver in concentrate. Production from El Mochito was down slightly from 1997, owing to Hurricane Mitch, which flooded the mine’s lower workings and forced a temporary suspension of operations in November.

The El Toqui zinc mine in southern Chile operated for eight months in 1998 before operations were suspended in September. During that time, the mine milled 257,600 tonnes grading 7.5% zinc and 0.8 gram gold per tonne, producing 16,385 tonnes zinc in concentrate and 2,307 oz. gold in concentrate. The cost per pound of payable zinc in concentrate was US56 cents in 1998, compared with US53 cents in 1997, when the mine operated for five months.

After it acquired El Toqui in 1997, Breakwater undertook operating improvements to the mine in an attempt to reduce mining costs. Accordingly, milling operations were suspended in September 1998 and a capital improvement program was undertaken to slash costs and boost production. Milling operations using stockpiled development ore were resumed in January 1999 and mining resumed in mid-March.

Breakwater says early indications are that El Toqui’s operating costs will be substantially reduced in 1999, with zinc production expected nearly to double.

The Caribou mine, which began production in July 1997, was shut down in August 1998 owing to poorer-than-expected metallurgical performance and declining metal prices. Additional metallurgical tests were completed at Lakefield Research, reserves were reviewed by management, and operating costs were updated.

Nanisivik was the only Breakwater operation that finished 1998 in the black, recording a 1998 operating profit of $2.8 million on revenue of $69.2 million. Among the other three commercial operations: Bougrine had an operating loss of $1.7 million on revenue of $30.6 million; El Mochito lost $3.6 million on revenue $54.1 million; and El Toqui lost $8.5 million on revenue of $22.2 million.

At the end of 1998, Breakwater’s working capital totalled $16.3 million, down from $61.6 million a year earlier. Net debt (total debt less cash) was $33.8 million at the end of 1998. Breakwater’s working capital line of credit was recently increased by $15 million, to $45 million, in a deal arranged by 35.9%-owner Dundee Bancorp (DBC-T).

In 1999, Breakwater’s total zinc production is expected to grow 30% to 385 million lbs. of zinc in concentrate, and the company aims to reduce mine site cash operating costs by 10% to below US40 cents per lb. of payable zinc in concentrate.