Breakwater joins Blue Note back at Caribou (September 09, 2008)

As tumbling prices hamper zinc producers, Breakwater Resources (BWR-T, BWLRF-O) has taken a 20% interest in Blue Note Mining‘s (BN-T,BNMFF-O) Caribou zinc mine complex in New Brunswick, where production is steady but operating costs left the company with dismal results in the second quarter.

Breakwater Resources had until Sept. 1 to exchange a $15-million unsecured subordinated convertible debenture for a 20% interest in the Caribou underground and Restigouche open-pit mines. Breakwater received the debenture from Blue Note as a part of the deal to acquire the Caribou operation in August 2006. Mining was restarted last summer.

If Breakwater chose not to take the interest in the mine, the company had the option of cash or shares. At the time of the original deal, Blue Note’s share price was about 36 a share. More recently, the stock has been hovering around the 5-mark since mid-August after trading steadily around 8-9 in July.

“We would take a fifteen-million-dollar debenture and I think we’d immediately make it worth $2.1 million,” says Ann Wilkinson, vice-president of investor relations for Breakwater.

While that was clearly an easy decision, whether Blue Note will be able to stay alive in the coming months is another question dependent on where zinc prices go. Zinc is currently trading at US76.7 per lb., down from more than US$1.20 per lb. this time last year.

The company reported a net loss of $12.7 million for the second quarter of the year. Revenue was $25.8 million, while direct operating expenses were $29.1 million, plus another $9 million in other expenses.

On Aug. 25, Blue Note announced that it was cutting its capital budget by $10.5 million to $17.8 million.

Glenn Massad, Blue Note’s director of communications, says the budget cut was about being prudent.

“It’s about spending $10 million less; it’s sort of just being frugal, being mindful,” Massad says. “It’s not really dramatic.”

Massad didn’t have information about what exactly was being cut, instead quoting the press release about the cuts.

“Only capital expenditures required to protect the health and safety of employees and the environment and to ensure continuous operations will be undertaken,” Massad said.

He says Blue Note will re-evaluate its budget when metals prices improve.

Blue Note also reported that that it had cut 70 jobs at the mine, including employees, contractors and consultants. The company says the cuts, which brought staff levels down to 300, were planned.

The company said it expected operating costs to fall to $75-78 per tonne milled during the third quarter from $93 per tonne milled in the first quarter of this year.

Breakwater’s Wilkinson had no comments about the viability of the Caribou operation directly as the company has yet to see the mine operating plan. As well, negotiations about Breakwater’s future role are ongoing, she says.

Wilkinson says that if Breakwater — which has four mines running in Canada and Central and South America — does have advice for Blue Note, she hopes the company would take it.

For the month of August, Blue Note’s plant operated at a 100.2% capacity, milling more than 93,000 tonnes of ore, or 3,005 tonnes per day.

Zinc recovery was 83.4%, with a zinc concentrate grade of 50.1%. Metal in concentrate produced totalled 10.5 million lbs. of zinc, along with 99,000 oz. silver.

Lead recovery was 70.4% and the lead concentrate grade measured 42.3% for the 5.3 million lbs. of lead in concentrate produced.

“Operationally, things couldn’t be going better,” Blue Note’s chief operating officer, John Martin said in a statement.

The Caribou mine consists of the Caribou underground portion and the Restigouche open pit. A 2006 reserve estimate tallied the combined deposits to 4.9 million tonnes grading 6.59% zinc, 3.45% lead and 86 grams silver per tonne.

According to its National Instrument 43-101 business plan for reopening the Caribou and Restigouche mines filed in April 2006, Blue Note projected it would produce more than 476 million lbs. of zinc, 223 million lbs. of lead and 5 million oz. silver over a five-year mine life. The project could be extended beyond that by upgrading and expanding an inferred resource of 3.9 million tonnes grading 7.36% zinc, 3.59% lead and 107 grams silver per tonne.

In May, Blue Note launched a lawsuit against Breakwater and its subsidiary CanZinco. In early June, Breakwater launched a countersuit.

The lawsuit is related to an alleged misrepresentation over a 10% net profit interest (NPI) on the Caribou mine dating back to the 1980s, when East West Mining was the operator. The Fern Trust, which Blue Note describes as an offshore entity, has sued Blue Note for $40 million in anticipatory damages caused by Blue Note’s alleged repudiation of its NPI claim. Blue Note says it has not repudiated the claim but was seeking proper documentation related to the NPI.

Blue Note and Breakwater’s litigations are related to legal compensation for the cost of the Fern Trust lawsuit.

Both Wilkinson and Massad say the lawsuits won’t affect the company’s working relationship.

“The lawsuits are unrelated and extraordinarily unfortunate,” Wilkinson says.