Breakwater turns a corner

Breakwater Resources (BWR-T, BWLRF-O) is taking full advantage of a soaring zinc price to reinvest in its existing mines, look for acquisitions, and investigate the hidden potential of anomalies discovered years ago but never followed up on because of the long bear market for zinc.

The mid-tier miner has been better known lately for its mine closures and reclamation obligations at the Nanisivik, Bouchard-Hbert and Bougrine operations, but it’s turned a corner with the purchase of the Myra Falls deposit in British Columbia and the onset of a promising zinc market. Zinc is trading in the US90-$1.10-per-lb. range, up from US60 per lb. a year ago.

The company now has a trio of operating mines: Myra Falls, El Mochito in Honduras and El Toqui in Chile. Zinc production is expected to reach 240.1 million lbs. in 2006, just less than half of which will come from Myra Falls.

“Breakwater, in the past, has not had much of an organic story to its growth,” says George Pirie, a former Placer Dome (PDG-T, PDG-N) executive who replaced Colin Benner as president and CEO last summer. “We are not looking to pursue opportunities to buy long-in-the-tooth assets. We’re looking for opportunities that would invigorate the corporation and be long-life, relatively low-cost assets.”

Unlike other metals that have been enjoying a multi-year bull-run, zinc just started to awaken last year and is nowhere near the inflation-adjusted highs of US$10,000 per tonne reached in the 1970s. As a result, the industry has not seen the kind of consolidation that other base metal sectors have experienced, and there are still opportunities for growth through acquisition, Pirie says.

Until the right opportunity comes along, Breakwater will focus on fast-tracking development at the Langlois deposit in northwestern Quebec, improving the Myra Falls mining complex, and exploring for new resources around its existing operations.

For instance, the company recently raised $6 million in flow-through funding by issuing 10 million shares at 60 apiece for exploration in northwestern Quebec. The money will be used to hunt for new deposits around the Bouchard-Hebert mine, which closed last year, and the Langlois mine, scheduled for commercial production in mid-2007.

Roughly half of the budget will be spent at Bouchard-Hbert, which covers 18 km of strike length along the Blake River group of volcanics, the host rocks for several large massive sulphide and gold deposits. The work will include ground and airborne geophysics and diamond drilling along with down-hole geophysical surveying. The presence of an existing mill makes the economic potential of any discovery more appealing.

The other half will be spent along the geological corridor that hosts the Langlois, Grevet B and Orphee properties, including drilling and geophysics. Grevet B has open-pit potential. Metco Resources (MKO-V, MTKOF-O) has a 50% interest in the 464-hectare Orphee property near Lebel-sur-Quvillon.

Langlois

“We’ve got two-hundred million dollars in infrastructure at Langlois ready to roll, and we’re sitting on a magnificent land package that’s been underexplored for all the right reasons. No one was looking with zinc at thirty cents (per pound),” Pirie says.

Last year, Breakwater reopened the books on Langlois, which had undergone a previous feasibility study in 2001, when zinc averaged US44 per lb. The Breakwater review concluded that, assuming an average zinc price of US53 per lb. over the 7-year mine life, the project had an internal rate of return of 16.6%, based on proven and probable reserves of 3.3 million tonnes grading 10.8% zinc, 0.82% copper and 52 grams silver per tonne.

Total capital costs are estimated at $47.6 million, while cash costs, net of byproduct credits for copper, silver and gold, would average 42 per lb. zinc.

Resources at Langlois stand at 5 million tonnes grading 11.2% zinc, 0.79% copper and 54 grams silver, and Pirie is excited about the potential of Zone 97, which averages about 11% zinc and remains open to the east and at depth.

“We’re aggressively trying to ramp up increases in production where possible at our sites, and Langlois has that type of opportunity,” he says. “Certainly, at these prices, it’s a very robust project.”

Another potential source of additional reserves is the Concordia deposit at Breakwater’s El Toqui mine in Chile. Recent drilling there has outlined resources of 1.87 million tonnes grading 10.2% zinc, 5.14% lead and 68 grams silver per tonne and the deposit remains open to the south and southeast. Breakwater is now completing metallurgical testing and infill drilling to establish reserves and, if all goes well, plans to carry out a feasibility study for Concordia by the end of the second quarter.

At a more grassroots level, the Santa Barbara anomaly on the Mochito mine property in Honduras looks promising, Pirie says. The geochemical anomaly, which dwarfs the anomaly over the existing mine, was discovered several years ago but was never followed up because of poor zinc prices.

“It doesn’t demand the highest level of exploration this year because it’s still at early stages, but we hope that we’ll be successful and spend more on exploration there in the future,” Pirie says.

Overall, Breakwater will spend $15.1 million on exploration in 2006, including $7.1 million for advanced drilling at Langlois and at El Toqui.

Reclamation costs remain a drag on the company’s bottom line. Although costs are down from 2005, when the bulk of the work at Nanisivik mine in Nunavut was done, Breakwater will spend $8.3 million to finish work at Nanisivik and continue reclamation at Bouchard-Hbert and Bougrine in Tunisia. By the end of the year, reclamation work will be 65% complete at Bouchard-Hbert and 90% complete at Bougrine.

The company has also taken out a US$12-million loan from Standard Bank to pay the British Columbia government the environmental bond for Myra Falls.

Pirie puts a positive spin on the reclamation work, however, saying that by taking responsibility for cleanup, Breakwater increases its chances of acquiring assets shed by major companies as they consolidate and refocus their priorities.

“The investment community was looking at our reclamation obligations as a negative point, but I look at it as an investment in its future,” Pirie says. “Now we can be considered as a potential operator of assets from larger companies. They’re only going to consider doing business with companies that have a social licence, and we have that.”

For example, about 4% of the combined assets of the merging Inco (N-T, N-N) and Falconbridge (FAL.LV-T, FAL-N) will be in zinc, which the new company may decide to sell in order to concentrate on nickel, its main commodity.