Breakwater widens loss

With zinc prices at record lows, Breakwater Resources (BWR-T) posted a net loss of $111.1 million for 2001.

The loss converts into $1.20 per share, and compares with a year-ago loss of $8.7 million (or 10 per share. Revenue between the two periods climbed slightly to $302 million from $300 million. The recent loss includes $70.3 million in non-cash writedowns on mineral properties and fixed assets, compared with $27.1 million in writedowns in 2000. The company’s mining operations burnt up $23.5 million during 2001, a $60.3-million turnaround from the $36.8 million generated in 2000.

The bulk of the recent non-cash charge took the form of $53.4 million to reduce the carrying value of the metallurgically troublesome Caribou mine in New Brunswick to zero. Another $11.2 million was written off at the Nanisivik mine plus $5.6 million for the carrying value for other exploration and non-producing properties.

Providing some encouragement during 2001, was increased production. For the year, the company produced, in concentrate, 211,544 tonnes zinc (compared with 208,996 tonnes last year), 6,932 tonnes copper (4,532 tonnes), 13,174 tonnes lead (11,021 tonnes), 2.9 million oz. silver (2.8 million oz.) and 38,500 oz. gold (20,289 oz.). Total cash costs fell to US36 per lb. of payable zinc from US40.

Breakwater’s top producer during the year was the Nanisivik mine in Nunavut, which cranked out 51,512 tonnes of zinc in concentrate, down from 59,399 tonnes the previous year. Similarly, silver production slipped to 539,380 oz. from 567,707 oz. Total cash costs climbed a penny to US42 per lb. of payable zinc. The mine chipped in an operating loss of $20.3 million, compared with a year-ago operating profit of $15.7 million. The mine, situated on Baffin Island is slated for closure in September 2002, well ahead of schedule.

Casting a shadow on the improved production were zinc prices, which declined steadily during 2001, from US$1,018.50 per tonne (US46 per lb.) at the beginning of the year to just US$750 per tonne (US34 per pound) at year-end. The drop off led the company to a restructure its banking arrangements, and commit to raise additional equity.

In November, the company reached a refinancing deal with Dundee Bancorp, a major shareholder. As part of the deal, Breakwater intends to complete a $15-million rights offering to shareholders. The company figures that the offering, along with a new term loan will be sufficient for its cash requirements until the end of 2002. Cash needs will be the highest in June 2002 when concentrate inventory at its Nanisivik mine is at its height.

Still, the company warns that it will not be able to repay its debt under the credit facilities, which mature on Jan. 2, 2003, unless metal price improve significantly in short order. The company will look to negotiate extensions or restructure its facilities.

Looking ahead the picture doesn’t get any prettier short-term. Breakwater sees continued weakness in zinc prices and expects that situation to continue at least until the second half of 2002. The company hopes to expand production at the El Toqui mine in Chile and reopen the Langlois mine in Quebec in the near term and, price permitting, the Caribou mine in New Brunswick.

At the end of 2001, Breakwater’s working capital stood at $5 million, compared with $23.9 million at the end of 2000. Cash and cash equivalents were $3.3 million down from $4.7 million. Total debt was $80.4 million, resulting in a net debt-to-equity ratio of 44%.