Depressed metal prices are taking their toll on
The loss, which translates into 8 per share, includes $7.4 million recorded in the second quarter, when revenue topped a mere $59.4 million. By comparison, Breakwater earned $8.8 million (11 per share) on $146.4 million in the first half of 2000.
Cash flow similarly withered, to $5.9 million from $19.6 million a year ago.
Breakwater’s sharp reversal in fortune is attributable to a sustained drop in zinc prices. Indeed, the company realized just US39 per lb. for every pound sold in the first half of the year, versus US51 per lb. in the first half of 2000.
Against that backdrop, on June 30, Breakwater became in default of its US$45-million revolving credit facility. The facility, from which US$29 million had been withdrawn, is based on the value of the company’s concentrate inventories and receivables; both were devalued to reflect current metal prices.
The creditors have agreed to release US$1.5 million in credit to the company for every US1 rise in the price of zinc — though the reverse holds true and the credit line decreases if the price falls. In return, Breakwater must raise US$16 million in working capital on its own by Sept. 30.
So far, Breakwater has raised US$6 million through deferred delivery contracts with one of its customers. The remainder is to come from a rights offering of 23.1 million shares priced at 50 apiece.
Also in June, Breakwater had deferred the next three quarterly payments on its US$23.1-million term loan. A quarterly payment of US$2.7 million is now due on April 1.
Addressing the liquidity crunch, Breakwater Chairman Gordon Bub says management is focusing “on operating-cost reductions, restraining capital-cost expenditures to the absolute minimum required to maintain operations, and raising additional capital in order to bridge this period of low zinc prices.”
On the bright side, Breakwater is enjoying one of its best operational years on record. Production in the first half of 2001 was up 9% over last year to 103,458 tonnes zinc-in-concentrate, and costs were reduced 12% to US36 per lb., net of byproduct credits.
However, zinc prices are sure to dog the company for a while yet, as each US1 fluctuation affects earnings and cash flow by US$3.4 million. Moreover, on June 30, about 63% of this year’s production was valued at US37 per lb. zinc, in line with current 3-month London delivery prices but US2 lower than Breakwater’s projected total cash costs for 2001. Breakwater expects to produce 217,724 tonnes zinc during the year.
“We believe the current low price is unsustainable as it is below the cash costs of more than half the zinc mines in the Western World,” says Bub, noting that many analysts expect the U.S. economy to turn around in the fourth quarter or early 2002. “As far as the outlook for the U.S. dollar is concerned, that’s anybody’s guess.”
Much of Breakwater’s operational improvement reflects the inclusion of a full six months of production from the Bouchard-Hbert mine in Quebec, acquired in May 2000 from
The Bougrine mine, in Tunisia, was the only other mine to turn a profit, earning $1.4 million. But this was off considerably from a year earlier, owing to lower metal prices.
Lower zinc prices combined with an 18% decline in head grades and higher operating costs to leave the Nanisivik mine, in Nunavut, with an $8.3-million operating loss in the first half of the year. Costs are expected to improve in the second half as lower-grade material is passed through the newly commissioned dense media separation plant. The plant is expected to add some 6,800-8,900 tonnes of zinc to Nanisivik’s annual output over the remainder of the mine life. The addition of low-grade ore to the mine schedule may also prolong production.
The El Mochito and El Toqui mines, in Honduras and Chile, respectively, contributed another $5.1 million to operating losses, all on account of depressed zinc prices. Nevertheless, costs are down at both operations.
The suspended Langlois mine, in Quebec, may soon return to life. An independent feasibility study focusing on Zone 97 is scheduled for completion by October.
Situated near Val d’Or, Que., Langlois was part of the Bouchard-Hbert acquisition but was subsequently shut down in November on account of operational problems, high treatment charges and low zinc prices. The mine produced 14,519 tonnes zinc-in-concentrate at a cost of US52 per lb. zinc prior to its closure.
On June 30, Breakwater had $21.5 million in working capital and $32.3 million in long-term debt. Working capital slipped 16% since the year’s start, whereas long-term debt rose by 5% on account of repayment deferals.
Breakwater expects to spend $5.3 million on capital projects during the remainder of the year.
Be the first to comment on "Breakwater dons survival gear as zinc sinks"