What a difference a decade makes.
Analysts Kerry Smith and John Lydall of National Bank Financial have affirmed their “focus buy” recommendation for the company, setting a target of $6 per share. In a research report, they note that once the Bouchard-Hbert and Langlois transactions are completed, Breakwater will have six operating mines, with total annual contained metal production of 550 million lbs. zinc, 18 million lbs. copper, 27 million lbs. lead, 30,000 oz. gold and 2.5 million oz. silver.
“The company has done a tremendous job at growing through acquisition, with the purchase of Nanisivik in 1996, El Toqui and Bougrine in 1997, and now Bouchard-Hbert and Langlois in 2000,” they note. The analysts gave a thumbs-up to the latest acquisition, saying it continues Breakwater’s extensive track record of growth by prudent acquisition.
More importantly, they point out that all the acquisitions have been completed “at very attractive prices,” beginning with Nanisivik in the Canadian Arctic, which was acquired for a total cost of $44.2 million. The net cost after adjustments (working capital and concentrate inventories) was a mere $15.2 million.
The Bougrine mine in Tunisia was acquired for a total cost of $26.8 million, or a net cost of $20.8 million after adjustments, whereas El Toqui in Chile was acquired for a total cost of $18.7 million, or a net cost of $10.9 million after adjustments.
The two mines to be purchased from Cambior also appear to be bargains, relative to cash flow, net asset value and earnings potential. In 1999, they generated cash flow from operations of about $25 million. “The acquisition price thus represents less than three times 1999 cash flow,” Smith and Lydall state. The net cost to Breakwater will be $53 million after adjustments.
Bouchard-Hbert, situated 30 km northeast of Rouyn-Noranda, operates at the daily rate of 2,900 tonnes, producing both zinc and copper concentrates. It has a reserve life of about five years.
Langlois, 213 km north of Val d’Or, processes 1,800 tonnes per day and also produces zinc and copper concentrates. It has a reserve life of about 12 years.
“It should be noted that underground mines tend to have mine lives well in excess of their current proven and probable reserves,” the analysts point out. “We expect reserve additions to both orebodies in the years ahead.”
Breakwater plans to spend $10 million on exploration this year, with work focused on expanding reserves and resources at existing operations. “Much of the increase will be devoted to new permits around the Bougrine mine, and to exploring several promising targets around El Toqui,” the analysts note. “Breakwater is particularly encouraged by recent results from drilling around El Toqui, where the company believes it has the potential to increase the zinc resources significantly.”
Breakwater is also getting a thumbs-up for having reduced costs at its existing operations, with the overall cash cost per pound of zinc falling from US47 in 1997 to US43 in 1998 and to US40 in 1999.
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