Breakwater Ltd. (BWR : TSE : $3.05) Greg Barnes Cannacord
Recommendation: BUY
Target price: $4.50
52-week price range: $4.60-1.50
Shares O/S: basic 81.8M
Working capital: $51.4M
Long-term debt: $8.6M
Market capitalization: $249M
Enterprise value: $206M
BWR announced this morning that it signed a letter of intent to earn a
90% interest in the Oed Amizour zinc project in Algeria from the
government.
The project hosts a drill-indicated resource of 30 million tonnes
grading 5.5% zinc and 1.4% lead. A higher grade core is present,
totaling 11 million tonnes grading 10.9% zinc and 3% lead. The
deposit is situated at a depth of 200-400 metres. The property is
located 10 km from a deep-water port and close to a highway, to gas,
and to power lines. No metallurgy has been conducted on the deposit,
however the mineralogy appears to be simple.
The company anticipates that a formal agreement (Protocol d'Accord)
will be signed during the first couple of weeks of June. The plan is
to then launch immediately into a $600K drilling program to twin holes
drilled by the government geological survey and to conduct
metallurgical testwork. If this proves successful, the company would
then move into a $5-7 million feasibility study. Ballpark development
capital expenditures would be in the order of US$125-130 million for a
ramp-accessed underground mine and a plant capable of processing 1.0
million tonnes of ore per year (producing approximately 220 million
lbs. per year of zinc in concentrate). The company estimates cash
costs in the low US$0.30's/lb. of zinc range. It could take 3-5 years
to get the mine into operation, contingent on the company being able
to finance development.
Breakwater has committed to taking the project to production to earn
its 90% interest. The government will retain a 10% net profits
interest once Breakwater recovers capital. Assuming the project
generates profits, the government will be paid US$1.0 million per year
over a five-year period to a total of US$5.0 million. If the project
does not generate the necessary profits, the US$5.0 million will not
be paid. The government also retains a 5% net smelter return royalty
which is on the high side), but Breakwater will get a five-year
tax-free holiday.
Given the up-front cost of the acquisition (nothing apart from work
commitments), this looks like a very reasonable deal for Breakwater.
The deposit looks robust and its location close to infrastructure and
continental Europe are also attractive. The company will also
probably be able to realize some operating and management synergies
with its Bougrine Mine in Tunisia.
However, we would be cautious given the political climate in Algeria.
The country has suffered internal strife in recent years, which has
seen terrorists (Islamic fundamentalists) attacking outlying villages
in the northern half of the country to pressure the government.
Terrorist attacks have lessened over the past year but the US State
Department still cautions visitors to the country - only one western
airline flies into the country. Major US oil companies operating in
the southern portion of the country have not experienced any attacks
in the past year (from a US State Department travel advisory dated
September 1999). It is our understanding that the government will
provide Breakwater with security.
We are maintaining our BUY recommendation and $4.50 target price.
Given the very early stage of this project and seemingly high
political risk in Algeria, we do not anticipate that this project will
have an impact on our NAV for Breakwater in the near-term. We would
view this project as a long-term option on the zinc price. Our NAV
for Breakwater, including the purchase of the Cambior mines, is
3.20/share. |
