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Gold/Mining/Energy : Breakwater Resources (T.BWR) -- Ignore unavailable to you. Want to Upgrade?

To: Stephen O who wrote (793)	3/29/2000 4:51:00 PM
From: Stephen O	Read Replies (2) \| Respond to of 962

Breakwater comment by Canaccord Breakwater Resources Ltd. (BWR : TSE : $2.90) Greg Barnes (416) 869-3092 Recommendation: BUY Target price: $4.50 Web site address: www.breakwater.ca 52-week price range: $4.60-0.93 Shares O/S: basic 81.6M fully diluted: 86.4M Working capital: C$51.4M Long-term debt: C$8.6M Market capitalization: C$237M Enterprise value: C$194M Breakwater announced yesterday (March 15) that it entered into an agreement with Cambior Inc. for the purchase of the Bouchard-Hebert and Langlois zinc/copper mines. Breakwater has agreed to pay US$48 million, including US$11.7 million in working capital. Along with the mining assets, Breakwater will also assume the associated zinc and copper hedging facilities. The acquisition of the mines is contingent upon Breakwater obtaining financing, Cambior obtaining the discharge of security interests in the two mines, the assignment of the hedging facilities in favour of Breakwater, and the receipt of regulatory approvals. Breakwater intends to finance the acquisition with debt. The company recently established a US$42.5 million credit facility (comprised of a US$35 million revolver and US$7.5 million in term debt), of which US$21 million is available for acquisition activities. The debt financing is expected to include tranches of debt from the company's revolving credit facility, an increase in the term debt facility plus a one-year bridge facility. For 2000, Cambior has put in place a hedging program covering 28,000 tonnes of zinc (or approximately 43% of production from the two mines) on a min-max program that will realize a minimum price of US$0.48/lb. and a maximum of US$0.53/lb. A similar program has been established for 36,000 tonnes of production in 2001. Bouchard-Hebert and Langlois are the two assets that Cambior has been actively marketing in its attempt to raise sufficient cash to pay a US$75 million debt installment payment due June 30, 2000. Below we summarize each of the assets: Bouchard-Hebert Zinc Mine, Quebec Bouchard-Hebert is a poly-metallic mine producing both zinc and copper concentrates, although it is predominantly a zinc producer. In 1999, the mine was forecast to produce 35,000 tonnes of zinc and 6,900 tonnes of copper in concentrate. We estimate cash costs at the operation are approximately US$0.43/lb. of zinc, net of by-product credits. Based on reserves of 5.3 million tonnes grading 4.73% zinc and 0.71% copper, 1.2 grams/tonne (g/t) gold, and 38.3 g/t silver at the end of 1999, Bouchard-Hebert has a mine life of approximately five years. Langlois Zinc Mine, Quebec The Langlois Mine has had a troubled history. This zinc mine started production in 1996 and was open for only 11 months before being closed due to low zinc prices and for the mining method to be changed. The operation re-opened in mid-1997 and in 1999 was expected to produce 32,000 tonnes of zinc in concentrate. We estimate cash costs are approximately US$0.37/lb. of zinc, net of by-product credits. Reserves at the end of 1999 stood at 5.6 million tonnes grading 9.45% zinc and 0.56% copper. The new, high-grade 97 Zone is presently being developed. This new mining area is expected to result in higher head grades at the operation. The head grade in 2000 is forecast to average 8.6% zinc, however this will increase to over 9.5% zinc by 2001. Mine life at year-end 1999 is estimated at 13 years. Combined, Bouchard-Hebert and Langlois are expected to produce about 65,000 tonnes of zinc in concentrate (143 million lbs.) in 2000 and cash costs are expected to stay at the US$0.40/lb. level. In 2000, Breakwater has forecast production at approximately 400 million pounds of zinc in concentrate at a cash cost of US$0.41/lb. of zinc. Breakwater is hoping to close the transaction by the end of March and would therefore be able to reflect nine months of production in its 2000 financial results. Our production, operating cost, EPS, and CFPS estimates, both post the acquisition and pre the acquisition, are summarized in Table 2 on the following page. Our estimates indicate that the acquisition will be accretive both on an earnings and cash flow basis. In 2001, based on a full-year of production from the new operations, our EPS estimates show a 33% increase while CFPS increases by 58%. On a net asset value basis, our calculations indicate that the acquisition is additive. Prior to the acquisition our net asset is $2.65/share (8% discount rate): including Bouchard-Hebert and Langlois increases our net asset value to 3.20/share. Breakwater's zinc production is estimated to increase to the 550 million pound level with the addition of the two mines from about 400 million pounds (based on a full-year of production). This will rank the company among the top eight or nine zinc miners in the world. At this level of production we believe that it will become even more necessary for the company to contemplate making the next step in its evolution and entering the zinc smelting/refining end of the business. Summary We believe that the acquisition of the Bouchard-Hebert and Langlois mines continues Breakwater's pattern of acquiring overlooked assets at reasonable prices (only 2.8X operating cash flow). The company will have achieved a significant increase in production (+35%) and the mines are additive to EPS, CFPS, and NAV. One concern with Breakwater has been its short reserve life. These acquisitions take a step towards addressing this concern (Langlois has a 13-year mine life), however, Breakwater still does not have the cornerstone asset that will move it to the next level of production and allow it to join the major producers (i.e., Cominco/Pasminco) Assuming this transaction is completed, at present levels Breakwater is trading at only 3.25X our CFPS estimate and at a 10% discount to our revised NAV. Breakwater has been recognized over the past 12 months as one of the purest zinc plays on the market. We believe that this acquisition will only serve to strengthen that perception. A US$0.05/lb. increase in the zinc price would increase our 2001 CFPS estimate by $0.29/share, a 33% increase. We are maintaining our $4.50 target price and our BUY recommendation.