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

To: Stephen O who wrote (813)	5/25/2000 1:19:00 AM
From: Stephen O	Read Replies (2) \| Respond to of 962

Breakwater Ltd. (BWR : TSE : $3.63) Greg Barnes (416) 869-3092 Canaccord Capital Recommendation: BUY Target price: $4.50 52-week price range: $4.60-1.50 Shares O/S: basic 81.8M Working capital: $56.9M Long-term debt: $7.9M Market capitalization: $297M Enterprise value: $248M Y/E Dec. 31 Sector: Metals & Minerals Web site address: www.breakwater.ca Breakwater announced yesterday that it has closed the acquisition of the Bouchard-Hebert and Langlois zinc mines that it is purchasing from Cambior Inc. Breakwater bought the assets for US$48 million (C$70 million), including US$11.7 million in working capital. The effective date of the acquisition will be May 1, meaning that Breakwater will report the full economic impact from the operations for eight months of 2000. The acquisition is being financed via debt. The financing has been arranged through a syndicate of banks and includes three facilities for the total cost of US$48 million. The facilities include: * An increase of US$10 million to the company's US$35 million revolving credit facility; * An increase of US$24 million to the company's non-revolving term loan payable quarterly until March 31, 2004; and * A US$15 million one-year, non-revolving facility repayable one-year from the closing of the transaction. The closing of the transaction has taken longer than originally anticipated due to operating problems encountered at the Bouchard-Hebert mill. The SAG mill developed a crack that is now being repaired. With the mill out of service, an alternate processing route has been established that is allowing the operation to continue working at approximately 80% of capacity. The mill is now expected to be back in full working order by mid to late summer. Business interruption insurance will offset the decline in revenues caused by the operating shortfall. The acquisition was delayed as the insurance companies, banks and companies involved negotiated to resolve the situation. In 1999, the Bouchard-Hebert mine produced 83 million pounds of zinc at a cash operating cost of US$0.32/lb. of payable zinc. In the same period, Langlois produced 62 million pounds of zinc at a cash cost of US$0.49/lb. payable zinc. Our understanding is that the Bouchard-Hebert mine, notwithstanding the recent problems with the mill, is a very predictable operation that is well run and well maintained. Langlois on the other hand has a history of problems that date back to the day it opened and that it will require significant management time in order to bring cash costs down from the high levels experienced in 1999. The objective at Langlois will be to upgrade the new, high-grade Zone 97 resource in order to move it into the production scenario. Cambior quoted reserves in Zone 97 of 2.7 million tonnes grading >10% zinc. We have included the new assets in our earnings and cashflow estimates going forward now that the acquisition has closed. In 2000, we estimate that Breakwater will produce approximately 485 million pounds of zinc and in 2001 we estimate production of 540 million pounds including Langlois and Bouchard-Hebert). Cash operating costs in both years are estimated at US$0.42/lb. Our earnings estimate for 2000 remains flat at $0.46 but in 2001 we have increased our earnings estimate to $0.47/share from $0.33. Our cash flow estimates have also improved. In 2000, our cashflow per share estimate has increased to 0.81 (from $0.67) and in 2001 our new cashflow per share estimate is 0.88. We are using a US$0.55/lb. average zinc price in both 2000 and 2001. The acquisition of the Cambior zinc mines has a beneficial impact on our earnings and cash flow estimates. It also improves our NAV estimate to $3.20, that continues to be held back by the relatively short average mine life inherent in the company's reserve base. We are maintaining our BUY recommendation and $4.50 target price which is 5.1 times our 2001 CFPS estimate 1.4 times our NAV. 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.