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

To: Stephen O who wrote (832)	9/29/2000 11:12:52 AM
From: Stephen O	Read Replies (1) \| Respond to of 962

Posted on Stockhouse 29 Sept 2000 By Bruce Campbell Contributing Columnist Mining: Zinc-Coated Breakwater is Better Than Gold Toronto, ONT, September 29 /SHfn -- Coating your portfolio with zinc is likely to not only protect it from rust; it may make enough money to buy a whole new car. The outlook for zinc remains favourable over the next several months. Demand is outstripping supply and auto production, a major end use, has continued at high levels. Breakwater Resources [T.BWR] is an excellent way to play higher zinc prices, as it is the only pure play on the metal in the Canadian market. At current zinc prices, Breakwater trades at less than six times this year's estimated earnings and at less than four times projected earnings for 2001. It also trades at the astoundingly low multiple of 2.5 times next year's projected cash flow. The stock could double and still trade at only half of Cominco's [T.CLT] multiple. Breakwater is now the seventh largest zinc producer in the world and has grown its production from 60 million pounds in 1985 with one mine, to a forecast 564 million pounds next year from six different mines in four different countries. Breakwater has a knack for buying cheap mines when the cycle is right. Breakwater has a knack for buying cheap mines when the cycle is right. The latest purchase was from Cambior [T.CBJ] earlier this year when it was in financial difficulty. The situation enabled BWR to buy two new mines cheaply and the acquisition was accretive to earnings in its first quarter of ownership. Breakwater is also an excellent operator and has increased production and profitability at every mine it has owned in every year since 1995 despite fluctuating prices of zinc. The company has great growth potential, even without the expected increase in the price of zinc over the next several quarters. On the forecast base for 2001 of 564 million pounds of production, there is almost 400 million pounds of additional tonnage that is likely to come on stream in the next couple of years. First and foremost, the Caribou mine in Eastern Canada will come back on stream if spot prices for zinc go to the high $0.50s, as management has stated it will only put the mine back into production if they can guarantee shareholders an economic return. This would add 125 million pounds. El Toqui in Chile increased its reserves 42% last year through its drilling program. This year's program has doubled the resource on top of that. The company will finish its expansion plan next year and this will add close to 30 million pounds. Nanisivik, in the Canadian Arctic, will add 20 million to 25 million pounds with a new circuit. El Mochito, in Honduras, is also increasing reserves through its current drilling program. The main ore zone has been extended and will produce 15 million pounds. The two mines obtained from Cambior, Bouchard-Hebert and Langlois, will be owned for a full year in 2001 and will therefore show higher production, net to Breakwater. This leaves Oued Amizour, the company's exploration project in Algeria. It has a 200 million pound potential. BWR can acquire a 90% interest by completing a feasibility study and arranging financing and placing the mine into production. This area has 30 million tonnes of 5.5% zinc and could lead to 200 million pounds of additional production in the future. This is not even included in the 400 million pound figure quoted above. Upside is based on leverage; a one-cent change in the price of zinc is an extra $5 million in BWR earnings. Breakwater is also a low-cost producer with its average cost at $0.41 a pound, well below current levels of $0.55 a pound. Combining that fact with its excellent balance sheet leaves the company room to take advantage of further acquisition opportunities if presented. It also makes the company relatively low risk for a mining play. The main downside risk therefore is if zinc prices do not rise, as expected. This could happen if auto demand weakens dramatically. Even in that kind of scenario, zinc prices are likely to just be flat, and the stock is likely to stagnate at or near the current levels, rather than go into a major downturn. With zinc inventories at only five weeks of consumption and the major world economies continuing their growth pattern, the more likely scenario is that zinc prices could be on the rise. Upside is based on leverage; a one-cent change in the price of zinc is an extra $5 million in BWR earnings. At a five to six times earnings multiple, this is 10% on the stock price. That is the major opportunity in owning Breakwater Resources at the current level. Bruce Campbell is an Oakville, Ontario-based portfolio manager with more than 20 years of experience in managing stock portfolios for various pension fund, institutional and individual investors.