BWLRF...TD Newcrest recently raised their price target to $2.50C, and gives them a 10% discounted NAV of over $2 using only current reserves. Current S/P is 97cUS (1.07C), which is a PE of under 3 using their estimated 2006 earnings and a PE of 2 using 07 est. earnings. BWR's CEO also did an interview on ROBTV this morning which is worth a look. He expects the company to have $100 Million in cash on hand by year's end after spending $75 million in Capex. They now expect to have the Langlois mine in Canada open by the end of the year. Most of the company's output is zinc followed by copper and that is not hedged. Sure looks cheap to me.
Action Notes Equity Research
Breakwater Resources Ltd. (BWR-T) C$1.25 ....12
BUY (Unchanged);Target: C$2.50↑ (Prior: C$2.00)
Company Profile
Breakwater Resources Ltd. is a Canada-based company engaged in the acquisition,
exploration, development and mining of base metal deposits in the Americas and North
Africa. Breakwater's principal product is zinc concentrate, which accounts for
approximately 82% of total revenue.
Please see the final pages of this
document for important
disclosure information.
Breakwater Resources Ltd.
(BWR-T) C$1.25
Forecast Metal Prices Revised Higher
Event
We have upgraded our base metal price forecasts over the period 2006 to
2010. Our higher metal price assumptions for 2006 to 2010 are being driven
by much higher prices than we anticipated at the start of the year and by our
view that metal supply could remain constrained for the next three years.
Impact
Positive — We remain bullish on the outlook for zinc prices and have raised
our outlook accordingly. The company has significant leverage to rising zinc
prices, which we believe should translate into significant increases in cash
flow, in particular in 2007 as the Langlois mines starts up. Further, we
anticipate that if exploration results around the El Toqui and El Mochito
mines are successful in adding reserves, concerns over the short mine lives of
these assets would be alleviated, resulting in higher valuations. We are
increasing our target price for Breakwater from C$2.00 to C$2.50 and
maintaining our BUY recommendation.
Details
As noted at the end of Q1/06, Breakwater expects that the strong financial
performance in the first quarter will continue into the second, particularly in
light of the fact that the absence of the sales of copper concentrate in the first
quarter will be recognized in the second. In light of the current metal price
environment performance, Q2/06 is expected to improve considerably. This
should continue to strengthen Breakwater’s balance sheet and position the
company to growth. As well, the company is maintaining its 2006 production
guidance of 240.1 million pounds of zinc and 24.5 million pounds of copper.
We would look for zinc production to grow to 325 million pounds in 2007
with the start up of the Lnaglois mine, the mining of higher grade material
from the Concordia zone at the El Toqui mine and continued improvement at
Myra Falls.
We have increased our zinc price forecasts for both 2006 and 2007. Our
higher price forecasts reflect higher than expected year-to-date prices in 2006
and our forecast for the market to be in substantial deficit in each of the next
two years. We have raised our 2006 zinc price forecast to US$1.32/lb (from
US$1.11/lb) and our 2007 forecast to US$1.50/lb (from US$1.20/lb).
The LME cash zinc price has averaged US$1.19/lb year-to-date, and
US$1.49/lb quarter-to-date. The zinc price peaked at US$1.72/lb in mid-May
Metals & Minerals
Recommendation: BUY
Unchanged
12-Month Target Price: C$2.50↑
Prior: C$2.00
12-Month Total Return: 100.0%
Market Data (C$)
Current Price $1.25
52-Wk Range $0.32-$1.69
Mkt Cap (f.d.)($mm) $571.4
Dividend per Share $0.00
Dividend Yield 0.0%
Avg. Daily Trading Vol. (3mths) 3,318,430
Financial Data (C$)
Fiscal Y-E December
Shares O/S (f.d.)(mm) 457.1
Float Shares (mm) 380.0
Net Cash ($mm) $14.2
Net Debt/Tot Cap nmf
NAVPS (current)(f.d.) $2.04
Estimates (C$)
Year 2004A 2005E 2006E 2007E
EPS (basic) 0.06 0.03 0.36 0.57
EPS (basic)(old) 0.06 0.04 0.24 0.43
CFPS (basic) 0.14 0.12 0.53 0.81
CFPS (basic)(old) 0.14 0.14 0.36 0.61
Valuations
Year 2004A 2005E 2006E 2007E
P/E (basic) 20.8x 41.7x 3.5x 2.2x
P/CFPS (basic) 8.9x 10.4x 2.4x 1.5x
Supplemental Data (C$)
Year 2004A 2005A 2006E 2007E
ZInc (US$/lb) 0.48 0.60 1.32 1.50
Zinc (MM lbs) 350 296 244 340
All figures in C$, unless otherwise specified.
Cliff Hale-Sanders, CFA
Action Notes May 29, 2006
Equity Research 13 of 54
before succumbing to a sharp correction along with the rest of the commodity sector during the week of May
15. Despite the correction, we remain very bullish on the outlook for zinc prices over the balance of 2006 and
into 2007 based upon our expectation that zinc supply is remarkably constrained by a lack of new supply over
the next several years and our belief that zinc inventories could drop below critical levels during Q3/06. We
note our revised metal price forecasts below:
Exhibit 1. New base metal price forecasts and previous price forecasts 2006E-2010E
Old New Old New Old New Old New Old New Old New
Zinc (US$/lb) $1.11 $1.32 $1.20 $1.50 $0.90 $1.20 $0.75 $1.00 $0.65 $0.85 $0.50 $0.60
Copper (US$/lb) $2.13 $2.80 $1.75 $2.25 $1.35 $1.75 $1.10 $1.50 $0.95 $1.25 $0.95 $1.10
2006 2007 2008 2009 2010 Long Term
Source: First Call, TD Newcrest
Valuation
Breakwater currently trades at 3.5 times our 2006 EPS estimate and 2.4 times our 2006 CFPS estimate. This
compares to its small-cap peer group average of 7.8 times 2006 EPS estimates and 8.3 times 2006 CFPS
estimates.
Justification of Target Price
We have increased our target price for Breakwater to C$2.50 from C$2.00 and we are maintaining our BUY
recommendation. Our target price is based upon 2/3 of our NAV and 1/3 of a 5.0 times multiple to our 2007
CFPS estimate. We view this as appropriate given the short mine life of two of the company’s operations
based upon current reserves. Our estimates have been raised as a result of our higher zinc price forecasts for
the 2006-2010 period, offset to a degree by our stronger Canadian dollar forecast. Based upon our higher
long-term zinc price of US$0.60/lb, we have increased our 10% discounted net asset value for Breakwater
from C$1.37/share to C$2.04/share. Our NAV assumes current reserves only.
Key Risks to Target Price
The key risks to Breakwater achieving our target price are actual commodity prices relative to our forecasts,
potential operating disruptions, foreign exchange rate risks, environmental risks and the degree of success in
replacing resources to extend the mine life of its operations.
Investment Conclusion
We remain bullish on the outlook for zinc prices and have raised our outlook accordingly given Breakwater’s
high degree of leverage to zinc prices. We have increased our target price for Breakwater to C$2.50 from
C$2.00 and we are maintaining our BUY recommendation.
Action Notes May 29, 2006
Equity Research 14 of 54
Breakwater Resources (BUY; 12-month target price C$2.50)
Ratio Analysis 2003A 2004A 2005A 2006E 2007E ## 2003A 2004A 2005A 2006E 2007E
Net Income (C$mm) 5.5 23.6 12.5 162.5 261.7 ## Average share price (C$) 0.53 0.48 1.14 1.14
EPS (f.d.) (C$/sh) 0.03 0.06 0.03 0.36 0.57 ## S/O (mm) 211.4 408.5 447.1 456.0 456.0
P/E (x) 11.0 8.2 15.4 2.9 1.8 ## Realized Metal Prices & Costs
Operating CF bf. ch. in WC (C$mm) 12.6 56.2 22.7 241.8 370.0 ## Zinc (US$/lb) 0.38 0.48 0.59 1.32 1.50
CFPS bf WC (C$/sh) 0.06 0.14 0.05 0.53 0.81 ## Copper (US$/lb) 0.81 1.30 1.61 2.80 2.25
P/CF (bf. ch. in WC) (x) 4.8 3.5 8.5 1.9 1.3 ##
Dividend (C$/sh) NA NA NA NA NA ## Production
Dividend yield NA NA NA NA NA ## Zinc (mmlbs) 3 27.6 3 50.1 2 74.4 2 43.2 3 25.2
LTD/Total capitalization 15% NA NA NA NA NA Copper (mm lbs) 7.4 1 7.7 1 8.0 1 7.8 2 4.3
Income Statement Items (C$mm) Silver (000 ozs) 2,019 2,018 2,448 2,279 2,161
Total revenue 210.1 295.0 282.9 487.2 664.2 ##
Operating costs 185.7 221.0 211.5 222.4 268.5 ## Additional Ratio Analysis
Depletion & amortization 23.3 27.6 30.7 34.9 46.4 ## Net interest coverage (x) NA 8.8 42.0 NA NA
Exploration - - - - -## Profit margin 12% 25% 25% 54% 60%
SG&A 5.1 9.0 8.6 8.6 8.6 ## ROE 3% 8% 4% 29% 29%
Interest expense (11.3) 3.7 0.5 - - ## ROA 5% 17% 8% 50% 45%
Other 2.6 5.1 12.1 9.6 1.9 - EV/EBITDA (x) 4.2 3.1 3.5 1.2 NA
EBITDA 16.7 59.9 50.7 246.6 385.2 ## Net Debt/Equity 7% NA NA NA NA
EBIT (6.6) 32.3 20.0 211.6 338.8 ## Book value (US$/sh) 0.54 0.35 0.36 0.71 1.29
EBT 4.7 28.6 19.5 211.6 338.8 ## Free cash flow (US$/sh) 0.01 0.08 (0.04) 0.37 0.78
Taxes (recovery) (0.8) 5.0 7.0 49.2 77.1 ## Zinc Production Profile
Effective tax rate NA 18% 36% 23% 23% ##
Minority interest - - - - -##
Equity earnings - - - - - -
Reported net earnings 5.5 23.6 12.5 162.5 261.7 ##
Adjusted net earnings 5.5 23.6 12.5 162.5 261.7 ##
Reported EPS (C$/sh) 0.03 0.06 0.03 0.36 0.57 ##
Adjusted EPS (C$/sh) 0.03 0.06 0.03 0.36 0.57 ##
Cash Flow Statement Items (C$mm)
Net earnings 5.5 23.6 12.5 162.5 261.7 ##
DD&A 23.3 27.6 30.7 34.9 46.4 ## PIE CHART
Deferred taxes (1.1) - 1.7 34.8 59.9 ##
Equity earnings - - - - - -
Other (15.2) 5.1 (22.2) 9.6 1.9 -
Operating CF bf. ch. in WC 12.6 56.2 22.7 241.8 370.0 ##
CF from operating activities 13.4 56.2 22.7 241.8 370.0 ##
CF from financing activities (6.0) 9.8 22.3 - - ## NAV Analysis
CAPEX (10.6) (23.7) (39.0) (74.6) (16.0) ## NAV 10%
CF from investing activities (10.6) (23.7) (39.0) (74.6) (16.0) ## Operation C$/sh
Net change in cash (3.2) 42.3 6.1 167.2 354.0 ## Bouchard-Hebert 0.00
CFPS bf. ch. in WC (C$/sh) 0.06 0.14 0.05 0.53 0.81 ## Myra Falls 0.78
Balance Sheet Items (C$mm) Bougrine 0.00
Cash 6.4 12.7 18.7 186.0 540.0 ## El Toqui 0.48
Current assets 68.2 116.9 116.9 284.1 638.2 ## El Mochito 0.25
Property, plant & equipment 107.3 153.1 165.2 204.9 174.4 ## Langlois 0.52
Total assets 175.6 287.5 357.2 564.1 887.7 ## Subtotal 2.03
Short-term debt 10.3 - - - -##
Current liabilities 32.0 80.3 72.5 72.5 72.5 ## Balance Sheet Items
Long-term debt 15.5 1.4 5.1 5.1 5.1 ## Cash 0.06
Total liabilities 29.9 65.8 121.9 166.3 228.2 ## to be converted warrants 0.02
Minority interest - - - - -## Non-Cash WC 0.05
Shareholder's equity 113.7 141.4 162.7 325.2 586.9 ## LT-Debt & Closure Provision (0.11)
Working capital 36.1 36.6 44.4 211.6 565.7 ## Total NAV/FD share 2.04
Company Profile: Breakwater Resources Ltd. is a Canadian-based company engaged in the acquisition, exploration, development and mining of base metal deposits in the Americas and
North Africa. Breakwater’s principal product is zinc concentrate, which accounts for approximately 82% of total revenue. Breakwater also produces lead, copper and gold concentrates, with
silver as a by-product. Breakwater currently operates five mines located in Canada, the United States, Tunisia, Honduras and Chile. Annual production in 2005 is estimated at around 300
million pounds of zinc, 22 million pounds of copper and 2.3 million ounces of silver. Production levels relative to past periods have declined as two of Breakwater’s mines were closed in
2005 as ore reserves were exhausted. As such, the company has commenced a program to increase its overall resource base in the coming years.
0
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100
150
200
250
300
350
400
2002A 2003A 2004 2005 2006 2007 2008 2009 2010 2011 Zinc Production (
mm lbs)
Bouchard Hebert Bougrine El Mochito
Langlois El Toqui Myra Falls
Source: Company reports, TD Newcrest
May 29, 2006
Action Notes Equity Research
