Breakwater Resources Ltd.
TSX : BWR

Breakwater Resources Ltd.

March 06, 2006 22:59 ET

Breakwater Reports Year-End Financial and Operating Results

TORONTO, ONTARIO--(Marketwire - March 6, 2006) - Breakwater Resources Ltd. (TSX:BWR) -

Attention Business/Financial Editors:

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion of the financial condition and results of operations of Breakwater Resources Ltd. prepared as of March 2, 2006, constitutes management's review of the factors that affected the Company's financial and operating performance for the year ended December 31, 2005, and factors reasonably expected to impact on future operations and results. The reporting currency is Canadian dollars. All amounts disclosed are in Canadian dollars unless otherwise stated.

The Company is a base metals mining company. It produces zinc, lead, copper and gold concentrates. During 2005, the Company's concentrate production was derived from two mines located in Canada, one each in British Columbia and Quebec; and a mine located each in Chile, Honduras and Tunisia. Its mine in Quebec, the Bouchard-Hebert mine, was closed in February 2005 and its mine in Tunisia was closed in September 2005; both due to depletion of mineral reserves. The Company also owns base metal and gold exploration properties in Canada, Honduras, Tunisia and Chile.

Overview

- Breakwater realized net earnings of $14.7 million or $0.04 per share in 2005 compared with $2.6 million or $0.01 per share in 2004, a $12.1 million increase. These results were generated from a realized zinc price of US$1,297 per tonne of zinc sold compared with US$1,035 per tonne in 2004. This compares with a significantly higher current price of US$2,372 per tonne. Included in the 2005 net earnings was an amount of $6.5 million, set up to recognize future income tax assets at El Mochito and El Toqui. This amount was offset by an $8.1 million charge against Nanisivik for higher than estimated costs for reclamation and closure of that mine.

- Gross sales revenue increased by 30% to $313.0 million, a new high, from $240.3 million in the prior year.

- The contribution from mining activities was $28.0 million compared with $25.7 million in 2004.

- Reclamation and closure activities, and reclamation security funding consumed $31.9 million of the Company's cash, $25.2 million on actual reclamation work and severance payments and $6.7 million for reclamation security deposits.

- The development of Langlois was announced in November 2005 with commercial production expected from the mine by mid-2007.

- Breakwater announced a mineral resource for the El Toqui mine's Concordia deposit of 1.87 million tonnes grading 10.0 percent zinc, 5.2 percent lead and 68 grams of silver per tonne. Breakwater is working towards bringing Concordia into production in 2007.

- In May 2005, the Company entered into a contract with a customer whereby the customer made a prepayment of US$5.0 million against future deliveries of zinc concentrate for the years 2005 through to 2009. The facility was assigned to a third party to whom Breakwater has issued eight promissory notes, each for US$625,000, plus interest. The prepayment facility is repayable in eight tranches, one in each of the consecutive six month periods commencing July 1, 2005.

- In August 2005, the Company entered into a gold loan facility with Natexis Banques Populaires of France whereby the Company received US$10.0 million gold equivalent (sufficient gold was borrowed and then sold at the prevailing spot price of $431 per ounce to provide the equivalent US dollar value of the Facility). The funds were used for capital investment and working capital requirements at Myra Falls.

- In December 2005, the Company entered into a Royalty Agreement ("Agreement") with Red Mile Resources No. 4 Limited Partnership ("Red Mile") whereby the Company sold a "Basic Royalty" on a portion of the payable zinc production, over the life of the Myra Falls Mine. The Company received cash of $56.5 million which included royalty income of $50.5 million and indemnity fees and interest of $6.0 million. The royalty income is shown as Royalty Obligation on the balance sheet and will attract a level interest rate over the life of the obligation that will be recorded as interest expense. The fees and interest received will be brought into income over the life of the agreement. $50.5 million of the funds received were placed with a financial institution, for which the Company took back a restricted promissory note. Interest earned from the promissory note and a portion of the principal must be used to fund the expected Basic Royalty payments. The remaining funds of $6.0 million will be used for working capital and capital requirements at the Myra Falls Mine.

Outlook

Our business plan is focused. In 2006 we plan to:

- Invest in capital projects to increase the productivity, efficiency and effectiveness of our operations;

- Increase the investment in overall exploration;

- Advance mine exploration and development to increase reserves and resources, both quantitatively and qualitatively;

- Advance the Langlois mine and Concordia projects to commercial production by mid-2007; and

- Acquire value added projects or assets.



Our production projections for 2006 are:
<<
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(payable)
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Zinc 240,100,000 pounds
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Copper 18,700,000 pounds
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Lead 20,500,000 pounds
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Silver 1,889,500 ounces
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Gold 59,600 ounces
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The projections above are based on the following mine site production
forecasts:

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Forecast 2006 Myra Falls El Mochito El Toqui All Sites
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Ore Milled (tonnes) 1,000,000 650,000 515,600 2,165,600
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Zinc (%) 6.8 6.6 6.1 6.5
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Copper (%) 1.1 n/a n/a n/a
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Lead (%) 0.5 1.9 n/a n/a
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Gold (g/t) 1.4 n/a 3.0 n/a
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Silver (g/t) 52.7 88.0 5.6 n/a
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Concentrate Production
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Zinc (tonnes) 111,100 74,600 57,000 242,700
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Copper (tonnes) 34,300 n/a n/a 34,300
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Lead (tonnes) 900 14,400 n/a 15,300
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Gold (tonnes) 56 n/a 4,100 4,156
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Payable Metal
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Zinc (pounds) 114,900,000 73,200,000 52,000,000 240,100,000
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Copper (pounds) 18,700,000 n/a n/a 18,700,000
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Lead (pounds) n/a 20,500,000 n/a 20,500,000
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Silver (ounces) 781,600 1,100,000 7,900 1,889,500
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Gold (ounces) 22,100 n/a 37,500 59,600
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Capital Expenditures

Capital expenditures for Breakwater's operations are planned to be $75.3 million in 2006. Of this amount the bulk of funds are related to the development of Langlois, the improvements to Myra Falls' mine and mill, and upgrading both mobile and stationary equipment at Myra Falls. The balance will be spent at the other mines and for exploration.




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Capital Expenditures ($ millions) 2006 Budget
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Myra Falls $24.1
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El Mochito $9.1
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El Toqui $9.0
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Langlois $23.4
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Exploration(a) $9.7
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Total Capital $75.3
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(a) This amount is more fully described below in the exploration table.


Exploration

It is expected that Breakwater will spend $15.1 million on exploration in 2006. The breakdown of the exploration is set forth in the following table:



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Capitalized Exploration ($ millions)
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El Mochito (US) 1.1
El Toqui (US) 4.0
Tunisia (US) 0.5
Langlois 3.1
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Total capitalized exploration 9.7
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Expensed Exploration
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Bouchard-Hebert 2.9
Myra Falls 2.5
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Total expensed exploration 5.4
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Total Exploration 15.1
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Selected Annual Information

The consolidated financial statements of the Company have been prepared in accordance with Canadian generally accepted accounting principles (GAAP).




Statement of Operations and Deficit Data

Years ended December 31,
--------------------------------------
2005 2004 2003
------------ ------------ ------------
($ million's except for per share
numbers and weights)
Tonnes of Concentrate Sold
(Zinc, Copper, Lead and Gold) 367,630 336,901 378,164
Gross Sales Revenue 313.0 240.3 207.6
Treatment and Marketing Costs 105.4 81.9 83.6
Net Revenue 207.6 158.4 124.0
Total Operating Costs 144.3 101.9 132.8
Contribution (Loss) from
Mining Activities 28.0 25.7 (8.8)
Net Earnings 14.7 2.6 0.7
Earnings per Common Share 0.04 0.01 0.00
Diluted Earnings per Common Share 0.04 0.01 0.00
Cash Provided by Operating
Activities(1) 19.5 29.3 15.5
Capital Expenditures 39.0 27.7 10.6
Weighted-Average Number of
Common Shares Outstanding (000's) 369,190 353,508 211,411
Number of Common Shares
Outstanding (000's) 380,917 363,156 285,790

(1) Before changes in non-cash working capital items (see non-GAAP
reconciliation below).


Balance Sheet Data As at December 31,
-------------------------
2005 2004
------------ ------------
Working Capital 44.4 36.6
Total Assets 357.2 287.5
Total Debt 18.7 1.7
Total Long-Term Liabilities 121.9 65.8
Shareholders' Equity 162.7 141.4
Capital Stock & Warrants 344.1 335.0


Sensitivity to Metal Prices and Exchange Rates

Breakwater's cash flow and common share price are highly sensitive to the price of zinc. The following table illustrates the sensitivity of cash flow to changes in the various metal prices and in the US$/C$ exchange rate based on production estimates for 2006 and on a US$/C$ exchange rate of $0.85/$1.00. Each of the sensitivities assumes the other prices and the exchange rate are held constant.



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Change Sensitivities
(C$ million)
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Zinc (US$0.01/pound) 1.8
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Lead (US$0.01/pound) 0.2
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Copper (US$0.01/pound) 0.2
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Silver (US$0.10/ounce) 0.1
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Gold (US$10.00/ounce) 0.5
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Exchange rate (US$0.01/C$1.00)(b) 1.7
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(b) When the Canadian dollar weakens against the US dollar cash flow
would increase.


Sensitivity to Smelter Treatment Charges

Breakwater sells zinc, lead, copper and gold concentrates to smelters in various parts of the world including Europe, Asia and the Americas. Smelters charge the Company for treating the zinc, lead, copper and gold concentrates. Treatment charges vary according to world demand for concentrates. In 2006 the zinc concentrate market will be undersupplied. Consequently base treatment charges will decline. However, this reduction will be offset by the effect of escalators, a form of price participation, built into our smelter contracts. The net effect is that realized treatment charges are expected to increase in 2006, assuming metal prices remain strong.

Statement of Operations Review - 2005 and 2004

Gross Sales Revenue

Gross sales revenue from the sales of zinc, lead, copper and gold concentrates increased by 30 percent to $313.0 million. Higher metal prices and increased concentrate sales, 367,630 tonnes in 2005 compared with 336,901 tonnes in 2004, accounted for this increase, which was partially offset by the stronger Canadian dollar and a mark-to-market loss on hedge positions of $2.9 million. The higher tonnage sold in 2005 was drawn from inventories that built up during 2004 and the sale of the final concentrate production from the Bouchard-Hebert and Bougrine mines, both of which closed in 2005.

Total concentrate production in 2005 was 336,896 tonnes compared with 388,736 tonnes in 2004.

The recorded sales of concentrate can fluctuate from period to period due to the Company's revenue recognition policy. The amount of concentrate recorded as sold in a given period can vary due to production levels, shipping volumes, ship schedules, price determination, and risk and title transfer terms with our various customers. The recognition of final sales can be as much as six months after the date of production.



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Gross sales revenue by metal ($ millions) 2005 2004
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Zinc (US) 156.0 136.3
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Copper (US) 39.2 9.2
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Lead (US) 23.5 11.9
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Gold (US) 23.1 16.8
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Silver (US) 18.1 10.4
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Hedging Mark-to-Market (2.5) 0.1
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Total Gross sales revenue (US$) 257.4 184.7
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Realized exchange rate (C$/US$) yearly average 1.2159 1.3010
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Total Gross sales revenue (C$) 313.0 240.3
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Sales by Concentrate (tonnes) 2005 2004
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Zinc 273,267 292,573
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Lead 40,685 22,087
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Copper 52,441 22,236
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Gold 1,237 5
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Total 367,630 336,901
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Sales by Payable Metal 2005 2004
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Zinc - tonnes 120,330 131,831
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Lead - tonnes 23,959 13,256
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Copper - tonnes 11,059 3,194
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Gold - ounces 51,720 40,211
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Silver - ounces 2,505,126 1,600,407
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Realized Prices & Exchange Rate 2005 2004
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Zinc (US$/tonne) 1,297 1,035
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Lead (US$/tonne) 983 900
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Copper (US$/tonne) 3,543 2,852
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Gold (US$/ounce) 445 414
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Silver (US$/ounce) 7.22 6.52
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Exchange rate (C$/US$) yearly average 1.2159 1.3010
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Average LME Metal Prices & Exchange Rate 2005 2004
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Zinc (US$/tonne) 1,381 1,048
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Lead (US$/tonne) 975 886
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Copper (US$/tonne) 3,678 2,864
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Gold (US$/ounce) 445 409
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Silver (US$/ounce) 7.32 6.65
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Exchange rate (C$/US$) yearly average 1.2111 1.3008
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Breakwater periodically hedges against fluctuations in metal prices and foreign exchange with the use of forward sales or options. The Company does not apply hedge accounting. Realized and mark-to-market gains or losses are included in gross sales revenue at the end of each period. The Company recorded a mark-to-market loss from hedging of US$2.6 million in 2005 compared with a gain of US$0.1 million in 2004. These are non-cash amounts that are reversed when the positions are closed as per the terms of the contract. The table below details the hedge positions outstanding at December 31, 2005.




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Metal Position Quantity Strike Price Strike Date
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Gold Call 25,000 ounces US$455 Dec 2006
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Silver Call 1,050,000 ounces US$7.50 Jan-Jun 2006
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Net Revenue

Net revenue, the value of concentrates sold after deducting treatment charges, freight and marketing costs, increased by 31 percent to $207.6 million in 2005 from $158.4 million in 2004. Total treatment charges, the amount paid to smelters for refining concentrates to produce metal, and shipping and marketing costs were 29 percent higher at $105.4 million in 2005 compared with $81.9 million in 2004. On a per tonne of concentrate basis these costs increased to $287 per tonne sold in 2005 compared with $243 per tonne in 2004. Despite lower average base treatment charges in 2005, higher metal prices triggered price escalators which resulted in higher realized treatment charges. Higher freight rates contributed to higher unit costs as well. These factors were partially offset by the stronger Canadian dollar as all these costs are incurred in US dollars.

Operating Costs

Direct operating costs were 42 percent higher in 2005 at $144.3 million compared with $101.9 million in 2004, as nine percent more tonnes of concentrate were sold and the average cost per tonne of concentrate sold increased to $393 in 2005 from $303 in 2004. The increase in the average cost per tonne was due to a greater percentage of higher cost copper and gold concentrates being sold in 2005 compared with 2004, the inclusion of a full year of production from Myra Falls in 2005 (only half a year in 2004), the loss of almost a full year of production from Bouchard-Hebert and a general increase in the cost of mine site labour and consumables.



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Direct
Operating
Costs 2005 2004
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Concentrate Cost Concentrate Cost
Aggregate Sold Per Tonne Aggregate Sold Per Tonne
($ millions) (tonnes) ($) ($ millions) (tonnes) ($)
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Myra Falls 67.1 116,139 578 13.0 24,616 528
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El Mochito 29.8 103,066 289 25.7 85,579 300
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El Toqui 22.2 59,355 374 13.6 49,294 275
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Bougrine 14.8 58,255 254 17.6 55,780 315
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Bouchard-
Hebert 10.4 30,815 337 32.0 121,632 263
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Total 144.3 367,630 393 101.9 336,901 303
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The total cash cost per pound of payable zinc sold, which includes all mine site cash costs, treatment charges, ocean freight and other marketing costs, net of by-product credits, was US$0.39 in 2005 compared with US$0.32 in 2004 (see non-GAAP reconciliation of the total cash cost per pound of payable zinc sold below). The increase was due to higher treatment charges and freight costs, the inclusion of the Myra Falls mine and increased prices for mine site consumables like fuel and steel grinding media.

Reclamation and Closure Costs

Reclamation and closure costs in 2005 were $12.1 million compared with $4.9 million in 2004. These costs include the accretion of the Company's estimated future reclamation obligations and any adjustments to reclamation obligations at closed mines where better information has caused Breakwater to revise its previous estimates. In 2005, $8.1 million of adjustments were made to the obligations related to the Nanisivik mine as the work required was significantly more than originally anticipated.



Other Expenses (Income)
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Other Expenses (Income) ($ millions) 2005 2004
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General and administrative 8.7 9.5
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Stock-based compensation 0.8 1.3
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Interest and financing 1.3 0.5
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Investment and other income (2.6) (0.8)
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Loss on gold loan 1.8 -
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Other foreign exchange (gain) loss (0.5) 0.4
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Foreign exchange loss on US dollar denominated debt 0.3 1.8
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Total Other Expenses (Income) 9.8 12.7
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Exploration costs 0.5 -
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Write-down of mineral property and fixed assets 0.9 1.2
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Other non-producing property costs 9.0 8.6
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Income and mining taxes (recovery) (7.0) 0.6
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Total Expense (Income) 13.2 23.1
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General and administrative

General and administrative costs decreased by $0.8 million to $8.7 million in 2005. The reduction was due to: lower capital taxes of $0.6 million; a reduction in the executive incentive plan of $0.2 million; lower costs related to the Company's corporate development activities of $0.2 million; lower shareholder communications costs of $0.1 million; and lower salaries and benefits of $0.1 million; partially offset by higher audit and consulting fees related to compliance with the new audit and public reporting requirements ($0.4 million).

Stock-based compensation

Stock-based compensation was $0.8 million in 2005 compared with $1.3 million in 2004; this non-cash expense was lower in 2005 as fewer stock options were granted.

Interest and financing costs

Interest costs were slightly higher in 2005 at $1.3 million compared with $0.5 million in 2004. The 2005 cost included interest and costs for the Red Mile royalty obligations, the May 2005 concentrate prepayment and the August 2005 gold loan. Costs in 2004 were primarily for interest on the credit facility that was fully repaid at the end of January 2004.

Investment and other income

Investment and other income was $2.6 million in 2005 compared with $0.8 million in 2004. The increase in 2005 was mainly due to the interest and fees earned on the Red Mile transactions of $0.2 million, the gain of $0.8 million realized on the sale of Breakwater's holdings in Yukon Zinc Corporation, the gain realized from the disposal of various fixed assets of $0.6 million and interest earned on higher banks balances of $0.2 million.

Loss on remeasurement of gold loan

The Company recorded a non-cash charge of $1.8 million related to the marking-to-market of the gold loan that was drawn in August 2005. The gold loan is marked-to-market at the end of each quarter to reflect the spot price of gold. The mark-to-market amount is reversed as the gold is repaid from Breakwater's gold production.

Foreign exchange (gain) loss on US dollar denominated debt

During 2005, the Company recorded a gain of $0.5 million on its US dollar denominated debt as the Canadian dollar strengthened during the year. In 2004, a loss of $0.4 million was recorded in January before the US dollar denominated debt was repaid at the end of that month.

Other foreign exchange loss

Breakwater's other foreign exchange loss was $0.3 million in 2005 compared with a loss of $1.8 million in 2004. This highlights the impact of the appreciation of the Canadian dollar on the Company's US dollar bank balances. In 2005, the Company had less funds invested in US dollar accounts and the Canadian dollar had only marginally strengthened during the year.

Write-down of mineral properties and fixed assets

In 2005, the book value of certain fixed assets at Nanisivik was written-down by $0.7 million. Equipment to be used in the final reclamation activities may be left at the site if it proves uneconomic to remove it. Accordingly, the write-down noted above properly values this equipment and its probable resale or salvage values, if any. The balance of the equipment was shipped out for sale or transfer to other Company sites in October. In 2004, Breakwater wrote off its investment of $1.2 million in the exploration properties Heninga Lake in Nunavut and Bousquet Ferris in Quebec, as there was no further work planned at these sites.

Other non-producing property costs

In 2005, other non-producing property costs were $9.0 million, which included the care and maintenance costs and holding costs for Caribou ($1.8 million), Langlois ($0.5 million), Bouchard-Hebert ($3.5 million), Bougrine ($0.8 million) and Nanisivik ($2.5 million). In 2004, other non-producing property costs were $8.6 million comprising $1.6 million for Caribou, $0.1 million for Langlois and $6.8 million for Nanisivik. Costs were higher in 2005 due to the closures of Bouchard-Hebert and Bougrine. With the closure work at Nanisivik almost complete and the re-development of Langlois under way other non-producing property costs should be substantially less in 2006.

Cash Provided from Operating Activities (before changes in non-cash working capital items) - 2005 and 2004

Cash provided from operating activities (before changes in non-cash working capital items) was $19.5 million in 2005 compared with $29.3 million in 2004.



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($ millions) 2005 2004
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Contribution from mining activities 27.9 25.7
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Other (expenses) income (9.8) (12.7)
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Other non-producing property (costs) (9.0) (8.6)
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Income and mining taxes recovery (expense) 7.0 (0.6)
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Exploration (costs) (0.5) 0.0
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Write-down of properties (0.9) (1.2)
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Net earnings 14.7 2.6
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Payment of reclamation and closure cost accruals (25.2) (7.9)
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Payment for employee future benefits (2.8) (1.0)
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Non-cash expenses 32.8 35.6
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Cash provided from operating activities
before changes in non-cash working capital items) 19.5 29.3
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(See non-GAAP reconciliation below)




Liquidity and Financial Position Review

Working Capital

Working capital at the end of 2005 was $44.4 million, a $7.8 million increase over the $36.6 million at the end of 2004. Current assets in total were unchanged and current liabilities decreased by $7.8 million during the year.

Current Assets

Total current assets were unchanged at $116.9 million at the end of 2005. Increases in individual line items were offset by decreases in others.

The increases were as follows:

- $6.5 million due to the set up of a future income tax asset related to El Mochito and El Toqui;

- $6.1 million in cash and cash equivalents reflecting improved metal prices, the completion of the Red Mile transaction and the flow-through share issue in December 2005;

- $2.9 million in other receivables as the second $3.0 million payment for the Red Mile transaction was due February 15, 2006; and

- $0.5 million in restricted cash for additional reclamation security posted in 2005.

decreases were as follows:

- $3.6 million and $8.7 million, respectively, in accounts receivable concentrate and concentrate inventory due to the final sales of concentrate at both Bougrine and Bouchard-Hebert;

- $2.5 million in materials and supplies inventory with the closure of Bougrine and Bouchard-Hebert; and,

- $1.1 million in prepaid expenses due mainly to a reduction in prepaid freight for concentrate shipments.

Current Liabilities

Current liabilities decreased by $7.8 million to $72.5 million at the end of 2005.

The decreases were as follows:

- $2.8 million for accounts payable and accrued liabilities, and $8.1 million for provisional payments for concentrate inventoryshipped, reflecting the closure of Bougrine and Bouchard-Hebert; and

- $10.9 million for the current portion of reclamation, closure cost accruals and other environmental obligations as less reclamation work will be required in 2006 as the majority of the work at Nanisivik was completed in 2005. Income and mining taxes payable decreased by $0.3 million.

The decreases were offset by an increase in short-term debt of $14.3 million as the Company entered into a concentrate prepayment facility and a gold loan facility in 2005.

Deferred Financing

Deferred financing fees are costs related to both the concentrate prepayment facility and the gold loan facility that will be expensed over the term of those facilities.

Restricted Cash and Reclamation Deposits

At December 31, 2005, Breakwater had a total of $10.7 million in restricted cash ($3.9 million) and reclamation deposits ($6.8 million).

Of the restricted cash on deposit, $2.4 million is with the Province of Quebec and represents funds that will be returned to Breakwater over the next 12 months as the reclamation work at Bouchard-Hebert, related to those funds, is completed; $1.3 million is held by Natexis Banques Populaires as a cash reserve against the outstanding gold loan (this amount will be returned upon the final gold loan payment scheduled at the end of August 2006) and $0.2 million supports a letter of credit issued to the Nunavut government related to the operating permit for the Nanisivik mine.

Of the $6.8 million of reclamation deposits, $0.7 million are additional funds deposited with the Province of Quebec for security for future reclamation, $6.0 million is held by the Province of New Brunswick as reclamation security for the Caribou mine (these funds will be returned to the Company on the completion of the sale of Caribou to Blue Note Metals Inc.), and $0.1 million is held by the British Columbia government in support of a park use permit at the Myra Falls mine.



Restricted Cash and Reclamation Deposits
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Jurisdiction Location $ millions Purpose
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Province of Bouchard-Hebert
Quebec & Langlois 3.1 Reclamation Security
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Province of
New Brunswick Caribou 6.0 Reclamation Security
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Natexis Banques
Populaires Gold Loan 1.3 Cash Reserve
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Province of
British Columbia Myra Falls 0.1 Park Use Permit
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Dept. of Indian
& Northern
Affairs Nanisivik 0.2 Operating Permit
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Total 10.7
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On January 31, 2006, the Company provided a Safe Keeping Agreement supported with a Guaranteed Investment Certificate in the amount of $13.4 million to the British Columbia government to satisfy the environmental security requirements at the Myra Falls mine.

Long-term Investments

The Company acquired the Taseko Mines Limited debenture with the purchase of Boliden Westmin (Canada) Limited. As this is considered a long-term asset it is carried at cost, $5.6 million, which was the estimated fair value at the time of acquisition.

Restricted Promissory Note

The Company held restricted promissory notes at the end of 2005 of $62.5 million compared with $11.7 million at the end of 2004. The 2005 amount comprises $11.7 million for the restricted promissory note related to the 2004 Red Mile transaction and $50.5 million for the restricted promissory note related to the 2005 Red Mile transaction. The interest earned and a portion of the principal of these restricted promissory notes will be used to meet the company's Red Mile transaction royalty obligation.

Deferred Income

Deferred income was $6.8 million at the end of 2005 compared with $1.8 million at the end of 2004. $5.5 million relates to the indemnity agreement fees and interest that the Company received in relation to the Red Mile transactions in 2004 and 2005; these amounts will be brought into income over the lives of the two agreements. The remaining balance in deferred income is the advance of a non-refundable royalty payment (US$1.0 million) received on the sale of the Lapa properties in June 2003. This amount will be taken into revenue as earned when the Lapa properties are put into production.

Long-term Lease Obligations

Long-term lease obligation of $1.0 million at the end of 2005 represents lease obligations for equipment at the Myra Falls mine.

Royalty Obligation

The Royalty Obligation of $62.5 million relates to the royalty amounts received from the 2004 ($12.0 million) and 2005 ($50.5 million) Red Mile transactions.

Employee Future Benefits

With the acquisition of the Myra Falls mine, the Company assumed the obligations of a defined benefit plan for the employees of that mine. The liability at December 31, 2005 was $5.4 million down from $6.4 million at the end of 2004.

Debt

Total debt was $18.7 million at December 31, 2005, compared with $1.7 million at the end of 2004. The Company entered into a concentrate prepayment contract (the "Prepayment Facility") with a customer in May 2005 whereby the customer advanced the Company US$5.0 million against future deliveries of zinc concentrate. The Prepayment Facility is repayable in eight equal installments. One installment is due in each six month period commencing with the July 1, 2005 to December 31, 2005 period. As at December 31, 2005 one repayment had been made.

In August 2005, the Company completed a Gold Based Pre-production Advance Facility (the "Facility"). The lender of the Facility was Natexis Banques Populaires of France. Under the terms of the Facility, the Company received US$10.0 million gold equivalent (sufficient gold was borrowed and then sold at the prevailing spot price of $431 per ounce to provide the dollar value of the Facility). The term of the Facility is 13 months with six principal payments commencing October 2005 and ending August 2006. The principal repayments will be in the form of gold. The interest rate is at the fixed Gold Base Rate of 0.4 percent plus 2.5 percent and paid monthly in arrears in US dollars. The funds were used for capital investment and working capital requirements at Myra Falls. Security for the Facility is a charge on Myra Falls' concentrate inventories and related smelter accounts receivable; an assignment of certain smelting contracts for the Myra Falls mine production; a cash collateral account; and, unsecured guarantees of the Company and NVI Holdings Ltd., a wholly-owned subsidiary. As at December 31, 2005 one repayment had been made, a second repayment was made on January 3, 2006.

Reclamation and Closure Cost Accrual

Reclamation and closure costs represent the Company's obligation for reclamation and severance costs accrued for its mine sites. At December 31, 2005, total accrued reclamation and closure costs were $50.3 million compared with $63.8 million at the December 31, 2004. Of the $50.3 million, $10.2 million is classified as current and is expected to be spent over the next 12 months at Nanisivik, Bouchard-Hebert, Bougrine and Myra Falls. The Company incurred expenditures of $25.2 million in reclamation and closure costs in 2005 compared with $7.9 million in 2004. Currently the Company is not able to setup a liability for reclamation at El Mochito as there is no law, regulation or contract related to this asset's retirement.



Reclamation and Closure Cost Accrual at December 31, 2005

-----------------------------------------------------------------------
($ millions) Current Long-term Total
-----------------------------------------------------------------------
Myra Falls 2.0 24.8 26.8
-----------------------------------------------------------------------
El Mochito 0.0 1.3 1.3
-----------------------------------------------------------------------
El Toqui 0.0 3.9 3.9
-----------------------------------------------------------------------
Langlois 0.0 1.3 1.3
-----------------------------------------------------------------------
Bouchard-Hebert 3.3 2.7 6.0
-----------------------------------------------------------------------
Caribou 0.0 5.2 5.2
-----------------------------------------------------------------------
Nanisivik 2.7 0.3 3.0
-----------------------------------------------------------------------
Bougrine 2.2 0.6 2.8
-----------------------------------------------------------------------
Total 10.2 40.1 50.3
-----------------------------------------------------------------------


Equity

During 2005, the Company issued 17,761,348 Common Shares for net proceeds of $9.1 million. Thirteen million of the shares issued were flow through shares for exploration to be conducted around Breakwater's properties in Quebec. 2,841,000 were issued on the exercise of employee share options, 1,500,000 were issued on the exercise of banker warrants and 420,348 were issued pursuant to the Company's employee share purchase plan. At the end of 2005, the Company had issued and outstanding Common Shares of 380,917,489 compared with 363,156,141 million at the end of 2004.

Shareholders' equity at December 31, 2005, was $162.7 million compared with $141.4 million at December 31, 2004, an increase of $21.3 million. This reflects a net profit of $14.7 million for 2005 plus proceeds of $9.1 million from the issue of Common Shares and warrants, an increase in the contributed surplus of $0.2 million, offset by a reduction in Cumulative Translation Adjustments of $2.7 million.

Capital Expenditures

The following table sets forth a breakdown of the Company's investment in mineral properties and fixed assets in 2005 compared with the amounts invested in 2004.



-----------------------------------------------------------------------
($ millions) 2005 2004
-----------------------------------------------------------------------
Myra Falls 17.8 4.0
-----------------------------------------------------------------------
El Mochito 8.2 6.8
-----------------------------------------------------------------------
El Toqui 7.1 11.0
-----------------------------------------------------------------------
Bougrine 0.1 0.4
-----------------------------------------------------------------------
Bouchard-Hebert 0.6 1.2
-----------------------------------------------------------------------
Langlois 5.2 4.0
-----------------------------------------------------------------------
Other 0.0 0.3
-----------------------------------------------------------------------
Total 39.0 27.7
-----------------------------------------------------------------------


Myra Falls

In 2005, of the $17.8 million spent on capital at Myra Falls, $9.1 million was for mine development (to provide additional access to the known reserves and to identify new resources and reserves), $2.9 million was for the first phase of the surface ramp (to provide ventilation, exploration platforms and eventual access to the western portion of the property which had little exploration to date), $3.4 million was for mine equipment, $1.4 million was for the new Lynx tailings facility, and $0.7 million was for mill equipment and the initial work related to the installation of the lead circuit.

El Mochito

At El Mochito, of the $8.2 million spent on capital in 2005; $4.5 million was for environment purposes, (primarily on the new tailings facility), $2.1 million was for ongoing mine development, $1.1 million was for mine equipment and infrastructure, $0.4 million was primarily for surface infrastructure, and $0.2 million on mill equipment.

El Toqui

In 2005, total capital at El Toqui was $7.1 million. Of this amount $3.8 million related to equipment replacement, $1.5 million to ongoing mine development (primarily in Estatuas), and $1.8 million to exploration, with the bulk of these funds being spent on the Concordia deposit.

Langlois

$5.2 million of capital was spent on the initial redevelopment of the mine.

Bouchard-Hebert

$0.6 million was spent on exploration in the immediate vicinity of the mine.

Financial Capability

With the existing working capital, the current metal prices and current US$/C$ exchange rate the Company is positioned to carry out its operating, capital and environmental programs in 2006. The Company's financial capability is sensitive to metal prices and the US/Canadian dollar exchange rate.

Operating Review - 2005 and 2004

Myra Falls' contribution from mining activities improved to $2.4 million in 2005 from a loss of $5.1 million in 2004. As the Company acquired the mine in July of 2004, 2004 results are not comparable. 2005 unit cost of sales at Myra Falls have been higher than expected due to lower mine production at lower head grades.

El Mochito's contribution from mining activities was 89 percent higher in 2005 due to more concentrate sold in 2005 than in the same period in 2004 and higher metal prices.

El Toqui contribution from mining activities was lower in 2005. Although more concentrate was sold in 2005 and metal prices were higher, these were more than offset by higher unit production costs.

Bougrine's contribution from mining activities improved significantly in 2005 to $7.4 million from a loss of $5.2 million in 2004. This improvement was the result of higher metal prices and of higher lead production due to a better lead head grade. These factors resulted in more concentrate sold at a lower unit cost.

Bouchard-Hebert contributed $6.7 million from mining activities on the sale of 30,815 tonnes of concentrate in 2005 but, as the mine ceased production in February, this result is not comparable with the 2004 results.




-------------------------------------------------------------------------
Operating review for Concentrate Tonnes
the year ended ------------------------------------------------
December 31 2005 2004
-----------------------------------------------------------------------
Sold Produced Sold Produced
-----------------------------------------------------------------------
Myra Falls 116,139 122,497 24,616 52,305
-----------------------------------------------------------------------
El Mochito 103,066 96,625 85,579 91,786
-----------------------------------------------------------------------
El Toqui 59,355 60,662 49,294 58,813
-----------------------------------------------------------------------
Bougrine 58,255 42,785 55,780 60,648
-----------------------------------------------------------------------
Bouchard-Hebert 30,815 14,327 121,632 125,184
-----------------------------------------------------------------------
Total 367,630 336,896 336,901 388,736
-----------------------------------------------------------------------


-----------------------------------------------------------------------
Contribution
Operating review (Loss) From Capital
for the year ended Net Mining Non-cash Expend-
December 31 Revenue Activities(1) Costs(2) itures(4)
-----------------------------------------------------------------------
($ millions) 2005 2004 2005 2004 2005 2004 2005 2004
-----------------------------------------------------------------------
Myra Falls 79.1 11.8 2.4 (5.1) 9.5 3.8 17.8 4.0
-----------------------------------------------------------------------
El Mochito 56.0 40.4 19.8 10.5 6.3 4.2 8.2 6.8
-----------------------------------------------------------------------
El Toqui 30.6 23.2 3.9 6.2 4.6 3.5 7.1 11.0
-----------------------------------------------------------------------
Bougrine 26.5 20.8 7.4 (5.2) 4.3 8.4 0.1 0.4
-----------------------------------------------------------------------
Bouchard-Hebert 18.3 62.2 6.7 21.3 1.3 8.9 0.6 1.2
-----------------------------------------------------------------------
Nanisivik 0.0 0.0 (8.6) (0.7) 8.6 0.7 0.0 (0.2)
-----------------------------------------------------------------------
Langlois 0.0 0.0 (0.1) (0.1) 0.1 0.1 5.2 4.0
-----------------------------------------------------------------------
Other (2.9)(3) 0.0(3) (3.5) (1.2) 0.6 1.2 0.0 0.5
-----------------------------------------------------------------------
Total 207.6 158.4 28.0 25.7 35.3 30.8 39.0 27.7
-----------------------------------------------------------------------
(1) After non-cash costs.
(2) Depreciation, depletion and accretion costs.
(3) Net realised from metal hedging activities.
(4) Includes assets under capital lease.


Production Results

In 2005, Breakwater's production of metals in concentrate was affected by three major factors. We reported a full year of production from Myra Falls and we closed Bouchard-Hebert in February 2005 and Bougrine in September 2005.



Consolidated production is set forth in the following table.

-------------------------------------------------------------------------
All Mines Year ended December 31 Fourth Quarter
---------------------------------------------------
2005 2004 2005 2004
-----------------------------------------------------------------------
Ore Milled (tonnes) 2,468,565 2,822,228 540,949 802,040
-----------------------------------------------------------------------
Zinc (%) 6.5 6.8 6.1 6.2
-----------------------------------------------------------------------
Concentrate Production
-----------------------------------------------------------------------
Zinc (tonnes) 268,688 318,206 56,576 82,526
------------------------------------------------------------------------
Copper (tonnes) 35,361 43,882 7,410 15,702
-----------------------------------------------------------------------
Lead (tonnes) 28,702 21,633 3,741 6,473
-----------------------------------------------------------------------
Gold (tonnes) 4,145 5,015 1,114 1,540
-----------------------------------------------------------------------
Meal in Concentrates
-----------------------------------------------------------------------
Zinc (tonnes) 141,310 169,909 29,521 43,630
-----------------------------------------------------------------------
Copper (tonnes) 8,110 8,363 1,669 3,194
-----------------------------------------------------------------------
Lead (tonnes) 19,196 14,347 2,579 4,205
-----------------------------------------------------------------------
Silver (ounces) 3,059,914 2,538,021 758,008 736,113
-----------------------------------------------------------------------
Gold (ounces) 75,993 56,388 17,521 19,217
-----------------------------------------------------------------------
Total Cash Costs
-----------------------------------------------------------------------
Per lb. payable
zinc (US$) 0.40 0.34 0.45 0.43
-----------------------------------------------------------------------

The following table sets forth zinc production at each site for the
fullyear and the fourth quarter together with the change from the prior period.

-------------------------------------------------------------------------
Zinc Production Year ended December 31 Fourth Quarter
(million pounds -----------------------------------------------------
of zinc contained 2005 2004 % 2005 2004 %
in concentrate) change change
-----------------------------------------------------------------------
Myra Falls(c) 106.0 40.2 164 23.3 19.3 21
-----------------------------------------------------------------------
El Mochito 94.1 91.3 3 24.6 24.3 1
-----------------------------------------------------------------------
El Toqui 62.5 59.9 4 17.2 13.9 24
-----------------------------------------------------------------------
Bouchard-Hebert 13.9 120.9 (89) 0.0 23.8 (100)
-----------------------------------------------------------------------
Bougrine 35.0 62.3 (44) 0.0 14.9 (100)
-----------------------------------------------------------------------
Total zinc
production 311.5 374.6 (17) 65.1 96.2 (32)
-----------------------------------------------------------------------
(c) Acquired July 2004


Production of copper in concentrate was marginally lower, year over year, despite the closure of Bouchard-Hebert in the first quarter of 2005. Production of copper in concentrate during the fourth quarter of 2005 decreased 47 percent from the same period in 2004 due to the aforementioned closure combined with lower copper grades and concentrate recoveries at Myra Falls.



-----------------------------------------------------------------------
Copper Production Year ended December 31 Fourth Quarter
(million pounds of --------------------------------------------------
copper contained 2005 2004 % 2005 2004 %
in concentrate) change change
-----------------------------------------------------------------------
Myra Falls(d) 16.8 9.8 71 3.7 4.8 (23)
-----------------------------------------------------------------------
Bouchard-Hebert(xx) 1.0 8.6 (89) 0.0 2.3 (100)
-----------------------------------------------------------------------
Total copper
production 17.9 18.4 (3) 3.7 7.0 (47)
-----------------------------------------------------------------------
(d) Acquired July 2004
(xx) Closed February 2005


Production of lead in concentrate increased 34 percent in 2005 due to higher lead grades at Bougrine and more tonnes milled at El Mochito. In the fourth quarter of 2005 production of lead in concentrate decreased 39 percent due to the closure of Bougrine.



-----------------------------------------------------------------------
Lead Production Year ended December 31 Fourth Quarter
(million pounds -----------------------------------------------------
of lead contained 2005 2004 % 2005 2004 %
in concentrate) change change
-----------------------------------------------------------------------
El Mochito 23.1 19.6 18 5.7 5.1 12
-----------------------------------------------------------------------
Bougrine(e) 19.2 12.1 59 0.0 4.2 (100)
-----------------------------------------------------------------------
Total lead
production 42.3 31.6 34 5.7 9.3 (39)
-----------------------------------------------------------------------
(e) Closed September 2005


Gold in concentrate increased due to higher gold production from the Aserradero zone at El Toqui and due to metallurgical improvements made in the recovery of gold in the gravity circuit at Myra Falls. In the fourth quarter of 2005 gold in concentrate decreased due to the closure of Bouchard-Hebert and lower gold grades at El Toqui. This was partially offset by increased gold production from Myra Falls.



-------------------------------------------------------------------------
Gold Production Year ended December 31 Fourth Quarter
(ounces of gold -----------------------------------------------------
contained in 2005 2004 % 2005 2004 %
concentrate) change change
-----------------------------------------------------------------------
Myra Falls 31,744 11,239 182 8,254 5,171 60
-----------------------------------------------------------------------
El Toqui 41,605 27,865 49 9,267 11,077 (16)
-----------------------------------------------------------------------
Bouchard-Hebert(f) 2,644 17,284 (85) 0 2,969 (100)
-----------------------------------------------------------------------
Total gold
production 75,993 56,388 35 17,521 19,217 (9)
-----------------------------------------------------------------------
(f) Closed February 2005


Silver in concentrate increased 21 percent due to higher silver grades and a full year's production from Myra Falls. Silver in concentrate increased three percent in the fourth quarter due to higher grades at Myra Falls and El Mochito which were partially offset by lower grades at El Toqui and the closure of Bouchard-Hebert.




-------------------------------------------------------------------------
Gold Production Year ended December 31 Fourth Quarter
(ounces of gold ---------------------------------------------------
contained in 2005 2004 % 2005 2004 %
concentrate) change change
-----------------------------------------------------------------------
Myra Falls 1,165,056 445,997 161 286,554 212,598 35
-----------------------------------------------------------------------
El Mochito 1,723,825 1,550,232 11 446,445 396,631 13
-----------------------------------------------------------------------
El Toqui 131,020 231,872 (43) 25,009 61,537 (59)
-----------------------------------------------------------------------
Bouchard-Hebert(*) 40,013 309,920 (87) 0 65,346 (100)
-----------------------------------------------------------------------
Total silver
production 3,059,914 2,538,021 21 758,008 736,112 3
-----------------------------------------------------------------------

Myra Falls Production

The following table sets forth Myra Falls' production for the periods
presented.

-----------------------------------------------------------------------
Year ended December 31 Quarters
-----------------------------------------------------------------------
2005 2004 4th 2005 4th 2004
-----------------------------------------------------------------------
Ore Milled (tonnes) 912,656 381,698 226,962 197,215
-----------------------------------------------------------------------
Zinc (%) 6.1 5.6 5.5 5.3
-----------------------------------------------------------------------
Copper (%) 1.2 1.5 1.0 1.4
-----------------------------------------------------------------------
Silver (g/t) 51 49 50 45
-----------------------------------------------------------------------
Gold (g/t) 1.8 1.7 2.0 1.6
-----------------------------------------------------------------------
Concentrate Production
-----------------------------------------------------------------------
Zinc (tonnes) 90,129 34,155 19,984 16,751
-----------------------------------------------------------------------
Recovery (%) 86.3 85.3 84.4 84.1
-----------------------------------------------------------------------
Grade (%) 53.4 53.3 53.2 52.2
-----------------------------------------------------------------------
Copper (tonnes) 32,333 18,144 7,410 8,908
-----------------------------------------------------------------------
Recovery (%) 69.6 78.1 71.5 78.5
-----------------------------------------------------------------------
Grade (%) 23.6 24.5 22.8 24.4
-----------------------------------------------------------------------
Gold (tonnes) 34.7 5.34 9.9 3.59
-----------------------------------------------------------------------
Recovery (%) 18.3 8.7 15.2 9.8
-----------------------------------------------------------------------
Grade (g/t) 8,741 8,498 6,890 7,268
-----------------------------------------------------------------------
Metal in Concentrates
-----------------------------------------------------------------------
Zinc (tonnes) 48,084 18,218 10,591 8,750
-----------------------------------------------------------------------
Copper (tonnes) 7,640 4,449 1,698 2,170
-----------------------------------------------------------------------
Silver (ounces) 1,165,056 445,997 286,554 212,598
-----------------------------------------------------------------------
Gold (ounces) 31,744 11,239 8,254 5,171
-----------------------------------------------------------------------
Total Cash Costs
-----------------------------------------------------------------------
Per lb. payable zinc
sold (US$) 0.47 0.54 0.52 0.59
-----------------------------------------------------------------------


Myra Falls Outlook

Work continues on improving mine planning, materials handling and metallurgical recoveries. Test work to develop a lead concentrate of marketable quality was carried out during the fourth quarter of 2005. The ultimate goal is to reduce the quantity of lead and zinc in the copper concentrate. The test work indicated that copper recoveries could be increased from the current 70 percent range to a range of 85-90 percent with a dramatic reduction in impurities and zinc concentrate grades could be increased from the current 53.0 to 53.4 percent range to 55.0 to 56.0 percent. A lead flash flotation test cell was installed in the grinding circuit during the month of February and test work with this unit is in progress. It is anticipated that a revision to the reagent scheme as well as the installation of zinc conditioner tanks would further improve recoveries and concentrate grades. A revised flow sheet is being developed for the final lead circuit and engineering work and procurement has commenced.

Installation of the shaking table in the gold circuit was delayed and should be completed in the first quarter of 2006. It is expected to improve gold recoveries and allow for the production of gold dore, thereby eliminating the need to process a portion of the gold production through high-cost smelting.

Underground exploration, consisting of drift development and diamond drilling is now concentrated on three prospective areas: the Marshall zone to the northwest; the Extension zone to the west of Battle-Gap; and the 43 Block to the east of HW.

The Company continues to review its near-term and long-term plans for the Myra Falls operation. The goal is to stabilize the operation by maintaining a steady flow of ore to the mill and to ensure that recoveries of all economic metals are maximized. The long-term goal is to define orebodies lying adjacent to and west of the current mining areas. The Company will aggressively explore the Myra Falls area to fully test its potential, which is believed to be excellent. Work towards this long-term goal has commenced with the Lynx Ramp and the drive towards the Marshall zone to the west of the Battle-Gap area.

El Mochito Production

The following table sets forth El Mochito's production for the periods presented.



-----------------------------------------------------------------------
Year ended December 31 Quarters
-----------------------------------------------------------------------
2005 2004 4th 2005 4th 2004
-----------------------------------------------------------------------
Ore Milled (tonnes) 700,190 650,017 185,597 170,560
-----------------------------------------------------------------------
Zinc (%) 6.7 6.9 6.5 7.0
-----------------------------------------------------------------------
Lead (%) 1.8 1.7 1.7 1.7
-----------------------------------------------------------------------
Silver (g/t) 87 84 86 82
-----------------------------------------------------------------------
Concentrate Production
-----------------------------------------------------------------------
Zinc (tonnes) 81,296 78,652 21,142 21,083
-----------------------------------------------------------------------
Recovery (%) 91.7 91.8 92.0 92.2
-----------------------------------------------------------------------
Grade (%) 52.5 52.7 52.6 52.3
-----------------------------------------------------------------------
Lead (tonnes) 15,329 13,134 3,741 3,416
-----------------------------------------------------------------------
Recovery (%) 80.9 80.5 80.1 80.4
-----------------------------------------------------------------------
Grade (%) 68.4 67.6 68.8 67.9
-----------------------------------------------------------------------
Metal in Concentrates
-----------------------------------------------------------------------
Zinc (tonnes) 42,698 41,413 11,147 11,034
-----------------------------------------------------------------------
Lead (tonnes) 10,488 8,877 2,579 2,319
-----------------------------------------------------------------------
Silver (ounces) 1,723,825 1,550,232 446,445 396,631
-----------------------------------------------------------------------
Total Cash Costs
-----------------------------------------------------------------------
Per lb. payable zinc
sold (US$) 0.32 0.31 0.20 0.23
-----------------------------------------------------------------------


El Mochito Outlook

During 2005, the Company continued to explore, develop and delineate new mineral resources and reserves along extensions of the productive Salva Vida and Santo Nino trends. The projected intersection of these trends is the key exploration focus at El Mochito, as major orebodies are typically found at structural intersections in favourable ground.

Surface geological exploration began during the second quarter on several target areas. During the third quarter, broad element spectrum geochemical surveys were carried out over zones previously surveyed in the 1960s and 1970s by Rosario and Asarco to validate these older surveys. During the fourth quarter, NSAMT geophysical surveys were carried out over promising zones adjacent to mine workings and target anomalies identified in previous campaigns.

During the quarter, construction continued on the new Soledad tailings storage facility. Work will continue on this facility until the second quarter 2006 when Pozo Azul, the current tailings impoundment facility, will be phased out and reclaimed.

El Toqui Production

The milled tonnage at El Toqui increased 11 percent in 2005 over 2004 reflecting the changes made to the grinding circuit in the mill in mid-2004. Despite the increase in mill throughput zinc grades were lower resulting in a modest four percent increase in zinc contained in concentrate. The lower zinc grades were due to mining remnant areas in the Mina Rosa and Mallin-Monica zones with an unexpectedly lower zinc grades and development delays in the Estatuas deposit due to the complex geology of the deposit.

During the fourth quarter of 2005, gold head grades were 26 percent lower reflecting an increase in mining from the Estatuas deposit, which doesn't contain any gold.




-------------------------------------------------------------------------
Year ended December 31 Quarters
-------------------------------------------------------------------------
2005 2004 4th 2005 4th 2004
-------------------------------------------------------------------------
Ore Milled (tonnes) 519,963 466,953 128,390 116,345
-------------------------------------------------------------------------
Zinc (%) 6.0 6.4 6.6 6.0
-------------------------------------------------------------------------
Gold (g/t) 2.9 2.3 2.6 3.5
-------------------------------------------------------------------------
Concentrate Production
-------------------------------------------------------------------------
Zinc (tonnes) 56,552 53,804 15,450 12,469
-------------------------------------------------------------------------
Recovery (%) 90.4 91.0 90.8 89.8
-------------------------------------------------------------------------
Grade (%) 50.1 50.5 50.4 50.5
-------------------------------------------------------------------------
Gold (tonnes) 4,110 5,009 1,104 1,536
-------------------------------------------------------------------------
Recovery (%) 51.4 57.2 49.8 61.3
-------------------------------------------------------------------------
Grade (%) 221.7 122.0 181.4 164.9
-------------------------------------------------------------------------
Metal in Concentrates
-------------------------------------------------------------------------
Zinc (tonnes) 28,347 27,190 7,786 6,295
-------------------------------------------------------------------------
Gold (ounces) 41,605 27,865 9,267 11,077
-------------------------------------------------------------------------
Silver (ounces) 131,020 231,872 25,009 61,537
-------------------------------------------------------------------------
Total Cash Costs
-------------------------------------------------------------------------
Per lb. payable zinc
sold (US$) 0.44 0.28 0.29 (0.05)
-------------------------------------------------------------------------


El Toqui Outlook

As noted previously, during 2005 it was discovered that the Estatuas deposit is highly faulted and more difficult to mine than originally planned. Additional infill drilling was carried out earlier in 2005 to better understand the degree and nature of the faulting. While we believe Estatuas can be mined economically, it continues to be the case that short-term problems may occur which could result in lower than expected tonnages or higher operating costs.

The Company is in the process of exploring the Aserradero deposit to the south and southeast. Work will also continue at Concordia to develop a feasibility study by the end of the second quarter of 2006. The Concordia deposit is located close to the existing mill infrastructure, is relatively shallow allowing for inexpensive ramp access and hosts zinc grades that are 40 percent higher than the current reserves with significant lead and silver content. Based on the drilling carried out to September 2005 an indicated and inferred mineral resource of 1.87 million tonnes grading 10.2 percent zinc, 5.1 percent lead and 68 grams per tonne silver has been estimated.

Work is currently underway on a regional exploration program on our extensive land holdings in the Toqui area. Our primary goal is to discover a gold skarn deposit similar to the Aserradero deposit.

During the fourth quarter, metallurgical testing was completed at El Toqui which examined the feasibility of treating the gold concentrate onsite with the goal of producing dore bars. Flotation concentrate samples were leached under intensive cyanidation conditions using the Gekko Mini Inline Leach Reactor ("ILR"). The procedure used mimics the conditions in a full sized batch ILR unit. Test results indicated that gold recoveries could reach 88-90 percent. This process could provide significant cost savings over third party treatment of the concentrate and provide a more stable cash flow from the mine. In 2005, over 29,000 ounces of gold were contained in the gold concentrate produced. Engineering work has commenced on a full size batch ILR unit.

Langlois

Langlois, which is situated in north-western Quebec approximately 213 kilometres north of Val-d'Or, is currently being developed to reach commercial production in mid-2007.

A feasibility study to reopen the Langlois Mine, including a technical solution for the ore pass problem, was completed by SRK in August 2001, following an extensive drilling program. The SRK feasibility study was updated in 2003 and the project economics were reviewed again by Breakwater late in 2005. The 2005 Breakwater review concluded that based on a life-of-mine average price for zinc of US$0.53 per pound, a copper price of US$1.05 per pound, a silver price of US$6.59 per ounce and an exchange rate of US$0.80 per C$1.00 the project had an internal rate of return of 16.6 percent based on mining and milling the proven and probable mineral reserves of 3.3 million tonnes at the grades and recoveries set forth in the Proven and Probable Mineral Reserves Production table below.




Proven and Probable Mineral Reserves Production Table
-----------------------------------------------------------------------
Tonnes Milled 3,323,000
-------------------------------------------------------------------------
Head Grade Zn (%) 10.8
Cu (%) 0.8
Au (g/t) 0.1
Ag (g/t) 52.1
Recoveries Zn (%) 93.6
Cu (%) 82.6
Au (%) 29.0
Ag (%) 35.5
Concentrate Grade Zn (%) 54.7
Cu (%) 23.8
Tonnes Concentrate Zn (t) 613,100
Cu (t) 96,300
Contained Metal Zn (t) 335,100
Cu (t) 22,900
Au (oz) 2,600
Ag (oz) 1,961,300
-----------------------------------------------------------------------


The operating plan incorporates several improvements to ensure the reliability of production and to control costs. These improvements include the elimination of ore passes for Zone 97, a new, level 9, ore dump and loading pocket, pre-development of several sublevels in Zone 97 and improvements for the underground mobile equipment fleet. Additionally, the operating plan includes continuing the exploration of Zone 97 which remains open to the east and at depth.

The high-grade mining alternative in the feasibility study does not isolate the lower grade mineral resources, some of which could be brought into the production plan under the current economic conditions.

The following table sets forth the mineral resources and mineral reserves as they have been calculated pursuant to National Instrument 43-101.




Mineral Resources and Mineral Reserves

Zinc Copper Silver Gold
Category Tonnage (%) (%) (g/t) (g/t)
-------------------------------------------------------------------------
Proven & Probable
Mineral Reserves
-----------------------------------------------------------------------
Zones 3 and 4 1,203,500 9.49 0.49 39.52 0.07
Zone 97 2,119,200 11.51 1.02 59.28 0.09
-----------------------------------------------------------------------
Total 3,322,700 10.78 0.82 52.13 0.09
-----------------------------------------------------------------------

Measured & Indicated Resources(g)
-----------------------------------------------------------------------
Zones 3 and 4 1,779,200 9.98 0.53 34.82 0.08
Zone 97 3,201,500 11.80 0.93 64.60 0.09
-----------------------------------------------------------------------
Total 4,980,700 11.15 0.79 53.96 0.09
-----------------------------------------------------------------------

-----------------------------------------------------------------------
Inferred
-----------------------------------------------------------------------
Zones 3 and 4 750,500 8.68 0.29 26.04 0.12
Zone 97 504,000 11.24 0.86 60.83 0.17
-----------------------------------------------------------------------
Total 1,254,500 9.71 0.52 40.02 0.14
-----------------------------------------------------------------------
(g) Measured and Indicated Mineral Resources include Proven and Probable


Mineral Reserves

Total Cash Costs

The total cash costs, including smelting, shipping and by-product credits for copper, silver and gold, is forecast to average US$0.42 per pound of payable zinc.

Capital Costs

The development capital, including inventory build up, is forecast to be $27.0 million during 2006 and 2007, net of revenue from development ore. The majority of the capital requirements are related to underground development, with the mill accounting for only $1.5 million of the total. Total capital required to extract the above noted tonnages is estimated to be $47.6 million.

Bougrine Mine

In accordance with the life-of-mine plan, the Bougrine mine closed permanently on September 10, 2005, due to exhaustion of the known mineral reserves. The Company is presently investigating other uses for the Bougrine infrastructure. Closure of the tailings facility commenced during the fourth quarter.



-----------------------------------------------------------------------
Year ended December 31 Fourth Quarter
---------------------------------------------
2005 2004 2005 2004
-----------------------------------------------------------------------
Ore Milled (tonnes) 216,823 330,392 - 84,395
-----------------------------------------------------------------------
Zinc (%) 9.1 10.4 - 9.8
-----------------------------------------------------------------------
Lead (%) 4.8 2.1 - 2.7
-----------------------------------------------------------------------
Concentrate Production
-----------------------------------------------------------------------
Zinc (tonnes) 29,412 52,149 - 12,377
-----------------------------------------------------------------------
Recovery (%) 80.6 82.2 - 81.7
-----------------------------------------------------------------------
Grade (%) 54.0 54.2 - 54.5
-----------------------------------------------------------------------
Lead (tonnes) 13,373 8,499 - 3,057
-----------------------------------------------------------------------
Recovery (%) 83.9 79.9 - 82.3
-----------------------------------------------------------------------
Grade (%) 65.1 64.4 - 61.7
-----------------------------------------------------------------------
Metal in Concentrates
-----------------------------------------------------------------------
Zinc (tonnes) 15,889 28,265 - 6,748
-----------------------------------------------------------------------
Lead (tonnes) 8,708 5,470 - 1,886
-----------------------------------------------------------------------
Total Cash Costs
-----------------------------------------------------------------------
Per lb. payable zinc
sold (US$) 0.36 0.40 (0.01) 0.40
-----------------------------------------------------------------------


Bougrine Mine Outlook

Reclamation of the Bougrine mine has commenced and is expected to be 90 percent complete in 2006. The mill building will be kept in place pending the results of an exploration program on a zinc lead prospect 170 kilometres to the north-west of the Bougrine mine site. Exploration of this prospect, budgeted at $0.5 million, is expected to commence during the first half of 2006.

Bouchard-Hebert Production

The Bouchard-Hebert mine closed permanently on February 20, 2005. Reclamation work, consisting of rock removal and covering the tailings disposal area, continued during the fourth quarter. The Company explored the area immediately around the mine, but no economic mineralization was encountered. Based on the results, the Company removed the mobile equipment and some of the underground infrastructure, and allowed the mine to flood.



-----------------------------------------------------------------------
Year ended December 31 Fourth Quarter
-----------------------------------------------------------------------
2005 2004 2005 2004
-----------------------------------------------------------------------
Ore Milled (tonnes) 118,933 993,168 - 233,525
-----------------------------------------------------------------------
Zinc (%) 5.8 6.1 - 5.2
-----------------------------------------------------------------------
Copper (%) 0.5 0.5 - 0.5
-----------------------------------------------------------------------
Silver (g/t) 31 29 - 28
-----------------------------------------------------------------------
Gold (g/t) 1.1 1.0 - 0.8
-----------------------------------------------------------------------
Concentrate Production
-----------------------------------------------------------------------
Zinc (tonnes) 11,299 99,446 - 19,846
-----------------------------------------------------------------------
Recovery (%) 91.1 90.3 - 88.9
-----------------------------------------------------------------------
Grade (%) 55.7 55.1 - 54.4
-----------------------------------------------------------------------
Copper (tonnes) 3,028 25,738 - 6,794
-----------------------------------------------------------------------
Recovery (%) 86.5 82.3 - 83.8
-----------------------------------------------------------------------
Grade (%) 15.5 15.2 - 15.1
-----------------------------------------------------------------------
Metal in Concentrates
-----------------------------------------------------------------------
Zinc (tonnes) 6,292 54,823 - 10,803
-----------------------------------------------------------------------
Copper (tonnes) 470 3,914 - 1,024
-----------------------------------------------------------------------
Silver (ounces) 40,013 309,920 - 65,346
-----------------------------------------------------------------------
Gold (ounces) 2,644 17,284 - 2,969
-----------------------------------------------------------------------
Total Cash Costs
-----------------------------------------------------------------------
Per lb. payable zinc
sold (US$) 0.30 0.25 - 0.30
-----------------------------------------------------------------------


Bouchard-Hebert Mine Outlook

The Company will continue to explore for mineral deposits on the 7,982 hectares of exploration claims surrounding the mining leases. The concentrator building and equipment will be left intact pending any success in discovering economic mineralization in the near term.

Exploration commenced in October 2005 to test targets outside the current mine area. The program, which is to test multiple targets, will continue throughout 2006. In February, 2006 an airborne Megatem survey was carried out over the Bouchard-Hebert property.

Nanisivik

Reclamation continued at the site until mid-October when the winter season set in and the Contractor's equipment was shipped off site via the sea-lift. The major earth moving activities required for closure are now complete.

To date, approximately 2.8 million tonnes of earth have been moved. This includes covering the tailings area, removing waste rock, backfilling and covering the open pits, covering the landfill, removing any contaminated soils, and the backfilling/closure of the mine access ways (with the exception of 2 adits which will remain open for backhauling demolition debris in 2006).

The remaining reclamation work will be completed by Wolfden Resources Inc.'s contractor who has remained on-site to complete its own work, comprising the dismantling of the mill complex and the concentrate storage facilities. Wolfden will use the Nanisivik fleet of equipment to finish reclamation of the site which includes the demolition of the town site accommodations and removal of any remaining contaminated soil. We expect this will be completed in 2006 and all remaining salvageable equipment will be shipped off site at that time for sale on the open market or transfer to other Breakwater properties.

Caribou

On July 12, 2004, the Company and its wholly-owned subsidiary CanZinco Ltd. signed a revised letter of intent ("LOI") with Forest Gate Resources Ltd. and its wholly-owned subsidiary, Blue Note Metals Inc., regarding the acquisition of the Caribou and Restigouche mines. Under the terms of the LOI, after raising sufficient funds, Blue Note will acquire the Caribou and Restigouche mines by replacing the reclamation deposits of approximately $6.0 million with the New Brunswick government and issuing to CanZinco a $15 million convertible debenture with a maturity of five years. In the interim, the Caribou and Restigouche properties are managed on a care and maintenance basis under a contractual agreement with Bioteq Environmental Technologies Inc.

Fourth Quarter Review

The Company realized net earnings in the fourth quarter of 2005 of $9.8 million compared with a net loss of $6.3 million in the same period in 2004. The 2005 fourth quarter net earnings included a $6.5 million tax recovery related to the setup of a tax asset for El Mochito and El Toqui, this is a non-cash gain.

In the fourth quarter ended December 31, 2005, gross sales revenues generated were seven percent lower despite stronger metal prices due to the sale of 24 percent fewer tonnes of concentrate and a stronger Canadian dollar. Fewer tonnes were sold because Breakwater had three producing mines in the fourth quarter of 2005 compared with five in the same period of 2004 thereby reducing production.

Treatment charges and freight costs averaged $292 per tonne of concentrate sold in the fourth quarter of 2005 compared with $250 per tonne in the same period in 2004. Treatment charge escalators were triggered by the higher metal prices and realized freight rates were higher in 2005. Direct operating costs were higher in 2005 at $406 per tonne of concentrate sold compared with $357 per tonne in 2004.




-----------------------------------------------------------------------
Operating review for Concentrate Tonnes
the fourth quarter ----------------------------------------------
ended December 31 2005 2004
-----------------------------------------------------------------------
Sold Produced Sold Produced
-----------------------------------------------------------------------
Myra Falls 16,710 27,404 17,574 25,663
-----------------------------------------------------------------------
El Mochito 21,834 24,883 11,165 24,499
-----------------------------------------------------------------------
El Toqui 13,643 16,554 10,535 14,005
-----------------------------------------------------------------------
Bougrine 8,204 0 11,408 15,434
-----------------------------------------------------------------------
Bouchard-Hebert 0 0 29,172 26,640
-----------------------------------------------------------------------
Total 60,391 68,841 79,854 106,241
-----------------------------------------------------------------------


-----------------------------------------------------------------------
Operating
review for Contribution
the fourth (Loss)
quarter ended Net From Mining Non-cash Capital
December 31 Revenue Activities(1) Costs(2) Expenditures(4)
-----------------------------------------------------------------------
($ millions) 2005 2004 2005 2004 2005 2004 2005 2004
-----------------------------------------------------------------------
Myra Falls 12.5 8.9 0.6 (3.6) 1.4 2.3 5.7 2.9
-----------------------------------------------------------------------
El Mochito 14.9 5.2 6.8 1.5 2.0 1.2 2.3 2.2
-----------------------------------------------------------------------
El Toqui 10.4 10.0 3.3 4.8 1.3 0.9 2.2 4.0
-----------------------------------------------------------------------
Bougrine 4.2 4.2 1.9 (1.2) 0.4 1.8 0.0 (0.2)
-----------------------------------------------------------------------
Bouchard-Hebert 0.0 13.6 0.3 3.2 (0.3) 2.5 0.0 0.1
-----------------------------------------------------------------------
Nanisivik 0.0 0.0 (0.1) (0.2) 0.1 0.2 0.0 0.0
-----------------------------------------------------------------------
Langlois 0.0 0.0 0.0 0.0 0.0 0.0 0.8 1.5
-----------------------------------------------------------------------
Other (2.3)(3) (0.3)(3) (2.5) (0.6) 0.2 0.3 0.0 0.0
-----------------------------------------------------------------------
Total 39.7 41.6 10.3 3.9 5.1 9.2 11.0 10.5
-----------------------------------------------------------------------
(1) After non-cash costs.
(2) Depreciation, depletion and accretion costs.
(3) Net realised from metal hedging activities.
(4) Includes assets under capital lease.


General and administrative costs were slightly higher by $0.1 million due mainly to higher audit and regulatory compliance costs.

Stock based compensation was reduced to $0.2 million in 2005 compared with $0.6 million in 2004 as fewer options were issued in the 2005.

In the fourth quarter of 2005, the Company recorded a mark-to-market loss of $0.9 million on its gold loan facility, entered into in August 2005, as the result of the increase in the gold price during the quarter. This is a non-cash cost that will be reversed as the loan is repaid in physical gold during 2006.

Other non-producing property costs were significantly lower in the fourth quarter of 2005 at $1.7 million compared with $5.1 million in 2004. The main reason for the decrease was the $2.1 million write down of supplies inventory at the Nanisivik mine and higher than expected holding costs at Nanisivik in 2004.

In the fourth quarter of 2005, a recovery of $6.3 million in income and mining taxes was recognized compared with an expense of $0.2 million in 2004 as the Company recorded a future income tax asset of $6.5 million related to tax loss pools at El Mochito and El Toqui as it is more likely than not that the tax losses carried forward will be used to reduce taxable income in 2006.



Non-GAAP Reconciliations

-----------------------------------------------------------------------
Non-GAAP Reconciliation of Cash Provided from
Operating Activities (before changes in
non-cash working capital items)
to Consolidated Financial Statements
($ millions) 2005 2004 2003
-----------------------------------------------------------------------
Net Cash Provided By Operations Activities
per Consolidated Statements of Cash Flows 22.0 24.1 17.9
-----------------------------------------------------------------------
Less changes in non-cash working capital (2.5) 5.2 (2.4)
-----------------------------------------------------------------------
Cash Provided from Operating Activities
(before changes in non-cash working
capital items) 19.5 29.3 15.5
-----------------------------------------------------------------------


Cash Provided from Operating Activities (before changes in non-cash working capital items) is furnished to provide additional information and is a non-GAAP measure. This measure should not be considered in isolation as a substitute for measures of performance prepared in accordance with generally accepted accounting principles and are not necessarily indicative of cash provided from operating activities as determined under generally accepted accounting principles. This measure intends to provide investors with information about the cash generating capabilities of the Company's operating activities on a cash basis in a given period; the Company uses this information for the same purpose. Mining operations are capital intensive. These measures exclude financing activities, investing activities and changes in non-cash working capital. These items are discussed throughout the MD&A and the consolidated financial statements.



-----------------------------------------------------------------------
Non-GAAP Reconciliation of Total Cash
Cost per Pound of Payable Zinc Sold
to Consolidated Financial Statements 2005 2004
-----------------------------------------------------------------------
By-Product Credit ($ millions)
-----------------------------------------------------------------------
Gross sales revenue per financial statements 313.0 240.3
-----------------------------------------------------------------------
Less zinc sales revenue (189.7) (177.6)
------------------------
-----------------------------------------------------------------------
123.3 62.7
------------------------
-----------------------------------------------------------------------
Treatments & Freight Charges ($ millions)
-----------------------------------------------------------------------
Per financial statements 105.4 81.9
------------------------
-----------------------------------------------------------------------
Direct operating costs ($ millions)
-----------------------------------------------------------------------
Per financial statements 144.3 101.9
------------------------
-----------------------------------------------------------------------

-----------------------------------------------------------------------
Total cash costs - Canadian ($ millions) 126.4 121.1
-----------------------------------------------------------------------

-----------------------------------------------------------------------
Exchange rate C$/US$ 1.2111 1.3001
-----------------------------------------------------------------------

-----------------------------------------------------------------------
Total cash costs - US ($ millions) 104.6 93.2
-----------------------------------------------------------------------

-----------------------------------------------------------------------
Zinc pounds sold (millions) 265.3 290.6
-----------------------------------------------------------------------

-----------------------------------------------------------------------
Total cash cost per pound of payable
zinc sold (US$)
-----------------------------------------------------------------------
By-product credit (0.39) (0.17)
-----------------------------------------------------------------------
Treatment and marketing cots 0.33 0.22
-----------------------------------------------------------------------
Direct operating costs 0.45 0.27
-----------------------------------------------------------------------
Total 0.39 0.32
-----------------------------------------------------------------------


Total Cash Costs per Pound of Payable Zinc Sold instead of Total Cash Costs per Pound of Payable Zinc Produced are furnished to provide additional information and is a non-GAAP measure. This measure should not be considered in isolation as a substitute for measures of performance prepared in accordance with GAAP and is not necessarily indicative of operating expenses as determined under GAAP. This measure is intended to provide investors with information about the cash generating capabilities of the Company's mining operations; the Company uses this information for the same purpose. Mining operations are capital intensive. These measures exclude capital expenditures. Capital expenditures are discussed throughout the MD&A and the consolidated financial statements.



Summary of Quarterly Results

-----------------------------------------------------------------------
2004
-----------------------------------------------------------------------
Q1 Q2 Q3 Q4
-----------------------------------------------------------------------
Gross Sales Revenue
($ millions) 60.2 52.5 66.1 61.5
-----------------------------------------------------------------------
Net Earning (Loss)
($ millions) 2.2 4.4 2.4 (6.3)
-----------------------------------------------------------------------
Per share - basic $0.01 $0.01 $0.01 ($0.02)
-----------------------------------------------------------------------
Weighted-average number of
Common Shares outstanding
(millions) 343.8 344.5 362.7 363.0
-----------------------------------------------------------------------
Per share - diluted $0.01 $0.01 $0.00 ($0.02)
-----------------------------------------------------------------------
(C$/US$) realized exchange
rate 1.3172 1.3596 1.3127 1.2290
-----------------------------------------------------------------------
Average realized zinc
price (US$/t) 1,058 1,006 988 1,095
-----------------------------------------------------------------------
Average realized zinc
price (C$/t) 1,394 1,368 1,297 1,345
-----------------------------------------------------------------------
Concentrate tonnes sold 86,031 76,061 94,957 79,854
-----------------------------------------------------------------------
Concentrate tonnes produced 84,590 86,115 111,790 106,241
-----------------------------------------------------------------------


-----------------------------------------------------------------------
2005
-----------------------------------------------------------------------
Q1 Q2 Q3 Q4
-----------------------------------------------------------------------
Gross Sales Revenue
($ millions) 91.3 92.4 71.9 57.4
-----------------------------------------------------------------------
Net Earning (Loss)
($ millions) 4.1 2.4 (1.6) 9.8
-----------------------------------------------------------------------
Per share - basic $0.01 $0.01 $0.00 $0.03
-----------------------------------------------------------------------
Weighted-average number of
Common Shares outstanding
(millions) 365.7 367.4 369.5 374.2
-----------------------------------------------------------------------
Per share - diluted $0.01 $0.01 $0.00 $0.02
-----------------------------------------------------------------------
(C$/US$) realized exchange
rate 1.2274 1.2429 1.2019 1.1744
-----------------------------------------------------------------------
Average realized zinc
price (US$/t) 1,256 1,252 1,296 1,502
-----------------------------------------------------------------------
Average realized zinc
price (C$/t) 1,542 1,556 1,558 1,764
-----------------------------------------------------------------------
Concentrate tonnes sold 108,507 118,022 80,196 60,391
-----------------------------------------------------------------------
Concentrate tonnes produced 103,259 88,782 76,014 68,841
-----------------------------------------------------------------------


The quantity of concentrate sold directly affects gross sales revenue. The recognition of revenue from the sale of concentrate can vary from quarter-to-quarter based on customer agreements, the availability of ships and compliance with the Company's revenue recognition policy. As all sales are based in US dollars, the US dollar weakening against the Canadian dollar has reduced the realized Canadian dollar gross sales revenue.



Contractual Obligations

-----------------------------------------------------------------------
Payments Due by Period
-----------------------------------------------------------------------
Contractual less greater greater
Obligations than than than
($ millions) Total 1 year 1-3 years 4-5 years 5 years
-----------------------------------------------------------------------
Capital Leases 1.7 0.7 0.7 0.3 0.0
-----------------------------------------------------------------------
Operating Leases 3.8 1.1 1.3 1.1 0.3
-----------------------------------------------------------------------
Purchase
Obligations 22.3 22.3 0.0 0.0 0.0
-----------------------------------------------------------------------
Other Long-term
Obligations 30.9 21.8 6.1 2.5 0.5
-----------------------------------------------------------------------
Reclamation 48.2 9.3 9.2 2.5 27.2
-----------------------------------------------------------------------
Total 106.9 55.2 17.3 6.4 28.0
-----------------------------------------------------------------------


Related Party Transactions

In December 2005, a syndicate of investment dealers comprising Dundee Securities Corporation ("DSC") and GMP Securities ("GMP") participated in raising $6 million flow through financing for the Company. DSC is related to the significant shareholder of the Company. The Company paid DSC a commission of $120,000. The Company accrued expenses of $500,000 for services provided by Dundee Corporation during the period from October 2001 to December 2003.

Changes in Accounting Policies

In 2005 the Company adopted the following policies:

On January 1, 2005, the Company adopted the Canadian Institute of Chartered Accountants ("CICA") Accounting Guideline No. 15 - "Consolidation of Variable Interest Entities" ("AcG-15") which requires that the Company consolidate a variable interest entity when the Company has a variable interest, or combination of variable interests, that will absorb a majority of the entity's expected losses, receive a majority of the entity's expected residual returns, or both. On October 17, 2005, the CICA issued EIC-157 - "Implicit Variable Interests Under AcG-15" which clarifies the identification of variable interest entity under AcG-15. As at December 31, 2005 the Company had no entities which would qualify as a variable interest entity under AcG-15.

On December 6, 2005, the CICA issued EIC-159 - "Conditional Asset Retirement Obligations" which clarifies the identification of conditional asset retirement obligations as used in CICA 3110 - Asset Retirement Obligation. The adoption of this policy had no impact on the Company's asset retirement obligations.

Critical Accounting Estimates

Asset Impairment

The carrying values of producing mineral properties, including properties placed on care and maintenance and related deferred expenditures, are reviewed regularly and, where necessary, are written down to the estimated net recoverable amounts. Estimated future net cash flows, on an undiscounted basis, are calculated for each property using: estimated recoverable reserves, on the basis of current proven and probable reserves, except for Langlois mine where the conversion of resources was considered, taking into account the cost of conversion; estimated future metal price realization (considering historical and current prices, price trends and related factors); and estimated operating and capital cash flows. Estimates of future cash flows are subject to risks and uncertainties. It is possible that changes could occur that may affect the recoverability of the carrying value of mineral properties. No write downs were required in 2005.

Reserves

Every year the Company estimates its proven and probable mineral reserves (the "Reserves") in accordance with National Instrument 43-101 ("NI 43-101"), a rule adopted by Canadian securities administrators as the standard of disclosure for mineral projects. This estimate is used to determine mine viability, mine life and amortization rates. The estimation of Reserves is based on drill hole information, historical mining results, historical metallurgical results, estimated future operating costs and estimated future metal prices. A "Qualified Person", as defined by NI 43-101, performs the Reserves estimate. As all of the Company's operations have had significant operating history the factor that could have the greatest impact on the Reserves estimate is future metal prices.

Amortization

The Company uses the units of production method for amortization of Mineral Properties and some of its Fixed Assets based on the reserves. Any significant changes in the Reserves could impact the amount of annual amortization.

Inventory

The Company values its concentrate inventories at the lower of cost or realizable value at the end of the reporting period. Costs represent the average cost, and include direct labour and materials costs, mine site overhead and depreciation and amortization. Realizable value includes metal prices, net of treatment charges and freight. Metal prices can be subject to significant change from period to period. At December 2005 all concentrate inventories were recorded at cost.

Future Tax Assets and Liabilities

Future tax assets and liabilities are calculated using the asset and liability method. Under the asset and liability method, future tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Future tax assets and liabilities are measured using current tax rates. The effect on future tax assets and liabilities of a change in tax rates is recognized in income in the period the change is known. To the extent that the Company considers it to be more likely than not that a future tax asset will be recovered, a tax asset will be setup, otherwise it provides a valuation allowance against the excess. It is possible that changes could occur in the future that may affect the recoverability of the carrying value of future tax assets and a write down may be required.

Reclamation

The Company provides for the fair value of liabilities and capitalized costs for asset retirement obligations in the period in which they are incurred. Over time, the liability is accreted to its present value and the capitalized cost is amortized over the useful life of the related asset. Asset retirement obligations are obligations of the Company that arise as a result of an existing law, regulation or contract related to asset retirements. Estimates of the liability associated with the retirement of an asset are based on current laws and regulations and the expected resulting costs, all of which are subject to change. If actual costs of reclamation exceed the recorded amount Breakwater will record a loss. Alternatively, if reclamation costs incurred are less than those recorded the Company will record a gain. Currently the Company is not able to setup a liability for reclamation at El Mochito as there is no law, regulation or contract related to this asset's retirement.

Risks and Uncertainties

The most significant risk affecting the profitability and viability of the Company is the fluctuation of metal prices, particularly zinc, as the Company's earnings and cash flow are highly sensitive to changes in the realized metal prices. Low metal prices can impair the Company's liquidity and, if they persist for an extended period, the Company would be required to look to alternatives other than cash flow to maintain its liquidity until metal prices recover. Other risks facing the Company include fluctuations in treatment charges, operating, geological and environmental risks associated with mining and, due to the varied geographic locations of the Company's operations, political risks.

Price Risk

The profitability of any mining operation owned by the Company is significantly affected by the market price of zinc. It is estimated that each US$0.01 per pound change in the price of zinc will impact earnings and cash flow by approximately $1.8 million during 2006. An earlier table shows the approximate impact on the Company's cash flows of variations in metal prices and the US/Canadian dollar exchange rate, based on current plans for 2006, and assuming that the changes remain in effect for the full year.

Fluctuations in metal prices are influenced by numerous factors beyond the control of the Company. Exchange rates, interest rates, inflation, and the world's supply and demand for metals can each cause significant fluctuations in metal prices. Such external economic factors are, in turn, influenced by changes in international economic growth patterns and political developments.

Foreign Exchange Risk

The Company operates using the Canadian dollar and the American dollar as well as several other currencies, and as such may be affected by fluctuations in foreign exchange rates. Currency fluctuations may affect the revenues which Breakwater realizes from its operations, as concentrates are sold in American dollars, while a significant percentage of its expenses are denominated in non-American currencies. This exposes the Company to increased volatility in earnings as reported in Canadian dollars due to fluctuations in foreign exchange rates. While foreign currencies are generally convertible into Canadian and American dollars, there is no guarantee that they will continue to be so convertible or that fluctuations in the value of such currencies will not have an adverse effect on the Company.

Credit Risk

The Company is subject to credit risk through trade receivables. The Company manages this risk through evaluation and monitoring processes and carries credit insurance when necessary. Although the Company has a number of significant customers, they are all established and creditworthy customers. Credit risk is further mitigated through the use of provisional payment arrangements and the use of letters of credit where appropriate. Credit risk also relates to derivative contracts arising from the possibility that a counterparty to an instrument in which the Company has an unrealized gain fails to perform. The Company transacts only with counterparties that have strong credit ratings. The Company does not consider the credit risk associated with these financial instruments to be significant.

Interest Rate Risk

The Company had various operating lines of credit that tie interest payments to the bank prime or LIBOR lending rates. Therefore, the Company was exposed to interest rate risk through fluctuations in these interest rates. In addition, the Gold Loan carries a fixed rate of interest of 2.9%, thus, the Company is also exposed to interest rate price risk. The Company does not enter into financial instruments to manage its interest rate risk.

Operating, Geological and Environmental Risk

The Company maintains high operating standards at all of its operations by adopting stringent social, safety and operating practices. The Company focuses on environmental protection, employee training and safety. A program of regular reviews is structured to continually identify risks and control loss at every level. Co-operation with the Company's insurers increases the effectiveness of the Company's loss control programs. Changing environmental laws and regulations can create uncertainty with regard to future reclamation costs. In addition, the review process can be lengthy and complex and delay both the commissioning and decommissioning of projects. To minimize this risk, the Company monitors environmental issues on an ongoing basis and believes reasonable provisions for future environmental costs have been made and are reflected in the financial statements.

Environmental Security

As at December 31, 2005, the Company had $9.2 million of environmental security in place. These funds are held to partially fund reclamation requirements at the Company's various mine sites. The current amounts of these funds are expected to be returned to the Company as work planned in 2006 is completed. In addition, the Company was obligated to post $13.4 million of security related to the Myra Falls mine. These funds were posted on January 31, 2006.



-----------------------------------------------------------------------
Environmental Security
(million's) Current Long-term Total
-----------------------------------------------------------------------
Myra Falls 0.0 0.1 0.1
-----------------------------------------------------------------------
Bouchard-Hebert 2.4 0.7 3.1
-----------------------------------------------------------------------
Caribou 0.0 6.0 6.0
-----------------------------------------------------------------------
Total 2.4 6.8 9.2
-----------------------------------------------------------------------


As regulations regarding environmental restoration and the security related thereto can change from time to time, it is possible that demands may be made on the Company to provide additional security.

Financial Instruments

The Company manages its exposure to fluctuations in commodity prices, foreign exchange rates and interest rates by entering into derivative financial contracts in accordance with the formal risk management policy approved by the Company's Board of Directors and managed by the Company's Hedge Committee. The Company does not hold or issue derivative contracts for speculation or trading purposes.

The Company's short-term financial instruments, made up of cash and cash equivalents, restricted cash, accounts receivable, accounts payable and accrued liabilities, and short-term debt excluding the Gold Loan are carried at cost which, due to their short-term nature, approximates their fair value. The Gold Loan is carried at fair value. The fair value of the long-term debt also approximates its carrying value.

Such fair value estimates are management's best estimates, not necessarily indicative of the amounts the Company might pay or receive in actual market transactions, though the amounts realized in an actual transaction may differ from these estimates. Potential taxes and other transaction costs have not been considered in estimating fair value.

Outstanding Share Data and Full Dilution Calculation

The Company is authorized to issue an unlimited number of Common Shares and 200,000,000 preferred shares, issuable in series; there are no preferred shares outstanding. Each Common Share entitles the holder of record thereof to one vote at all meetings of shareholders of the Corporation, except at meetings at which only holders of another class or series of shares of the Corporation are entitled to vote. The table set forth below summarizes the Capital Stock.



-----------------------------------------------------------------------
Common Shares or Securities Convertible into Common
Shares March 2, 2006
-----------------------------------------------------------------------
Issued and Outstanding 381,695,510
-----------------------------------------------------------------------
Share Options Outstanding weighted average exercise
price $0.89. 10,084,667
-----------------------------------------------------------------------
Dundee Corporation 15,400,705 warrants granted at $0.20,
will expire March 2, 2007 and 15,400,705 expire
May 2, 2007. 30,801,410
-----------------------------------------------------------------------
Lender Warrants to Dundee Corporation granted at $0.19,
expire March 27, 2006. 1,000,000
-----------------------------------------------------------------------
Warrants granted at $1.00, expire January 28, 2009
- traded on TSX 33,571,429
-----------------------------------------------------------------------
Future Fully Diluted 457,153,016
-----------------------------------------------------------------------


Conclusion Relating to Disclosure Controls and Procedures

An evaluation was performed under the supervision of and with the participation of management, including the President and Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the Company's disclosure controls and procedures as defined in the Multilateral Instrument 52-109. Based on that evaluation, the President and Chief Executive Officer and the Chief Financial Officer concluded that the design and operation of the Company's disclosure controls and procedures were effective as at December 31, 2005.

Other Information

Additional information regarding the Company is included in the Company's Annual Information Form filed with the Canadian securities regulators and the United States Securities and Exchange Commission, a copy of which is posted on the SEDAR website at www.sedar.com.

Cautionary Note on Forward Looking Statements

Certain statements included in this Management's Discussion and Analysis includes forward-looking statements, which are made pursuant to the "safe harbor" provisions of the United States Private Securities Litigation Reform Act of 1995. They include estimates and statements that describe the Company's future plans, objectives and goals, including words to the effect that the Company or management expects a stated condition or result to occur. When used herein, words such as "forecast", "estimate", "expect, "believe", "intend", "will", "eventual", "ongoing", "anticipated", "explore", "projected", "could", "continue", "likely", "future", "budget", "plan", "projection" and other similar expressions are intended to identify forward-looking statements. In particular, statements relating to the estimated future metal prices, cash flows, expenses, capital costs, ore production, mine life, financing, development of mines, and exploration are forward-looking statements. Such forward-looking statements involve inherent risks and uncertainties and are subject to other factors, many of which are beyond our control, that may cause the actual results or performance to differ materially from those expressed or implied by such forward-looking statements. Such factors include, among others, asset impairment, metal price volatility, fluctuations in foreign exchange rates, economic and political events affecting metal supply and demand, fluctuations in ore grade or ore tonnes milled, geological, operating and environmental risks, problems during the development, construction and start-up phases of an underground mine, inadequacy of environmental insurance. For a more comprehensive review of risk factors, please refer to the Company's most recent annual report under "Management's Discussion and Analysis of Financial Results", Annual Information Form and Form 40-F under "Risk Factors" on file with the U.S. Securities and Exchange Commission and Canadian provincial securities regulatory authorities filed on SEDAR at www.sedar.com. The Company is under no obligation and it expressly disclaims any such obligation to update or alter any forward-looking statements whether as a result of new information, events or otherwise. Readers are cautioned not to put undue reliance on these forward-looking statements.




Breakwater Resources Ltd.
Consolidated Balance Sheets
As at December 31, 2005 and December 31, 2004
(Expressed in thousands of Canadian dollars)
(Unaudited)
-----------------------------------------------------------------------
2005 2004
-----------------------------------------------------------------------
Assets
Current Assets
Cash and cash equivalents $ 18,749 $ 12,667
Restricted cash 3,929 3,391
Short-term investments 2,523 2,633
Accounts receivable - concentrate 3,027 6,622
Other receivables 9,369 6,488
Concentrate inventory 47,501 56,215
Materials and supplies inventory 21,388 23,863
Prepaid expenses and other current assets 3,934 5,022
Future income tax assets 6,517 -
-----------------------------------------------------------------------
116,937 116,901
Deferred Financing Fees 344 -
Reclamation Deposits 6,808 100
Mineral Properties and Fixed Assets 165,168 153,073
Long-term Investment 5,615 5,615
Restricted Promissory Note 62,285 11,785
-----------------------------------------------------------------------
$ 357,157 $ 287,474
-----------------------------------------------------------------------
-----------------------------------------------------------------------
Liabilities
Current Liabilities
Accounts payable and accrued
liabilities $ 32,797 $ 35,558
Provisional payments for concentrate
inventory shipped and not priced 14,807 22,962
Short-term debt including current
portion of long-term debt 14,585 256
Income and mining taxes payable 164 441
Current portion of reclamation, closure
cost accruals and other environmental
obligations 10,165 21,081
-----------------------------------------------------------------------
72,518 80,298
Deferred Income 6,888 1,848
Long-term Lease Obligations 984 -
Royalty Obligation 62,479 11,696
Long-term Debt 4,143 1,424
Reclamation, Closure Cost Accruals and
Other Environmental Obligations 40,099 42,673
Employee Future Benefits 5,379 6,446
Future IncomeTax Liabilities 1,921 1,681
-----------------------------------------------------------------------
194,411 146,066
-----------------------------------------------------------------------
Shareholders' Equity
Capital stock 335,512 326,403
Warrants 8,561 8,561
Contributed surplus 3,300 3,120
Deficit (172,928) (187,667)
Cumulative translation adjustments (11,699) (9,009)
-----------------------------------------------------------------------
162,746 141,408
-----------------------------------------------------------------------
$ 357,157 $ 287,474
-----------------------------------------------------------------------
-----------------------------------------------------------------------

Breakwater Resources Ltd.
Consolidated Statements of Operations and Deficit
For the Years Ended December 31, 2005, 2004 and 2003
(Expressed in thousands of Canadian dollars except share and
per share amounts)
(Unaudited)

-----------------------------------------------------------------------
2005 2004 2003
-----------------------------------------------------------------------
Gross sales revenue $ 312,965 $ 240,299 $ 207,591
Treatment and marketing costs 105,391 81,856 83,581
-----------------------------------------------------------------------
Net revenue 207,574 158,443 124,010
-----------------------------------------------------------------------

Operating Costs
Direct operating costs 144,297 101,922 103,239
Depreciation and depletion 23,229 25,896 25,964
Reclamation and closure costs 12,093 4,896 3,619
-----------------------------------------------------------------------
179,619 132,714 132,822
-----------------------------------------------------------------------
Contribution (Loss) from
Mining Activities 27,955 25,729 (8,812)
-----------------------------------------------------------------------
Other Expenses (Income)
General and administrative 8,666 9,559 5,087
Stock-based compensation 809 1,253 274
Interest and financing 1,284 509 3,321
Investment and other income (2,595) (843) (405)
Loss on gold loan 1,787 - -
Foreign exchange (gain) loss on
US dollar denominated debt (492) 431 (11,578)
Other foreign exchange loss (gain) 294 1,809 (206)
-----------------------------------------------------------------------
9,753 12,718 (3,507)
-----------------------------------------------------------------------
Earnings (Loss) Before the
Following: 18,202 13,011 (5,305)
-----------------------------------------------------------------------

Exploration costs 535 - -
Write-down of mineral properties
and fixed assets 879 1,178 279
Other non-producing property costs
(income) 9,035 8,638 (5,394)
Income and mining (recovery)
tax provision (6,986) 571 (841)
-----------------------------------------------------------------------
3,463 10,387 (5,956)
-----------------------------------------------------------------------
Net Earnings 14,739 2,624 651
Deficit - Beginning of Year (187,667) (190,291) (190,942)
-----------------------------------------------------------------------
-----------------------------------------------------------------------
Deficit - End of Year $ (172,928) $ (187,667) $ (190,291)
-----------------------------------------------------------------------
Basic Earnings per Common
Share $ 0.04 $ 0.01 $ 0.00
-----------------------------------------------------------------------
-----------------------------------------------------------------------
Diluted Earnings per Common
Share $ 0.04 $ 0.01 $ 0.00
-----------------------------------------------------------------------
-----------------------------------------------------------------------
Basic Weighted-Average Number
of Common Shares Outstanding 369,190,000 353,508,000 211,411,000
-----------------------------------------------------------------------
-----------------------------------------------------------------------



Breakwater Resources Ltd.
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2005, 2004 and 2003
(Expressed in thousands of Canadian dollars)
(Unaudited)

-----------------------------------------------------------------------
2005 2004 2003
-----------------------------------------------------------------------
Cash Provided by (Used in)
Operating Activities
Net earnings $ 14,739 $ 2,624 $ 651
-----------------------------------------------------------------------

Non-cash items:
Depreciation and depletion 23,229 25,896 25,964
Gain on sale of investment (851) - -
Gain on sale of property - - (10,336)
Write-down of mineral properties
and fixed assets 879 1,178 279
Unrealized loss on gold loan 1,656 - -
Foreign exchange gain on US dollar
denominated loans (447) - (3,712)
Other non-cash items (9) (133) (761)
Stock-based compensation 809 1,253 274
Deferred income (56) - 1,340
Future income taxes (6,277) 1,909 (1,050)
Reclamation closure cost
accruals and other
environmental obligations 12,093 4,764 2,787
Employee future benefits 1,773 553 -
-----------------------------------------------------------------------
32,799 35,420 14,785
-----------------------------------------------------------------------
Payment of reclamation, closure
cost accruals and other
environmental obligations (25,162) (7,879) (728)
Payment of employee future
benefits (2,840) (968) -
Changes in non-cash working
capital items 2,486 (5,045) 3,179
-----------------------------------------------------------------------
Net cash provided by operating
activities 22,022 24,152 17,887
-----------------------------------------------------------------------
Financing Activities
Increase in restricted cash (538) (3,036) (355)
Proceeds from sale of royalty
interest 50,500 12,204 -
Issue of common shares for cash 8,480 30,407 29,316
Issue of warrants for cash - 7,211 -
Deferred Financing fees (344) - -
Deferred income 5,096 - -
Increase (decrease) in short-
term debt 11,874 (10,059) (18,711)
Increase (decrease) in long-
term debt 3,964 (14,095) (29,821)
-----------------------------------------------------------------------
Net cash provided by (used in)
financing activities 79,032 22,632 (19,571)
-----------------------------------------------------------------------
Investing Activities
Funds advanced on promissory note (50,500) (11,785) -
Reclamation deposits (6,708) - 1,287
Acquisition of Boliden Westmin
(Canada) Limited, net of cash
acquired - (886) -
Mineral properties and fixed
assets (37,978) (27,689) (10,621)
Proceeds from sale of mineral
properties 214 210 10,616
-----------------------------------------------------------------------
Net cash (used in) provided by
investing activities (94,972) (40,150) 1,282
-----------------------------------------------------------------------
Increase (Decrease) in Cash 6,082 6,634 (402)
-----------------------------------------------------------------------
Cash and Cash Equivalents -
Beginning of Year $ 12,667 $ 6,033 $ 6,435
-----------------------------------------------------------------------
-----------------------------------------------------------------------
Cash and Cash Equivalents -
End of Year $ 18,749 $ 12,667 $ 6,033
-----------------------------------------------------------------------
-----------------------------------------------------------------------

Supplemental Disclosure of
Cash Flow Information
Cash paid for:
Interest $ 437 $ 436 $ 2,681
Income and mining taxes $ 634 $ 358 $ 339
>>






Breakwater Resources Ltd.
Consolidated Balance Sheets
As at December 31, 2005 and December 31, 2004
(Expressed in thousands of Canadian dollars)
(Unaudited)
-----------------------------------------------------------------------
2005 2004
-----------------------------------------------------------------------
Assets
Current Assets
Cash and cash equivalents $ 18,749 $ 12,667
Restricted cash 3,929 3,391
Short-term investments 2,523 2,633
Accounts receivable - concentrate 3,027 6,622
Other receivables 9,369 6,488
Concentrate inventory 47,501 56,215
Materials and supplies inventory 21,388 23,863
Prepaid expenses and other current assets 3,934 5,022
Future income tax assets 6,517 -
-----------------------------------------------------------------------
116,937 116,901
Deferred Financing Fees 344 -
Reclamation Deposits 6,808 100
Mineral Properties and Fixed Assets 165,168 153,073
Long-term Investment 5,615 5,615
Restricted Promissory Note 62,285 11,785
-----------------------------------------------------------------------
$ 357,157 $ 287,474
-----------------------------------------------------------------------
-----------------------------------------------------------------------
Liabilities
Current Liabilities
Accounts payable and accrued
liabilities $ 32,797 $ 35,558
Provisional payments for concentrate
inventory shipped and not priced 14,807 22,962
Short-term debt including current
portion of long-term debt 14,585 256
Income and mining taxes payable 164 441
Current portion of reclamation, closure
cost accruals and other environmental
obligations 10,165 21,081
-----------------------------------------------------------------------
72,518 80,298
Deferred Income 6,888 1,848
Long-term Lease Obligations 984 -
Royalty Obligation 62,479 11,696
Long-term Debt 4,143 1,424
Reclamation, Closure Cost Accruals and
Other Environmental Obligations 40,099 42,673
Employee Future Benefits 5,379 6,446
Future IncomeTax Liabilities 1,921 1,681
-----------------------------------------------------------------------
194,411 146,066
-----------------------------------------------------------------------
Shareholders' Equity
Capital stock 335,512 326,403
Warrants 8,561 8,561
Contributed surplus 3,300 3,120
Deficit (172,928) (187,667)
Cumulative translation adjustments (11,699) (9,009)
-----------------------------------------------------------------------
162,746 141,408
-----------------------------------------------------------------------
$ 357,157 $ 287,474
-----------------------------------------------------------------------
-----------------------------------------------------------------------

Breakwater Resources Ltd.
Consolidated Statements of Operations and Deficit
For the Years Ended December 31, 2005, 2004 and 2003
(Expressed in thousands of Canadian dollars except share and
per share amounts)
(Unaudited)

-----------------------------------------------------------------------
2005 2004 2003
-----------------------------------------------------------------------
Gross sales revenue $ 312,965 $ 240,299 $ 207,591
Treatment and marketing costs 105,391 81,856 83,581
-----------------------------------------------------------------------
Net revenue 207,574 158,443 124,010
-----------------------------------------------------------------------

Operating Costs
Direct operating costs 144,297 101,922 103,239
Depreciation and depletion 23,229 25,896 25,964
Reclamation and closure costs 12,093 4,896 3,619
-----------------------------------------------------------------------
179,619 132,714 132,822
-----------------------------------------------------------------------
Contribution (Loss) from
Mining Activities 27,955 25,729 (8,812)
-----------------------------------------------------------------------
Other Expenses (Income)
General and administrative 8,666 9,559 5,087
Stock-based compensation 809 1,253 274
Interest and financing 1,284 509 3,321
Investment and other income (2,595) (843) (405)
Loss on gold loan 1,787 - -
Foreign exchange (gain) loss on
US dollar denominated debt (492) 431 (11,578)
Other foreign exchange loss (gain) 294 1,809 (206)
-----------------------------------------------------------------------
9,753 12,718 (3,507)
-----------------------------------------------------------------------
Earnings (Loss) Before the
Following: 18,202 13,011 (5,305)
-----------------------------------------------------------------------

Exploration costs 535 - -
Write-down of mineral properties
and fixed assets 879 1,178 279
Other non-producing property costs
(income) 9,035 8,638 (5,394)
Income and mining (recovery)
tax provision (6,986) 571 (841)
-----------------------------------------------------------------------
3,463 10,387 (5,956)
-----------------------------------------------------------------------
Net Earnings 14,739 2,624 651
Deficit - Beginning of Year (187,667) (190,291) (190,942)
-----------------------------------------------------------------------
-----------------------------------------------------------------------
Deficit - End of Year $ (172,928) $ (187,667) $ (190,291)
-----------------------------------------------------------------------
Basic Earnings per Common
Share $ 0.04 $ 0.01 $ 0.00
-----------------------------------------------------------------------
-----------------------------------------------------------------------
Diluted Earnings per Common
Share $ 0.04 $ 0.01 $ 0.00
-----------------------------------------------------------------------
-----------------------------------------------------------------------
Basic Weighted-Average Number
of Common Shares Outstanding 369,190,000 353,508,000 211,411,000
-----------------------------------------------------------------------
-----------------------------------------------------------------------



Breakwater Resources Ltd.
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2005, 2004 and 2003
(Expressed in thousands of Canadian dollars)
(Unaudited)

-----------------------------------------------------------------------
2005 2004 2003
-----------------------------------------------------------------------
Cash Provided by (Used in)
Operating Activities
Net earnings $ 14,739 $ 2,624 $ 651
-----------------------------------------------------------------------

Non-cash items:
Depreciation and depletion 23,229 25,896 25,964
Gain on sale of investment (851) - -
Gain on sale of property - - (10,336)
Write-down of mineral properties
and fixed assets 879 1,178 279
Unrealized loss on gold loan 1,656 - -
Foreign exchange gain on US dollar
denominated loans (447) - (3,712)
Other non-cash items (9) (133) (761)
Stock-based compensation 809 1,253 274
Deferred income (56) - 1,340
Future income taxes (6,277) 1,909 (1,050)
Reclamation closure cost
accruals and other
environmental obligations 12,093 4,764 2,787
Employee future benefits 1,773 553 -
-----------------------------------------------------------------------
32,799 35,420 14,785
-----------------------------------------------------------------------
Payment of reclamation, closure
cost accruals and other
environmental obligations (25,162) (7,879) (728)
Payment of employee future
benefits (2,840) (968) -
Changes in non-cash working
capital items 2,486 (5,045) 3,179
-----------------------------------------------------------------------
Net cash provided by operating
activities 22,022 24,152 17,887
-----------------------------------------------------------------------
Financing Activities
Increase in restricted cash (538) (3,036) (355)
Proceeds from sale of royalty
interest 50,500 12,204 -
Issue of common shares for cash 8,480 30,407 29,316
Issue of warrants for cash - 7,211 -
Deferred Financing fees (344) - -
Deferred income 5,096 - -
Increase (decrease) in short-
term debt 11,874 (10,059) (18,711)
Increase (decrease) in long-
term debt 3,964 (14,095) (29,821)
-----------------------------------------------------------------------
Net cash provided by (used in)
financing activities 79,032 22,632 (19,571)
-----------------------------------------------------------------------
Investing Activities
Funds advanced on promissory note (50,500) (11,785) -
Reclamation deposits (6,708) - 1,287
Acquisition of Boliden Westmin
(Canada) Limited, net of cash
acquired - (886) -
Mineral properties and fixed
assets (37,978) (27,689) (10,621)
Proceeds from sale of mineral
properties 214 210 10,616
-----------------------------------------------------------------------
Net cash (used in) provided by
investing activities (94,972) (40,150) 1,282
-----------------------------------------------------------------------
Increase (Decrease) in Cash 6,082 6,634 (402)
-----------------------------------------------------------------------
Cash and Cash Equivalents -
Beginning of Year $ 12,667 $ 6,033 $ 6,435
-----------------------------------------------------------------------
-----------------------------------------------------------------------
Cash and Cash Equivalents -
End of Year $ 18,749 $ 12,667 $ 6,033
-----------------------------------------------------------------------
-----------------------------------------------------------------------

Supplemental Disclosure of
Cash Flow Information
Cash paid for:
Interest $ 437 $ 436 $ 2,681
Income and mining taxes $ 634 $ 358 $ 339
>>


Contact Information

  • Breakwater Resources Ltd. Richard Godfrey Chief Financial Officer (416) 363-4798 x276 Email: rgodfrey@breakwater.ca
    or
    Breakwater Resources Ltd. Ann Wilkinson Vice President, Investor Relations (416) 363-4798 x277 Email: awilkinson@breakwater.ca