Breakwater Resources Ltd.
TSX : BWR

Breakwater Resources Ltd.

July 25, 2007 17:10 ET

Breakwater Resources Ltd.'s Interim Financial and Operating Results for the Periods Ended June 30, 2007

TORONTO, ONTARIO--(Marketwire - July 25, 2007) -

Attention Business/Financial Editors:

Breakwater Resources Ltd. (TSX:BWR), a mining, exploration and development company which produces and sells zinc, copper, lead and gold concentrates to customers around the world, announces its financial and operating results for the three and six month periods ended June 30, 2007. The Company's concentrate production is derived from mines located in Canada, Chile and Honduras. All dollar amounts in this news release are in Canadian dollars unless otherwise stated.



HIGHLIGHTS

- The Company realized net earnings of $38.7 million or $0.09 per share
in the second quarter of 2007 after recording a net income tax
recovery of $4.7 million ($0.01 per share) compared with
$28.6 million or $0.07 per share in the second quarter of 2006 after
recording an income tax provision of $2.8 million ($0.01 per share)
- Gross sales revenue increased by 2% to $103.4 million in the second
quarter of 2007 from $101.2 million in the second quarter of 2006 due
to higher realized prices for metals sold partially offset by lower
concentrate sales
- Sales of concentrate in the second quarter of 2007 decreased to
51,553 tonnes from 59,779 in the second quarter of 2006. The decrease
was primarily due to 9,343 more tonnes of concentrate in inventory at
the end of the second quarter of 2007 compared with the second
quarter of 2006
- Concentrate inventories at June 30, 2007 were 89,471 tonnes compared
with 62,090 and 80,517 tonnes at December 31, 2006 and March 31, 2007
respectively
- Production in the second quarter of 2007 was 75,596 tonnes of
concentrate (60,675 tonnes excluding Langlois which commenced
commercial production July 1, 2007) compared with 59,906 tonnes in
the second quarter of 2006
- The contribution from mining activities was $43.1 million in the
second quarter of 2007 compared with $37.6 million in the second
quarter of 2006
- Net cash provided by operating activities was comparable with the
second quarter 2006 at $42.3 million in the second quarter of 2007
and was primarily used for $33.4 million of capital expenditures
- At June 30, 2007, cash and cash equivalents were $102.9 million and
total debt was $2.4 million
- Total cash costs per pound of payable zinc increased to US$0.45 per
pound in the second quarter of 2007 from US$0.32 per pound in the
second quarter of 2006. See the non-GAAP reconciliation section in
this news release

OUTLOOK

- The Company announced that Langlois had achieved commercial
production effective July 1, 2007 and expects production to continue
to ramp-up over time
- In the second quarter of 2007, the Company announced that proven and
probable mineral reserves and measured and indicated mineral
resources at Toqui had increased by 50% and 37% respectively and that
it had commenced a pre-feasibility study for a new 1.0 million tonne
per annum mill, an increase from the current 540,000 tonnes per annum
facility


STATEMENT OF OPERATIONS REVIEW - THREE AND SIX MONTHS ENDED JUNE 30,

2007 AND 2006

Gross Sales Revenue

Langlois entered commercial production on July 1, 2007 and therefore the sales of concentrate produced at Langlois prior to that date are not reflected in the income statement.

Gross sales revenue from the sale of zinc, copper, lead, and gold concentrates for the three month period ended June 30, 2007 (the "second quarter of 2007") increased by $2.2 million (2%) compared with the three month period ended June 30, 2006 (the "second quarter of 2006"). Higher metal prices accounted for this increase, which was partially offset by decreased concentrate sales - 51,553 tonnes in 2007 compared with 59,779 tonnes in 2006 - and a stronger Canadian dollar. The decreased tonnage of concentrate sold in 2007 was primarily due to concentrate shipping schedules which caused an increase of 9,343 tonnes in ending concentrate inventories at June 30, 2007 compared with June 30, 2006. Tonnes of concentrate produced, excluding Langlois which was in preproduction, increased slightly in the second quarter of 2007 compared with the prior year period.

Gross sales revenue for the six month period ended June 30, 2007 (the "first six months of 2007") were comparable with gross sales revenue in the six month period ended June 30, 2006 (the "first six months of 2006"). Higher metal prices and a hedging loss of $4.4 million in 2006 were partially offset by decreased concentrate sales - 90,887 tonnes in 2007 compared with 127,133 tonnes in 2006 - to keep gross revenues flat in the first six months of 2007 compared with the prior year period. The decreased tonnage of concentrate sold in the first six months of 2007 was primarily due to significantly higher inventory levels at the beginning of 2006 (19,381 more tonnes at December 31, 2005 than at December 31, 2006) and shipping schedules which resulted in higher end of period concentrate inventories and lower concentrate sales at Myra Falls and Mochito partially offset by higher concentrate sales at Toqui.

The Company periodically hedges against fluctuations in metal prices and foreign exchange rates with the use of forward sales or options.



Gross Sales Revenue by Metal Second Quarter First Six Months
($ millions) 2007 2006 2007 2006
-------------------------------------------------------------------------
Zinc (US$) 61.3 49.0 104.4 111.4
Copper (US$) 7.6 21.4 15.3 21.4
Lead (US$) 8.9 3.3 12.4 6.0
Gold (US$) 7.0 6.8 14.3 10.5
Silver (US$) 9.6 5.3 14.5 7.8
Other 0.3 3.6 0.6 2.2
-------------------------------------------------------------------------
Total gross sales revenue (US$) 94.7 89.4 161.5 159.3
C$/US$ realized exchange rate 1.0914 1.1315 1.1229 1.1421
-------------------------------------------------------------------------
Total gross sales revenue (C$) 103.4 101.2 181.3 181.9
-------------------------------------------------------------------------


Sales by Concentrate Second Quarter First Six Months
(tonnes) 2007 2006 2007 2006
-------------------------------------------------------------------------
Zinc 39,042 39,705 69,098 103,276
Copper 4,907 14,482 10,558 14,482
Lead 6,668 5,025 9,468 8,325
Gold 936 567 1,763 1,050
-------------------------------------------------------------------------
Total 51,553 59,779 90,887 127,133
-------------------------------------------------------------------------


Sales by Payable Metal Second Quarter First Six Months
2007 2006 2007 2006
-------------------------------------------------------------------------
Zinc (tonnes) 16,522 16,916 29,077 45,009
Copper (tonnes) 1,024 3,107 2,209 3,107
Lead (tonnes) 4,325 3,182 6,140 5,288
Gold (ounces) 10,413 13,833 21,714 23,253
Silver (ounces) 718,370 717,572 1,091,899 1,046,661
-------------------------------------------------------------------------


Realized Prices Second Quarter First Six Months
2007 2006 2007 2006
-------------------------------------------------------------------------
Zinc (US$/tonne) 3,710 2,895 3,591 2,474
Copper (US$/tonne) 7,460 6,872 6,920 6,872
Lead (US$/tonne) 2,058 1,045 2,016 1,138
Gold (US$/ounce) 668 494 657 451
Silver (US$/ounce) 13.37 7.47 13.25 7.45
-------------------------------------------------------------------------


Average Metal Prices & Second Quarter First Six Months
Foreign Exchange Rate 2007 2006 2007 2006
-------------------------------------------------------------------------
Zinc (US$/tonne) 3,664 3,301 3,560 2,767
Copper (US$/tonne) 7,639 7,251 6,785 6,070
Lead (US$/tonne) 2,174 1,095 1,979 1,169
Gold (US$/ounce) 668 627 659 590
Silver (US$/ounce) 13.34 12.25 13.33 10.96
C$/US$ exchange rate 1.0981 1.1223 1.1347 1.1381
-------------------------------------------------------------------------


The Company has a conservative revenue recognition policy which, among other things, requires final pricing of concentrate inventories prior to recognition of revenue. Using commodity prices and exchange rates prevailing at June 30, 2007, the following schedule provides details regarding inventories shipped but not recognized for revenue purposes and the related provisional payments. Estimated net smelter return, earnings before taxes and weighted-average months to settlement are non-GAAP measures and are furnished to provide additional information.



Weighted-
Net Earnings Provis- average
Concen- smelter Inventory before ional months to
trate return value taxes payments settle-
(DMT) ($000's) ($000's) ($000's) ($000's) ment
-------------------------------------------------------------------------
Zinc 36,217 37,426 21,310 16,116 37,518 1.7
Copper 6,559 12,693 8,878 3,815 11,964 3.6
Gold 469 1,176 399 777 1,418 1.0
-------------------------------------------------------------------------
43,245 51,295 30,587 20,708 50,900
-------------------------------------------------------------------------


At June 30, 2006, the Company estimated that inventories shipped but not recognized for revenue purposes had earnings before tax of $33.0 million consisting of $57.9 million of net smelter return less $24.9 million of inventory value on 47,495 tonnes of concentrate.

Net Revenue

Net revenue, the value of concentrates sold after deducting treatment charges and freight and marketing costs, increased by 3% to $78.1 million in the second quarter of 2007 from $75.7 million in the second quarter of 2006. Treatment and marketing costs were 1% lower at $25.3 million in the second quarter of 2007 compared with $25.5 million in the second quarter of 2006 primarily due to lower tonnes of concentrate sold offset by higher metal prices triggering price escalators in treatment charges. On a per tonne of concentrate sold basis, total treatment and marketing costs increased to $491 per tonne in the second quarter of 2007 compared with $427 per tonne in the second quarter of 2006 primarily due to the reasons noted above partially offset by certain spot sales which did not have any escalators.

For the first six months of 2007, net revenue increased by 4% to $136.1 million compared with the first six months of 2006. Treatment and marketing costs decreased to $45.2 million in the first six months of 2007 compared with $50.4 million for the first six months of 2006 primarily due to lower tonnes of concentrate sold offset by higher metal prices triggering price escalators in the treatment charges partially offset by certain spot sales which did not have any escalators. On a per tonne of concentrate sold basis, total treatment and marketing costs increased to $498 per tonne in the first six months of 2007 compared with $396 per tonne in the first six months of 2006 primarily due to the reasons noted above.

Direct Operating Costs

Direct operating costs were 12% lower in the second quarter of 2007 at $30.2 million compared with $34.2 million in the second quarter of 2006 as 14% fewer tonnes of concentrate were sold. The average cost per tonne of concentrate sold increased to $586 in the second quarter of 2007 from $572 in the second quarter of 2006. Higher direct operating costs and tonnes of concentrate sold at Mochito partially offset by lower direct operating costs and tonnes of concentrate sold at Myra Falls and Toqui in the second quarter of 2007 compared with the second quarter of 2006 resulted in higher direct operating costs per tonne sold in the second quarter of 2007.



Direct
Operating
Costs Second Quarter 2007 Second Quarter 2006
-------------------------------------------------------------------------
Concentrate Cost Per Concentrate Cost Per
Aggregate Sold Tonne Aggregate Sold Tonne
($ millions) (tonnes) ($) ($ millions) (tonnes) ($)
-------------------------------------------------------------------------
Myra Falls 19.7 22,927 859 23.0 25,850 890
Mochito 7.6 18,498 411 5.3 16,287 325
Toqui 2.9 10,128 286 5.9 17,642 334
-------------------------------------------------------------------------
Total 30.2 51,553 586 34.2 59,779 572
-------------------------------------------------------------------------


For the first six months of 2007, direct operating costs were $53.8 million compared with $63.0 million for the first six months of 2006 and the average direct operating cost per tonne of concentrate sold increased to $592 in 2007 from $495 in 2006. Significantly lower concentrate sales at Myra Falls and Mochito partially offset by Toqui's aggregate direct operating costs increasing greater than Toqui's increase in tonnes of concentrate sold resulted in higher direct operating costs per tonne sold in the first six months of 2007 compared with the first six months of 2006.



Direct
Operating
Costs First Six Months 2007 First Six Months 2006
-------------------------------------------------------------------------
Concentrate Cost Per Concentrate Cost Per
Aggregate Sold Tonne Aggregate Sold Tonne
($ millions) (tonnes) ($) ($ millions) (tonnes) ($)
-------------------------------------------------------------------------
Myra Falls 30.2 30,690 984 40.9 59,206 691
Mochito 12.4 30,622 405 13.1 40,867 321
Toqui 11.2 29,575 379 9.0 27,060 329
-------------------------------------------------------------------------
Total 53.8 90,887 592 63.0 127,133 495
-------------------------------------------------------------------------


Total Cash Cost per Pound of Payable Zinc Sold

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$0.45 in the second quarter of 2007 compared with US$0.32 in the second quarter of 2006 (see non-GAAP reconciliation). The increase was primarily due to lower by-product credits and lower pounds of zinc sold partially offset by reduced direct operating costs.

The total cash cost per pound of payable zinc sold was US$0.47 in the first six months of 2007 compared with US$0.51 in first six months of 2006 (see non-GAAP reconciliation). The decrease was primarily due to higher by- product credits, reduced direct operating costs and reduced treatment costs partially offset by significantly lower pounds of zinc sold.

Depreciation and Depletion

Despite fewer tonnes of concentrate sold in the second quarter and the first six months of 2007 compared with the corresponding periods in 2006, depreciation and depletion increased by $1.1 million and $0.2 million respectively. The higher depreciation and depletion expense is primarily due to the change in the mix of concentrates sold as well as productivity levels at each of the operations with Myra Falls having a significant impact.

Other Expenses (Income)

Other expenses (income) in the second quarter of 2007 increased by $3.0 million compared with the corresponding 2006 period primarily due to other expenses which included an increase of $6.5 million of foreign exchange losses associated with the impact of the 6% appreciation in the Canadian dollar in the second quarter of 2007 on US$ cash balances held, partially offset by a $3.2 million increase in investment and other income due to unrealized gains on investments held for trading and the associated imbedded derivatives and greater interest income on larger cash balances.

For the first six months of 2007, other expense (income) increased by $2.1 million primarily due to the items noted above for the second quarter of 2007 and $0.8 million of reduced interest and financing expenses related to losses and interest expenses incurred on debts which were outstanding during the first six months of 2006.

Exploration Expenses

Exploration expenses of $2.9 million in the second quarter of 2007 increased by $0.1 million from the corresponding period in 2006. The increase was primarily due to expanded exploration programmes at Myra Falls, Mochito and Toqui partially offset by $1.4 million of decreased exploration expenses at Bouchard-Hebert.

Exploration expenses of $5.6 million in the first six months of 2007 increased by $1.1 million from the corresponding period in 2006. The increase was primarily due to expanded exploration programmes at Myra Falls, Toqui and Mochito partially offset by $2.2 million of decreased expenses at Bouchard- Hebert and Bougrine.

Other Non-Producing Property Costs

Other non-producing property costs include care and maintenance costs, holding costs, settlement costs and other costs associated with non-producing properties net of proceeds received from those properties related to property options and assets sold. Other non-producing property costs in the second quarter of 2007 decreased by $0.1 million compared with the corresponding 2006 period primarily due to $0.5 million of costs incurred at the Caribou mine prior to its sale in August 2006 partially offset by gains on sale of assets of $0.3 million at Nanisivik in 2006 which did not recur in 2007.

Other non-producing property costs in the first six months of 2007 decreased by $1.8 million compared with the corresponding 2006 period primarily due to $1.0 million of costs incurred at the Caribou mine prior to its sale in August 2006 and a charge of $1.3 million to settle a claim against the Company partially offset by gains on sale of assets at Nanisivik in 2006 which did not recur in 2007.

Income and Mining Tax Provision (Recovery)

Income and mining tax recovery in the second quarter of 2007 was $4.7 million compared with a provision of $2.8 million in the second quarter of 2006. The $7.5 million change was primarily due to the recognition of a $14.2 million income tax recovery at Langlois partially offset by increased income tax provisions of $6.1 million and $1.7 million at Mochito and Toqui. During the second quarter of 2007, the Company determined that Langlois would generate future taxable income which would be offset by available loss carry forwards and other tax shelters. As a result, the Company set up a future income tax asset and recorded a corresponding income tax recovery. This determination was based on the Company's future operating and capital plans and metal price expectations. This income tax asset will be drawn down and charged to income as taxable income is earned at Langlois.

The income and mining tax provision in the first six months of 2007 was $2.5 million compared with a recovery of $22.9 million in the first six months of 2006. The $25.4 million change was primarily due to a net change of $28.1 million at Myra Falls related to a future tax asset recognized in 2006 and income tax provision increases in 2007 of $5.5 million and $3.8 million at Mochito and Toqui respectively partially offset by the recognition of the $14.2 million future tax asset at Langlois noted above.

LIQUIDITY AND FINANCIAL POSITION REVIEW

Working Capital

Working capital at June 30, 2007 was $120.3 million compared with $109.9 million at December 31, 2006, an increase of $10.4 million.

Current Assets

Total current assets increased by $41.0 million to $238.5 million at June 30, 2007 compared with December 31, 2006. The main components of current asset changes were as follows:



- Cash and cash equivalents increased by $21.5 million reflecting
improved cash flow generated by stronger metal prices
- Accounts receivable - concentrate decreased by $10.4 million
primarily due to a reduction in concentrates shipped late in the
second quarter of 2007 compared with concentrates shipped late in the
fourth quarter of 2006
- Concentrate inventory increased by $16.3 million due to the tonnes of
concentrate in inventory increasing by 27,380 tonnes to 89,471 tonnes
at June 30, 2007
- The current portion of future income tax assets increased by
$4.2 million primarily due to a $5.7 million increase related to the
recognition of the current portion of the Langlois future tax asset
recognized in the second quarter of 2007


Current Liabilities

Current liabilities increased by $30.6 million to $118.2 million at June 30, 2007 compared with December 31, 2006. The $30.6 million increase was primarily due to an increase in provisional payments for concentrate inventory shipped and not priced which represent payments received for concentrate shipments that were not recognized as revenue. The balance at June 30, 2007 was $54.5 million compared with $24.2 million at December 31, 2006. Please refer to the table in Gross Sales Revenue section of this news release for additional details.

Long-term Investments

At June 30, 2007, long-term investments were $36.7 million, an increased of $22.0 million from $14.7 million at December 31, 2006. The increase was primarily due to new accounting requirements for financial instruments and comprehensive income required by the Canadian Institute of Chartered Accountants ("CICA") and adopted by the Company on January 1, 2007.

Restricted Promissory Note

The Company held two restricted promissory notes at June 30, 2007 and December 31, 2006 of $62.3 million related to the Red Mile transactions(1) in 2004 and 2005. The interest earned and a portion of the principal of these restricted promissory notes will be used to meet the Company's royalty obligations.

------------------------

(1) For further information on the Red Mile transactions please see the
Company's most recent Annual Report filed on SEDAR or available at
the Company's website at www.breakwater.ca.

Royalty Obligations

The royalty obligations of $62.5 million relates to the royalty amounts received from the 2004 and 2005 Red Mile transactions. See restricted promissory note above.

Reclamation and Closure Cost Accrual

Reclamation and closure costs represent the Company's obligation for reclamation and severance costs accrued for its mine sites. As there is no law, regulation or contract currently in Honduras related to reclamation and closure costs, GAAP does not permit the Company to set up a liability for reclamation at Mochito.

At June 30, 2007, total accrued reclamation and closure costs were $39.3 million compared with $40.6 million at December 31, 2006. Of the $39.3 million, $7.3 million is classified as current and is expected to be spent over the next 12 months at Myra Falls, Bouchard-Hebert, Nanisivik and Bougrine.



Reclamation and Closure Cost Accrual at June 30, 2007

($ millions) Current Long-term Total
-------------------------------------------------------------------------
Myra Falls 2.2 25.1 27.3
Mochito 0.0 1.3 1.3
Toqui 0.0 3.6 3.6
Langlois 0.0 1.3 1.3
Bouchard-Hébert 1.8 0.1 1.9
Nanisivik 2.5 0.4 2.9
Bougrine 0.8 0.2 1.0
-------------------------------------------------------------------------
Total 7.3 32.0 39.3
-------------------------------------------------------------------------


The Company incurred expenditures of $1.1 million in reclamation and closure costs in the second quarter of 2007 compared with $2.0 million in the second quarter of 2006. For the first six months of 2007, the Company incurred expenditures of $2.4 million in reclamation and closure costs compared with $3.7 million in the first six months of 2006. The decreased reclamation and closure cost expenditures in both the second quarter and first six months of 2007 compared with the corresponding periods in 2006 were primarily due to significantly reduced expenditures at Bouchard-Hebert partially offset by increased expenditures for the Myra Falls tailings facility modifications.

Shareholders' Equity

Shareholders' equity at June 30, 2007 was $384.4 million compared with $308.6 million at December 31, 2006. The increase of $75.8 million was primarily due to net earnings of $54.0 million, the exercise of $6.2 million of warrants and the impact of adopting new accounting policies as required by the CICA of $17.7 million.



Shareholders' Equity Capital Contributed Retained
($000's) stock Warrants surplus earnings
-------------------------------------------------------------------------
As at December 31, 2006 167,093 8,561 793 139,795
Adjustment of opening
balance on adoption of
CICA accounting policy - - - 5,706
Value ascribed to options
exercised under stock-based
compensation 704 - (704) -
Employee share option plan -
proceeds of options exercised 1,428 - - -
Employee share purchase plan 156 - - -
Exercise of warrants 6,192 - - -
Stock-based compensation - - 1,081 -
Cancellation of shares (211) - 211 -
Other comprehensive loss - - - -
Net earnings - - - 53,969
-------------------------------------------------------------------------
As at June 30, 2007 175,362 8,561 1,381 199,470
-------------------------------------------------------------------------


Other Total
compre- Cumulative share-
Shareholders' Equity hensive translation holders'
($000's) income adjustments equity
--------------------------------------------------------------
As at December 31, 2006 - (7,689) 308,553
Adjustment of opening
balance on adoption of
CICA accounting policy 4,291 7,689 17,686
Value ascribed to options
exercised under stock-based
compensation - - 0
Employee share option plan -
proceeds of options exercised - - 1,428
Employee share purchase plan - - 156
Exercise of warrants - - 6,192
Stock-based compensation - - 1,081
Cancellation of shares - - 0
Other comprehensive loss (4,703) - (4,703)
Net earnings - - 53,969
--------------------------------------------------------------
As at June 30, 2007 (412) 0 384,362
--------------------------------------------------------------


In the first six months of 2007, the Company issued the following Common Shares: 1,823,456 following the exercise of employee share options; 90,215 pursuant to the Company's employee share purchase plan; and, 30,801,410 pursuant to warrants exercised. On March 2, 2007 and March 14, 2007, Dundee Corporation ("Dundee") exercised 15,400,705 and 15,400,705 warrants respectively to purchase 30,801,410 Common Shares at $0.20 per Common Share.

Capital Expenditures

The Company invested $57.0 million in mineral properties and fixed assets in the first six months of 2007.

Of the $57.0 million noted above, $22.8 million related to capital expenditures at Langlois and consisted primarily of $11.9 million of underground development for Langlois, $9.5 million of underground development, preproduction and equipment for Grevet B and $4.1 million of equipment, buildings and infrastructure at Langlois partially offset by $3.6 million of preproduction contribution from mining operations.

Myra Falls' capital expenditures of $11.8 million in the first six months of 2007 consisted primarily of $2.7 million of mobile equipment purchases, $3.4 million for development at Lynx 5/6, $2.9 million of deferred development, $0.9 million for a new tailings disposal area and $1.3 million for ramp development.

In the first six months of 2007, $9.8 million of capital expenditures at Mochito consisted primarily of $3.3 million repairs to the new tailings facility and upgrading and closure costs of the old tailings facility, $3.9 million for equipment and buildings and $2.6 million of mine development.

Toqui capital expenditures of $10.1 million in the first six months of 2007 consisted primarily of $7.0 million of development, $1.2 million of equipment purchases and mill modifications and $0.8 million for the intense leach reactor construction and commissioning.

Financial Capability

With the existing working capital, the current metal prices and current C$/US$ exchange rate, the Company is well positioned to carry out its operating, capital, exploration and environmental programs in 2007. The Company's financial capability is sensitive to metal prices, smelter treatment charges and the C$/US$ exchange rate. Please refer to pages seven and eight of the Company's 2006 Annual Report.



OPERATING REVIEW - QUARTERS ENDED JUNE 30, 2007 AND 2006

Depreciation,
Contribution depletion,
(loss) reclamation
from mining and closure Capital
Net revenue activities(1) costs expenditures
-------------------------------------------------------------------------
($ millions) 2007 2006 2007 2006 2007 2006 2007 2006
-------------------------------------------------------------------------
Myra Falls 33.1 39.6 10.9 15.2 2.6 1.4 5.3 4.9
Mochito 32.9 17.8 24.0 11.4 1.3 1.1 6.6 2.6
Toqui 12.1 18.7 8.5 11.9 0.7 0.9 6.1 4.4
Langlois(3) 0.0 0.0 (0.0) 0.0 0.0 0.0 13.3 6.3
Other 0.0 (0.4)(2) (0.3) (0.9) 0.2 0.5 2.1 0.0
-------------------------------------------------------------------------
Total 78.1 75.7 43.1 37.6 4.8 3.9 33.4 18.2
-------------------------------------------------------------------------
(1) After non-cash costs.
(2) Net realised from metal hedging activities.
(3) First concentrate shipped November 2006 and commenced commercial
production on July 1, 2007.


OPERATING REVIEW - FIRST SIX MONTHS ENDED JUNE 30, 2007 AND 2006

Depreciation,
Contribution depletion,
(loss) reclamation
from mining and closure Capital
Net revenue activities(1) costs expenditures
-------------------------------------------------------------------------
($ millions) 2007 2006 2007 2006 2007 2006 2007 2006
-------------------------------------------------------------------------
Myra Falls 47.4 67.9 12.9 22.3 4.3 4.6 11.8 8.6
Mochito 53.7 39.2 39.0 23.2 2.3 2.9 9.8 4.7
Toqui 35.0 28.7 21.0 18.3 2.7 1.5 10.1 5.6
Langlois(3) 0.0 0.0 (0.1) (0.1) 0.1 0.1 22.8 8.5
Other 0.0 (4.3)(2) (0.3) (5.0) 0.5 0.7 2.5 0.0
-------------------------------------------------------------------------
Total 136.1 131.5 72.5 58.7 9.9 9.8 57.0 27.4
-------------------------------------------------------------------------
(1) After non-cash costs.
(2) Net realised from metal hedging activities.
(3) First concentrate shipped November 2006 and commenced commercial
production on July 1, 2007.


PRODUCTION RESULTS

Consolidated production is set forth in the following table. The production results section includes the production of Langlois since November 2006. For accounting purposes, Langlois production is not recognized on the income statement until after the commencement of commercial production - July 1, 2007.



All Mines Second Quarter First Six Months
2007 2006 2007 2006
-------------------------------------------------------------------------
Ore Milled (tonnes) 592,301 492,395 1,139,716 1,019,975
Zinc (%) 5.8 5.8 5.8 5.9
Concentrate Production (tonnes)
Zinc 59,148 49,159 113,946 103,036
Copper 10,837 5,720 17,051 13,063
Lead 4,130 4,049 8,684 7,772
Gold 1,481 978 2,810 2,164
Metal in Concentrates
Zinc (tonnes) 30,599 25,254 58,133 53,132
Copper (tonnes) 2,484 1,357 3,836 3,108
Lead (tonnes) 2,662 2,753 5,796 5,289
Silver (ounces) 712,451 678,906 1,532,318 1,348,887
Gold (ounces) 11,717 14,327 31,914 31,602
-------------------------------------------------------------------------


Aggregate production of zinc in concentrate in the second quarter of 2007 was 67.5 million pounds compared with 55.7 million pounds in 2006, a 21% increase. The increase was primarily due to improved zinc grades and tonnes milled at Myra Falls together with production from Langlois, which was not in commercial production during the second quarter of 2006.



Zinc Production
(million pounds
of zinc contained
in concentrate Second Quarter First Six Months
-------------------------------------------------------------------------
2007 2006 % 2007 2006 %
-------------------------------------------------------------------------
Myra Falls 19.7 19.2 2.6 35.0 42.0 (16.7)
Mochito 15.8 20.5 (22.9) 34.3 43.6 (21.3)
Toqui 16.1 16.0 0.6 33.5 31.5 6.3
Langlois(a) 15.9 0.0 - 25.4 0.0 -
-------------------------------------------------------------------------
Total zinc
production 67.5 55.7 21.2 128.2 117.1 9.5
-------------------------------------------------------------------------
(a) First concentrate shipped November 2006 and commenced commercial
production on July 1, 2007.


Production of copper in concentrate increased 83% in the second quarter of 2007 from the same period in 2006 due to greater tonnes milled and improved copper grades at Myra Falls together with production from Langlois, which was not in commercial production during the second quarter of 2006.



Copper Production
(million pounds
of copper contained
in concentrate) Second Quarter First Six Months
-------------------------------------------------------------------------
2007 2006 % 2007 2006 %
-------------------------------------------------------------------------
Myra Falls 4.9 3.0 63.3 7.5 6.9 8.7
Langlois(a) 0.6 0.0 - 1.0 0.0 -
-------------------------------------------------------------------------
Total copper
production 5.5 3.0 83.3 8.5 6.9 23.2
-------------------------------------------------------------------------
(a) First concentrate shipped November 2006 and commenced commercial
production on July 1, 2007.


Production of lead in concentrate decreased 3% during the second quarter of 2007 due to fewer tonnes milled at Mochito.



Lead Production
(million pounds
of lead contained
in concentrate) Second Quarter First Six Months
-------------------------------------------------------------------------
2007 2006 % 2007 2006 %
-------------------------------------------------------------------------
Mochito 5.9 6.1 (3.3) 12.8 11.6 10.3
-------------------------------------------------------------------------
Total lead
production 5.9 6.1 (3.3) 12.8 11.6 10.3
-------------------------------------------------------------------------


Silver in concentrate increased 5%, quarter over quarter, despite lower silver grades from Myra Falls, due to higher silver production at Mochito and Toqui together with production from Langlois, which was not in commercial production during the second quarter of 2006.



Silver Production
(ounces of
silver contained
in concentrate) Second Quarter First Six Months
-------------------------------------------------------------------------
2007 2006 % 2007 2006 %
-------------------------------------------------------------------------
Myra Falls 185,433 222,501 (16.7) 515,583 447,726 15.2
Mochito 459,829 436,351 5.4 908,215 865,563 4.9
Toqui 27,226 20,054 35.8 49,472 35,598 39.0
Langlois(a) 39,963 - - 59,048 - -
-------------------------------------------------------------------------
Total silver
production 712,451 678,906 4.9 1,532,318 1,348,887 12.9
-------------------------------------------------------------------------
(a) First concentrate shipped November 2006 and commenced commercial
production on July 1, 2007.


Gold in concentrate decreased 18% in the second quarter of 2007 from the same period in 2006 due to lower gold head grades at Myra Falls and less gold production from Toqui due to the scheduling of production from the Aserradero deposit.



Gold Production
(ounces of gold
contained
in concentrate) Second Quarter First Six Months
-------------------------------------------------------------------------
2007 2006 % 2007 2006 %
-------------------------------------------------------------------------
Myra Falls 5,175 5,569 (7.1) 11,491 11,546 (0.5)
El Toqui 6,542 8,758 (25.3) 20,423 20,056 1.8
-------------------------------------------------------------------------
Total gold
production 11,717 14,327 (18.2) 31,914 31,602 1.0
-------------------------------------------------------------------------


Myra Falls Production

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

Second Quarter First Six Months
-------------------------------------------
2007 2006 2007 2006
-------------------------------------------------------------------------
Ore Milled (tonnes) 202,930 188,098 388,326 396,417
Zinc (%) 5.1 5.3 4.8 5.6
Copper (%) 1.4 0.9 1.1 1.0
Silver (g/t) 35 47 49 45
Gold (g/t) 1.2 1.5 1.4 1.6
Concentrate Production
Zinc (tonnes) 16,799 17,005 30,498 36,579
Zinc Recovery (%) 85.4 87.1 85.6 85.5
Zinc Grade (%) 53.0 51.3 52.0 52.1
Gold Recovery (%) 88.2 17.6 88.2 17.0
Gold Grade (g/t) 51.2 3.0 51.2 3.0
Copper (tonnes) 9,532 5,720 14,934 13,063
Copper Recovery (%) 80.0 76.3 77.7 75.3
Copper Grade (%) 23.0 23.7 22.7 23.8
Gold Recovery (%) 88.2 31.9 88.2 26.9
Gold Grade (g/t) 51.2 16.0 51.2 13.4
Gold (tonnes) 0.1 1.6 0.4 11.4
Recovery (%) 3.9 9.0 3.2 11.8
Grade (g/t) 17,496 18,477 9,400 6,515
Metal in Concentrates
Zinc (tonnes) 8,915 8,730 15,868 19,065
Copper (tonnes) 2,196 1,357 3,389 3,108
Silver (ounces) 185,433 222,501 515,583 447,726
Gold (ounces) 5,175 5,569 11,491 11,546
Total cash costs per lb.
payable zinc sold (US$) 0.88 0.12 0.77 0.59
-------------------------------------------------------------------------


Production of zinc in concentrate was 2% greater in the second quarter of 2007 compared with the same period in 2006 and 28% greater than the first quarter of 2007 due to more tonnes milled at higher zinc grades.

The construction of the new tailings facility is on schedule.

Myra Falls Outlook

Development of the surface ramp to the west is continuing with the objective of connecting with the ventilation system in the western extent of the currently known mine. Once connected, it will provide good ventilation for mining the Gopher, Main and Upper zones as well as for future long term development. Development of the high grade zones in the Battle Gap continues with mining of the first high grade area expected early in the third quarter of 2007. Mining in the open pit has entered the second phase with a pushback to the west which is expected to access additional high grade copper mineralization. Milling of this material is anticipated to commence near the end of the third quarter and continue through the fourth quarter of 2007. The development to access the Lynx 5 deposit has reached mineralization. A detailed interpretation of the zones is being finalized and mining is expected to continue through the remainder of 2007 and into 2008. Development, to intersect an internal orepass, is continuing. This will allow material to be transferred to Lynx 10 level. Work on installing and upgrading the systems and infrastructure necessary to develop the Price deposit continues in a number of areas. Production mining is expected to commence in late 2007 or early 2008.

The directional drilling program to upgrade the resources in the Marshall is underway. The 24 level drilling proved to be difficult due to ground conditions. The program is now being drilled from the 18 level.



Mochito Production

The following table sets forth Mochito's production for the periods
presented.
Second Quarter First Six Months
-------------------------------------------
2007 2006 2007 2006
-------------------------------------------------------------------------
Ore Milled (tonnes) 151,219 168,722 306,403 352,151
Zinc (%) 5.3 6.1 5.7 6.2
Lead (%) 2.3 2.1 2.4 1.9
Silver (g/t) 110 92 107 88
Concentrate Production
Zinc (tonnes) 13,927 17,633 30,275 37,832
Recovery (%) 88.7 90.2 89.1 90.8
Grade (%) 51.5 52.7 51.4 52.3
Lead (tonnes) 4,130 4,049 8,684 7,772
Recovery (%) 78.4 80.6 78.8 80.6
Grade (%) 64.5 68.0 66.8 68.0
Metal in Concentrates
Zinc (tonnes) 7,165 9,286 15,543 19,786
Lead (tonnes) 2,662 2,753 5,796 5,289
Silver (ounces) 459,829 436,351 908,215 865,563
Total cash costs per lb.
payable zinc sold (US$) (0.28) (0.01) (0.18) 0.27
-------------------------------------------------------------------------


As planned, milled tonnage decreased during the second quarter of 2007 from the same period in 2006. Mining activities were focused on developing new production areas as well as developing exploration headings.

Less zinc in concentrate was produced during the second quarter of 2007 compared with the same period in 2006 due to fewer tonnes milled at lower zinc grades. Production of lead in concentrate was slightly lower during the second quarter of 2007 compared with the same period in 2006 due to fewer tonnes milled.

Mochito Outlook

During the second quarter of 2007, an additional flotation cell bank was added to the lead circuit which is expected to improve lead recoveries during the third quarter of 2007.

The Soledad tailings impoundment area was commissioned in the second quarter of 2007 following a delay in commissioning when storm damage in August 2006 necessitated a repair to the geo-membrane liner. This tailings impoundment area is expected to have capacity for seven years production at current production rates. With Soledad now in full operation, reclamation work will commence on the Pozo Azul tailings impoundment area.

The collective bargaining agreement at Mochito is scheduled to expire in October 2007 and the first meeting with representatives of the employees is scheduled for early August.

During 2007, the Company will continue to explore and delineate new mineral resources and reserves in several areas of mine. Drilling in the Santo Nino area continues to show promising results with increases expected in resources and reserves. Likewise, the exploration and delineation drilling results from the La Leona trend are favourable and are expected to add resources and reserves to the mine. Exploration drilling on the Barbasco- Imperial trend has identified additional chimney style mineralization in this area. Upward extensions of the chimney style mineralization in the Mackenny/Nacional Pipe area were identified by drilling as well. Beginning in the third quarter of 2007, the drilling will test the manto style mineralization between the Salva Vida/San Jose and Yojoa areas of the mine and additional drilling on the Santo Nino Chimney will focus on determining its geometry and grade. In the latter part of 2007, exploration drilling will target the most easterly portion of the existing mine. Limited drilling in this area, called Deep East, has intercepted economic grade chimney style mineralization and planned exploration will test the potential for manto style mineralization below the chimneys in this area. A second drill is being brought in for this campaign.

The Company continues its surface exploration program at Mochito with two large diamond drills, capable of testing the mineral potential of deep targets, currently focused on drilling two target areas with pronounced geochemical and magnetic anomalies. Three holes targeting the Big Fuzzy, located roughly 2.5 kilometres east of the mine, have been completed and have discovered manto style Pb-Zn skarn mineralization. Stepout drilling on Big Fuzzy is planned to identify in on the extent, style, and grade of the skarn mineralization. On the western side of the Mochito graben, three holes have been completed at the Arandanos target with one hole identifying native copper and trace amounts of skarn alteration minerals. Drilling of two other surface targets, ML2 and ML3, is planned for the second half of 2007 and will test the mineral potential at the projected intersections of known structures which control the mineralization in the mine. The ML2 target is coincident to a prominent soil geochemical anomaly.



Toqui Production

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

Second Quarter First Six Months
-------------------------------------------
2007 2006 2007 2006
-------------------------------------------------------------------------
Ore Milled (tonnes) 128,837 135,575 258,470 271,407
Zinc (%) 6.3 5.9 6.5 5.8
Gold (g/t) 2.0 2.3 3.0 2.6
Concentrate Production
Zinc (tonnes) 14,806 14,521 30,798 28,625
Recovery (%) 88.8 90.4 90.0 90.5
Grade (%) 49.5 49.9 49.3 49.9
Gold (tonnes) 1,481 976 2,810 2,152
Recovery (%) 61.8 69.6 59.4 68.8
Grade (g/t) 89.6 197.7 145.6 209.2
Metal in Concentrates
Zinc (tonnes) 7,323 7,238 15,191 14,281
Silver (ounces) 27,226 20,054 49,472 35,598
Gold (ounces) 6,542 8,758 20,423 20,056
Total cash costs per lb.
payable zinc sold (US$) 0.60 0.69 0.77 0.56
-------------------------------------------------------------------------


Fewer tonnes were milled during the second quarter of 2007 than the same period in 2006 due to a planned shutdown of one of the ball mills for a bull gear change out and severe winter conditions which hampered mill operations in June. The first dore from the newly installed Gekko intense leach reactor was produced in April 2007. The Gekko plant experienced normal start-up issues and, during the third quarter of 2007, is expected to reach full capacity.

Production of zinc in concentrate increased slightly during the second quarter of 2007 compared with the same period in 2006 due to higher zinc grades, while gold produced decreased due to lower tonnage and grades.

During the second quarter of 2007, ramp development to access the Concordia deposit reached the North Block. Production from Concordia during the second half of 2007 is likely to be less than originally planned due to the greater complexity and somewhat reduced tonnage of the North Block, as indicated by in-fill drilling. Development continues to access the Concordia South Block.

Toqui Outlook

The collective bargaining agreement at Toqui is scheduled to expire in September 2007 and negotiations with the union are expected to commence in mid-August 2007.

As disclosed in a news release issued June 22, 2007, exploration conducted thus far this year has increased the proven and probable mineral reserves at Toqui by 50% (34% on a contained zinc basis) and the measured and indicated resources, which resources include the proven and probable reserves, by 37% (23% on a contained zinc basis). Further, the work completed at Toqui has improved the Company's understanding of the potential size and location of sufficient additional mineralization to give the Company the confidence to commence a pre-feasibility study for a 1.0 million tonne per annum mill as this operation is currently limited by the capacity of the mill which runs at 1,475 tonnes per day or a current maximum of 540,000 tonnes per annum.

During the first half of 2007, 25,500 metres of diamond drilling in 90 drill holes was completed with the objective to explore the Altazor and Melchor targets and confirm the shape of the Porvenir deposit. The Toqui exploration program is based on a large geochemical, geophysical and geological database and the completion of a total of 50,822 metres of diamond drilling over the last 1 1/2 year period.

During the second quarter of 2007, four diamond drills drilled a total of 9,820 metres of in-fill and definition drilling on the Porvenir and the Concordia deposits. The in-fill drilling has defined a large new mineral resource for the Porvenir deposit. In-fill drilling will continue in the third quarter of 2007. Plans are currently being developed for access to and mining of the Porvenir deposit.

Exploration drilling is a major component of a $10 million budget that also includes testing of some high-priority distal stratigraphic targets outside of the defined deposits within a defined NW-SE anomalous trend. The more distal target drilling has proved the potential for continuity south-east of the known mineralization within the favourable trend where the Toqui mineralized system is hosted.

Langlois Production

Langlois, which is situated in north-western Quebec approximately 213 kilometres north of Val-d'Or, reached commercial production as of July 1, 2007. Production commenced during the fourth quarter of 2006 in Zones 3 and 4 with a total of 186,517 tonnes milled during the first half of 2007.

The quality of the concentrate increased steadily throughout the second quarter of 2007 as the mill was fine tuned. Iron content in the zinc concentrate was reduced while the concentrate grade was improved.

Development drifts continue to be driven between Zone 3, Zone 4 and Zone 97 to the east on Levels 4, 9 and 13. During the second quarter of 2007, a ramp was started from Level 9 to access 97 Zone between Level 9 and Level 4 as well as a decline to access 97 Zone between Level 9 and Level 13.

A new ramp from surface was collared during the first quarter of 2007. By the beginning of the third quarter of 2007, the new ramp had accessed the upper portions of Zone 4 between the current mining areas and surface. The mining of this material is not included in the current mine plan and, although lower grade, is economic at current prices.

Production during the second quarter of 2007 also included the processing of material from the Grevet B deposit, located three kilometres south-east of Langlois. During the second quarter of 2007, the Certificate of Authorization was received from the Ministere du Developpement durable, de l'Environnement et des Parcs for the Grevet B mine allowing the Grevet B material to be mined and milled during 2007 and 2008.

The Company currently has five diamond drills operating on the property on surface, two for exploration of Zone 3, two focused on the lower portion of Zone 97 and one on the Grevet B deposit.



The following table sets forth Langlois' production for the 2007 periods
presented.
Second First Six
Quarter Months
-------------------------------------------------------------------------
Ore Milled (tonnes) 109,315 186,517
Zinc (%) 7.2 6.9
Copper (%) 0.4 0.4
Silver (g/t) 32 30
Concentrate Production
Zinc (tonnes) 13,616 22,375
Recovery (%) 91.4 89.8
Grade (%) 52.6 51.4
Copper (tonnes) 1,305 2,117
Recovery (%) 67.8 65.1
Grade (%) 22.1 21.1
Metal in Concentrates
Zinc (tonnes) 7,196 11,531
Copper (tonnes) 288 447
Silver (ounces) 39,963 59,048
-------------------------------------------------------------------------


Langlois Outlook

A 47,000 metre diamond drill program is currently being conducted to investigate the highly prospective extensions of all the known zones containing resources and reserves at the mine. This program will cover an area of 800 vertical metres from surface by two kilometres along the strike of the Langlois deposit. One objective of this program is to move some of the known inferred resources into the indicated category. Very few of the proximal zone extensions have been tested from underground due to a lack of development.

For the second quarter of 2007, 14,473 metres of drilling were completed. Zones 3, 4 and 97 surface and underground extensions were drilled from both surface and underground. For Zone 3, economic mineralization appears to extend to the surface and consequently a new resource estimate from surface to 130 metres below surface was prepared. A possible surface extension of Zone 97 has been tested using two drill rigs and results show lower potential for mineralization. From underground, Zone 97 west extension was tested from Level 13 following a promising intersection obtained in 2006 from surface drilling which was located about 400 metres west of the currently known Zone 97. A number of intercepts with sub economic to economic values were found and drilling is continuing. Additional shallow surface holes will be drilled on the east extension of Zone 97 to test extensions of this zone to surface.

During the third quarter of 2007, Zone 2 (parallel to Zone 3 but about 20-30 metres further north) and Zone 3 will be tested from surface with the objective of upgrading some inferred resources to the indicated category. The Zone 3 east extension, located between Level 6 and 8, will be drilled in order to upgrade inferred resources to the reserve category. Drilling of the Zone 3 east plunge extension between level 11 and 13 will continue with an underground drill rig on level 13 as the economic continuity has yet to be determined. The west, east and down plunge extensions of Zone 4 will also be tested from underground.

Drilling on Zone 5 has successfully outlined a westerly dipping volcanogenic massive sulfide ("VMS") lens. A mineral resource estimate is being prepared which should be available in the third quarter of 2007. A second phase delineation program will also be conducted in the third quarter to upgrade inferred mineral resources into the indicated mineral resource category. A request for a bulk sampling permit for Zone 5 will be filed early in the third quarter of 2007. Mining and milling this bulk sample should provide the Company with the metallurgical information necessary to prepare a mine plan for this deposit. Following receipt of the necessary permit it is anticipated that this bulk sample will be processed during the last quarter of 2007.

During 2007, all of the zones will be reinterpreted and re-modeled to incorporate forecast base metal prices, lower cut-off grades and incorporation of all diamond drill intersections and channel samples in order to redefine the economic envelope. By the end of 2007, it is expected that a fully integrated 3D block model will have been developed for Langlois with which to calculate new resource and reserve estimates.

During the first quarter of 2007, Metco Resources Inc. ("Metco") announced that a pre-feasibility study would be conducted in 2007 on the Orphee deposit (50% Breakwater, 50% Metco). Should the results of the pre- feasibility be positive, the Orphee deposit, located six kilometres from the Langlois mill, could provide additional mill feed for Langlois, which currently has excess mill capacity. Breakwater conducted a delineation drilling program over the western part of the Orphee deposit, of which it owns 100% of the mining rights, to enhance the scope of the pre-feasibility study.

Coulon Project

In the second quarter of 2007, Virginia Mines Inc. ("Virginia") continued drilling on the Coulon project, located in the James Bay region of Quebec. In accordance with an agreement entered into in May 2006, the Company has the option to acquire a 50% interest in the Coulon property in return for $6.5 million in exploration expenditures and cash payments totalling $180,000 over an eight-year period. Mobilization of a second deep drilling rig is scheduled for mid-July 2007 in order to accelerate the exploration work. In the third quarter of 2007, two deep rigs will focus on delineating additional resources within lenses 44 and 9-25 and a heliborne drill rig will continue exploring for new drill targets on a regional scale. The Company expects to fulfill its earn-in commitments by the end of 2007.

Drill results released by Virginia on July 11, 2007 indicated excellent continuity of the Coulon mineralized system over more than 14 kilometres along strike. Lens 44 and 9-25 have been intercepted at depths of 380 and 550 metres respectively and both are open at depth in all directions.

Trieste Project

On June 14, 2007, the Company signed an option agreement with Virginia on the Trieste property, which is also located in the James Bay area of Quebec. Under the terms of the agreement, the Company has the option to acquire a 50% interest in the property, in exchange for $1.0 million exploration work before May 8, 2011 and payments totalling $50,000. Virginia will be the operator. The Trieste property is located within the La Grande Archean volcano-sedimentary belt and covers an assemblage of mafic to felsic volcanics, iron formations, and a synvolcanic intrusion. Many electromagnetic conductors remain unexplained and VMS type mineralized showings returned values of up to 2.6% Zn within the volcanic sequence. An arsenopyrite-rich boulder also returned 20 g/t Au. Geological mapping and prospecting is planned during the summer of 2007.

Other Properties

The reclamation work is largely complete at the Bouchard-Hebert, Bougrine and Nanisivik properties, with Nanisivik to be fully reclaimed in 2007. The mills at Bouchard-Hebert and Bougrine remain intact pending exploration results elsewhere throughout the Company's properties.

NON-GAAP RECONCILIATION

Total cash costs per pound of payable zinc sold 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 GAAP and is not necessarily indicative of cash provided from operating activities or operating expenses as determined under GAAP. This measure is intended to provide investors with information about the cash generating capabilities of the Company's operating activities in a given period which is the same purpose for which the Company uses this information.



Non-GAAP reconciliation of total cash cost per pound of payable zinc sold
to consolidated financial statements

Second Quarter First Six Months
-------------------------------------------------------------------------
2007 2006 2007 2006
-------------------------------------------------------------------------
By-product credit ($ millions)
Gross sales revenue per
financial statements (103.4) (101.2) (181.3) (181.9)
Less zinc sales revenue 66.9 54.6 117.3 126.7
-------------------------------------------------------------------------
(36.5) (46.6) (64.0) (55.2)
Treatments and marketing charges
($ millions) per financial
statements 25.3 25.5 45.2 50.4
Direct operating costs ($ millions)
per financial statements 30.2 34.2 53.8 63.0
-------------------------------------------------------------------------
Total cash costs -
C$ (millions) 19.0 13.1 35.0 58.2
C$/US$ exchange rate 1.1500 1.1100 1.1585 1.1500
-------------------------------------------------------------------------
Total cash costs -
US$ (millions) 16.5 11.8 30.2 50.6

Zinc pounds sold (millions) 36.4 37.3 64.1 99.2

Total cash cost per pound of
payable zinc sold (US$)
By-product credit (0.87) (1.13) (0.86) (0.48)
Treatment and marketing costs 0.60 0.62 0.61 0.44
Direct operating costs 0.72 0.83 0.72 0.55
-------------------------------------------------------------------------
Total 0.45 0.32 0.47 0.51
-------------------------------------------------------------------------

SUMMARY OF QUARTERLY RESULTS
2005(a) 2005 2006 2006 2006 2006 2007 2007
Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2
-------------------------------------------------------------------------
Gross sales
revenue
($ millions) 71.9 57.4 80.7 101.2 112.0 158.3 77.9 103.4
Net earning (loss)
($ millions) (1.2) 9.3 38.3 28.6 39.2 50.4 15.3 38.7
Basic earnings
per share $0.00 $0.02 $0.10 $0.08 $0.10 $0.13 $0.04 $0.09
Weighted-average
number of
Common Shares
outstanding
(millions) 369.5 374.2 382.0 383.8 384.3 385.0 396.4 418.0
Diluted earnings
per share $0.00 $0.02 $0.09 $0.07 $0.09 $0.12 $0.04 $0.09
C$/US$ realized
exchange rate 1.2019 1.1744 1.1559 1.1239 1.1187 1.1422 1.1683 1.0914
Average realized
zinc price
(US$/t) 1,296 1,502 2,221 2,895 3,363 4,227 3,434 3,710
Average realized
zinc price
(C$/t) 1,558 1,764 2,567 3,226 3,762 4,828 4,012 4,049
Concentrate
tonnes sold(b) 80,205 60,391 67,355 59,779 61,385 73,230 39,333 51,553
Concentrate
tonnes
produced(c) 76,014 68,841 66,129 59,906 59,420 67,058 66,895 75,596
-------------------------------------------------------------------------
(a) Includes results of the Bougrine mine which closed in September 2005.
(b) Excludes tonnes sold from Langlois prior to the commencement of
commercial production on July 1, 2007.
(c) Includes tonnes produced from Langlois from November 2006, the date
of first concentrate shipment.


The quantity and mix of concentrates sold directly affects gross sales revenue. The recognition of revenue from the sale of concentrate can vary from quarter to quarter for the reasons discussed in the "Gross Sales Revenue" section of this news release. As all sales are based in US dollars, the US dollar's general weakening against the Canadian dollar over the past eight quarters has reduced the realized Canadian dollar gross sales revenue.

TRANSACTION WITH RELATED PARTIES

In the first six months of 2007, an affiliated company of a significant shareholder of the Company provided consulting services of $50,000.

ACCOUNTING POLICIES AND CRITICAL ACCOUNTING ESTIMATES

The notes to the Company's December 31, 2006 audited consolidated financial statements outline the Company's significant accounting policies. The section below entitled Accounting Changes describes changes to the Company's accounting policies. Pages 25 and 26 of the 2006 Annual Report contain a discussion of certain accounting estimates that are considered particularly important, as they require management to make significant judgments, some of which relate to matters that are inherently uncertain. Readers are encouraged to refer to the 2006 Annual Report to review that discussion.

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, issueable 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 Company, except at meetings at which only holders of another class or series of shares of the Company are entitled to vote. The table set forth below summarizes the Capital Stock.



Common Shares or Securities Convertible
into Common Shares July 25, 2007
-------------------------------------------------------------------------
Issued and outstanding 418,407,313
Share options outstanding weighted
-average exercise price $1.18 8,542,810
Warrants granted at $1.00,
expire January 28, 2009
- traded on TSX 33,538,329
-------------------------------------------------------------------------
Future fully diluted 460,488,452
-------------------------------------------------------------------------


RISKS, UNCERTAINTIES AND OTHER INFORMATION

Readers are encouraged to read and consider the risk factors, and additional information regarding the Company, included in its most recent Annual Report and Form 40-F/Annual Information Form filed with the Canadian securities regulators and the United States Securities and Exchange Commission (the "SEC"), as applicable, a copy of which is posted on the SEDAR website at www.sedar.com and/or the SEC's website at www.sec.gov.

CAUTION ON FORWARD-LOOKING INFORMATION

This news release contains certain statements which constitute forward-looking information. These forward-looking statements are not descriptive of historical matters and may refer to management's expectations or plans. These statements include, but are not limited to, statements concerning the Company's business objectives and plans; future trends in the Company's industry; future production costs and volumes; mineral grades, reserve and resource estimates and types; sales volumes and realized prices; capital spending plans; exploration plans; expansion plans; expected market fundamentals and prices; availability of equipment and supplies; expected plant availability; success of process changes; the Company's processing technologies; global economic growth and industrial demand; production of base metal concentrates by the Company's operations; future metal prices and treatment charges; future royalties payable; changes in global metal and concentrate inventories; currency exchange rates; costs of energy, materials and supplies; the outcome of disputes and legal proceedings in which the Company is involved; future effective tax rates; and future benefits costs.

Inherent in forward-looking statements are risks and uncertainties beyond the Company's ability to predict or control, including risks that may affect the Company's operating or capital plans, including risks generally encountered in the development and operation of mineral properties and processing facilities such as unusual or unexpected geological formations, unanticipated metallurgical difficulties, ground control problems, process upsets and equipment malfunctions; risks associated with labour disturbances and unavailability of skilled labour; fluctuations in the market prices of the Company's principal products, which are cyclical and subject to substantial price fluctuations; risks created through competition for mining properties; risks associated with lack of access to markets; risks associated with mineral and resource estimates, including the risk of errors in assumptions or methodologies; risks posed by fluctuations in exchange rates and interest rates, as well as general economic conditions; risks associated with environmental compliance and permitting, including those created by changes in environmental legislation and regulation; risks associated with the Company's dependence on third parties in the provision of transportation and other critical services; risks associated with aboriginal title claims and other title risks; social and political risks associated with operations in foreign countries; and risks associated with legal proceedings.

Actual results and developments are likely to differ, and may differ materially, from those expressed or implied by the forward-looking statements contained in this news release. Such statements are based on a number of assumptions which may prove to be incorrect, including, but not limited to, the following assumptions: that there is no material deterioration in general business and economic conditions; that there is no unanticipated fluctuation of interest rates and foreign exchange rates; that the supply and demand for, deliveries of, and the level and volatility of prices of zinc, copper, lead, gold and silver and the Company's other primary metals and minerals develop as expected; that the Company receives regulatory and governmental approvals for its development projects and other operations on a timely basis; that the Company is able to obtain financing for its development projects on reasonable terms; that there is no unforeseen deterioration in the Company's costs of production or production and productivity levels; that the Company is able to continue to secure adequate transportation for its products; that the Company is able to procure mining equipment and operating supplies (including tires) in sufficient quantities and on a timely basis; that engineering and construction timetables and capital costs for the Company's development and expansion projects are not incorrectly estimated or affected by unforeseen circumstances; that costs of closure of various operations are accurately estimated; that there are no unanticipated changes to market competition; that the Company's reserve estimates are within reasonable bounds of accuracy (including with respect to size, grade and recoverability) and that the geological, operational and price assumptions on which these are based are reasonable; that environmental and other proceedings or disputes are satisfactorily resolved; and that the Company maintains its ongoing relations with its employees and with its business partners and joint venturers.

Readers are cautioned that the foregoing list of important factors and assumptions is not exhaustive. Forward-looking statements are not guarantees of future performance. Events or circumstances could cause the Company's actual results to differ materially from those estimated or projected and expressed in, or implied by, these forward-looking statements. Readers should also carefully consider the matters discussed under "Risk Factors" in the Company's Annual Information Form. The Company undertakes no obligation to update publicly or otherwise revise any forward-looking statements or the foregoing list of factors, whether as a result of new information or future events or otherwise, except as may be required under applicable laws.

ACCOUNTING CHANGES

Financial Instruments, Hedges and Comprehensive Income

On January 1, 2007, the Company adopted the CICA's new accounting requirements for securities, hedging derivatives and certain other financial instruments. Under these new rules, the Company is required to measure certain securities and hedging derivatives at fair value and include a new section in Shareholders' Equity, called Other Comprehensive Income, to report unrealized gains or losses related to: certain available-for-sale securities, cash flow hedges and foreign exchange gains or losses on the Company's net investment in foreign operations.

Certain of the Company's investment securities (referred to as available- for-sale securities) are recorded at fair value under the new rules; however, the requirements for recognizing gains or losses in net income are unchanged. Unrealized gains or losses are deferred in Other Comprehensive Income until the securities are sold or there is an impairment that is other than temporary. It is only at that time that any gain or loss is recorded in net earnings. Securities whose sale is restricted or that are not traded in an active market are also included in available-for-sale securities, but continue to be recorded at cost.

Any hedging derivatives that the Company enters into in the future will be recorded at fair value under the new rules, but changes in fair value will only impact net earnings to the extent that they do not perfectly offset changes in the fair value of the item that the Company is hedging (i.e.: hedge ineffectiveness). Any hedge ineffectiveness would be recorded in net earnings. For any of the Company's future hedging programs, it is expected that such hedges would very closely match the items that the Company hedges and, as a result, the Company would not expect a significant amount of hedge ineffectiveness to arise.



Breakwater Resources Ltd.
Consolidated Balance Sheets
(Expressed in thousands of Canadian dollars)
(Unaudited)

June 30, December 31,
2007 2006
-------------------------------------------------------------------------
Assets

Current
Cash and cash equivalents 102,930 81,412
Restricted cash 1,054 1,221
Short-term investments 4,358 4,120
Accounts receivable - concentrate 2,277 12,687
Other receivables 17,933 12,676
Concentrate inventory 60,032 43,686
Materials and supplies inventory 25,381 22,904
Prepaid expenses and other current assets 5,624 4,029
Future income tax assets 18,911 14,745
-------------------------------------------------------------------------
Total current assets 238,500 197,480
Future income tax asset, long-term 15,842 13,440
Reclamation deposits 13,500 13,500
Mineral properties and fixed assets 249,086 207,884
Long-term investments 36,659 14,704
Restricted promissory notes 62,285 62,285
-------------------------------------------------------------------------
615,872 509,293
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Liabilities and Shareholders' Equity
Current
Accounts payable and accrued liabilities 47,233 43,128
Provisional payments for concentrate
inventory shipped and not priced 54,535 24,246
Short-term debt including current portion
of long-term debt 190 2,169
Income and mining taxes payable 8,904 9,798
Current portion of reclamation,
closure cost accruals and other
environmental obligations 7,332 8,267
-------------------------------------------------------------------------
Total current liabilities 118,194 87,608
Deferred income 5,971 6,277
Long-term lease obligations 358 501
Royalty obligations 62,479 62,479
Long-term loan 1,851 -
Reclamation, closure cost accruals and
other environmental obligations 31,999 32,293
Employee future benefits 3,747 4,493
Future income tax liabilities 6,911 7,089
-------------------------------------------------------------------------
Total liabilities 231,510 200,740
Shareholders' equity 384,362 308,553
-------------------------------------------------------------------------
615,872 509,293
-------------------------------------------------------------------------
-------------------------------------------------------------------------


Breakwater Resources Ltd.
Consolidated Statements of Operations and Retained Earnings (Deficit)
(Expressed in thousands of Canadian dollars except share and per share
amounts)
(Unaudited)

Three Months Ended Six Months Ended
For the periods ended June 30 2007 2006 2007 2006
-------------------------------------------------------------------------
(restated) (restated)

Gross sales revenue 103,401 101,202 181,348 181,860
Treatment and marketing costs 25,311 25,540 45,231 50,389
-------------------------------------------------------------------------
Net revenue 78,090 75,662 136,117 131,471
-------------------------------------------------------------------------

Operating costs
Direct operating costs 30,187 34,178 53,780 62,991
Depreciation and depletion 4,042 2,896 8,144 7,935
Reclamation and closure costs 769 943 1,722 1,885
-------------------------------------------------------------------------
34,998 38,017 63,646 72,811
-------------------------------------------------------------------------
Contribution from mining
activities 43,092 37,645 72,471 58,660
-------------------------------------------------------------------------
Other expenses (income)
General and administrative 3,431 3,675 7,394 7,216
Interest and financing 977 1,525 2,133 2,938
Investment and other income (4,952) (1,716) (6,642) (3,303)
Other 6,338 (655) 6,629 600
-------------------------------------------------------------------------
5,794 2,829 9,514 7,451
-------------------------------------------------------------------------
Earnings before the following: 37,298 34,816 62,957 51,209
-------------------------------------------------------------------------

Exploration expenses 2,920 2,860 5,591 4,491
Other non-producing property
costs 411 551 906 2,667
Income and mining tax provision
(recovery) (4,712) 2,817 2,491 (22,875)
-------------------------------------------------------------------------
(1,381) 6,228 8,988 (15,717)
-------------------------------------------------------------------------
Net earnings 38,679 28,588 53,969 66,926
Retained earnings (deficit),
beginning of period 160,791 (151,325) 139,795 (189,663)
Changes in accounting policy - 172,928 5,706 172,928
-------------------------------------------------------------------------
Retained earnings, end
of period 199,470 50,191 199,470 50,191
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Basic earnings per Common Share 0.09 0.07 0.13 0.17
Diluted earnings per
Common Share 0.09 0.07 0.12 0.16
Basic weighted-average number
of Common Shares outstanding
(000's) 417,982 383,672 407,211 382,817
-------------------------------------------------------------------------
-------------------------------------------------------------------------



Breakwater Resources Ltd.
Consolidated Statement of Accumulated Other Comprehensive Income (Loss)
(Expressed in thousands of Canadian dollars)
(Unaudited)


For the six month period ended June 30 2007
-------------------------------------------------------------------------
Accumulated other comprehensive income, beginning of period 11,980
Reclassification of cumulative translation adjustments (7,689)
Other comprehensive loss (4,703)
-------------------------------------------------------------------------
Accumulated other comprehensive loss, end of period (412)
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Breakwater Resources Ltd.
Consolidated Statements of Other Comprehensive Income
(Expressed in thousands of Canadian dollars)
(Unaudited)

Three Six
Months Months
Ended Ended
For the periods ended June 30 2007 2007
-------------------------------------------------------------------------
Net earnings 38,679 53,969
-------------------------------------------------------------------------

Other comprehensive income (loss), net of income taxes:
Unrealized losses on translating financial
statements of self sustaining foreign operations (4,321) (4,937)
Unrealized loss on short-term available-for-sale
securities, net of income tax provision of $41,000
(3 months - $4,000) (43) (210)
Unrealized gain on long-term available-for-sale
securities, net of income tax provision of $87,000
(3 months - $27,000) 148 444
-------------------------------------------------------------------------
Other comprehensive loss, net of income taxes (4,216) (4,703)
-------------------------------------------------------------------------
Comprehensive income 34,463 49,266
-------------------------------------------------------------------------
-------------------------------------------------------------------------



Breakwater Resources Ltd.
Consolidated Statements of Cash Flow
(Expressed in thousands of Canadian dollars)
(Unaudited)

Three Months Ended Six Months Ended
For the periods ended June 30 2007 2006 2007 2006
-------------------------------------------------------------------------
Operating Activities (restated) (restated)
Net earnings 38,679 28,588 53,969 66,926
-------------------------------------------------------------------------

Items not affecting cash:
Depreciation and depletion 4,042 2,896 8,144 7,935
Gain on sale of investment - - (306) -
Unrealized gain on
investments (2,628) - (5,235) -
Other non-cash items (303) (813) (203) 514
Stock-based compensation 552 623 1,081 1,019
Issue of Common Shares to
settle litigation - 848 - 848
Unrealized deferred income (153) (153) (306) (306)
Future income taxes (14,507) 1,305 (6,789) (24,686)
Reclamation, closure cost
accruals and other
environmental obligations 769 943 1,722 1,885
Employee future benefits 371 444 766 887
-------------------------------------------------------------------------
(11,857) 6,093 (1,126) (11,904)
-------------------------------------------------------------------------
Payment of reclamation, closure
cost accruals and other
environmental obligations (1,142) (2,039) (2,377) (3,721)
Payment of employee future
benefits (772) (743) (1,512) (1,490)
Changes in non-cash working
capital items 17,407 11,162 20,601 19,958
-------------------------------------------------------------------------
Net cash provided by operating
activities 42,315 43,061 69,555 69,769
-------------------------------------------------------------------------

Investing Activities
Reclamation deposits - 883 - (12,679)
Short-term investments - - 1,033 2,305
Mineral properties and
fixed assets (33,358) (18,152) (57,036) (27,368)
Proceeds from sale of
fixed assets 272 208 290 208
-------------------------------------------------------------------------
Net cash used in investing
activities (33,086) (17,061) (55,713) (37,534)
-------------------------------------------------------------------------

Financing Activities
(Increase) decrease in
restricted cash (21) (626) 167 (223)
Issue of Common Shares for cash 1,020 268 7,777 990
Deferred financing fees - - - (223)
Decrease in long-term lease
obligations (67) (124) (143) (248)
Decrease in short-term debt (387) (13,772) (125) (10,925)
-------------------------------------------------------------------------
Net cash provided by (used in)
financing activities 545 (14,254) 7,676 (10,629)
-------------------------------------------------------------------------
Net increase in cash during
the period 9,774 11,746 21,518 21,606
Cash and cash equivalents,
beginning of period 93,156 28,609 81,412 18,749
-------------------------------------------------------------------------
Cash and cash equivalents,
end of period 102,930 40,355 102,930 40,355
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Supplemental Information
Cash interest paid 28 365 235 583
Cash income and mining
taxes paid 12,292 162 12,292 343
-------------------------------------------------------------------------
-------------------------------------------------------------------------


Contact Information

  • Breakwater Resources Ltd. Dave Langille Vice President, Finance and Chief Financial Officer (416) 363-4798 Ext. 236
    or
    Breakwater Resources Ltd. Ann Wilkinson Vice President, Investor Relations (416) 363-4798 Ext. 277