Breakwater Resources Ltd.
TSX : BWR

Breakwater Resources Ltd.

October 31, 2007 18:05 ET

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

TORONTO, ONTARIO--(Marketwire - Oct. 31, 2007) - Breakwater (TSX:BWR), a mining, exploration and development company which produces and sells zinc, copper, lead and gold concentrates to customers around the world, releases its financial and operating results for the three and nine month periods ended September 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 $7.8 million or $0.02 per share in the third quarter of 2007 compared with $39.2 million or $0.10 per share in the third quarter of 2006. The three main items affecting the drop in net earnings were:

-- concentrate shipped but not recognized as revenue in this period

-- the $13.8 million gain on sale of Caribou in 2006

-- higher exploration expenses

- Production in the third quarter of 2007 was 73,122 tonnes of concentrate compared with 59,420 tonnes in the third quarter of 2006

- Sales of concentrate in the third quarter of 2007 were 50,748 tonnes compared to 61,385 in the third quarter of 2006. The decrease was due to concentrate inventory shipped to smelters for which final pricing per the smelter contract terms had not occurred and therefore were not recognized as revenue in the quarter

- At September 30, 2007, 70,519 tonnes of concentrate inventories had been shipped to smelters. Had these inventories been priced and recognized as revenue, the Company estimates that earnings before tax would have increased by $29.4 million

- Concentrate inventories, including the 70,519 shipped to smelters noted above, were 111,413 tonnes at September 30, 2007 compared with 78,234 tonnes at September 30, 2006. Included in the September 30, 2007 concentrate inventories were 17,495 tonnes produced from Langlois and 8,334 produced from Myra Falls

- Settled new three-year labour contracts at Toqui and Mochito

- Gross sales revenue fell by 22% to $87.5 million in the third quarter of 2007 from $112.0 million in the third quarter of 2006 primarily due to fewer tonnes of concentrate sold

- The contribution from mining activities was $26.8 million in the third quarter of 2007 compared with $43.5 million in the third quarter of 2006. The $16.7 million decrease was due to a $16.0 million reduced contribution from Myra Falls in the third quarter of 2007 compared with the third quarter of 2006

- Net cash provided by operating activities was lower by $33.4 million than in the third quarter 2006 at $6.9 million in the third quarter of 2007 and was primarily used for $24.0 million of capital expenditures and $6.1 million of short-term investments

- Total cash costs per pound of payable zinc increased to US$0.61 per pound in the third quarter of 2007 from US$0.57 per pound in the third quarter of 2006. See the non-GAAP reconciliation section in this news release

- Prefeasibility study started for 1.0 million tonne per year mill at Toqui

- Completed expenditures necessary to earn a 50% interest in Coulon

- Completed in excess of 33 kilometres of drilling with encouraging results at Toqui, Langlois and Mochito

OUTLOOK

- At Mochito, the Pozo Azul tailings impoundment area was recommissioned following a discharge of water from the newly commissioned Soledad tailings impoundment area. Tests are ongoing in the mill to determine the optimum reagent mix required to control levels of copper in the effluent of Pozo Azul.

- At Myra Falls, the connection of the surface ramp with the Lynx 15 level has increased ventilation capacity which will allow for increased production from the western area of the mine. The open pit copper and zinc zones will be mined in the fourth quarter of 2007.

- Drilling at Toqui continues to support the recent decision to commence a prefeasibility study for a 1.0 million tonne per annum mill.

- In the fourth quarter of 2007, drilling at Langlois is expected to upgrade known inferred resources to the indicated resource category as well as test a number of targets including the west extension of Zone 97.

- Because of the uncertainties at Mochito, the Company is unable to provide production guidance at this time.

STATEMENT OF OPERATIONS REVIEW - THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006

Gross Sales Revenue

Langlois entered commercial production on July 1, 2007. Of the 20,189 tonnes of concentrate produced in the third quarter of 2007, 2,694 tonnes were recognized as sold and the revenue has been included in the income statement. Net cash flow from concentrate produced at Langlois prior to June 30, 2007 reduced preproduction capital expenditures.

Gross sales revenue from the sale of zinc, copper, lead, and gold concentrates for the three month period ended September 30, 2007 (the "third quarter of 2007") decreased by $24.5 million (22%) compared with the three month period ended September 30, 2006 (the "third quarter of 2006"). Lower concentrate sales - 50,748 tonnes in 2007 compared with 61,385 tonnes in 2006, a stronger Canadian dollar and lower prices for zinc and copper accounted for the drop in gross sales revenue.

Concentrate sales in the quarter were lower due to significantly higher concentrate inventories at September 30, 2007 related to the timing of shipments and the related impact on revenue recognition.

Gross sales revenue for the nine month period ended September 30, 2007 (the "first nine months of 2007") decreased by $25.0 million (9%) compared with the nine month period ended September 30, 2006 (the "first nine months of 2006"). Lower concentrate sales of 141,635 tonnes in 2007 compared with 188,518 tonnes in 2006 and a stronger Canadian dollar, were partially offset by higher prices for zinc and lead, and a hedging loss in 2006 which did not recur in 2007.

Concentrate sales in the first nine months were down due to higher concentrate inventories at September 30, 2007 related to the timing of shipments and less concentrate was in inventory at the beginning of 2007 compared with 2006 making tonnes available for sale lower.



Gross Sales Revenue by Metal Third Quarter First Nine Months
($ millions) 2007 2006 2007 2006
---------------------------------------------------------------------
Zinc (US$) 54.1 68.0 158.5 179.4
Copper (US$) 8.1 18.0 23.3 39.3
Lead (US$) 9.4 2.5 21.7 8.5
Gold (US$) 6.1 5.1 20.3 15.6
Silver (US$) 6.7 6.3 21.2 14.2
Other 0.0 0.2 0.9 2.4
---------------------------------------------------------------------
Total gross sales revenue (US$) 84.4 100.1 245.9 259.4
C$/US$ realized exchange rate 1.0374 1.1187 1.0937 1.1330
---------------------------------------------------------------------
Total gross sales revenue (C$) 87.5 112.0 268.9 293.9
---------------------------------------------------------------------

Sales by Concentrate Third Quarter First Nine Months
(tonnes) 2007 2006 2007 2006
---------------------------------------------------------------------
Zinc 39,649 47,198 108,747 150,474
Copper 5,104 10,638 15,662 25,120
Lead 4,708 3,310 14,176 11,635
Gold 1,287 239 3,050 1,289
---------------------------------------------------------------------
Total 50,748 61,385 141,635 188,518
---------------------------------------------------------------------

Sales by Payable Metal Third Quarter First Nine Months
2007 2006 2007 2006
---------------------------------------------------------------------
Zinc (tonnes) 16,891 20,259 45,968 65,268
Copper (tonnes) 1,059 2,339 3,268 5,446
Lead (tonnes) 2,900 2,140 9,039 7,429
Gold (ounces) 8,986 8,354 30,700 31,607
Silver (ounces) 517,161 548,325 1,609,060 1,594,987
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Third Quarter First Nine Months
Realized Prices 2007 2006 2007 2006
---------------------------------------------------------------------
Zinc (US$/tonne) 3,200 3,357 3,448 2,748
Copper (US$/tonne) 7,609 7,675 7,143 7,217
Lead (US$/tonne) 3,231 1,166 2,406 1,146
Gold (US$/ounce) 674 615 662 495
Silver (US$/ounce) 12.97 11.54 13.16 8.85
---------------------------------------------------------------------

Average Metal Prices & Third Quarter First Nine Months
Foreign Exchange Rate 2007 2006 2007 2006
---------------------------------------------------------------------
Zinc (US$/tonne) 3,228 3,363 3,449 2,966
Copper (US$/tonne) 7,707 7,667 7,092 6,604
Lead (US$/tonne) 3,143 1,188 2,367 1,176
Gold (US$/ounce) 680 622 666 602
Silver (US$/ounce) 12.70 11.70 13.12 11.22
C$/US$ exchange rate 1.0448 1.1213 1.1044 1.1326
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The Company has a conservative revenue recognition policy which, among other things, requires final pricing of concentrate inventories prior to recognizing revenue. Using commodity prices and exchange rates at September 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 provided as additional information.



Net Earnings Pro- Weighted-
Concen- smelter Inventory before visional average
trate return value taxes payments months to
(DMT) ($000's) ($000's) ($000's) ($000's) settlement
-----------------------------------------------------------------------
-----------------------------------------------------------------------
Zinc 65,746 60,915 36,586 24,329 45,570 1.7
Copper 2,619 4,986 3,742 1,244 4,341 2.1
Lead 1,903 4,895 1,265 3,630 4,593 2.0
Gold 251 396 217 179 0 1.0
-----------------------------------------------------------------------
70,519 71,192 41,810 29,382 54,504
-----------------------------------------------------------------------


At September 30, 2006, the Company estimated that inventories shipped but not recognized for revenue purposes had earnings before tax of $24.9 million consisting of $44.1 million of net smelter return less $19.2 million of inventory value on 37,127 tonnes of concentrate.

Net Revenue

Net revenue, the value of concentrates sold after deducting treatment charges and freight and marketing costs, contracted by 21% to $65.5 million in the third quarter of 2007 from $82.7 million in the third quarter of 2006. Treatment and marketing costs were 25% lower at $22.0 million in the third quarter of 2007 compared with $29.4 million in the third quarter of 2006 primarily due to fewer tonnes of concentrate sold and lower treatment costs for Toqui and Myra Falls. Treatment and marketing costs, as a percentage of gross sales revenue, declined slightly to 25% in the third quarter of 2007.

For the first nine months of 2007, net revenue decreased by 6% to $201.6 million compared with the first nine months of 2006. Treatment and marketing costs declined 16% to $67.3 million in the first nine months of 2007 compared with $79.8 million for the first nine months of 2006 primarily due to lower treatment costs for Mochito and Myra Falls partially offsetting higher treatment costs at Toqui. Treatment and marketing costs, as a percentage of gross sales revenue, declined from 27% in the first nine months of 2006 to 25% in 2007.

Direct Operating Costs

Direct operating costs were 3% lower in the third quarter of 2007 at $33.9 million compared with $34.9 million in the third quarter of 2006. The direct operating cost per tonne of concentrate sold increased to $668 in 2007 from $568 in 2006.



Direct
Operating
Cost Third Quarter 2007 Third Quarter 2006
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Concen- Cost Concen- Cost
trate per trate per
Aggregate sold tonne Aggregate sold tonne
($ millions) (tonnes) ($) ($ millions) (tonnes) ($)
--------------------------------------------------------------------------
Myra Falls 18.8 18,819 998 25.1 31,651 793
Langlois 1.8 2,694 660 0.0 0 n.a.
Mochito 6.5 14,180 461 7.4 21,750 342
Toqui 6.8 15,055 451 2.4 7,984 296
--------------------------------------------------------------------------
Total 33.9 50,748 668 34.9 61,385 568
--------------------------------------------------------------------------


For the first nine months of 2007, direct operating costs were $87.7 million compared with $97.9 million for the first nine months of 2006. The tonnes of concentrate sold and aggregate direct operating costs decreased by 25% and 10% respectively resulting in the average direct operating cost per tonne of concentrate sold increasing to $619 in 2007 from $519 in 2006.



Direct
Operating
Cost First Nine Months 2007 First Nine Months 2006
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Concen- Cost Concen- Cost
trate per trate per
Aggregate sold tonne Aggregate sold tonne
($ millions) (tonnes) ($) ($ millions) (tonnes) ($)
--------------------------------------------------------------------------
Myra Falls 49.0 49,510 989 66.0 90,856 727
Langlois 1.8 2,694 660 0.0 0 n.a.
Mochito 18.9 44,801 423 20.6 62,618 328
Toqui 18.0 44,630 403 11.3 35,044 323
--------------------------------------------------------------------------
Total 87.7 141,635 619 97.9 188,518 519
--------------------------------------------------------------------------


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$0.62 in the third quarter of 2007 compared with US$0.57 in the third quarter of 2006 (see non-GAAP reconciliation). The increase was primarily due to higher direct operating costs per pound of payable zinc sold partially offset by higher by-product credits for lead. Pounds of zinc sold decreased by 17% in 2007 compared with 2006.

The total cash cost per pound of payable zinc sold was US$0.53 in the first nine months of 2007 compared with US$0.53 in the first nine months of 2006 (see non-GAAP reconciliation). Pounds of zinc sold decreased by 30% in 2007 compared with 2006.

Depreciation and Depletion

Despite fewer tonnes of concentrate sold in the third quarter and the first nine months of 2007 compared with the corresponding periods in 2006, depreciation and depletion increased by $0.4 million and $0.6 million respectively. This expense was higher in the third quarter of 2007 due to the commencement of commercial production at Langlois while the increase in the first nine months of 2007 was primarily due to Langlois as noted above and increased depreciation at Toqui partially offset by lower depreciation at Myra Falls and Mochito.

Other Expenses (Income)

Other expenses (income) rose by $1.3 million in the third quarter of 2007 compared with the third quarter of 2006. For the first nine months of 2007, other expense (income) increased by $3.3 million. These increases were due to foreign exchange losses from the rise of the Canadian dollar, more spent on consulting fees and salaries, partially offset by interest earned on larger cash balances, and unrealized gains on investments held for trading and on the conversion rights of the long-term investments.

Exploration Expenses

Exploration expenses were $5.3 million in the third quarter of 2007 and $10.9 million in the first nine months of 2007.



Exploration Expenditures
-----------------------------------------------------
-----------------------------------------------------
Capital Expenses Total
($ millions) ($ millions) ($ millions)
-----------------------------------------------------
Toqui 5.3 2.5 7.8
Mochito 0.6 2.3 2.9
Langlois 2.6 2.5 5.1
Myra Falls - 3.0 3.0
Non-operating - 0.6 0.6
Corporate 7.3 - 7.3
-----------------------------------------------------
Total 15.8 10.9 26.7
-----------------------------------------------------


Refer to note 1 of the Company's audited consolidated financial statements for the year ended December 31, 2006 for the accounting treatment of exploration expenditures.

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. In the third quarter of 2006, the Company recorded a gain on sale of its Caribou property of $13.8 million and included this gain in other non-producing property costs. Excluding this gain, other non-producing property costs in the third quarter of 2007 fell by $0.4 million compared with the corresponding 2006 period primarily due to $0.3 million of costs incurred at Caribou prior to its sale in August 2006.

Excluding the gain on the Caribou sale, other non-producing property costs in the first nine months of 2007 decreased by $2.1 million compared with the corresponding 2006 period primarily due to $1.9 million of costs incurred at Caribou prior to its sale and a charge of $0.8 million to settle a claim against the Company partially offset by gains on sale of assets at Nanisivik in 2006.

Income and Mining Tax Provision (Recovery)

Income and mining tax provision in the third quarter of 2007 was $9.8 million compared with a provision of $12.5 million in the third quarter of 2006. The $2.7 million decrease was primarily due to an increase to the Quebec mining duties future tax liability of $6.0 million and a reduction of future tax assets at Mochito and Toqui by $2.8 million in the third quarter of 2006, partially offset by a reduction of a future tax asset at Myra Falls of $2.0 million in the third quarter of 2007 and by increased income tax provisions of $2.5 million and $2.2 million at Mochito and Toqui respectively in the third quarter of 2007.

The income and mining tax provision in the first nine months of 2007 was $12.3 million compared with a recovery of $10.4 million in the first nine months of 2006. The $22.7 million change was primarily due to a net change of $23.7 million at Myra Falls related to a future tax asset recognized in 2006 and income tax provision increases in 2007 of $11.6 million and $4.4 million at Mochito and Toqui respectively partially offset by the recognition of the $14.2 million future tax asset at Langlois in 2007.

LIQUIDITY AND FINANCIAL POSITION REVIEW

Working Capital

Working capital at September 30, 2007 was $107.0 million compared with $109.9 million at December 31, 2006, a decrease of $2.9 million.

Current Assets

Total current assets rose by $43.0 million to $240.4 million at September 30, 2007 compared with December 31, 2006. The main components of current asset changes were as follows:

- Concentrate inventory increased by $33.1 million due to the tonnes of concentrate in inventory increasing by 49,323 tonnes to 111,413 tonnes at September 30, 2007. Of the increased tonnes, 17,495 related to Langlois and 8,334 related to Myra Falls

- Prepaid expenses and other current assets increased by $6.1 million primarily due to a $3.8 million deferral of stripping costs at Myra Falls related to the Lynx pit and $2.0 million of prepaid freight associated with concentrate inventory shipped but not priced

- Short-term investments rose by $4.2 million due to an acquisition of shares in certain public companies and mark-to-market adjustments

- Accounts receivable - concentrate decreased by $8.6 million primarily due to higher levels of concentrate inventory shipped but not priced net of price adjustments

- The current portion of future income tax assets rose by $2.0 million primarily due to a $6.1 million increase related to the recognition of the current portion of the Langlois future tax asset recognized in the second quarter of 2007 and a reduction of future tax assets of $3.3 million and $1.2 million at Myra Falls and Toqui respectively

Current Liabilities

Current liabilities increased by $45.9 million to $133.5 million at September 30, 2007 compared with December 31, 2006. The main components of the current liability changes were as follows:

- Provisional payments for concentrate inventory shipped and not priced, which represent payments received for concentrate shipments that were not recognized as revenue, increased by $30.3 million. The balance at September 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

- Accounts payable and accrued liabilities increased by $16.9 million primarily due to $5.1 million of provisional payments returnable to customers related to a fall in metal prices from the time the initial provisional payment was received to September 30, 2007 and a $9.0 million increase in accounts payable and accrued liabilities at Myra Falls due to contractors employed on various capital and development projects

Long-term Investments

At September 30, 2007, long-term investments were $41.9 million, up $27.2 million from $14.7 million at December 31, 2006. The increase was 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 September 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 September 30, 2007, total accrued reclamation and closure costs were $37.2 million compared with $40.6 million at December 31, 2006. Of the $37.2 million, $7.1 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 September 30, 2007



($ millions) Current Long-term Total
------------------------------------------
------------------------------------------
Myra Falls 2.2 23.5 25.7
Mochito 0.0 1.1 1.1
Toqui 0.0 3.4 3.4
Langlois 0.0 1.3 1.3
Bouchard-Hebert 1.8 0.1 1.9
Nanisivik 2.3 0.5 2.8
Bougrine 0.8 0.2 1.0
------------------------------------------
Total 7.1 30.1 37.2
------------------------------------------


The Company spent $2.7 million in reclamation and closure costs in the third quarter of 2007 compared with $2.1 million in the third quarter of 2006. For the first nine months of 2007, the Company spent $5.1 million compared with $5.9 million in the same period of 2006.

Shareholders' Equity

Shareholders' equity at September 30, 2007 was $389.4 million compared with $308.6 million at December 31, 2006. The increase of $80.8 million was primarily due to net earnings of $61.7 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.



Cumul-
ative
Ret- Other trans- Total
Contri- ained compre- lation share
Capital War- buted earn- hensive adjust- holders'
($000's) stock rants surplus ings income ments equity
---------------------------------------------------------------------------
---------------------------------------------------------------------------
As at December
31, 2006 167,093 8,561 793 139,795 - (7,689) 308,553
Adjustment of
opening balance
on adoption of
CICA accounting
policy - - - 5,706 4,291 7,689 17,686
Value ascribed
to options
exercised under
stock-based
compensation 1,046 - (1,046) - - - 0
Employee share
option plan -
proceeds
of options
exercised 2,001 - - - - - 2,001
Employee share
purchase plan 256 - - - - - 256
Exercise of
warrants 6,243 - - - - - 6,243
Stock-based
compensation - - 1,698 - - - 1,698
Cancellation
of shares (211) - 211 - - - 0
Other
comprehensive
loss - - - - (8,753) - (8,753)
Net earnings - - - 61,743 - - 61,743
---------------------------------------------------------------------------
As at September
30, 2007 176,428 8,561 1,656 207,244 (4,462) 0 389,427
---------------------------------------------------------------------------


In the first nine months of 2007, the Company issued the following Common Shares: 2,611,256 following the exercise of employee share options; 131,717 pursuant to the Company's employee share purchase plan; and, 30,884,510 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 $81.0 million in mineral properties and fixed assets in the first nine months of 2007.

At Langlois, $21.5 million was spent consisting primarily of $19.6 million for development for Langlois (including $2.6 million of capitalized exploration), $11.3 million of underground development, preproduction and equipment for Grevet B and $7.1 million for equipment, buildings and mine infrastructure partially offset by $16.7 million of preproduction contribution from mining operations.

Myra Falls' capital expenditures of $18.9 million consisted primarily of $5.5 and $2.2 million for development at Lynx 5/6 and Price, $3.0 million of mobile equipment purchases, $2.6 million of deferred development, $1.9 million for ramp development, $1.8 million for a ventilation raise, $1.0 million for a new tailings disposal area and $0.9 million for building construction and mill equipment.

At Mochito, $16.0 million was spent as follows: $4.5 million for tailings facilities; $3.3 million for mobile equipment; $2.7 million for mine development; $1.9 million for building and services; $1.6 million for equipment; $1.3 million for deferred development; and, $0.6 million of capitalized exploration.

Toqui capital expenditures of $17.1 million consisted of $8.9 million for development (including $5.0 million for Concordia and Porvenir), $2.1 million for mine equipment, $1.5 million for capitalized exploration, $2.8 million for mill equipment and modifications and $1.8 million for service and infrastructure upgrades.

Corporate capital expenditures of $7.5 million were primarily related to earn-in payments made on the Coulon property.

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 SEPTEMBER 30, 2007 AND 2006

Contribution Depreciation,
(loss) from depletion, Capital
mining reclamation and expend-
Net revenue activities(1) closure costs itures
-------------------------------------------------------------------------
($ millions) 2007 2006 2007 2006 2007 2006 2007 2006
-------------------------------------------------------------------------
Myra Falls 21.7 44.1 0.6 16.5 2.3 2.5 7.1 4.7
Mochito 25.1 29.5 17.4 20.7 1.1 1.3 6.2 2.8
Toqui 15.8 8.5 8.5 6.0 0.5 0.2 7.1 1.6
Langlois(3) 3.0 0.0 0.6 0.0 0.6 0.0 (1.3) 10.6
Other 0.0 0.6(2) (0.3) 0.3 0.3 0.3 4.9 1.3
-------------------------------------------------------------------------
Total 65.6 82.7 26.8 43.5 4.8 4.3 24.0 21.0
-------------------------------------------------------------------------
(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 NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006

Contribution Depreciation,
(loss) from depletion, Capital
mining reclamation and expend-
Net revenue activities(1) closure costs itures
-------------------------------------------------------------------------
($ millions) 2007 2006 2007 2006 2007 2006 2007 2006
-------------------------------------------------------------------------
Myra Falls 69.1 112.0 13.4 38.8 6.7 7.1 18.9 13.3
Mochito 78.8 68.7 56.4 43.9 3.5 4.3 16.0 7.5
Toqui 50.7 37.2 29.5 24.3 3.2 1.7 17.1 7.2
Langlois(3) 3.0 0.0 0.6 (0.1) 0.7 0.1 21.5 19.0
Other 0.0 (3.8)(2) (0.6) (4.7) 0.6 0.9 7.5 1.3
-------------------------------------------------------------------------
Total 201.6 214.1 99.3 102.2 14.7 14.1 81.0 48.3
-------------------------------------------------------------------------
(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

The table below contains the Company's production for periods presented. Production results include the production from Langlois since January 2007. For accounting purposes, production from Langlois was not recognized on the income statement until the commencement of commercial production - July 1, 2007.



All Mines Third Quarter First Nine Months
2007 2006 2007 2006
--------------------------------------------------------------------------
Ore Milled (tonnes) 569,923 455,650 1,709,639 1,475,625
Zinc (%) 6.3 6.3 5.9 6.0
Concentrate Production (tonnes)
Zinc 61,740 50,241 175,686 153,277
Copper 6,737 4,156 23,788 17,219
Lead 3,259 4,252 11,943 12,024
Gold 1,386 771 4,196 2,935
Metal in Concentrates
Zinc (tonnes) 32,111 25,752 90,244 78,884
Copper (tonnes) 1,423 958 5,259 4,066
Lead (tonnes) 2,108 2,922 7,904 8,211
Silver (ounces) 679,797 674,161 2,212,115 2,023,048
Gold (ounces) 11,510 12,160 43,423 43,762
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Aggregate production of zinc in concentrate in the third quarter of 2007 was 70.7 million pounds compared with 56.8 million pounds in 2006, 24.5% higher. The increase was due to production from Langlois partially offset by lower production at the other operations.



Zinc Production (million
pounds of zinc contained
in concentrate) Third Quarter First Nine Months
-------------------------------------------------------------------
2007 2006 % 2007 2006 %
-------------------------------------------------------------------
Myra Falls 15.0 17.6 (14.8%) 50.0 59.6 (16.1%)
Mochito 16.6 18.3 (9.3%) 50.9 61.9 (17.8%)
Toqui 18.2 20.9 (12.9%) 51.6 52.4 (1.5%)
Langlois(a) 20.9 0.0 - 46.4 0.0 -
-------------------------------------------------------------------
Total zinc production 70.7 56.8 24.5% 198.9 173.9 14.4%
-------------------------------------------------------------------
(a) First concentrate shipped November 2006 and considered
to be at commercial production levels effective July 1, 2007.


Production of copper in concentrate rose 47.6% in the third quarter of 2007 from the same period in 2006 due to production from Langlois, which was not in production during the third quarter of 2006.



Copper Production (million
pounds of copper contained
in concentrate) Third Quarter First Nine Months
---------------------------------------------------------------------
2007 2006 % 2007 2006 %
---------------------------------------------------------------------
Myra Falls 2.1 2.1 - 9.5 10.1 (5.9%)
Langlois(a) 1.0 - - 1.9 - -
---------------------------------------------------------------------
Total copper production 3.1 2.1 47.6% 11.4 10.1 12.9%
---------------------------------------------------------------------
(a) First concentrate shipped November 2006 and considered to be
at commercial production levels effective July 1, 2007.


Production of lead in concentrate fell 28.1% during the third quarter of 2007 due to fewer tonnes milled at Mochito with a lower lead grade.



Lead Production (million
pounds of lead contained
in concentrate) Third Quarter First Nine Months
---------------------------------------------------------------
2007 2006 % 2007 2006 %
---------------------------------------------------------------
Mochito 4.6 6.4 (28.1%) 17.4 18.0 (3.3%)
---------------------------------------------------------------
Total lead production 4.6 6.4 (28.1%) 17.4 18.0 (3.3%)
---------------------------------------------------------------


Silver in concentrate increased 0.8%, quarter over quarter due to higher silver production at Mochito and Toqui, related to higher grades more than offsetting lower mill throughput and production from Langlois, partially offset by lower silver grades at Myra Falls.



Silver Production (ounces
of silver contained
in concentrate) Third Quarter First Nine Months
--------------------------------------------------------------------------
2007 2006 % 2007 2006 %
--------------------------------------------------------------------------
Myra Falls 162,387 237,348 (31.6%) 677,970 685,074 (1.0%)
Mochito 425,622 421,510 1.0% 1,333,837 1,287,073 3.6%
Toqui 42,912 15,303 180.4% 92,384 50,901 81.5%
Langlois(a) 48,876 - - 107,924 - -
--------------------------------------------------------------------------
Total silver
production 679,797 674,161 0.8% 2,212,115 2,023,048 9.3%
--------------------------------------------------------------------------
(a) First concentrate shipped November 2006 and considered to be at
commercial production levels effective July 1, 2007.


Gold in concentrate decreased 4.7% in the third quarter of 2007 from the same period in 2006 due to lower gold grades at Myra Falls partially offset by higher grades at Toqui.



Gold Production (ounces
of gold contained
in concentrate) Third Quarter First Nine Months
--------------------------------------------------------------------
2007 2006 % 2007 2006 %
--------------------------------------------------------------------
Myra Falls 3,699 5,231 (29.3%) 15,190 16,777 (9.5%)
Toqui 7,811 6,929 12.7% 28,233 26,985 4.6%
--------------------------------------------------------------------
Total gold production 11,510 12,160 (5.3%) 43,423 43,762 (0.8%)
--------------------------------------------------------------------


Myra Falls Production

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



Third Quarter First Nine Months
--------------------------------------
2007 2006 2007 2006
--------------------------------------------------------------------------
Ore Milled (tonnes) 156,094 151,838 544,420 548,255
Zinc (%) 5.1 6.0 4.9 5.7
Copper (%) 1.0 0.9 1.1 1.0
Silver (g/t) 39 61 46 50
Gold (g/t) 1.1 1.5 1.3 1.6
Concentrate Production
Zinc (tonnes) 12,881 15,373 43,379 51,952
Zinc Recovery (%) 86.0 87.5 85.7 86.1
Zinc Grade (%) 53.0 52.0 52.3 52.1
Gold Recovery (%) 27.6 21.8 22.5 18.4
Gold Grade (g/t) 4.0 3.2 3.8 3.1
Copper (tonnes) 4,422 4,156 19,356 17,219
Copper Recovery (%) 71.6 67.6 76.3 73.4
Copper Grade (%) 21.9 23.0 22.5 23.6
Gold Recovery (%) 36.3 30.4 41.5 27.8
Gold Grade (g/t) 14.8 16.0 15.7 14.0
Gold (tonnes) - 1.3 0.4 12.7
Recovery (%) - 10.4 3.2 10.9
Grade (g/t) - 10,629 9,400 9,534
Metal in Concentrates
Zinc (tonnes) 6,818 7,992 22,686 27,057
Copper (tonnes) 958 958 4,347 4,066
Silver (ounces) 162,387 237,348 677,970 685,074
Gold (ounces) 3,782 5,231 15,190 16,777
Total cash costs per lb.
payable zinc sold (US$) 1.10 0.67 0.91 0.61
--------------------------------------------------------------------------


Production of zinc in concentrate was 14.7% lower in the third quarter of 2007 compared with the same period in 2006 and 23.5% lower than the second quarter of 2007 due to fewer tonnes milled at lower zinc grades.

Myra Falls Outlook

The Surface Ramp broke through into the Lynx 15 level providing sufficient volumes of fresh air to the western extremities of the Battle Gap Mine to allow additional haulage equipment into the stoping areas and for development to the north and west. A new ventilation raise was driven from the Gopher zone up to the 18-155 drift to bring additional ventilation into the Gopher and Main zones which are expected to be the main mining areas for the next two to three years. Production in the third quarter of 2007 was lower than anticipated due to: the long delivery time of additional haulage trucks which will be put into production during the fourth quarter of 2007; damage to a drill jumbo caused by a blasting incident; and, delays in hoisting mined material due to longer tramming distances due to the plugging of the main ore pass. The mining of some of the higher grade open pit material, anticipated in the third quarter of 2007, was delayed due to pit wall instability which has been addressed and the copper zone from the open pit has now been mined with the zinc zone to be mined before year end. The geology department has reinterpreted the mineralization in the Lynx 5 area and mining will begin in the fourth quarter of 2007. Development of Price is ongoing with production expected in 2008.

The diamond drill program from 18 level towards the Marshall zone experienced difficulties associated with directional drilling and accordingly the program was abandoned. In September 2007, drill access was gained to the Lynx 15 level from where some of the original discovery holes for the Marshall zone were drilled. Drilling conditions on the Lynx 15 level appear to be favourable and the Company moved the rigs to this location to continue the program with results expected before the end of the year.

The definition drill program identified extensions of the Track, Bornite, and HW upper zinc zones and is expected to further extend these zones.

The construction of the new tailings facility is on schedule for completion in 2008.



Mochito Production
Mochito's production is set out in the following table.

Third Quarter First Nine Months
--------------------------------------
2007 2006 2007 2006
---------------------------------------------------------------------------
Ore Milled (tonnes) 150,031 166,723 456,434 518,874
Zinc (%) 5.7 5.5 5.7 6.0
Lead (%) 1.8 2.1 2.2 2.0
Silver (g/t) 101 90 105 89
Concentrate Production
Zinc (tonnes) 14,274 15,855 44,549 53,687
Recovery (%) 89.7 90.1 89.3 90.6
Grade (%) 52.8 52.2 51.8 52.3
Lead (tonnes) 3,259 4,252 11,943 12,024
Recovery (%) 79.6 81.7 79.0 81.0
Grade (%) 64.7 68.7 66.2 68.3
Metal in Concentrates
Zinc (tonnes) 7,551 8,282 23,094 28,068
Lead (tonnes) 2,108 2,922 7,904 8,211
Silver (ounces) 425,622 421,510 1,333,837 1,287,073
Total cash costs per lb.
payable zinc sold (US$) (0.38) 0.44 (0.24) 0.33
---------------------------------------------------------------------------


As planned, milled tonnage declined during the third quarter of 2007 compared with 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 third quarter of 2007 compared with the same period in 2006 due to fewer tonnes milled partially offset by higher grades while production of lead in concentrate was lower due to fewer tonnes milled and lower lead grades.

Mochito Outlook

On October 18, 2007, Breakwater announced that it had discovered a discharge of water from the newly commissioned Soledad tailings impoundment area which necessitated a suspension of milling at Mochito. A preliminary evaluation of the situation has determined that recommissioning the Pozo Azul tailings impoundment area, for which permitting remains in place, will be the quickest method of returning Mochito to full production.

The Company is conducting a test in the mill to determine the optimum reagent mix required to control the levels of copper in the effluent of Pozo Azul. If the reagent test is successful, as determined by the production of saleable concentrates, then the mill will be able to run at full capacity while the ultimate capacity of Pozo Azul is being increased. If the test is not successful, then Mochito will only be able to mill intermittently, dependent on water levels in Pozo Azul. Accordingly, the Company is unable to provide production guidance. Enlargement of the Pozo Azul tailings impoundment area is expected to provide up to 24 months of storage. The Company is currently unable to estimate the construction time to enlarge Pozo Azul, as it is largely weather dependent.

At Soledad, the water level was lowered and the discharge of water has stopped. Based on monitoring conducted to date, there are no indications of any adverse impacts on receiving waters including Lake Yojoa. Plans are still being formulated to determine the nature of the repairs required for Soledad.

Earlier this year, a bank of flotation cells was added to the lead circuit for use when lead grades exceed 2.0%. Once milling has returned to normal, these flotation cells will be used exclusively while the existing cells undergo maintenance.

The collective bargaining agreement at Mochito was renewed for three years.

The Company continued drilling to identify new mineral resources in several areas of the mine. Manto mineralization extending northeast of the Santo Nino area was identified in the third quarter of 2007 and drilling in this area, including the Santo Nino Chimney, will be carried out during the remainder of the year.

A drill program to test the area east of Mochito, called the Deep East, began in the third quarter of 2007. Drilling has encountered both manto and chimney-style mineralization extending east from the Santo Nino area and this campaign is expected to continue through the remainder of 2007.

Exploration drilling continues to confirm the existence of manto-style mineralization of economic interest connecting areas between the Salva Vida, San Jose and Yojoa orebodies. Drilling planned for the fourth quarter of 2007 will focus on defining the extent of mineralized manto northward toward the Salva Vida and San Jose areas.

Drilling began in the third quarter of 2007 in the Nacional SW area with the objective of upgrading inferred resources to indicated resources. This drilling is expected to establish the continuity of manto-style mineralization between the La Leona and Nacional areas of the mine.

During the fourth quarter of 2007, exploration drilling is planned to test the southern extension of manto-style mineralization in the Nacional area. This area, known as Manto Sur, was discovered during previous exploration and its economic viability is being re-examined. Drilling from Manto Sur will test extensions of mineralization toward the southwest in the El Raton area.

Exploration continues to test the Big Fuzzy target. Step-out drilling is focusing to the west of a hole that encountered lead/zinc manto-style mineralization. More drilling is planned in the fourth quarter of 2007 and a grid of soil geochemical samples will be extended to the east and north of the initial hole.



Toqui Production
Toqui's production is set out in the following table.

Third Quarter First Nine Months
--------------------------------------
2007 2006 2007 2006
---------------------------------------------------------------------------
Ore Milled (tonnes) 131,123 137,089 389,593 408,496
Zinc (%) 7.1 7.6 6.7 6.4
Gold (g/t) 2.3 1.8 2.8 2.3
Concentrate Production
Zinc (tonnes) 16,711 19,013 47,509 47,638
Recovery (%) 90.0 91.0 90.0 90.7
Grade (%) 49.5 49.9 49.4 49.9
Gold (tonnes) 1,386 770 4,196 2,922
Recovery (%) 47.6 71.4 55.5 69.5
Grade (g/t) 117.1 198.1 136.2 206.3
Metal in Concentrates
Zinc (tonnes) 8,278 9,478 23,469 23,759
Silver (ounces) 42,912 15,303 92,384 50,901
Gold (ounces) 7,811 6,929 28,233 26,985
Total cash costs per lb.
payable zinc sold (US$) 0.76 0.71 0.77 0.59
---------------------------------------------------------------------------


Fewer tonnes were milled during the third quarter of 2007 than the same period in 2006 due to a planned shutdown of ball mill # 2, and abnormally severe winter conditions which caused pipeline freezeups which hampered mill operations in September 2007. The newly installed Gekko plant, which treats Toqui gold/silver concentrate in a three stage process involving intensive leaching in a rotary intense leach reactor; electrowinning the metal to cathode; and smelting the cathode to dore for sale to the market, produced its first dore in April 2007. Efforts are focussed on optimizing gold and silver production. A gold recovery consulting firm has been retained to assist in these efforts.

Production of zinc in concentrate dropped during the third quarter of 2007 compared with the same period in 2006 due to milling fewer tonnes and lower grades, while the Company produced more gold due to higher grades and better recovery in the gold and lead concentrates. Zinc and lead grades are expected to increase as more Concordia material is mined in the last quarter of 2007.

Production commenced in Concordia North and decline development is proceeding towards Concordia South. The Concordia deposits will be an integral part of production in 2008.

Underground programs, of about $5.0 million for capital development and $4.0 million for underground mobile equipment replacements, are both on schedule. The new mine offices are complete and construction of a new surface mine shop, a new geological office and a new supervisors' accommodation is underway. Installation, training, and implementation of a new enterprise resource planning software was completed. Projects relating to tailings pastefill for underground and the new tailings impoundment facility were advanced and other projects are in progress in an effort to ensure that the appropriate infrastructure is in place to allow efficient construction of a new mill, should the prefeasibility study be positive.

The Company has selected a mining contractor to develop Porvenir. Excavation work has commenced. The Company expects to take 16 months to develop Porvenir with production expected in early 2009.

Toqui Outlook

The collective bargaining agreement at Toqui was renewed for three years effective October 1, 2007. Management's goal was to secure a three-year agreement to ensure that there is labour harmony during any construction period related to the possible construction of a new mill at El Toqui.

The new lead flotation circuit expansion is expected to be operational in the fourth quarter of 2007 which is expected to improve lead concentrate production.

Engineering studies and plans have started for the construction of a paste backfill plant as well as the basic study of a new tailings impoundment area, based on paste tails deposition.

A $10 million exploration budget for 2007 includes drilling as a major component to test some high-priority regional targets outside of the defined deposits within a defined NW-SE anomalous trend. Drilling results continue to support the recent decision to commence a pre-feasibility study for a 1.0 million tonne per annum mill. Toqui is constrained by the capacity of its mill which runs at 1,475 tonnes per day or approximately 540,000 tonnes per annum.

To the end of the third quarter of 2007, Toqui had completed about 42.6 kilometres of drilling in more than 140 holes which resulted in the discovery of new mineralized zones aligned along the known NW-SE trend that crosses through the Toqui district as well as confirming the shape and continuity of Porvenir and Concordia.

During the third quarter of 2007, five diamond drills carried out approximately 16.3 kilometres of in-fill, extensional and exploration drilling at Toqui. Sixty-four holes were drilled on the Porvenir deposit, due south of Aserradero, and on the south block of Concordia, located north-west of Estatuas. Exploration drilling also tested new areas east and south-east of Concordia, south-east of Porvenir, south-south-west of Porvenir and, at Cerro Elefante on the north-west of the Toqui property.

At Porvenir, the Company proved mineralization is continuous along a NW-SE trend and down dip. The strength of the mineralization in this area indicates there is potential for a significant Zn/Au deposit located parallel to the Aserradero gold skarn deposit. A new drill program is currently underway 250 metres south-west of Porvenir, within the area known as Los Boldos. Recently, the Company compiled information that deals with the potential of this area. Based on older information, soil geochem anomalies, and basic alteration zonation patterns, there is potential for a repeat of the Porvenir-type mineralized system in this area.

The latest drill results from Porvenir southeast indicate the potential for a larger extended NW-SE mineralized system. The southeast extension of Porvenir has been outlined as one of the most promising untested areas in the district. It comprises a mineralized main manto of about 10 to 14 metres thick, containing higher gold grades and lower zinc grades, similar to the Aserradero deposit.

Exploration drilling has shown encouraging results in other areas of the district, including an area located 300 metres east of the Concordia deposit. Additional exploration drilling is following up the mineralization in order to connect Concordia with the area known as Cerro Elefante/Mallines.

Exploration diamond drilling is now under way on a 2.5 kilometre by 1.0 kilometre area that connects the Concordia deposit with the north and north-west sectors of the formerly producing parts of the Dona Rosa mine. This area, known as the Catedral Project, is targeted for 15.0 kilometres of drilling over the next few months.

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 319,192 tonnes milled during the first nine months of 2007.

The quality of the concentrate increased steadily throughout the third 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 third quarter of 2007, a ramp was started from level 9 to access Zone 97 between level 9 and level 4 as well as a decline to access Zone 97 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 third quarter of 2007 also included the processing of material from the Grevet B deposit, located three kilometres south-east of Langlois. The Certificate of Authorization was received from the Ministere du Developpement durable, de l'Environnement et des Parcs for the Grevet B mine earlier this year 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, one for exploration of Zone 5, two focused on the lower portion of Zone 97, one focused on the Contact Zone, east of Grevet B and west of Orphee, and one on Grevet B.



The following table sets forth Langlois' production for the 2007 periods
presented.

Third Quarter First Nine Months
--------------------------------------------------------
Ore Milled (tonnes) 132,675 319,192
Zinc (%) 7.8 7.3
Copper (%) 0.5 0.4
Silver (g/t) 28 29
Concentrate Production
Zinc (tonnes) 17,874 40,249
Recovery (%) 91.4 90.5
Grade (%) 53.2 52.2
Copper (tonnes) 2,315 4,432
Recovery (%) 73.7 69.6
Grade (%) 20.1 20.6
Metal in Concentrates
Zinc (tonnes) 9,464 20,995
Copper (tonnes) 465 912
Silver (ounces) 48,876 107,924
--------------------------------------------------------
Total cash costs per lb.
payable zinc sold (US$) 0.72 n/a
--------------------------------------------------------


Langlois Outlook

A 50.4 kilometre drill program is 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 two kilometres along the strike of the Langlois deposit to a depth of 800 metres below surface. One objective of this program is to upgrade 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. To September 30, 2007, 44.1 kilometres have been completed.

During the third quarter of 2007, 16.2 kilometres of drilling were completed with five drills. Zones 1, 3, 4, 5 and 97 near surface and underground extensions were drilled from both surface and underground.

At Zone 3, economic mineralization appears to extend to surface and consequently a new resource estimate from surface to 130 metres below surface was prepared as reported on September 18, 2007. A subsequent infill drilling program has been carried out in order to upgrade some inferred resources into the indicated category. Holes were drilled between levels 6 and 8 to decrease the spacing between holes and results to date confirm that the mineralization in this area of Zone 3 is economic.

Zone 4 was also drilled from underground to delineate its western extension between levels 3 and 5. Economic mineralization was encountered extending the current resource limit of the zone at least 200 metres along strike and 50 metres vertically. Drilling continues and this sector will be included in the next resource estimation.

Drilling on Zone 5 has successfully outlined a westerly dipping volcanogenic massive sulphide ("VMS") lens. The Company will conduct a second phase of drilling in the fourth quarter of 2007 to build geological confidence and to bring Zone 5 to a resource evaluation basis which will lead to a pre-feasibility study by the end of the year. A request for a bulk sampling permit for Zone 5 was filed in the third quarter of 2007. Mining and milling this bulk sample should provide Langlois 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 fourth quarter of 2008.

Zone 97 was tested from level 13 underground and the area, located about 200 metres west of the known Zone 97, continues to show economic mineralization. During the third quarter of 2007, 3.8 kilometres were drilled from level 11 to below level 13 and the mineralization is still open at depth and to the east.

Fifteen in-fill holes were completed during the quarter at Grevet B for a total of 1.2 kilometres of drilling. The main purpose of the program was to determine the economic limits of the bottom portion of lens 100 and the top portion of lens 200. The Company will use the results from this program to refine the design of stopes in this area and to guide the development on level 74.

During 2007, reinterpretation and re-modeling of all of the zones was carried out taking into account 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 the third quarter, all interpretation was completed and work was started on a fully integrated 3D block model. By the end of 2007, this work should be complete. It is expected that a fully integrated 3D block model will greatly assist all mine applications, especially the estimation of new resources and reserves.

During the fourth quarter of 2007, underground drilling is expected to test the west extension of Zone 4 between levels 3 and 6. As well, drilling is expected to test the newly identified Zone 97 west extension. This drilling will be carried out from level 13 as development headings allow. Zone 3 west extensions between level 6 and 8 will also be tested before year end, again, as development allows. Additional drilling will be required in this area in order to upgrade the inferred resources to the reserve category. Zone 97 surface and east extensions will be drilled from surface to confirm a satellite zone in close proximity to surface.

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 nine kilometres from the Langlois mill, could provide additional mill feed for Langlois, which currently has excess mill capacity. The Company conducted a delineation drilling program over the western part of the Orphee deposit, for which it owns 100% of the mining rights, in order to enhance the prefeasibility study. A phase II delineation program will be conducted over the western part of the Orphee deposit during the fourth quarter of 2007.

Coulon Project

During the third 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 and amended in September 2007, the Company has the option to acquire a 50% interest in the Coulon property in return for $7.5 million in exploration expenditures and payments totalling $180,000 over an eight-year period. The September 2007 amendment not only increased the exploration spend by $1.0 million but it expanded the land package to include Virginia's Fontanges Sud and Coulon Pitaval properties as well as 1,981 new claims covering all the prospective stratigraphy of the Coulon Volcanic Belt ("CVB"). The Coulon property now consists of 3,250 claims covering more than 90 kilometres of the CVB. A third deep drilling rig was mobilized during the third quarter of 2007 to accelerate exploration work. In the fourth quarter of 2007, two deep rigs will focus on delineating additional resources within lenses 43, 44 and 9-25 and a heliborne survey will explore for new drill targets on a regional scale. The Company fulfilled its earn-in commitments in mid-October 2007.

Drill results released by Virginia during the third quarter of 2007 indicated continuity of the Coulon mineralized system over more than 20 kilometres along strike with the discovery of a new showing. The Spirit showing consists of semi-massive to massive sulphide mineralization rich in chalcopyrite and sphalerite, with slighter quantities of galena, hosted by sillimanite gneisses representing metamorphosed felsic volcanics. The electromagnetic conductor can be traced over a lateral distance of 80 metres, in a general north-south direction, and in a thickness of 4 to 7 metres. This conductor remains open laterally since it disappears at both ends under a thick overburden which is greater than the investigation depth of the electromagnetic survey. Three unexplained, airborne EM conductors lie in the vicinity of the Spirit showing. Lens 43 is now confirmed over a lateral distance of 340 metres and a vertical depth of 380 metres and it is still open at depth. Lens 44 and 9-25 have been intercepted at depths to 380 and 550 metres respectively and both are also open at depth.

Trieste Project

On September 14, 2007, the Company signed an 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 of 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.

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. This earnings release and the third quarter 2007 financial statements of the Company discuss the components not included in this non-GAAP measure.



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


Third Quarter First Nine Months
--------------------------------------------------------------------------
2007 2006 2007 2006
--------------------------------------------------------------------------
By-product credit ($ millions)
Gross sales revenue per financial
statements (87.5) (112.0) (268.9) (293.8)
Less zinc sales revenue 56.0 76.5 173.3 203.2
--------------------------------------------------------------------------
(31.5) (35.5) (95.6) (90.6)
Treatments and marketing charges
($ millions) per financial statements 22.0 29.4 67.3 79.8
Direct operating costs ($ millions) per
financial statements 33.9 34.9 87.7 97.8
--------------------------------------------------------------------------
Total cash costs - C$ (millions) 24.4 28.8 59.4 87.0
C$/US$ exchange rate 1.0644 1.1230 1.1118 1.1390
--------------------------------------------------------------------------
Total cash costs - US$ (millions) 23.0 25.6 53.4 76.4

Zinc pounds sold (millions) 37.2 44.7 101.3 143.9

Total cash cost per pound of payable
zinc sold (US$)
By-product credit (0.79) (0.70) (0.85) (0.56)
Treatment and marketing costs 0.56 0.58 0.60 0.49
Direct operating costs 0.85 0.69 0.78 0.60
--------------------------------------------------------------------------
Total 0.62 0.57 0.53 0.53
--------------------------------------------------------------------------



SUMMARY OF QUARTERLY RESULTS

2005 2006 2006 2006 2006 2007 2007 2007
Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3
---------------------------------------------------------------------------
Gross sales revenue
($ millions) 57.4 80.7 101.2 112.0 158.3 77.9 103.4 87.5
Net earning (loss)
($ millions) 9.3 38.3 28.6 39.2 50.4 15.3 38.7 7.8
Basic earnings per
share $0.02 $0.10 $0.08 $0.10 $0.13 $0.04 $0.09 $0.02
Weighted-average
number of Common
Shares outstanding
(millions) 374.2 382.0 383.8 384.3 385.0 396.4 418.0 418.7
Diluted earnings per
share $0.02 $0.09 $0.07 $0.09 $0.12 $0.04 $0.09 $0.02
C$/US$ realized
exchange rate 1.1744 1.1559 1.1239 1.1187 1.1422 1.1683 1.0914 1.0374
Average realized
zinc price (US$/t) 1,502 2,221 2,895 3,363 4,227 3,434 3,710 3,200
Average realized
zinc price (C$/t) 1,764 2,567 3,226 3,762 4,828 4,012 4,049 3,320
Concentrate tonnes
sold(a) 60,391 67,355 59,779 61,385 73,230 39,333 51,553 50,748
Concentrate tonnes
produced(b) 68,841 66,129 59,906 59,420 67,058 66,895 75,596 73,122
---------------------------------------------------------------------------
(a) Excludes tonnes sold from Langlois prior to the commencement of
commercial production on July 1, 2007.
(b) 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 earnings 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 nine 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. 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 October 30, 2007
-------------------------------------------------------------------
-------------------------------------------------------------------
Issued and outstanding 419,559,000
Share options outstanding weighted-average
exercise price $1.35 8,041,143
Warrants granted at $1.00, expire January 28, 2009
- traded on TSX 33,488,329
-------------------------------------------------------------------
Future fully diluted 461,088,472
-------------------------------------------------------------------


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 Annual Information Form filed with the Canadian securities regulators, a copy of which is posted on the SEDAR website at www.sedar.com.

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.



BREAKWATER RESOURCES LTD.
Consolidated Balance Sheets

(Expressed in thousands of Canadian dollars)
(Unaudited)
---------------------------------------------------------------------------
September 30, December 31,
2007 2006
---------------------------------------------------------------------------
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Assets

Current
Cash and cash equivalents 80,882 81,412
Restricted cash 629 1,221
Short-term investments 8,274 4,120
Accounts receivable - concentrate 4,065 12,687
Other receivables 15,673 12,676
Concentrate inventory 76,822 43,686
Materials and supplies inventory 27,239 22,904
Prepaid expenses and other current assets 10,089 4,029
Future income tax assets 16,762 14,745
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Total current assets 240,435 197,480

Future income tax assets, long-term 14,110 13,440
Reclamation deposits 13,500 13,500
Mineral properties and fixed assets 260,625 207,884
Long-term investments 41,928 14,704
Restricted promissory notes 62,285 62,285
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632,883 509,293
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Liabilities and Shareholders' Equity
Current
Accounts payable and accrued liabilities 59,999 43,128
Provisional payments for concentrate inventory
shipped and not priced 54,505 24,246
Short-term debt including current portion of
long-term debt 190 2,169
Income and mining taxes payable 11,696 9,798
Current portion of reclamation, closure cost
accruals and other environmental obligations 7,082 8,267
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Total current liabilities 133,472 87,608

Deferred income 5,819 6,277
Long-term lease obligations 305 501
Royalty obligations 62,479 62,479
Long-term debt 1,851 -
Reclamation, closure cost accruals and other
environmental obligations 30,164 32,293
Employee future benefits 3,304 4,493
Future income tax liabilities 6,062 7,089
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Total liabilities 243,456 200,740
Shareholders' equity 389,427 308,553
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632,883 509,293
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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 Nine Months Ended
For the periods ended September 30 2007 2006 2007 2006
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---------------------------------------------------------------------------
(restated) (restated)
Gross sales revenue 87,532 112,037 268,880 293,897
Treatment and marketing costs 22,036 29,380 67,267 79,769
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Net revenue 65,496 82,657 201,613 214,128
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Operating costs
Direct operating costs 33,895 34,894 87,675 97,885
Depreciation and depletion 3,802 3,384 11,946 11,319
Reclamation and closure costs 1,002 866 2,724 2,751
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38,699 39,144 102,345 111,955
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Contribution from mining activities 26,797 43,513 99,268 102,173
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Other expenses (income)
General and administrative 4,013 3,203 11,407 10,419
Interest and financing 975 1,071 3,108 4,009
Investment and other income (4,919) (1,933) (11,561) (5,236)
Other 3,336 (197) 9,965 403
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3,405 2,144 12,919 9,595
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Earnings before the following: 23,392 41,369 86,349 92,578
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Exploration expenses 5,284 2,584 10,875 7,075
Other non-producing property costs 546 (12,867) 1,452 (10,200)
Income and mining tax provision
(recovery) 9,788 12,468 12,279 (10,407)
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15,618 2,185 24,606 (13,532)
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Net earnings 7,774 39,184 61,743 106,110
Retained earnings (deficit),
beginning of period 199,470 50,191 139,795 (189,663)
Changes in accounting policy - - 5,706 -
Reduction of stated share capital
and contributed surplus - - - 172,928
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Retained earnings, end of period 207,244 89,375 207,244 89,375
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Basic earnings per Common Share 0.02 0.10 0.15 0.28
Diluted earnings per Common Share 0.02 0.09 0.14 0.25
Basic weighted-average number of
Common Shares outstanding (000's) 418,693 384,335 411,038 383,323
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BREAKWATER RESOURCES LTD.
Consolidated Statement of Accumulated Other Comprehensive Income (Loss)
(Expressed in thousands of Canadian dollars)
(Unaudited)
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For the nine month period ended September 30 2007
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--------------------------------------------------------------------------

Accumulated other comprehensive income, beginning of period 11,980
Reclassification of cumulative translation adjustments (7,689)
Other comprehensive loss (8,753)
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Accumulated other comprehensive loss, end of period (4,462)
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BREAKWATER RESOURCES LTD.
Consolidated Statements of Other Comprehensive Income
(Expressed in thousands of Canadian dollars)
(Unaudited)
---------------------------------------------------------------------------
Three Months Nine Months
Ended Ended
For the periods ended September 30 2007 2007
---------------------------------------------------------------------------
---------------------------------------------------------------------------

Net earnings 7,774 61,743
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Other comprehensive income (loss), net of income
taxes:
Unrealized losses on translating financial
statements of self sustaining foreign
operations (4,636) (9,573)
Unrealized loss on short-term available-for-sale
securities, net of income tax provision of
$63,000 (3 months - $22,000) (112) (322)
Unrealized gain on long-term available-for-sale
securities, net of income tax provision of
$226,000 (3 months - $139,000) 698 1,142
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Other comprehensive loss, net of income taxes (4,050) (8,753)
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Comprehensive income
3,724 52,990
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BREAKWATER RESOURCES LTD.
Consolidated Statements of Cash Flow
(Expressed in thousands of Canadian dollars)
(Unaudited)
---------------------------------------------------------------------------
Three Months Ended Nine Months Ended
For the periods ended September 30 2007 2006 2007 2006
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Operating Activities (restated) (restated)
Net earnings 7,774 39,184 61,743 106,110
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Items not affecting cash:
Depreciation and depletion 3,802 3,384 11,946 11,319
Gain on sale of investment - - (306) -
Gain on sale of property - (13,818) - (13,818)
Unrealized gain on investments (3,098) (276) (8,333) -
Other non-cash items 319 (713) 116 (475)
Stock-based compensation 617 182 1,698 1,201
Issue of Common Shares to settle
litigation - - - 848
Unrealized deferred income (152) (152) (458) (458)
Future income taxes 2,957 9,720 (3,832) (14,966)
Reclamation, closure cost accruals
and other environmental
obligations 1,002 866 2,724 2,751
Employee future benefits 372 636 1,138 1,523
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5,819 (171) 4,693 (12,075)
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Payment of reclamation, closure cost
accruals and other environmental
obligations (2,701) (2,137) (5,078) (5,858)
Payment of employee future benefits (815) (764) (2,327) (2,254)
Changes in non-cash working capital
items (3,158) 4,173 17,443 24,131
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Net cash provided by operating
activities 6,919 40,285 76,474 110,054
---------------------------------------------------------------------------

Investing Activities
Reclamation deposits - 5,952 - (6,727)
Short-term investments (6,088) (2,341) (5,055) (36)
Mineral properties and fixed assets (23,980) (20,961) (81,016) (48,329)
Proceeds from sale of fixed assets - 86 290 294
---------------------------------------------------------------------------
Net cash used in investing
activities (30,068) (17,264) (85,781) (54,798)
---------------------------------------------------------------------------

Financing Activities
Decrease in restricted cash 425 2,474 592 2,251
Issue of Common Shares for cash 725 75 8,502 1,065
Deferred financing fees - - - (223)
Decrease in long-term lease
obligations (53) - (196) (248)
Increase (decrease) in short-term
debt 4 (2,492) (121) (13,417)
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Net cash provided by (used in)
financing activities 1,101 57 8,777 (10,572)
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Net (decrease) increase in cash
during the period (22,048) 23,078 (530) 44,684
Cash and cash equivalents, beginning
of period 102,930 40,355 81,412 18,749
---------------------------------------------------------------------------
Cash and cash equivalents, end of
period 80,882 63,433 80,882 63,433
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Supplemental Information
Cash interest paid 26 47 261 630
Cash income and mining taxes paid 6,052 82 18,344 425
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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
    Website: www.breakwater.ca