Breakwater Resources Ltd.
TSX : BWR

Breakwater Resources Ltd.

February 22, 2007 17:42 ET

Breakwater Resources Ltd.'s Year-End and Fourth Quarter Financial and Operating Results

TORONTO, ONTARIO--(Marketwire - Feb. 22, 2007) -

Attention Business/Financial Editors:

Breakwater Resources Ltd. (TSX:BWR)

All dollar amounts in this news release are in Canadian dollars unless otherwise stated.



HIGHLIGHTS

- The Company realized net earnings of $156.5 million or $0.41 per
share in 2006 compared with $14.0 million or $0.04 per share in 2005,
a $142.5 million increase
- The contribution from mining activities was $168.5 million in 2006
compared with $29.6 million in 2005
- Net cash provided by operating activities increased by $139.8 million
to $158.5 million in 2006 and was primarily used for $75.7 million of
capital expenditures and $16.6 million of debt repayment
- At December 31, 2006, cash and cash equivalents were $81.4 million
and total debt was $2.7 million
- Gross sales revenue increased by 44.5% to $452.2 million in 2006 from
$313.0 million in 2005
- Development of the Langlois mine is on track to commence commercial
production by mid-2007
- Mineral reserves at Langlois increased by 10% and mineral resources
increased by 14% through the addition of the Grevet B deposit
- Exploration success at Langlois prompted the Company to stake an
additional 4,000 hectares surrounding the Company's land package
- Development of El Toqui's Concordia deposit is on track and
production is anticipated by mid-2007
- On the Coulon joint venture with Virginia Mines Inc., exploration
carried out during 2006 led to the discovery of two new significant
polymetallic lenses, bringing the total known lenses to five, and
confirmed the vertical continuity of lens 9-25 to a depth of 365
metres


Reserves and Resources

On February 22, 2007 the Company released its 2006 mineral reserve and mineral resource statement to the public. References in this news release to 2006 mineral reserves and resources should be read in conjunction with that news release.

OUTLOOK



In 2007, the Company plans to:
- Invest in capital projects to increase the productivity, efficiency
and effectiveness of the Company's operations
- Substantially increase the investment in overall exploration
- Advance mine exploration and development to significantly increase
reserves and resources, both quantitatively and qualitatively,
specifically at Langlois and El Toqui
- Commence commercial production at the Langlois mine and
Concordia deposit
- Acquire value added projects or assets

The Company's projected payable metals production for 2007 is:

Zinc 121,700 tonnes
Copper 8,000 tonnes
Lead 12,500 tonnes
Silver 2,002,000 ounces
Gold 43,000 ounces

These projections are based on the following:

-------------------------------------------------------------------------
All
Myra Falls El Mochito El Toqui Langlois(1) Operations
-------------------------------------------------------------------------
Ore Milled
(tonnes) 856,000 607,000 537,000 394,000 2,394,000
Zinc (%) 5.9 5.9 6.8 9.0 6.6
Copper (%) 1.0 n/a n/a 0.5 n/a
Lead (%) 0.5 1.9 0.7 n/a n/a
Gold (g/t) 1.3 n/a 2.2 n/a n/a
Silver (g/t) 48.2 84.6 18.6 n/a n/a
Payable Metal
Zinc (tonnes) 38,100 27,500 27,800 28,300 121,700
Copper (tonnes) 6,700 n/a n/a 1,300 8,000
Lead (tonnes) 900 8,900 2,700 n/a 12,500
Silver (ounces) 659,000 1,121,000 101,000 121,000 2,002,000
Gold (ounces) 17,000 n/a 26,000 n/a 43,000
-------------------------------------------------------------------------
(1) Includes both pre-production and commercial production at Langlois.


Capital Expenditures

Capital expenditures for the Company's operations are planned to be $94.3 million in 2007. Of this amount, the bulk of funds are related to the development of Langlois and the satellite Grevet B deposit, improvements to the El Mochito and Myra Falls' mines and upgrading mobile equipment at all the operations.



-------------------------------------------------------------------------
Capital Expenditures ($ millions) 2007 Projection
-------------------------------------------------------------------------
Myra Falls $18.7
El Mochito $21.5
El Toqui $14.8
Langlois $39.3
-------------------------------------------------------------------------
Total Capital $94.3
-------------------------------------------------------------------------


Exploration

It is expected that the Company will spend $27.0 million on exploration expenditures in 2007 with the objective of substantially increasing the proven and probable mineral reserves at Langlois and El Toqui and the mineral resources (both measured and indicated and inferred) at El Mochito and Myra Falls as well as advancing a number of greenfield exploration targets. The breakdown of exploration expenditures is set forth in the following table.



-------------------------------------------------------------------------
($ millions)
-------------------------------------------------------------------------
El Mochito 3.2
El Toqui 10.7
Tunisia 0.5
Langlois 6.2
Bouchard-Hébert 0.2
Myra Falls 3.7
Others 2.5
-------------------------------------------------------------------------
Exploration Expenditures 27.0
-------------------------------------------------------------------------


Reclamation Expenditures

Cash required for reclamation work in 2007 is expected to be $5.6 million, significantly less than in 2006 as the bulk of the work at the Company's closed sites has been completed.

SENSITIVITY TO METAL PRICES, ZINC SMELTER TREATMENT CHARGES AND EXCHANGE RATES

The Company's cash flow and net earnings are sensitive to the price of zinc, smelter treatment charges for zinc and the US$/C$ exchange rate. The following table provides the Company's estimates of the sensitivity of cash flow to changes in the various metal prices, smelter treatment charges for zinc and US$/C$ exchange rate movements based on projections for 2007. The Company's projection for 2007 is based on a US$/C$ exchange rate of $0.91/$1.00. The sensitivity table assumes that all other prices and/or the exchange rate are held constant.



-------------------------------------------------------------------------
Variable Change Sensitivity ($000s)
-------------------------------------------------------------------------
Zinc US$0.01/pound 2,100
Lead US$0.01/pound 200
Copper US$0.01/pound 200
Silver US$0.10/ounce 200
Gold US$10/ounce 400
Exchange rate US$0.01/C$1.00 3,300
Zinc smelter treatment
charges 5% 3,800
-------------------------------------------------------------------------


SELECTED ANNUAL INFORMATION

-------------------------------------------------------------------------
Statement of Operations and Retained
Earnings (Deficit) and Statement of Years ended December 31,
Cash Flows Data --------------------------------
($ millions except for per share numbers) 2006 2005 2004
-------------------------------------------------------------------------

Gross sales revenue 452.2 313.0 240.3
Treatment and marketing costs 127.8 105.4 81.9
Net revenue 324.4 207.6 158.4
Total operating costs 155.9 178.0 129.9
Contribution from mining activities 168.5 29.6 28.5
Net earnings 156.5 14.0 3.3
Basic earnings per Common Share 0.41 0.04 0.01
Diluted earnings per Common Share 0.37 0.04 0.01
Net cash provided by operating activities 158.5 18.7 22.0
Capital expenditures 75.7 35.6 25.6
Basic weighted-average number
of Common Shares outstanding (000's) 383,748 369,190 353,508
Number of Common Shares outstanding
(000's) 385,646 380,917 363,156
-------------------------------------------------------------------------


-------------------------------------------------------------------------
As at December 31,
Balance Sheet Data ---------------------
($ millions) 2006 2005
-------------------------------------------------------------------------
Cash and cash equivalents 81.4 18.7
Working capital 109.8 44.4
Total assets 509.3 342.6
Total debt 2.7 19.7
Total long-term liabilities 113.1 121.9
Shareholders' equity 308.6 148.2
-------------------------------------------------------------------------


CHANGE IN ACCOUNTING POLICY

In the fourth quarter of 2006, the Company changed its accounting policy for exploration expenditures. Under the new policy, which has been retroactively applied, all exploration expenditures are expensed as incurred until the mineralized deposit is deemed commercially recoverable, at which time all subsequent development costs are capitalized. The Company believes this policy provides more reliable and relevant information aligning the Company's policy with a significant majority of large and mid-size mining companies globally and therefore will make peer and industry comparisons easier.

STATEMENT OF OPERATIONS REVIEW - 2006 AND 2005

Gross Sales Revenue

Gross sales revenue from the sale of zinc, copper, lead, and gold concentrates increased by 44% to $452.2 million. Higher metal prices accounted for this increase, which was partially offset by decreased concentrate sales - 261,749 tonnes in 2006 compared with 367,630 tonnes in 2005, a stronger Canadian dollar and hedging losses of $4.3 million (2005 - $2.9 million). The lower tonnage of concentrate sold in 2006 was due to the closure of the Bouchard-Hebert and Bougrine mines in 2005 and lower concentrate sales from all other operations.

Sales of concentrate fluctuate period to period due to production levels, shipping volumes, ship schedules, price determination terms, and risk and title transfer terms with the Company's various customers. The recognition of sales can be as much as six months after the date of concentrate production. The Company's sales are primarily denominated in United States dollars ("US$").



-------------------------------------------------------------------------
Gross Sales Revenue by Metal ($ millions) 2006 2005
-------------------------------------------------------------------------
Zinc (US$) 300.4 156.0
Copper (US$) 39.3 39.2
Lead (US$) 13.8 23.5
Gold (US$) 24.5 23.1
Silver (US$) 20.2 18.1
Hedging mark-to-market and other (0.2) (2.5)
-------------------------------------------------------------------------
Total Gross Sales Revenue (US$) 398.0 257.4
Realized exchange rate (C$/US$) yearly average 1.1362 1.2159
-------------------------------------------------------------------------
Total Gross Sales Revenue (C$) 452.2 313.0
-------------------------------------------------------------------------

-------------------------------------------------------------------------
Sales by Concentrate (tonnes) 2006 2005
-------------------------------------------------------------------------
Zinc 217,346 273,267
Copper 25,120 52,441
Lead 16,556 40,685
Gold 2,727 1,237
-------------------------------------------------------------------------
Total 261,749 367,630
-------------------------------------------------------------------------

-------------------------------------------------------------------------
Sales by Payable Metal 2006 2005
-------------------------------------------------------------------------
Zinc (tonnes) 93,897 120,330
Copper (tonnes) 5,442 11,059
Lead (tonnes) 10,611 23,959
Gold (ounces) 42,210 51,720
Silver (ounces) 2,070,612 2,505,126
-------------------------------------------------------------------------

-------------------------------------------------------------------------
Realized Prices 2006 2005
-------------------------------------------------------------------------
Zinc (US$/tonne) 3,199 1,297
Copper (US$/tonne) 7,217 3,543
Lead (US$/tonne) 1,297 983
Gold (US$/ounce) 523 445
Silver (US$/ounce) 9.77 7.22
-------------------------------------------------------------------------

-------------------------------------------------------------------------
Average LME Metal Prices & Foreign Exchange Rate 2006 2005
-------------------------------------------------------------------------
Zinc (US$/tonne) 3,275 1,381
Copper (US$/tonne) 6,720 3,678
Lead (US$/tonne) 1,289 975
Gold (US$/ounce) 605 445
Silver (US$/ounce) 11.57 7.32
Exchange rate (C$/US$) yearly average 1.1341 1.2111
-------------------------------------------------------------------------


The Company has a relatively conservative revenue recognition policy which, among other things, requires final pricing of concentrate inventories prior to recognition of revenue. Using commodity prices and exchanges rates prevailing at December 31, 2006, the following schedule provides details regarding inventories shipped but not recognized for revenue purposes and the related provisional payments.



-------------------------------------------------------------------------
Net Earnings Provi- Weighted
smelter Inventory before sional average
Concentrate return value taxes payments months to
(DMT) ($000s) ($000s) ($000s) ($000s) settlement
-------------------------------------------------------------------------
Zinc 19,489 25,443 10,689 14,754 23,551 1.3
Copper 5,652 10,429 8,506 1,923 - 3.0
Gold 358 2,437 1,050 1,387 695 1.1
-------------------------------------------------------------------------
25,499 38,309 20,245 18,064 24,246
-------------------------------------------------------------------------


As at December 31, 2005, the Company estimated that inventories shipped but not recognized for revenue purposes had earnings before tax of $7.3 million consisting of $31.2 million of net smelter return less $23.9 million of inventory value.

The Company periodically hedges against fluctuations in metal prices and foreign exchange rates with the use of forward sales or options. The Company has not applied hedge accounting historically; therefore, mark-to-market gains or losses have been included in gross sales revenue at the end of each period. The Company did not have any commodity or foreign exchange hedges as at December 31, 2006. At December 31, 2005, the Company had 1,050,000 ounces of silver call options with an average strike price of US$7.50 per ounce maturing from January to June 2006 and had 25,000 ounces of gold call options with an average strike price of US$455 per ounce maturing in December 2006.

Net Revenue

Net revenue, the value of concentrates sold after deducting treatment charges and freight and marketing costs, increased by 56% to $324.4 million in 2006 from $207.6 million in 2005. Total treatment charges, the amount paid to smelters for refining concentrates to produce metal, and shipping and marketing costs were 21% higher at $127.8 million in 2006 compared with $105.4 million in 2005. On a per tonne of concentrate sold basis, total treatment charges increased to $488 per tonne in 2006 compared with $287 per tonne in 2005.

Direct Operating Costs

Direct operating costs were 7% lower in 2006 at $134.6 million compared with $144.3 million in 2005, as 29% fewer tonnes of concentrate were sold and the average cost per tonne of concentrate sold increased to $514 in 2006 from $393 in 2005. The increase in the average direct operating cost per tonne sold was due to the closure of the lower cost Bougrine and Bouchard-Hebert mines in 2005 and significant increases in direct operating costs per tonne at Myra Falls and El Mochito partially offset by a decrease in direct operating costs per tonne sold at El Toqui.



-------------------------------------------------------------------------
Direct
Operating
Costs 2006 2005
-------------------------------------------------------------------------
Concentrate Cost Concentrate Cost
Aggregate sold per tonne Aggregate sold per tonne
($ millions) (tonnes) ($) ($ millions) (tonnes) ($)
-------------------------------------------------------------------------
Myra Falls 83.9 111,603 751 67.1 116,139 578
El Mochito 31.8 95,272 333 29.8 103,066 289
El Toqui 18.9 54,874 345 22.2 59,355 374
Bougrine 0.0 0 - 14.8 58,255 254
Bouchard-
Hébert 0.0 0 - 10.4 30,815 337
-------------------------------------------------------------------------
Total 134.6 261,749 514 144.3 367,630 393
-------------------------------------------------------------------------


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$0.65 in 2006 compared with US$0.39 in 2005 (see non-GAAP reconciliation). The increase was primarily due to unfavourable movements in treatment and marketing costs, Myra Falls direct operating costs per tonne, the foreign exchange rate and pounds of zinc sold partially offset by higher by-product credits and reduced aggregate direct operating costs at other operations.

Depreciation and Depletion

Depreciation and depletion decreased by $4.0 million to $17.6 million primarily due to reduced depreciation and amortization related to the Bougrine and Bouchard-Hebert mines which were closed in 2005.

Reclamation and Closure Costs

Reclamation and closure costs in 2006 were $3.7 million compared with $12.1 million in 2005. These costs include the accretion of the Company's estimated future reclamation obligations and adjustments to reclamation obligations at closed mines where better information has caused the Company to revise its previous estimates. In 2005, $8.1 million of adjustments were made to the obligations related to the Nanisivik mine as the work required was significantly more than originally anticipated.

Other Expenses (Income)

Other expenses (income) in 2006 increased by $3.1 million to $12.9 million. The increase in other expense (income) was primarily due to: increased general and administrative and interest and financing expenses; partially offset by increased investment and other income.

Exploration Expenditures

Exploration expenditures in 2006 increased by $7.1 million to $10.0 million compared with $2.9 million in 2005. These increased expenditures reflect recent successes in target identification and a strategic effort to address past underinvestment in exploration of the Company's assets.

Other non-producing property (income) costs

Other non-producing property income of $9.6 million for the year ended December 31, 2006 includes: (i) a gain on sale of $13.8 million on disposal of the Caribou and Restigouche mines on August 1, 2006 to Blue Note Metals Inc. ("Blue Note"); and, (ii) a charge of $1.3 million to settle a claim against the Company by Kalwea Financial Corp., BVI. Under the terms of the agreement, Blue Note replaced the Company's reclamation deposit of $5.9 million and issued to the Company a $15.0 million unsecured subordinated convertible debenture with a maturity of five years. The Company will also receive a 1 to 2% net smelter return royalty payable quarterly on zinc metal production provided the average price of zinc as determined by the London Metal Exchange is above US$0.65 per pound.

In addition to the amounts in (i) and (ii) noted above, $2.9 million (2005 - $9.0 million) of care and maintenance and holding costs were incurred in 2006 and related to the Caribou, Bougrine and Bouchard-Hebert mines. In 2005, other non-producing property costs of $9.0 million related to the Bouchard-Hebert, Nanisivik, Caribou, Bougrine and Langlois mines.

Due to the depletion of mineral reserves, the Company closed the Nanisivik, Bouchard-Hebert and Bougrine mines in September 2002, February 2005 and September 2005 respectively. Prior to November 2005, the Langlois mine was on a care and maintenance basis.

Income and Mining Taxes (Recovery) Provision

Income and mining taxes recovery decreased to $1.3 million in 2006 compared with $7.0 million in 2005. The $5.7 million decrease in income and mining tax recovery in 2006 compared with 2005 was primarily due to increased tax provisions at El Mochito and El Toqui, partially offset by an income tax recovery for Myra Falls. During the year, the Company determined that the Myra Falls mine would generate future taxable income which will be offset by available loss carry forwards. As a result, the Company setup a future income tax asset of $27.0 million and recorded a corresponding income tax recovery. This determination was based on the Company's five-year operating and capital plan and used the forward metal prices. This income tax asset will be drawn down and charged to income as actual taxable income is earned.

LIQUIDITY AND FINANCIAL POSITION REVIEW

Working Capital

Working capital at the end of 2006 was $109.8 million compared with $44.4 million at the end of 2005, an increase of $65.4 million.

Current Assets

Total current assets increased by $80.5 million to $197.4 million as at December 31, 2006 compared with December 31, 2005. The main components of current asset changes were as follows:



- Cash and cash equivalents increased by $62.7 million reflecting
improved cash flow generated by stronger metal prices
- Accounts receivable - concentrate increased by $9.7 million primarily
due to a greater volume of production shipped in late 2006 for which
revenue was recognized but final payments had not yet been received
compared with December 31, 2005
- The current portion of future income tax assets increased by
$8.2 million primarily due to the set up of a $13.6 million current
future income tax asset for the Myra Falls mine (long-term portion
$13.4 million) offset by a $5.5 million future tax asset drawdown at
El Mochito


Current Liabilities

Current liabilities increased by $15.1 million to $87.6 million at December 31, 2006 compared with December 31, 2005. The main components of the current liabilities changes were as follows:



- Accounts payable increased by $10.3 million primarily due to amounts
associated with the ongoing development at the Langlois mine

- Provisional payments for concentrate inventory shipped and not priced
represent payments received for concentrate shipments that were not
recognized as revenue. The balance as at December 31, 2006 was
$24.2 million. Please refer to the table in Gross Sales Revenue
section of this news release for additional details. The December 31,
2005 balance of $14.8 million was for payments for zinc concentrate
shipments from the Myra Falls mine

- Short-term debt decreased by $12.4 million primarily due to the
repayment of the gold loan outstanding at December 31, 2005

- Income and mining taxes payable increased by $9.6 million primarily
due to full utilization of loss carry forwards at El Mochito and
El Toqui mines resulting in tax provisions being required in 2006


Reclamation Deposits

At December 31, 2006, the Company had reclamation deposits of $13.5 million, an increase of $6.7 million from December 31, 2005. The increase was primarily due to $13.4 million of reclamation deposits held under a safe keeping agreement in support of reclamation requirements at Myra Falls entered into in the first quarter of 2006 partially offset by reimbursement of $5.9 million for reclamation deposits previously held as reclamation security on the Caribou and Restigouche mines which were sold in August 2006.

Long-term Investments

At December 31, 2006, long-term investments increased by $9.1 million to $14.7 million from $5.6 million at December 31, 2005. As part of the consideration received on the sale of the Caribou and Restigouche mines on August 1, 2006, the Company received a convertible debenture in Blue Note in the amount of $15.0 million which the Company valued at $9.1 million. At December 31, 2006 and 2005, also included in long-term investments was a $17.0 million convertible debenture of Taseko Mines Limited that is carried at a cost of $5.6 million which was the estimated fair value at the time of acquisition.

Restricted Promissory Note

The Company held restricted promissory notes at the end of 2006 and 2005 of $62.3 million. The balance consists of restricted promissory notes 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 obligation.

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

(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.

Deferred Income

Deferred income of $6.3 million at December 31, 2006 consisted of (i) deferred indemnity agreement fees and prepaid interest income received in relation to the Red Mile transactions in 2004 and 2005 which will be taken into income over the lives of the two agreements and (ii) a non-refundable royalty payment received on the sale of the Lapa properties in 2003 (US$1.0 million) which will be taken into revenue as earned when the Lapa properties are put into production.

Royalty Obligation

The royalty obligation of $62.5 million relates to the royalty amounts received from the 2004 and 2005 Red Mile transactions.

Total Debt

Total debt at December 31, 2006 was $2.7 million, a reduction of $17.0 million compared with $19.7 million at the end of 2005.

In the first and second quarters of 2006, the Company obtained loans of US$1.4 million and US$1.5 million to restructure certain gold forward and option positions. These loans were repaid in full in 2006. In August 2005, by way of a gold loan, the Company borrowed US$10.0 million. The gold loan had six scheduled principal repayments and, in August 2006, the final principal repayment was made. In May 2005, the Company entered into a concentrate prepayment contract with a customer whereby the Company received US$5.0 million against future deliveries of zinc concentrate. The Company elected to repay this concentrate prepayment contract in May 2006.

Reclamation and Closure Cost Accrual

Reclamation and closure costs represent the Company's obligation for reclamation and severance costs accrued for its mine sites. At December 31, 2006, total accrued reclamation and closure costs were $40.6 million compared with $50.3 million at December 31, 2005. Of the $40.6 million, $8.3 million is classified as current and is expected to be spent over the next 12 months at Nanisivik, Bouchard-Hebert, Bougrine and Myra Falls. The Company incurred expenditures of $7.4 million in reclamation and closure costs in 2006 compared with $25.2 million in 2005. As there is no law, regulation or contract in Honduras related to reclamation and closure costs, Canadian generally accepted accounting principles do not permit the Company to setup a liability for reclamation at the El Mochito mine.



Reclamation and Closure Cost Accrual at December 31, 2006

-------------------------------------------------------------------------
($ millions) Current Long-term Total
-------------------------------------------------------------------------
Myra Falls 2.2 25.0 27.2
El Mochito 0.0 1.4 1.4
El Toqui 0.0 3.8 3.8
Langlois 0.0 1.3 1.3
Bouchard-Hébert 2.4 0.1 2.5
Nanisivik 2.3 0.4 2.7
Bougrine 1.4 0.3 1.7
-------------------------------------------------------------------------
Total 8.3 32.3 40.6
------------------------------------------------------------------------


Future Income Tax Liabilities

As at December 31, 2006, future tax liabilities were $7.1 million, an increase of $5.2 million from December 31, 2005. The increase in future tax liabilities was primarily due to establishing an additional mining duties liability related to the Langlois mine.

Shareholders' Equity

Shareholders' equity at December 31, 2006 was $308.6 million compared with $148.2 million at December 31, 2005, an increase of $160.3 million primarily due to net earnings of $156.5 million in 2006.



-------------
Shareholders'
Equity
-------------------------------------------------------------------------
Cumu-
($000s) lative
trans- Total
Contri- Retained lation share-
Capital buted earnings adjust- holders'
stock Warrants surplus (deficit) ments equity
-------------------------------------------------------------------------
As at
December 31,
2005 335,512 8,561 3,300 (189,663) (9,495) 148,215

Reduction
of stated
capital (169,628) - (3,300) 172,928 - -
Value ascribed
to options
exercised
under
stock-based
compensation 815 - (815) - - -
Employee share
option plan -
proceeds of
options
exercised 1,538 - - - - 1,538
Employee share
purchase plan 163 - - - - 163
Exercise of
warrants 190 - - - - 190
Settlement of
liability 848 - - - - 848
Renunciation of
flow-through
share value (2,345) - - - - (2,345)
Stock-based
compensation - - 1,608 - - 1,608
Net earnings - - - 156,530 - 156,530
Cumulative
translation
adjustments - - - - 1,806 1,806
-------------------------------------------------------------------------
As at
December 31,
2006 167,093 8,561 793 139,795 (7,689) 308,553
-------------------------------------------------------------------------


At the annual and special meeting held on June 8, 2006, the shareholders approved a special resolution to reduce the stated capital of the Company by an amount of $172.9 million, which was equal to the accumulated deficit as at December 31, 2005 prior to the change in accounting policy. As a result, capital stock was reduced by $169.6 million, contributed surplus was reduced by $3.3 million and deficit was reduced by $172.9 million.

In 2006, the Company issued the following Common Shares: 2,804,899 following the exercise of employee share options; 173,823 pursuant to the Company's employee share purchase plan; 1,000,000 pursuant to warrants exercised; and, 750,000 in settlement of an outstanding lawsuit.

Capital Expenditures

The Company invested $75.7 million in mineral properties and fixed assets in 2006.

In 2006, the $39.5 million of capital expenditure at Langlois primarily consisted of: development and extraction of a bulk sample from the Grevet B deposit; drifting to access Zone 97; building and equipment; and other underground work partially offset by preproduction revenues.

Myra Falls' capital expenditures of $16.6 million in 2006 consisted primarily of: surface ramp advances; underground development; installation of a lead circuit; tailings dam construction; and information systems and telecommunication system upgrades.

In 2006, the $9.6 million of capital expenditures at El Mochito consisted primarily of: Soledad and Pozo Azul tailings pond construction and upgrades respectively; underground development; and equipment purchases.

El Toqui capital expenditures in 2006 of $8.4 million consisted primarily of: ramp development; Gekko intense leech reactor construction and installation; Concordia deposit development; deferred development; and capital equipment.

Financial Capability

With the existing working capital, the current metal prices and current US$/C$ 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 US$/C$ exchange rate.



OPERATING REVIEW - YEARS ENDED DECEMBER 31, 2006 AND 2005

-------------------------------------------------------------------------
Depreciation,
Contribution depletion,
(loss) from reclamation Capital
mining and closure expenditures
Net revenue activities(1) costs (3)
-------------------------------------------------------------------------
($ millions) 2006 2005 2006 2005 2006 2005 2006 2005
-------------------------------------------------------------------------
Myra Falls 142.6 79.1 48.3 2.4 10.4 9.5 16.6 17.8
El Mochito 116.6 56.0 78.4 19.8 6.4 6.3 9.6 8.0
El Toqui 69.5 30.6 47.4 5.1 3.1 4.6 8.4 5.2
Langlois(a) 0.0 0.0 (0.1) (0.1) 0.1 0.1 39.5 5.2
Bougrine(b) 0.0 26.5 (0.2) 7.4 0.2 4.3 0.0 0.1
Bouchard-
Hebert(c) 0.0 18.3 (0.4) 7.1 0.4 1.3 0.0 0.3
Nanisivik(d) 0.0 0.0 (0.2) (8.6) 0.2 8.6 0.0 0.0
Other (4.3)(2) (2.9)(2) (4.7) (3.5) 0.4 0.6 1.6 0.0
-------------------------------------------------------------------------
Total 324.4 207.6 168.5 29.6 21.2 33.7 75.7 36.6
-------------------------------------------------------------------------
(1) After non-cash costs. (a) First concentrate shipped
(2) Net realised from November 2006.
metal hedging activities. (b) Closed September 2005.
(3) Includes assets under (c) Closed February 2005.
capital lease. (d) Remediation and closure on-going.


Production Results
Consolidated production is set forth in the following table.

-------------------------------------------------------------------------
Year ended December 31 Fourth Quarter
All Mines 2006 2005 2006 2005
-------------------------------------------------------------------------
Ore Milled (tonnes) 2,003,862 2,468,565 528,237 540,949
Zinc (%) 6.0 6.5 6.0 6.1
Concentrate Production (tonnes)
Zinc 209,133 268,688 55,856 56,576
Copper 21,866 35,361 4,647 7,410
Lead 17,263 28,702 5,239 3,741
Gold 4,251 4,145 1,316 1,114
Metal in Concentrates
Zinc (tonnes) 107,136 141,310 28,252 29,521
Copper (tonnes) 5,093 8,110 1,027 1,698
Lead (tonnes) 11,775 19,196 3,564 2,579
Silver (ounces) 2,721,676 3,059,914 698,628 758,008
Gold (ounces) 57,231 75,993 13,469 17,521
-------------------------------------------------------------------------


Aggregate production of zinc in concentrate in 2006 was 236.2 million pounds compared with 311.5 million pounds in 2005, a 24% reduction. The closure of the Bouchard-Hebert and the Bougrine mines in 2005 accounted for 16% of the reduction with the balance related to lower zinc head grades at Myra Falls and El Mochito and lower milled tonnes at Myra Falls, offset by production at Langlois.

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



-------------------------------------------------------------------------
Zinc Production
(million pounds
of zinc contained
in concentrate) Year ended December 31 Fourth Quarter
---------------------------------------------------------
2006 2005 % 2006 2005 %
-------------------------------------------------------------------------
Myra Falls 74.3 106.0 (30) 14.7 23.3 (37)
El Mochito 83.0 94.1 (12) 21.1 24.6 (14)
El Toqui 70.0 62.5 12 17.6 17.2 2
Langlois(a) 8.9 0.0 - 8.9 0.0 -
Bouchard-Hébert(b) 0.0 13.9 - 0.0 0.0 -
Bougrine(c) 0.0 35.0 - 0.0 0.0 -
-------------------------------------------------------------------------
Total zinc
production 236.2 311.5 (24) 62.3 65.1 (4)
-------------------------------------------------------------------------
(a) First concentrate shipped November 2006. (b) Closed February 2005.
(c) Closed September 2005.


Production of copper in concentrate decreased 37% in 2006 from the same period in 2005 due to lower milled tonnes and lower copper grades at Myra Falls as well as the closure of the Bouchard-Hebert mine in February 2005.



-------------------------------------------------------------------------
Copper Production
(million pounds
of copper
contained in
concentrate) Year ended December 31 Fourth Quarter
---------------------------------------------------------
2006 2005 % 2006 2005 %
-------------------------------------------------------------------------
Myra Falls 10.8 16.8 (36) 1.8 3.7 (51)
Langlois(a) 0.5 0.0 - 0.5 0.0 -
Bouchard-Hébert(b) 0.0 1.1 - 0.0 0.0 -
-------------------------------------------------------------------------
Total copper
production 11.3 17.9 (37) 2.3 3.7 (38)
-------------------------------------------------------------------------
(a) First concentrate shipped November 2006. (b) Closed February 2005.


Despite higher lead production at El Mochito, production of lead in
concentrate for 2006 decreased 39% year over year due to the closure of
Bougrine in September 2005.

-------------------------------------------------------------------------
Lead Production
(million pounds
of lead
contained in
concentrate) Year ended December 31 Fourth Quarter
---------------------------------------------------------
2006 2005 % 2006 2005 %
-------------------------------------------------------------------------
El Mochito 26.0 23.1 13 7.9 5.7 39
Bougrine(a) 0.0 19.2 - 0.0 0.0 -
-------------------------------------------------------------------------
Total lead
production 26.0 42.3 (39) 7.9 5.7 39
-------------------------------------------------------------------------
(a) Closed September 2005.


Silver in concentrate decreased 11% year-over-year due to lower tonnes milled and lower silver grades from Myra Falls and lower silver production at El Toqui as well as the closure of the Bouchard-Hebert mine in February 2005.



-------------------------------------------------------------------------
Silver Production
(ounces of silver
contained in
concentrate) Year ended December 31 Fourth Quarter
---------------------------------------------------------
2006 2005 % 2006 2005 %
-------------------------------------------------------------------------
Myra Falls 857,775 1,165,056 (26) 172,701 286,554 (40)
El Mochito 1,769,456 1,723,825 3 482,227 446,445 8
El Toqui 71,703 131,020 (45) 20,802 25,009 (17)
Langlois(a) 22,855 0 - 22,855 0 -
Bouchard-Hébert(b) - 40,013 - 0 0 -
-------------------------------------------------------------------------
Total silver
production 2,721,789 3,059,914 (11) 698,585 758,008 (8)
-------------------------------------------------------------------------
(a) First concentrate shipped November 2006. (b) Closed February 2005.


Gold in concentrate decreased 25% in 2006 from the same period in 2005 due to lower milled tonnes at Myra Falls and less gold production from El Toqui as well as the closure of the Bouchard-Hebert mine in February 2005.



-------------------------------------------------------------------------
Gold Production
(ounces of gold
contained in
concentrate) Year ended December 31 Fourth Quarter
---------------------------------------------------------
2006 2005 % 2006 2005 %
-------------------------------------------------------------------------
Myra Falls 20,231 31,744 (36) 3,454 8,254 (58)
El Toqui 36,795 41,605 (12) 9,810 9,267 6
Langlois(a) 205 0 - 205 0 -
Bouchard-Hébert(b) 0 2,644 - 0 0 -
-------------------------------------------------------------------------
Total gold
production 57,231 75,993 (25) 13,469 17,521 (23)
-------------------------------------------------------------------------
(a) First concentrate shipped November 2006. (b) Closed February 2005.


Myra Falls Production

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



Year ended December 31 Fourth Quarter
2006 2005 2006 2005
-------------------------------------------------------------------------
Ore Milled (tonnes) 714,443 912,656 166,188 226,962
-------------------------------------------------------------------------
Zinc (%) 5.5 6.1 4.6 5.5
Copper (%) 0.9 1.2 0.7 1.0
Silver (g/t) 48 51 41 50
Gold (g/t) 1.5 1.8 1.2 2.0
-------------------------------------------------------------------------
Concentrate Production
-------------------------------------------------------------------------
Zinc (tonnes) 64,902 90,129 12,950 19,984
Recovery (%) 86.5 86.3 88.2 84.4
Grade (%) 51.9 53.4 51.2 53.2
Copper (tonnes) 20,788 32,333 3,569 7,410
Recovery (%) 73.0 69.6 70.9 71.5
Grade (%) 23.5 23.6 22.9 22.8
Gold (tonnes) 14.1 34.7 1.4 9.9
Recovery (%) 11.5 18.3 9.8 15.2
Grade (g/t) 9,489 8,741 32,714 6,890
-------------------------------------------------------------------------
Metal in Concentrates
-------------------------------------------------------------------------
Zinc (tonnes) 33,708 48,084 6,651 10,591
Copper (tonnes) 4,885 7,640 819 1,698
Silver (ounces) 857,775 1,165,056 172,701 286,554
Gold (ounces) 20,231 31,744 3,454 8,254
-------------------------------------------------------------------------
Total Cash Costs (US$)
Per lb. payable zinc
sold 0.81 0.47 1.44 0.52
-------------------------------------------------------------------------


Zinc head grades were lower in 2006 from the same period in 2005 due to increased mining in the lower grade HW Zone. Milled tonnage decreased during 2006 compared with 2005. Production was hindered during the year due to the lack of working areas underground, delays in improving the Battle/Gap underground infrastructure and problems with underground equipment availability. Additionally, ventilation requirements in the western extensions of the mine slowed production improvements. The ventilation raise connecting the surface ramp to the underground operation was completed in January 2007. The mill upgrades are on schedule and on budget. The new copper and zinc circuits have been commissioned resulting in improved recoveries and a reduction in the penalty elements in the copper concentrate.

During the fourth quarter, operations at Myra Falls were suspended for a 10 day period due to damage to the bridge over Thelwood Creek on the road leading to Myra Falls, which necessitated the temporary closure of this bridge to vehicular traffic. The damage to the bridge was sustained during a one in 200 year storm event on Vancouver Island on November 15th. Installation of a temporary bridge was completed on November 24th and normal operations resumed the following day.

Myra Falls Outlook

While the issue of ventilation has largely been addressed, production will be constrained by the number of available working faces and the haulage distances underground. The track development out to the Marshall zone for exploration continues on the 24 level. Underground diamond drilling is scheduled during the first half of 2007 in this area. Current drilling is focused on the Marmot Trough, a drill target developed last year following a reinterpretation of certain drill holes completed in the 1990's. The significance of the Marmot Trough as a target is that it is directly below current mine workings and, in the event of significant mineralization, is accessible from the current mine infrastructure.

Diamond drilling from the surface ramp commenced during 2006. The diamond drill contractor mobilized in the fourth quarter and set up on surface to drill the extension of the Marshall zone.

El Mochito Production

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



Years ended December 31 Fourth Quarter
2006 2005 2006 2005
-------------------------------------------------------------------------
Ore Milled (tonnes) 690,243 700,190 171,369 185,597
-------------------------------------------------------------------------
Zinc (%) 6.0 6.7 6.2 6.5
Lead (%) 2.1 1.8 2.6 1.7
Silver (g/t) 92 87 101 86
-------------------------------------------------------------------------
Concentrate Production
-------------------------------------------------------------------------
Zinc (tonnes) 72,413 81,296 18,726 21,142
Recovery (%) 90.4 91.7 89.9 92.0
Grade (%) 52.0 52.5 51.2 52.6
Lead (tonnes) 17,263 15,329 5,239 3,741
Recovery (%) 81.0 80.9 81.0 80.1
Grade (%) 68.2 68.4 68.0 68.8
-------------------------------------------------------------------------
Metal in Concentrates
-------------------------------------------------------------------------
Zinc (tonnes) 37,646 42,698 9,578 11,147
Lead (tonnes) 11,775 10,488 3,564 2,579
Silver (ounces) 1,769,456 1,723,825 482,227 446,445
-------------------------------------------------------------------------
Total Cash Costs (US$)
Per lb. payable zinc sold 0.43 0.32 0.62 0.20
-------------------------------------------------------------------------


Zinc head grades were slightly lower in 2006 from 2005 due to the recovery of mineral reserves in the lower grade skarn areas such as Salva Vida and La Leona which are economic at current metal prices.

El Mochito Outlook

During 2006, the Company continued to explore, develop and delineate new mineral resources and reserves along extensions of the productive Salva Vida and Santo Nino trends. Drilling also continued on the Barbasco trend which continues to show a possible connection with the Imperial zone to the north. During the fourth quarter, the Company initiated exploration between Santo Nino and the manto of Yojoa Norte. Results to date show the presence of low grade skarn and a possible connection between the two trends. Exploration and delineation drilling of the La Leona deposit also continued to show promising results with increases expected in resources and reserves in this area.

During 2006, the Company continued its surface exploration program at El Mochito. The Company acquired a larger diamond drill capable of drilling deeper targets. This drill was initially set-up to deepen existing holes at Caliche in order to investigate below the Mochito shales. Geological mapping completed in 2006 to the east on the Big Fuzzy target and to the west over the Santa Barbara mountain or Arandanos anomaly will be drill tested in 2007 and reported on later in the year. As well, geological mapping carried out over two new targets, ML2 and ML3, will be investigated in 2007 by surface diamond drilling. These target areas are located at the projected intersections of fault zones located to the north of the current underground workings.

During 2006, the Company experienced a delay in commissioning the new tailings facility Soledad. Storm damage necessitated a repair to the geomembrane liner which delayed commissioning of Soledad into 2007. Soledad is scheduled to be commissioned in the third quarter of 2007. Once complete, Soledad is expected to have capacity for seven years at current production rates and the current tailings impoundment facility, Pozo Azul, will be reclaimed.

El Toqui Production

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



Years ended December 31 Fourth Quarter
2006 2005 2006 2005
-------------------------------------------------------------------------
Ore Milled (tonnes) 539,803 519,963 131,307 128,390
-------------------------------------------------------------------------
Zinc (%) 6.5 6.0 6.6 6.6
Gold (g/t) 2.4 2.9 2.7 2.6
-------------------------------------------------------------------------
Concentrate Production
-------------------------------------------------------------------------
Zinc (tonnes) 63,617 56,552 15,979 15,450
Recovery (%) 91.0 90.4 91.9 90.8
Grade (%) 49.9 50.1 49.9 50.4
Gold (tonnes) 4,237 4,110 1,315 1,104
Recovery (%) 68.5 51.4 66.3 49.8
Grade (g/t) 192.1 221.7 160.5 181.4
-------------------------------------------------------------------------
Metal in Concentrates
-------------------------------------------------------------------------
Zinc (tonnes) 31,725 28,347 7,966 7,786
Silver (ounces) 71,703 131,020 20,802 25,009
Gold (ounces) 36,795 41,605 9,810 9,267
-------------------------------------------------------------------------
Total Cash Costs (US$)
Per lb. payable zinc sold 0.63 0.44 0.69 0.29
-------------------------------------------------------------------------


The milled tonnage at El Toqui increased in 2006 compared with the same period in 2005 due to a higher number of available working areas at the Estatuas and Dona Rosa deposits. The decrease in gold head grade during 2006 is due to a decision to stockpile Aserradero material until commissioning of the Gekko Intense Leach Reactor commences during the first quarter of 2007. The Aserradero deposit has high gold grades with the mill producing a gold concentrate as well as a zinc concentrate.

El Toqui Outlook

During 2006, ramp development to access the Concordia deposit continued with a total of 566 metres of development completed to the end of the year. The Concordia deposit is on schedule with production expected by mid-2007.

During 2007, drilling will continue on the Porvenir deposit to increase the inferred resources, which currently stand at 1.6 million tonnes of 9.62% Zn and 0.34 g/t Au and to attempt to delineate the outline of the deposit which is currently open to the north-west and south-east. Altazor, Terrunyo and Melchor will be the main targets for exploration at El Toqui in 2007.

If the exploration programs are successful in increasing the mineral reserves and resources at El Toqui, the Company will conduct a feasibility study to determine the optimal size and location of a mill to increase production throughput.

Langlois Production

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

Development drifts are currently being driven between Zone 3, Zone 4 and Zone 97 to the east on Levels 4, 9 and 13. Production has commenced in Zones 3 and 4 with a total of 59,374 tonnes milled during the fourth quarter of 2006.

During the fourth quarter of 2006, excavation of the bulk sample was carried out on the Grevet B deposit, located three kilometres south-east of the Langlois mine. The bulk sample was milled in the first quarter of 2007 and gave positive metallurgical results. The results of the Grevet B bulk sample have proven successful, therefore processing at Langlois mill is expected to increase during 2007 and 2008.

The Company currently has five diamond drills operating on the property on surface, three for exploration and two focused on the upper portion of Zone 97 for definition drilling.



-------------------------------------------------------------------------
Year and Quarter ended December 31
2006
-------------------------------------------------------------------------
Ore Milled (tonnes) 59,373
-------------------------------------------------------------------------
Zinc (%) 8.3
Copper (%) 0.5
Silver (g/t) 41
Gold (g/t) 0.3
-------------------------------------------------------------------------
Concentrate Production
-------------------------------------------------------------------------
Zinc (tonnes) 8,201
Recovery (%) 82.2
Grade (%) 49.5
Copper (tonnes) 1,078
Recovery (%) 72.1
Grade (%) 19.3
-------------------------------------------------------------------------
Metal in Concentrates
-------------------------------------------------------------------------
Zinc (tonnes) 4,057
Copper (tonnes) 208
Silver (ounces) 22,855
Gold (ounces) 205
-------------------------------------------------------------------------


Langlois Outlook

During the fourth quarter of 2006, a diamond drill program commenced to investigate the upper portions of Zones 4 between the current mining areas and surface. To date, 32 holes totalling 6,200 metres have been drilled. All 32 holes intersected semi to massive sulphide zones. Based on this drilling, the Company is planning a ramp from surface which will be able to access these zones for mining and will eventually connect with the current underground workings at Langlois, thus facilitating the movement of equipment, material and manpower between surface and the mine.

During the fourth quarter of 2006, Metco Resources Ltd. announced that a pre-feasibility study will be conducted during the first half of 2007 on the Orphee Deposit (50% Breakwater, 50% Metco Resources Inc.). The Orphee deposit is located only 6 kilometres away from the Langlois mill. Should the results of the pre-feasibility be positive, then the Orphee deposit could become a source of additional mill feed for Langlois, which currently has excess mill capacity.

During the first quarter of 2006, the Company completed an airborne Megatem geophysical survey over the Langlois property. The survey identified several anomalies in the immediate area surrounding the Langlois mine, both on the existing land package as well as open ground. The Company has acquired additional claims totalling 4,000 hectares which cover the anomalies and is in the process of investigating them with ground geophysical surveys and diamond drilling.

Virginia Mines Inc. - Coulon Project

On May 8, 2006, the Company announced the signing of an agreement with Virginia Mines Inc. ("Virginia") on the Coulon project, located in the James Bay region of the Province of Quebec. In accordance with the agreement, the Company has the option to acquire a 50% interest in the Coulon property in return for C$6.5 million in exploration expenditures and cash payments totalling C$180,000 over an 8-year period. Virginia will be the operator until the completion of a positive pre-feasibility study. The Coulon project, located 15 kilometres from the Fontanges airport, lies in an unexplored volcanic belt and is characterized by a geological assemblage typical of belts hosting volcanogenic, massive-sulphide deposits that have made north western Quebec and north eastern Ontario one of the world's richest regions of polymetallic deposits.

The Coulon project is the host to polymetallic, massive-sulphide lenses, which returned values of up to 15.39% Zn, 3.12% Pb, 117 g/t Ag and 0.46% Cu over 10.5 metres (lens 16-17), on the Dom zone, 2.91% Zn, 1.12% Cu, 34.25 g/t Ag and 0.3 g/t Au over 21.8 metres (lens 9-25) and 12.65% Zn, 1.36% Cu, 1.54% Pb, 125 g/t Ag and 0.3 g/t Au over 4.70 metres (lens 08).

The exploration program carried out during the summer and fall of 2006 led to the discovery of two new important polymetallic lenses (lenses 43 and 44), bringing the total of known lenses to five, and confirmed the vertical continuity of lens 9-25 to a depth of 365 metres. Furthermore, this recent work brought to light many new priority drill targets on the property. The Company is very encouraged by the results of the 2006 campaign. All these lenses remain open and the potential to increase their tonnage is excellent. Many other priority targets were also defined within this fertile volcanic belt that now presents mineralized showings and alteration along a lateral distance of over 20 kilometres. Virginia plans to begin a new campaign composed of geophysical surveying and diamond drilling during the first quarter of 2007 and mobilization of a second drill rig on the project in order to accelerate the exploration work.

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 in the immediate vicinity or elsewhere throughout the Company's properties.

FOURTH QUARTER REVIEW

The Company realized net earnings in the fourth quarter of 2006 of $50.4 million compared with $9.3 million in the same period in 2005.

In the fourth quarter ended December 31, 2006, gross sales revenues increased by $101.0 million to $158.3 million primarily due to significantly higher zinc and other metal prices and a 21% increase in tonnes of concentrate sold partially offset by a stronger Canadian dollar.

Treatment and marketing costs increased by 173% in the fourth quarter of 2006 to $657 per tonne of concentrate sold compared with $292 per tonne in the same period in 2005. Higher metal prices in the fourth quarter of 2006 triggered treatment charge escalators which significantly increased aggregate treatment costs. Direct operating costs were higher in 2006 at $501 per tonne of concentrate sold compared with $406 per tonne in 2005.



-------------------------------------------------------------------------
Depreciation,
Operating review Contribution depletion,
for the fourth (loss) from reclamation Capital
quarter ended mining and closure expenditures
December 31 Net revenue activities(1) costs (3)
-------------------------------------------------------------------------
($ millions) 2006 2005 2006 2005 2006 2005 2006 2005
-------------------------------------------------------------------------
Myra Falls 30.6 12.5 9.5 0.6 3.3 1.4 3.3 5.7
El Mochito 47.9 14.9 34.5 6.8 2.1 2.0 2.2 2.1
El Toqui 32.3 10.4 23.2 3.4 1.4 1.0 0.8 1.2
Bougrine 0.0 4.2 0.0 1.9 0.0 0.4 0.0 0.0
Bouchard-Hébert 0.0 0.0 (0.1) 0.3 0.1 (0.3) 0.0 0.0
Nanisivik 0.0 0.0 (0.1) (0.1) 0.1 0.1 0.0 0.0
Langlois 0.0 0.0 0.0 0.0 0.0 0.0 20.4 0.8
Other (0.5)(2) (2.3)(2) (0.6) (2.6) 0.2 0.2 0.2 0.0
-------------------------------------------------------------------------
Total 110.3 39.7 66.4 10.3 7.2 4.8 26.9 9.8
-------------------------------------------------------------------------
(1) After non-cash costs.
(2) Net realised from metal hedging activities.
(3) Includes assets under capital lease.


Other expense (income) in the fourth quarter of 2006 decreased by $0.9 million to $3.3 million primarily due to an increase in investment and other income and a decrease in loss on gold loan partially offset by increased general and administrative costs and other foreign exchange loss. Investment and other income increased by $3.1 million in the fourth quarter of 2006 compared to the same period in 2005 primarily due to additional interest and indemnity fee income associated with the 2005 Red Mile transaction, more interest earned on higher cash balances and gains on the sale of certain short-term investments. The gold loan was repaid in 2006 and therefore the loss on gold loan in the fourth quarter of 2005 did not recur. General and administrative costs were higher by $0.7 million in the fourth quarter of 2006 primarily due to higher consulting fees associated with Sarbanes-Oxley compliance and corporate development activities and higher capital tax accruals partially offset by certain stock-based compensation costs which were allocated to the mines in the fourth quarter of 2006. Other foreign exchange loss increased by $1.6 million in the fourth quarter of 2006 compared with the fourth quarter of 2005 primarily due to the impact of foreign exchange rate movements on significantly higher US dollar cash positions in 2006.

Exploration expenditures in the fourth quarter of 2006 increased by $1.8 million primarily due to increased expenditures at El Toqui and Myra Falls compared with the same period in 2005.

Other non-producing property (income) costs decreased by $1.1 million in the fourth quarter of 2006 compared with the same period in 2005 primarily due to reduced costs at Bougrine and the impact of the disposal of the Caribou and Restigouche mines in 2006.

Income tax provisions increased by $15.5 million in the fourth quarter of 2006 compared with 2005 due to higher tax provisions at El Mochito and El Toqui partially offset by an income tax recovery at Myra Falls. The El Mochito and El Toqui tax provisions increased by $18.7 million in the fourth quarter of 2006 because future tax assets established for these mines in the fourth quarter of 2005 did not recur and both mines became taxable in 2006 resulting in tax provisions being established. The increase in income tax recovery at Myra Falls was due to the establishment of a future tax asset for that operation in 2006.

NON-GAAP RECONCILIATIONS

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 that the Company uses this information for.



-------------------------------------------------------------------------
Non-GAAP reconciliation of total cash cost per
pound of payable zinc sold to consolidated
financial statements 2006 2005
-------------------------------------------------------------------------
By-product credit ($ millions)
-------------------------------------------------------------------------
Gross sales revenue per financial statements (452.2) (313.0)
Less zinc sales revenue 341.3 189.7
-------------------------------------------------------------------------
(110.9) (123.3)
Treatments and marketing charges ($ millions)
per financial statements 127.8 105.4
Direct operating costs ($ millions) per
financial statements 134.6 144.3

-------------------------------------------------------------------------
Total cash costs - Canadian ($ millions) 151.1 126.4
-------------------------------------------------------------------------

-------------------------------------------------------------------------
Exchange rate C$/US$ 1.1330 1.2111
-------------------------------------------------------------------------

-------------------------------------------------------------------------
Total cash costs - US$ ($ millions) 133.7 104.6
-------------------------------------------------------------------------

-------------------------------------------------------------------------
Zinc pounds sold (millions) 207.0 265.3
-------------------------------------------------------------------------

-----------------------------------------------------------------------
Total cash cost per pound of payable zinc sold (US$)
-------------------------------------------------------------------------
By-product credit (0.47) (0.39)
-------------------------------------------------------------------------
Treatment and marketing costs 0.55 0.33
-------------------------------------------------------------------------
Direct operating costs 0.57 0.45
-------------------------------------------------------------------------
Total 0.65 0.39
-------------------------------------------------------------------------


SUMMARY OF QUARTERLY RESULTS
-------------------------------------------------------------------------
2006
-------------------------------------------------------------------------
Q1 Q2 Q3 Q4
-------------------------------------------------------------------------
Gross sales revenue
($ millions) 80.7 101.2 112.0 158.3
-------------------------------------------------------------------------
Net earning ($ millions) 38.3 28.6 39.2 50.4
-------------------------------------------------------------------------
Basic earnings per share $0.10 $0.08 $0.10 $0.13
-------------------------------------------------------------------------
Weighted-average number of Common
Shares outstanding (millions) 382.0 383.8 384.3 385.0
-------------------------------------------------------------------------
Diluted earnings per share $0.09 $0.07 $0.09 $0.12
-------------------------------------------------------------------------
C$/US$ realized exchange rate 1.1559 1.1239 1.1187 1.1422
-------------------------------------------------------------------------
Average realized zinc price (US$/t) 2,221 2,895 3,363 4,277
-------------------------------------------------------------------------
Average realized zinc price (C$/t) 2,567 3,226 3,762 4,828
-------------------------------------------------------------------------
Concentrate tonnes sold 67,355 59,779 61,385 73,230
-------------------------------------------------------------------------
Concentrate tonnes produced 66,129 59,906 59,420 67,058
-------------------------------------------------------------------------

-------------------------------------------------------------------------
2005 (restated)
-------------------------------------------------------------------------
Q1 Q2 Q3 Q4
-------------------------------------------------------------------------
Gross sales revenue
($ millions) 91.3 92.4 71.9 57.4
-------------------------------------------------------------------------
Net earning (loss) ($ millions) 3.8 2.1 (1.2) 9.3
-------------------------------------------------------------------------
Basic earnings per share $0.01 $0.01 $0.00 $0.02
-------------------------------------------------------------------------
Weighted-average number of Common
Shares outstanding (millions) 365.7 367.4 369.5 374.2
-------------------------------------------------------------------------
Diluted earnings per share $0.01 $0.01 $0.00 $0.02
-------------------------------------------------------------------------
C$/US$ realized exchange rate 1.2274 1.2429 1.2019 1.1744
-------------------------------------------------------------------------
Average realized zinc price (US$/t) 1,256 1,252 1,296 1,502
-------------------------------------------------------------------------
Average realized zinc price (C$/t) 1,542 1,556 1,558 1,764
-------------------------------------------------------------------------
Concentrate tonnes sold 109,012 118,022 80,205 60,391
-------------------------------------------------------------------------
Concentrate tonnes produced 103,259 88,782 76,014 68,841
-------------------------------------------------------------------------


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 weakening against the Canadian dollar over the past 8 quarters has reduced the realized Canadian dollar gross sales revenue.

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, a copy of which is posted on the SEDAR website at www.sedar.com.

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. For a more complete description of certain elements please refer to note 14 to the consolidated financial statements of the Company.



-------------------------------------------------------------------------
Common Shares or Securities Convertible
into Common Shares February 21, 2007
-------------------------------------------------------------------------
Issued and outstanding 385,849,867
-------------------------------------------------------------------------
Share options outstanding weighted average
exercise price $0.93 9,178,434
-------------------------------------------------------------------------
Dundee - 15,400,705 warrants granted
at $0.20, will expire March 2, 2007 and
15,400,705 expire May 2, 2007. 30,801,410
-------------------------------------------------------------------------
Warrants granted at $1.00, expire January 28, 2009
- traded on TSX 33,571,429
-------------------------------------------------------------------------
Future fully diluted 459,401,140
-------------------------------------------------------------------------


CAUTION ON FORWARD-LOOKING INFORMATION

Certain information contained in or incorporated by reference in this news release, including any information as to our future financial or operating performance and other statements that express management's expectation or estimates of future performance, constitute "forward-looking statements". All statements, other than statements of historical fact, are forward-looking statements. The words "believe", "expect", "anticipate", "contemplate", "target", "plan", "intends", "continue", 'budget", "estimate", "may", "will", "schedule" and similar expressions identify forward-looking statements. Forward-looking statements are necessarily based upon a number of estimates and assumptions that, while considered reasonable by us, are inherently subject to significant business, economic and competitive uncertainties and contingencies. Known and unknown factors could cause actual results to differ materially from those projected in the forward-looking statements. Such factors include, but are not limited to: fluctuations in the currency markets; fluctuations in commodity prices; risks arising from holding derivative instruments (such as credit risk, market liquidity risk and mark to market risk); changes in national and local government legislation, taxation, controls, regulations and political or economic developments in Canada, Chile, Honduras, Tunisia or other countries in which we do or may carry on business in the future; business opportunities that may be presented to, or pursued by, us; our ability to successfully integrate acquisitions; operating or technical difficulties in connection with mining or development activities; employee relations; the speculative nature of exploration and development, including the risks of obtaining necessary licences and permits; diminishing quantities or grades of reserves; adverse changes in our credit rating; and contests over title to properties, particularly title to undeveloped properties. In addition, there are risks and hazards associated with the business of exploration, development and mining, including environmental hazards, industrial accidents, unusual or unexpected formations, pressures, cave-ins, flooding (and the risk of inadequate insurance, or inability to obtain insurance, to cover these risks). Many of these uncertainties and contingencies can affect our actual results and could cause actual results to differ materially from those expressed or implied in any forward-looking statements made by, or on behalf of, us. Readers are cautioned that forward-looking statements are not guarantees of future performance. All of the forward-looking statements made in this news release are qualified by these cautionary statements. Specific reference is made to the Company's most recent Form 40F/Annual Information Form on file with the SEC and Canadian provincial securities regulatory authorities for a discussion of some of the factors underlying forward-looking statements. The Company disclaims any intention or obligation to update or revise any forward-looking statements whether as a result of new information, future events or otherwise, except as required by applicable law.



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

-------------------------------------------------------------------------
As at December 31 2006 2005
(restated)
-------------------------------------------------------------------------
Assets

Current
Cash and cash equivalents 81,412 18,749
Restricted cash 1,178 3,929
Short-term investments 4,120 2,523
Accounts receivable - concentrate 12,687 3,027
Other receivables 12,676 9,369
Concentrate inventory 43,686 47,501
Materials and supplies inventory 22,904 21,388
Prepaid expenses and other current assets 4,029 3,934
Future income tax assets 14,745 6,517
-------------------------------------------------------------------------
Total current assets 197,437 116,937
Deferred financing fees - 344
Future income tax asset, long-term 13,440 -
Reclamation deposits 13,543 6,808
Mineral properties and fixed assets 207,884 150,637
Long-term investments 14,704 5,615
Restricted promissory notes 62,285 62,285
-------------------------------------------------------------------------
509,293 342,626
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Liabilities and Shareholders' Equity
Current
Accounts payable and accrued liabilities 43,128 32,797
Provisional payments for concentrate inventory
shipped and not priced 24,246 14,807
Short-term debt including current portion of
long-term debt 2,169 14,585
Income and mining taxes payable 9,798 164
Current portion of reclamation, closure cost
accruals and other environmental obligations 8,267 10,165
-------------------------------------------------------------------------
Total current liabilities 87,608 72,518
Deferred income 6,277 6,888
Long-term lease obligations 501 984
Royalty obligations 62,479 62,479
Long-term debt - 4,143
Reclamation, closure cost accruals and other
environmental obligations 32,293 40,099
Employee future benefits 4,493 5,379
Future income tax liabilities 7,089 1,921
-------------------------------------------------------------------------
Total liabilities 200,740 194,411
Shareholders' equity 308,553 148,215
-------------------------------------------------------------------------
509,293 342,626
-------------------------------------------------------------------------
-------------------------------------------------------------------------



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

-------------------------------------------------------------------------
Years ended December 31 2006 2005 2004
(restated) (restated)
-------------------------------------------------------------------------
Gross sales revenue 452,233 312,965 240,299
Treatment and marketing costs 127,847 105,391 81,856
-------------------------------------------------------------------------
Net revenue 324,386 207,574 158,443
-------------------------------------------------------------------------

Operating costs
Direct operating costs 134,572 144,297 101,922
Depreciation and depletion 17,558 21,565 23,087
Reclamation and closure costs 3,723 12,093 4,896
-------------------------------------------------------------------------
155,853 177,955 129,905
-------------------------------------------------------------------------
Contribution from mining
activities 168,533 29,619 28,538
-------------------------------------------------------------------------
Other expenses (income)
General and administrative 14,047 9,475 10,812
Interest and financing 4,990 1,284 509
Investment and other income (8,162) (2,595) (843)
Loss on gold loan 1,232 1,787 -
Foreign exchange (gain) loss on
US dollar denominated debt (313) (492) 431
Other foreign exchange loss 1,074 294 1,809
-------------------------------------------------------------------------
12,868 9,753 12,718
-------------------------------------------------------------------------
Earnings before the following: 155,665 19,866 15,820
-------------------------------------------------------------------------

Exploration expenditures 9,973 2,915 2,097
Write-down of mineral properties
and fixed assets - 879 1,178
Other non-producing property
(income) costs (9,581) 9,035 8,638
Income and mining tax (recovery)
provision (1,257) (6,986) 571
-------------------------------------------------------------------------
(865) 5,843 12,484
-------------------------------------------------------------------------
Net earnings 156,530 14,023 3,336
Deficit, beginning of year (189,663) (203,686) (207,022)
Reduction in stated share capital
and contributed surplus 172,928 - -
-------------------------------------------------------------------------
Retained earnings (deficit),
end of year 139,795 (189,663) (203,686)
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Basic earnings per Common Share $ 0.41 $ 0.04 $ 0.01
Diluted earnings per Common Share $ 0.37 $ 0.04 $ 0.01
Basic weighted-average number of
Common Shares outstanding (000s) 383,748 369,190 353,508
-----------------------------------------------------------------------
-----------------------------------------------------------------------



Breakwater Resources Ltd.
Consolidated Statements of Cash Flows
(Expressed in thousands of Canadian dollars)
(unaudited)

-------------------------------------------------------------------------
Years ended December 31 2006 2005 2004
(restated) (restated)
-------------------------------------------------------------------------
Operating Activities
Net earnings 156,530 14,023 3,336
-------------------------------------------------------------------------

Items not effecting cash:
Depreciation and depletion 17,558 21,565 23,087
Gain on sale of investment - (851) -
Gain on sale of properties (13,818) - -
Write-down of mineral properties
and fixed assets - 879 1,178
Unrealized loss on gold loan - 1,656 -
Foreign exchange gain on US
dollar denominated loans - (447) -
Other non-cash items (579) (7) (132)
Stock-based compensation 1,608 809 1,253
Issue of common shares to settle
litigation 848 - -
Unrealized deferred income (611) (56) -
Future income taxes (18,845) (6,277) 1,909
Reclamation, closure cost
accruals and other
environmental obligations 3,723 12,093 4,764
Employee future benefits 2,139 1,773 553
-------------------------------------------------------------------------
(7,977) 31,137 32,612
-------------------------------------------------------------------------
Payment of reclamation, closure
cost accruals and other
environmental obligations (7,439) (25,162) (7,879)
Payment of employee future benefits (3,025) (2,840) (968)
Changes in non-cash working
capital items 20,459 1,524 (5,075)
-------------------------------------------------------------------------
Net cash provided by operating
activities 158,548 18,682 22,026
-------------------------------------------------------------------------

Investing Activities
Funds advanced on promissory note - (50,500) (11,785)
Reclamation deposits (6,735) (6,708) -
Short-term investments (1,207) 961 30
Acquisition, net of cash acquired - - (886)
Mineral properties and fixed assets (75,653) (35,599) (25,593)
Proceeds from sale of mineral
properties and fixed assets 335 214 210
-------------------------------------------------------------------------
Net cash used in investing
activities (83,260) (91,632) (38,024)
-------------------------------------------------------------------------

Financing Activities
Decrease (increase) in restricted
cash 2,751 (538) (3,036)
Proceeds from sale of royalty interest - 50,500 12,204
Issue of common shares for cash 1,892 8,480 30,407
Issue of warrants for cash - - 7,211
Deferred financing fees (223) (344) -
Deferred income - 5,096 -
Decrease in long-term lease
obligations (483) - -
(Decrease) increase in
short-term debt (12,919) 11,874 (10,059)
Increase (decrease) in long-term debt (3,643) 3,964 (14,095)
-------------------------------------------------------------------------
Net cash provided by (used in)
financing activities (12,625) 79,032 22,632
-------------------------------------------------------------------------
Net increase in cash during the year 62,663 6,082 6,634
Cash and cash equivalents,
beginning of year 18,749 12,667 6,033
-------------------------------------------------------------------------
Cash and cash equivalents, end of year 81,412 18,749 12,667
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Supplemental Information
Cash interest paid 644 437 436
Cash income and mining taxes paid 8,337 634 358
-------------------------------------------------------------------------


%CIK: 0000782875

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