Breakwater Resources Ltd.
TSX : BWR

Breakwater Resources Ltd.

February 26, 2009 20:16 ET

Breakwater Resources Ltd.'s 2008 Year-End and Fourth Quarter Financial and Operating Results

TORONTO, ONTARIO--(Marketwire - Feb. 26, 2009) -

The reporting currency is Canadian dollars ("C$" or "$") and all amounts disclosed are in Canadian dollars unless otherwise indicated.

Breakwater Resources Ltd. ("Breakwater" or the "Company") (TSX:BWR) is a mining, exploration and development company which produces zinc, copper, lead and gold concentrates. During 2008, the Company's concentrate production was derived from mines located in Canada, Chile and Honduras. The Company also owns base metal and gold exploration properties in Canada, Honduras, Chile and Tunisia. The Langlois mine, located in Canada, began production in November 2006 and commenced commercial production for accounting purposes on July 1, 2007. On November 2, 2008, the Company temporarily suspended operations at Langlois due to the decline in commodity prices and the general deterioration of the economic outlook globally. The start-up and subsequent temporary suspension of the Langlois mine affects all aspects of the Company's financial results which makes comparisons between years difficult.

CURRENT MARKET CONDITIONS AND GOING CONCERN

Current global financial conditions have negatively impacted the economic environment and numerous financial institutions have either gone into bankruptcy or have had to be rescued by governmental authorities. Access to public financing has significantly diminished for companies like Breakwater as a direct result of both sub-prime mortgages and the liquidity crisis affecting the asset-backed commercial paper market. If the current negative economic environment and market turmoil continue, the Company's ability to operate could be adversely impacted and the trading price of the shares could continue to be under downward pressure. Also see Financial Capability section of this news release.

The Company's ability to continue its operations in the normal course of business is dependent upon its ability to achieve and sustain profitable operations. Alternatively, the Company is dependent on continued support from shareholders and creditors. Thus far in 2009, metal prices remain low and the Company continues to experience operating losses and the Company's cash has been significantly reduced. Management is exploring all available options to secure additional funding including equity and debt financing, sale of non-core assets and strategic partnerships. It is not possible to determine with any certainty the success and adequacy of these initiatives.

HIGHLIGHTS

Fourth Quarter

The Company realized a net loss of $53.5 million or $0.12 per share in the fourth quarter of 2008 compared with $38.3 million or $0.09 per share in the fourth quarter of 2007. The change in the results quarter-over-quarter was primarily due to:

-a $19.5 million higher write-down of mineral properties and fixed assets primarily due to $25.3 million and $8.3 million write-downs at Myra Falls and Mochito respectively partially offset by a $16.0 million write-down at Myra Falls in 2007

- a $19.1 million positive move in investment and other income from an $8.4 million expense in 2007 to income of $10.7 million in the fourth quarter of 2008 relating to the disposal of certain non-core assets

- $35.4 million (US$54.4 million) lower gross sales revenue, despite 2% greater tonnes of concentrate sold, largely due to a 49% drop in the price of zinc, a 40% decline in copper prices and lead prices decreasing by 64% quarter-over-quarter

- $6.6 million higher treatment and marketing costs primarily due to higher freight rates and the impact of a weaker C$

- $5.9 million higher depreciation and depletion expenses primarily due to higher fixed asset bases and lower mineral reserves at Mochito and Toqui and the impact of higher production at Langlois

- $19.9 million change in income and mining tax from a provision in 2007 of $14.3 million to a recovery of $5.6 million in 2008 primarily due to lower earnings before tax at Mochito and Toqui and a future tax asset write-down at Myra Falls in 2007

Concentrate produced in the fourth quarter of 2008 decreased by 9% to 65,986 tonnes largely due to decreased production at Toqui, Myra Falls and Langlois.

On October 28, 2008, the Company announced that it would temporarily suspend operations at both Langlois in Quebec, Canada and Myra Falls in British Columbia, Canada. This decision was precipitated by the decline in commodity prices and the general deterioration of the short-term economic outlook globally, which mitigated the overall operational improvements in production and costs at both mines. At Langlois, the temporary cessation of operations took full effect by November 2, 2008. At Myra Falls, results of exploration activities caused the Company to extend the notice period and accordingly the operation continues to produce albeit on a reduced scale with a smaller workforce. The Company continues to closely monitor economic and market conditions and will take appropriate actions in the best interest of the Company, its employees and its shareholders.

In December 2008, the Company sold its 50% interest in the Coulon joint venture property to Virginia Mines Inc. ("Virginia"). Virginia purchased the interest by issuing 1,666,666 common shares of Virginia. At closing, all of the shares of Virginia issued to the Company in respect of the transaction were resold at a price of $2.85 per share ($4.75 million) to third-party buyers.

Additionally, the Company sold its 1.0 percent net smelter royalty ("NSR") on all gold production from the Tonawanda property and its 0.5 percent NSR on all gold production from the Zulapa property (the "Lapa Royalty") to Agnico-Eagle Mines Limited ("Agnico-Eagle") for $6.25 million.

In December 2008, the Company entered into a Royalty Agreement ("Agreement") with Red Mile Resources No. 5 Limited Partnership ("Red Mile") whereby the Company sold a "Basic Royalty" on a portion of the payable zinc production, over the life of the Myra Falls mine. The Company received $18.2 million which included royalty income of $16.0 million and indemnity fees and interest of $2.2 million. The royalty income is shown as Royalty Obligation on the balance sheet and will attract a royalty payment over the life of the obligation that will be recorded as interest expense. The fees and interest received will be brought into income over the life of the Agreement. Of the funds received, $16.0 million were placed with a financial institution, for which the Company took back a restricted promissory note. Interest earned from the promissory note and a portion of the principal must be used to fund the expected Basic Royalty payments. The remaining funds of $2.2 million will be used for working capital purposes.

At December 31, 2008, the Company estimated that inventories shipped but not recognized for revenue purposes had earnings before tax of $0.8 million on 25,407 tonnes of concentrate compared with earnings before tax of $2.9 million on 40,041 tonnes of concentrate at September 30, 2008. Concentrate produced in the fourth quarter of 2008 decreased to 65,986 tonnes from 72,470 tonnes primarily due to decreased production at Langlois, Myra Falls and Toqui offset by increased production at Mochito.

Year

The Company realized a net loss of $88.3 million or $0.20 per share in 2008 compared with net earnings of $23.4 million or $0.06 per share in 2007. The main items affecting the movement to a loss were:

- $30.5 million higher write-down of mineral properties and fixed assets primarily due to $25.3 million and $8.3 million write-downs at Myra Falls and Mochito respectively combined with an $11.0 million write-down of the carrying value of a 20% interest (defined below) in the mineral properties and mine facilities which comprise the Caribou and Restigouche mines in 2008 partially offset by a $16.0 million write-down of Myra Falls in 2007

- $6.2 million (US$7.5 million) lower gross sales revenue due to 42% higher concentrate sales being more than offset by decreases of 39%, 13% and 23% in the realized prices of zinc, copper and lead respectively

- $35.5 million increase in treatment and marketing costs primarily due to higher production volumes and significantly higher freight rates

- $68.2 million increase in direct operating costs primarily due to the impact of higher sales volumes principally at Langlois ($44.6 million) and higher costs at the other mines

- $24.9 million increase in depreciation and depletion expense due to Langlois and increases in the depreciation charges at Toqui and Mochito due to higher fixed asset bases

- $8.1 million decrease in the income tax provision due primarily to write-downs of future tax assets at Myra Falls and Langlois and lower earnings before tax at Mochito and Toqui

- $21.1 million increase in investment and other income primarily due to gains on sales of investments and the Lapa Royalty disposal and lower unrealized losses on investments held for trading

- $15.0 million improvement in foreign exchange and other is primarily due to the impact of the weakening of the C$ against the US$ in 2008 compared with a strengthening C$ in 2007

Concentrate produced in 2008 increased by 10% to 315,837 tonnes largely due to increased production at all operations and particularly Langlois.

On April 10, 2008, the Company purchased a 3% net smelter royalty at Myra Falls established in December 2007 in conjunction with the creation of a qualifying environmental trust for 13,518,739 Common Shares.

On April 15, 2008, the Company issued 7.0 million Common Shares to acquire Metco Resources Inc. ("Metco") to consolidate its land position in Lebel-sur-Quevillon and acquire a large under-explored land package in the prolific Matagami camp.

On August 29, 2008, the Company gave notice it would exercise its right to convert an unsecured subordinated convertible debenture from Blue Note Mining Inc. (formerly, Blue Note Metals Inc.) (together with its affiliates, "Blue Note") to a 20% interest in the mineral properties and mine facilities which comprise the Caribou and Restigouche mines (the "20% interest"). The Company claims that Blue Note is not in compliance with its obligations under the debenture and related documents and accordingly the 20% interest has not been conveyed to the Company. At September 30, 2008, based on the estimated and undiscounted cash flow for the fair value of the 20% interest and the prevailing market conditions, the investment was deemed to be impaired and was written off. There is currently litigation between the Company, CanZinco Ltd. and Blue Note which in part relates to this conveyance and joint venture obligation. The Company claims that Blue Note has an obligation prior to conveying an interest to the Company to discharge or vacate liens and claims against the properties, other than claims specifically permitted under the agreements to which the Company is a party.

The collective bargaining agreement at Myra Falls was renewed during 2008 for eighteen months and has an expiry date of September 30, 2009.


OUTLOOK

In 2009, the Company's objectives are to maximize cash flow in this uncertain economic environment while maintaining safe, environmentally compliant and productive mines. Where necessary and appropriate the Company will invest in capital projects to increase the productivity and efficiency of operations and continue to advance mine exploration and development.

Sales

The Company's Canadian dollar gross sales revenues are affected by the United States dollar ("US$") denominated metals prices received and the exchange rate between the US$ and C$. With the current volatility in the markets it is extremely difficult to forecast metal prices or exchange rates. The effect of various government planned stimulus packages and interest rate cuts will have on the worldwide economy is unknown.

Processing Charges and Freight

Base zinc treatment charges, while currently under negotiation, are expected to decline from 2008 levels. Unsustainably low metal prices are reducing mine production globally. It is anticipated that copper treatment and refining charges will increase in 2009 following recently announced benchmark settlements between major mining companies and smelters. Ocean freight rates are expected to fall significantly from the levels prevailing in 2008, reflecting the current slowdown in global economic activity.

Production

The Company's projected metals production for 2009 is set forth in the following table:



Metal in Concentrate Contained Payable
------------------------------------
Zinc (tonnes)
Mochito 33,300 28,200
Toqui 8,200 6,800
Myra Falls 36,200 30,800
------------------------------------
77,700 65,800
------------------------------------
Copper (tonnes)
Myra Falls 4,800 4,600
------------------------------------
Lead (tonnes)
Mochito 17,600 16,700
------------------------------------

Gold (ounces)
Toqui 44,000 36,000
Myra Falls 14,200 11,300
------------------------------------
58,200 47,300
------------------------------------
Silver (ounces)
Mochito 2,235,000 1,807,000
Toqui 37,000 7,000
Myra Falls 698,000 409,000
------------------------------------
2,970,000 2,223,000
------------------------------------


These projections are based on the following throughput at each mine:

Tonnes Zinc Copper Lead Gold (g/t) Silver (g/t)
Milled (%) (%) (%)
----------------------------------------------------------------------------
Mochito 698,000 5.4 n.a. 3.0 n.a. 114.6
Toqui 259,000 3.7 n.a. n.a. 6.2 7.6
Myra Falls 482,000 8.3 1.3 n.a. 1.3 55.8
----------------------------------------------------------------------------
All Operations 1,439,000 6.1 n.a. n.a. n.a. n.a.
----------------------------------------------------------------------------


Estimates of production are subject to change and actual production may vary materially from such estimates

There are numerous uncertainties inherent in estimating anticipated production including many factors beyond the control of the Company. The estimation of anticipated production is a subjective process and the accuracy of any such estimates is a function of the quality of available data, reliability of production history, variability in grade encountered, mechanical or other problems encountered, engineering and geological interpretation and operator judgment. Rates of production may be less than anticipated. Results of drilling, metallurgical testing and production, and the evaluation of mine plans subsequent to the date of any estimate may cause actual production to vary materially from such estimates.

Exploration

Based on current market conditions, the Company expects to spend $2.5 million on exploration expenditures in 2009 with the objective of increasing the mineral resources (both measured and indicated and inferred) at Mochito in Honduras and at Toqui in Chile as well as meeting the Company's obligations under various joint venture agreements in Quebec, Canada. In the event of a further deterioration in market conditions, the Company may curtail or eliminate projected exploration expenses. The breakdown of exploration expenses is set forth in the following table.




Exploration Expenses
($ millions) 2009 Projection
----------------------------------------------------------
Mochito 0.5
Toqui 0.6
Quebec 1.4
----------------------------------------------------------
2.5
----------------------------------------------------------


Capital Expenditures

In 2009, based on current market conditions, the Company plans to spend $17.3 million on capital with the bulk of the funds related to Mochito and Toqui. Of the capital expenditure budget at Mochito, $6.2 million of the total has been allocated to the mine and mine development with $2.4 million allocated to complete the work at Soledad and Pozo Azul. At Toqui, $2.7 million of the capital expenditures will be directed to the development of Mina Profunda and certain other deposits and to underground delineation drilling. A portion of the construction of a new tailings impoundment area will account for $1.8 million. The mill and the Company's initiative of increasing hydro-electric generating capacity have been allotted $1.0 million. The balance of the funds will be spent on a number of other projects including several environmental and safety initiatives. In the event of a further deterioration in market conditions, the Company may curtail or eliminate projected capital expenditures.



Capital Expenditures
($ millions) 2009 Projection
----------------------------------------------------------
Mochito 9.9
Toqui 6.2
Myra Falls 1.1
Other 0.1
----------------------------------------------------------
Total Capital 17.3
----------------------------------------------------------


Costs

The operating costs on a production basis at each mine are estimated to fall in the ranges set forth below:


Production Costs
(per tonne milled)
----------------------------------------
Mochito US$45 - US$55
Toqui US$56 - US$69
Myra Falls C$93 - C$113


Key Assumptions

Corporate

The Company's ability to continue its operations in the normal course of business is dependent upon its ability to achieve and sustain profitable operations. Alternatively, the Company is dependent on continued support from shareholders and creditors. Thus far in 2009, metal prices remain low and the Company continues to experience operating losses and the Company's cash has been significantly reduced. Management is exploring all available options to secure additional funding including equity and debt financing, sale of non-core assets and strategic partnerships. At this time, it is not possible to determine with any certainty the success and adequacy of these initiatives.

There are numerous uncertainties inherent in estimating anticipated production including many factors beyond the control of the Company. The estimation of anticipated production is a subjective process and the accuracy of any such estimates is a function of the quality of available data, reliability of production history, variability of grade encountered, mechanical or other problems encountered, engineering and geological interpretation and operator judgment. Rates of production may be higher or lower than anticipated. Results of drilling, metallurgical testing and production, and the evaluation of mine plans subsequent to the date of any estimate may cause actual production to vary materially from such estimates.

Mochito

As noted in previous interim reports, in late 2007 and early 2008 certain ground control issues affected the mine necessitating the move to mining mineralized material in areas unaffected by these issues. This change in the mine plan resulted in the extraction of certain lower grade mantos and the final production figures being below those originally predicted in early 2008. While these issues are thought to be largely resolved, a recurrence could result in the 2009 production being lower than anticipated.

Toqui

The 2009 mine plan at Toqui is focused on mining the gold bearing deposits, Mina Profunda and Aserradero, to the exclusion of other production ready deposits such as the zinc/lead/silver bearing Concordia deposit or the zinc bearing Estatuas deposit. It is anticipated that the throughput will be approximately half that of 2008's throughput with a reduction in manpower and/or the implementation of job sharing initiatives. A recovery in the price of zinc would support the restart of mining these other deposits and the Company will continue to monitor the markets closely to assess the need to modify the mine plan.

Myra Falls

Myra Falls is assumed to operate throughout 2009 with high grade feed in the latter half of the year coming from the South Flank, a lens discovered late in 2008. The current labour agreement with Myra Falls employees, represented by the Canadian Auto Workers union, expires September 30, 2009. In addition to the known and unknown challenges in these markets, in the event the Company is unable to negotiate a new labour contract at Myra Falls, the Myra Falls production forecast may be unattainable.

Langlois

The suspension of operations at Langlois is considered temporary. The Company will continue to closely monitor the markets to determine when it is economically feasible to restart the mine.

SENSITIVITY TO METAL PRICES AND EXCHANGE RATES

The Company's cash flow and net earnings are sensitive to movements in the price of zinc, lead, copper, silver 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 and US$/C$ exchange rate movements based on the projections for 2009 (also see the Outlook section of this news release for additional details). The Company's projections for 2009 are based on prices for zinc, copper, lead, gold and silver of US$0.50 per pound, US$1.45 per pound, US$0.60 per pound, US$825 per ounce and US$11 per ounce respectively and a US$/C$ exchange rate of $0.8333. The sensitivity table assumes that all other prices and/or the exchange rate are held constant.



Sensitivity
Variable Change ($millions)
----------------------------------------------------------------------
----------------------------------------------------------------------
Zinc +/-US10 cents per pound +$14.3/-$13.6
Copper +/-US20 cents per pound +$2.0/-$2.0
Lead +/-US10 cents per pound +$4.3/-$3.8
Gold +/-US$20 per ounce +$1.2/-$1.2
Silver +/-US$1 per ounce +$2.6/-$2.4
Exchange rate +/-US$/C$ 10 cents -$6.5/+$8.1


SELECTED ANNUAL INFORMATION

Statement of Operations and Statement of
Cash Flow Data Years ended December 31,
----------------------------------------------------------------------------
----------------------------------------------------------------------------
($ millions except for share and per share numbers) 2008 2007
----------------------------------------------------------------------------

Gross sales revenue 398.1 404.3
Treatment and marketing costs 135.8 100.3
--------------------
Net revenue 262.3 304.0
Total operating costs 280.9 191.3
--------------------
(Loss) contribution from mining activities (18.6) 112.7
Write-down of mineral properties and fixed assets 46.5 16.0
--------------------
Net (loss) earnings (88.3) 23.4
--------------------
--------------------
Basic (loss) earnings per Common Share (0.20) 0.06
Diluted (loss) earnings per Common Share (0.20) 0.05
Net cash (used in) provided by operating activities (3.7) 79.1
Capital expenditures 76.8 113.8
----------------------------------------------------------------------------
Basic weighted-average number of Common Shares
outstanding (000's) 441,378 413,681

Number of Common Shares outstanding (000's) 446,843 425,700

Balance Sheet Data As at December 31,
----------------------------------------------------------------------------
----------------------------------------------------------------------------
($ millions) 2008 2007
----------------------------------------------------------------------------
Cash and cash equivalents 20.3 62.9
Working capital 29.2 82.6
Total assets 495.2 609.6
Total debt 6.8 2.3
Total long-term liabilities 113.5 134.3
Shareholders' equity 309.7 364.4


STATEMENT OF OPERATIONS REVIEW - THREE AND TWELVE MONTHS ENDED DECEMBER 31, 2008 AND 2007

Gross Sales Revenue

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 Company has a relatively conservative revenue recognition policy (see below) and 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 US$.



Fourth Quarter Year
---------------------------------------------------------------------
Concentrate Sold (tonnes) 2008 2007 2008 2007
---------------------------------------------------------------------
Zinc:
Mochito 13,928 27,801 55,316 58,426
Toqui 16,618 26,241 73,488 67,825
Myra Falls 21,197 15,960 68,361 50,243
Langlois(1) 29,078 15,562 81,730 17,817
---------------------------------------------------------------------
80,821 85,564 278,895 194,311
---------------------------------------------------------------------
Copper
Myra Falls 9,436 11,300 23,500 26,523
Langlois(1) 4,152 2,407 11,818 2,846
---------------------------------------------------------------------
13,588 13,707 35,318 29,369
---------------------------------------------------------------------
Lead
Mochito 6,610 1,878 20,669 16,054
Toqui 2,087 - 6,828 -
---------------------------------------------------------------------
8,697 1,878 27,497 16,054
---------------------------------------------------------------------
Gold
Toqui 1,192 1,266 4,894 4,313
Myra Falls 1 - 1 3
---------------------------------------------------------------------
1,193 1,266 4,895 4,316
---------------------------------------------------------------------
All Metals 104,299 102,415 346,605 244,050
---------------------------------------------------------------------

(1) Langlois entered commercial production on July 1, 2007. Net cash
flow from concentrate produced prior to July 1, 2007 reduced
preproduction capital expenditures. On November 2, 2008, Langlois
operations were temporarily suspended.


Fourth Quarter 2008
----------------------------------------------------------------------
Concentrate Realized Gross sales
sold Payable price(1) revenue
(tonnes) metal(1) (US$) ($000's)
----------------------------------------------------------------------
Zinc 80,821 36,183 1,331 48,149
Copper 13,588 3,044 4,020 12,235
Lead 8,697 5,276 1,189 6,271
Gold(2) 1,193 10,393 803 8,345
Silver n.a. 765,344 10.54 8,069
------------ ----------
104,299
-----------
-----------
Gross sales
revenue in US$ 83,069
Exchange rate 1.2050
----------
Gross sales
revenue in C$ 100,101
----------
----------

Fourth Quarter 2007
----------------------------------------------------------------------
Concentrate Realized Gross sales
sold Payable price(1) revenue
(tonnes) metal(1) (US$) ($000's)
----------------------------------------------------------------------
Zinc 85,564 36,692 2,608 95,677
Copper 13,707 2,939 6,755 19,852
Lead 1,878 1,123 3,328 3,737
Gold(2) 1,266 13,807 790 10,908
Silver n.a. 518,218 14.00 7,254
-------------- ------------
102,415
--------------
--------------
Gross sales
revenue in US$ 137,428
Exchange rate 0.9856
------------
Gross sales
revenue in C$ 135,455
------------
------------

(1) Payable metal and realized prices for zinc, copper and lead are
per tonne and for gold and silver are per ounce.
(2) Gold concentrate sales are principally from Toqui while payable
gold is from all operations except Mochito.


Concentrate sold increased 2% in the fourth quarter of 2008 compared with the fourth quarter of 2007. The 1,884 tonne increase in 2008 was due to increases of 12% at Myra Falls and 85% at Langlois partially offset by 31% and 28% fewer tonnes sold at Mochito and Toqui respectively.

In payable metal terms, zinc sold decreased by 1% in the fourth quarter of 2008 from 36,692 tonnes in the fourth quarter of 2007 while gold decreased by 25% and copper, lead and silver increased by 4%, 370% and 48% respectively.

Zinc, copper, lead and silver prices, denominated in US$, decreased by 49%, 40%, 64% and 25% respectively in the fourth quarter of 2008 while realized gold prices increased by 2%. The Company periodically hedges against fluctuations in metal prices and foreign exchange rates using 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. There were no hedges in place in 2008 and 2007 and accordingly no hedging gains or losses.

Gross sales revenue decreased by US$54.4 million or 40% in the fourth quarter of 2008 due to the significant decline in prices noted above. A weaker C$ resulted in a decrease in the average US$/C$ exchange rate of 22% in the fourth quarter of 2008. In C$ terms, gross sales revenue decreased $35.4 million or 26% in the fourth quarter of 2008 compared with the fourth quarter of 2007.



Year 2008
----------------------------------------------------------------------
Concentrate Realized Gross sales
sold Payable price(1) revenue
(tonnes) metal(1) (US$) ($000's)
----------------------------------------------------------------------
Zinc 278,895 122,047 1,882 229,724
Copper 35,318 7,440 6,042 44,950
Lead 27,497 16,235 1,930 31,331
Gold(2) 4,895 37,209 873 32,486
Silver n.a. 2,646,450 14.69 38,884
Other(3) n.a. (2,231)
-------------- --------------
346,605
--------------
--------------
Gross sales
revenue in US$ 375,144
Exchange rate 1.0612
--------------
Gross sales
revenue in C$ 398,110
--------------
--------------

Year 2007
----------------------------------------------------------------------
Concentrate Realized Gross sales
sold Payable price(1) revenue
(tonnes) metal(1) (US$) ($000's)
----------------------------------------------------------------------
Zinc 194,311 82,661 3,075 254,154
Copper 29,369 6,207 6,959 43,193
Lead 16,054 10,162 2,508 25,481
Gold(2) 4,316 44,508 702 31,225
Silver n.a. 2,127,277 13.36 28,429
Other(3) n.a. 165
------------- ------------
244,050
-------------
-------------
Gross sales
revenue in US$ 382,647
Exchange rate 1.0567
------------
Gross sales
revenue in C$ 404,335
------------
------------

(1) Payable metal and realized prices for zinc, copper and lead are
per tonne and for gold and silver are per ounce.
(2) Gold concentrate sales are principally from Toqui while payable
gold is from all operations except Mochito.
(3) Other gross sales revenue represents revaluations of prior period
concentrate receivables.


Concentrate sold in 2008 increased 42% to 346,605 tonnes. The 102,555 tonne increase was due to increases of 2% at Mochito, 18% at Toqui, 20% at Myra Falls and 353% at Langlois.

In payable metal terms, zinc, copper, lead and silver sales in 2008 were 48%, 20%, 60% and 24% higher respectively while gold sales were 16% lower than in 2007.

Zinc, copper and lead prices, denominated in US$, decreased by 39%, 13% and 23% respectively in 2008 compared with 2007 while realized prices for gold and silver increased by 24% and 10% respectively.

Gross sales revenues decreased US$7.5 million or 2% in 2008 compared with 2007. In C$ terms, gross sales revenue decreased $6.2 million in 2008 compared with 2007.

The Company's revenue recognition policy requires that, among other things, final pricing of concentrate inventories be known prior to the recognition of revenue. Using commodity prices and exchanges rates prevailing at December 31, 2008, the following schedule provides details regarding inventories shipped but not recognized for revenue purposes and the related provisional payments.




Net Weighted-
smelter Inventory Earnings Provisional average
Concentrate return value before taxes payments months to
(DMT) ($000's) ($000's) ($000's) ($000's) settlement
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Zinc 19,449 4,234 3,729 505 4,897 1.5
Copper 4,085 4,990 4,708 282 5,615 2.8
Lead 1,873 1,674 1,674 - - 1.0
----------------------------------------------------------------------------
25,407 10,898 10,111 787 10,512
----------------------------------------------------------------------------


As at December 31, 2007, the Company estimated that inventories shipped but not recognized for revenue purposes had earnings before tax of $8.4 million consisting of $47.8 million of net smelter return less $39.4 million of inventory value on 51,100 tonnes of concentrate.

The following table provides the average base and precious metal prices and exchange rates for the periods indicated.




Fourth Quarter Year
----------------------------------------------------------------------------
Average Metal Prices & Exchange Rate 2008 2007 2008 2007
----------------------------------------------------------------------------
Zinc (US$/tonne) 1,185 2,621 1,875 3,242
Copper (US$/tonne) 3,905 7,178 6,956 7,114
Lead (US$/tonne) 1,245 3,209 2,091 2,578
Gold (US$/ounce) 796 788 872 697
Silver (US$/ounce) 10.20 14.22 15.02 13.40
C$/US$ exchange rate 1.2124 0.9821 1.0675 1.0736
----------------------------------------------------------------------------


Treatment and Marketing Costs

Treatment and marketing costs increased 20% to $39.7 million in the fourth quarter of 2008 from $33.0 million in the fourth quarter of 2007 despite the tonnes of concentrate sold only increasing by 2%. Treatment and marketing costs for the fourth quarter of 2008 were 40% of gross revenue compared with 24% in 2007. The overall increase in treatment charges was primarily due to the weakness of the C$. As a percentage of gross sales revenue, the increase was largely due to higher freight rates.

Treatment and marketing costs increased 35% to $135.8 million in 2008 from $100.3 million in 2007 while 42% more tonnes of concentrate were sold. Treatment and marketing costs as a percentage of gross sales revenue in 2008 were 34% compared with 25% in 2007. The increase in treatment and marketing costs as a percentage of revenue was primarily due to the significantly higher freight rates as well as higher base treatment charges.

Direct Operating Costs

Direct operating costs were 3% higher in the fourth quarter of 2008 at $76.2 million compared with $73.9 million in the fourth quarter of 2007. The increased costs were primarily due to Mochito, Toqui and Langlois partially offset by lower aggregate costs at Myra Falls. On a cost per tonne of concentrate sold basis, direct operating costs increased slightly to $731 in the fourth quarter of 2008 from $722 in 2007.

Direct operating costs were 42% higher in 2008 at $229.8 million compared with $161.6 million in 2007, as 42% more tonnes of concentrate were sold. The average cost stayed constant at $663 per tonne of concentrate sold in 2008 compared with $662 in 2007. Also see details of direct operating costs under each mine's Expenses in the Production Results section of this news release.

Depreciation and Depletion

Depreciation and depletion increased $5.9 million in the fourth quarter of 2008 compared with the corresponding period in 2007. The increase was primarily due to a higher fixed asset base and lower mineral reserves at Mochito and Toqui and the impact of higher sales from Langlois.

Depreciation and depletion increased $24.9 million in 2008 compared with 2007. Langlois, which commenced commercial production effective July 1, 2007 and which suspended operation on November 2, 2008, was primarily responsible for the increase with depreciation and depletion of $21.1 million in 2008 compared with $5.0 million in 2007. The balance of the increase was due to the impact of higher fixed asset bases and lower mineral reserves at both Mochito and Toqui.

Reclamation and Closure Costs

Reclamation and closure costs decreased by $3.6 million in the fourth quarter of 2008 compared with the corresponding period in 2007 primarily due to a $3.2 million provision for completion of modifications of the tailings facility at Myra Falls taken in the fourth quarter of 2007.

Reclamation and closure costs decreased by $3.6 million in 2008 compared with 2007. The decrease was primarily due to a $3.2 million provision for completion of modifications of the tailings facility at Myra Falls in 2007 and a $1.2 million reduction in 2008 at Toqui and Langlois partially offset by a $1.0 million increase in estimated closure costs at Bouchard-Hebert in 2008. The reductions at Toqui and Langlois were due to a revised estimate of reclamation and closure cost obligations which resulted from a change in the timing of cash flows for reclamation due to increased reserves which extended the lives of both of these operations.

General and Administrative

General and administrative expenses decreased by $3.3 million in the fourth quarter of 2008 compared with 2007. The decrease was primarily due to decreased bonus accruals, capital taxes, salaries and consulting fees partially offset by higher legal fees.

General and administrative expenses decreased by $3.3 million in 2008 compared with 2007. The decrease was primarily due to decreased bonus accruals, consulting fees, stock-based compensation expense, travel expenses and capital taxes partially offset by costs associated with the acquisition of Metco and increased salaries, legal expenses and a refund of a deposit to purchase shares of Jascan Resources Inc. in 2007 which did not recur in 2008.

Interest and Financing

Interest and financing costs decreased by $2.3 million and $2.4 million in the fourth quarter of 2008 and the 2008 year respectively compared with the equivalent 2007 periods primarily due to $1.4 million lower royalty costs associated with the Myra Falls royalty transactions and $1.0 million of fees paid in relation to the qualifying environmental trust at Myra Falls in 2007.

Investment and Other (Income) Expense

Investment and other income was $10.7 million in the fourth quarter of 2008 compared with an expense of $8.4 million in 2007. The $19.1 million positive swing was primarily due to $11.2 million lower unrealized losses on marking-to-market of investments held for trading in 2008 compared with 2007 and a $6.4 million gain on disposal of the Lapa Royalty.

For 2008, investment and other income was $21.1 million higher than 2007 at $24.2 million. The increase was primarily due to an $8.7 million gain on sale of investments, a $6.4 million gain on sale of the Lapa Royalty and $5.7 million lower unrealized losses on marking-to-market of investments held for trading in 2008 compared with 2007 partially offset by $2.7 million lower interest income due to lower cash balances.

Foreign Exchange and Other

Foreign exchange and other income expense was a gain of $3.7 million in the fourth quarter of 2008 compared with $0.2 million in 2007. The increase in foreign exchange and other was primarily due to the impact of the weakening of the C$ versus the US$ in the fourth quarter of 2008 compared with a relatively flat exchange rate in the fourth quarter of 2007.

For 2008, foreign exchange and other was $15.0 million higher with an income of $5.2 million compared with an expense of $9.8 million in 2007. The change in foreign exchange and other was primarily due to the weakening of the C$ versus the US$ in 2008 compared with a strengthening C$ in 2007.

Exploration

Exploration expenses decreased by $2.8 million in the fourth quarter of 2008 compared with 2007. Lower expenses at all operations except Mochito accounted for the decrease. In 2008, exploration expenses were similar to 2007 primarily due to decreases at all operations being offset by increased expenses at the Company's joint venture properties.

Please refer to the exploration section of each mine and the project sections for details of the exploration activities in 2008.



Exploration Fourth Quarter Year
------------------------------------------------------------
($ millions) 2008 2007 2008 2007
------------------------------------------------------------
Mochito 0.8 0.6 2.6 2.9
Toqui 0.1 0.3 1.0 2.7
Myra Falls 0.0 0.4 1.0 3.3
Langlois 0.3 1.8 3.9 4.3
Non-operating 0.0 0.1 0.5 0.8
Corporate 2.1 3.0 8.2 3.0
------------------------------------------------------------
Total 3.3 6.2 17.2 17.0
------------------------------------------------------------
------------------------------------------------------------


Other Non-Producing Property Costs

Other non-producing property costs decreased by $0.1 million and $0.3 million for the fourth quarter of 2008 and the 2008 year respectively compared with the equivalent periods in 2007 due to reduced expenditures as non-producing properties proceed towards closure partially offset by inventory write-downs.

Write-down of Mineral Properties and Fixed Assets

At December 31, 2008, the carrying value of the mineral properties and fixed assets at Myra Falls and Mochito were written-down by $25.3 million and $8.3 million respectively as the net book values exceeded the fair values. The $16.0 million write-down of mineral properties and fixed assets in 2007 related to an impairment charge for Myra Falls. Fair value was determined by using estimated future cash flow. For 2008 testing purposes, the Company used the price assumptions contained in the Sensitivity to Metal Prices and Exchange Rates section of this news release for 2009 and, estimated future price realizations and exchange rates for 2010 to the end of each mine's life. The write-downs were allocated against the fixed assets of the respective mine on a prorata basis, based on the net book value before the write-down. At December 31, 2008, the carrying values of fixed assets at Bougrine and Nanisivik were also determined to exceed their fair values and were written-down by $0.9 million and $0.4 million respectively. At September 30, 2008, based on estimated and undiscounted cash flow for the fair value of the 20% interest in the Caribou and Restigouche mines and the prevailing market conditions, the investment was deemed to be impaired and $11.0 million was written-off.

The carrying values of the Company's wholly-owned mines are tested for impairment when conditions warrant. The Company will continue to monitor these assets for impairment and readers are cautioned that further write-downs may be required should circumstances change.

Income and Mining Tax Provision (Recovery)

In the fourth quarter of 2008, income and mining tax provision (recovery) changed to a recovery of $5.6 million in 2008 from a provision of $14.3 million in 2007. The $19.9 million change was primarily due to a $12.4 million write-down of a future tax asset at Myra Falls in the fourth quarter of 2007 which did not recur in 2008 and the impact of losses before tax at Mochito and Toqui in 2008 compared with earnings before tax in 2007.

The income and mining tax provision decreased to $18.5 million from $26.6 million in 2007, an $8.1 million change. The decrease was primarily due to a $19.0 million write-down of the Myra Falls future tax asset in 2007 related to an impairment review and the establishment of a $15.5 million future tax asset for Langlois in 2007 partially offset by write-offs of $13.4 million and $18.0 million of future tax assets at Langlois and Myra Falls respectively in 2008, the impact of lower earnings before tax at Mochito and Toqui in 2008 and a renunciation of the tax benefit of flow-through shares in 2008 of $2.2 million. Please refer to the income and mining tax provision sections for each mine in the Production section of this news release for additional details.

LIQUIDITY AND FINANCIAL POSITION REVIEW

Working Capital

Working capital at the end of 2008 was $29.2 million compared with $82.6 million at the end of 2007, a decrease of $53.4 million.

Current Assets

Total current assets decreased by $92.2 million to $101.3 million at December 31, 2008 compared with December 31, 2007. The main components of current asset changes were:

- Cash and cash equivalents decreased by $42.6 million reflecting lower cash flow from operating activities, expenditures on mineral properties and fixed assets net of proceeds from investment sales

- Short-term investments decreased by $6.4 million primarily due to the sale of certain equity investments and unrealized losses on equity investments held

- Concentrate inventory decreased by $43.0 million primarily due to the tonnes of concentrate in inventory decreasing by 31,732 tonnes to 49,085 tonnes at December 31, 2008 and the value of those tonnes decreasing to $444 per tonne at December 31, 2008 from $801 per tonne at December 31, 2007

- Materials and supplies inventory increased by $8.3 million primarily due to higher quantities of inventory at Mochito and the impact of a stronger US$ on translation of inventories at Mochito and Toqui partially offset by $1.4 million of additional provisions for obsolescence

Current Liabilities

Current liabilities decreased by $38.8 million to $72.1 million at December 31, 2008 compared with December 31, 2007. The main components of the current liabilities changes were:

- Accounts payable and accrued liabilities decreased by $11.1 million primarily due to a $10.1 million decrease in accounts payable and accrued liabilities at Myra Falls due to lower production levels and reduced capital spending and a $5.6 million decrease at Langlois related to the temporary suspension of operations partially offset by an increase of $4.9 million of provisional payments refundable to customers related to a fall in metal prices from the time the initial provisional payment was received to December 31, 2008

- Short-term debt increased by $4.7 million primarily due to US$4.0 million of borrowings by Toqui

- Provisional payments for concentrate inventory shipped and not priced, which represent payments received for concentrate shipments that were not recognized as revenue, decreased by $21.7 million. The balance at December 31, 2008 was $10.5 million compared with $32.2 million at December 31, 2007. Refer to the table in Gross Sales Revenue section of this news release for additional details

- Income and mining taxes payable decreased by $9.8 million due principally to reduced profits at Mochito and Toqui

Provisional payments for concentrate inventory shipped and not priced are based on prices prevailing on the date of payment. Recognition of sales can be as much as six months after the date of concentrate production based on contract terms. In the event that prices deteriorate significantly, a portion of the provisional payment may have to be repaid to the customer.

Future Income Tax Asset, Long-Term

At December 31, 2008, future income tax assets, long-term were nil down from $19.9 million at December 31, 2007. The decrease was due to write-offs of future tax assets at Langlois and Myra Falls.

Restricted Reclamation Investments

At December 31, 2008, the Company had restricted reclamation investments of $35.0 million compared with $33.5 million at December 31, 2007. Reclamation deposits of $13.5 million and $21.5 million are held under a safe keeping agreement and a trust indenture respectively to fund future reclamation requirements at Myra Falls.

Long-term Investments

At December 31, 2008, long-term investments were nil down from $32.9 million at December 31, 2007. The decrease was primarily due to sales of certain equities and the conversion and sale of certain convertible debentures.

Restricted Promissory Notes

The Company held three restricted promissory notes at December 31, 2008 totalling $80.9 million compared with two restricted promissory notes totalling $62.3 million at December 31, 2007. All promissory notes are related to Myra Falls royalty transactions(1) completed in 2004, 2005 and 2008. 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 Myra Falls royalty please see the Company's most recent audited consolidated financial statement filed on SEDAR at www.sedar.com or available at the Company's website at www.breakwater.ca.

Deferred Income

Deferred income of $5.9 million at December 31, 2008 consisted of deferred indemnity agreement fees and prepaid interest income received in relation to the Myra Falls royalty transactions in 2004, 2005 and 2008 which will be taken into income over the lives of the three agreements. During 2008, the Company entered into an additional Red Mile transaction which increased deferred income by $2.2 million and sold a royalty interest it held on Agnico-Eagle's Lapa properties which reduced deferred income by $1.3 million.

Royalty Obligations

The royalty obligations of $78.4 million at December 31, 2008 relate to the royalty amounts received from the 2004, 2005 and 2008 Myra Falls royalty transactions. The 2008 Red Mile transaction increased royalty obligations by $16.0 million while shares issued to acquire a 3% net smelter royalty interest in Myra Falls related to a qualifying environmental trust reduced royalty obligations by $20.0 million. See reclamation deposits and restricted promissory notes above.

Reclamation, Closure Cost Accruals and Other Environmental Obligations

Reclamation, closure cost accruals and other environmental obligations represent the Company's obligation for reclamation and severance costs accrued for its mine sites. At December 31, 2008, total reclamation, closure cost accruals and other environmental obligations were $28.5 million compared with $39.7 million at December 31, 2007. During 2008, the provision at Myra Falls was decreased by $9.8 million due to a change in mine life while the provision at Bouchard-Hebert was increased by $1.1 million and was included in reclamation and closure costs.

Of the $28.5 million, $5.6 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 spent $2.5 million in reclamation and closure costs in the fourth quarter of 2008 compared with $1.7 million in the fourth quarter of 2007. The Company incurred expenditures of $5.4 million in reclamation and closure costs in 2008 compared with $6.8 million in 2007. As there is currently no law, regulation or contract in Honduras related to reclamation and closure costs, GAAP does not permit the Company to set up a liability for reclamation at the Mochito mine. Closure and reclamation costs for Mochito are estimated to be $4.6 million.



Reclamation and Closure Cost Accruals and Other
Environmental Obligations at December 31, 2008
($ millions) Current Long-term Total
-----------------------------------------------------------------
-----------------------------------------------------------------
Myra Falls 0.7 16.7 17.4
Mochito(1) 0.0 1.1 1.1
Toqui 0.0 3.1 3.1
Langlois 0.0 1.1 1.1
Bouchard-Hebert 2.2 0.1 2.3
Nanisivik 2.2 0.4 2.6
Bougrine 0.5 0.4 0.9
-----------------------------------------------------------------
Total 5.6 22.9 28.5
-----------------------------------------------------------------
(1) Reclamation and closure cost accruals for Mochito relate to
accrued severances.


Employee Future Benefits

Employee future benefits payable relate to Myra Falls and decreased $1.8 million in 2008 to $0.9 million at December 31, 2008. The decrease was primarily due to an $8.1 million increase in unamortized actuarial loss and a $0.2 million increase in unamortized past service costs partially offset by a $4.7 million decrease in the fair value of plan assets and a $1.7 million increase in accrued benefit obligations. The $4.7 million or 14% decrease in the fair value of plan assets was primarily due to the impact of the significant volatility in the financial markets experienced in 2008 on plan asset values. Continued deterioration of the financial markets in the future could increase the $10.6 million defined benefit pension plan deficit resulting in the requirement for greater contributions after the next required actuarial valuation on December 31, 2010. The $8.1 million increase in unamortized actuarial loss was primarily due to a change in the actuarial assumption that the mine closure date would be December 31, 2020.

Included in employee future benefits is a defined benefit pension plan for the Myra Falls unionized employees. Actuarial reports valuing this defined benefit pension plan are prepared every three years with December 31, 2007 being the most recent valuation. The Company's minimum contribution, until the next required valuation on December 31, 2010, for the defined benefit pension plan is approximately $2.9 million per annum consisting of $1.2 million for current service costs and $1.7 million for annual special payments.

Future Income Tax Liabilities

Future income tax liabilities decreased $4.7 million to $3.2 million at December 31, 2008. The decrease was primarily due to a $4.9 million reduction of Quebec mining duties at Langlois and a $2.3 million reduction associated with gains on investments which were sold in 2008 partially offset by a $2.4 million increase at Toqui related to timing differences.

Shareholders' Equity

Shareholders' equity at December 31, 2008 was $309.7 million compared with $364.4 million at December 31, 2007. The decrease of $54.7 million was primarily due to a net loss of $88.3 million and the renunciation of $2.2 million related to the flow-through shares issued in late 2007 partially offset by the issuance of 7.0 million Common Shares on the acquisition of Metco, the issuance of approximately 13.5 million Common Shares on the acquisition of a 3% royalty at Myra Falls and $7.1 million of other comprehensive income.



Other Total
Shareholders' Contri- comprehen- share-
Equity Capital buted Retained sive holders'
($000's) stock Warrants surplus earnings income equity
----------------------------------------------------------------------------
----------------------------------------------------------------------------
As at
December 31,
2007 188,726 8,540 2,029 168,908 (3,817) 364,386

Shares issued
on
acquisition
of
Metco, net of
expenses 7,264 - - - - 7,264
Shares issued
on
acquisition
of
the Myra
Falls
royalty, net
of
expenses 18,146 - 1,820 - - 19,966
Value
ascribed to
options
exercised
under
stock-based
compensation 15 - (15) - - -
Adjustment to
flow-through
share costs (26) - - - - (26)
Renunciation
related to
flow
through
shares (2,160) - - - - (2,160)

Exercise of
warrants 8 (2) - - - 6
Employee
share option
plan -
proceeds of
options
exercised 26 - - - - 26
Employee
share
purchase plan 375 - - - - 375
Stock-based
compensation - 1,091 - - 1,091
Other
comprehensive
income - - - 7,074 7,074
Loss - - (88,340) - (88,340)

----------------------------------------------------------------------------
As at
December 31,
2008 212,374 8,538 4,925 80,568 3,257 309,662
----------------------------------------------------------------------------


In 2008, the Company issued the following Common Shares: 7,000,000 on the acquisition of Metco; 13,518,739 on the acquisition of the Myra Falls royalty; 6,480 on exercise of warrants; 46,667 following the exercise of employee share options and 570,626 pursuant to the Company's employee share purchase plan. The 33,481,849 outstanding warrants at December 31, 2008 expired on January 28, 2009.

Capital Expenditures

The Company invested $76.8 million in mineral properties and fixed assets in 2008. At mining operations, $28.1 million, $20.9 million, $3.7 million and $25.0 million were spent at Mochito, Toqui, Myra Falls and Langlois respectively. For details of these expenditures, please refer to the financial results discussion for each mine. Corporate capital expenditures of negative $0.8 million were primarily related to tax credits of $1.3 million partially offset by fixed asset additions and earn-in payments made on certain joint venture properties including Coulon in Quebec.

Financial Capability

Recent market events and conditions, including disruptions in the Canadian, American and international credit markets and other financial systems and the deterioration of the Canadian, American and global economic conditions have had a significant material adverse impact on a number of financial institutions forcing them into bankruptcy or requiring government authorities to rescue them. These events and a general flight from risk have limited access to capital and credit for many companies. These unprecedented disruptions in the current credit and financial markets, could, among other things, impede access to capital or increase the cost of capital, which would have an adverse effect on the Company's ability to obtain, or increase its cost of obtaining, capital and financing, if required, for its operations. The Company's access to additional capital may not be available on terms acceptable to the Company or at all.

In recent months, worldwide securities markets, particularly those in the United States and Canada, have experienced a high level of price and volume volatility, and the market price of securities of many companies have experienced unprecedented declines in price which have not necessarily been related to the operating performance, underlying asset values or prospects of such companies. In addition, significantly higher redemptions by holders of mutual and hedge funds has forced many of such funds (including those holding the Company's securities) to sell such securities at any price. Therefore, there can be no assurance that significant fluctuations in the trading price of the Company's Common Shares will not occur, or that such fluctuations will not materially adversely affect the Company's ability to raise equity funding without significant dilution to its existing shareholders, or at all.


PRODUCTION RESULTS

The table below contains the Company's production for the 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. On November 2, 2008, the Company temporarily suspended operations at Langlois due to the decline in commodity prices and the general deterioration of the economic outlook globally.



Fourth Quarter Year
----------------------------------------------------------------------------
2008 2007 2008 2007
----------------------------------------------------------------------------
Tonnes Milled 486,727 584,361 2,272,740 2,294,000
Zinc (%) 6.4 5.7 6.7 5.9

Concentrate Production (tonnes)
Zinc:
Mochito 12,198 11,656 53,757 56,205
Toqui 15,253 17,813 64,776 65,322
Myra Falls 14,161 13,599 66,051 56,978
Langlois(1) 11,175 13,935 71,868 54,184
----------------------------------------------------------------------------
52,787 57,003 256,452 232,689
----------------------------------------------------------------------------
Copper:
Myra Falls 4,039 7,825 21,569 27,181
Langlois(1) 1,475 2,060 10,661 6,492
----------------------------------------------------------------------------
5,514 9,885 32,230 33,673
----------------------------------------------------------------------------
Lead:
Mochito 4,943 3,527 18,865 15,470
Toqui 1,193 922 5,395 1,564
----------------------------------------------------------------------------
6,136 4,449 24,260 17,034
----------------------------------------------------------------------------

Gold:
Toqui 1,549 1,133 2,895 4,687
Myra Falls - - - -
----------------------------------------------------------------------------
1,549 1,133 2,895 4,687
----------------------------------------------------------------------------
Total 65,986 72,470 315,837 288,083
----------------------------------------------------------------------------
----------------------------------------------------------------------------
C$ operating costs,
production basis ($000's) 40,019 61,650 192,553 178,397
C$ operating cost per tonne milled
(production basis) 82 106 85 85
(1) First concentrate shipped November 2006 and considered to be at
commercial production levels effective July 1, 2007. On
November 2, 2008, Langlois operations were temporarily suspended.


Concentrate produced in the fourth quarter of 2008 decreased by 9% to 65,986 tonnes largely due to decreased zinc concentrate production at Toqui and Langlois; decreased copper concentrate production at Myra Falls and Langlois; and, decreased gold concentrate production at Toqui. Concentrate produced in 2008 increased by 10% to 315,837 tonnes largely due to increased zinc concentrate production at Myra Falls and Langlois; increased copper concentrate production at Langlois; and, increased lead concentrate production at Mochito and Toqui.

The table below summarizes the Company's metal contained in concentrate, before smelting deductions, for the periods presented.



Fourth Quarter Year
------------------------------------------------------
Metal in Concentrate 2008 2007 % 2008 2007 %
------------------------------------------------------
Zinc (tonnes)
Mochito 6,470 6,117 5.8% 28,462 29,211 -2.6%
Toqui 7,518 8,722 -13.8% 31,992 32,191 -0.6%
Myra Falls 7,659 7,159 7.0% 35,762 29,845 19.8%
Langlois(1) 6,046 7,332 -17.5% 38,620 28,327 36.3%
------------------------------------------------------
27,693 29,330 -5.6% 134,836 119,574 12.8%
------------------------------------------------------
Copper (tonnes)
Myra Falls 895 1,739 -48.5% 5,024 6,086 -17.4%
Langlois(1) 281 403 -30.3% 1,994 1,315 51.6%
------------------------------------------------------
1,176 2,142 -45.1% 7,018 7,401 -5.2%
------------------------------------------------------
Lead (tonnes)
Mochito 3,305 2,311 43.0% 12,545 10,215 22.8%
Toqui 670 - n.a. 2,796 - n.a.
------------------------------------------------------
3,975 2,311 72.0% 15,341 10,215 50.2%
------------------------------------------------------
Gold (ounces)
Toqui 9,758 8,786 11.1% 23,085 37,021 -37.6%
Myra Falls 2,870 3,607 -20.4% 13,994 18,880 -25.9%
------------------------------------------------------
12,628 12,393 1.9% 37,079 55,901 -33.7%
------------------------------------------------------
Silver (ounces)
Mochito 431,849 398,918 8.3% 1,894,835 1,732,755 9.4%
Toqui 94,899 63,506 49.4% 343,457 155,890 120.3%
Myra Falls 134,897 133,383 1.1% 661,228 811,353 -18.5%
Langlois(1) 43,424 51,748 -16.1% 298,863 159,672 87.2%
------------------------------------------------------
705,069 647,555 8.9% 3,198,383 2,859,670 11.8%
------------------------------------------------------
(1) First concentrate shipped November 2006 and considered to be at
commercial production levels effective July 1, 2007. On November 2,
2008, Langlois operations were temporarily suspended.


Aggregate production of zinc in concentrate in the fourth quarter of 2008 was 6% lower at 27,693 tonnes. The decreased zinc was primarily due to lower production from Toqui and Langlois partially offset by higher production from Mochito and Myra Falls. Production of copper in concentrate decreased 45% in the fourth quarter of 2008 from 2007 due to lower tonnes milled at Myra Falls and Langlois. Production of lead in concentrate increased 72% in the fourth quarter of 2008 due to a more tonnes milled at higher lead grades at Mochito and milling of higher lead grade material from Concordia at Toqui. Gold in concentrate increased 2% the fourth quarter of 2008 primarily due to the planned increase in milling of gold material at Toqui partially offset by lower production from Myra Falls. Silver in concentrate increased 9% primarily due to more tonnes milled at Mochito, higher silver grades at Toqui, lower tonnes milled at Myra and more tonnes milled at Langlois at higher silver grades.

Aggregate production of zinc in concentrate in 2008 was 13% higher at 134,836 tonnes. The increased zinc was primarily due to higher production from Myra Falls and Langlois partially offset by lower production from Mochito and Toqui. Production of copper in concentrate decreased 5% in 2008 from 2007 due to lower tonnes milled at Myra Falls. Production of lead in concentrate increased 50% in 2008 due to more tonnes milled at higher lead grades at Mochito and milling of higher lead grade material from Concordia at Toqui. Gold in concentrate decreased 34% year-over-year due to lower production from Myra Falls and the planned reduction in milling of gold material at Toqui during the first nine months of 2008. Silver in concentrate increased 12% year-over-year primarily due to more tonnes milled at Mochito, higher silver grades at Toqui and more tonnes milled at Langlois at higher silver grades.



Mochito

(i) Mochito Financial Results

Fourth Quarter Year
---------------------------------------
2008 2007 2008 2007
---------------------------------------
Gross sales revenue 20,411 37,820 98,596 130,005
Treatment and marketing costs (6,933) (9,891) (28,978) (23,252)
---------------------------------------
Net revenue 13,478 27,929 69,618 106,753
Direct operating costs (15,309) (13,590) (42,463) (32,540)
Depreciation and depletion (3,750) (1,656) (10,033) (4,374)
Reclamation and closure costs (390) (353) (1,314) (1,099)
---------------------------------------
(Loss) contribution from mining
activities (5,971) 12,330 15,808 68,740
Exploration (821) (642) (2,609) (2,919)
Write-down of mineral properties and
fixed assets (8,327) - (8,327) -
---------------------------------------
(15,119) 11,688 4,872 65,821
Income and mining tax recovery
(provision) 1,928 (3,393) (3,270) (19,132)
---------------------------------------
Net (loss) earnings (13,191) 8,295 1,602 46,689
---------------------------------------
---------------------------------------
Capital expenditures 8,315 7,122 28,091 23,130
---------------------------------------
---------------------------------------


Revenue:

The following tables and discussion provide details of Mochito's gross sales revenue for the periods indicated:



FOURTH QUARTER 2008
----------------------------------------------------------------------
Concentrate Realized Gross sales
sold Payable price(1) revenue
(tonnes) metal(1) (US$) ($000's)
----------------------------------------------------------------------
Zinc 13,928 6,144 1,129 6,938
Lead 6,610 4,175 1,248 5,210
Silver n.a. 457,899 9.97 4,565
-------------------- ------------
20,538
--------------------
--------------------
Gross sales revenue in US$ 16,713
Exchange rate 1.2212
-------------
Gross sales revenue in C$ 20,411
-------------
-------------

FOURTH QUARTER 2007
----------------------------------------------------------------------
Concentrate Realized Gross sales
sold Payable price(1) revenue
(tonnes) metal(1) (US$) ($000's)
----------------------------------------------------------------------
Zinc 27,801 12,103 2,552 30,892
Lead 1,878 1,123 3,328 3,737
Silver n.a. 257,139 13.96 3,589
-------------------- ------------
29,679
--------------------
--------------------
Gross sales revenue in US$ 38,218
Exchange rate 0.9896
-------------
Gross sales revenue in C$ 37,820
-------------
-------------
(1) Payable metal and realized price(s) for zinc and lead are per tonne and
for silver is per ounce.


Concentrate sold in the fourth quarter of 2008 was 31% lower due to a fall in zinc concentrate sales. This together with significant declines in the realized prices of all the metals produced at Mochito resulted in a 56% drop in gross sales revenues in US$ terms. A weakening of the C$ resulted in gross sales revenue in C$ terms decreasing by 46% in the fourth quarter of 2008.



2008
----------------------------------------------------------------------
Concentrate Realized Gross sales
sold Payable price(1) revenue
(tonnes) metal(1) (US$) ($000's)
----------------------------------------------------------------------
Zinc 55,316 24,422 1,771 43,244
Lead 20,669 12,856 2,023 26,006
Silver n.a. 1,736,421 14.61 25,377
Other(2) n.a. (1,168)
-------------------- ------------
75,985
--------------------
--------------------
Gross sales revenue in US$ 93,459
Exchange rate 1.0550
-------------
Gross sales revenue in C$ 98,596
-------------
-------------


2007
----------------------------------------------------------------------
Concentrate Realized Gross sales
sold Payable price(1) revenue
(tonnes) metal(1) (US$) ($000's)
----------------------------------------------------------------------
Zinc 58,426 25,307 3,079 77,926
Lead 16,054 10,162 2,507 25,481
Silver n.a. 1,395,766 13.29 18,546
Other(2) n.a. 453
-------------------- ------
74,480
--------------------
--------------------
Gross sales revenue in US$ 122,406
Exchange rate 1.0621
-------------
Gross sales revenue in C$ 130,005
-------------
-------------
(1) Payable metal and realized price(s) for zinc and lead are per tonne and
for silver is per ounce.
(2) Other gross sales revenue represents revaluations of prior period
concentrate receivables.


Concentrate sales in 2008 were 2% higher than in 2007 primarily due to 29% more lead sold partially offset by less zinc sold. 27% more payable lead and 24% more payable silver were partially offset by 3% less payable zinc. Despite these factors, the 42% decline in realized zinc prices resulted in gross sales revenue falling by US$28.9 million or $31.4 million in C$ terms.

Expenses:

Despite a drop in aggregate treatment and marketing costs quarter-over-quarter due to a 31% drop in tonnes sold partially offset by higher shipping costs and base treatment charges, treatment and marketing costs rose marginally to $338 per tonne of concentrate sold in the fourth quarter of 2008 from $333 in the same period in 2007.

For the full year, treatment and marketing costs were higher than in 2007 both in aggregate terms and per tonne sold primarily due to an increase in the global availability of zinc concentrates which increased treatment charge terms and because of higher freight rates.

Direct operating costs rose in the fourth quarter of 2008 due to higher than normal levels of rainfall which gave rise for the need for additional manpower on projects related to dewatering, road repair and ground rehabilitation. In addition, increased power consumption and fuel surcharges resulted in higher costs.

Direct operating costs for 2008 increased primarily due to increased power consumption and fuel surcharges, a switch to an improved, more expensive method of ground control and support and to the wetter than normal rainy season. Upgrades to the electrical system and other major initiatives also increased direct operating costs.

Depreciation and depletion for the fourth quarter of 2008 and for the 2008 year increased $2.1 million or 126% and $5.7 million or 129% respectively when compared with the respective periods in 2007. The increase was primarily due to decreased proven and probable mineral reserves compared with 2007, higher capital assets due to acquisitions in prior years and lower mineral reserves.

Exploration expenses in the fourth quarter of 2008 and for the 2008 year were broadly comparable with the respective periods in 2007. Please refer to the exploration section below for additional details.

At December 31, 2008, the carrying value of the mineral properties and fixed assets at Mochito were written-down by $8.3 million as the net book value exceeded the fair value. Fair value was determined by using estimated future cash flow.

Income and mining tax provision (recovery) for the fourth quarter of 2008 and for the 2008 year decreased by $5.3 million and $15.9 million respectively primarily due to significantly lower earnings before tax in the 2008 periods compared with the respective periods in 2007.

Capital Expenditures:

At Mochito, $28.1 million was spent in 2008 primarily as follows: $6.0 million for mobile equipment; $4.8 million for tailings facilities; $0.5 million for electrical upgrades; $9.8 million for mine development; $2.1 million for various infrastructure projects; and $2.7 million for capital spares.



(ii) Mochito Production

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

Fourth Quarter Year
----------------------------------------------------------------------------
2008 2007 2008 2007
----------------------------------------------------------------------------
Tonnes Milled 162,083 151,149 646,845 607,583
Zinc (%) 4.6 4.6 5.0 5.4
Lead (%) 2.5 1.9 2.4 2.1
Silver (g/t) 94 94 103 102
Concentrate Production
Zinc (tonnes) 12,198 11,656 53,757 56,205
Recovery (%) 87.3 87.2 88.6 88.9
Grade (%) 53.1 52.6 53.0 52.0
Lead (tonnes) 4,943 3,527 18,865 15,470
Recovery (%) 82.8 77.1 82.4 78.6
Grade (%) 66.8 65.5 66.5 66.0
Metal in Concentrates
Zinc (tonnes) 6,470 6,117 28,462 29,211
Lead (tonnes) 3,305 2,311 12,545 10,215
Silver (ounces) 431,849 398,918 1,894,835 1,732,755

US$ operating costs, production
basis ($000's) 9,289 9,171 35,761 31,655
US$ operating cost per tonne
milled (production basis) 57 61 55 52


Production of zinc in concentrate was 6% higher in the fourth quarter of 2008 compared with the same period in 2007 due to more tonnes milled. Production of lead in concentrate was 43% higher in the fourth quarter of 2008 compared with the same period in 2007 due to higher lead grades and higher mill throughput. Production of zinc in concentrate in 2008 was 3% lower than 2007 due to lower zinc grades despite more tonnes milled. Production of lead in concentrate in 2008 was 23% higher than 2007 due to higher lead grades and more tonnes milled.

(iii) Mochito Exploration

There are three principal mineral trends that remain open at Mochito as well as numerous secondary mineral trends that remain prospective. Exploration results during 2008 were favourable on the extension of all three of the main mineral trends and exploration efforts will continue to focus on these trends in 2009 (the northeast extension of the Porvenir trend; the northeast extension of the Salva Vida trend; and the northern extension of the Barbasco-Imperial trend).

Drill hole #8571, drilled furthest to the northeast on the Deep North target, intersected 11.9 metres (true thickness) of mineable grade zinc. The intersection is situated well away from any other holes and lies on the north-eastern projection of the prolific Porvenir trend, which is known to host the largest deposits on the property. There are no drill holes to the northeast of drill hole #8571 and the area is open to further exploration. Drilling continues to test this area.

The Salva Vida trend continues to produce encouraging results that confirm that the mineralizing system continues to the northeast. The extension of this trend has been tested by relatively few drill holes and there remains good potential for other major deposits along this trend.

Extensional drilling of the Imperial zone has almost doubled the size of the known deposit and the zone appears to be strengthening to the north. The grades, as well as the intensity of alteration, improve to the north where the chimney is expected to intersect the manto. The discovery of more reserves is anticipated in this area. The Barbasco and Imperial zones lie on the same mineralizing structure. The extension of this structure to the north has never been tested and there is good potential for more major deposits along this trend.

The first drill hole to the west from within the Leona stope encountered skarn mineralization at least 50 metres further west than the current limits of the stope. La Leona was a major producing mining area in 2008. Grades in this area tend to be modest but production costs are low due to its proximity to the orepass. More drilling is required to confirm that the deposit continues along this trend.

The majority of the results from the surface soil sampling program have been received, with a few more remaining. A strong anomaly has been identified over the Santo Nino trend which indicates that this trend remains prospective. A new multi-element geochemical anomaly has been identified on the Palmar fault approximately 3-1/2 kilometres east of Mochito. There are a series of small anomalies along the fault with the largest being open ended at the edge of the sample grid. Additional sampling could enlarge this anomaly. Much of the area between the Mochito mine and the anomaly on the Palmar fault is covered by younger Red Bed formations that will mask geochemical anomalies. Advanced analytical techniques will be applied to this area in order to filter out the effects of geological and topographical variables.

(iv) Mochito Outlook

Based on current market conditions, the Company is focusing all its efforts on those activities necessary to maintain a safe, environmentally compliant and productive mine while maximizing cash flows. The mine rehabilitation program, commenced to address ground control problems experienced late in 2007 and in the first few months of 2008, continued with the installation of improved ground support media throughout the mine. This initiative is expected to be complete in the first quarter of 2009.

Construction work to increase the capacity of the Pozo Azul tailings facility is largely complete. Pozo Azul is expected to provide ample capacity while the Soledad facility is repaired with completion anticipated late in 2009.

The collective bargaining agreement at Mochito, renewed in 2007, has an expiry date of October 1, 2010.



Toqui

(i) Toqui Financial Results

Fourth Quarter Year
------------------------------------------
2008 2007 2008 2007
------------------------------------------
Gross sales revenue 18,763 34,395 96,056 114,785
Treatment and marketing costs (9,265) (10,588) (40,187) (40,245)
------------------------------------------
Net revenue 9,498 23,807 55,869 74,540
Direct operating costs (11,107) (10,292) (37,385) (28,262)
Depreciation and depletion (3,117) (1,285) (9,372) (4,311)
Reclamation and closure
(costs) recovery (3) (63) 955 (276)
------------------------------------------
(Loss) contribution from
mining activities (4,729) 12,167 10,067 41,691
Exploration (128) (264) (943) (2,734)
------------------------------------------
(4,857) 11,903 9,124 38,957
Income and mining tax recovery
(provision) 626 (944) (2,051) (5,919)
------------------------------------------
Net (loss) earnings (4,231) 10,959 7,073 33,038
------------------------------------------
------------------------------------------

Capital expenditures 3,135 9,606 20,890 26,738
------------------------------------------
------------------------------------------


Revenue:

The following tables and discussion provide details of Toqui's gross sales revenue for the periods indicated:



Fourth Quarter 2008
----------------------------------------------------------------------
Concentrate Realized Gross sales
sold Payable price(1) revenue
(tonnes) metal(1) (US$) ($000's)
----------------------------------------------------------------------
Zinc 16,618 6,968 1,256 8,749
Lead 2,087 1,101 963 1,061
Gold 1,192 6,227 795 4,953
Silver n.a. 67,229 9.98 671
-------------------- ------------
19,897
--------------------
--------------------

Gross sales revenue in US$ 15,434
Exchange rate 1.2157
------------
Gross sales revenue in C$ 18,763
------------
------------

Fourth Quarter 2007
----------------------------------------------------------------------
Concentrate Realized Gross sales
sold Payable price(1) revenue
(tonnes) metal(1) (US$) ($000's)
----------------------------------------------------------------------
Zinc 26,241 10,716 2,652 28,420
Lead n.a. n.a. n.a. n.a.
Gold 1,266 8,396 796 6,686
Silver n.a. 2,596 14.26 37
-------------------- ------------
27,507
--------------------
--------------------

Gross sales revenue in US$ 35,143
Exchange rate 0.9787
------------
Gross sales revenue in C$ 34,395
------------
------------

(1) Payable metal and realized prices for zinc and lead is per tonne
and for gold and silver are per ounce.


Total concentrate sold in the fourth quarter of 2008 was 28% lower than in the fourth quarter of 2007 primarily due to 37% and 6% decreases in zinc and gold concentrate sold respectively partially offset by increased lead concentrate sales. Lower payable zinc and gold combined with a 53% lower zinc price resulted in a 56% decrease in gross sales revenue in US$ terms. A 24% increase in the exchange rate resulted in 45% lower gross sales revenue in C$ terms.


2008
----------------------------------------------------------------------
Concentrate Realized Gross sales
sold Payable price(1) revenue
(tonnes) metal(1) (US$) ($000's)
----------------------------------------------------------------------
Zinc 73,488 29,926 2,020 60,460
Lead 6,828 3,379 1,576 5,325
Gold 4,894 25,780 876 22,591
Silver n.a. 218,054 14.54 3,171
Other(2) n.a. (127)
-------------------- ------------
85,210
--------------------
--------------------
Gross sales revenue in US$ 91,420
Exchange rate 1.0507
------------
Gross sales revenue in C$ 96,056
------------
------------

2007
----------------------------------------------------------------------
Concentrate Realized Gross sales
sold Payable price(1) revenue
(tonnes) metal(1) (US$) ($000's)
----------------------------------------------------------------------
Zinc 67,825 27,642 3,143 86,879
Lead n.a. n.a. n.a. n.a.
Gold 4,313 28,209 703 19,831
Silver n.a. 5,770 13.60 78
Other(2) (195)
-------------------- ------------
72,138
--------------------
--------------------

Gross sales revenue in US$ 106,593
Exchange rate 1.0769
------------
Gross sales revenue in C$ 114,785
------------
------------
(1) Payable metal and realized prices for zinc and lead are per tonne
and for gold and silver are per ounce.
(2) Other gross sales revenue represents revaluations of prior period
concentrate receivables.


Tonnes of concentrate sold increased by 18% in 2008 compared with 2007 due to increased sales of all types of concentrate. A 36% decrease in the realized price for zinc and a 9% decrease in payable gold were partially offset by increased payable metals for zinc, lead and silver resulting in a 14% decrease in US$ gross sales revenue.

Expenses:

Treatment and marketing costs were 13% lower on an aggregate basis in the fourth quarter of 2008 compared with the fourth quarter of 2007 primarily due to 28% fewer tonnes of concentrate sold partially offset by higher freight costs and lower Canadian dollar. Treatment and marketing costs increased 21% to $466 per tonne of concentrate sold primarily due to the factors noted above. As a percentage of gross revenue, treatment and marketing costs increased to 49% from 31% in the same period in 2007 primarily due to the fall in gross revenues from the lower zinc price realized.

Despite an 18% increase in tonnes of concentrate sold in 2008 compared with 2007, aggregate treatment and marketing costs were comparable. Lower treatment costs offset the increased tonnage sold and resulted in the cost per tonne sold decreasing to $472 from $558 in 2007. As a percentage of gross revenue, treatment and marketing costs increased to 42% in 2008 compared with 35% in 2007 primarily due to lower realized prices for zinc sold.

Direct operating costs in the fourth quarter of 2008 were 8% higher than in the same period in 2007 despite 28% lower tonnes of concentrate sold primarily due to an unfavourable exchange rate movement and higher labour and fuel costs. On a cost per tonne sold basis, fourth quarter 2008 direct operating costs increased to $558 from $374 primarily due to the factors noted above. As a percentage of gross revenue, treatment and marketing costs increased to 59% from 30% primarily due to the factors noted above and the 53% decrease in the realized zinc price.

Direct operating costs increased 32% in 2008 compared with 2007 primarily due to 18% higher concentrate sales, an unfavourable exchange rate movement between the Chilean peso and the US$ and higher labour and fuel costs. On a cost per tonne sold basis, 2008 costs increased to $439 from $392 in 2007 primarily due to the factors noted above. As a percentage of gross revenue, treatment and marketing costs increased to 39% from 25% primarily due to the 36% lower realized zinc price.

Depreciation and depletion for the fourth quarter of 2008 and for the 2008 year increased $1.8 million or 143% and $5.1 million or 117% respectively when compared with the respective periods in 2007. The increases were primarily due to decreased proven and probable mineral reserves compared with 2007 and higher capital assets due to acquisitions in prior years.

Exploration expenses decreased in the fourth quarter of 2008 and for the 2008 year primarily due to reduced expenses related to Concordia and Porvenir. Please refer to the exploration section below for additional details.

Income and mining tax provision (recovery) for the fourth quarter of 2008 and for the 2008 year decreased by $1.7 million and $3.9 million respectively primarily due to significantly lower earnings before tax compared with the same periods in 2007.

Capital Expenditures:

Toqui capital expenditures of $20.9 million in 2008 consisted primarily of: $9.3 million for development of Porvenir, Mina Profunda, Concordia, Concordia East, Estatuas and Aserradero; $5.0 million for mine equipment and buildings; $3.2 million for mill improvements including a lead flotation circuit and a thickened tailings plant study; $0.9 million for the mill pre-feasibility study and gold gravity circuit; and, $0.8 million for a new sedimentation pond and a tailings facility management study.

(ii) Toqui Production

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


Fourth Quarter Year
----------------------------------------------------------------------------
2008 2007 2008 2007
----------------------------------------------------------------------------
Tonnes Milled 130,893 132,489 519,379 522,082
Zinc (%) 6.6 7.3 7.0 6.9
Lead (%) 0.9 0.7 0.9 0.3
Silver (g/t) 31 21 28 14
Gold (g/t) 3.1 2.6 1.9 2.7
Concentrate Production
Zinc (tonnes) 15,253 17,813 64,779 65,322
Recovery (%) 88.1 90.1 88.8 90.0
Grade (%) 48.0 51.2 49.1 49.9
Lead (tonnes) 1,193 922 5,395 1,564
Recovery (%) 65.6 61.7 61.2 61.0
Grade (%) 56.1 54.2 51.8 52.6
Gold (tonnes) 1,549 1,133 2,895 4,687
Recovery (%) 56.1 58.5 55.5 59.8
Grade (g/t) 127.4 141.6 142.3 150.9
Metal in Concentrates
Zinc (tonnes) 7,518 8,722 31,992 32,191
Lead (tonnes) 670 499 2,796 823
Gold (ounces) 9,758 8,786 23,085 37,021
Silver (ounces) 94,899 63,506 343,457 155,890

US$ operating costs, production
basis ($000's) 5,840 8,278 24,744 24,172
US$ operating cost per tonne
milled (production basis) 45 62 48 46


Production of zinc in concentrate was 14% lower in the fourth quarter of 2008 compared with the same period in 2007 due to lower zinc grades and recoveries and fewer tonnes milled. Production of lead in concentrate was higher due to higher lead grades despite fewer tonnes milled. Production of gold in concentrate was 11% higher in the fourth quarter of 2008 due to higher gold grades despite fewer tonnes milled. Production of zinc in concentrate in 2008 was 1% lower than 2007 due to lower recoveries and fewer tonnes milled. Production of gold in concentrate was 38% lower than 2007 due to lower gold grades, lower recovery and fewer tonnes milled.

Silver and lead grades increased in 2008 due to the addition of Concordia material. The new lead flotation circuit expansion became operational in the third quarter of 2008 and, as expected, improved lead concentrate production. Production from the Concordia and Estatuas deposits was curtailed during the fourth quarter in order to concentrate on the development of the gold-rich Mina Profunda deposit. Development of the access for the Mina Profunda deposit is now complete and mining has commenced.

(iii) Toqui Exploration

Exploration potential in the Toqui district is considered excellent for identifying additional resources and reserves. Since acquiring the Toqui mine in 1997, the Company has systematically explored the region and has identified several areas which have expanded the mineral reserves and mineral resources in the area of the mine. Despite this, the Toqui region generally remains under-explored.

During 2008, some 24,763 metres were drilled in 215 holes, with 14,600 metres drilled from surface in 71 holes and 10,163 metres drilled from underground in 144 holes.

On surface, the drilling program encompassed 7,226 metres in 33 holes to determine the northern and southern extensions of the Mina Profunda deposit (a gold deposit which occurs in a lower horizon of calcareous sandstones located some 60 metres below the Dona Rosa deposit), while 7,374 metres in 38 holes were drilled on new targets such as Catedral or on exploration of known mineralization, mainly Concordia, Concordia east and Porvenir northwest.

The bulk of the underground campaign was targeted on the Mina Profunda deposit initially as preliminary resource definition and later in the year as infill drilling. Some 7,518 metres were drilled in 91 holes from underground in Mina Profunda. The drilling confirmed the continuity of the gold skarn system as well as the mineralization and alteration characteristics.

At Estatuas, 2,645 metres of underground drilling in 53 holes has extended the zinc mineralization toward the south and west, with limited definition drilling remaining. To the east, two drill holes intercepted sub-mineralized manto some 60 metres below the level of current workings and to the east of the Marlin fault. To the northwest, drill hole DES69 intercepted 4.5 metres of mineralization (main manto) with economic grades as well as a lower mineralized horizon (calcareous sandstone) approximately 30 metres below the main manto, with a thickness of 8.2 metres with economic grades. When market conditions permit, further drilling will be required to investigate the significance of these intersections.

(iv) Toqui Outlook

Based on current market conditions, the Company is focusing all its efforts on those activities necessary to maintain a safe, environmentally compliant and productive mine and to maximize cash flows. Capital expenditures not required for safety and environmental initiatives have been curtailed. Mining in Concordia and Estatuas will recommence once metal prices improve. In the interim, mining will focus mainly on the higher NSR Aserradero and Mina Profunda deposits.

The Company is in the process of purchasing a used thickened tails backfill plant that it plans to relocate to Toqui during 2009. It is expected this plant will be operational by the middle of 2010 and will enable Toqui to deposit thickened tails in a yet-to-be constructed tailings impoundment facility.



Myra Falls

(i) Myra Falls Financial Results

Fourth Quarter Year
----------------------------------------
2008 2007 2008 2007
----------------------------------------
Gross sales revenue 33,915 42,123 109,404 134,666
Treatment and marketing costs (10,392) (7,868) (32,886) (31,347)
----------------------------------------
Net revenue 23,523 34,255 76,518 103,319
Direct operating costs (31,933) (34,689) (88,247) (83,667)
Depreciation and depletion (2,562) (3,383) (7,031) (8,839)
Reclamation and closure costs (178) (3,635) (1,466) (4,840)
----------------------------------------
(Loss) contribution from mining
activities (11,150) (7,452) (20,226) 5,973
Exploration (7) (360) (1,033) (3,328)
Write-down of mineral properties
and fixed assets (25,300) (16,000) (25,300) (16,000)
----------------------------------------
(36,457) (23,812) (46,559) (13,355)
Income and mining tax recovery
(provision) 291 (12,205) (7,873) (18,890)
----------------------------------------
Net loss (36,166) (36,017) (54,432) (32,245)
----------------------------------------
----------------------------------------

Capital expenditures 420 2,450 3,670 21,362
----------------------------------------
----------------------------------------


Revenue:

The following tables and discussion provide details of Myra Falls' gross sales revenue for the periods indicated:




Fourth Quarter 2008
----------------------------------------------------------------------
Concentrate Realized Gross sales
sold Payable price(1) revenue
(tonnes) metal(1) (US$) ($000's)
----------------------------------------------------------------------
Zinc 21,197 9,869 1,441 14,221
Copper 9,436 2,360 4,108 9,694
Gold 1 3,729 816 3,041
Silver n.a. 125,065 13.38 1,674
------------- -----------
30,634
------------
------------
Gross sales
revenue in US$ 28,630
Exchange rate 1.1846
-----------
Gross sales
revenue in C$ 33,915
-----------
-----------

Fourth Quarter 2007
----------------------------------------------------------------------
Concentrate Realized Gross sales
sold Payable price(1) revenue
(tonnes) metal(1) (US$) ($000's)
----------------------------------------------------------------------
Zinc 15,960 7,067 2,694 19,042
Copper 11,300 2,462 6,664 16,407
Gold n.a. 5,126 782 4,007
Silver n.a. 206,546 14.15 2,922
--------------
27,260
--------------
--------------
Gross sales
revenue in US$ 42,378
Exchange rate 0.9940
-----------
Gross sales
revenue in C$ 42,123
-----------
-----------

(1) Payable metal and realized prices for zinc and copper are per tonne
and for gold and silver are per ounce.


Concentrate sold in the fourth quarter of 2008 was 12% higher than in the fourth quarter of 2007. Despite the increase in concentrate sold, 47% and 38% decreases in the realized price of zinc and copper respectively resulted in revenues for the quarter decreasing by 32% in US$ terms. A 19% higher exchange rate resulted in gross sales revenue decreasing 19% in C$ terms, to $33.9 million.



2008
----------------------------------------------------------------------
Concentrate Realized Gross sales
sold Payable price(1) revenue
(tonnes) metal(1) (US$) ($000's)
----------------------------------------------------------------------
Zinc 68,361 31,061 1,851 57,483
Copper 23,500 5,401 5,873 31,718
Gold 1 10,144 867 8,791
Silver n.a. 359,767 15.58 5,605
Other(2) n.a. (1,341)
-------------------- ------------
91,862
--------------------
--------------------
Gross sales revenue in US$ 102,256
Exchange rate 1.0699
-------------
Gross sales revenue in C$ 109,404
-------------
-------------


2007
----------------------------------------------------------------------
Concentrate Realized Gross sales
sold Payable price(1) revenue
(tonnes) metal(1) (US$) ($000's)
----------------------------------------------------------------------
Zinc 50,243 21,890 3,156 69,096
Copper 26,523 5,654 6,928 39,171
Gold 3 15,967 698 11,148
Silver n.a. 663,245 13.52 8,967
Other(2) n.a. (93)
-------------------- ------------
76,769
--------------------
--------------------
Gross sales revenue in US$ 128,289
Exchange rate 1.0497
-------------
Gross sales revenue in C$ 134,666
-------------
-------------
(1) Payable metal and realized prices for zinc and copper are per tonne and
for gold and silver are per ounce.
(2) Other gross sales revenue represents revaluations of prior period
concentrate receivables.


Tonnes of concentrate sold in 2008 were 20% higher than in 2007 with 36% more zinc sold partially offset by 11% fewer tonnes of copper sold. Despite the significant increase in tonnes of concentrate sold, 41% and 15% decreases in the realized prices for zinc and copper respectively resulted in a 20% decrease in gross sales revenue in US$ terms. A 2% increase in the exchange rate resulted in a 19% decrease in gross sales revenue in C$ terms.

Expenses:

In the fourth quarter of 2008, treatment and marketing costs were 32% higher on an aggregate basis primarily due to 12% greater concentrate sales, a 19% higher exchange rate and higher freight costs. In the fourth quarter of 2008, treatment and marketing costs increased on a per tonne of concentrate sold basis and as a percentage of gross sales revenue primarily due to higher freight rates and lower realized prices.

In 2008, aggregate treatment and marketing costs increased by 5% compared with 2007 primarily due to higher concentrate sales and higher freight costs partially offset by the mix of concentrates sold and lower treatment charges. Treatment and marketing costs per tonne sold decreased by 12% due to lower treatment charges and 11% fewer tonnes of copper concentrate sold partially offset by 36% more tonnes of zinc concentrate sold. As a percentage of gross revenue, treatment and marketing costs increased to 30% in 2008 compared with 23% in 2007 primarily due to the significant decreases in the zinc price realized.

Despite a 12% increase in concentrate sold, aggregate direct operating costs and direct operating costs per tonne sold decreased 8% and 18% respectively in the fourth quarter of 2008 compared with the fourth quarter of 2007 primarily due to cost cutting measures and the mix of concentrate sold partially offset by write-downs related to marking inventory to the lower of cost and net realizable value.

In 2008, aggregate direct operating costs increased 5% compared with 2007 primarily due to the 20% increase in concentrate sold, write-downs related to marking inventory to the lower of cost and net realizable value and restructuring expenses partially offset by cost cutting measures and the mix of concentrate sold.

Reclamation and closure costs in the fourth quarter of 2008 and for the 2008 year decreased from the respective periods in 2007 primarily due to a $3.2 million expense in the fourth quarter of 2007 related to a revised estimate of the cost to complete upgrades to the existing tailings facility which did not recur in 2008.

Exploration expense decreased in the fourth quarter of 2008 and for the 2008 year compared with the respective periods of 2007 due to a reduced exploration program in 2008 given the existing metal's price environment. Please refer to the exploration section below for additional details.

At December 31, 2008, the carrying value of the mineral properties and fixed assets at Myra Falls were written-down by $25.3 million as the net book value exceeded the fair value. Fair value was determined by using estimated future cash flow.

Income and mining taxes decreased $12.5 million in the fourth quarter of 2008 primarily due to a $12.4 million write-down of a future tax asset in the fourth quarter of 2007 which did not recur in 2008. The $11.0 million decrease in income and mining tax provision in 2008 compared with 2007 was primarily due to a future tax asset write-down of $19.0 million in 2007 which was larger than the $8.0 million write-down in 2008.

Capital Expenditures:

Myra Falls' capital expenditures in 2008 of $3.7 million consisted primarily of $1.1 million for development at Price, $2.0 million for a new tailings disposal area, $0.2 million in ramp development and $0.3 million for mining equipment.

(ii) Myra Falls Production

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



Fourth Quarter Year
----------------------------------------------------------------------------
2008 2007 2008 2007
----------------------------------------------------------------------------
Tonnes Milled 126,140 182,040 592,072 726,460
Zinc (%) 6.9 4.7 6.9 4.8
Copper (%) 1.0 1.2 1.1 1.1
Gold (g/t) 1.2 0.9 1.2 1.2
Silver (g/t) 43 27 45 42
Concentrate Production
Zinc (tonnes) 14,161 13,599 66,051 56,978
Zinc Recovery (%) 87.5 84.0 87.1 85.3
Zinc Grade (%) 54.1 52.7 54.1 52.4
Gold Recovery (%) 23.2 22.4 24.8 22.5
Gold Grade (g/t) 2.4 2.8 2.7 3.5
Copper (tonnes) 4,039 7,825 21,569 27,181
Copper Recovery (%) 72.7 81.9 74.1 77.9
Copper Grade (%) 22.2 22.2 23.3 22.4
Gold Recovery (%) 38.9 42.8 35.9 41.9
Gold Grade (g/t) 13.9 9.4 12.0 13.9
Gold (tonnes) - - - 0.5
Recovery (%) - - - 3.2
Grade (g/t) - - - 9,400
Metal in Concentrates
Zinc (tonnes) 7,659 7,159 35,762 29,845
Copper (tonnes) 895 1,739 5,024 6,086
Gold (ounces) 2,870 3,607 13,994 18,880
Silver (ounces) 134,897 133,383 661,228 811,353

C$ operating costs, production
basis ($000's) 14,176 30,264 75,724 91,736
C$ operating cost per tonne milled
(production basis) 112 166 128 126


Production of zinc in concentrate was 7% higher in the fourth quarter of 2008 compared with the same period in 2007 due to higher zinc grades and recoveries despite fewer tonnes milled. Production of copper in concentrate was lower in the fourth quarter of 2008 due to lower copper grades and fewer tonnes milled. Production of zinc in concentrate in 2008 was 20% higher than 2007 due to higher zinc grades and recoveries despite fewer tonnes milled. Production of copper in concentrate was lower in 2008 compared with the same period in 2007 due to fewer tonnes milled.

On December 24, 2008, the Company announced that it had entered into a royalty agreement with Red Mile whereby the Company sold a basic royalty on a portion of the payable zinc production over the life of the Myra Falls mine. The Company received $18.2 million, which included royalty income of $16.0 million and fees and interest of $2.2 million.

Under the terms of the royalty agreement, the Company is required to make basic royalty payments at fixed amounts per pound of payable zinc produced, which escalates from $0.003 per pound to $0.075 per pound over the first twelve years of the royalty agreement. In addition, the Company granted Red Mile a net profit interest of 1.0%, 1.25% or 1.5% in years 2014 through 2018 if the price of zinc in a given calendar year averages US$4,250, US$4,500 or US$4,750 per tonne respectively. Of the cash received, $16.0 million was placed with a financial institution, for which the Company took back a promissory note. Interest earned from the promissory note will be used to fund the expected basic royalty payments during the initial years of the royalty agreement. Over the remaining years of the royalty agreement, interest and principal from the promissory note will be used to fund the basic royalty payments.

The balance of the funds received of $2.2 million will be used for general corporate purposes. Under certain circumstances the Company has the right, by way of a call option, to acquire the partnership units of Red Mile for the lower of market value or for the outstanding amount of the promissory note.

(iii) Myra Falls Exploration

In 2008, the focus of the diamond drilling programs switched from the Marshall deposit and other longer range initiatives to those not yet evaluated targets closer to mine infrastructure. This has been called the peripheral drill program and has been directed towards the extension and bordering areas of the Battle and HW deposits. In addition to new lens definition, infill drilling was also conducted to augment resources. The program totalled 17,638 metres of diamond drilling, carried out by company drillers using medium range drills, with the majority of the drill holes less than 200 metres in length. This program is being continued in 2009.

Specifically, the discovery of new zones, or extensions of zones into new areas include:

- The HW East lens

- The South Flank lens

- The North Gap lens

- The Bornite and Gnu West extensions

- The Gopher West down drop zone

While the Marshall drill program, which was terminated in early 2008, did not provide a sufficient density of drilling to permit a re-interpretation of the zone for a resource update, it did confirm and further define known boundaries. The next phase of evaluation will include drifting west from 24 level to provide closer diamond drill platforms for definition drilling. This program is currently on hold.

A more extensive program of exploration and property evaluation is evolving from the results of the current work.

(iv) Myra Falls Outlook

On October 28, 2008, the Company announced that it would temporarily suspend operations at Myra Falls. Temporary layoffs and the reduction in the workforce occurred; however, mining and milling activities continued throughout the fourth quarter and into the first quarter of 2009. The Company continues to closely monitor economic and market conditions as they relate to any decision to temporarily suspend the mine. Myra Falls personnel have completed and are executing a mine plan which includes a higher grade, lower tonnage scenario with the goal of producing positive cash flow at forecast metal prices and exchange rates. The South Flank lens has the potential to add additional higher grade material to the 2009 mine plan.

The collective bargaining agreement at Myra Falls was renewed during 2008 for eighteen months and has an expiry date of September 30, 2009.

Langlois

Langlois was considered to be in commercial production effective July 1, 2007. For accounting purposes, revenue from concentrate produced and sold after commencement of commercial production is included in the income statement. Net cash flow from concentrate produced prior to July 1, 2007 reduced preproduction capital expenditures when sold. On November 2, 2008, operations at Langlois were temporarily suspended due to the decline in commodity prices and the general deterioration of the economic outlook globally. The above factors make comparisons between years and quarters difficult.



(i) Langlois Financial Results

Fourth Quarter Year
----------------------------------------
2008 2007 2008 2007
----------------------------------------
Gross sales revenue 27,012 21,117 94,054 24,879
Treatment and marketing costs (13,074) (4,674) (33,745) (5,444)
----------------------------------------
Net revenue 13,938 16,443 60,309 19,435
Direct operating costs (17,897) (15,368) (61,734) (17,145)
Depreciation and depletion (7,257) (4,451) (21,075) (5,032)
Reclamation and closure costs (20) (25) (80) (101)
----------------------------------------
(Loss) contribution from mining
activities (11,236) (3,401) (21,580) (2,843)
Exploration (306) (1,796) (3,905) (4,313)
----------------------------------------
(11,542) (5,197) (26,485) (7,156)
Income and mining tax recovery
(provision) 2,701 279 (6,302) 15,470
----------------------------------------
Net (loss) earnings (8,841) (4,918) (32,787) 8,314
----------------------------------------
----------------------------------------

Capital expenditures 1,741 13,614 24,992 35,105
----------------------------------------
----------------------------------------


Revenue:

The following tables and discussion provide details of Langlois' gross sales revenue for the periods indicated:



Fourth Quarter 2008
----------------------------------------------------------------------
Concentrate Realized Gross sales
sold Payable price(1) revenue
(tonnes) metal(1) (US$) ($000's)
----------------------------------------------------------------------
Zinc 29,078 13,203 1,382 18,241
Copper 4,152 684 3,714 2,541
Silver n.a. 115,150 10.07 1,159
Gold n.a. 437 803 351
-------------------- ------------
33,230
--------------------
--------------------
Gross sales revenue in US$ 22,292
Exchange rate 1.2117
-------------
Gross sales revenue in C$ 27,012
-------------
-------------

Fourth Quarter 2007
----------------------------------------------------------------------
Concentrate Realized Gross sales
sold Payable price(1) revenue
(tonnes) metal(1) (US$) ($000's)
----------------------------------------------------------------------
Zinc 15,562 6,805 2,546 17,323
Copper 2,407 477 7,225 3,445
Silver n.a. 51,937 13.59 706
Gold n.a. 285 753 215
-------------------- ------------
17,969
--------------------
--------------------
Gross sales revenue in US$ 21,689
Exchange rate 0.9736
-------------
Gross sales revenue in C$ 21,117
-------------
-------------
(1) Payable metal and realized prices for zinc a gold and silver are
per ounce.


Concentrate sold in the fourth quarter of 2008 was 85% higher than in the fourth quarter of 2007 primarily due to the ramp-up of production which occurred in 2008. Despite the higher tonnes of concentrate sold, gross revenues in US$ only increased by 3% due to decreases of 46% and 49% in the realized prices of zinc and copper respectively. A 24% increase in the exchange rate resulted in 28% higher gross revenues in C$ terms.



2008
----------------------------------------------------------------------
Concentrate Realized Gross sales
sold Payable price(1) revenue
(tonnes) metal(1) (US$) ($000's)
----------------------------------------------------------------------
Zinc 81,730 36,638 1,871 68,537
Copper 11,818 2,039 6,489 13,232
Silver n.a. 332,209 14.24 4,731
Gold n.a. 1,285 860 1,104
Other(2) n.a. 404
-------------------- ------------
93,548
--------------------
--------------------

Gross sales revenue in US$ 88,008
Exchange rate 1.0687
-------------
Gross sales revenue in C$ 94,054
-------------
-------------

2007
----------------------------------------------------------------------
Concentrate Realized Gross sales
sold Payable price(1) revenue
(tonnes) metal(1) (US$) ($000's)
----------------------------------------------------------------------
Zinc 17,817 7,822 2,589 20,251
Copper 2,846 552 7,283 4,022
Silver n.a. 62,496 13.38 837
Gold n.a. 332 741 246
Other(2) n.a. n.a.
-------------------- ------------
20,663
--------------------
--------------------
Gross sales revenue in US$ 25,356
Exchange rate 0.9812
-------------
Gross sales revenue in C$ 24,879
-------------
-------------
(1) Payable metal and realized prices for zinc and copper are per tonne
and for gold and silver are per ounce.

(2) Other gross sales revenue represents revaluations of prior period
concentrate receivables.


Year-over-year comparisons for Langlois are of limited usefulness given the commencement of commercial production in the third quarter of 2007 and the temporary closure in the fourth quarter of 2008. The 278% increase in revenues did not keep pace with the 353% increase in concentrate sold primarily due to the 28% decrease in zinc price realized.

Expenses:

Treatment and marketing costs in aggregate, on a cost per tonne concentrate sold and as a percentage of gross revenue were all dramatically higher in the fourth quarter of 2008 and for the 2008 year compared with 2007. The increases were primarily due to the sale of significantly more tonnes of concentrate, higher freight costs and a lower Canadian dollar and, as a percentage of revenue basis, the impact of lower zinc prices realized.

Direct operating costs increased by 16% in the fourth quarter of 2008 compared with the fourth quarter of 2007 despite the 85% increase in concentrate tonnes sold. Higher production levels spread fixed costs over greater tonnage resulting in a 37% decrease in direct operating costs per tonne of concentrate sold to $539 in 2008 from $855 in the fourth quarter of 2007. As a percentage of gross revenue, direct operating costs decreased to 66% from 73% primarily due to higher tonnage sold partially offset by the impact of lower zinc prices realized reducing gross sales revenues.

As noted above, year-over-year comparisons are of limited usefulness. Direct operating costs increased dramatically in 2008 compared with 2007 primarily due to higher tonnage of concentrate sold. On a per tonne of concentrate sold and as a percentage of gross revenue basis, 2008 direct operating costs decreased by 20% and 3% respectively.

Depreciation and depletion in the fourth quarter of 2008 increased $2.8 million compared with 2007 primarily due to higher tonnes of concentrate sold and accelerated depreciation of the Grevet B deposit related to a change in the mine plan for this deposit.

Depreciation and depletion increased $16.0 million in 2008 compared with 2007 primarily due to the higher production in 2008 and accelerated depreciation of the Grevet B deposit related to a change in the mine plan for this deposit.

Exploration expenses in the fourth quarter of 2008 decreased by $1.5 million primarily due to a reduced exploration program in 2008 and the temporary suspension of mining operations in the fourth quarter of 2008. Prior to the commencement of commercial production, exploration expenditures were capitalized. Exploration expenses in 2008 were modestly lower compared with 2007. Please refer to the exploration section below for additional details.

Income and mining tax recovery increased by $2.4 million in the fourth quarter of 2008 compared with the fourth quarter of 2007 primarily due to a $1.2 million greater reduction in Quebec mining duties provision in 2008 and a $0.8 million future tax asset reduction in 2007.

Income and mining tax provision changed by $21.8 million to a provision of $6.3 million in 2008 compared with a recovery of $15.5 million in 2007. The change was primarily due to the write-off of $13.4 million of a future tax asset in 2008 which was set-up in 2007 partially offset by a $2.9 million lower Quebec mining duties provision in 2008 and a $2.2 million tax recovery in 2008 due to flow-through shares issued.

Capital Expenditures:

At Langlois, $25.0 million was spent in 2008 consisting primarily of: $12.1 million for lateral development of Zones 97, 4 and 3; $1.8 million for horizontal and other development at Zone 4, $1.8 million for ramp and horizontal development at Grevet B; $6.0 million for underground mobile and stationary equipment; $0.6 million for housing; and, $1.3 million for an underground paste backfill system.

(ii) Langlois Production

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



Fourth Quarter Year
----------------------------------------------------------------------------
2008 2007 2008 2007
----------------------------------------------------------------------------
Tonnes Milled 67,611 118,683 514,444 437,875
Zinc (%) 9.7 6.8 8.1 7.1
Copper (%) 0.5 0.4 0.5 0.4
Silver (g/t) 35 28 35 29
Concentrate Production
Zinc (tonnes) 11,175 13,935 71,868 54,184
Recovery (%) 92.0 92.0 92.5 90.9
Grade (%) 54.1 52.6 53.7 52.3
Copper (tonnes) 1,475 2,060 10,661 6,492
Recovery (%) 78.4 77.5 77.3 72.1
Grade (%) 19.1 19.6 18.7 20.3
Metal in Concentrates
Zinc (tonnes) 6,046 7,332 38,620 28,327
Copper (tonnes) 281 403 1,994 1,315
Silver (ounces) 43,424 51,748 298,863 159,672


Fourth Quarter Year
----------------------------------------------------------------------------
2008 2007 2008 2007
----------------------------------------------------------------------------
C$ operating costs, production
basis ($000's) 8,282 13,834 53,001 26,725
C$ operating cost per tonne milled
(production basis) 122 117 103 106


Production of zinc in concentrate was 18% lower in the fourth quarter of 2008 compared with the same period in 2007 due to temporarily suspending operations on November 2, 2008. Production of copper in concentrate was lower in the fourth quarter of 2008 compared with the same period in 2007 as well due to the suspension. Production of zinc in concentrate in 2008 was 36% higher than 2007 due to higher zinc grades and recoveries as well as more tonnes milled. Production of copper in concentrate in 2008 was 52% higher than 2007 due to higher copper grades and recoveries as well as more tonnes milled. The collective bargaining agreement at Langlois has an expiry date of January 17, 2012.

(iii) Langlois Exploration

During 2008, an 11,974 metre surface and underground diamond drilling program was carried out with the goal of completing infill, definition and valuation drilling.

More than half of the program was completed in Zone 97 in order to better define the relationship between the Main and North zones. This drilling was done to evaluate the potential of mining Zone 97 Main and Zone 97 North, a parallel vein structure, at one time within one stope. All drilling was done from the 13 level targeting the area between 12 and 14 levels. Results show two veins with massive to semi-massive sulphides (mainly sphalerite). The veins range from less than a metre to four metres width with the waste between the veins ranging from virtually zero to five to six metres in some places. Zone 97 North and West extensions were delineated from level 13. The main goal was to optimize stope design and mining. A final interpretation shows areas where two veins are mineable together which is accounted for in the December 31, 2008 reserve estimate. Additional drilling may be required in the future in order to identify other similar areas.

Diamond drilling was carried out in Zones 3 and 4 and at Grevet B as well. For Zone 3, the continuity of economic mineralization was confirmed in the central west part between levels 6 and 8. Zone 1 was investigated from surface by shallow drilling.

On the Orphee lens, 525 metres were drilled in two drill holes in 2008. The drill holes were focused on delineating the western part of the lens. A resource estimate is scheduled for delivery the first half of 2009.

(iv) Langlois Outlook

On November 2, 2008, the Company temporarily suspended operations at the Langlois mine. The operation is being maintained on a care and maintenance basis. Langlois personnel have developed a re-opening plan which anticipates a minimum of six months of pre-production development in order to enable increased production rates. The Company will continue to closely monitor economic and market conditions as they relate to any decision to continue the temporary suspension or to restart the mine.

Coulon Project

In December 2008, the Company sold its 50% interest in the Coulon joint venture property to Virginia for 1,666,666 common shares of Virginia. At closing, all of the shares of Virginia issued to the Company in respect of the transaction were resold at a price of $2.85 per share ($4.75 million) to third-party buyers.

Trieste Project

In 2007, the Company signed an agreement with Virginia on the Trieste property, which is 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 is the operator.

During the first half of 2008, Virginia carried out ground geophysical surveys on the Trieste property in order to pinpoint past airborne electromagnetic ("EM") anomalies. Interpretation of the survey was undertaken in the second half of 2008.

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 EM conductors remain unexplained and VMS type mineralized showings returned values of up to 2.6% zinc within the volcanic sequence. An arsenopyrite-rich boulder also returned 20 g/t gold.

Gayot Project

Under an agreement reached in 2007, the Company signed an option agreement with Virginia on the Gayot property which is located in the James Bay region of Quebec. Under the terms of the agreement, the Company has the option to earn a 50% interest in the property in exchange for $10.0 million in exploration work over a nine-year period and payments totalling $170,000 on or before the fourth anniversary of the agreement. Virginia is the operator until the completion of a positive pre-feasibility study. This agreement is subject to a 1% NSR in favour of Billiton Resources Canada.

A new camp was constructed in 2008 to permit field operations for a long duration. Reconnaissance and geological mapping as well as re-logging of some of the old core were completed during 2008.

The Gayot property consists of 116 claims covering 4,947 hectares and three mining exploration permits covering a surface area of 15,437 hectares. The property entirely covers the Venus Archean greenstone belt which consists dominantly of ultramafic magnesium-oxide rich sills and flows. This ultramafic sequence is the host to twelve nickel-platinum-palladium mineralized zones distributed over a strike length of 25 kilometres.

Kaminak Project

In April 2007, Kaminak Gold Corporation ("Kaminak") and the Company entered into a generative strategic alliance targeting primarily nickel-copper-platinum group element deposits over parts of eastern North America. Each company initially funded $50,000 for data compilation, targeting and field work during 2007.

By September 2007, Kaminak and the Company had acquired, through staking, a number of nickel targets within the Grenville geological province of southern Quebec. A 50-50 joint venture was formed on each separate property. An airborne geophysical survey was conducted over selected targets in 2008. In early 2009, the Company sold its 50% interest in the joint venture to Kaminak for a nominal amount.

Gatineau and Weedon Projects

During the third quarter of 2008, the Company gave Midland Exploration Inc. notice that it would no longer participate in the joint ventures formed for the Gatineau and Weedon projects.

Other Properties

The reclamation work was largely complete at Bouchard-Hebert, Bougrine and Nanisivik by the end of 2008. The crushing and grinding circuits and certain other components at Bougrine remain intact, dismantling of the mill at Bouchard-Hebert is continuing and the tank farm remains intact at Nanisivik.

NON-GAAP RECONCILIATIONS

Operating cost per tonne milled on a production basis is a performance indicator. It is a non-GAAP measure and because there is no standard method for calculating it, operating costs per tonne milled on a production basis is not a reliable way to compare the Company against other companies. It can however allow an understanding of how production costs have changed from year-to-year and the impact on cash flows.



Three Months ended
December 31, 2008 Myra
($000's) Mochito Toqui Falls Langlois(1) Total
----------------------------------------------------------------------------
Direct operating costs
per financial
statements 15,309 11,107 31,933 17,897 76,246
Adjustment to production
basis (4,094) (3,941) (17,713) (9,640) (35,388)
Less: stock-based
compensation (9) (19) (44) (15) (87)
Add: royalty adjustment n.a. 8 n.a. n.a. 8
---------------------------------------------------
Operating costs on a
production basis 11,206 7,155 14,176 8,282 40,779
---------------------------------------------------
---------------------------------------------------
Average exchange rate 1.2063 1.2251 1.3470 1.4417 1.2999
Operating costs on
production basis (US$) 9,289 5,840 10,524 5,717 31,370
---------------------------------------------------
---------------------------------------------------
Tonnes milled 162,083 130,893 126,140 67,611 486,727
---------------------------------------------------
---------------------------------------------------
Operating cost per
tonne milled - US$ $57 $45 $83 $85 $64
Operating cost per
tonne milled - C$ $69 $55 $112 $122 $84
(1) On November 2, 2008, Langlois operations were temporarily suspended.



Three Months ended
December 31, 2007 Myra
($000's) Mochito Toqui Falls Langlois Total
----------------------------------------------------------------------------
Direct operating costs
per financial
statements 13,590 10,292 34,689 15,368 73,939
Adjustment to
production basis (4,412) (1,497) (4,287) (1,481) (11,677)
Less: stock-based
compensation (24) (59) (138) (53) (274)
Less: royalties n.a. (338) n.a. n.a. (338)
---------------------------------------------------
Operating costs on a
production basis 9,154 8,398 30,264 13,834 61,650
---------------------------------------------------
---------------------------------------------------
Average exchange rate 0.9981 1.0145 1.0160 1.0426 1.0189
Operating costs on
production basis (US$) 9,171 8,278 29,787 13,269 60,505
---------------------------------------------------
---------------------------------------------------
Tonnes milled 151,149 132,489 182,040 118,683 584,361
---------------------------------------------------
---------------------------------------------------
Operating cost per
tonne milled - US$ $61 $62 $164 $112 $104
Operating cost per
tonne milled - C$ $61 $63 $166 $117 $106



Year ended
December 31, 2008 Myra
($000's) Mochito Toqui Falls Langlois(1) Total
----------------------------------------------------------------------------
Direct operating costs
per financial
statements 42,463 37,385 88,247 61,734 229,829
Adjustment to
production basis (4,234) (9,605) (12,230) (8,672) (34,741)
Less: stock-based
compensation (54) (138) (293) (61) (546)
Less: royalties n.a. (1,229) n.a. n.a. (1,229)
---------------------------------------------------
Operating costs on a
production basis 38,175 26,413 75,724 53,001 193,313
---------------------------------------------------
---------------------------------------------------
Average
exchange rate 1.0675 1.0675 1.0675 1.0675 1.0675
Operating costs on
production basis (US$) 35,761 24,744 70,936 49,650 181,091
---------------------------------------------------
---------------------------------------------------
Tonnes milled 646,845 519,379 592,072 514,444 2,272,740
---------------------------------------------------
---------------------------------------------------
Operating cost per
tonne milled - US$ $55 $48 $120 $97 $80
Operating cost per
tonne milled - C$ $59 $51 $128 $103 $85
(1) On November 2, 2008, Langlois operations were temporarily suspended.


Year ended
December 31, 2007 Myra
($000's) Mochito Toqui Falls Langlois(1) Total
----------------------------------------------------------------------------
Direct operating costs
per financial
statements 32,540 28,262 83,667 17,145 161,614
Adjustment to
production basis 1,631 (33) 8,689 9,633 19,920
Less: stock-based
compensation (186) (313) (620) (53) (1,172)
Less: royalties n.a. (1,965) n.a. n.a. (1,965)
---------------------------------------------------
Operating costs on
production basis 33,985 25,951 91,736 26,725 178,397
---------------------------------------------------
---------------------------------------------------
Average
exchange rate 1.0736 1.0736 1.0736 1.0736 1.0736
Operating costs on a
production basis (US$) 31,655 24,172 85,447 24,893 166,167
---------------------------------------------------
---------------------------------------------------
Tonnes milled 607,583 522,082 726,460 437,875 2,294,000
Less: preproduction
tonnes n.a. n.a. n.a. (186,517) (186,517)
---------------------------------------------------
Tonnes milled,
production basis 607,583 522,082 726,460 251,358 2,107,483
---------------------------------------------------
---------------------------------------------------
Operating cost per
tonne milled - US$ $52 $46 $118 $99 $79
Operating cost per
tonne milled - C$ $56 $50 $126 $106 $85
(1) Commenced commercial production on July 1, 2007.


SUMMARY OF QUARTERLY RESULTS



2007 2008

---------------------------------------------------------
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
----------------------------------------------------------------------------
Gross sales
revenue
($ millions) 77.9 103.4 87.5 135.5 81.9 115.1 101.0 100.1
Net earning (loss)
($ millions) 15.3 38.7 7.8 (38.4) (6.9) 8.1 (36.1) (53.5)
Basic earnings
(loss) per
share $0.04 $0.09 $0.02 $(0.09) $(0.02) $0.02 $(0.08) $(0.12)
Weighted-average
number of
Common Shares
outstanding
(millions) 396.4 418.0 418.7 421.6 425.8 446.4 446.5 446.8
Diluted
earnings
(loss)
per share $0.04 $0.09 $0.02 $(0.09) $(0.02) $0.02 $(0.08) $(0.12)
C$/US$ realized
exchange rate 1.1683 1.0914 1.0374 0.9857 1.0047 1.0100 1.0457 1.2050
Average
realized zinc
price (US$/t) 3,434 3,710 3,200 2,608 2,409 2,205 1,830 1,331
Average
realized zinc
price (C$/t) 4,012 4,049 3,320 2,571 2,420 2,227 1,914 1,604
Concentrate
tonnes sold(1) 39,333 51,553 50,748 102,415 59,210 95,188 87,978 104,229
Concentrate
tonnes
produced(1) 66,895 75,596 73,122 72,470 73,481 86,856 89,514 65,986

(1) Langlois commenced commercial production effective July 1, 2007. On
November 2, 2008, Langlois operations were temporarily suspended.
Included in concentrate produced in Q1 2007 and Q2 2007 were 9,571 and
14,921 tonnes respectively which are not included in concentrate
tonnes sold.


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$, the US$'s movement against the C$ over the past eight quarters impacts the realized C$ gross sales revenue.

CONTRACTUAL OBLIGATIONS



Contractual Obligations
($ millions) Payments Due by Period
----------------------------------------------------------------------------
----------------------------------------------------------------------------
less than greater than greater than
1 year 1-3 years 4-5 years 5 years Total
----------------------------------------------------------------------------
Capital leases 0.2 0.2 - - 0.4
Operating leases 0.8 0.9 0.1 - 1.8
Debt 4.9 1.0 0.8 - 6.7
Accrued benefit
obligations(1) 2.4 5.7 7.2 22.7 38.0
Reclamation(1) 4.7 7.0 9.5 7.3 28.5
Royalty
obligations(1) - - - 78.4 78.4
----------------------------------------------------------------------------
Total 13.0 14.8 17.6 108.4 153.8
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) Accrued benefit obligations, reclamation and royalty obligations have
funding sources from pension plan assets ($30.1 million), restricted
reclamation investments ($35.0 million) and restricted promissory notes
($80.9 million) respectively.


TRANSACTION WITH RELATED PARTIES

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. In December 2007, the Company issued 6,122,449 flow-through Common Shares by way of private placement at a price of $1.96 per Common Share exclusive of share issuance costs of $12,000 to a wholly-owned subsidiary of Dundee. The flow-through Common Shares had a four-month hold period. The proceeds of the flow-through shares were used to finance exploration activities principally in Quebec. Additionally, in 2007 an affiliated company of Dundee provided consulting services of $50,000. Dundee is a significant shareholder of the Company.

OUTSTANDING SHARE DATA AND FULL DILUTION CALCULATION

The Company is authorized to issue an unlimited number of Common Shares and 200,000,000 preferred shares, issuable in series. There are no preferred shares outstanding. Each Common Share entitles the holder of record thereof to one vote at all meetings of shareholders of the 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 February 26, 2009
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Issued and outstanding 447,664,693
Share options outstanding (weighted-average exercise price $1.20) 7,269,442
----------------------------------------------------------------------------
Future fully diluted 454,934,135
----------------------------------------------------------------------------
----------------------------------------------------------------------------


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 and freight 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 reserve 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 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. Given these uncertainties, investors are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date made. 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)
---------------------------------------------------------------------------
As at December 31 2008 2007
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Assets

Current
Cash and cash equivalents 20,328 62,934
Restricted cash 761 629
Short-term investments 142 6,532
Accounts receivable - concentrate 614 3,585
Other receivables 12,451 17,025
Concentrate inventory 21,816 64,775
Materials and supplies inventory 37,278 28,976
Prepaid expenses and other current assets 5,748 7,541
Income and mining tax receivable 1,550 -
Future income tax assets 621 1,491
---------------------------------------------------------------------------
Total current asssets 101,309 193,488

Future income tax assets, long-term - 19,915
Restricted reclamation investments 35,026 33,500
Mineral properties and fixed assets 277,990 267,462
Long-term investments - 32,922
Restricted promissory notes 80,886 62,285
---------------------------------------------------------------------------
495,211 609,572
---------------------------------------------------------------------------
---------------------------------------------------------------------------

Liabilities and Shareholders' Equity
Current

Accounts payable and accrued liabilities 50,837 61,900
Provisional payments for concentrate inventory
shipped and not priced 10,512 32,248
Short-term debt including current portion of
long-term debt 4,854 190
Income and mining taxes payable 264 10,078
Current portion of reclamation, closure cost
accruals and other environmental obligations 5,622 6,486
---------------------------------------------------------------------------
Total current liabilities 72,089 110,902

Deferred income 5,924 5,666
Long-term lease obligations 125 267
Royalty obligations 78,449 82,479
Long-term debt 1,851 1,851
Reclamation, closure cost accruals and other
environmental obligations 22,906 33,262
Employee future benefits 994 2,817
Future income tax liabilities 3,211 7,942
---------------------------------------------------------------------------
Total liabilities 185,549 245,186
Shareholders' equity 309,662 364,386
---------------------------------------------------------------------------
495,211 609,572
---------------------------------------------------------------------------
---------------------------------------------------------------------------



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

---------------------------------------------------------------------------
Three Months Ended Twelve Months Ended
December 31 December 31

2008 2007 2008 2007
---------------------------------------------------------------------------
---------------------------------------------------------------------------

Gross sales revenue 100,101 135,455 398,110 404,335
Treatment and marketing costs 39,664 33,021 135,796 100,288
---------------------------------------------------------------------------
Net revenue 60,437 102,434 262,314 304,047
---------------------------------------------------------------------------

Direct operating costs 76,246 73,939 229,829 161,614
Depreciation and depletion 16,726 10,845 47,677 22,791
Reclamation and closure costs 689 4,260 3,358 6,984
---------------------------------------------------------------------------
93,661 89,044 280,864 191,389
---------------------------------------------------------------------------
(Loss) contribution from
mining activities (33,224) 13,390 (18,550) 112,658
---------------------------------------------------------------------------

General and administrative 990 4,272 12,423 15,679
Interest and financing (272) 2,009 2,706 5,117
Investment and other income (10,669) 8,415 (24,205) (3,146)
Foreign exchange and other (3,703) (155) (5,191) 9,810
Exploration 3,382 6,161 17,212 17,036
Write-down of mineral
properties and fixed assets 35,508 16,000 46,478 16,000
Other non-producing
property costs 590 701 1,834 2,153
---------------------------------------------------------------------------
25,826 37,403 51,257 62,649
---------------------------------------------------------------------------
(Loss) earnings before income
and mining tax provision (59,050) (24,013) (69,807) 50,009
Income and mining
tax (recovery) provision (5,564) 14,323 18,533 26,602
---------------------------------------------------------------------------
Net (loss) earnings (53,486) (38,336) (88,340) 23,407

Retained earnings, beginning
of period 134,054 207,244 168,908 139,795

Changes in accounting policy - - - 5,706
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Retained earnings,
end of period 80,568 168,908 80,568 168,908
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Basic (loss) earnings per
Common Share $ (0.12) $ (0.09) $ (0.20) 0.06
---------------------------------------------------------------------------
Diluted (loss) earnings per
Common Share $ (0.12) $ (0.09) $ (0.20) 0.05
---------------------------------------------------------------------------
Basic weighted-average
number of Common Shares
outstanding (000's) 446,843 421,610 441,378 413,681
---------------------------------------------------------------------------
---------------------------------------------------------------------------



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

---------------------------------------------------------------------------
Years ended December 31 2008 2007
---------------------------------------------------------------------------
---------------------------------------------------------------------------

Accumulated other comprehensive loss, beginning of year (3,817) (7,689)
Remeasurement of available-for-sale securities
at January 1, 2007 - 11,980
Other comprehensive income (loss) 7,074 (8,108)
---------------------------------------------------------------------------

Accumulated other comprehensive income (loss),
end of year 3,257 (3,817)
---------------------------------------------------------------------------
---------------------------------------------------------------------------


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

---------------------------------------------------------------------------
Three Months Ended Twelve Months Ended
December 31 December 31
2008 2007 2008 2007
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Net (loss) earnings (53,486) (38,336) (88,340) 23,407
---------------------------------------------------------------------------

Other comprehensive income
(loss), net of income taxes:
Unrealized gains (losses) on
translating financial
statements of self sustaining
foreign operations 13,622 187 19,789 (9,386)
Unrealized loss on short-term
available-for-sale
securities, net of income
tax provision (3) (248) (26) (570)
Unrealized gain on restricted
investment, net of income tax
provision 407 - 533 -
Unrealized gain on long-term
available-for-sale
securities, net of income
tax provision - 706 - 1,848
Reclassification of gains on
sale of available-for-sale
securities to income - - (13,222) -
---------------------------------------------------------------------------
Other comprehensive income
(loss), net of income taxes 14,026 645 7,074 (8,108)
---------------------------------------------------------------------------
Comprehensive (loss) income (39,460) (37,691) (81,266) 15,299
---------------------------------------------------------------------------
---------------------------------------------------------------------------



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

---------------------------------------------------------------------------
Three Months Ended Twelve Months Ended
December 31 December 31
2008 2007 2008 2007
---------------------------------------------------------------------------
---------------------------------------------------------------------------

Operating Activities
Net (loss) earnings (53,486) (38,336) (88,340) 23,407
Items not affecting cash:
Depreciation and depletion 16,726 10,845 47,677 22,791
Gain on sale of investment 14 - (9,021) (306)
Write-down of mineral
properties and fixed assets 35,508 16,000 46,478 16,000
Gain on sale of Lapa royalties (6,350) - (6,350) -
Unrealized loss on investments (385) 15,934 1,337 7,601
Other non-cash items 1,568 (4,534) 4,383 (4,418)
Stock-based compensation 190 451 1,091 2,149
Unrealized deferred income (153) (153) (611) (611)
Future income taxes (2,231) 11,426 13,454 7,594
Reclamation, closure cost
accruals and other
environmental obligations 689 4,260 3,358 6,984
Employee future benefits 249 345 1,633 1,483
Payment of reclamation,
closure cost accruals and
other environmental
obligations (2,537) (1,707) (5,420) (6,785)
Payment of employee future
benefits (975) (832) (3,456) (3,159)
Changes in non-cash working
capital items 13,650 (11,057) (9,946) 6,386
---------------------------------------------------------------------------
Net cash (used in) provided by
operating activities 2,477 2,642 (3,733) 79,116
---------------------------------------------------------------------------

Investing Activities
(Increase) decrease in
restricted cash (250) - (132) 592
Restricted reclamation
investments (423) (20,000) (899) (20,000)
Short-term investments (14) - 7,003 (5,055)
Long-term investments - - 13,350 -
Funds advanced on promissory
notes (15,970) - (15,970) -
Issue of common shares to
purchase Myra Falls Limited
Partnership - - (34) -
Acquisition of Metco Resources
Inc., net of cash acquired - - 23 -
Mineral properties and
fixed assets (11,689) (32,766) (76,839) (113,782)
Proceeds from sale of mineral
properties and fixed assets 7,018 14 7,210 304
---------------------------------------------------------------------------
Net cash provided by (used in)
investing activities (21,328) (52,752) (66,288) (137,941)
---------------------------------------------------------------------------

Financing Activities
Proceeds from sale of royalty
interest 15,970 20,000 15,970 20,000
Proceeds from sale of
Lapa royalty 6,350 - 6,350 -
Issue of common shares
for cash 97 12,197 381 20,699
Deferred income relating
to royalties 869 - 869 -
Decrease in long-term lease
obligations (33) (38) (142) (234)
Increase (decrease) in
short-term debt 3,096 3 3,987 (118)
Decrease (increase) in
long-term debt (3,057) - - -
---------------------------------------------------------------------------
Net cash provided by financing
activities 23,292 32,162 27,415 40,347
---------------------------------------------------------------------------
Net decrease in cash during
the period 4,441 (17,948) (42,606) (18,478)
Cash and cash equivalents,
beginning of period 15,887 80,882 62,934 81,412
---------------------------------------------------------------------------
Cash and cash equivalents,
end of year 20,328 62,934 20,328 62,934
---------------------------------------------------------------------------
---------------------------------------------------------------------------

Supplemental information
Cash interest paid 148 60 214 321
Cash income and mining
taxes paid 859 4,595 15,494 22,939
Cash interest received 412 826 1,396 4,299


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