BWLRF.OB - Speculating Resources
May 10th, 2007 by Cameron FousBreakwater Resources Ltd. (BWLRF.OB), incorporated in 1979, is a base metals mining company that produces zinc, lead, copper and gold concentrates.
They primarily mine zinc, although they produce silver, copper, and gold throughout the year. All the resources listed places them under the gold and silver industry, although a comparison can be draw to the metal mining industry as well.
BWLRF growth in 2006 EPS has been quite amazing to say the least. In the years 2004 and 2005 BWLRF managed to squeeze out some profitability reporting .01 and .04 for 2004 and 2005 respectively. In February they reported their full year 2006 results with .37 EPS which was a 825% increase in income from 2005 to 2006. BWLRF has managed to sustain this sudden rise in income and is expected to grow to an annual .50 EPS for 2007 and .60 eps for 2008, with increased heavily revenues. It appears that things are leveling off into 2008 estimates, but BWLRF looks heavily undervalued here, especially when compared to industry averages and to a similar companies like, Rio Narcea Gold Mines (RNO).
2006 highlights (from BWLRF PDF report)
• The Company realized net earnings of $156.5 million or $0.41 per share in 2006 compared with $14.0 million or $0.04 per share in 2005, a $142.5 million increase
• The contribution from mining activities was $168.5 million in 2006 compared with $29.6 million in 2005
• Net cash provided by operating activities increased by $139.8 million to $158.5 million in 2006 and was primarily used for $75.7 million of capital expenditures and $16.6 million of debt repayment
• At December 31, 2006, cash and cash equivalents were $81.4 million and total debt was $2.7 million
• Gross sales revenue increased by 44.5% to $452.2 million in 2006 from $313.0 million in 2005
• Development of the Langlois mine is on track to commence commercial production by mid-2007
• Mineral reserves at Langlois increased by 10% and mineral resources increased by 14% through the addition of the Grevet B deposit
• Exploration success at Langlois prompted the Company to stake an additional 4,000 hectares surrounding the Company’s land package
• Development of El Toqui’s Concordia deposit is on track and production is anticipated by mid-2007
• On the Coulon joint venture with Virginia Mines Inc., exploration carried out during 2006 led to the discovery of two new significant polymetallic lenses, bringing the total known lenses to five, and confirmed the vertical continuity of lens 9-25 to a depth of 365 metres
RNO is primarily a gold stock, but both mining companies have similar fundamentals. Both companies around the same size, (BWLRF has a 746m cap and RNO has a 731.2m cap) though BWLRF seems steeply undervalued compared to RNO. BWLRF is only trading at a 4.86 earnings multiple, while RNO is trading more than double BWLRF’s P/E at 10.19x.
The gold and silver industry average is 26.6x, so it would seem as if they both look undervalued based on P/E ratios. P/S ratio for BWLRF is currently 2.3x, while RNO is trading at 3.18x, making BWLRF more attractive from this perspective as well. Essentially, RNO is trading at prices more than double that of BWLRF’s share price, while the companies’ fundamentals and future EPS estimates are almost identical. This makes BWLRF look much cheaper given the financial information and corresspondinly a better value. BWLRF also provides a better technical entry at the moment as well.
One negative aspect of BWLRF is the outstanding share count being double that of RNO. Current outstanding shares are 385 million and fully diluted; including warrants expiring in 2009 there are 459m outstanding shares, which doesn’t seem appealing. So if BWLRF doubled from here to trade at 4x to catch up to RNO’s P/E ratio, then is BWLRF really worth $1.5 billion - More than double that of RNO’s value? That could be a possibility with revenues and income nearly double that of RNO’s.
The O/S shares situation with BWLRF is discouraging, but the technical outlook is extremely bullish and attractive fundamentals; along with a healthy current ratio of 2.6x. BWLRF could be worth a speculative position since resource stocks have been in favor lately.
This months analysts’ recommendations:
5 Buys
2 Strong BuysTechnical Analysis
BWLRF has been in a very strong uptrend since late 2005 starting around .30 and has been up as high as 566% to date. Recently the price broke out of a very bullish symmetrical triangle to 7 year highs along with a very heavy day of volume for confirmation of the breakout. It’s possible that we will see a retest of support near $1.80, which is the breakout support zone for this pattern. We already witnessed a retest of a key support level near the midpoint of yesterday’s breakout candle. Considering BWLRF’s recent earnings and sustained growth into this year and 2008, along with low p/e and p/s ratios, there’s no reason for this bullish trend not to continue.
Disclosure: I filled a 1/3 position yesterday at 1.88
