DIRECTORS’ REPORT TO SHAREHOLDERS

1986 IN REVIEW

Despite downward pressure on sales volumes and
prices, the Company was able to generate a cash flow
of $11 million to service and reduce bank debt.

As of March 1987, the outstanding bank debt is $34.6
million as compared to $43.3 million one year ago.

The Company sales revenues in 1986 were $48.7
million as compared to $61.3 million in 1985. The
decrease in revenue was offset by a significant
reduction in the cost of fibre produced. The Com-
pany had an accounting loss of $283,000 as compared
to a restated profit of $2,778,000 in 1985.

The Company has changed its method of
accounting for waste rock removal costs from a
deferral method, where costs are charged to
production on a per tonne of ore mined basis, to
expensing costs in the year in which they are
incurred. The Company believes that the
accounting method of charging waste removal
costs to production expenses as they are incurred is
more consistent with accounting practices of many
Canadian mining companies and facilitates a closer
relationship between statement of earnings and
cash flow. 1985 expenses have been restated to
conform with the change in accounting policy.

The Cassiar mine produced 80 676 tonnes of fibre
from 794 015 tonnes of ore mined during nine
months of operation. Waste removal requirements
for the year were met in the first six months.

Continuing cost reductions were made through the
implementation of operating efficiencies and
reduction in townsite services and facilities
together with a lower electrical power and ore
drying cost due to a reduction in fuel prices.

The McDame exploration program was financed by
a further $4.6 million by issuing 3,597,704 ‘‘flow-
through”’ shares from the treasury. These funds
were spent on adit development, diamond drilling
and bulk sampling. Information obtained from this
program provided the basis for a preliminary
feasibility study which was completed in early 1987.

Asbestos markets and prices continued to be
depressed and the Company has reacted
aggressively by appointing two new sales
representatives and placing renewed emphasis on
the development of new grades to meet market
requirements. With the current reduced output
from most mines, there is an apparent balance
between production and usage which should lead
to more stable pricing. In addition, the Company is
well positioned to take advantage of the growth
markets of South East Asia.

On the world scene, there have been some
indications of acceptance that chrysotile asbestos
fibre does not pose a health risk, relative to
alternate products, provided its use is properly
controlled. The most significant development in
this regard was the adoption of the controlled use
approach for chrysotile asbestos fibre by the
International Labour Organization (part of the
United Nations). In the United States, the
Occupational Safety and Health Administration
published new standards for control of asbestos in
the work place. The greatest challenge in this area
came from the Environmental Protection Agency
(‘‘EPA’’) in the United States, which issued a
proposal to ban asbestos in that country. Public
hearings were conducted and, in October 1986,
questioning of EPA staff members revealed that
much of the evidence supporting EPA’s proposal
was inaccurate and outdated. EPA has undertaken
a re-analysis of the evidence it offered to support
the proposal. The Canadian Government believes
that EPA’s proposal to ban asbestos in the United
States is out of step with the controlled use
approach adopted by most countries. (See excerpts
from Canadian Government brief on page 8.)

The rate of new product liability suits brought
against the Company in the United States has
levelled off. Substantially all of the litigation costs
continue to be paid by insurers (see page 16).

In August 1986, the Company and Consolidated
Brinco Limited, the largest shareholder of the
Company at the time, both sold exploration
properties to Western Canadian Mining Corpor-
ation in exchange for 50% each of the outstanding
shares. Effective January 14, 1987, that company
was amalgamated with a Vancouver listed public
company and continued under the name of Western
Canadian Mining Corporation. Following the amal-
gamation, Cassiar Mining Corporation owns
2,571,292 shares, being approximately 40% of those
issued. On January 21, 1987, the stock commenced
trading and to March 16, 1987, 94,550 shares had
traded in the price range of $0.77 to $1.50.

In 1986, drilling conducted on the Company’s San
Antonio property indicated 1.46 million tons of
reserves grading 0.233 oz/ton gold, equal to 340,000
ounces of contained gold. The San Antonio project is
described in more detail later in this report.