President’s Report to Shareholders

1987 was a successful year for the
Company, both in terms of financial
results attained and the decisions
reached for the future. Most important
was the decision to proceed with the
development of the McDame Mine.

The improved market position has
provided the needed confidence which
has enabled the Company to make this
production decision.

Financial position strengthens
Sales revenue of $58,129,000 for the
year exceeded last year’s revenue by
20 percent.

Net earnings in 1987 were $3,719,000,
or $0.23 per share as compared to a loss
of $547,000 ($0.11 per share) in 1986.
Increased earnings are mainly the result
of improved revenues on strengthened
fibre demand and the extension of the
useful life of existing assets as a result of
the McDame production decision.

During 1987 a total of $9.8 million was
applied to debt service, leaving a
balance at year-end of $27.0 million.
Because sales strengthened toward year-
end, accounts receivable increased by
$4.7 million to $14.9 million. Collection
of these receivables in early 1988 will
increase cash available for further debt
reduction.

Marketing strategy

provides turnaround

A successful strategy of diversifying fibre
distribution by aggressively approaching
new growth markets permitted an
increase in production to 96,014 tonnes
to meet the 1987 sales demands. This
production, which was approximately
20 percent higher than the 80,676 tonnes
produced in 1986, was the highest oper-
ating rate achieved in the past six years.

Increased market penetration without
further price erosion has provided the
needed market confidence to support the
McDame development decision. The
strategic plan for market diversification
will continue in 1988. We are confident
that the present market demand for high
quality chrysotile fibre will continue.

Cassiar operating

efficiencies continue

Productivity at Cassiar improved with
cash operating costs being held close to
the 1986 levels. Total cash costs for the
eleven-month operation in 1987 were

6.7 percent above the nine-month
operation during 1986.

Waste rock removal was nearly double
that of 1986. Waste remaining in the pit
to be removed over the next 3.5 years is
only 38 percent more than the total
extracted in 1987. The decrease in waste
stripping costs will more than offset
expected inflationary cost increases in
total operating costs for the balance of
the open pit mine.

Production decision for
McDame deposit

The Technical/Economic Evaluation
Report on the McDame deposit was
completed in early December. This
study confirms that the project can
susiain a continuing viable operation.

A key factor in the Company’s decision
to place the McDame Mine into produc-
tion was the B.C. Government's agree-
ment to provide the Company with a
development loan of up to $25 million
to be repaid from a portion of the cash
flow generated from the McDame deposit.
Bank financing has been arranged for
the balance of the required funds.

Development of the McDame Mine is
planned to start by mid-year with the
first ore coming from the new deposit in
mid 1990. Ore from the open pit will
sustain the operation through to the end
of 1990. The McDame Mine will utilize
the Company’s existing mill, townsite
and transportation facilities.

The initial phase of McDame will
involve mining 16 million tonnes of ore
grading 5.6 percent recoverable fibre.
This tonnage will support the operation
to the year 2000.

New wet milling facilities
under construction

Construction commenced in December,
1987 on a new wet milling pilot facility
at the Cassiar minesite. This milling
method extracts fibre from tailings by
means of a gravity process. Agreement
was reached with the Federal
Government to share the cost of
constructing and operating this test
facility to treat tailings material from the
existing operation. Research completed
to date indicates that this process will
enhance recovery of fibre from the
current operation, as well as provide an
economic method for treating the
tailings stockpile from prior operations.