Objective AnalysisThe opening line of my post dated Jan 24, 2021 titled “Q4-2021 Production Results and 2022 Guidance” was “Disaster written all over it”. Now TV management has shown that they are not only incompetent, they are also involved in manipulation of production figures and finished goods stocks.
On Jan 24, 2022, TV reported a Q4 production of 37 mlbs of payable zinc from Perkoa mine based on concentrate zinc assays and tonnes measured at the mine site. Now, TV says that Q4 production was only 31.2 mlbs (a reduction of 6.2 mlbs) based on final weight measurements at the discharge port and subsequent independent metal assays.
All international trade is conducted based on dispatch quantities given by the seller and if the buyer wants to verify quality and quantities before dispatch from seller’s mine/warehouse/production unit, then the buyers can send their own inspectors or third part inspectors to seller’s dispatch point and verify the quality and quantities. Adjustment of quantities based on measurements at discharge port is blatant manipulation.
Having said that, let us see what can be expected from this incompetent management in 2022 and 2023:
- TV revised its guidance for 2021 through its October 2021 presentation and could not even meet that guidance (a guidance given after 3 quarters of the year had already gone by). That guidance projected 330-355 mlbs payable zinc at an AISC of $0.94-0.98. MD&A for 2021 claims a production of 316.2 mlbs of payable zinc. Even if we reduce the lower end of the guidance by 5 mlbs to compensate for lost December production from Santander, there is a shortfall of about 9 mlbs. MD&A for 2021 claims an AISC of $1.05 which is $0.07 higher than the higher end of the guidance.
- There will be no production from Perkoa in 2023. In my post dated Jan 27, 2021 titled “Market is over reacting”, I said, “I see Perkoa Mine being closed/sold off in end 2022/beginning 2023”. Many posters reacted to it sighting the mineral resources that Perkoa has. I still stand by my prediction. In the MD&A, TV management has said that if underground exploration success is achieved on the T3 horizon in H1 2022, operations will likely have to be suspended and the mine put on care and maintenance prior to mining due to the need for additional drilling and underground development. This means that we can add another alternative, in addition to closing/selling off, and that alternative is putting the mine on care and maintenance for about a year in 2022-2023. Whether that period will be H2 2022 and H1 2023 or full 2023 is debatable but, any which way, TV will only get production for 1 year in the 2 year period of 2022-2023.
- Whether TV makes a profit or loss from Caribou, Glencore needs the concentrate from that mine. Glencore will force TV management to keep the mine operating in 2023.
- For 2022, TV management has projected 247-280 mlbs payable zinc production at an AISC of $1.03-1.13. I assume that TV will achieve 263.5 mlbs payable zinc production (mid-point of guidance) with 189.5 mlbs being unhedged and 74 mlbs being hedged at $1.25/lb. I also assume that TV will have an AISC of $1.13 (high end of the guidance. I would have assumed $1.15 but since the Q4 2021 lead shipment has spilled over to Q1 2022, I am assuming it to be $1.13).
- For 2023, I assume 126 mlbs payable zinc production (62 mlbs from RP and 64 mlbs from Caribou). All the production will be unhedged. I also assume that the AISC will be $1.15.
- Apart from AISC, TV has annual cash expenses of about $32 million (General & Administrative Expenses, Share Based Compensation, Interest, forex Loss, Other Expenses, Current Taxes). With Santander sold off, these might be reduced somewhat. However, for my calculations, I am assuming them to remain at the same level.
Based on the above analysis and assumptions:
- If zinc price averages 1.65 in 2022 and 2023, TV will generate a cash of about $89 million in 2022 (out of this TV has already committed $20 million for RP2.0 Early Works Program and $2.5 million for other expansions) and $31 million in 2023. Total for 2022 and 2023 will be $120 million.
- If zinc price averages 1.5 in 2022 and 2023, TV will generate a cash of about $70 million in 2022 and $19 million in 2023. Total for 2022 and 2023 will be $89 million.
If you read the MD&A carefully, TV management appointed Endeavour Financial in
September 2021 for a comprehensive financing package totalling approximately $200 million to refinance existing debt ($89 million) and fund the RP2.0 project ($111 million). The key word here is September 2021. Things have changed after that. TV has committed $20 million for RP2.0 in the form of early works program. Glencore has committed additional $20 million (total $33 million).
TV has to refinance existing debt of $89 million (revolving credit facility), continue exiting Glencore credit facility of $13 million, and find another $71 million for RP2.0 (after deducting $20 million early works program amount and additional support of $20 million from Glencore from $111 million). TV can easily get this from internal cash generation in 2022 & 2023. In my post dated Jan 27, 2022, I had said that TV should arrange additional $35 million (in addition to existing revolving credit facility of $89 million) to tide over the likely mismatches between the timing of cash generation and cash requirements due to supply chain delays. I still stand by it.
From 2024, Trevali will have a world class mine in RP. I still maintain that, despite an incompetent management, TV will not only survive but thrive. I would give a hold rating to TV instead of a sell rating.
IMHO