Teal Valley T.TV

Paradigm Capital: Buy rating and $1.75 target for Trevali

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According to Paradigm Capital:

https://personal.crocodoc.com/cy5R2Ns

Trevali Mining Corporation

Stock Rating: Buy

12‐Mth Target: $1.75

Caribou Mine Set to Double Consolidated Production Levels

Investment Thesis. With the commencement of mining activities at the Santander Mine, and funding secured to complete rehabilitation work at the Caribou Mine, the growth story is coming together for Trevali. Given our view for a material tightening within the zinc market, TV could be poised for a re-share price rating.

Event

Trevali recently announced its 2014 financial results. We are updating our financial forecast to reflect positive 2015 production guidance, as well as our revised commodity price forecasts (announced on Jan.29).

Details

- Santander Mine Delivers Solid Performance in Initial Year of Operation: Trevali reported 2014 revenue of $94M, adjusted EBITDA of $17.2M, an adjusted net loss of $3.8M (-$0.01/sh), and operating cash flow of $17.1M ($0.06/sh). EPS and CFPS were within $0.01 of our estimates, coming up short primarily owing to lower commodity prices in Q4 (Figure 1). More importantly, the Santander mine continued to post solid operating results in Q4, bringing full-year production to 92Mlb ZnEq at a C1 cash cost of $0.69/lb, exceeding management’s original guidance by 25%, and revised guidance and our forecast by 2–3%.

- 2015 Production Guidance Ahead of Our Expectations: Management has guided to production of 48–50Mlb Zn, 23–25Mlb Pb and 850–950Koz Ag with on-site cash costs of US$48–US$51/t. On a ZnEq basis, the 2015 production guidance is ~15% above our previous forecast, primarily owing to the positive contribution from the recently discovered high-grade Rosa and Fatima zones. Consequently, we have raised our 2015 production forecast to 87Mlb ZnEq, at a C1 cash cost of $0.76/lb (Figure 1).

- Caribou Remains on Track for Commissioning in Q2/15: Rehabilitation work has progressed on schedule and modestly below budget to date. Trevali has tapped its partner Glencore to provide experienced IsaMill operational specialists, and also engaged DRA Americas to provide a specialist metallurgy and plant operations group for technical assistance during commissioning. We forecast the mine to produce ~70Mlb ZnEq during the ramp-up phase in 2015 (mostly pre-commercial), with C1 cash costs of $0.79/lb, and for the mine to exit the year at full capacity (Figure 1).

- Cash Balance Expected to Trough in Q2 and Grow Thereafter: Management estimates cash on hand as at the end of Q1 to be ~$20M. The current cash balance should be sufficient to see the company through the commissioning of the Caribou mine, albeit with only limited wiggle room. Remaining near-term cash expenditures include ~$10M to complete the Caribou mine, ~$5M in associated working capital build, and debt service obligations of ~$3M/quarter, offset by operating cash generation. We estimate cash balances will trough near $10M in Q2, and then build to ~$25M by year-end.

- Expected News: 1) Caribou mine start-up, Q2/15; 2) Caribou paste plant study, Q2/15; 3) Santander resource update, Q2/15; 4) Stratmat resource update, Q2/15; and 4) Halfmile/Stratmat development PEA study results, H2/15.

Conclusion

Trevali remains the best independent zinc growth story, in our opinion. The timing of its production growth coincides well with our expectation for a tightening global market and higher prices for the metal. Pending shutdowns of the Century and Lisheen mines later this year will remove an additional ~500Kt of primary zinc production from a market already forecast to be in a production deficit. We maintain our Buy recommendation and $1.75 target.