Teal Valley T.TV

M Partners: Buy rating and $2.00 target for Trevali Mining

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According to M Partners:

https://personal.crocodoc.com/nbeqPrX

TREVALI MINING CORP.

(TV - TSX, $1.09)

Rating: Buy

12-Month Target: $2.00

INITIAL WORK SUGGESTS PASTE BACKFILL WOULD BENEFIT CARIBOU

Initial work on Caribou paste backfill suggests it is likely to go ahead. Trevali’s PEA in May 2013 recommended that the addition of a paste backfill plant was likely to optimize the mineable resource. Yesterday, the company reported results of an updated paste backfill study suggesting it would be appropriate. This work suggests an additional 0.717 to 1.33MM tonnes could be mined from the current resource through the addition of paste backfill, which would extend the mine life versus the current dry waste-rock backfill. As well, backfill costs would decline from $13.50/tonne to $8.50/tonne improving economics. Including contingency the paste backfill system is expected to cost $9-12MM. Besides the economic benefits of paste backfill, we would expect its use to also reduce dilution (by 8-10%), improve ground stability, reduce ventilation requirements and reduce tailings storage requirements (40-50% less used in the paste). The results appear to be good and it is likely that Trevali moves ahead with additional paste backfill studies, including testing freshly produced tailings from Caribou. In our view, the economic benefits suggested above make it very likely that Trevali uses paste backfill at Caribou.

Figure 1: Mine Plan Showing Previously Planned Sills (Pink)



Source: Company reports

Estimates already incorporated the use of paste backfill; timing and capex updated. We had previously included the use of paste backfill in our estimates, and continue to assume that 75% of the resource tonnes excluded from the PEA are able to be mined. We had modelled $10MM in capex for the paste backfill system, being spent in mid-2016 (Q2 and Q3). We are now modelling capex of $12MM being spent in H1 2016. At this point we do not incorporate operating cost savings into our estimates but we plan to review our estimates as operations ramp-up.

Mill commissioning at Caribou next key catalyst. We continue to believe that subsequent progress updates from Caribou, particularly the initial mill commissioning, are likely to be a key driver for the stock. Our most recent conversation with management suggests the restart of Caribou is on track for our mid-Q2 mill commissioning estimate.

We are maintaining our BUY rating and our one-year target price of $2.00 per share. Our target price is based on 5.5x our one year forward, next twelve months EBITDA estimate of $124.9MM (unchanged). Trevali currently trades at 0.54x NAV and 3.5x our 2016 EV/EBITDA estimate versus peers at 0.68x and 5.0x. We believe that as Trevali ramps up production it should trade at a premium to base metal peers because of its unique leverage to a favourable macro environment for zinc.

POTENTIAL CATALYSTS AND EVENTS

Q2 2015 – Initial production at Caribou

Q2 2015 – Q1 financial results from Santander (May 14th)

Q2 2015 – Stratmat resource update