Teal Valley T.TV

Haywood Securities comments on Trevali Mining Corporation

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According to Haywood Securities:

https://personal.crocodoc.com/zxTIYWQ

Trevali Mining Corp.

(TV-T, $1.09)

Rating: Buy

Target Price: $1.35

Caribou Paste Backfill Test Work Points to Additional Upside Potential

Valuation | Our target is based on a 1.0x multiple to a fully financed after-tax corporate NAV10% of $1.30 per fully diluted share at Haywood’s long-term forecast zinc price of US$1.15/lb. A change of US$0.10/lb (~9%) in the long-term zinc price impacts our target by ~$0.30 per share (~22%), providing investors with strong leverage to the metal.

Risks | Trevali has not published any NI 43-101 compliant technical studies outlining the details of a modern mining operation at Santander. Thus, our formal project valuation is based on conceptual Company guidance and peer-group comparables only. Ongoing/future development at Santander also appears to be taking place in lieu of publicly available technical documentation, in part illustrated by Trevali’s recent initiative to fast-track underground development on four sublevels at the Rosa Zone. Hence, we consider forecast risk as High. The Company is hypothetically fully funded to establish commercial production at its second mine (Caribou) within the next year. That said, our formal valuation includes additional consideration for anticipated (modest) financing(s), which is pro forma in nature.

Impact – Positive (neutral to our formal valuation) | Trevali recently provided an update on positive initial results from the first two phases of paste backfill test work at the Company’s 100%-owned Caribou polymetallic project in New Brunswick. Engineered paste backfill is an established practice in many cut-and-fill mines where binding components (cement) are added to mill tailings (and/or sand), resulting in a mixture that has superior strength and ground support characteristics compared to dry waste-rock backfill. In addition to allowing greater extraction of a mineral deposit, the use of paste backfill decreases the size and footprint of surficial tailings management facilities. The paste backfill study builds on Caribou upside potential recently illustrated by a ‘proof of concept’ 200 m step-out drill hole, which returned 50.90 m of massive sulphides grading 5.08% zinc, 1.76% lead, 0.37% copper, 59.66 g/t silver, and 1.63 g/t gold (refer to Radar Screen, April 16, 2015).

- Caribou’s June 2014 PEA mine plan (SRK) includes 1.9 Mt of mineralization utilized as ground support in the form of sill pillars, of which 601 kt is extracted over the project’s 6.3 year mine life (refer to Radar Screen, May 20, 2014). However, paste backfill test work, headed by Kovit Engineering (a Sudbury-based specialist in the field), indicates that the implementation of paste backfill technology in place of dry waste-rock backfill at Caribou would result in the additional recovery of 717 kt (54%) to 1.33 Mt (100%) of mineralized material currently ‘locked’ in sill pillars and excluded from the project’s PEA production plan (which is underpinned by 6.15 Mt of mill feed grading 6.11% zinc, 2.49% lead, 0.34% copper, 67.8 g/t silver, and 0.86 g/t gold). Hence, the use of paste backfill at Caribou stands to meaningfully extend the mine’s current 6.3 year life (by ~12% to 22%).

Caribou 3D Mine Model (pink = sill pillars, yellow = planned stopes, grey = previously mined stopes and fill)


- In addition to increased mine life, the use of paste backfill also stands to (1) increase mill head grades (via lower waste-rock dilution; currently at 16% in Caribou’s PEA mine plan; paste backfill estimated to decrease dilution to 8% to 10%), (2) improve operational efficiencies (decreased cycle times [by 25% to 30%], re-handling of material, mining fleet requirements, and ventilation requirements), and (3) decreased surface tailings requirements—the use of paste backfill at Caribou is conservatively estimated to reduce surface tailings volumes by 40% to 50%, in turn increasing the permitted life of the mine’s tailing impoundment on surface.

- Preliminary estimates peg the initial capital cost for a new tailings-sand backfill plant (installed; including underground distribution systems) at $9M to $12M (including a 30% contingency; directly in line with our previous expectations, refer to Radar Screen, April 2, 2015). Operating costs for the paste plant are estimated at $8.50 per tonne versus $13.50 per tonne for dry backfill in Caribou’s current PEA mine plan. We note that the inclusion of a US$10M paste backfill plant designed to facilitate the extraction of an additional 1.0 Mt of Caribou’s resource currently ‘locked’ in the mine plan’s sill pillars would increase Caribou’s after-tax project NAV10% by about US$15M in our model, in turn boosting Trevali’s fully financed after-tax corporate NAV10% to ~$1.35 per share (from $1.30 per share currently). Furthermore, (arguably more importantly) Caribou’s life-of-mine average total zinc cash cost would drop to ~US$0.55/lb net of credits in our model (from US$0.60/lb currently). We note that this preliminary analysis does not take into consideration the potential for improved head grade (see above).