Teal Valley T.TV

Haywood Securities comments on Trevali Mining Corporation

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According to Haywood Securities:

https://personal.crocodoc.com/8lIuyIH

May 15, 2015

Trevali Mining Corporation (TV-T, $1.14)

Rating Buy

Target Price $1.35

Return 18%

Santander Delivers Another Solid Q1/15 - Caribou Commissioning Start-up Imminent

Event

Q1/15A financial results—2015E production guidance reiterated

Valuation

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

Impact – Neutral

Q1/15A cash flow per share (CFPS) of $0.01 is essentially in line with Haywood and IBES analyst consensus expectations (both at US$0.01).

- Trevali’s Q1/15A financials were driven by previously reported production of 12.5 Mlb of zinc, 7.4 Mlb of lead, and 255 koz of silver (payable) from the Company’s 100% owned Santander mine in Peru–in line with reiterated 2015E production guidance of 48-50 Mlb of zinc, 23-25 Mlb of lead, and 850-950 koz of silver on an annualized basis. Unit on-site operating costs increased modestly to US$48.88/t milled in Q1/15 (vs. a 2014A average unit operating cost of US$47.33/t; albeit up from US$43.12/t in Q4/14)—directly in line with Trevali’s reiterated 2015E operating cost guidance of US$48 to US$51/t. Ongoing underground mining optimizing initiatives appear to be bearing fruit. As a result, Santander’s average total zinc cash cost increased modestly to US$0.49/lb payable net of credits in Q1/15 (vs. US$0.45/lb in Q4/14A, but still well below US$0.63/lb in Q3/14A), reflecting higher throughput, zinc head grade, and zinc recovery offset by lower by-product credits during the first quarter (noting by-product credits decreased Santander’s Q1/15 cash cost by US$0.81/lb of payable zinc vs. US$0.92/lb in Q4/14). Our model includes an arguably conservative onsite operating cost figure of US$55/t milled at Santander this year, which translates into a 2015E average total zinc cash cost of US$0.50/lb net of credits for the mine in our valuation.

- Caribou is expected to begin shipping concentrates by early Q3/15. Hence, with a current cash balance of ~$18M (including ~$3.6M of remaining flow through financing), Trevali appears positioned to fully fund remaining start-up costs a Caribou, which are currently estimated at ~$5M (including associated working capital considerations). Nevertheless, this outlook is contingent on a successful commissioning campaign expected to begin this quarter (imminently). In the meantime, we would not be surprised to see the market maintain a cautious view with respect to Trevali’s near-term financing requirements, which could require additional (modest) debt and/or equity consideration—noting our model continues to include a modest US$10M ‘top-up’ equity financing this year (priced at $1.25 per share; ~3% dilution).

- Our model includes +2017E CFPS of +US$0.25. Trevali’s peer group currently trades at +5.0x annualized operating CFPS, implying a target price on the order of +$1.50 per share once the Company establishes a steady-state (expanded) production profile. Furthermore, we remain cognizant Trevali is poised to become a (the) marquee mid-tier pure-play zinc producer in a market facing a significant medium-term (+H2/15) supply issue. Hence, we would not be surprised to see the Company garner a premium market valuation on the back of higher zinc pricing / strengthening sentiment for the metal.