Teal Valley T.TV

Haywood Securities: Buy rating and $1.25 target for Trevali

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According to Haywood Securities:

https://personal.crocodoc.com/J42jRuL

Trevali Mining Corporation (TV-T, $1.07)

Rating: Buy

Target Price: $1.25 (-$0.10)

Return: 17%

Bought Deal Equity Financing Dilutes Formal Valuation, but Eliminates Near-Term Potential Cash Flow Concerns – Caribou Ramp-Up Now More Than Fully Buffered

Event

Yesterday, after market close Trevali announced a $20.0M bought-deal equity financing, which has subsequently been increased to $30.6M.

Valuation

Based on a 1.0x multiple to a fully financed after-tax corporate NAV10% of $1.20 per fully diluted share at Haywood’s long-term forecast zinc price of US$1.15/lb.

Impact – Mixed

The $30.6M equity financing priced at $1.02 per share (a ~12% discount to yesterday’s 20-day VWAP [$1.16 per share]), expected to close on/about June 11, 2015, stands to add +30.0M shares to Trevali’s capital structure (+10% dilution; 34.5M shares/12% dilution in our model which assumes full exercise of a 15% overallotment option). The proceeds of the financing will be used to fund rampup initiatives at the Company’s 100% owned Caribou zinc mine in New Brunswick, where mill commissioning began earlier this week (refer to Radar Screen, May 19, 2015), as well as working capital and corporate expenditures.

- Caribou is expected to begin shipping concentrates by early Q3/15, ramping up to full-scale production (3,000 tpd) by year-end 2015 (subsequent ‘commercial’ production declared by early 2016). With a cash balance of ~$18M (including ~$3.6M of remaining flow through financing), Trevali appeared positioned to fully fund remaining start-up costs a Caribou, which are currently estimated at ~$5M (including associated working capital considerations). Nevertheless, this outlook was contingent on a successful commissioning campaign. Cognizant of a potential working capital squeeze, we had previously modelled a modest US$10M ‘top-up’ equity financing this year (priced at $1.25 per share; ~3% dilution) in part to buffer Caribou’s targeted production start-up timeline (refer to Radar Screen, May 15, 2015). The recent bought deal announcement, which will boost the Company’s cash balance to +$49M, now (more than) negates the need for this ‘top-up’ consideration in our model. Nevertheless, the added dilution associated with the larger equity financing has decreased Trevali’s fully financed after-tax corporate NAV10% to $1.20 per fully diluted share in our model (from $1.30 per share), in turn prompting a target price decrease to $1.25 per share (which remains based on a 1.0x multiple to fully financed after-tax corporate NAV10%). We continue to maintain a Buy rating.

- Although dilutive, the financing addresses apparent market concern (overhang) with regards to Trevali’s near-term free cash flow profile. With additional funding in hand, the Company will now be better positioned to attract market attention on the back of strengthening zinc sentiment. We remain cognizant Trevali is poised to become a (arguably the only) marquee mid-tier pure-play zinc producer in a market facing a significant medium-term (+H2/15) supply issue (refer to Radar Screen, May 20, 2015). Hence, we would not be surprised to see the Company garner a premium market valuation on the back of higher zinc pricing. For illustrative purposes we note that our model generates a ~$2.00 per share fully financed after-tax corporate NAV10% at a US$1.50/lb long-term zinc price.