Teal Valley T.TV

Raymond James: Outperform rating and $1.60 target for TV

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According to Raymond James:

https://personal.crocodoc.com/yDLDNpH

Trevali Mining Corporation

Rating: Outperform 2

Target price: C$1.60

Well Financed to Bring Caribou into Production

Recommendation

We have updated our estimates following the closing of Trevali’s C$30.6 mln equity financing last week. Our Outperform rating and C$1.60 target price are maintained. We continue to believe Trevali is on the verge of realizing positive free cash flow later this year as its new Caribou mine ramps-up, a significant milestone for this growing zinc focused miner. At spot metal prices, we expect Trevali’s cash position to range from C$30-$40 mln over the next 18 months.

Analysis

- Trevali issued 30 mln shares (11% dilution) at C$1.02, raising gross proceeds of C$30.6 mln. The proceeds are to be used to facilitate the ramp-up process and optimization initiatives at the Caribou mine in New Brunswick, and for working capital and general corporate purposes. Our NAVPS rose by two pennies to $1.27 as we rolled forward our model a quarter, offsetting the impact of dilution.

- After taking into account debt-related costs (interest & principal) and if we were to assume that currently weak spot metal prices persist (Zn $0.94, Pb $0.81, and Cu $2.60), we expect TV’s cash position to remain in the $30-$40 mln range for the next 18 months, increasing in 2017. As such, we do not have any balance sheet concerns.

- Regular updates on ramp-up activities at Caribou should help improve confidence in Trevali’s ability to turn this previously troubled mine into a profitable operation. Hitting the recoveries targeted in the mine’s 2014 PEA will be the focus, with attention also paid to keeping mining dilution to a minimum. We expect commercial production to be achieved before year end 2015.

- A PEA on the combination of the company’s Halfmile and Stratmat zinc projects in New Brunswick could be completed around year-end, setting a baseline for evaluating the potential to add a third mine to Trevali’s portfolio. Benefiting the PEA process is an ability to use some historic mining and processing results from Halfmile (~100 kt was mined in 2012), actual operating and capital costs from Caribou, and availability of some existing brownfield infrastructure nearby. That being said, substantial technical evaluation of the project remains to be done over the coming months.

Valuation

Our $1.60 target is based on 50% weighting of a 1.2x P/NAV multiple to our 8% minesite NAV (Exhibit 1) and 6.0x multiple to our next-twelve month EBITDA forecasts, above its mid-tier base metal peers at 1.0x and 5.9x, respectively. In our view, these higher multiples are appropriate given the scarcity of zinc-focused producers in the market.