Teal Valley T.TV

M Partners: Buy rating and $1.80 target for Trevali Mining

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According to M Partners:

https://personal.crocodoc.com/3TxCmHP

TREVALI MINING CORP. (TV - TSX, $0.95)

Rating: Buy

New 12-Month Target: $1.80

Old 12-Month Target: $2.00

BALANCE SHEET STRENGTHENED; STRATMAT RESOURCE EXPANDED

Funds in place to provide flexibility during Caribou commissioning. Trevali recently completed a $30.6MM equity financing (30MM shares at $1.02/share). We had previously modelled a smaller equity raise of $5MM this quarter at $1.00 per share to provide balance sheet flexibility during commissioning. Since the financing was larger than expected, it is dilutive to our estimates, reducing our NAVPS to $1.90 (was $1.98) and our target to $1.80 (was $2.00).However, we view the financing positively as it provides Trevali financial flexibility during commissioning and its potential appeared to be weighing down Trevali’s share price, offsetting the good news of commissioning at Caribou.

Stratmat resource update increases the likelihood of a second production centre in New Brunswick. On May 20, 2015, Trevali announced an updated resource estimate for its Stratmat deposit located in the Bathurst mining Camp in New Brunswick. Total tonnes increased by 29% and the updated resource is now 66% in the higher confidence indicated category (was 100% inferred); however, overall grades have declined (Figure 2). We view the increased confidence and size as important, particularly considering the company’s plan to complete an updated PEA on Stratmat/Halfmile that would see both deposits processed at a common second milling facility in the Bathurst Camp. While lower grades are likely to impact economics of the combined project, we believe the resource is still likely to support an economic mining operation, particularly when developed in conjunction with Halfmile. We have updated our in-situ valuation for Stratmat to reflect the updated resource, increasing it to US$56.3MM from US$51.4MM. We have been using an in-situ value for Stratmat/Halfmile in our NAV calculation since it represents longer term growth for the company with production unlikely until F2019E.

Investor focus expected to remain on Caribou commissioning. With start of commissioning announced on May 19th, we believe the company’s share price is likely to be driven by monthly commissioning updates. We expect commercial production to be declared in Q3 2015E. As well, we expect throughput to progressively ramp up, reaching 2,700 tpd in Q1 2016E and 3,000 tpd by Q1 2017E. We expect the next commissioning update in early July.

We are maintaining our BUY rating and are reducing our one-year target price to $1.80 per share (was $2.00). Our target price is based on 5.5x our next twelve months EBITDA estimate of $118.4MM (was $124.9MM). The larger than expected financing was dilutive to our estimates, reducing our target. Trevali currently trades at 0.50x NAV and 3.7x our 2016 EV/EBITDA estimate versus peers at 0.62x and 5.0x. We believe that Caribou’s continued execution at Santander and moving Stratmat/Half-Mile forward are likely to be key catalysts for Trevali. As Trevali ramps up zinc 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 – Ongoing Caribou commissioning updates

Q3 2015 – Q2 2015 operating and financial results

Late 2015 – Stratmat/Halfmile PEA