Teal Valley T.TV

Paradigm Capital: Buy rating and $1.25 target for Trevali

[shakerman640]

According to Paradigm Capital:

https://www.ge.tt/api/1/files/7ahsb1Q2/0/blob?download

Trevali Mining Corp.

Santander Outperforms while Caribou Ramping Up Quickly

Stock Rating: Buy

12Mth Target: $1.25 (previously was $1.75)

Investment Thesis. With Trevali’s 1st mine generating positive cash flow, and their 2nd mine, Caribou, well advanced in the commissioning stage, the growth story is coming together for Trevali. A successful start-up at Caribou akin to the experience at Santander should catapult the company into the next phase of its growth. Given our view for a material tightening within the zinc market, TV could be poised for a share price re-rating.

Event

Trevali recently announced a strong Q3/15 operational update for both the Santander mine and the commissioning progress at the Caribou mine. Production guidance has been increased at Santander, while we continue to expect Caribou to achieve commercial production in Q4/15.

Details

- Santander Mine Continues to Outperform: Q3/15 payable production of 14.6Mlb zinc, 7.6Mlb lead and 282Koz silver (or ~27Mlb ZnEq) was another excellent result for the mine. YTD production now stands at 40.9Mlb zinc, 23.8Mlb lead and 827Koz silver — 82%, 95% and 87% of the top end of the original guidance ranges, respectively. Cash costs have not been provided, but we estimate costs are once again below $0.70/lb ZnEq.

- 2015 Production Guidance Increased: Management increased Santander guidance ~10% (on a ZnEq basis) to 50–52Mlb zinc, 29–31Mlb lead and 1,050–1,000Koz silver while lowering on-site cost guidance by 5% to US$46–US$48/t.

- Caribou Mill Commissioning Faster than PEA Projections: We continue to expect the mine to achieve commercial production in Q4/15. Metallurgical recoveries have stepped up again in September to 75% zinc (from 63% in Aug.) and 53% lead (from 45% in Aug.). We look for full design throughput and recovery rates to be achieved around year-end. Underground mining rates will need to accelerate to keep pace with the mill in Q4, but we expect no significant hurdles here.

- Balance Sheet Remains Sound: Cash on hand as at the end of June was ~$25M. After funding pre-commercial operations at Caribou, we look for Trevali to end the year with ~$10M cash, and for cash balances to substantially increase thereafter based on our bullish outlook for zinc. We estimate zinc prices of ~$0.85/lb are required for the company to remain free cash neutral (after debt service obligations) in 2016.

- Expected News: 1) Q3/15 full financial results – Nov. 16; 2) 6,000m infill drilling at Santander targeting 2016/2017 production zones – Q4/15; 3) 10,000m drilling at Caribou to upgrade inferred resources and follow up on a high-grade step-out intercept – Q4/15; and 4) Halfmile/Stratmat development PEA study results – Q1/16.

Conclusion

We have updated our NAV to reflect operational progress YTD at both of Trevali’s mines, and incorporated the share dilution from the Q2 equity raise. Our revised NAV is $1.38/sh to which we apply a 0.75x multiple, arriving at our new target price of $1.25 (was $1.75). We maintain our Buy recommendation.

Trevali remains the best independent zinc growth story, in our opinion. The share price has been depressed YTD on the back of a 25% decline in zinc prices (through to Sept. 30), but the tremendous price leverage works both ways, as demonstrated last week with a 1-day rise in the TV-T share price of 57% on the heels of Glencore’s production cut announcement (amounting to 4% of global production). The zinc price could next get a lift from the shutdowns of the Century and Lisheen mines (~5% of global zinc production, with the impacts commencing in Q1/16).