Trevali Mining Corporation (TV): Cash Cushion to See CaribouTrevali Mining (TV-CN, SO, C$0.80, Mark Turner 416-863-7484) has closed its previously announced marketed equity financing, raising gross proceeds of $14.95M at a price of $0.32/share. Scotiabank is now officially off restriction and Base Metals Analyst Mark Turner has updated his model. In Mark’s view, the additional capital, in concert with the debt facility amendments (deferral and additional funds) completed at year-end 2015, have significantly improved the company's liquidity position. While balance sheet and ramp-up risks remain, Mark believes the risk/reward trade-off now makes sense for investors as they position for strengthening zinc prices he expects to commence later this year. Under the Scotiabank GBM metals price deck (see below), Mark estimates the company will generate free cash flow and have sufficient in-place liquidity to complete the final stages of the Caribou ramp-up and meet its debt amortization schedules, as well as finance a mill capacity increase at Santander (late 2017 timeframe). Mark’s modelling suggests that even the same can be said, but with little cushion, at current spot pricing of US$0.83/lb zinc and lead. Worth noting is that prior to the announcement of the equity raise, Mark’s modelling had suggested a negative working capital balance in Q2/16 and through most of 2017. As noted above, post the equity financing, Mark believes the balance sheet is much better positioned to ride out the current commodity price environment and remaining capital required to fully ramp Caribou.
Scotiabank GBM Relevant Metal Price Forecast… Think Zinc? Think Trevali!: TV continues to offer significant leverage to the zinc price, and be one of only a handful of publicly traded equities globally to offer meaningful pure-play exposure. We estimate that TV will generate operating cash flow (before changes in non-cash working capital) of $0.09 per share in 2016, increasing by an estimated 76% to $0.16 per share in 2017, Caribou’s first full year operating at design rates.
A 10% increase in our zinc price forecast in these years increases our CFPS estimates by 13.2% and 18.6%, respectively. Additionally, a 10% increase in our zinc price forecast boosts our NAVPS8% estimate by 53.8% from $0.90 to $1.39. Caribou Commissioning Update Reminder: 1) Recall that TV provided a January and February (to mid-month) mill commissioning update for the Caribou complex showing continued improvement, on February 24, 2016. The update was important, in Mark’s view, as throughput has increased metal recovery rates and concentrate grades have been maintained or improved. While processing design-grade mill feed in Q4/15, the zinc recovery circuit became overloaded and constrained near the ~2,000 tpd rate. To address this issue, upgrades to pumps and pipes were completed in late December 2015. Overall process variability continues to decrease, which Mark views as an important positive, as given the finer grind size, stabilization of the circuits is often more difficult to achieve. Reduction of the primary grind size to 30 microns, from 35 microns, has been identified as a key opportunity for improvement. Modifications are being undertaken now and are to continue in upcoming scheduled maintenance periods. Mark covered this in his previous Trevali note:
Throughput Ramping Back Up Post Late Q4/15 Modifications, located here:
https://www.scotiaview.com/cs/Satellite/research/1294923768967/Daily-TV-TO-Throughput-Ramping-Back-Up-Post-Late-Q4-15-Modifications-165553.pdf 2) While the easier gains up the recovery-concentrate grade curve have been made, focus remains on increasing mill circuit stability and continuing the positive trends of both zinc and lead recoveries as throughput is increased. Mark continues to believe that zinc, lead, and silver recoveries of 84%, 65%, and 37.5%, respectively, and concentrate grades, as assumed in the June 2014 preliminary economic assessment (PEA), are ultimately achievable. Focus remains on stabilizing operations to achieve these rates consistently when recovering multiple concentrate streams from ultrafine grained ores.
All that said, Mark has delayed his assumption of commercial production being declared until the end of Q2/16. He has made no changes to his site opex or capex assumptions, and his estimated free cash flow has not changed materially; however, his 2016E EBITDA and earnings estimates have been reduced on removal of Caribou’s impact on the income statement for 1H/16. Mark also noting this morning that TV maintains one of the lowest debt to total capitalization ratios in our mid-cap producer coverage universe at 24% in 2016E and 17% in 2017E. On our estimates, 2016E net debt to EBITDA remains comfortable at 1.3x, dropping to 0.6x in 2017E as Caribou operates at design rates as per our expectations. Source: Scotiabank GBM Base Metals Research
Mark Turner’s comprehensive Trevali Upgrade Note Here… https://www.scotiaview.com/cs/Satellite/research/1294925319113/Daily-TV-TO-Cash-Cushion-to-See-Caribou-Through-to-Commercial-Production-193631.pdf