Santander Syndrome And Other Serious ConcernsThe Santander situation is a serious concern – another potential mine shutdown with a financial care and maintenance burden within a year! More alarming though is the timeline of events:
* During 2020 Q4, Santander did not incur any sustaining mine and mill expenditures (its C1 and AISC are both at $0.95 per pound - MDA page 34). Did management decide to curtail such capex prior to September 30, 2020, for what reason and was there any disclosure of such?
* The January 25, 2021 Corporate presentation emphasized that Santander had “941 million lbs contained zinc (in measured & indicated resources” (page 19) but did not give any indication about potential impairment issues.
* The FS (published February 24, 2021) state that “Following the
completion of studies in December 2020, the life-of-mine plan for Santander was revised with mining operations at the Magistral deposit scheduled to complete at the end of 2021 and the economic feasibility of the Santander Pipe was re-evaluated. The Santander operation is expected to transition into an exploration phase” (FS page 21).
* No sustaining capex since September 30, 2020 and a life-of-mine plan review completed by December 2020 but no mention of impairment during the January 25, 2021 corporate presentation! And, one month later, it is announced that the mine is scheduled to close by the end of 2021!?
Management and directors, past and present, have consistently failed to deliver any reasonable financial and production results.
* The “tone at the top” is
chaotic – in the past few years, there have been 4 CFO’s, 3 CEO’s, 3 Chairs of the Board, most of the head office staff replaced, most of the on-site senior mine management replaced, head office twice relocated, most of the directors replaced.
* Management is highly compensated (
2020-$8.3M and 2019-$12.1M – FS page 36) but recent results stagger belief -
$30.9M operating loss for 2020 alone (FS page 8); $200.7M impairment write-downs (
2020-$197M and 2019-$3.7M – FS page 8); $13.0M restructuring expenses (
2020-$5.4M and 2019-$7.6M – FS page 8);
$21.6M in 2020 financial expenses (including mark-to-market losses on financial instruments, mark-to-market settlements, foreign exchange losses and interest expense (FS page 8
) all of this under management’s purview, and
Caribou 2020 $7.3M care and maintenance expenses (FS page 8) with more expected in 2021 Q1 along with an estimated $7M in start-up costs!
The plan for Trevali was to create a pure-play zinc investment vehicle fully exposed to the market with the intention to grow by acquiring additional productive assets. Over the past few years, management has squandered cash reserves paying down lines-of-credit and on futile share buy-backs (thereby depleting the acquisition ‘war chest’) and, then, because the company was short of cash, forced to re-negotiate the lines of credit (at more costly terms all the while wasting their time fixing their own self-inflicted wounds), to draw $51.9M on new loans during 2020 ($38.9M on the credit facility and $13.0M from Glencore – FS page 9), and to issue $25.1M in new equity (FS page 9). As an aside, there are different 2020 ‘new equity issuance’ numbers throughout the financials – see pages 9-$25.1M, 10-$22.7M and 28-$26.6M (and no explanation reconciling these differences)! To add insult to the ‘share buy-back’ injury, during 2020, management issued 25.9M stock options at $0.17 per share (FS page 29) and $29.9M ‘performance share units’ at $0.04 per share (FS page 30) - the Trevali website reports the 52-week low share price is $0.06 – how do you justify such rich options!?
Long term debts
mature September 18, 2022 - $104.3M plus $12.7M (FS page 26) – where will Trevali find this money? This is critical since Rosh Pinah 2.0 needs to be financed!!!
Excessive share float bloat – 989,092,585 issued shares as of December 31, 2020 (FS page 10) with potential dilution including:
* 46,632,000 warrants at $0.23 per share expiring June 2, 2022 (FS page 26)
* 21,067,017 stock options at $0.17 per share expiring March 10, 2025 with another 5,612,690 stock options ranging between $0.45 and $1.59 per share (FS page 29)
* 35,883,281 PSU’s, RSU’s and DSU’s (including 27,239,809 PSU’s at $0.04 per share and 6,186,278 DSU’s at $0.11 per share) (FS page 30).
How many shares does management own outright and why is this not prominently disclosed (lots of options have been granted but how much money has management invested in Trevali shares)?
Using hedges (buying puts like insurance for downside protection) is costly but works but should not be financed by selling any upside potential (especially when management indicates that a ‘bull’ market is approaching!!)!!!
Copper is not mentioned in the current FS, MDA, or Reserves and Resources (Caribou has been analyzing its copper potential for more than twelve years).
Life-of-mines should be clearly disclosed and explained. The most current Reserve and Resource statement is based on zinc at a $1.14 per pound but, as of February 25, 2021, management forecasts zinc prices at $1.15 (2021) and $1.10 (2022 and beyond) (FS page 22). How does this impact the Reserves and Resources and forecasted revenue for 2021 and beyond?
More comprehensive production and financial information should be presented for all quarters (to analyze current results, you need to poke around in many different sections within the news release, financials and MDA). Also, there are many ‘financial’ “snap shots” within the MDA but I find them to be incomplete and not very valuable – management should present quarterly cash flow reports (for all four quarters) delineated by mine operations, exploration and corporate (and not at such a high-level that the important details are blurred away).
Impairments (and impairment reversals) are non-cash items – not a major issue.
This is a sorry tale but is there a happy ending?
- Trevali did generate $12.3M in cash flow from operations during 2020 Q4 (but also invested $10.1M in equipment etc.) (MDA page 14).
- Rosh Pinah 2.0 has huge potential but only if funding can be secured (but we will have to wait for two years or so for the results)!
- Treatment charges may be significantly lower for 2021 (not sure if management has disclosed its assumption for 2021 or 2022 and whether the 2021 Q1 results will incorporate their estimated 2021 rate).
At the end of the day, positive cash flow is the most critical issue (lets hope that management does not spill the milk and shoot the cow)!
I am in it for the long haul… I have a high target price before I can gracefully exit.