Trevali Mining Corp. (
TSX: T.TV,
Stock Forum) passed a key milestone last week as the Canadian mining company moves to become a unique Canadian stock market play on zinc.
Vancouver-based Trevali has begun producing zinc (and lead-silver) rich concentrates at its Santander mine in Peru, one of two mining operations that the company has been working to bring into production before the end of next year (2014).
The other is the Caribou mine complex and related assets in New Brunswick.
Now that its mill in Peru is finally processing stockpiled ore, Trevali can concentrate on ramping Santander up to a planned production rate of 2,000 tonnes-per-day before the end of October.
This development is clearly a win for Trevali Chief Executive Officer Mark Cruise, a former zinc mining specialist with
Anglo American PLC (
OTO: AAUKF,
Stock Forum), who recognized that the lack of investment in the zinc sector when he left Anglo in 2004.
With the help of strategic partner GlencoreXstrata, (the Swiss commodities trading giant) Cruise has guided Santander from the drilling stage in 2008 right through to production.
Under the terms of a life-of-mine offtake agreement, GlencoreXstrata is buying concentrates from Trevali under a deal that enables the Vancouver company to receive the average monthly London Metal Exchange price for its zinc and lead production.
Within the next few weeks, Trevali will cross another key milestone when Santander starts to generate cash flow from the sale of concentrates.
It is a sequence of events that has prompted Dundee Capital Markets analyst Joseph Gallucci to place a top pick buy rating on Trevali, with a target of $1.50 a share.
Trevali was unchanged Friday at 72 cents, leaving the company with a market cap of $161.2 million, based on 223.9 million shares outstanding. The 52-week range is $1.32 and 49 cents.
“With production starting in Peru and mill rehabilitation work progressing in New Brunswick, Trevali should have two producing operations on line and fully ramped up by the time we expect improving zinc fundamentals to buoy prices in 2014,’’ wrote Gallucci in a research report.
Reacting to the start of production in Peru, PI Financial Corp. this week reiterated its speculative buy rating on Trevali, saying it has a 12-month target of $2.05.
In an interview with Stockhouse, Gallucci said he likes the company’s leverage to any future increase in the price of zinc, a rise that he believes will be fueled in part by an expected drop in global production as some of the world’s largest zinc mining operations reach the end of their lifespan, creating a supply deficit in the process.
While zinc was trading at US87 cents a pound this week, Gallucci expects prices to rise to 90 cents next year, increasing to US1 in 2015.
If those forecasts are correct, Trevali is poised to be a profitable zinc producer with all-in costs in the 80 cents per pound range, once Peru and New Brunswick are fully ramped up by 2015.
While
Teck Resources Ltd. (
TSX: T.TCK.A,
Stock Forum) (
TSX: T.TCK.B,
Stock Forum) (
NYSE: TCK,
Stock Forum) and
Lundin Mining Corp. (
TSX: T.LUN,
Stock Forum) both have leverage to zinc, Trevali has few competitors in the junior and mid-tier space as companies like
Zazu Metals Corp. (
TSX: T.ZAZ,
Stock Forum) and
Canadian Zinc Corp. (
TSX: T.CZN,
Stock Forum) both of which are a few years behind in terms of aiming to bring new mines into production.
“If zinc doesn’t get up over US$1, it would be quite difficult for these companies [Zazu and Canadian Zinc] to get financing,’’ Gallucci said.
Still the lack of options in the zinc mining space is not the only reason why Dundee has a buy on Trevali.
“When you talk about Trevali, time and time again you need to talk about their strategic relationship with GlencoreXstrata,’’ he said.
He believes the arrangement suits both companies, providing Trevali with a strategic partner with deep pockets and a global reach. For its part, GlencoreXstrata is getting a secure access to metal in a sector where mines tend to be smaller operations than copper, for example.
“In the junior mining space today, if you don’t have access to capital and a strategic partner you are not going to survive,” the Dundee analyst said.The fact that GlencoreXstrata is paying the average monthly LME price for Trevali’s zinc, means that the Canadian company remains exposed to any upside in the price of the metal, he said.
Subject to the closing of a pre-arranged $30 million debt facility, Trevali is expected to be processing concentrates at its New Brunswick operations by the second half of 2014. The debt facility is part of a $60 million financing that was announced in September 2012, with RMB Resources, the resource financing division of FirstRand Group of South Africa). This facility is expected to close by October of this year.
The New Brunswick operations consist of the Caribou mine and mill, the Half Mile Mine (that underwent trial production in 2012), plus additional resources at the nearby Stratmat deposit.
Initially, the Caribou mill will be fed with ore from the Caribou underground mine and Half Mile mine.
Once both assets (Peru and New Brunswick) are fully ramped up, by 2015; Trevali can look forward to producing about 300 million pounds of zinc (200 million from New Brunswick and 100 million from Peru), plus an additional 100 million pounds of lead.
The company can increase its production capacity in the Bathurst Mining Camp operations if it proceeds with plans to potentially build a second 4,000-5,000 tonne-per-day milling complex, separate from Caribou, to process ore from the Stratmat deposit.
“Everyone has been waiting for Trevali to make the transition from developer to producer,’’ said Gallucci. “It’s a beautiful thing when you see a junior mining company progress from drilling to production’’ he said.
Biography
Joseph Gallucci, MBA – VP, Senior Analyst – Joseph Gallucci has approximately 10 years of experience in equity research. Joseph joined Dundee Capital Markets in June 2012 as a Mining Research Analyst. Joseph spent the previous 5 years at Canada’s largest independent broker, in the mining research team where he was originally a research associate and then promoted to Mining Analyst. Joseph’s main focus is on base metals and bulk commodities on a global scale. Prior to this, Joseph was a research associate in the forestry sector at a Canadian bank-owned broker. Mr. Gallucci holds a Bachelor of Commerce degree from Concordia University. Mr. Gallucci also holds an MBA in investment management from the Goodman Institute of Investment Management.
Disclosures:
Joseph Gallucci does not beneficially own, have a financial interest in, or exercise investment discretion or control over, Trevali Mining Corp.
Dundee Capital Markets and its affiliates, in the aggregate, do not beneficially own 1% or more of a class of equity securities issued by Trevali Mining Corp.
Dundee Capital Markets has provided investment banking services to Trevali Mining Corp. in the past 12 months.
All disclosures and disclaimers are available on the Internet at www.dundeecapitalmarkets.com. Please refer to formal published research reports for all disclosures and disclaimers pertaining to companies under coverage and Dundee Capital Markets. The policy of Dundee Capital Markets with respect to Research reports is available on the Internet at
www.dundeecapitalmarkets.com.