Trevali Mining - Benefiting from Rising Prices

Joseph Gallucci has approximately 10 years experience in equity research. In 2012, Joseph joined Dundee Capital Markets as a Mining Research Analyst. Joseph’s main focus is on base metals and bulk commodities on a global scale. 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.

Resource Investing News: To start off, can you tell me a little bit about what’s going on in the zinc market currently?

Joseph Gallucci: The zinc market is starting to turn towards a deficit. It’s been a long and sort of drawn out story over the last few years that the zinc market’s actually going to go into deficit. But it’s happening now. And the large zinc mine closures are happening now. We saw the first one this year where Xstrata’s Brunswick finally closed its doors. So that’s the first of many shutdowns that we predict to happen over the next 3 years eventually leading to a deficit by 2014-2015.

RIN: Many zinc mines will be shutting down in the next few years taking with them about 15% of global supply. How is Trevali positioned to benefit from this situation?

JG: I would describe Trevali Mining (TSX:TV) as one of the few pure zinc vehicles on the Canadian market. If you look back to 2011, there was a consolidation of zinc levered stocks where Breakwater, Farallon and Iberian Minerals were all taken over. And since then, there hasn’t been a production-ready company to replace them aside from Trevali. If you look at their competitors on the TSE, which there are some decent projects, like Canadian Zinc (TSX:CZN) and Zazu (TSX:ZAZ) but they’re further away to development and don’t have any capital to do it. So there’s nobody that can benefit from rising zinc prices in the short term as much as Trevali can.

RIN: How does Trevali’s relationship with the newly merged “Glenstrata” play into the overall outlook for the company?

JG: I think Glencore obviously has a positive view long term for zinc; otherwise, they wouldn’t have bought Xstrata.

I think that having Glencore as a strategic partner in your assets definitely gives an advantage over your competitors. Selling all your offtake to Glencore and with the potential that Glencore is going to probably look to divest some of their smaller zinc assets, and Trevali would be the likely fit to acquire those. Further, if you keep in mind what Glencore is, Glencore is a metals trader. They just want to trade concentrate. So if they can have Trevali do the mining for them and trade their concentrate, it’s a win-win situation. It’s a symbiotic relationship between the two. They need each other.

RIN: Trevali received operation permits for the Caribou Concentration Plant and Mine in New Brunswick in early May. Combined with the Limited Environmental Liability Agreement, what is left before investors can expect Trevali to move into production?

JG: They haven’t given a formal timeline yet, but there’s one big mill that they need, a SAG mill, that they’ve ordered and it’s a nine-month delivery…so nine months starting when they got the final closing of their debt facility. So roughly nine months from now, let’s say. But, you know, it’s very possible that given the other projects aren’t coming in on time or on budget, they may get that mill sooner rather than later. On a conservative basis for us, we assume that it’s going to happen in Q1 next year.

But it could be sooner. We’ll probably get an update on that at some point in the summer from the company. Once they’re up and running in Peru, once they announce production at Santader, they’ll start releasing information on what they’re going to be doing in New Brunswick as the focus shifts there.

RIN: Funding has been rather difficult to come by in this current market, yet Trevali has managed to secure a $60 million in a debt and streaming deal with RMB – $30 million of which has been advanced to the company. How should investors interpret this transaction?

JG: I think that speaks to the quality of the management team, the quality of the assets, and definitely the favorable outlook for the commodity that they’re in. I think you hit the nail on the head there. It is virtually impossible for junior mining companies to raise money in these markets. The equity markets are essentially closed. The debt markets are not accessible really, to the smaller guys, unless you are a special situation, and Trevali is indeed a special situation. And I think that’s one of the biggest deal RMB had ever done in that space and that’s a fantastic deal for Trevali.

RIN: Trevali has completed all major construction at the Santander site and is underway with its dry commissioning phase with the expectation of ramping up production to 2,000 tonnes per day by mid-2013. What challenges could the company face in meeting this goal?

JG: There are always challenges when you’re starting up a new mill. It’d be strange if everything went smoothly. But given the fact that it’s a Glencore mill and they’re contracted workers from Glencore as well, there should be few issues with labor. They have their own power generation from the Tingo power station at least for part of the power, so that shouldn’t be an issue.

But then again, there are things that can go wrong. The one thing that makes me content is they have three months of material already stockpiled and ready for processing. So there won’t be a bottleneck on the mining side, which is excellent. It’s just a question of getting the mill up and running. We originally had it coming on line at the end of last year. It’s been delayed now almost two quarters by our count, and I think that the worst is over, if you ask me. I think in the next couple weeks, they announce production, and then we’re off to the races.

RIN: In a March research note, you mention that once operational Trevali could potentially meet the criteria of Peruvian pension funds – What would it mean for the company to get that sort of investment?

JG: I think that’s one of the big de-risking events for the company. I mean, if you look at a company like Rio Alto, which is also a Peruvian listed company; same thing happened to them and upon the release of that, the stock rallied and went up five percent that day. What it basically does is that Peruvian pension funds like to invest in local businesses, but you need to meet criteria. Production looks to be a criterion. And then aside from being in production, there are other criteria. I don’t have a list of what they are, but quality of assets and management are surely on that list. Put it this way, for a pension fund to put their money behind it, they have to go through a due diligence process that they’re happy with, and I think given that half the volume of stock trades on the Peruvian exchange can be seen as a benefit having those players in the market as well. So you can definitely see the stock price and the volume react positively upon that sort of announcement.

RIN: Trevali is Dundee Capital Market’s Top Pick for junior in the mining space. What factors have impacted this decision?

JG:. As an analyst it’s difficult at times to choose a top pick. But Trevali was one that checked all the boxes for me as top pick, mainly because the supply and demand for zinc and the quality of the management team and assets. The strategic relationship with Glenstrata also helped.

And despite the fact that Trevali is the last remaining zinc vehicle (in production) on the TSE, I think it’s actually very well-run. I think the management team is fantastic. I think Mark Cruise has done a really good job:  1) in bringing this asset (Santander) into production with very low capital; 2) actually acquiring capital in very difficult markets; and 3) negotiating deals with Glencore where he doesn’t give away a pound of flesh. And I think that’s the key here. This management team knows what they’re doing.

RIN: Well, that’s all I have for today. Thank you Joseph for joining us.

JG: Thank you.

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.

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