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Stefan Ioannou of Haywood Securities shares his thoughts on zinc-focused base metals miner Trevali Mining. He believes the company is “really the only pure-play zinc producer out there right now.”

Mining analyst Stefan Ioannou covers mid-cap base metals companies at Haywood Securities. Prior to joining the firm he worked at a number of exploration and mining companies, as well as government agencies, as a field geologist.

In the interview below, Ioannou shares his thoughts on zinc-focused base metals miner Trevali Mining (TSX:TV). The company has an operating zinc-leadsilver mine in Peru and a second polymetallic mine in New Brunswick that’s currently in the commissioning phase; additionally, it’s conducting work at the Halfmile mine and Stratmat deposit, also in New Brunswick. May was a big news month for the company, and Ioannou was able to shed some light on what it all means for the company.

RIN: On May 14, Trevali put out its Q1 financial results. Were they in line with your expectations/market expectations as a whole?

SI: Yes, on both fronts. Cash flow is the key number we look to for producing mining companies, and it came in at C$0.01 a share. Both us and the street were looking for something on the order of US$0.01 a share, so aside from FX rate considerations, it was pretty much right in line with expectations.

RIN: During the conference call on those results, Mark Cruise, Trevali’s president and CEO, mentioned that a big difference between Q1 2015 and previous quarters was lower prices for commodities, especially silver and lead. Do you see that being a big issue for the company?

SI: I don’t think so. In Q1, Santander’s cash cost increased to US$0.49 per pound zinc vs. US$0.43 in Q4 of last year. The primary culprit for the increased cost figure was lower lead and silver by-product credits. That said, the Q1 results were underpinned by strong throughput, higher head grades and higher metallurgical recoveries, which was good to see. A cash cost on the order of $0.50 per pound zinc is still well below where zinc’s at right now — call it a spot price of ~US$1 per pound. This relatively low cash cost profile should continue for the next few years in Peru.

RIN: Another theme of that call was funding — i.e., how much money does Trevali have in the bank, and how much does it need to get Caribou restarted and complete all the other projects it’s got going on. What’s the consensus and how does last week’s financing fit in?

SI: At the end of Q1, Trevali had C$18 million in cash on its balance sheet. In terms of near-term expenditures coming down the pipeline, the big focus has been building the Caribou mine in New Brunswick, getting it up and running. Mill commissioning started last week, and there’s about C$1 million left to spend on the build, which was originally budgeted at C$36 million. In addition, there’s probably another C$3 to C$4 million of working capital needed to get the mine up and running. So all in, probably about C$5 million in costs, and that’s vs. C$18 million in cash on the balance sheet — a fair bit of buffer.

That said, if there were to be a delay ramping up Caribou, Trevali’s cash balance could conceivably be squeezed a bit tighter than the company would like. So one thing we saw happen last week was an equity raise on the order of C$30 million, which is more than what we expected the company might raise to buffer ramp-up initiatives. Nevertheless, the money was there, and so Trevali decided to be better safe than sorry and take it. It should be more than enough to cover any sort of potential timing delays with regards to the start up at Caribou and/or intermittent zinc price weakness over the next six months.

RIN: Since that financing I’ve seen some concerns that the company is getting too diluted — what are your thoughts?

SI: Dilution’s always a concern for shareholders, especially existing ones. I think the original business thesis behind Trevali would have been to build the Santander mine in Peru and use cash flow from it to build future operations like Caribou. But obviously building up significant enough cash flow from a mine to build another mine takes time. One could argue Trevali is being more opportunistic here, recognizing a looming rally in the zinc price. Two producing mines would definitely positon the company to take better advantage of higher zinc pricing.

RIN: Looking more closely at Caribou, you mentioned that mill commissioning started up there last week. It sounds like Trevali will be following the same strategy used at Santander — will it translate over to a different mine?

SI: I’m sure there were many lessons learned at Santander. I give Trevali a lot of credit at the mine, which was up and running within about six weeks — an unheard of timeline in the mining industry from a commissioning point of view. So a very successful, very quick ramp-up campaign there.

I think at Caribou we have to be a little bit more cautious in that that mine has historically had metallurgical issues. In a nutshell, the ore there is very fine grained, and so requires very fine grinding to liberate the zinc and other metals. Past operators at Caribou have had problems with that in terms of getting good recoveries. The last operator there was a company by the name of Blue Note Mining. It had a lot of problems, but right near the end of its time at Caribou the company installed something called an IsaMill, which is a fine-grinding technology. For the last few months of operations, the mill actually had very good results, with recoveries coming up to design levels. Unfortunately, the global credit crunch hit in 2008 and the mine shut down.

Trevali’s coming in and it’s going to use IsaMills right out of the gate. The thinking is that the metallurgical issues have been unlocked at Caribou with the IsaMills. But I still think it’s a bit of a “show me” story. The market still has a bad taste in its mouth from Caribou’s historic performance, so it’s going to take a quarter or two of near-design, steady state metallurgical results to really get comfortable with the mine.

RIN: Also last week, Trevali updated the resource estimate for the Stratmat deposit. Any surprises there for you?

SI: No. The nice thing about Stratmat and the neighboring Halfmile deposit is that they form another chapter for the New Brunswick story for Trevali. Obviously the focus right now is getting Caribou up and running. But once Trevali does that, the market’s next question will be, “what is your next growth step?” And Halfmile and Stratmat, probably combined, provide a very nice opportunity to increase the company’s production profile in the next five, six or seven years. There’s significant resources at both, and I think the idea would be to build a processing facility near those two deposits, and then be off to the races with a second milling operation in New Brunswick. That has implications for boosting Trevali’s overall zinc production profile significantly in the 2020 timeframe.

RIN: Trevali has a lot going on — are you concerned that it has too many balls in the air? What exactly is the company up to?

SI: I think Trevali has a pretty realistic outlook on its priorities. It’s been very much focused on Caribou up until now, which I think is the right thing to do. From an underground mining point of view things are going better than expected, and now mill commissioning has just started, so hopefully over the coming weeks and months we’ll get updates as to how well that’s going. Meanwhile, Santander is running great — I don’t want to say it’s taking care of itself, but it is running well and there haven’t been a lot of headaches there that we know about.

The company has been busy with exploration as well. Trevali recently had some big step-out drill intercepts at Caribou and Stratmat, which points to blue sky potential down the road at both deposits. In Peru, the company has been hitting it out of the park with underground drilling at Santander — last year two new higher-grade zones were discovered, one of which is already now being mined. The Rosa zone is higher grade than the underpinning resource on Santander’s Magistral North deposit, which is “gravy” for the operation. We would not be surprised to see more exploration bear fruit at the project moving forward.

RIN: Trevali’s also benefiting from the current outlook for zinc, which has a lot of supporters these days. That said, there are some skeptics — in particular I’ve noticed concerns that zinc’s current price uptick will fall flat as it did last year. What’s your opinion?

SI: Over the last few weeks we’ve seen zinc get up to a year-to-date high of US$1.10 per pound; it has since pulled off and is just below US$1 per pound now. I think really you have to understand short-term vs. medium-term and even longer-term considerations. The real bullish zinc thesis fits into the medium-term scenario. We’ve seen a number of large mines shut down over the last few years, and there are two big ones coming later this year: the Century mine in Australia and the Lisheen mine in Ireland. When you add up all the mines that have closed or are about to close down, we’re losing about 10 percent of world production, and when you look at the list of new projects coming on, there simply aren’t enough advanced, large-scale projects to replace the ones we’re losing. So the market is facing a medium-term supply deficit.

We are already seeing inventories on the LME, which are the most visible, come down almost daily — declines are averaging almost 3,000 tonnes per day right now. I think it is these declines that underscore the metal’s bullish view. However, I don’t think we will really get to a technical crunch point until global inventories get down to around two weeks of supply, and they’re not there yet. So in the short term, you could see the zinc price flatline. It did get up to US$1.10 per pound recently, but that may have been a bit premature. I don’t think it is until we get into late 2015 and/or early 2016 that quantitative supply considerations breach a technical threshold that could prompt higher zinc prices. That said, market anticipation for higher prices could boost the pricing of zinc-associated equities sooner.

RIN: What’s your overall outlook for Trevali? How does it compare with valuations from other firms?

SI: We’ve got a C$1.25 per share target on the company right now, and it is definitely at the lower end of analyst consensus — target prices range between C$1.25 and C$2 per share.

We like zinc’s outlook, though we’re a little bit cautious over the short term like I mentioned earlier. Average zinc pricing around US$1 to US$1.10 per pound for the remainder of 2015 is probably a realistic number. It’s not until we get into 2016 that we really see the zinc price starting to move. But if and when that happens, Trevali’s going to be very well positioned to capture that sentiment. Unlike copper, where there’s literally hundreds of companies one can invest in to get exposure, the zinc space is underpinned by a very limited number of good stories, most of which are developers. Trevali’s really the only pure-play zinc producer out there right now, which stands to garner a premium valuation. You could also invest in companies like Hudbay Minerals (TSX:HBM), Lundin Resources (TSX:LUN), Nevsun Resources (TSX:NSU,NYSEMKT:NSU) or Teck Resources (TSX:TCK.B,NYSE:TCK), which have zinc in their production profiles, but it’s not the only metal in the mix.


Securities Disclosure: I, Charlotte McLeod, hold no direct investment interest in any company mentioned in this article. 

Editorial Disclosure: Trevali Mining is a client of the Investing News Network. This interview was conducted as part of the company’s investor education campaign. 

Interviews conducted by the Investing News Network are edited for clarity. The Investing News Network does not guarantee the accuracy or thoroughness of the information reported. The opinions expressed in these interviews do not reflect the opinions of the Investing News Network and do not constitute investment advice. All readers are encouraged to perform their own due diligence.

Haywood Securities, Inc. has reviewed lead projects of Trevali Mining Corp. (TV-T) and a portion of the expenses for this travel have been reimbursed by the issuer. Haywood Securities Inc. or one of its subsidiaries has also has managed or co-managed or participated as selling group in a public offering of securities for Trevali Mining Corp. (TV-T) in the last 12 months.


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