Trevali poised to benefit from zinc’s revival

VANCOUVER — In a market where raising even a few million dollars is tough, Trevali Mining (TSX: TV; US-OTC: TREVF) is busy filling a $46-million bought-deal financing, adding to a balance sheet that in the last 14 months already saw $16 million come in from two equity raises and $60 million made available through a debt facility and silver-stream agreement with South African bank RMB Resource.

Clearly, the market likes a new production story. Trevali’s Santander zinc–lead–silver mine in Peru is ramping up to commercial production — a goal it expects to reach before year-end — and production from its Caribou zinc-rich polymetalic mine in New Brunswick should follow in a year.

But what Trevali is producing is getting as much attention as its push to commission two mines in a year. Both Santander and Caribou are primary zinc operations, with by-product lead and silver, and after a decade in the doldrums zinc prices are poised to climb, spurred by major mine closures in the next few years, and a dearth of production-ready projects.

In fact, Trevali is the most zinc-focused production story on the entire Toronto Stock Exchange, and one of only a few on the world’s markets. Several analysts follow the company, and every one highlights Trevali’s unique position in a rally-ready zinc market.

“Unlike copper, we would argue the list of ‘good’ zinc-focused equity names can be counted on one hand,” wrote Stefan Ioannou, an analyst with Haywood Securities, in his latest Trevali note. “With zinc production from two mines expected to ramp-up to around 210 million lb. per annum by 2017, we believe Trevali is poised to become the marquee mid-tier zinc producer in a market facing a significant medium-term supply issue.”

Trevali’s vice-president of corporate communications Steve Stakiw agrees.

“The zinc fundamentals are very bullish,” he said in an interview. “That’s just based on the fact that all these big mines are closing globally, and no one has been putting money into zinc for the last decade and a half. The majors and mid-tiers that were into zinc have moved to copper — it’s a sexier metal and you get better valuations, so they put their exploration money into that, not zinc.”

Little exploration, less development, and a raft of mine closures mean zinc is staging a slow comeback. In a recent report Wood Mackenzie predicted that zinc, which is priced at US$1,955 a tonne, will reach US$3,500 a tonne in 2016. Other analysts are similarly bullish and expect the market, which produced 265,000 surplus tonnes last year, will go into deficit within three years.

Driving zinc’s changing outlook is the fact that 10–14% of recent world zinc production will disappear over the next few years. Already this year the Brunswick 12 and Perseverance mines in Canada have been shut down, eliminating almost 400,000 tonnes of annual output, while in the next three years Australia’s Century — one of the world’s largest zinc mines, responsible for almost 5% of global output — will close down, as will the Lisheen mine in Ireland.

And there are not nearly enough new mines to replace all that lost production. China’s Minmetals says its $1.5-billion Dugald River mine, one of few large zinc mines under development, will not meet its planned 2015 debut.

And zinc discoveries over the last decade have been limited because low prices have meant few have been exploring for the metal.

Those low prices did not make things easy for Trevali, as it tried to prepare Santander and Caribou for production. The biggest challenge was finding funds. Thankfully Trevali found a deep-pocketed zinc expert to partner with at Santander.

In 2010 Glencore Xstrata (LSE: GLEN) signed on to provide, build and operate the process plant at Santander, and contract-operate the underground mine.

Trevali, which retained 100% ownership of the project, will repay Glencore for the plant from cash flow. Glencore also has the right to buy all of Santander’s life-of-mine metal production, at benchmark pricing.

The deal with Glencore, along with a few equity dollars, enabled Trevali to get Santander up and running.

The next challenge was arranging funding for its New Brunswick project, but Trevali’s position as one of few zinc-leveraged production stories meant it had some options.

The first came in September 2012, when Trevali signed onto a US$60-million debt and prepaid silver facility with RMB Resources, the resource financing division of FirstRand Group. The deal included two parts: a five-year, US$30-million debt facility bearing interest of Libor, plus 5.5% and a US$30-million gold and silver streaming agreement.

Trevali soon took on the $30-million debt but RMB held back on the streaming funds, awaiting a technical report on Caribou, due out shortly. The wait worked out in Trevali’s favour. Terms for the streaming portion are still not set, but the $30-million deal would have meant RMB could buy 4 million to 4.5 million oz. silver at a discount to spot price of $8–10 per oz.

“It was one of the better deals we could negotiate a year ago,” Stakiw said. “But the bottom line is that it was still going to be pretty expensive money. Over five years, something like 4.5 million oz. silver at a $10 per oz. discount — that’s up to $45 million you’re paying for $30 million.”

Since arranging that deal, Stakiw says Trevali’s success advancing Santander to production brought new interest to the company. Several funds approached Trevali, saying they would invest if the company were carrying less debt. To that end they presented Trevali with the option of a bought-deal financing, proceeds from which could repay debt.

That new financing, closed on Nov. 28, saw Trevali sell 55.43 million shares at 83¢ apiece, for gross proceeds of $46 million. Meanwhile the RMB deal is being scaled back: the two portions would total $35 million, instead of $60 million. Trevali will use part of its new $46 million to reduce its obligation under the RMB debt facility to its new maximum of $17.5 million.

Of course, the new financing means another round of shareholder dilution. Stakiw says Trevali’s management took that into consideration.

“It came down to the cost of capital, and when we ran the numbers, it was clear that the equity is better,” he said. “It’s short-term pain for long-term gain. Shareholders tend to prefer debt, but servicing debt can get expensive.”

Should zinc prices perform even half as well as analysts predict, Trevali will have no trouble servicing its remaining debt. Zinc is trading in the US85¢ to US90¢ per lb. range. Trevali can produce a pound of zinc at Santander for US50¢, net of by-product credits. Production costs in New Brunswick will be slightly higher, but still well below current prices.

“Our philosophy is to build these mines now, even if the commodity price is not yet super high,” Stakiw said. “It would be easier to wait until zinc is trading at US$1.40 per lb. and finance at that level, when your stock price is much higher. But if you wait, you could miss the whole cycle.”

Rather than miss the cycle, Trevali is already ahead of time. At Santander underground development work got underway in mid-2012. The mill facility started up in June, and by August it had produced its first concentrate.

Santander is home to carbonate-replacement deposit mineralization, which generally occurs in a series of lenses. At Santander those lenses are near vertical, and three of them — Magistral North, Magistral Central and Magistral South — host 6.26 million indicated tonnes grading 3.62% zinc, 1.3% lead and 43 grams silver per tonne, plus 13.8 million inferred tonnes averaging 4.62% zinc, 0.4% lead and 21 grams silver.

To access the three lenses Trevali excavated three portals and
drove more than 6 km of ramps, creating three linked but independent underground operations. Together the zones could churn out up to 6,000 tonnes of ore per day once all development is in place, though at present production is limited to 2,000 tonnes per day.

That is the amount the mill facility can handle. Glencore provided and built the facility, and will stay on as mill operator and contract miner. Glencore’s experience with the processing plant has made for a smooth ramp-up. At the start of October the plant had been on for just six weeks, but it maintained an average throughput of 2,000 tonnes per day — meaning 100% effective availability — all month.

Moreover, metallurgical recoveries improved significantly over the month. Zinc recoveries rose from 81–85%, lead recovery improved to 83% from 78% and silver recovery reached 69% from 64%.

While workers above ground focus on fine-tuning the mill, workers below ground are mining into better-than-expected grades and encountering new zones during development. In October mill feed graded, on average, 4.4% zinc, 1.8% lead and 49.8 grams silver.

As for new zones, one called Rosa is showing strength. Rosa is adjacent to Magistral North, which means it has already been developed on four levels despite not being part of the official mine plan. Trevali was aware the zone existed, and Stakiw says that “we clipped it in our drilling, but since it is perpendicular to the other zones, we were always drilling parallel to Rosa — and so would never get enough drilling information to pull it into the resource model . . . when we started developing underground we got into it, and it’s even better than expected. It’s blowing out, it looks like it has some serious depth potential and the grades are spectacular.”

The company is optimistic it will encounter other zones like Rosa as development progresses at Santander. Drilling has already intercepted several new mantos in the footwall of Magistral North and in the hangingwall at Magistral Central.

“There are cross faults controlling the mineralization here, and Rosa is along one of those faults,” Stakiw said. “The likelihood of finding similar things at Magistral Central and South is good.”

Santander is in Peru’s Lima department, 200 km northeast of Lima. Trevali is not the first to mine at Santander. The project’s carbonate-replacement deposits were mined from 1958 to 1991, in an underground operation that reached 480 metres depth. Operations ceased despite ending in mineralization grading 11% zinc owing to hyperinflation and low metal prices.

That story is common to Trevali’s other area of operations: the Bathurst mining camp in New Brunswick, Canada, where the company has three projects: the Caribou milling and mine complex, the Halfmile mine and the Stratmat project. Trevali is focusing first on getting into production its Caribou asset, which was acquired only a year ago by taking over privately held Maple Minerals.

Caribou came with a 3,000-tonne-per-day processing plant and underground workings. Better yet, previous owner Blue Note Mining invested more than $100 million into the plant and mine workings just a few years prior. Blue Note then operated the mine for 13 months before going broke in 2008, when crashing commodity prices rendered the company unable to service its significant debt load.

The Caribou project alone hosts 7.2 million measured and indicated tonnes grading 6.99% zinc, 2.93% lead, 0.43% copper, 84.4 grams silver and 0.89 gram gold per tonne, plus 3.7 million inferred tonnes of similar grade. But Trevali also owns two other projects within 20 km of the Caribou complex.

The historic Halfmile mine hosts 6.3 million indicated tonnes grading 8.13% zinc, 2.58% lead, 0.22% copper and 30.78 grams silver, plus 6.1 million inferred tonnes averaging 6.69% zinc, 1.83% lead, 0.14% copper and 20.51 grams silver. Nearby, the Stratmat project is home to 5.5 million inferred tonnes grading 6.11% zinc, 2.59% lead, 0.4% copper and 54.21 grams silver.

These resources are in good company. Caribou, Halfmile and Stratmat are all part of the Bathurst mining camp, an area just west of the city of Bathurst that includes the recently closed Brunswick 12 mine. Brunswick 12 was a large operation, one that churned out 250,000 tonnes of zinc per year. Its closure means the city of Bathurst is full of highly experienced underground miners looking for work, an asset Trevali will happily tap into when Caribou gets going.

That is expected around this time next year. Between now and then Trevali has to install a new semi-autogenous grinding (SAG) mill, build a copper-recovery circuit and commission the operation.

The copper circuit is crucial to the timeline. Earlier operators only recovered zinc and lead at Caribou. In some places, mining halted because copper grades were too high. As such, Trevali is assessing how to best add a copper-recovery circuit to the mill.

A technical report on that question is expected in the next few weeks. Once it is complete, RMB will release the silver-streaming portion of its debt facility, which totals $17.5 million. That money will fund other needs at the site including the installation of a new SAG mill to replace one that is damaged. Knowing that a SAG mill was the longest lead-time item on its Caribou restart list, Trevali used part of the $30-million RMB loan to the mill. It is now built and on its way to site.

Trevali’s share price has climbed and fallen considerably. In June, shares fell to a 52-week low of 49¢. Over the next four months they rallied, reaching $1 in late October before relaxing to 80¢. At the start of the year Trevali shares were worth almost $1.20. Trevali has 224 million shares outstanding.