Trevali nears commercial production at Caribou

Pure-play zinc producer Trevali Mining (TSX: TV; US-OTC: TREVF) expects to reach commercial production at its second zinc mine before July.

The company is commissioning its 3,000-tonne-per-day Caribou underground operation in northern New Brunswick, and will finish installing a copper circuit there next year.

Caribou has an estimated six-and-a-half-year mine life and will supplement zinc production from Trevali’s wholly owned underground Santander mine in Peru, which has a nine-year mine life and produces zinc and silver-lead concentrates.

Last year, Santander — 215 km northeast of Lima — produced 54.1 million lb. zinc, 30.2 million lb. lead and 1 million oz. silver.

Trevali acquired the past-producing Santander mine in 2007 and returned it to production in January 2014. The company bought Glencore’s (LSE: GLEN) 2,000-tonne-per-day mill on a lease-to-own basis and signed a life-of-mine concentrate off-take agreement. Glencore operates the mine and the plant.

Glencore also has zinc, lead and copper concentrate off-take agreements at Caribou, the past-producing polymetallic deposit, 50 km west of Bathurst.

The diversified resource conglomerate and commodity trader owns 5.2% of Trevali’s share capital.

“We’ve got a strong working relationship with Glencore,” Mark Cruise, Trevali’s president and CEO, said in an interview. “They buy all of our concentrate from us and in Peru. Even though we own 100% of the mine, it’s a joint-operation team.

“Glencore is incredibly bullish on zinc — they want the concentrate for their marketing division, so the sooner we can get to commercial production at Caribou, the better it is for them,” Cruise said. “They’re on-site at Caribou and have given us access to their corporate technical services team, and are … giving advice.”

Cruise — who cofounded Trevali in 2007 to help the company take advantage of anticipated global zinc deficits — noted that Glencore’s involvement in both of its mines is not only a testament to their shared outlook on zinc’s fundamentals, but also the junior itself.

“What we’re getting as a small company is access to global mega mining services,” he said. “Probably no mid-tier companies would ever have that sort of access, never mind an emerging small-cap mining company. Glencore’s involvement is a vote of confidence in the metal and a vote of confidence in Trevali, and helps us derisk, as well.”

Pierre Vaillancourt, a mining analyst at LB Securities in Toronto, initiated coverage of Trevali with a “buy” rating and a one-year, 80¢-per-share target price, compared to its current 36¢ trading price. Over the last year Trevali has traded between 24.5¢ and $1.24 per share.

“With the impending commercial start-up of the Caribou mine and steady production at Santander, operational risk has been mostly eliminated and capital requirements will fall,” Vaillancourt wrote in an April 5 research note.

A mill in the processing plant at Trevali Mining’s Caribou zinc mine in New Brunswick. Credit: Trevali Mining

The mining analyst noted that Glencore’s off-take agreements “align its interests with Trevali to meet production targets,” and pointed out that Glencore gave Trevali a break recently on payments for its mill, which the junior bought from Glencore in 2010, “to enable the most effective use of limited cash flow from the mine in the current zinc market.”

Vaillancourt, who is bullish on zinc’s prospects, describes Trevali as “unique among base metal companies as a zinc-focused producer,” and says the company should do well in a higher zinc-price environment.

“Among base metals, we like the prospects for zinc in 2016 the most, as we believe the longest down cycle in the zinc price since the 1920s is ending,” the analyst noted. “We expect a modest increase in demand — combined with reduced production growth — to lead to a concentrate market deficit over the next few years.”

Weak zinc prices last year were a challenge, however. While Trevali exceeded its production guidance at Santander and posted cash costs that were also lower than expected (US$42.65 per tonne milled, compared to 2014’s US$47.33 per tonne milled), the company struggled, posting operational income of $6.7 million on concentrate sales revenue of $106.4 million, for a net loss of $14.3 million, or 5¢ per share.

“At zinc prices below US80¢ per lb., the company does not generate free cash flow,” Vaillancourt noted. But profitability “improves considerably at a zinc price above US85¢ per lb.

This year Vaillancourt forecasts 12¢ in earnings per share and 19¢ of cash flow per share.

“A US10¢ increase in the zinc price increases our net asset value 8%,” he said. “We estimate Trevali will generate 26¢ per share in cash flow in 2017, Caribou’s first full year of commercial production, when we expect the zinc price to average US85¢.”

In addition to Caribou and Santander, Trevali owns the past-producing Halfmile mine and Stratmat deposit, both in northern New Brunswick’s Bathurst mining camp, 20 km from Caribou.

As far as exploration upside goes, all of Trevali’s deposits are open for expansion.

At Caribou, Vaillancourt believes there is “attractive exploration upside” that could take the mine life to 10 years. The company has identified zinc mineralization in seven zones, as well as copper feeder zones that were never previously targeted, he noted.

“Recent deep drilling has found massive sulphides 450 metres below the current defined resource,” he said. “Historic deep holes encountered significant mineralized intervals, including 76, with 5.8 metres of 8.4% zinc, 3.9% lead, 0.3% copper, 147 grams silver per tonne and 1.2 grams gold per tonne.”

Trevali’s Cruise noted that between the historic drilling on the property and the company’s own modest drilling, management says the mine is open at depth, and it plans to follow up this year.

“There are 6 million tonnes in the current mine plan, but SRK identified 10 million tonnes that are mineable, so … we’re going to do a 10,000-metre underground drill program — which is about to kick off — and we’ll do more detailed and infill drilling to convert some of those 10 million tonnes and get more information on them, and that will increase the mine life,” he said.

“An eight-year mine life is achievable, and we’ll get to 10 years because the current mine plan goes from surface down to 500 metres vertical depth, and one of the first things we did when we acquired it was drill the deepest hole at a 1 km depth from surface, and we hit the main lens within 40 metres of where we modelled it would be,” he said. “The mineralization continues, so finding more over the short- to medium-term isn’t going to be a technical challenge. It’s relatively easy exploration.”

At Santander, the company will eventually double processing capacity to 4,000 tonnes per day, and finish a 3,000-metre underground drill program before July. Assay results should come over the next couple of weeks.

Cruise noted that Santander is in the third year of production, and the company has replaced what it has mined in each of those years, which was one of management’s goals.

Based on the latest drill program in 2015, the company says that two of three active mining zones at Magistral combine at depth, and the zinc grades increase as the drills go deeper. Last year the focus was on the two zones — Magristal South and Central — and this year the drill program will refocus on Magistral North.

The company has $20 million in cash. Its long-term debt and finance leases add up to nearly $112 million. All of its production is unhedged.