Trevali’s Caribou looks profitable

Trevali Mining (TSX: TV; US-OTC-TREVF) is firing on all cylinders, with commercial production underway since February at its Santander zinc–lead–silver mine in Peru, and a preliminary economic assessment (PEA) newly wrapped up at its flagship zinc-rich Caribou mine and mill project in New Brunswick.

The PEA released after markets closed on May 13 outlines a mine life of just over six years, with an average 93 million lb. zinc annual payable production, 32.5 million lb. lead, 3.1 million lb. copper, 730,000 oz. silver and 1,500 oz. gold.

“The restart of our Caribou mine in New Brunswick in 2015 will further strengthen our role as a pre-eminent zinc producer, and position the company to take advantage of anticipated major zinc deficits going forward,” president and CEO Mark Cruise told The Northern Miner. “With the construction and commissioning of our Santander polymetallic mine in conjunction with partners Glencore, Trevali is the only pure zinc producer on the TSX.” 

Average operating costs over Caribou’s mine life according to the study would be US65¢ per lb., after by-products and royalties. The PEA forecasts that with initial capital costs of $36.3 million, the Caribou mine and mill complex would serve up an after-tax net present value of $106 million and a 57% post-tax internal rate of return, using a 5% discount rate. The study’s base case uses price assumptions of US$1 per lb. zinc, US$1 per lb. lead, US$3 per lb. copper, US$21 per oz. silver and US$1,200 per oz. gold.

Commissioning the 3,000-tonne-per-day Caribou mill complex is slated to start in the first half of 2015.

Management says there is potential for more optimization: the Caribou deposit is open for expansion, with drill intercepts hitting mineralized intervals outside the current resource shell, and the PEA excludes 3 million tonnes of mineralized material. It’s also possible to maximize sill–pillar recovery by replacing waste backfill with paste backfill.

The mine plan models a low overall sill pillar recovery of 27.2% due to the unconsolidated waste rock backfill planned for placement above the sill levels. But if sill pillar recovery is increased to 100%, up to 1.5 million tonnes of plant feed in the mine plan could reach grades of 6% zinc, 2.59% lead, 0.29% copper, 71.75 grams silver per tonne and 0.75 gram gold per tonne, which would prolong the mine life without much more development.

Metallurgical test work could also enhance recoveries. Life-of-mine concentrate grades are expected to average 50% zinc in the zinc concentrate, 45% lead in the lead concentrate and 20% copper in the copper concentrate.

Cruise says the company is following up on the recommendations in the PEA regarding the potential for paste-fill, additional metallurgical test work focusing on improving silver and gold recoveries, and ongoing stope optimization, which he says can “increase the current modelled mine life.”

Analysts believe the company stands out in the zinc space, where mine closures over the next few years and little investment in new zinc mines could squeeze supply.

“Trevali is poised to become the marquee mid-tier zinc producer in a market facing a significant medium-term supply issues,” Stefan Ioannou of Haywood Securities writes in a note, adding that zinc production from the company’s two mines could reach 200 million lb. per year by 2017. Ioannou also points out that, unlike copper, the “list of good zinc-focused equity names can be counted on one hand.”

Even Christopher Chang of Laurentian Bank Securities — who, after reviewing the PEA, said it was below his expectations because forecast payable production was below his estimate for all metals, and especially for by-product precious metals — describes Trevali as “the go-to name for zinc leverage,” and has a “buy” rating on the stock.

The Caribou mine and mill complex, 50 km west of Bathurst in New Brunswick, is located just off Provincial Highway 180, which connects the project to major road, rail and port infrastructure, including the deepwater ocean port and smelting complex at Belledune, 80 km northeast. Caribou is also connected to the province’s power grid.

The PEA envisions the past-producing Caribou mine as a stand-alone operation.

Trevali is also advancing its Halfmile underground mine (25 km south of Caribou) and the Stratmat project in the Bathurst mining camp. The New Brunswick assets would comprise two-thirds of the company’s production value.

Joseph Gallucci and Iain Farmer of Dundee Capital Markets note that the PEA shows Caribou can operate as a stand-alone operation, “which would allow the 4,000-tonne-per-day Halfmile–Stratmat project to also operate on a stand-alone basis later on.”

They write in a client note that “this effectively provides Trevali with two operations in the province and a greater degree of flexibility on development options, and eliminates the $15 per tonne in trucking costs that would have stemmed from the previous operational plan.” The analysts forecast production by the second quarter of 2015 at Caribou, with Halfmile–Stratmat following in 2018. They estimate 11 years of operation but point out that their estimates are on the conservative side, and that the mine life can likely grow.

The Dundee analysts estimate that the Halfmile and Stratmat deposits can be brought online for $125 million by building a mill at Heath Steele, a brownfield site next to the Stratmat deposit. Alternatively, they argue, instead of building its own mill at Halfmile, Trevali could send its ore to Glencore Xstrata’s (LSE: GLEN) Brunswick 12 mill, which closed down recently.

Some analysts aren’t ruling out a takeover bid for the company.

“In addition to its concentrate offtake partnership already in place with Glencore Xstrata, we remain cognizant that Trevali’s anticipated production profile, backed by high grades, low capital-cost intensity, established infrastructure and politically stable addresses could attract significant third-party interest, likely in the form of an established base metals producer looking to increase its zinc production profile,” Haywood’s Ioannou writes. “Corporate activity is a notable wildcard catalyst that could drive the company’s market valuation higher.”