Trevali Mining's (TREVF) CEO Mark Cruise on Q3 2017 Results - Earnings Call Transcript - Seeking Alpha

Trevali Mining Corp. (OTCQX:TREVF) Q3 2017 Earnings Conference Call November 15, 2017 10:30 AM ET

Executives

Steve Stakiw - VP, IR & Corporate Communications

Mark Cruise - President & CEO

Anna Ladd - CFO

Analysts

Stefan Ioannou - Cormark Securities

Alex Terentiew - BMO Capital Markets

Pierre Vaillancourt - Haywood Securities

David Kay - Private Investor

Dave Brown - Private Investor

Craig Hutchison - TD Securities

Operator

Good morning, ladies and gentlemen. And I welcome to the Trevali Mining Corporation Third Quarter 2017 Financial and Earnings Release Conference Call. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session with instructions provided. I would like to remind everyone that this call is being recorded.

I would now like to turn the call over to Steve Stakiw, Vice President of Investor Relations and Corporate Communications.

Steve Stakiw

Thank you, operator. Good morning everyone and welcome to Trevali Mining's Q3 2017 financial results conference call. Trevali's third financial results were issued yesterday and are available both on our website and filed on SEDAR as well. Additionally, a corresponding news release was also issued with our financial results to review the main points of our third quarter, specifically, operational results from our Caribou zinc mine in New Brunswick, our Santander Zinc Mine in Peru and in addition our first reported quarter results, albeit only a partial quarter, for our Rosh Pinah Mine in Namibia and the Perkoa Mine in Burkina Faso, which were both acquired from Glencore on August 31st.

Our presenter today is Dr. Mark Cruise, Trevali's President and CEO; and accompanying Mark for the question-and-answer portion of this call is Anna Ladd, Trevali's Chief Financial Officer.

I will now turn the call over to Mark Cruise.

Mark Cruise

That's great. Thanks, Steve, and good morning everybody. I'll quickly run through the financial summary and then we can get into the Q&A session.

And overall, little bit of a complicated quarter, given that the acquisition closed by two thirds the way through as of August 31 as Steve stated. But nonetheless we're pleased with the results and pretty solid financial footing going forward.

And highlights really were record concentrate sales of $81.6 million, and I should say all figures are US. That resulted in EBITDA of approximately $20 million and an operating cash flow of $0.11 per share.

However, there was an overall net loss of $7.8 million or $0.01 per share and really these were due to one-time transactions expenses due to the acquisition. And we did record income from mine operations of $28.4 million and the net result in the end of the day is record total cash position of a little bit shy of $106 million and incredibly well healthy working cap position $135.5 million respectively.

Really this all stems from strong production stats and we mined during - which were previously released and - but we did mine during the quarter at 552,000 tonnes and milled 567,000 thousand tonnes. And with the various recoveries which we'll look into in a bit more detail, when we do a bit of an operations roundup, this resulted in payables zinc production of 58.4 million pounds zinc and 12.4 million pounds lead and 433,000 ounces payable silver, on a zinc equivalent basis approximately 73 million pounds of zinc equiv.

Overall our sites operating costs or C1s came in at $0.42 per pound zinc equivalent and total site all in came in at $0.86 pound and that really equates to a site operating cost of $53.86 per pound and clearly that resulted in strong revenues on cash flow of you know $0.11 per share.

So, getting into a bit more detail on the operations roundup and we'll kick off with our Santander Mine and certainly the first half of the year is a little bit weak at Santander, certainly second half is meant to be more typical, normal Santander production and we've certainly seen this reflected in the Q3 numbers where Santander produced 14.6 million pounds of payable zinc, 3.9 million pounds of lead and 194,000 ounces of payable silver. That resulted in revenue at the operational level of $27.9 million.

Recoveries were pretty standard for Santander at high 80s for Zinc, 82% for lead and 67% for silver and our site operating cash cost were certainly in line with guidance at $39.98. So, between $35 and $40 per tonne is what we guided or $0.44 cents per pound zinc equivalent.

I really won't go through the detailed breakdown on that, just to give you a feel for it. And so certainly Santander at certainly stronger second half and the first half is really the key takeaway there and I should say we have a pretty aggressive exploration program at Santander this year really at all the mine sites, but we do anticipate releasing additional results between now and the end of the year, so perhaps something to look at for.

Moving to Canada, our Caribou operation, Q3 results were 20.8 million pounds of payable zinc, 7.3 million pounds of payable lead and 220,000 ounces of payable silver. Revenue at the operational level is $43.7 million.

And really for Caribou this year it was one of transition from contracted mining to owner-operated and we're certainly starting to see that reflected in the course which are lowering and the efficiencies that we're gaining with production coming up, so certainly trending the right way.

And as a result of this the site operating cash cost came in at the mid-range of $57.75 per tonne mills, more importantly a decrease of a little bit over $3 per tonne or 5% versus the first half of the year. And that resulted in direct site cost to zinc equivalent of about $0.47 per pound.

And recoveries at 79% percent for zinc, so a little bit of room for improvement on the zinc side, which the team is still working on, 61% for lead and 41% for silver. And certainly, we do anticipate the ongoing gains, we're moving to owner-operated and continue into the fourth quarter and hopefully should be pretty much stable as we move into 2018.

And so certainly the takeaway from Caribou is that continuing trend of increased production and production efficiencies with modestly decreasing cost, so certainly things are going the right way there as well.

And I just reiterate our overall guidance for the year, cost guidance at the Caribou operating levels between 50 - range between $55 to $60 per tonne, so pretty much mid-range at this point in time.

Jumping into the African continent now and we'll start off in Namibia in southern Namibia Rosh Pinah. And just to reiterate really this - this does only reflect effectively the month of September. And so, for the month of September, site produced 8 million pounds of payable zinc, 1.3 million pounds of lead and 19,000 ounces of payable silver and that resulted in zinc conc production of 7,800 tonnes of zinc concentrate, 1,200 tonnes for lead.

And site operating cash cost for the month were $50.22 at the upper end of guidance. And although we do anticipate that trending lower just the way development is put in this year as the year goes on and that resulted in a zinc equivalent of $0.31 per pound zinc.

Recoveries were in line with a normal average for site at about 87% for zinc, 58% for lead and 50% for silver. And certainly, one of the business initiatives that site's undertaking at Rosh Pinah is we're putting in a zinc re-grind circuit and that is anticipated in place by the end of the year.

We're about six, seven weeks ahead of schedule at the moment and certainly one of the benefits for that is, it's anticipated to increase recoveries for both zinc and lead by approximately 1.5% to 2%. So certainly, something to keep your eye on as we move forward there as well. Overall, and just to reiterate, site cash costs are anticipated to range this year between $45 to $50 per tonne at Rosh Pinah.

And finally, to Perkoa, and again, only one month at statistics, just to recap, you know, Perkoa is one of the highest grade zinc mines in production globally at this point in time, penetrates places like the Red Dog mine in Alaska for any given month and very high recoveries, it's quite a course mineralization typically in the low to mid 90s.

And that's really reflected in the production stats, they produced 15.1 million pounds of payable zinc for the month of September, recoveries were 92%. And you can see the high grades there are quite stellar at 15.23% zinc and that resulted in the concentrate production of a little bit shy of 16,000 tonnes of zinc concentrate.

The cost per tonne during the period was $0.94 - $94.27, so certainly at the lower end of range of guidance. It is a remote site and, so we are on diesel generator power which pushes cost a little bit higher. And certainly, it's something we're going to look at from a business initiative perspective and next year moving forward.

And there were no sales reported during the quarter and certainly subsequent to quarter end though we have shipped the majority of the concentrates that were stored at port and certainly we expect just from a logistics perspective we expect the bulk of concs to be shipped and cleared by the end of the year. So that's really where we are at Perkoa.

So, I think overall you know, bit of a sloppy quarter, just the way it ended in timing and - but the key takeaways certainly from our viewpoint are incredibly strong balance sheet with about $105.6 million. Nice work and cap position of $135 million and some logistics tweaks at Perkoa which are not resolved and certainly anticipate selling the bulk of those concentrates by the end of the year.

And so, you know, reasonably good position heading into 2018 and we are active actually from an exploration perspective on all sites, I think probably not widely realized, but we do actually have 10 drill rigs going across the corporation on a combination of resource conversion and resource expansion projects.

And so, you will start seeing some of the new flow from that moving this quarter and obviously that will continue on into the first half of 2018.

And I think with that, I'm done, and I think I'll hand back to Steve and we can open up the lines for any questions or comments and hope that we can answer them.

Steve Stakiw

Yeah, thank you. Operator, we can open up the line for questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Your first question comes from the line of Stefan Ioannou from Cormark Securities. Your line is open.

Stefan Ioannou

Thanks very much, guys. I'm just wondering you know, obviously now with the Glencore transactions sort of formally booked and you know, the two mines operating well, just you know, sort of thinking ahead in terms of what's next. Obviously, you tabled the PEA for Halfmile and Stratmat and that gave you a couple of options there.

But I mean, is there sort of a focus to start thinking about a standalone mill, a new one in New Brunswick or sort of maybe tackle some lower hanging fruit at some of the other mines or you know, and maybe even just process Halfmile and Stratmat through Caribou? What's sort of your thinking there?

Steve Stakiw

Yeah. Thanks, Stefan. I mean, listen, it is a work in progress. I think you know, subject to board approval at a high level we do see more operational gains and efficiencies at the current mines. And so, you know, short term the focus is going to be at the mines that our showing us cash flow and it makes more sense for us.

And I think you know, which we're aware and some feedback are on paper relatively short life of mines and in some instances. And so that's why we've been actually pretty active with the drill rigs. So, we anticipate you know, updated resource estimates and we'll close it off as of December 31st, so we're pushing hard with the drill rigs and that will flow through to updated resource estimates in Q1 of next year.

And certainly, you know, I'd like to think that the Mark will be pleasantly surprised, but obviously it will make up its own mine for them. You know, certainly provided we've got a decade of exploration success behind our belts, we're not going to stop now and so that certainly one of the short term goals.

And I think from that as well the way you approached the business subject to you know, updated resource estimates, it maybe a little bit different. And one of the things I think what we like about the Santander their operating model at the site, team has done very well, is pushed more tonnes through and design. So, it's 2000 tonne per day mill you know, not routinely consistently they push through approximately 15% to 20% percent more throughput.

Certainly, we believe similar gains maybe not the - quite to 15% but in 10% level is possible at the other three operating units. So that's a pretty low hanging fruit and obviously you fixed costs don't vary and so that's something that really translates directly through to the balance sheet and lowers your overall cost. So that will be one of the main focuses.

And you know, regarding the Bathurst mining camp what we do have is a lot of optionality and it's always been a two phase approach and we've got them - two surface rigs drilling at Caribou at the moment, one underground rig just finishing off a pretty aggressive program.

So really what we want to see is trying to get a better feel for what really will be the ultimate Caribou life of mine, depending on what that is, it never changed for whatever reason and unlikely obviously we feel pretty strongly that it will increase, but if it didn't increase materially it wouldn't make sense to build a second standalone mill because effectively you know Caribou we ramping down, while you're ramping up the second mill from a financial technical perspective probably makes little sense. And so that's one of the things we need to get a feel for.

But you know, overall, I must admit you know, personally I do like that kind of centralized Canadian VMS strategy where you leverage the infrastructure you have in place and you derisk it from a technical perspective and permitting perspective and you flow everything through your one operating mill, but we'll have to see what makes more sense.

Stefan Ioannou

Okay, that's great. Thanks very much, guys.

Mark Cruise

Thank you.

Operator

The next question comes from the line of Alex Terentiew from BMO Capital Markets. Your line is open.

Alex Terentiew

Hey, guys. Just a couple of questions on operating costs. It's good to see the costs coming down there at your mines. Just two mines in particular, Caribou, how much lower do you expect to be able to get your costs on a per tonne basis, now that you've moved to the new mining fleet and owner mining and also at Perkoa you've got a big drop there, I think it was $294 a tonne you know, in the first half of the year you're 110 plus.

Is this all from the new mining contractor where we you know, getting themselves into - and into a good rhythm here and is that the main drivers or is there anything else that's causing that good improvement?

Mark Cruise

Yeah, no certainly I mean, I'll do with the Caribou bit first and then we will to Perkoa, I am sorry, morning, Alex. Listen, I think at Caribou we certainly feel there is more gains that we had from moving to owner-operated. Obviously, there's a transition period with training the operators and in the new equipment, different ways to do it and to maximize utilage [ph].

And so certainly I don't think we're done at Caribou, I don't know put a hard figure on it, but I mean, you know, I think you know, certainly there's several more dollars per tonne to be had, you know what that ultimate dollar figure is we need to wait and see.

So certainly, you know, decrease cost at Caribou, I think I'd like to see that as an ongoing trend, as just as we get more efficient, pull more tonnes and push more tonnes to the mill.

Moving to Perkoa, you know, you hit it right in the head. I mean, really the [indiscernible] guys who are our current mining contractor from Australia are really very good operators, very pleased with them. Obviously in the first half of the year they just moved to site December last year. So, there's obviously always going to be a bit of a transition period.

And so certainly you know, in line with what was anticipated and hopefully depending on some business initiatives we can drive those costs modestly lower at the Perkoa level next year as well. But it is something that our operating team are working very closely with the Perkoa team at this point in time.

Alex Terentiew

Okay, great. And I recall that you guys talking about examining that - the opportunity to move to a heavy fuel oil. Is that still something you're looking at?

Mark Cruise

We're still looking at the detailed business case for that. And certainly, make sense on paper and - but obviously subject to board approval and the guys are getting the final detail quotes and all the rest of it. So, it is chugging away in the background, but overall yes, that would make sense certainly at this point in time based on the information we have.

Alex Terentiew

All right. Great, thank you.

Mark Cruise

Cheers. Thanks, Alex.

Operator

Your next question comes from the line of Pierre Vaillancourt from Haywood Securities. Your line is open.

Pierre Vaillancourt

Hey, Mark, could you just remind us what the plan is for Santander. I mean, originally you know, I believe an expansion decision was going to come by the end of this year and, so it's been pushed off. Is it less of a priority now in light of the acquisitions you know, and what you're doing with the deeper infrastructure there now?

Mark Cruise

Yes. Listen, it is a work in progress. Certainly, you know, Santander is our lowest grade operation and it is our first one, so it's certainly dear to my heart. And you know, things that get played with water and I should say that pumping is on track.

So just to recap for the people on the call and we had some water issues this year. They were anticipated, but they kind of hit us about a year early, so our planning was a little bit out of sync and we are putting in pretty significant pumping capacity at the moment. And that is on track to start commissioning certainly by the end of the year, I think at the end of this month. So, we're a couple of weeks from that one.

And really as well in line with that as well, there is been a bit more training on kind of water practices, a bit more proactive from water management versus reactive. And certainly, we're seeing that with development a bit on schedule.

But nonetheless, what it resulted was certainly our exploration program it really started late, just because we didn't want to impact production any more, while they are dealing with the water issues.

And so, a lot of that program is going to spill over into the first half of next year. So, I'd say that decision is not off the table, but we just won't have the information or the data to make it until - certainly towards the end of 2018, I would guess, and you know contingent on results.

And what I will say and I've kind of alluded to on the call is we are anticipating you know, obviously ongoing exploration results and we have two underground rigs drilling a Santander at the moment, one surface rig and we are just mobilizing in a second surface rig in the next week, so I'll kind of give you a feel for them. You know, we are hitting in aggressively. We are starting to play catch up and obviously we'll see what happens with the results.

And that said though, you know, I think short term as I kind of stated to Stefan, you know let's try and get those 10% gains of the other operations, they can be material given the head grades and if we can try and achieve that over the course of next year that will put us on a good footing, while we continue to work at Santander.

Pierre Vaillancourt

Okay. Thanks, Mark.

Mark Cruise

Thanks, Pierre.

Operator

Your next question comes from the line of David Kay, a Private Investor. You provide us open.

David Kay

Good morning, guys. Mark a couple of questions, one concerns your long-term debt with the $105 million cash on hand are you intending to pay down that debt?

Mark Cruise

Yes. You know, one of the things we did when we did the acquisition, we could have taken on a lot more debts and probably been twice as leverage had we wanted to. And so, we were in the nice position that we were actually turned down and money in banks which doesn't always happen, and we like to think we kind of learned some lessons from the industry in 2015.

You know, overall subject to board approval, we do want to pay down debt as fast as possible. And so certainly that's one of the kinds of key strategies that will be discussed at our board meetings. But in general, I would expect that number to decrease, certainly modest to aggressively over the course of you know, 2018 when zinc prices hang at these levels.

And certainly, you know, we're of the opinion that zinc should strengthen from here. So yeah, actually it's kind of - it's manageable compared to our peer group anyway and I don't know, probably best-in-class or getting close to. But nonetheless the idea the idea is to pay down that debt as soon as possible just to put ourselves on sound - while even more sound financial footing.

David Kay

Okay. The other question was actually concerning the price for zinc worldwide, given the decline in the LME inventories. Do you have like a range that you can see zinc trading at in 2018?

Mark Cruise

Yeah, certainly. I mean, I'll hand this one over to Steve, and people [indiscernible] to be yacked on for a while, but he tried to look at this very closely, so Steve?

Steve Stakiw

All right, David. Its Steve here. Yeah, no just looking - I know you're correct certainly watching you know, LME inventories are kind of you know, I guess approaching kind of 9 year lows at this age.

You know, global supply has gone sub 10 day. So certainly, you know getting close to those trigger points where one would expect zinc price to start to react. You know, a lot more bullishly from where we are currently.

If you look at what some of the forecasts are out there for zinc going forward, groups like you know, the Wood. Mackenzie, the commodity forecasters, I think they're modeling or they're forecasting an average of zinc price in 2018 of about a $1.76 a pound, continuing up in the $1.70s through 2019, that's over their short term at this stage.

So certainly, I think you know, everybody is still kind of bullish and a lot of it is obviously predicated that you know, the deficits are there and there are no big significant new zinc mines coming online that aren't currently accounted for in those equations.

So, the fundamentals do look good. So, we see you know, at least a couple of years if not longer of pretty strong or bullish zinc price going forward.

David Kay

That sounds good. One thing I've noticed with the price for zinc over the last - I don't know 12 months or so, the inventory comes down and then you get a sudden spike of the 10,000 to 20, 000 tonnes it just brings it right back up, like where does that come from?

Steve Stakiw

I guess, typically you're going to see, that's all we've seen - just to - that's the refined zinc. So that's not concentrate coming from mine, so that's refined zinc that's coming from the from the smelters refineries.

So, at any given time there will be blocks of inventory that will move you know, from there into the LME warehouses and then if you get moved between LME warehouses into Shanghai and then into bonded warehouses.

So, they can move around a bit at times. So, you know, there's always - I'd say you know, 10,000 to 20,000 tonnes kind of you know influx or transit it's really not that unusual. So, it's kind of expected.

David Kay

Okay. All right. Well, thanks so much and keep up the good work guys.

Steve Stakiw

Thanks, David.

Operator

Your next question comes from the line of in a lot of Dave Brown, Private Investor. Your line is open.

Dave Brown

Thanks for taking my question today. With respect to Caribou in the past you mentioned then in the winter the zinc recovery drops due to a temperature issue. I wonder if you've been able to work out a solution to that particular problem?

Mark Cruise

Yeah, Mark here. I guess, I mean, something smart [ph] we'll wait and see. And certainly, the team has been working on it with our partners Glencore, their corporate metallurgist and the Raglan mine team in Northern Quebec, which is a Glencore operation to try and get a feel for it.

And certainly, at this point in time it's better for the time of year than it was compared to a year previously. So certainly, so far, we're only starting to get into the winter months. It is - the sync circuits behaving better than it was this time last year.

And you know, so it is going to be one of those wait and see. And you know, as kind of previously mentioned water chemistry was affected as things start to freeze up and guys kind of resolve that one with some reagents additions and they are looking at some of the temperature controls on the water as well and just to see if that will help.

So certainly, tentatively better than was this time next year. We are monitoring very closely, clearly and see, but they have been working on it, it has been on the metallurgist mines all through the year. It's not as if they stopped working on us. So, we'll just have to see how that trend continues and as we get into the real winter months.

Dave Brown

Okay. Thanks very much.

Operator

Your next question comes from the line of Craig Hutchison from TD Securities. Your line is open.

Craig Hutchison,

Good morning, guys. I apologize if this question was asked, my line dropped out earlier. The throughput at Caribou, what's the sort of targets now that you have your own operated fleet in place, do you think you can get that sort of 2800 tonne per day design?

Mark Cruise

Yeah, it's Mark. Craig, no absolutely and we will surpass it and certainly on individual days we're getting up to you know 3000 to 3300 and so continue to work on the scheduling just to get the kinks out of that. But based on the scope availability, development in place and the fleet utilization which is materially higher you know because of the new fleets, we see no reason why we can't hit our 3000 tonne per day target.

Craig Hutchison,

Excellent. And then on Santander, I know you guys I think previous caller mentioned targets of I think low 5% zinc next year from the 4% [ph] now, is that still in play?

Mark Cruise

We're working on the mine plan and updating that given the water and just trying to manage it a bit better and, so we will give guidance at the end of the year. But certainly, overall you know, yes, certainly higher zinc grades in the first half of this year, so certainly the trend will be towards higher zinc grades. And once we get to finalized you know, revised mine plan obviously we'll put our guidance.

Craig Hutchison,

Okay. In terms of the inventory build on balance sheet and I think the concentrates went from 3 million to 90 million, was that all Perkoa?

Mark Cruise

And the lion's share that was Perkoa, yeah, absolutely. There was a little bit of lead concs at Rosh Pinah, they just get sold by annually and just because you need to build up enough for a shipment and it's really is by product by product, the Rosh Pinah operation, but yes, the bulk of that was from the Perkoa operation.

Craig Hutchison,

Did any material at all go some to port in the quarter?

Mark Cruise

No, in the quarter no, it went there over post-quarter, there were three ships left in October to early November and there is another four scheduled between now and into the year.

Craig Hutchison,

There's no reason for that, no hold ups, so to port at all to get that material out?

Mark Cruise

No, this is - well, we've been given you know, schedule berthing periods, so not at this point in time.

Craig Hutchison,

All right. Thanks, guys.

Mark Cruise

It's great. Thanks, Craig.

Operator

Your next question comes from the line of Geraldo Gabaldio from Credit Corp Capital. Your line is open.

Unidentified Analyst

Hello. I was wondering what sort of adjustments related to the acquisitions should we see in your income statements in the coming quarters?

Mark Cruise

Perfect, yeah. Morning, Geraldo. And Anna, I'll let you handle that one.

Anna Ladd

Sure. So, the biggest adjustments you'll see running through our income statement in the future quarter is going to be related to inventory that we acquired on the close of August 31st. So, we are required to fair value, all the assets of one of which is inventory and not you know, concentrate inventory.

So that will carry a fair value bump and that will increase you know, sort of the cost of goods sold and you will see that running through the income statement until you know the inventory that we inherited August 31 it is completed. So probably over the next couple of quarters you'll be seeing higher reflected cost of goods sold but that is just an accounting adjustment.

So that that really is you know, the biggest one that would affect the income statement and then obviously higher depreciation as a result of inheriting the assets of Rosh Pinah and Perkoa.

Unidentified Analyst

All right. Thank you very much.

Anna Ladd

You're welcome.

Mark Cruise

Thank you.

Operator

There are no further questions at this time. Mr. Steve Stakiw, I turn the call back over to you.

Steve Stakiw

Thank you, Christine. Once again, thank you everyone for dialing in and participating in our conference call this morning. As usual if there are any follow up questions please feel free to give us a ring or e-mail us, and we'll get back to you as quickly as possible. Thanks again everyone and have a great day.

Operator

Thank you. This concludes today's conference call. You may now disconnect.

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