Trevali Mining Corp (TSX: TV) is a natural resource company engaged in the acquisition, exploration, development, and production of mineral properties in Peru and Canada. The company's operating segments Perkoa Mine, Rosh Pinah Mine, Caribou Mine, and Santander Mine. Primarily It explores for zinc, lead, silver, copper deposits.

Key Highlights

• Started year on a positive note: In Q1 2022, the Company's revenue climbed by USD 21.2 million to USD 93.1 million. Revenue rise year over year is mostly attributable to higher average realization prices of various commodities, accept silver. Adjusted EBITDA increased to USD 41.4 million, while net income boosted to USD 20.1 million, compared to a net loss of USD 2.5 million in the prior year. Increased topline and mark-to-market gains drove higher profits. Even on the sequential basis, the company witnessed improved number, which is a key positive.             

Source: Company Filing, Analysis by Kalkine Group

• Positive macros: The Company's management feels that the zinc market's outlook and pricing movement are both positive. As global economic activity intensifies with infrastructure spending, pent-up demand growth, and metal supply restrictions, the metals sector has fared well and is beginning to reflect investor confidence in an extended positive price cycle.

             Source: Company Filing

• Elevated zinc price on LME exchange: The LME zinc price averaged USD 1.70 per pound in Q1 2022, sustaining its rise from the epidemic low of USD 0.82 per pound in March 2020. The Company expects that zinc prices will enjoy fundamental support in the medium term as global economic activity grows and infrastructure expenditure and green energy measures take effect.

• Drop in inventories at LME exchange: LME exchange inventories fell to 139,955 tonnes at the end of the first quarter of 2022, down from 199,575 tonnes on December 31, 2021. Total exchange inventories increased through the quarter and currently amount to just 8 days of world demand, which is quite low by historical standards and does not provide much of a buffer against any supply interruptions to smelter operations. Relatively low stocks and robust demand continue to put upward pressure on spot zinc premium, which is moving higher and is positive for the company.

• Rise in Proven and Probable Mineral Reserves: The company's proved and probable mineral reserves at the Rosh Pinah mine have expanded by 50%, and its consolidated proven and probable mineral reserves have climbed by 4.9 million tonnes, a 28 percent increase over the year ended 2020.

• Higher operating cash flows before changes in working capital: The company's operational cash flows before changes in working capital were USD 46.3 million in the reporting period of Q1 2022, compared to USD 15.4 million in the previous equivalent period. Higher commodity prices, the gain on settlement mark-to-market, and the timing of the lead shipment at the Rosh Pinah mine all contributed to the rise in cash generated from operating operations before changes in working capital.

• Minimizing debt: The company managed to minimize its net debt by USD 19.1 million to USD 62.7 million as of April 30, 2022, largely due to the higher operating profit. We believe reducing debt would help the company in a near term by improving its margin and bottom line. Furthermore, most of the USD 96.1 million receivables balance on March 31, 2022, is expected to be collected between April and July 2022, which would be a key positive.

• Trading at discounted valuations: The company’s shares are available at an NTM EV/Sales multiple of 0.6x compared to the Sector (Basic Material) median of 1.5x. while on NTM Price to Cash Flow multiple the stock is trading at 0.7x compared to 4.2x. This implies that the shares are trading at deep discount against the sector. The stock is undervalued on multiple valuation parameters. The table below reflects the picture.           

Risks associated with investments 

The mining industry involves many risks which are inherent to the nature of the business, global economic trends and economic, environmental and social conditions in the geographical areas of operations are few of them. Furthermore, the Company is subject to other risks also like higher energy prices, supply chain challenges and associated manufacturing and production shortages may result in operating cost pressure and price volatility.

Financial overview of Q1 2022 (In 000 of USD)

Source: Company Filing

• Robust revenue: For Q1FY22, the Company reported an increase in net revenue to USD 93.11 million as compared to USD 53.65 million in Q1FY21. During Q1FY22, the average Zinc LME price rose to 36% and average lead LME prices surged to 15%, as compared to Q1FY21, resulting in higher revenue.

• Increase in mine operating expenses: The Company’s mine operating expenses in Q1FY22 stood higher at USD 75.57 million, against USD 45.85 million in Q1FY21, mainly due to higher revenue.

• Higher operating profits: The operating profits witnessed a steep rise during Q1FY22 at USD 15.98 million against USD 5.11 million in pcp. This was driven majorly by lower general and administrative expenses in Q1FY22 as compared to Q1FY21.

• Turnaround at bottom line: The group reported net income and total comprehensive income of USD 20.05 million in Q1FY22 as compared to the net loss and total comprehensive loss of USD 2.51 million in Q1FY21, this turnaround was mainly on the back of above discussed rationale along higher mark-to-market gain. 
  

Top-5 Shareholders 

The top 5 shareholders have been highlighted in the table, which forms around 30.61% of the total shareholding. Glencore International AG hold the company's maximum interests at 26.26%. The company's institutional ownership stood at 5.57%, while strategic entities ownership stands at 26.38%.

Valuation Methodology (Illustrative): EV to Sales based  

Stock recommendation 

In the first quarter of 2022, the Company produced 62.3 million pounds of payable zinc throughout its portfolio. Rosh Pinah and Perkoa produced another solid quarter, while Caribou concentrated on positioning for improved performance for the remainder of the year. In terms of financial performance, a notable highlight in the first quarter was the company's Adjusted EBITDA of USD 41.4 million, a 64% improvement over the preceding quarter owing to higher zinc prices.

Furthermore, management anticipates that the zinc market's outlook and pricing trend will stay positive. Also, we believe the firm is well positioned to benefit from improving underlying commodity prices, and that it will close FY2022 in strong financial form.

The stock is also trading at deeply discounted valuations against its peers on multiple factors. Hence, considering the aforesaid rationales, we recommend a “Speculative Buy” rating in the stock at the last closing price of CAD 0.68 on May 31, 2022. Moreover, the markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

One-Year Technical Price Chart (as on May 31, 2022). Source: REFINITIV, Analysis by Kalkine Group 

*Recommendation is valid on June 1, 2022, price as well.

Technical Analysis Summary

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