Trevali (TSXV: TV) is a global base-metals mining company, headquartered in Vancouver, Canada. The bulk of the Company’s revenue is generated from base-metals mining at its four operational assets: the 90%-owned Perkoa Mine in Burkina Faso, the 90%-owned Rosh Pinah mine in Namibia.

Revenue Mix

Investment Rationale

• Elevated underlying commodity prices: Trevali’s biggest exposure is in Zinc. Zinc prices are roaring higher, with prices up ~21% on YTD basis. Moreover, Zinc prices are expected to remain firm as zinc market saw a 26% rally to a 14-year high of US$3,795 in the first half of October, following the announcement of production cuts by top producer Glencore and Belgium-based Nyrstar amid soaring energy costs.
• Firm Lead and Silver prices: Lead prices are up ~21.2% on a YTD basis, and Silver consolidating near US$24/oz ,which is still up ~90% from March 2020 low of ~US$12/oz. Strong Lead and Silver prices will further boost Trevali’s financial performance in coming quarters.
• Solid performance in Q2FY21: On the back of significant jump in underlying commodities production, together with higher underlying commodities prices in Q2FY21, Trevali reported strong financial performance. Top line surged by 137% on a YoY basis, EITDA up by whooping 661% on a YoY, turned profitable at the bottom line.

Source: Kalkine Group, Analysis by Kalkine Group

• Lower Balance Sheet Risk: Despite relatively higher Debt/Equity ratio as of June 30, 2021 (Trevali’s Debt/Equity ratio of 0.57x vs Industry Median of 0.18x), the company is having strong debt protection metrices, with Net Debt as of June 30, 2021, is just 3.15x in size of EBITDA, implies lower balance sheet risk.
• Strong global manufacturing: We believe that the outlook for the zinc market remains robust. The metals sector has performed well as global economic activity increased and pent-up demand struggled to be satisfied due to supply chain constraint. Meanwhile, global manufacturing is strong and there are multiple factors to drive this shift including infrastructure spending initiatives, decarbonization of energy sources, electrification of transportation and technology-related improvements in manufacturing efficiency.

Risk Associated

The company is exposed to variety of risks ranging from adverse movement in the underlying commodity prices, resurgence of COVID-19 cases could hamper production and disrupt supply chain, inflationary pressure could impact margin profile, interest rate risk given relatively higher debt contribution in the balance sheet, and forex risk.

Financial Highlights: Q2FY21

Source: Company Filing

Solid topline performance: During the quarter under consideration, the company reported revenue nudged by 137% to USD 101.1 million against the same period of the corresponding previous financial year. This was mainly because of  48% increase in zinc price, 20% increase in zinc payable sales volumes and the 47% decrease in 2021 zinc treatment charge benchmark.

EBITDA expansion: The company reported EBITDA for Q2FY21 surged by 798% to USD 30.1 million and adjusted EBIDTA surged by 661% to USD 32.04 million on a YoY basis. The difference between EBITDA and Adjusted EBITDA during Q2 2021 is minimal with the USD1.9 million variance a net impact of foreign exchange and mark-to-market revaluations.

Turned profitable: The Net Income for Q2FY21 stood at USD 3.87 million against the net loss of USD19.38 million reported in Q2FY20, on the back of higher production and higher average realized prices.

Debt levels: Net Debt as of June 30, 2021, increased to USD 109.0 million from USD 92.6 million on March 31, 2021, due to the increase in receivables with USD 50.7 million collected during July. The Net Debt position as of July 31, 2021 has reduced USD 16.6 million to USD 92.4 million.

Top10 Shareholders: Top-10 shareholders together holds approximately 31.8% stake in the company, with Glencore International AG and Aegis Financial Corporation are the major shareholders in the company, with an outstanding position of 26.27% and 1.37% respectively. Institutional holding in the company stood at 

Source: REFINITIV, Analysis by Kalkine Group

Valuation Methodology (Illustrative): Price to Cash Flow-Based Valuation

Note: Premium (discount) is based on our assessment of the company’s growth drivers, economic moat, competitive advantage, stock’s current and historical multiple against peer group average/median and investment risks

Stock Recommendation

The company reported robust performance in Q2FY21 on the back of higher production numbers across the board amid time when commodities are hovering near multiyear highs. However, company is relatively higher leverage compared to industry peer, which is one concern but robust risk protection metrices minimizes the balance sheet risk associated with the company.

Further, we believe that that the outlook for the zinc market remains robust on the back of surge in global manufacturing.

Though, investors are exposed of significantly higher risk given the penny-cap market categorization of the company.

Hence, we recommend a “Speculative Buy” rating on the stock of TV at the closing price of CAD 0.22 (November 02, 2021)

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached.

Technical Analysis Summary:

1-Year Price Chart (as on November 02, 2021). Source: REFINITIV, Analysis by Kalkine Group

*The reference data in this report has been partly sourced from REFINITIV.

*Recommendation is valid on November 03, 2021, price as well.

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Disclaimer

 

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