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

• 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 metal sector has fared well and is beginning to reflect investor confidence in an extended positive price cycle.

Source: Company Presentation 

• Clocking higher operating cash flows: In the reported period of FY 2021, the company’s operating cash flows before changes in working capital stood at USD 90.8 million against USD 10.5 million in the previous corresponding period. An elevation in the operating cash flows was mainly due to strengthened zinc, lead and silver prices and reduced zinc treatment charge rate.

• Minimizing debt: The company managed to minimize its net debt by USD 27.0 million to USD 78.0 million in the reported period compared from December 31, 2020, 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.

Source: Company Filing

• Trading at discounted valuations: The company’s shares are available at an NTM EV/Sales multiple of 0.4x compared to the industry (Metals & Mining) median of 2.0x. while on NTM Price to Cash Flow multiple the stock is trading at 1.0x compared to 2.9x. 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 FY 2021 (In 000 of USD)

Source: Company Filing

• In FY 2021, the company’s revenue increased 61% to USD 343.7 million compared to the prior year due to a 32% strengthening of the average annual zinc price and a 47% decrease in treatment charges.
• On the back of higher revenues, the company recorded elevated adjusted EBITDA of USD 102.2 million against USD 18.9 million in pcp.
• Net income in the reported period stood at USD 26.6 million against a loss of USD 245.6 million in the previous corresponding period. Net income increased primarily due to the increase in revenues due to the higher zinc price, no impairment charge and an increase in the net income from discontinued operations due to the USD 19.2 million gain on disposal of the Santander mine in 2021.
  

Valuation Methodology (Illustrative): EV to EBITDA based

Analysis by Kalkine Group 

Stock recommendation 

In 2021, the firm earned Adjusted EBITDA of USD 102.2 million, up from USD 18.96 million the previous year, thanks to a 32% rise in average zinc price and a 47% decrease in zinc concentrate treatment charges. Despite the production issues it had during the year, the firm was able to lower its Net Debt to USD 78 million as of December 31, 2021, which is a significant positive. It also illustrates the company's perseverance and sensible decisions. 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 on the stock at the closing price of CAD 1.20 on February 28, 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 Price Chart (as on February 28, 2022). Source: REFINITIV, Analysis by Kalkine Group 

  Technical Analysis Summary

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