Trevali Mining Corp

Good day, ladies and gentlemen, and welcome to the True Valley Mining Corporation third quarter 2020 financials and earnings conference call or webcast. After the speaker's remarks, there will be a Q&A session. If you would like to ask a question during that time, please press star 1 on your telephone keypad. You may press star 1 at any time during the call to enter the queue. I would like to remind everyone that this conference call is being recorded. I would now like to turn the call over to Brendan Green, Free Valley's Vice President of Investor Relations and Interim Chief Financial Officer. You may begin your conference.

Thank you, Chantal. Good day, everyone, and thanks for taking the time to join the call this morning. your attention to our forward-looking got language on slide two. Our discussion today will contain forward-looking information about the company's future performance. Although forward-looking statements are based on what management believes to be reasonable assumptions, actual results may turn out to be different to these forward-looking statements. For a complete discussion of the risks, uncertainties, and factors which may lead to actual operating and financial results, MD&A filed on CDAR dated September 30, 2020. I'd also like to mention that this conference call is being recorded and a replay webcast will be available one hour after today's call. In conjunction with this conference call, there is an accompanying PDF presentation available on the event section and the corporate presentation section of Trevally's website under the Investors tab. The link to our live webcast is also on Trevally's website under Event. The main presenter today is Rikas Grimbeek, Trevally's president and CEO, and he will be accompanied by Derek Dupree, Trevally's chief technology officer, and myself as Trevally's interim chief financial officer. Rikas, over to you.

Thank you, Brendan, and good day from my side to everyone on the call, and thank you very much for your time. Starting on slide four, the quarterly results for Q3 highlight significant turnaround for our business, both from a macroeconomic perspective and operationally. The zinc price averaged $1.06 per pound for the quarter, up from $0.89 per pound in Q2, and ended September at $1.09 per pound. Today the price hits the $1.17 and our view is that these prices will sustain and may go higher in the near term due to market forces which I will speak to later in the presentation. For the third quarter, this depreciation in zinc price contributed positively to the revenue and earnings. We also took the opportunity to put in place a hedging program to lock in some of these cash flows while retaining the exposure and leverage to the higher zinc price. Having executed on this hedging program, we are forecasting compliance with our financial covenants related to our credit facilities over the coming quarters. At the current zinc price, we are also meaningfully cash flow positive. With the business healthier and our debt maturing only in September 2022, this also means that the urgency to act under the strategic review process has diminished and we have more time to choose the best value-enhancing option for our business and our shareholders. Operationally, we produced over 74 million pounds of zinc, a 13% increase to the previous quarter. C1 cash cost of 81 cents per pound and an all-in sustaining cost of 91 cents per pound. This represents a 13% decrease in cash cost to the previous quarter, despite a temporary shutdown of operations at Santander related to COVID-19, where we lost the better part of a month's worth of production. Lastly, I'm pleased to confirm our previous revised guidance for the year that we put out as part of our second quarter results. Turning to slide five, I will step through the operations in detail. Starting with Pakawa, payable zinc production for Q3 2020 was at 39.3 million pounds. A 19% increase over the prior quarter due to improved zinc upgrades as higher grade stoves were mined in accordance with the revised mine plan that was developed when we updated our guidance in Q2. The average grade for the quarter was 12.7% zinc. In the quarter, we also restarted drilling on the T3 deposits, which lies below the hanging wall of the mainland and has the potential to extend the mine life of the cover. We will have initial drill results in the fourth quarter. In addition to the exploration activities related to T3 deposits and near mine exploration targets, we are also soliciting interest from potential partners to explore the regional land package that is further afield from the mine. At Raspina, we delivered the pre-feasibility study for the IP 2.0 extension project, which Derek will speak to the highlight in coming slides. I would like to point out that we have begun some of the initial work related to the final feasibility study, and we are now forecasting the completion of the study by mid-year 2021. We are also looking at solar energy to reduce energy costs at Raspina. We've submitted an application to become an approved market participant to the Namibian Electricity Regulator and have also expressed interest to sign a DAWA purchase agreement to purchase solar energy equivalent to 30% of our annual energy consumption. With respect to cost and production, a good performance from Raspina with production of 20.9 million pounds at an all-in sustaining cost of 90 cents, which did not have the benefit of the lead concentrate shipment this quarter and therefore a by-product credit. We will see the lead concentrate shipment in the fourth quarter as per plan. At the end of the third quarter, we had zinc concentrate build up in the inventory of approximately 12,000 tons, and so our payable sales were down, but this is just the timing issue which we will catch up in the fourth quarter. At Santander, as I mentioned on the previous slide, we restarted the operation on July 15th and are currently operating at full capacity with a reduced workforce focused on production. While we were impacted by the temporary shutdown, I'm happy to report that our production was medium to higher than Q2 at $14 million. and our all-in sustaining costs came in at 92 cents a pound due to the focus on production over development. This 92 cents a pound all-in sustaining cost is an especially good showing as it includes about $750,000 or about 5 cents a pound of COVID-related costs tied to the temporary shutdown. At Caribou, we continue to study a number of value-enhancing opportunities while the operation remains on care and maintenance. Over to you, Derek. Thank you, Lucas.

Moving to slide 6, I will describe the RP2.0 expansion project as outlined in the pre-feasibility study technical report that was released in August. The project incorporates an upgrade to the combination circuit to include a new single-stage sand mill and pebble crushers. The upgrade also includes a new primary crossing and oil blending system, along with circuit modifications to provide increased flotation, thickening, filtration, and pumping capacity to achieve the target throughput of 1.3 million tons per annum. The upgrade will also include several flow sheet modifications aimed at improving both the concentrate grade and metal recoveries. In addition, we will add a peaceful plant which has the benefit of increasing ore recovery, reducing mining dilution, while also reducing the area of the tallings facility on surface as we will pump the tallings back underground. A dedicated portal and decal to the WF3 deposit will also be constructed to support the increased mine production levels and to reduce operating costs. The new trucking vehicle will act as an additional fresh air intake and will enable direct overreach from the WS3 zone to the new surface primary crust station utilizing large-scale 60-ton trucks. On slide 7, you can see the main benefits for the investment in RP2.0. For a project capital cost of $93 million, the production capacity is increased by 86% with a reduction to orange sustaining cost to an average of 64 cents per pound by the expansion, while using a 10-year mine life. Economically, the project provides an NPV of $142 million, a reduced IRR of 65%, and a project period of less than four years. Once the infrastructure is in place, we fully expect to extend the mile-long and add to these economics through the definition of further resources on the spin-off property, as well as the potential to process all from the growth of the property where we have a joint venture with the downtown. As Rikus mentioned earlier, we are now forecasting to complete the final feasibility study by the end of Q2 2021 and looking to advance funding sources for an investment decision in the second half of 2021. Brendan, over to you.

Thanks, Derek. On slide 8, I am pleased to report that we have made significant progress on our T90 program this quarter, having implemented an additional $11 million of initiatives, bringing the total to $41 million. We are still forecasting to implement $43 million worth of initiatives by the end of 2020, with the remaining $7 million of our $50 million target expected in the first half of 2021. with reducing all unsustaining costs by $0.08 per pound, increasing revenues by almost $1 million, as well as increasing adjusted EBITDA by $6.8 million. The two graphs on the bottom of the slide illustrate the leverage the T90 program has on our business. By achieving our T90 program target, the company has the potential to produce a significant margin above our $0.90 all unsustaining costs. production guidance of 320 million pounds and applying various zinc prices against it. If you choose $1.15 a pound, which is close to the current spot price today, the margin above P90 is 80 million per annum, or 10 cents per trivali share. Moving to slide 9, as Rick has mentioned earlier, the quarter was supported by a higher average zinc price of 106 per pound compared to a second quarter number of 89 cents a pound. Revenues were $50.2 million, an increase of 17% relative to the second quarter due to a 19% increase in the zinc price and a 35% reduction in freight costs. This increase in revenue comes despite a 10% decrease in sales volume relative to the second quarter having sold 65 million pounds. cents per pound in the second quarter benefited from higher payable production and from the cost savings and efficiencies of the T90 program that I referenced on the previous slide, and despite not receiving a byproduct credit this quarter from Rashpena in the form of lead concentrate sale. All in sustaining costs in the third quarter of 91 cents per pound improved compared to 105 per pound in Q2 2020 for the same reasons as C1 cash costs, as well as due to savings related to sustaining capital expenditures. and increased revenues by just under $1 million for the quarter. Adjusted EBITDA of $11.2 million improved from negative $5.7 million in Q2 2020 due to the higher zinc price and lower operating cost per pound, as well as the higher inventory levels due to timing of sales. Lastly on this slide, I would like to highlight that $17.1 million of operating cash flows before working capital that the business generated and point out that all operations contributed positively to this number. On slide 10, I'd like to bring your attention to the hedging program we executed on over the course of September and October, which covers approximately 50% of our forecasted production over the six-month period October 2020 to March 2021. The program has two key objectives. The first objective is to mitigate against the volatility of adjusted EBITDA in our business to ensure continued compliance to our credit facility's financial covenants, which come back into effect at the end of the fourth quarter. The second objective we are bullish on. We have used two financial instruments to achieve this objective, put options and forward swaps. The put options, which represent approximately 25% of estimated production, provide protection to the potential downside movement in the ZIG price while allowing for exposure to the upside. The strike price of the put options is 104 at a cost of 3.4 cents a pound. The forward swaps represent the other 25% into two separate arrangements to fix the price of zinc. One was entered with an average price of $1.10 per pound over the six-month period, and the second arrangement was entered at an average price of $1.12 per pound over a shorter period of five months, November through March. With this program in place and where the zinc price has been trending, we expect to be in compliance with our financial covenants over the coming quarters. to highlight that 54% of our sales were at the back end of the quarter, having occurred in the month of September. Most of the cash related to the sales in September were collected in the month of October and at a higher Zing price than the cash collected from sales earlier in the quarter. So while our net debt position increased from Q2 to Q3 by $18 million, it has subsequently, as of October 31st, improved by $10.8 million to $119.1 million, and and 8 million pounds of lead production that remains unpaid as of October 31st. The nature of our business is that we see a lagging effect between the appreciation of the commodity price and when we collect the cash for sales of the commodity concentrates we produce. The impact was magnified more than normal this quarter due to both the timing of sales and the increase to the zinc price. At the current zinc price, we expect to be generating strong, positive cash flow for the remainder of the year as our sales catch up. Rick is back to you.

Thank you, Brendan. Moving to slide 12, we've refreshed the historic zinc price chart that we shared with you at the last quarter. The zinc price as of today is $1.17 per pound, up 43% from the low of $0.82 back in March. While this is a significant recovery and puts Toronto well into positive free cash flow territory, it only brings us back to the increase that was depressed by the trade wars between China and the United States. And I believe this still has significant upside potential from here. Demand for the metal is strong and continues to strength on the back of announced government infrastructure investments and stimulus programs. China is already ahead on executing their infrastructure program, and we've seen strong demand for the metal there, while other countries are a little behind in their programs, in particular the United States. I expect more stimulus to be announced there as they come out of their federal election process. On slide 13, this picture clearly illustrates the impact COVID-19 has had and continues to have on mine production. It's estimated that 1.4 million tons of zinc concentrate production will be lost for the full year of 2020 due to the combination of mine suspensions, closures, and lower productivity levels. While on the right you can see the expected impact to global smelting production, which was materially impacted early on in 2020, but largely recovered in the second quarter. It's estimated that only 250,000 tons of smelting production have been impacted on an annualized basis. The key reason for the overweight production loss from mines relative to smelters is the location of the mines. Some of the largest zinc-producing nations happen to be those that have been harvested by COVID-19, including Peru, Mexico, and Bolivia. Over the past six months, this has resulted in concentrate market tightness, with concentrate stock of 46 days or smelter capacity being largely depleted. Moving to slide 14, where our stocks for refined zinc continues to be depressed and modestly increased relative to second quarter by 61,000 tons to 281,000 or an estimate seven days of global consumption. This inventory level remains well below historical averages of approximately 18 days and can easily reduce in the short term due to ongoing global production issues. as I spoke in a previous slide. Upstream in the zinc market, the differential between the annual benchmark treatment charges of approximately $300 a tonne for 2020, which was settled back in late March, and the spot market continues to show a significant divergence due to the mine production issues, and its impact on concentrate supply to smelters. The average monthly difference between benchmark and spot TCs was $115 a tonne in September. You can see on the graph that after a slow increase in TCs in June and July, TCs again retreated. Annual benchmark negotiations started for 2021 back in October when this year's LME week kicked off virtually. Industry experts have been calling for a 2021 benchmark treatment charge of anywhere between $100 to $250 per ton, with many calling the midpoint of $200. If we had a $200 treatment charge for next year, this $100 per ton decrease from 2020 rate of $300 would translate into an increased margin of $0.10 per pound, or $32 million on an annualized basis when considering the midpoint of our full year guidance in 2020. so a significant boon to our business. Turning to slide 15, I will close by saying that the business is in a much stronger position than it was last quarter. I'm proud of everyone for working safely and achieving our planned operational targets while implementing an additional $11 million of T90 business improvement initiatives, and we are closing in on our target of an audience-signing cost of $0.90 per pound. While we recognize that we drew down significant credit in the first half of the year, at the current zinc price, we are now meaningfully cash flow positive. And while reducing this buildup of debt is one of our key priorities, there is less urgency to do this in the short term. We have options in front of us, and we will choose the best value-enhancing option for the business and our shareholders. With the third quarter behind us and with tailwinds in the form of high zinc price, we expect a positive momentum to continue. We are on track to deliver our revised 2020 guidance and are projecting compliance to our financial covenants over the coming quarters once they are reinstated at the end of Q4. I'd like to take the opportunity to thank all the Trivali employees and our partners for all their support and hard work and commitment. With that, I'll take those and we're happy to take any questions.

As a reminder, to ask a question, you'll need to press star one on your telephone keypad. To fill out your question, press the pound or hash key. Please stand by while we compile the Q&A roster. Our first question comes from Boris Valkada with SocialBank. Your line is open.

Hi. Good afternoon. Rikis, can you give us a bit more color on the strategic review? It sounded like you said earlier that Has that been put on hold effectively, or is that still ongoing in the background?

Oh, it's great to hear from you. I think what I'm saying is definitely not on hold. What I'm saying is that we are not backed up in a corner. As I said, we are meaningfully cash flow positive at the moment. We've got multiple options that we're studying, and we're not going to make a pressurized move without looking at real shareholder value. So we're looking at all the options, and we've got time on our side. We only have to pay back our debt In September 2022, we meaningfully carry cash flow positive at the moment, so that gives us time to make the right choice. So it's not on hold at all. It is just that we don't have the pressure of doing something that we don't really want to do.

So does that mean that you expect to be kind of fully in compliance with the terms of the credit facility kind of by year end, and that effectively just takes the pressure off until the actual maturity of 2022? Yeah, I'll ask again, Brendan, to talk about that. Yeah, yeah, thanks, Orit. As mentioned earlier in the presentation, we put the hedging program in place.

One of those key objectives of that program was so we would be in compliance with the financial covenants, and we feel very comfortable with how we've hedged that program, and with 50% of our production with the put options and the pour swaps, that we will be in compliance. So zinc price has to drip significantly lower for us to be offside with respect to those covenants. And when I say significantly lower, we're talking below a dollar.

Okay, and then final question, just what's the financing plan for the Roche Pinot expansion? I mean, that's 93 million capex. What's the likely source of financing for that?

We still have a lot of time on our hands. We've got the final feasibility study that we kicked off and working on, and that won't be completed until mid-year 2021. But we're speaking to a number of groups, and there's a variety of things that we can do with respect to financing there.

Okay. But is partnering on the asset an option in terms of something you're considering, or no? No.

Yeah, I mean, that's absolutely one of the things that we're looking at and considering, but it's one of a multitude of options.

Okay. Thank you. Yeah, and maybe also, Aris, if you just keep in mind that, you know, we're also working on fixing our balance sheet at the moment, so, you know, expect a different balance sheet by that time in any case. Thanks, Rick. Thanks, mate.

Just to remind you, no questions. If there are one at any time to enter the queue, our next question comes from Megan Ionel with Cormark Securities. Your line is open.

Good. Thanks very much, guys. Maybe just to follow up on Anwar's question, just in terms of a formal decision on Rashpina from the board, should we anticipate, you know, you get the feasibility study done middle of next year and then at that point we'll get sort of a formal word from the board or do we still want to have all the financing plans sort of ironed out and formally as well before you make that green light decision?

It's a good question. I think you'll understand how these processes work. We started work on the feasibility study. We will be finished with that by the end of the second quarter next year. We will present that to the board and as you know these things, that's when the will be made. We will leave it up to the board. But if you look at the study itself, it really is a world-class asset. If that expansion is done, the all-in-the-study cost average of 64 cents a pound really gives you an asset that is a company builder.

Okay, great, great. And then just obviously great to see the progress on the T90 program through the quarter. The all-in sustaining cost reported for the quarter of $0.91. I just noticed that when you look at the actual detail, I mean, there's a little bit of minutia of some sort of, I guess, remnant Caribou by-product credits feeding into that number. Should we anticipate like Q4 and going forward that Caribou is completely out of the equation? for the future numbers, or is there still going to be a little bit more hangover coming in as precious metals and stuff get, I guess, reconciled?

Yeah, thanks for that, Stefan. Yeah, we had about a $2 million by-product credit with respect to Carebit, so that was one of the finalized sales that just happened to be a carryover from a previous quarter. There's a little bit left, but it's not in the million-dollar range, so it's sub-a-million dollars, so you shouldn't expect that to have a material impact on our ASIC and Q4 going forward.

Okay, got it, got it, great. Thanks again, and good to see that T90 progress.

Our next question comes from Ryan MacArthur. His name is James. Your line is open.

Good afternoon. So I just want to follow up on the previous question. So just technically, the debt comes due in 2022. You'll be covenant okay. But can you – do the covenants actually prevent you from making a decision on or doing something on Rosh Panah? Because, again, as you say, you probably want to make that decision before – The debts do, but they may want their money back. So it all kind of comes together at the same time. And as Orr says, if you have sort of $140,000 plus $90,000, I'm not telling you anything you haven't figured out. I know $220,000. I mean, that's still a pretty big number if the zinc price doesn't move.

Yeah, thanks, Brian. And I think, you know, as I pointed out earlier to Horace as well, that, you know, we are running this particular process at the moment, and we will be solving the balance sheet issues over this period. So, and, you know, it's a great... time to it. It's got a great IRR. So people tend to be able to see through that. Some investors see that. There's a really positive zinc market in front of us as well for the coming years. There's a long-term industrial investments that will happen around the globe. So zinc is going to be in high demand for years to come. Supply will be constrained, especially in the shorter term and even in the medium term. So, you know, I think investors will be able to see through that. But expect us to have dealt with a portion, if not all, but at least a big portion of our balance sheet before we need to do any financing for Raspina 2.0.

And just on TCR next year, will you look to settle as soon as possible? Just because, as you said, I mean, getting the last dollar might not matter there, but getting it down $100 even makes a huge difference for you? Or what's your thinking going into those negotiations?

Yeah, so, you know, I wish I was at the table, founding the table to get the base one number lower. We basically just price-take us on that. So I'd be cheering very, very heavily on the corner of the miners and making sure that that benchmark number is as low as possible because, as you can see, it makes a material difference to our business. $10, $10 a pound margin is a lot of money for us. So, yeah, my prediction is that it will be settled somewhere, maybe a similar time to this year, you know, February-March time, and hopefully that's going to be more towards our side this year because $300 was a very punitive number for this year that we had to deal with. Right. Great. Thank you very much. That's very helpful. Thanks, Brian.

Thank you for dialing in. As a reminder, there is an accompanying PDF presentation available on Trivali's website under the Investors tab. You will also find a link to the recorded website presentation on the Events page. If you did not have the chance to ask a question on today's call, please contact info at trivali.com. This concludes today's conference call. You may now disconnect.