Trevali Mining Corp

Good day, everyone, and welcome to the Trevally Mining Corporation fourth quarter and full year 2021 financials and earnings conference call and 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 the conference call is being recorded. I would now like to turn the call over to Brendan Craney, Trevely's Chief Financial Officer. You may begin, sir.

Thank you, Valerie. Good day, everyone, and thanks for taking the time to join the call this morning. Before we get started, I would like to direct your attention to our forward-looking 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 being different from the estimates contained in our forward-looking statements, please refer to our latest MD&A filed on CDAR for the period ended December 31st, 2021. 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 in the events 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 events. Moving to slide three, our main presenters today are Rikas Grimbeak, Trevally's president and CEO, and he will be accompanied by Derek Dupree, Trevally's chief technical officer, an interim chief operating officer, and myself as Trevally's chief financial officer. Rikas, over to you.

Thank you, Brendan. Starting on slide four. Our safety records saw a decrease in total recordable injuries in Q4 versus Q3. Importantly, significant incidents continued to decline in 2021 with a 30% reduction year over year. The trends are shown in the top right-hand graph on slide four. We achieved payable production of £316 million in 2021 at a C1 cash cost of 91 cents per pound, and all in sustaining costs of $1.05 per pound. Unfortunately, these were below guidance and production and cost as shown in the table on the bottom right of the slide. We will discuss some of the reasons for the shortfall in upcoming slides. We restarted Caribou in the first quarter of last year with a two-year production plan. At the time, we elected to enter into a fixed price arrangement at $1.25 per pound of zinc in order to protect the cost structure while studying the potential to extend the mine life. The zinc price averaged $1.36 per pound in 2021 versus $1.03 per pound in 2020, and thus contributed to the $343.7 million in revenue for the year. The 47% decline in benchmark treatment charges in 2021 versus 2020 was also a key benefit for us last year. We reported a full year 2021 adjusted EBITDA of $102.3 million and operating cash flow of almost $91 million. The strong cash flows contributed to the $27 million reduction in net debt for the year, which at year end stands at $78 million. We were quite active on the asset optimization front in 2021. We ended the year by consolidating our shares and completing the divestiture of our Santander mine in December. The highlight over was the publication of our RP 2.0 feasibility study in August. This was followed by the initiation of a financing effort that is still underway. More on this shortly. Turning to slide 5, we are confirming our 2022 production and cost guidance. We expect to produce between 247 and 280 million pounds of zinc on a consolidated basis at an all-in sustaining cost of between $1.03 and $1.13 per pound of zinc. As we have seen in Q4, with the zinc price averaging at $1.53 per pound, the current spot price is now approximately $1.65 per pound, and this has important implications for our ability to generate cash flow. The two charts on the right hand of this slide and show what the consolidated margin could potentially look like at $1.55, $1.65 and $1.75 per pound of zinc. The top chart shows how the consolidated margin rises from the $79 million to $117 million with each 10 cent per pound increase from the basis of $1.55 per pound. We have taken a midpoint of zinc production guidance and used the midpoint of our ASIC guidance and adjusted for the 22.5 million in expensory capital we guided to, and the fact that of the 263 million pounds of payable zinc production, there are 74 million pounds of caribou that is fixed at $1.25 in 2022. In this calculation, we have excluded exploration expenditures, corporate costs, tax, and financing costs. But the idea is to provide one a sense of the leverage we have to an improved zinc price environment. The lower chart converts the margin in the above chart to a consolidated per share amount. That is $0.80 per share at $1.55 per pound zinc and $1.18 per share at $1.75 zinc price. The leverage is clear. A 13% increase in zinc price from a base of $1.55 per pound translates to a 48% increase in consolidated margin per share. Turning to slide 6, operations update. At Ras Pena, production picked up from Q1 levels with a strong Q4 finish of £21.1 million. The high ASIC in Q4 2021 of $1.06 was impacted by a delayed leg concentrate shipment which was produced in the fourth quarter but sold in January due to the unavailability of ships. We will discuss the early works program on the RP 2.0 project in detail later on the call, but as announced in January, we have a $20 million expansionary capital program, which is expected to be funded from internal cash flows. As part of the RP 2.0 project, and to reduce our carbon footprint at site, our solar project license has been granted as well. As a cover, we achieved production of 155 million pounds of zinc for 2021. This was impacted by a negative production adjustment, which we will provide details on in an upcoming slide. In the meantime, the bar chart at the bottom left of the slide shows the progression of production and cost through the year and a clear impact of the negative production adjustment and a jump of ASIC to $1.36 per pound in the fourth quarter. Placing the adjustment aside, we did have some success at Pocoa. We did produce 3% more zinc in 2021 compared to 2020. The extraction of the ground pillar commenced during Q4 2021 with the first step successfully mined from the open pit as part of a plan to mine the remaining proven and profitable mineral reserves. While the company is doing work to evaluate the cost structure of the operation in the current zinc price environment and further exploration work at T3, it is not currently anticipated that there will be a material conversion of the existing measured and indicated mineral resource to mineral reserve in 2022. On the exploration front, EM surveys continue and targets will be drill tested in late Q1 2022. At Caribou, production volumes were negatively impacted in Q4, down to 10.2 million pounds of production at an already outstanding cost of $1.44 per pound. Production continued to be impacted in Q4 due to the temporary closure of production area in the third quarter caused by localised ground conditions where historically ground activity and failures were not encountered. We have completed a third party ground control assessment, which confirms that this is not a pervasive stability issue and developed a bypass to increase mining flexibility. Reduction issues aside, we are advising studies for a conventional mine life extension beyond 2022, in parallel with investigating the potential to apply FL Schmidt's rapid oxidative leach technology at Caribou. The PEA is underway for the roll technology. In early December, we completed the divestiture of Santander on a strong footing. With only two months of production for the quarter, payable zinc volumes of 9.1 million pounds exceeded Q3 levels of 8.2 million pounds. And at a lower ASIC of $3 per pound versus Q3, this success was driven by the change out of our mining contract in mid-year. Now over to Derek.

Thank you, Rikus. Turning to slide seven. As you know, I would first like to highlight some achievements. There were zero recordable injuries in Q4 and payable zinc production of 21.1 million pounds shown in the right-hand chart was the strongest quarter for the year. The 76.1 million pounds of payable zinc produced in 2021 was within the upper range of guidance. The improved results in Q4 reflect our focus on reducing dilution and optimizing the feed which is enabled by our digitization interventions. We will speak about the RP2.0 expansion soon, but we would like to make clear that we are not standing still on the exploration front at Rashpino. We continue to drill along the western ore field, targeting the northern extension and on the AAD deposit at depth for low-risk mineral resource conversion. We also have several EM anomalies that we will drill test soon. Target 58 to 66 million pounds of payable zinc production in 2022 versus the 76.1 million pounds achieved in 2021 due to lower grades in 2022, which is expected to return back closer to the average mineral reserve grade in 2023 and beyond, as per the mine plan outline in the feasibility study. In addition to the reduced grades in 2022, our sustaining capital expenditures also impact units Warren's sustaining cost is targeted between $107 to $1.17 per pound, versus the $106 per pound in 2021. Moving to slide 8 for Pacawa, a detailed reconciliation between the reported payable production and sales completed in February 2022 identified a discrepancy in concentrating assays and tons measured at the mine site when compared to final weight measurements at the discharge port and subsequent independent metal assays. The outcome is a £6.2 million adjustment, decreasing Pacowa's payable deck production from the preliminary production results reported on January 24, 2022. We have taken measures to ensure such discrepancies are avoided going forward. As Rick has mentioned earlier, we have a crumpled recovery plan which we started to mine in Q4 where medium to high grade stoves are recovered in remnant areas. Stove 113 was mined successfully from an open pit in Q4 and stove 112 is fully drilled and ready for production. Ground EM servos continued in Q4 and multiple regional targets will be drill tested in Q1 of this year. In a few months we will recommend drilling of the T3 horizon once the underground ramp has reached the deepest level. Previously, we were drilling T3 from surface. Once the underground ramp has reached the deepest level, which will provide better drilling angles at depths, if underground exploration success is achieved, it is likely to include a suspension of exploration and a period of care and maintenance prior to mining due to the need for additional drilling and underground development. We target production of 128 to 145 million pounds of payable zinc in 2022, at an all-interest standing cost of 98 to 108 dollars per pound. The ink volumes are less than the 155 million pounds produced in 2021 due to declining grades. Then into slide 9 for caribou. Recall that caribou was restarted in Q1 2021 with a two-year production plan. The restart of the mine occurred on time, however underground productivity was challenged in the ramp-up Production was further impacted in Q3 2021 due to the temporary suspension of mining in the localised area caused by ground conditions. Minory sequencing and productivity challenges persisted into Q4 2021. Limited oil availability in 2021 due to low development productivity, equipment availability and ground control management has been factored into the schedule for 2022, with production expected to be higher in the second half of the year. Tailing CapEx is focused on an extension of the tailings dam and mine development to add flexibility in 2022, as well as enable a potential life of mine extension. We have two studies underway, one looking at a conventional mine life extension and another one investigating the potential to use F.L. Smith's rapid oxidative leach technology to unlock further value in the gold and copper that is lost in the conventional process. A PEA on the ROL technologies plan for completion in first half of this year. The results from the second phase of the pilot plan to date indicate that the results achieved at the Karibu mine site are on par or marginally better than those conducted at FL Smith's facility in Salt Lake City. This is good news because it supports the initial test results as we were able to replicate them under more representative conditions. We are guiding to 60 to 68 million pounds of payable zinc production in 2022 at an all-in sustaining cost of between $1.10 and $1.20 per pound. This compares to the 40.6 million pounds produced last year at an all-in sustaining cost of $1.16 per pound. Moving to slide 10, we are highlighting our early works program on the IP 2.0 expansion project. In parallel with the project financing initiatives, we continue to advance certain aspects of the $111 million RP 2.0 expansion project in order to maintain the project schedule and mitigate the risks associated with the project as outlined in the feasibility study. The early work program, which has a 2022 capital budget of $20 million, is expected to be financed from internal cash flows and consists of the following scope. The equipment of mobile equipment, power supply system upgrade, base back for plant long lead item procurement, wall construction and decline development, and process plant detailed engineering. Aspects completed thus far include a limited notice to proceed for the management of EPCM services was issued, a power supply agreement for upgrading the bulk power supply system was signed with Nampower, inquiries for selected long lead equipment have been completed. There have been inquiries for earthworks and civils for boxcar and portal with construction expected to start in Q2 2022. The procurement of mobile equipment completed with deliveries of equipment commencing as early as March 2022. We are moving along a solid path at site. We are pursuing the financing package.

Thank you, Derek. On slide 11, let's Now let us take a step back on the financing initiative and look at what we are trying to solve for here. The financing initiative is comprised of two key components. Number one, project finance for the RP2.0 expansion project, and number two, refinancing the existing corporate revolving credit facility and the Glencore facility, which are both due in September of 2022. Taking year end as a snapshot in time, we ended the year 2021 with total debt of $108.7 million and a project capital cost of $111 million for RP2.0. We are therefore targeting approximately $200 million for the full financing package. This will be plus or minus, depending on how much flexibility we prefer and how much cash flow is generated between now and closing on the financing. So there are a few moving pieces. This should, however, provide you with some context on our financing objective. So the next question is, where are we in the process? Well, we appointed Endeavor Financial as our advisor in September last year, and since then we have been analyzing several opportunities for the financing package, including project finance debt, subordinated debt, and a silver stream on Roche Penis silver production. We have received non-binding expressions of interest from several capital providers, including commercial banks, streaming and royalty companies, and mining-focused alternative lenders, as well as from Roche Penis concentrate offtaker Glencore. The indicative support from subordinated to traditional project finance debt and contingent on the remainder of the required financing package being secured, as well as negotiation of satisfactory terms and conditions. It is still a work in progress and the initiative is tracking well. We will continue to keep the market updated as developments are made. Moving to slide 12, the average LME price for zinc during 2021 was $1.36 a pound, up 32% over 2020. 2021 revenue of 343.7 million increased 61% compared to 2020 due to higher metal prices, but also due to a 47% reduction in treatment charges. We did see cost pressure in the freight market resulting in approximately 50% increase versus the period a year ago. The year over year comparison in the table on the bottom right of the slide is quite striking given the similar volumes of production and unit costs when compared to 2020. impact on adjusted EBITDA and operating cash flow, which reflects the leverage we have to higher Zinc prices. Adjusted EBITDA of 102.3 million in 2021 compared to 19 million in 2020. Operating cash flow has increased almost nine times to 90.8 million from 10.5 million. The waterfall chart on the top right-hand side of the slide shows the buildup of adjusted EBITDA from the 2020 level of 19 million to the 102.3 million for 2021. higher sales prices and lower treatment charges were the main drivers of the improvement and more than offset the higher site operating costs. The strong cash flow generation allowed us to reduce our net debt by $27 million to end the year with a net debt position of $78 million. Finally, we generated positive adjusted earnings per share of $0.13 for the year versus a loss last year. Moving to slide 13, we spoke about high zinc inventory levels last quarter, which were mainly caused by Perco and Roche Pinot and the inability to get ships out. In early Q4, those ships went out. At the end of Q4, at Percoa, we exercised our tidal transfer option at port, leaving approximately 5,000 dry-metric tons of material in inventory in transit to port. At Rojpina, at the end of the Q4, inventory was approximately 12,000 dry-metric tons, with the majority of the material at port ready to ship. The end result is our zinc inventory levels have stabilized, as shown in the top right bar chart. Lead volumes, on the other hand, are up since Q3, due to the inability to secure a vessel before year-end at Rojpina. This third planned lead concentrate shipment was subsequently sold in January of this year. We continue to see a tight global shipping market and we expect periodic delays in sales in 2022. Over to you, Rickus.

Thank you, Brendan. On slide 14, I'd like to speak about the zinc price trend. This is a longer-term zinc price chart starting in 2008. It is a volatile market with rare periods of price stability, which you can observe by looking at the zinc price in the 2012 and 2015 time period, due to China's influence on managing the market. As prices weakened in 2015-16, the industry did curtail production, and then when fundamentals improved, we witnessed a significant price increase into 2018, which attracted speculators and new suppliers in concentrates. This led to a price correction in 2019 and a brief recovery before COVID-19 hit and drove the zinc price down to 82 cents per pound in March 2020. 2021 started the year with concentrate shortages, mainly due to COVID constraints, and the zinc prices recovered. And now we start this year with low global inventories of zinc, smelting, or settlement due to the high energy prices. More on this in the next slide. On slide 15, you can see the impact to stock levels and the price in the top right-hand chart, which shows the LME and the Shanghai inventory and the zinc price since 2007. One of the key themes in keeping global inventories of refined zinc is high energy prices. Smelter output in Europe has been curtailed with two smelters on carrier maintenance due to the cost of power. Refined zinc inventories have slipped to just seven days. the tightness in the market is reflected in above average zinc spot metal premiums at least in europe and the and the usa fabricators are willing to pay up to 16 cents per pound more over the spot price of 1.65 per pound in order to secure zinc metal for their manufacturing needs we believe this low inventory high spot premium dynamic is supportive to the zinc price in 2022. The lower right line graph shows the benchmark treatment charges, imported spot treatment charges in China and the domestic treatment charges in China from 2017. They were all clearly lower versus 2020 and mostly flat in 2021 until mid-year last year, when Chinese domestic treatment charges increased and approached the benchmark levels. Notably, imported spot treatment charges moved sharply higher in January, but are still below the 2021 benchmark. We believe this bodes well for the treatment charge negotiations in 2022, which are off to a late start. From a base of $215 per tonne, which was the basis for our 2022 unit cost guidance, for every $20 per tonne change in the zinc treatment charge, our cost impact is approximately two cents per pound of zinc. Turning to our final slide, slide 16. In 2021, we generated strongly adjusted EBITDA of $102.3 million and operating cash flows of $90.8 million and an average zinc price of $1.36 per pound. We are reconfirming our 2022 guidance of 247 to 280 million pounds of zinc at an all-in sustaining cost of between $1.03 and $1.13 per pound. Current spot prices of $1.65 per pound We are positioned to generate significant cash flows again in 2022. We reduced net debt in 2021 by $27 million to $78 million. The divestment of Santander Mine supports our disciplined capital allocation strategy. We are progressing well with our discussions with capital providers to fund the RP 2.0 expansion project and other growth opportunities. We have begun a $20 million early works program on RP2.0 expansion and continue to study on a conventional mine life expansion at Caribou in parallel with AFL-Smith rapid oxidative leach technology for additional value capture at Caribou. To summarize, we are improving financials, a backdrop of high zinc prices and the anticipated financing of the RP2.0 project, the next phase of the ROL program at Caribou. We are excited about the company's future prospects. We look forward to providing you further updates as we progress throughout the year. With that, operator, I will see you for questions.

Thank you, sir. At this time, as a reminder, please press star 1 on your telephone keypad for questions at this time. And again, that is star 1 for questions. And there is a question from the line of Craig Hutchinson of TD Securities. Please go ahead.

Good afternoon, guys. My question is related to the Caribou, the Life of Mind study. Are you guys looking at just Caribou, or are you starting to think about reintegrating some of those satellite projects like Restagouche or Half Mile in this study that's going to come out, I guess, page one this year?

We're looking at the conventional extension of the mine at the moment to see what we can do with the remaining mine life. Part of the RAL study, we definitely are considering what that could look like if we include some of the satellites, ore bodies and mines that we do own. We're looking at the whole package, not just the caribou mines.

Okay, thanks. And then just in terms of the RL project, is that a capital-intensive project? And if so, is it something you guys are looking to joint venture, or are you looking to do this all on your own?

Yeah, I think that, you know, it's being studied at the moment, so it's a bit hard to say exactly. But, you know, the expectation is that it will be, you know, capital-intensive. But, you know, that's part of why we want to do the economic study and see what that looks like. Are we structured that in the future? There will be quite many, many options that we could consider, especially seeing that we would be bringing the gold into the payables. There are many options around streaming. There could be options around joint venturing with other parties. So that's all things that we will look at at a later stage. At the moment, it's doing the PEA and publishing that. and we'll take it from there. But the key focus for the company, as I keep on pointing out, is financing RP2.0 at the moment, getting that up and running. I guess it's a great project, and it's going to totally transform this business.

Okay, and maybe just one last question for me on Percoa. I know just based on the reserve life that came out at the end of last year, sorry, the end of 2020, reserves will probably be exhausted this year. And I know you were doing some exploration at the T3 zone. Can we expect your reserve additions just based on how strong kind of metal prices have been in the last 12 months?

Yeah, that's a good question. And it's good that you picked up on the reserves, you know, because, you know, as you know, we're doing the exploration at T3. They're still going to be doing some drilling in Q1 this year. But the reality is if we do find something at T3, it's going to take a couple of years to develop over there, to do enough drilling to do the mine designs. So, you know, I don't think T3 conversion will happen soon, but we are definitely studying, especially under these type of metal prices, options to get some of the resource into reserve again as, you know, As we study and find ways to reduce operating costs, if there are ways that we can develop GPO with some of the areas, those are all things we're studying at the moment. And we'll update you as soon as we know what that looks like. But at the moment, as we said in our text, we can't see any material conversion from resource to reserve this year.

Okay, great. Thanks, guys.

Thank you, sir. And again, at this time, please press star 1 on your telephone for questions at this time. And at this time, sir, there are no further questions. And I would now turn the call back over to Mr. Carini.

Thanks, everyone, for joining the call today. And thank you, Valerie, for walking us through. Have a great rest of your day.

Thank you, sir. And this is the conclusion of today's conference call. Thank you for participating. You may now disconnect.