Trevali Mining Corporation (OTCQX:TREVF) Q1 2022 Earnings Conference Call May 16, 2022 1:00 PM ET
Derek du Preez – Chief Operating Officer
Brendan Creaney – Chief Financial Officer
Conference Call Participants
Brian MacArthur – Raymond James Ltd.
Orest Wowkodaw – Scotiabank
Stefan Ioannou – Cormark Securities
Craig Hutchison – TD Securities
Good day, everyone and Welcome to the Trevali Mining Corporation First Quarter 2022, Financials and Earnings Conference Call and Webcast. After the speakers remarks, there will be a Question and Answer Session. [Operator Instructions]. I Would like to remind everyone that this conference call is being recorded. I would now like to turn the call over to Brendan Creaney, Trevali’s Chief Financial Officer. You may begin your conference.
Thank you, Erica. 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 2. Our discussion today will contain forward-looking information about the Company’s future performance. All the 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 SEDAR for the period ended March 31st, 2022. 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 events section and the Corporate Presentation section of Trevali’s website under the Investors tab.
The link to our live webcast is also on Trevali’s website under events. Moving to Slide 3, I will be presenting the Q1 results with Derek du Preez, our Chief Operating Officer. Note that our CEO, Ricus Grimbeek, is on-site at Perkoa in Burkina Faso supporting the efforts on the ground as we are at the critical phase of the search, and is unable to attend today’s call. Moving to slide 4, we announced on April 16th that we experienced a flooding events at our Perkoa mine in Burkina Faso. In the early morning of April 16th, an unprecedented heavy rainfall event occurred. After flooding stopped, the water level in the mine settled at approximately level 520, which is 520 meters from surface.
The total depth to the mine is to level 710. While most workers were able to successfully evacuate the mine, eight workers all of them we’re working below the 520 level, remain uncounted for. We’re continuing our search to locate the eight missing workers, and we are imminently close to reaching the refuge chamber located on level 570. It is an incredibly trying and difficult time for everyone involved, especially the families and communities. Management has been working with representatives from the Burkinabe, minister of mines and quarry’s and multiple national, regional local authorities, as well as the mining community in Burkina Faso, in our search efforts.
While crews have added additional pumping and piping capacity to facilitate de -watering and search efforts. We have mobilized a tremendous amount of equipment and expertise in our response. We are providing support to and are in regular communication with the families of the missing workers and community to ensure the have what they need in these difficult times. Production and cost guidance for Perkoa has been suspended and we’re conducting a detailed investigation process to fully understand the incident before we determine how best to safely proceed. I, on behalf of Trevali, thank everyone in the Trevali team, but particularly the group at Perkoa, our mining contractor [Indiscernible], and the Burkinabe government, who continue to work tirelessly in the search efforts.
Turning to Slide 5, we achieved payable production of 62.3 million pounds in the first quarter, at C1 cash cost of a $1.6 per pound and an all-in sustaining costs of $1.22 per pound of zinc. We note that inflationary pressures will likely add to unit costs volatility this year. Production and cost performance by operation is shown in the table on the bottom right of this slide. our Rosh Pinah and Caribou production guidance is unchanged. We report adjusted EBITDA of $41.4 million in Q1, which was helped along by a strong average price of $1.70 per pound for the quarter.
Net debt increased slightly to $81.8 million in the quarter versus $78 million in Q4, largely due to receivables which increased by $43.7 million in the quarter, some of which settled subsequent to quarter-end. As of April 30th, net debt has reduced to $62.7 million. I’m pleased to announce that we executed a mandate agreement to range a senior secured project finance at this facility of up to a 110 million with Standard Bank towards the potential financing package to refinance existing debt and RP2.0 project funding. We have also received fulsome non-binding expressions of interest from several streaming and royalty companies. All of these are clearly positive steps that Perkoa flooding events has created some uncertainty around the amount and timing of financing. Lastly, the RP2.0 early works program is tracking well on costs and schedule. Now over to Derek for an update on our operations.
Derek Du Preez
Thank you Brendan, turning to Slide 6 for Operations Update. at Rosh Pinah, viable production declined to £17.1 million of zinc from £21.1 million in quarter four, primarily due to a 13% [Indiscernible] aspect guidance and to long to [Indiscernible] mine plan to learn all-in sustaining cost of ID since the bump that decreased 3%, 4% as a result of the late shipment that was delayed from December into January due to the unavailability of ships at the time reflecting a tight shipping market.
We will discuss the [Indiscernible] program on the RP2.0 project in detail later on in the call but we spent $1.5 million in the quarter on the expansion. As announced at the end of March, our consolidated proven and probable mineral reserves tonnage increased by 28% year over the year with [Indiscernible], contributing significantly to the increase. At Perkoa, we achieved a strong production results of £36.3 million of zinc in the quarter due to [Indiscernible]. The willing sustaining costs declined to $1.16% from $1.36% in the fourth quarter. As mentioned earlier, we have suspended production and cost guidance as the current due to the flooding event which took place on April 16th.
At Caribou, production volumes were negatively impacted in Q1 by low stock availability as a result of the due technical challenges encountered in the second half of 2021 that impacted stock availability during the quarter. Caribou delivered £1 million of zinc at an all-in sustaining costs of $2.20 [Indiscernible] this £10.2 million at an all-in sustaining costs of $1.44 in Q4 2021. Productivity enhancements are underway, Improvement in development meters during Q1 unanticipated to translate to an increase in the number of available production starts for the balance of 2022, which will result in a more stable production right.
While the first quarter was weaker than anticipated given the increase of available production starts, we are reconfirming our production guidance of £60 million to £68 million of zinc with high levels of production anticipated in the second half of the year. We take production aside, we continue to advance studies for a conventional mine launch extension beyond 2022 in parallel with investigating the potential to apply FLSmidth Rapid Oxidative leach, abbreviated as ROL technology at Caribou.
The TI is underway for the ROL technology, and it’s anticipated to be completed by the end of June 2022, moving to Slide 7, we are providing an update on Caribou. Recall that Caribou was restarted in Q1 2021 with a two year production plan. The restart of the mine occurred on-time, however production performance was challenged in the ramp-up and towards [Indiscernible] impact in the second hall of 2021 due to the temporary suspension of mining in a localized area because of poor ground conditions. Mine resequencing, and productivity challenges persisted into Q4, 2021, limited ore availability in 2021 due to low equipment availability, development, productivity, and additional ground control requirements have been factored into the schedule for 2022, reproduction expected to be higher in the second half of the year.
To provide information to support mine planning, an extensive ground monitoring campaign was conducted in the quarter, a seismic system was installed, that is now being used to proactively manage ground activity and testing has being conducted to identify alternate types of support. We have also adopted the mix of mining methods to optimize recovery and provide more mining flexibility, and implement a just-on-time development whenever possible in parallel lenses to limit ground deformation over time.
We have two studies underway to guarding exceeding [Indiscernible] with [Indiscernible]. One is looking at the conventional mine life extension. And another one is investigating the potential to use [Indiscernible]. If [Indiscernible] Swiss at all, technology to unlock further value in the golden corporate that’s lost in a conventional flotation prices. On the ROL technology is transfer completion by the end of the first half of this year. In decision on the conventional mine life extension is expected around the same time.
Guidance of 60 to 68 billion pounds of payable zinc reduction are credible in 2022 remains unchanged. This compares to the 40.6 million pounds produced last year. Moving to Slide 8, we are highlighting our early programmer will expand them on the RP2.0 expansion in parallel with project financing initiatives, we continue to advance certain aspects of DyNet and 11 million or P2P 0 expansion project in order to maintain the project schedule and mitigate the risks associated with the project as outlined in the feasibility study fault on August 17, 2021.
The Early Works program, which has a 2022 capital budget of $20 million, is expected to be financed from internal cash flows and progress, the of Q1 included, delivery of mobile equipment to site has commenced, upgrade of the bulk power supply system in collaboration with Nam-Power estimates gains at adjudications and purchase orders, have been placed for the selected long lead items for the price backfill plant, adjudication of tender for earthworks and civil construction is in the final stages. Engineering design for the processing plant upgrades has progressed to a stage that allows us to commence within quality productions for long lead items. We would like to reiterate that the project is tracking well, at least on time and on budget with that, over to you, Brendan.
Thank you, Derek. On Slide 9, I would like to update you on the latest developments on our financing initiative with caveats that the Perkoa flooding event has added some complexity and uncertainty related to the size and timing of the financing package. Recall that our key objective is to secure project financing for the RP2.0 Expansion Project and refinanced existing corporate debt, which matures in September 2022. Prior to the Perkoa flooding event, we had targeted approximately $200 million for a comprehensive financing package for the company, and we’re considering several opportunities, including project finance, debt, subordinated debt, a silver stream on Rosh Pinah’s silver production, and other financing sources.
As a result of the flash flooding event, the total amount of the financing package and timing of completion is not as clear cut as it once was and the $200 million target can no longer be relied upon. Regardless, we have made significant progress on our financing. Specifically, we have managed Standard Bank to arrange a $110 million senior secured financing facility. Standard Bank has agreed to seek credit approval to provide up to a 100% of the amount of the loan facility and to arrange and export credit agency backed equipment financing facility for a significant portion of the $110 million loan facility.
This component extends the tenure of the facility at favorable interest rates to us. As a reminder and announced previously, our off-taker and largest shareholder Glencore, has provided a conditional support for $33 million for expansion plans. We appreciate the support. We have also received attractive non-binding expressions of interest from several streaming and royalty companies in the order of $40 million to $50 million, in addition to support from mining focused alternative lenders. Like the RP2.0 project, the financing initiative is tracking well, we’ll continue to keep the market updated as developments are made.
Moving to Slide 10, the average LME zinc price during Q1, 2022 was $1.70 per pound compared to a $1.53 per pound in Q4. Q1, 2022 revenue increased by 3% to $93.1 million compared to Q4 and is attributed to the following. Approximately an 11% increase in the LME zinc price, a higher lead payable sold due to the timing of shipments, which was partially offset by lower metal zinc sales volumes, and higher freight, smelting and refining charges. C1 cash cost and all in sustaining costs of $1.6 and $1.22 per pound, respectively, 3% and 5% decreases from the prior quarter are due to higher byproduct credits, which more than offset higher treatment and freight charges, and impact the inflationary costs.
Net debt increased to $81.8 million in Q1 versus $78 million in Q4, 2021, while receivables increased by $43.7 million, a significant amount of which were collected in April, which reduces the net debt position to $62.7 million as of April 30th, 2022, annual treatment charge benchmark rates for zinc finalized at $230 per tonne, with an escalator of +5% for LME zinc price above $1.72 per pound. This compares to a 159 per tonne in 2021 excluding the impact of the escalator, treatment charges rose approximately 45% year-over-year.
These charges represent approximately 35% of our C1 cash costs. As I mentioned earlier, we expect further volatility on our operating unit costs at Rosh Pinna and Caribou, reflecting higher raw material costs, energy costs, zinc treatment charges, freight rates, and the increase in commodity prices that in many cases resulted higher-priced link royalties at our operations. Finally, we generated positive adjusted earnings per share of $0.07 for the quarter versus $0.01 in Q4 2021. Moving to Slide 11. Q1 2022, receivables increased by $43.7 million over Q4 2021 to a total of $96.1 million due to the following; an increase in open metal sales and the reevaluation price of zinc, which increased from $52 to $280 per pound.
This increase to receivables occurred while zinc inventories latest levels remained relatively flat versus the prior quarter. By the end of April, we collected $61.4 million in receivables, which contributed to reducing our net debt to $62.7 million on April 30th. We continue to see a tight global shipping market and we expect periodic delays to sales in 2022. On Slide 12, I would like to speak about the zinc price trends. This is a longer-term zinc price chart starting in 2008, it is a volatile market with rare periods of price stability that you can observe by looking at the zinc price in the 2012 and 2015 time period due to China’s influence in managing the market.
As prices weakened in 2015 to 2016, the industry curtailed production and then when fundamentals improved, we witnessed a significant price increase into 2018, which attracted speculators and new supply zinc concentrates. This led to a price correction in 2019 and a brief recovery before COVID-19 hit and drove the zinc price down to $0.82 per pound in March of 2020. 2021 started the year with concentrate shortages mainly due to COVID constraints and zinc prices recovered and now we start this year with low global inventories and zinc smelter curtailments due to higher energy prices and the zinc price that is now traded above $2 per pound a month ago.
But has recently retraced to a $1.60 a pound. More on this in the next slide. On Slide 13, you can see the impact to stock levels and price in the top right hand chart, which shows LME and Shanghai inventory and zinc price since 2007. Current themes in the refined zinc market include high energy prices in Europe continue to be among the biggest issues impacting their refined zinc metal market. Smelter output in Europe, 16% of global output is being cut in the near-term, but two smelters being placed on care and maintenance from January 2022 due to higher power costs.
Refine zinc inventories remained low by historical standards and are expected to sufficiently meet global demand for eight days. Observe also that the LME inventory level for zinc is craft lower in recent weeks, while Shanghai levels have remained essentially flat. At some point soon we expect to see more metal moved from the Asian inventory to Europe to satisfy demand. Lastly, these issues have very recently been overshadowed by rising interest rate risks along with recession risk. Spot zinc premiums remain elevated by approximately $0.20 per pound in Europe and approximately $0.26 per pound in USA. We believe this low inventory, high spot premium dynamic is supportive for zinc prices in 2022.
However, rising interest rates may add pressures to the zinc in the short-term as evidenced by the recent price decline to $1.60 per pound prevailed into the concentrate market in treatment charges. The lower right line graph on the slide shows benchmark treatment charges, imported spot treatment charges into China and domestic treatment charges into China from 2017. The 2022 annual zinc benchmark treatment charge rose 45% to $230 per tonne, versus a $159 per tonne last year, and $300 per tonne in 2020.
Notably the 2022 benchmark settlement includes an escalator of plus 5% for an LME zinc price above $1.72 per pound. From a base treatment charge of $230 per tonne for every $0.20 per pound increase above LME zinc price $1.72 per pound. Trevali’s cost impact is approximately $0.02 per pound of payable zinc produced. Concentrates inventory of Chinese smelters is reported to be low and Chinese smelters are talking of bringing forward maintenance shutdowns if they can’t purchase important concentrate at an economic treatment charge. Last refined zinc production through this period supports an elevated zinc price, in our opinion.
Turning to our final slide, Slide 14, our search efforts continue at Perkoa and we will provide stakeholder updates as appropriate. In the meantime, we’ve suspended production and cost guidance for 2022 until we can determine how best to safely proceed. We reduced net debt by $19.1 million to 62.7 million as of April 30th, 2022. We’re advancing well on project financing with mandating of a senior secured financing facility for up to a 110 million with Standard Bank plus non-binding offers from streaming ROL companies of for $40 to $50 million and Glencore conditional financing for $33 million.
Perkoa’s current status creates uncertainty around the amount in the timing of potential comprehensive financing package. The RP2.0 Early Works program is tracking well and cost and schedule was $2.4 million of the $20 million budget expanded at the end of April and with Early Works expected to be funded from internal cash flows. Consolidate improvement in problem in reserve tonnage increased by 4.9 million tons, a 28% increase year-over-year across the asset portfolio and effective December 31st, 2021. The continuation of Caribou is Rapid Oxidative Leach NI 43-101 TA technical report is expected by the end of H1 2022 and in mine life extension decision in the coming months. We will continue to provide further updates as we progress throughout the year. With that, Erica, over to you for questions.
Thank you the, floor is now open for questions. There will now be a Q&A session. [Operator Instructions]. I would like to remind everyone that this conference call is being recorded. Your first question comes from the line of Brian MacArthur from Raymond James. Your line is open.
Good morning, good afternoon. My question has to do with the hedging book. Can you just quickly go through, you talked about how — obviously there’s 21 months originally in $1.25 at Caribou, but now we’re behind on the deliveries as I read there’s 20.6 million pounds. Does that mean going forward, you still have — have you been booking any pounds at the 1.25 the last quarter? Let’s put it that way. And then secondly, does that mean going forward there’s the original amounts that’s due over the next nine months at $1.25 and then an additional 20.6 million pounds are going to be sold 1.25? Can you just go through that for me, please?
Yes. Thanks, Brian, for the question. So yes. Your precise on the fact that, yes, we have £20 million of zinc that’s currently in depth as it relates to our fixed pricing in Caribou. We have production guidance to £60 million to £68 million of zinc at Caribou for the rest of the year and that remains unchanged. So we do you expect to be continuing to reduce that deficit over the remainder of the year. And just in relation to the remaining deficit that you can do the math on based on our production guidance and that 20 million current deficit, we are investing gating alternatives to settle the production shortfall on the fixed pricing arrangement, including, but not limited to potentially extending the mine life beyond 2022 as described in the conventional mine life extension discussion or just financially settling the difference.
Right. So if I looked at this going forward, originally, you would have had on a monthly basis about £49 million over the next nine month, 125. So now basically you’re saying, you have the 20.6 to that, so effectively all in Caribou going forward for rest of the year, it’s full that 125 — I mean, effectively everything is going to be full at 125, is that right? Plus a little bit from somewhere else to make up the difference?
You’ve got it right, Brian. That’s correct.
And just to be clear, did you book — so that’s the cash basis but for an accounting basis because I’m trying to figure this quarter was was everything sold at the average realized price this quarter so that the effect of the hedge book didn’t have any impact on this quarter, is that right or would part of it was there outflow a hedge factor in this quarter as well too, please?
We’ve settled the Caribou production at $1.25. So that just flows right through our revenue line. And then the deficit we’ve been rolling forward through, roll-forward costs that are fairly minimal.
Great. Thanks very much, Brendan. That’s very helpful.
Your next question comes from the line of Orest Wowkodaw from Scotiabank. Your line is open.
Good afternoon. I’m curious if you can provide us a bit more detail on the. financing package or potential package related to the expansion at Rosh Pinah and you’ve alluded to that there could be some uncertainty here because of what’s happening at Perkoa. Can you give us a bit of color like was Perkoa going to be used as some security for that package or is it just an issue of the state of your balance sheet or your go-forward financial metrics that’s more of the issue?
Yes. Thanks Q – Orest Wowkodaw and I appreciate the question. So as mentioned, we were targeting a financing package for $200 million and so a big portion of that financing package relates to the RP2.0 expansion project. Simple terms, they’re thinking about a $100 million of that is for RP2.0 and there are 100 or so is for the existing debt. And so when looking at that package, the organic cash flow is expected from Perkoa. We we’re going to be a significant portion to pay down that 100 million of existing debt. And so with it being offline currently and given the fact it’s too early to comment on a return production at Perkoa, that number that we were trying to solve for 200 million is in question. And then the timing of putting the package together as described earlier on the call with all those component parts is just — is uncertain at this time.
I see. Then your credit facility, I think matures in the third quarter of this year?
Yeah, in September 2022, as well as our Glencore facility that we have outstanding for $13 million.
I see. Should we be concerned that you may run into a liquidity issue if it takes longer to sort out the future of Perkoa here, or I don’t know if — or are there already discussions ongoing for some kind of extension on the maturity?
We’re currently in discussions with our existing RCF lenders, as well as Glencore on possible arrangements around their full comprehensive financing package. So we were already well in conversation with them before the Perkoa flooding events on April 16th. So we continue to have those conversations in and around any potential extension to the existing debt.
Okay. And then finally for me, I realize the focus at Perkoa is on search and rescue, and rightfully so. But I am curious on when you think or when the company thinks maybe in a position to be able to assess the future of Perkoa and whether there is a viable plan to restart or not, from a timing perspective?
Yeah, I would like to really appreciate that question and it’s absolutely on everyone’s mind, but it’s too early to comment on a return to production as our focus is on the search for our mining colleagues — missing colleague, the de -watering efforts and investigating the event.
Okay. Okay. Well, best of luck. Thank you.
Your next question comes from the line of Stefan Ioannou from Cormark Securities. Your line is open.
Great. Thank you very much guys. I mean, obviously there’s a lot of moving parts and maybe just a bit further to Q – Orest Wowkodaw’ question. Just looking at the future of the company, obviously, Rosh Pinna, the expansion there is one of the bright spots, but beyond that Caribou still seems a bit uncertain, Perkoa a big question mark now. Do you have a slight line or do you have any time right now, our capacity to think about maybe other potential bolt – ons to get this backup to more than “mine operation “, or where are you in that front from a growth point-of-view?
Yes, Stefan, great question. Of course, we’re always looking at external opportunities and outside the organic portfolio. But right now we’re very much focused on things on the ground at Perkoa and Burkina Faso. And secondly, getting our financing and balance sheet in order, and those are two key priorities.
Okay. Sure. Thanks very much, guys.
[Operator Instructions]. Your next question comes from the line of Craig Hutchison from TD Bank. Your line is open.
Good morning. Good afternoon. Just a question on Caribou with respect to geo -technical issues. I know you guys are obviously doing some improving development advance, some of your stopes there to try to get ahead of things. When this issue happened, I think back in 2018, there was a plan to try and get about six months ahead, if I recall, in terms of development, so you have fee to the [Indiscernible]. Could we expect a similar per share, maybe boosting CapEx to try and catch up and get ahead of things? And maybe just any color on kind of what we should expect in terms of mining rates here in Q2 or for the balance of the year will be helpful.
Yes. Thanks, Craig. And maybe we’ll just take the first part of the question and pass it to Derek to provide some of the color. We’re definitely looking at the Caribou mine life extension decision. I mean, as you recall, we did restart Caribou with the tier mine plan out to the end of December of this year. And so, I can say that those — that business case is being looked at very closely, and so there is potentially additional capital as part of that plan, is pretty modest in minor. But that is definitely something that’s being considered. And Derek will let you ask or provide more color on some of the technical questions from Craig.
Derek Du Preez
Perfect and thanks for the question. My [Indiscernible] Q1 of this year and also towards some day and of last year, the focus was on doing additional development to provide the additional mining flexibility and a lot of oil production for the first quarter, also came from oil development. And we now end up realizing that we’ve got a lot more prices and stocks available and multi deliver that we need, and to provide consistent and to the more going forward. And so, as they are pretty this comment and to guard institute food out these days [Indiscernible] and we’re reconfirming that change to debt guidance and we’ve got a flexibility to pull the rest of the year based on the development we’ve done already in Q4 and in Q1 of this year. [Indiscernible]
Yes, thank you. And Rosh Pinna, just in terms of the feasibility study, capital last year, I think it was 111, any — can you give us a guidance terms of what percentage you have, kind of committed or have visibility on at this point on that original budget?
Yes. Thanks, Craig. And so with RP2.0 we have, is per our presentation,. we’ve expanded $2.4 million of the $20 million early works. And Derek, maybe I’ll call in you just to provide the committed number if you have it handy?
Derek Du Preez
Yes. Thanks. And then in addition to that recent committed and $3 million additional to that.
I see you’re still confident even as inflation environment that number really hasn’t moved much.
Yes, we continue to assess the inflationary pressures related to the cost of RP2.0. And it’s, it’s premature to provide a detailed assessment of that capital estimate update and something we’re looking at, and obviously very focused on given the volatility in the wider market.
Understood. Thanks for taking my questions.
That concludes the question-and-answer portion of the call, and the call is now turn it back to the management for any closing comments.
Thank you, Operator, and thank you to our investors who have participated in the call today. This does conclude our first-quarter results conference call. We look forward to providing you with further updates as they come available. Thank you so much and good day.
This concludes today’s call. You may disconnect your line.