Trevali Mining Corporation (OTCQX:TREVF) Q1 2019 Results Conference Call May 6, 2019 11:00 AM ET
Alex Terentiew - SVP, Corporate Development and IR
Ricus Grimbeek - President and CEO
Gerbrand Van Heerden - CFO
Conference Call Participants
Ralph Profiti - Eight Capital
Orest Wowkodaw - Scotiabank
Stefan Ioannou - Cormark Securities
Craig Hutchison - TD Bank
Oscar Cabrera - CIBC
Jackie Przybylowski - BMO
Good morning, ladies and gentlemen. And welcome to the Trevali Mining Corporation Q1 2019 Financial and Earnings Conference Call. At this time, all the lines are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session with instructions provided. I would like to remind everyone that this conference call is being recorded.
I would now like to turn the call to Alex Terentiew, Trevali's Senior Vice President of Corporate Development and Investor Relations. You may begin your conference.
Thank you, Julie. Good morning, everyone, and welcome to Trevali Mining's first quarter 2019 Financial and Operating Results Conference Call. Trevali's first quarter results were issued this morning and are available both on our website at www.trevali.com and online at SEDAR. Additionally, a corresponding news release was issued with our financial results to review the Company’s financial performance, as well as production and sales from our four mines. In conjunction with this conference call, there is an accompanying presentation available under the Events and Presentation section of our website under the Investors section and also directly on our webcast as well.
Main presenter today is Ricus Grimbeek, Trevali's New President and CEO, who will be accompanied by Gerbrand Van Heerden, Trevali's Chief Financial Officer; and myself, Alex Terentiew, Trevali's Senior Vice President of Corporate Development and IR.
In today's presentation, there may be some forward-looking statements made and I draw your attention to the customary disclosure in our presentation materials.
Now, I'll turn the call over to Ricus.
Thank you, Alex, and good morning and good afternoon and good evening to everyone on the line.
I think if we’ll move on to the slide that shows my beautiful face, and I'll give you a little bit of my background. I'm a mining engineer. I've worked in whole bunch of different commodities across the world. Most recently was the Chief Operating Officer for the North Atlantic at Vale, running the nickel business; before that Chief Operating Officer for South32, the Australian operations; and before that multiple roles in different commodities in different parts of the world.
Why did I join Trevali? This is an amazing Company that I'm so excited and honored to be part of. What I've seen in my first couple of weeks have been very exciting. I can see a company that I thought -- when I looked at from the outside thought that this would be a great opportunity to both the mining company of the future and what I’ve seen in the last couple of weeks has really just supported that. I'm very excited about what we can do and how we can create something that is going to be the world leader in terms of safety, sustainability, cost efficiency, and ultimately I would love us to be seen as the best underground miners in the world.
The plan for next few months, I'll keep on visiting the operations. I will meet as many people as I can, including all our stakeholders and the government officials, communities, unions and employees, wherever I go. And I will also -- in a bit later, I'll just reiterate again that this is -- the focus for now is on keeping the ship steady, being really effective in reducing our costs, keeping the operations safe, and delivering on the promises.
Turning on to the next slides, give you a bit of an overview of the first quarter. Trevali's focus on safety resulted in a reduction of lost-time injuries, with one incident recorded in the first quarter of 2019, down from 11 in the same prior time or prior quarter last year.
Operationally, it was a solid quarter with payable metal production of 100 million pounds of zinc, 11.5 million pounds of lead and 0.4 million ounces of silver. Annual zinc production remains on track to achieve 2019 guidance of between 361 million and 401 million payable ounces.
The sites did very well on the cost front with on-site operating cost of $70 per ton milled, down 9% from last quarter. Three of the four mines delivered strong on-site cost performance at the bottom end or below the annual cost guidance.
C1 cash costs and all-inclusive sustaining costs increased in the quarter, driven by zinc concentrate treatment charges and costs associated with selling additional concentrate. On the sales front, we successfully reduced on-site concentrate stockpiles through improved logistics, leading to zinc sales of 125.4 million pounds in the quarter. This combined with strong on-site performance to deliver adjusted EBIT of $51 million, up from $49 million and $41 million in the first and fourth quarters of 2018, respectively.
I will now pass it over to Gerbrand to take you through some of the financial figures.
Gerbrand Van Heerden
Thank you, Ricus.
We’re certainly very excited with our new CEO and what this is going to hold for the future of Trevali.
On slide six, we provide more detail on the quarterly performance and put into context some of the improvements over the prior quarters. Despite higher treatment charges, quarterly net revenues are higher since the second quarter of 2018, largely reflecting an enhanced focus on logistics that successfully reduced on-site concentrate inventories. Net sales also included positive provisional pricing adjustment on zinc sales of 5.7 million on the back of stronger commodity prices. Of course, with the higher sales in quarter one, we had about 175 million pounds of zinc provisionally priced at quarter end. Some of those sales closed in April already, but others are closing shortly. And April zinc price was slightly higher than the average March price. So, there were only slight adjustments there. As the quarter progresses, we expect to get down to a more normal level.
On the operating front, higher mill throughput and improved recovery shall offset slightly lower grades quarter-over-quarter delivering total production in line with recent quarters.
Paging over to slide seven. Slide seven is a recap of our 2019 consolidated production and cost guidance which remains unchanged. We want to note that while quarter one was a strong quarter, we do expect some variability throughout the year. The production is on track to achieve our guidance of 360 million to over 400 million pounds of payable zinc.
Head grades at Rosh Pinah are expected to decline towards 8% over the remainder of the year. But we also expect to see grade improvements at Perkoa in Q2 and throughput improvements, obviously at Caribou.
Onsite operating costs are similarly tracking well to start the year with consolidated costs at the bottom end of annual guidance. Relative to guidance and Santander and Rosh Pinah delivered site cost below annual guidance with Perkoa at the bottom end of targeted range. Caribou was high as expected but it's forecast come down over the course of 2019.
Zinc concentrate treatment charges however are substantially higher than 2018 and also in guidance was set at the start of the year. And this will add approximately $0.07 per pound to cash cost for the year to be expected.
The mines, as we've noted, are performing well. And once DC [ph] terms are finalized, we expect to incorporate year-to-date results and provide updated operating cost guidance for our second quarter results. 2019 capital and exploration expenditure guidance remains unchanged.
Paging over to slide eight. We want to highlight Trevali's strong financial position, certainly something that's standing as well for the Company. We ended the first quarter with a healthy balance sheet. We're mainly focused on reducing debt levels, repaid $40 million in principal during the quarter, obviously reducing net debt and total debt by 8% and 23% respectively. At the end of March, liquidity position remained strong with just below $170 million available and undrawn on our revolving credit facility.
Reasonable portion of our sales were made at the end of the quarter with cash coming early in April, so further improving our net debt position as we go into quarter two. We have also intermittently been active on our normal course issuer bid, buying back approximately 2.5 million shares so far this year. We will continue to monitor the zinc price and operating performance as well as our funding needs and will decide accordingly if and how much we buy back.
That said, I will now pass over to Alex to make some comments on the zinc market. Thanks, Alex.
Thank you, Gerbrand.
So, this is on Slide nine. As we've noted, the zinc concentrate treatment charges have risen significantly since 2018 with market expectations now in the range of $245 a ton, that's up substantially from the $147 per ton benchmark last year. But, I think it's important to put the TC rise into context. If we look at the share of recovered zinc prices the miners and smelters get, and it's a good graphic to look at. 2017 and 2018 were perhaps anomalous, I’d say very much in favor of the miners. But, if you look at historic ratios and the trend over the past two decades, despite the higher TC this year, miners are still getting about 70% of the recovered zinc price, which is still well above historic ratio in favor of the miners.
On the zinc market and price, LME inventories have been rising over the past couple of weeks, but inventories are still at historically very low levels. Market is anticipating higher treatment charges and a good zinc price to incentivize growth and refined output. But most of this growth is anticipated to come from China. China, which has the greater share of refining capacity of 40% is however still strictly enforcing environmental compliance and limiting many of the smaller scale smelters from operating. In Q1, Chinese refined output was actually down 9.7% year-over-year. So, China continues to surprise the downside on supply. And overall when we look at the market this year, we do see good support for prices at current levels.
And with that, I’ll pass it over to Ricus, to talk a little bit more about the operations.
Thank you, Alex.
And on the next couple of slides, I'll give a little bit more detail on the specific operations. Slide 11, we start with Rosh Pinah, Caribou and Santander all delivered higher zinc production over the last quarter, with Perkoa the exception, where we had the slower start to the year due to a declining grade. We originally anticipated mining higher grades in quarter one, with lower grades in quarter two, but with changes in slop sequencing, we now expect quarter two to have the higher grades.
On the cost front, the sites performed very well, with three of the four mines delivering onsite operating costs per ton at the bottom end of or below the annual guidance. Aside from an overall focus on cost control, improved planning at Rosh Pinah and blending of the ore and lower than expected underground water pumping rates at Santander helped keep costs down. Costs at Caribou remained high, but have come down from quarter four. Costs are expected to decline over the course of 2019, and we still think that -- it will be within guidance.
On the cash cost side, it's important to reiterate that the C1 cost at Perkoa and Rosh Pinah include cost associated with sales of additional inventory. And this has been included and spread over the production numbers for the quarter. Sales volatility has been high over the past year and a half, and we’ve made substantial efforts to improve our focus on transportation and sales logistics and reduce inventories. Results have been positive with concentrate inventories significantly reduced at Perkoa and Rosh Pinah, in the quarter, leading to strong quarterly sales of 125 million pounds of zinc.
Looking forward, there are few key initiatives to highlight. Firstly, the heavy fuel oil power plants conversion at Perkoa is nearing completion and is expected to reduce operating costs once operational. Components for the mill upgrade at Rosh Pinah have been ordered and remain on track for installation in the second half of 2019, with concentrate [indiscernible] in Q4. In the meantime, increased efficiencies continue to be realized from improving planning or blending and great control strategies, and underground production development saw strong advancements in the quarter.
The RP2.0 optimization study is ongoing and is expected to be completed in the second half of 2019. At Caribou , the mine is returning to normal production levels and development rates have started to catch up to where we expect it to be. I also want to note that the strong first quarter recoveries at Caribou in the quarter, which is 78%, [ph] and this was a record quarter for recoveries. Also, the mill reliability is improved quite significantly and that's in the outcome of a very strong focus on the maintenance -- scheduled maintenance. The mining review at Caribou is targeted for to be completed later this quarter.
And lastly at Santander, a water management optimization study is being undertaken, expected to be completed later this quarter. The mine is well-positioned for the rest of 2019, with all the development in place for the remainder of the year.
We’ll go to the next slide, moving to slide 13. We wanted to give you a quick update on exploration. In 2019, our focus remains primarily on identifying new orebodies in the vicinity of our current operations, but this is directly mainly at Perkoa and Santander.
About a quarter of our annual budget was spent in the first quarter with additional spending above the $8 million budget possible contingent throughout the year. At Santander we were successfully -- we successfully converted a portion of the pipe deposits to a 2.8 million tons 6.8% zinc indicated resource. And I believe the scope increases further, but more work needs to be done to confirm the economic potential. We have plans to test additional targets in the area pending approval of surface permits. At Perkoa, we now have a strong team in place after building a team from scratch last year. We continue to conduct multidisciplinary geology, geochemical and geophysical surveys and have had success extending the depth of the current deposits. We've also had some mineralization in the regional targets, focusing along the 25 kilometers strike of Perkoa, which as illustrated, the Perkoa is not an isolated system.
So to wrap up on slide 14, I want to once again reemphasize how excited I am to be part of this Company and building a world-class, strong mining company of the future. We started 2019 solidly and the set of operating and financial results that look healthy as well as the balance sheet that makes me feel quite confident that this Company will go a long way.
Thank you again for listening. And thank you for taking the time to dial in. We are now going to open it up for questions and answers.
[Operator Instructions] Your first question comes from Ralph Profiti from Eight Capital. Your line is open.
Good morning, everyone. Thanks for taking my questions. Two for me , please, Ricus, if I may. The operating cost per ton was a positive stand out for me in the quarter. But, I understand that there's a lot of moving parts in 2019. So, in the context of this unit cost guidance that's currently out there for the year, can you talk maybe a little bit about the most impactful, say one or two items in the off-site costs that’s keeping you in this $69 to $76 ton range, and where this $0.07 a pound on C1 is coming from? Thanks very much.
Ralph, thank you for the question. And yes, I'll answer a part of it, and I’ll hand it over to Gerbrand to give a bit more detail. Now, it's really important for us to focus our attention on the cost that we control directly. And so, what I've seen in the first quarter is the ability for us to really start knuckling down and getting our arms around managing our cost on sites. And we also started some very good work on focusing on the logistics side of our business. And you can expect us to do a lot more in that space in the coming quarters. And the more offsite costs, I will ask Gerbrand to maybe give you a bit more flavor on this side?
Gerbrand Van Heerden
Thank you, Ricus. Ralph, to continue on that front, so I mean, we do expect to play industry benchmark terms as we go into 2019 and obviously we started providing for that in 2018 from a prudent point of view. We have assumed, like 2018 that 2019 will go up, unfortunately not to the extent that it has actually turned out to be and still in the process of being finalized. Like Ricus said, the focus is on our operating costs where we can make a significant impact on the cost and we’ve got a couple of projects ongoing at the moment that will start to deliver in the course of quarter 2 and for the rest of the year. And obviously, with that ongoing focus on manageable costs for the rest of the year, that is where most of our attention will go.
Okay. Yes. Thanks for that. Very helpful. If I can ask a follow-up, are you currently being penalized for the higher iron content in the Perkoa concentrate? Is this still within spec or is this something that at some point is going to need to be addressed?
I think, Ralph, we have got certain specifications that we need to meet. We know that the future of the Perkoa orebodies will have some higher iron content. So, it's quite prudent on us to just keep on focusing on getting the concentrate specs to where it should be. I think, it will be possible to stay within the specifications that we need to. I don't see any big issues for us in the future in that space.
Your next question comes from the line of Orest Wowkodaw of Scotiabank. Your line is open.
Hi. Good morning. Ricus, I wanted to get your view, coming in as a new set of eyes and new CEO. If you had a chance to really review the Company's portfolio in terms of the four operating lines. And I'm wondering if you're comfortable with the four assets that you have or whether you can see may be some strategic changes with the asset base, both in terms of potentially divesting any of the assets or maybe adding new ones to the portfolio? Thank you.
Thanks Orest. I'm not surprised you asked that question. And I'll start with the four assets we have. The great thing is they're all cash flow positive. And I think as we always will look at finding ways to improve them, I believe there are ways to even do better than what we have today with our current assets. I'm also going to take the next 90 days I think is what MBAs tell you to do and the next 90 days to study the operations in more depth. We'll be taking -- and we started conversations at a Board level around where do we want to take Trevali. And you can expect me to come back to you in the next quarter or second half of this year with a review of the Company. I'll make sure that you get a good sense of how I think about the different operations and how I think about the market and how I see the Company going forward. But I'm very excited with the four operations. We’ve got cash flow positive, we’ve got great people working at those operations. We have a great management team that are super keen to build a world class business, and there are so many opportunities that we can tap into in the next couple of quarters.
So, I can't really expand much more than that, but I'll leave it at that point.
Okay. Fair enough. We'll give you some time. And as a follow up, your cost guidance per ton at Perkoa I think was $106 to $117 and you did $106 in Q1. Given that you are making changes to the power in Q2, what's going to drive those costs higher in the rest of the year or is that guidance likely to come down?
We said, we are going to do update on guidance at the end of second quarter, but you have mining -- you always go deeper. So, you can expect us to mine something shallower, so we're going to be seeing higher cost in that space. I think if you look what we have given the guidance, we've hit the bottom end of that. We know that the power plant is coming in, so that should be little bit of a positive. I think it’ll also go deeper, so that'll be a negative again. So, I think roughly where we are now is what we can tell you is the right space. And then, we'll come back in the next quarter with some more detail on the cost guidance.
Gerbrand, is there anything else you wanted to add?
Gerbrand Van Heerden
Maybe just as an additional on top of that. We consistently looking Orest that that's why improving costs at our site, specifically Perkoa . There is definitely some opportunity. And some things have started coming through early parts of quarter two, reduction on the underground power consumption overall, which is positive, something that we -- better than we anticipated. And obviously the commissioning of the HFO plant is in progress, so certainly, looking for at a good cost performance from that specific site. But yes, we are consistently challenging inflationary pressures and onsite in West Africa.
[Operator Instructions] Your next question comes from the line of Stefan Ioannou from Cormark Securities. Your line is now open.
Just two quick questions on the two operations, on Santander, the cost looked quite good. Was that largely just a reflection of the improved pumping? Or I mean, now you're owner operated there. And I know there was some talk about improving the power infrastructure. Is it all those things speeding in, or should we expect to see even further cost improvements, going forward?
Stefan, Gerbrand here, I'll cover that one. We certainly had improved through quarter, management methods coming off from the first quarter. So it's really very looking positive from that front and we will try and maintain that operating procedure. And obviously, yes, there is opportunity and we continuing to work hard at those four, Santander specifically.
And then just over at Caribou, obviously, is it was good to see the recovery up towards at least in the high 70s range. Do you think you've cracked the nut now in terms of the winter conditions affecting recovery? Or is there still improvement there? Like, was there something specific that that helped you make that step function change? Or is there still more to do here?
I think the team did a really good job this winter. Just to give you a better sense, I used to run the Caribou business up in the far North of Canada. And I can tell you that the winter conditions are very, very different to the rest of the year. So I was really impressed with what they've done during the winter. But the issues that they've changed quality the water and that seems to have improved quite a bit. But it's also a lot to do with the maintenance. And we're getting some stability in the plants because every time you stop a plant and you lose recovery on the [shareholders] of the startup and the shut down. So there's definitely been able to improve the reliability of the plant. And I think you can expect that to grow through the rest of the year and to the next winter as well.
Your next question comes from the line of Craig Hutchison from TD Bank. Your line is open.
Maybe just a follow-up question on Santander. I think CapEx guidance this year was around $21 million, in Q1 you're I think just less than $3 million. Just given some of the improvements you've seen in terms of the water optimization and management. Do you think you're still going to be at that $21 million for the year or can that number come in much later?
Mining we are quite good at not spending capital in the first quarter and then catching up for the rest of the year. And I'd love to see us change over the next year or so, that’s more and more consistently spend money on the certain profile. So my expectation is that we’re still equipped in the guidance at all operations in terms of capital spend.
So what would be the heavy quarter for the spend at Santander?
It's hard to say. But you would see -- normally you see these things ramp up and gradually second, third, fourth quarter. But I can promise you the one thing I'll be doing and I've started doing is getting very deeply involved in understanding what we're going to spend capital dollars on. And I want to be able to ensure that every single dollar spent in the right place gives us the right returns and both from a return side but also sustainability side, if you don't want to end up starving the operations from capital and then end up paying for that in the future. So you can rest assured that I'll be looking at that in a lot of detail. Gerbrand, anything you wanted to add?
Gerbrand Van Heerden
Obviously, already got the message from Ricus, we've started implementing process to enhance and optimize our capital spend, and emphasis on actually spending our capital in the best places for us to return to the business.
Your next question comes from the line of David Kay, Private Investor. Your line is open.
My question refers to the share buyback program. Specifically, you had committed I think $20 million buyback the number of shares that would equate to that in the market value. Today, the shares are trading at $0.35. So my question is do you believe the shares are undervalued today at that price? And if so, why would you not commit more funds to buyback more shares?
Gerbrand Van Heerden
Thank you, David. I'll answer your question the best I can. So obviously, in terms of the NCIB, yes, we have communicated to the market that we've earmarked $20 million over the course of 12 months plus minus. We certainly want to keep on continuing assessing that situation in terms of our current cash flow requirements; number one, the share price like you said, we do believe is undervalued; and number three, in terms of commodity price outlook. And management will keep on addressing the NCIB on a daily, weekly basis, assessing it from that point of view. So selectively there, we are looking at it. And decisions will be made at the right time basically in a nutshell.
I was looking at, when you started the program to today, you probably bought back more shares at a higher price than what the shares are trading for today. So I don't -- I'm just trying to get my thoughts together on if you're buying back more shares at $0.45, $0.46 as opposed to $0.35. I just can't wrap my brain around that.
Gerbrand Van Heerden
Exactly for that reason, David, that we why are we assessing it on a continuing basis, so obviously we’ve got eye out on the NCIB and what will be going forward.
So I guess my last question is, are you committed to buying back at least the $20 million that you had committed?
Gerbrand Van Heerden
The commitment was that we cited up to $20 million so obviously, considering the commodity prices, our share price, as well as the future cash flow. So David, I think we'll stick to that as an answer and obviously continuously monitoring it.
Yes, I'm just looking at the company trying to leave, protect, and ultimately enhance shareholder value here.
Thank you, David. So we decided to take that and it's -- I think Gerbrand has explained that it's a process. We said we're going to be buying up to $20 million. We're not here to fix stock at the lowest point. We just buy that and when it comes on to markets. And we put our views as we said on what's the value of the company should be and that's how we're buying back stock at the moment.
Your next question comes from the line of Oscar Cabrera from CIBC. Your line is open.
Thank you for good morning, everyone. And Ricus welcome. Good luck with your new job and look forward to hearing what updates you have later in the year. So I was wondering if you could comment on the focus that you're having on sales logistics contributing to stronger sales. Do you think that this can have an effect on your costs?
Thanks, Oscar. Thanks for the question and thanks for the well wishes. So for me when I say we're going to focus on logistics. We've already shown in the first quarter that we have the ability to clean out the stockpiles when we need to. It doesn't make any sense to have big stockpiles of product sitting around that you can sell. So it's important for us to move the stocks when we could use it. Part of what we need what you will see us doing over the next coming quarters is a laser like focus on understanding exactly what is where in our logistics system and as from a volume and equality and a cost perspective. We will be utilizing our scale to get the best possible logistics, transport costs, scheduling costs, understanding exactly what the quality of the product is that we produce, so that we can also negotiate the best possible costs from our customers. So, I think to answer your question in a short way, yes, there won't be -- this really potential to reduce costs but it is also just running a world class business is what we want to set up in the logistic side.
And then just following up on that if I may, you talk about inventories at Perkoa and Rosh Pinah reduced to normal levels. What are those? And I guess what on your answers you're suggesting that there's no seasonality on your operations in terms of just getting product out on your operations in Africa?
Gerbrand Van Heerden
Oscar, if I -- its Gerbrand here. There is from in the value chain there is I mean a value or total quantity of say between 25,000 and 35,000 pounds in the system at all times. We've optimized that to a reasonable little now and obviously likely to say it will keep on optimizing and pushing to improve on that front. But from now on I think we are going to close -- track closer to our production levels and that's the aim. If there's any upside, we'll obviously be pushing that from upcoming quarter point of view. But that's average from an expectation point of view is that we'll be tracking closer to the production.
And then lastly on the upgrades in Rosh Pinah for filtration and grinding. Do you expect any shutdowns for the balance of the year that may affect production?
So in terms of the scheduled maintenance, those will be aligned with the scheduled maintenance plan. So obviously will be minimized as far as possible, but it's built into the plans for 2019 as it is, but are fully planned for.
And are these in the third quarter, second quarter, or fourth quarter?
Third and fourth quarter.
Your next question comes from the line of Jackie Przybylowski from BMO. Your line is open.
Thanks very much, and welcome Ricus to the Trevali team. We look forward to working with you going forward. I just wanted to ask about the Rosh P study. I know it says in the MD&A that it's still on track for second half '19. Just wondering I know it will probably be some more into what you gave you. But are you planning at the Rosh P study differently at all? Or do you anticipate it's going to be completed according to the current plans? Thanks.
Yes, that’s the beauty of the study is actually have the ability to look at all bunch of different angels to the same problem. The study is underway. I'm not sure my way to Rosh next week, I really look forward to talking to the team there and getting the best plans and roll them out and figure out a 2.0 for us and how it looks like.
I was going to ask on Caribou. Well, we were on site in October. We saw some work being done, Restigouche, Murray Brook and some of the other properties nearby. And I've noticed that is quite a down on that front on the development of the -- on the satellite properties. And I was just wondering if you could make any comments on the timing for those?
I think when you go back to our presentation you will see that the first quarter the focus of expiration was really at Santander and Perkoa. But in our talk Caribou last week definitely we will be stepping that up in this quarter and the next few quarters the expiration. And also coming back, as I said, I'm also going to back in the next second half of the year with a review of our business and that Caribou will be included in that whole commentary.
There are no further questions. At this time, I will turn the call back over to the presenters.
All right guys. Thank you very much for dialing in. We look forward to providing you with updates over the coming months.
This concludes today's conference call. You may now disconnect.