Trevali (TV-TO, TREVF)
On Tuesday, I purchased a ~4% position in Trevali at C$1.10-C$1.11 (US$0.83). Trevali is really the only pure play zinc miner in the world.
Zinc Industry
The zinc industry has rebounded over the last year or so when zinc prices fell to ~$1,500/mt (~$.70/lb). The zinc market has seen many large mine closures over the last few years as Brunswick (Glencore), Perseverence (Glencore), Century (MMG), and Lisheen (Vedanta) have depleted. I'm pretty sure that these 4 mines were all among the top 10 zinc mines in the world.
Zinc prices have been relatively weak since 2007 when prices spiked to $2/lb. These weak prices have resulted in a lack of investment in new zinc mines for the industry. Therefore, the industry hasn't been able to replace the large mines that have depleted. You also saw several mines close/cut production as a result of low prices in 2015-2016. Now we are a seeing a situation where demand is oustripping supply and inventories are declining. Inventories have been in steady decline YTD and are now currently at only 16 days of supply. This is a pretty low level and the last time inventories fell to this level was 2007 (when prices spiked to $2/lb.
Trevali
As I mentioned, Trevali is the only pure play on zinc. Their mines are not the largest or super low cost, but they are a pretty good operator with what they have (one mine in Canada and one in Peru). I've met the CEO a couple of times and he's definitely a straight shooter, which I like.
Trevali recently announced they are buying two mines from Glencore. The mines expand their reach into Africa. These mines are a little larger than their current mines, and costs are fairly in line with their current operations. This will vault them into a top 10 zinc producer in the world at ~410 MM lbs of zinc (from 140 MM lbs). The mines have an average cash cost of ~$.80/lb. They are financing the deal through issuing $190 MM in debt and issuing equity for the rest (Glencore who is already a large shareholder will be a 25% after the equity offering). At spot zinc prices (which are down a lot from $1.34 over the last month or so), they are paying 3.73x EBITDA. I think this is a very good price for the acquisition.
Outlook
I believe the next move for zinc prices will be $1.50, and not $1.00/lb. If this happens as I expect, Trevali has big leverage to improving prices and should be able to pay off the acquisition debt very quickly. One year of $1.50 zinc and Trevali would have enough to pay off the debt and have a lot of cash left over.
I've owned a decent sized position in Trevali for a while now (Sept 2015 with cost of US$0.38), but I believe now is a great time to add to the position on this pullback to the 200 day MA.
If you have any questions, let me know.
Just trying to make a few bucks.
