Trevali Mining Corp (OTCQX:TREVF) Q4 2019 Earnings Conference Call February 21, 2020 1:00 PM ET
Brendan Creaney – VP, IR
Ricus Grimbeek – President & CEO
Gerbrand Van Heerden – CFO
Yan Bourassa – VP, Mineral Resource Management
Conference Call Participants
Stefan Ioannou – Cormark Securities
Good day, ladies and gentlemen, and welcome to the Trevali Mining Corporation Fourth Quarter and Full Year 2019 Financial and Earnings Conference Call and Webcast. [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 Vice President of Investor Relations. You may begin your conference.
Thank you, Cheryl. Good day, ladies and gentlemen, and welcome to the Trevali Mining Corporation’s Fourth Quarter and Full Year 2019 Financial and Earnings Conference Call. I would like to remind everyone that this conference call is being recorded. Trevali’s fourth quarter results were issued last night after market closed, February 20, currently 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 4 operating mines. As a reminder, a replay webcast will be available 1 hour after today’s call. In conjunction with this conference call, there is an accompanying PDF presentation available on the Events section under 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.
The main presenter today is Ricus Grimbeek, Trevali’s President and CEO, who will be accompanied by Gerbrand Van Heerden, Tervali’s Chief Financial Officer; Yan Bourassa, Trevali’s Vice President of Exploration and Mineral Resources; and Trevali’s — and Amber Johnston-Billings, Trevali’s Chief Sustainability Officer.
In today’s presentation, there may be some forward-looking statements made, and I draw your attention to the customary disclosures in our corporate materials.
I would now like to turn the call over to Ricus.
Thank you very much, Brendan, and good morning, ladies and gentlemen. I’m pleased to be able to talk to you about our fourth quarter and full year 2019 highlights and the future plans for the company. On Slide 4, we will start with the 2019 highlights. With respect to safety, we saw a 46% reduction in the total recordable injury frequency when compared to 2018. We also published our first annual sustainability report.
Operationally, we have exceeded the top end of production guidance of all metals and broke company annual production records for both zinc and lead. Zinc production for the year was 417 million pounds. From a cost perspective, our C1 cash costs came in at the higher end of guidance. However, our all-in sustaining costs came in at low end of guidance at $1.01 per pound, despite the higher-than-expected zinc treatment charges. We drilled over 41,000 meters under our exploration program and identified and advanced a number of internal projects.
Financially, we had a strong year despite a declining zinc price with operating cash flow of $112 million and adjusted EBITDA of $107 million. We paid down $70 million in debt in 2019. Our net debt position is $54 million. And with our revolving credit facility, we have $229 million of liquidity available.
We launched our T90 program to ensure that Trevali is profitable under lower zinc price environment, targeting a reduction in our all-in sustaining costs to $0.90 per pound by the beginning of 2022. Given the impact that the coronavirus is having on the world’s economy and where the zinc price treatment charge is for today, the program is even more important than ever. And we will be accelerating the delivery of this program in this year.
Looking at 2020, we just want to reconfirm the production and cost guidance that we put out in January, and we also look forward to updating our mineral resources statement at the end of the first quarter and publishing our second annual report by the end of the second quarter. We are moving towards our goal of $0.90 per pound all-in sustaining cost under the T90 program and advancing our internal project pipeline, including publishing the RP 2.0 prefeasibility study, which is now scheduled for publication in the second quarter so that we can incorporate an updated mineral resources, updated cutoff grade assumptions and also the new price protocol, given the current macroeconomic environment.
In late 2019, we made the strategic decision to fix the zinc price at 2 of our higher-cost operations for 70% of production for the period of December through to May 2020. We locked in at a price of $1.10 per pound when the temporary — when the opportunity arose for the temporary strengthening of the zinc price in November. The decision to fix the price was made to allow us time to study and implement opportunities at both Caribou and Santander and to deliver the T90 program. If the current market conditions persist and we are unsuccessful in making a step change improvement at these operations, then we will have to consider all options available to us, including potentially putting Caribou on care and maintenance.
Slide 5 provides detail on where we ended the year against guidance. As previously mentioned, we exceeded production guidance on all metals, and our cash costs were at the high end of guidance, while all-in sustaining cost was at the lower end of guidance. Lower-end guided capital cost was the result of a strong new capital management program. Our assumption on treatment charges for 2019 guidance was $180 per tonne. However, the annual benchmark settled at $245 per tonne. Despite the higher-than-expected treatment charges, we were able to meet our cost guidance.
Moving to Slide 6, we compare 2019 results to 2018. The company mined 6% more ore tonnes than — in 2019 compared to 2018, with each operation contributing positively to the increased throughput. Payable zinc production was up 3% year-on-year, increasing from 407 million to 417 million tonnes.
All-in sustaining cost was up 5% year-over-year from $0.96 per pound to $1.01. However, I’d like to highlight that if we apply the 2018 annual zinc treatment charges of $147 per tonne, our all-in sustaining cost would be a full $0.10 lower at $0.91 per pound, proving that our T90 program is working and in operation. I’ll go to the next slide and just give you a short update on the specific mine operations. As previously mentioned, all operations performed well in 2019, with each operation mining and processing more ore tonnes than in 2018.
Caribou’s mining and milling rates were higher, and metallurgical recoveries for the year saw a 5% increase relative to 2018, having zinc recovery of — at 79%. Preferred ore tonnes were extracted from zone 6 in late Q4 as an additional ore source. At Santander, both mining and mill throughput rates increased, leading to a 9% increase in ore milled over 2018. Several capital upgrades to the processing plant took place, with the most significant being a new tertiary crusher being installed in the fourth quarter and a new primary crusher installed during the scheduled planned downtime in January 2020. These upgrades will lead to a finer grind size and improved metallurgical recoveries in 2020.
Rosh Pinah continued to deliver strong tonnage from the mine in the fourth quarter with a 10% increase over the third quarter. 2019 ended with an increase to ore mined of 14% and a decrease to ore milled of 10%. It’s important to note that the lower head grade experienced in the second half of 2019 is part of the mine plan and is expected to persist until 2021 when it will return to the reserve grade. At Perkoa, the head grade is declining, as expected and in line with the mine plan. However, this is being offset by improvements in the mined and milled.
I’ll now hand over to Gerbrand to talk to you about our company’s financials.
Gerbrand Van Heerden
Thank you, Ricus, and good day to all. We produced 417 million pounds of zinc and sold a record 440 million pounds for the year, having reduced our inventory to 15,000 dry metric tonnes by year-end. The average LME zinc price was $1.16 a pound for 2019, and our all-in sustaining cost was $1.01 per pound.
Our adjusted EBITDA for 2019 was $107 million compared to 2018 of $199 million. While record sales volumes improved adjusted EBITDA by $45 million year-over-year, the low zinc price and higher treatment charges negatively impacted adjusted EBITDA by $81 million and $57 million, respectively. With respect to the fourth quarter, our adjusted EBITDA was positively impacted by high zinc price, and zinc sales volume grew relative to the third quarter. However, as sales were heavily weighted to the back end of the quarter when zinc prices were at $1.03 per pound, 56% of fourth quarter zinc sales were booked in December. Provisional adjustments for the fourth quarter were negligible.
Operating cash flows for the full year were $112 million. Total capital expenditures and exploration expenditures on a cash basis was $67 million and $10 million, respectively. We paid down our debt in 2019 by $70 million. Earnings per share were negative $0.04 per pound for the year and $0.00 for the fourth quarter.
Moving over to the next slide. Our financial position is strong with liquidity of $229 million, made up of $24 million in cash and $196 million available on our revolving credit facility. Our net debt position is $67 million. As Ricus mentioned, the fixed pricing arrangement was entered into November — in November 2019 for 70% of the zinc concentrate produced at Caribou and Santander for the 6-month period covering December 2019 to May 2020 at a price of $1.10 per pound. As a result of fixed pricing arrangement which covered December 2019, net income for quarter four, 2019 was $700,000 higher. And now back to Ricus.
Thank you, Gerbrand. Moving on to the next slide, we’re highlighting the status of our T90 program. We’ve identified $42 million in opportunities against the $50 million target of annual sustainable efficiencies. Of the $42 million, we have implemented $14 million of these efficiencies.
On Slide 11 is an example of our T90 in action with the implementation of the semiautonomous loader at our Rosh Pinah mine. This will allow the operation of the loader from surface during shift change when an operator cannot be underground during the blast. Benefits include increasing operating hours, improved health and safety and an additional 160 tonnes of ore delivered to the mill each day, which translates into a pretax annual benefit of $3 million. The beauty of this opportunity is that the cost is minimal as the existing loader was coming to the end of its useful life and needed to be replaced regardless. The incremental cost of $400,000 includes the supply and installation of the communications infrastructure.
Moving on to the next slide, we review the status of the material studies and projects underway. At Caribou trial mining of historical mining zones were successful in the fourth quarter, allowing for inclusion of additional tonnes not previously in the mine plan. Trial mining of sublevel stoping in the east has also been identified as a location where the new top-down mining method will be trialed in H1 2020.
Also at Caribou, initial results for the review of Restigouche show that other satellite deposits owned by Trevali in the Bathurst region with higher grade and more tonnes may be better suited to feed Caribou mill in the near future. The study has been expanded to include Halfmile as an additional feed to Caribou mill.
At Rosh Pinah, the filtration and grinding project was completed successfully in December, 2 weeks early and on budget. Also at Rosh Pinah, the RP 2.0 prefeasibility study continued to advance during Q4 and providing our plan for publishing the prefeasibility study during Q2 2020. The change in [indiscernible] is to incorporate updated mine — mineral resources, price protocol and cutoff grades due to this study.
Last year, Santander drilling continued during Q4 2019, targeting an increase in inferred mineral resources and converting additional inferred mineral resources to indicated levels. Three drills were actively drilling the pipe at the end of Q4. The preliminary economic assessment is expected to be completed by the end of Q4 2020, which will evaluate the economic viability of incorporating Santander Pipe ore into the existing operation.
I will now hand over to Yan.
Thank you, Ricus. Last quarter was marked by a rise in exploration activities at all operations with exploration and resource conversion drilling programs increasing. It led to an increase in the original exploration budget from $8.4 million to actual spending for the year of $10.5 million. The 2020 exploration budget has been set at $12 million, though programs are under review in line with current economic conditions.
The 2019 exploration programs were successful in extending known deposits at all operations but also in discovering new near-mine mineralized zones, such as the T3 horizon at the Perkoa mine. Highlights of the 2019 programs also include the extension of the Santander Magistral and Pipe deposits at depth, the extension of the Caribou North Limb along strike and at depth, and the northern extension of the western ore field along strike to the north at Rosh Pinah.
Regional exploration was initiated at all operations in 2019 in the form of ground geophysical surveys and drilling programs with the aim to discover new deposits that will represent the future mill feed of the operations. The 2020 exploration programs will continue to focus on advancing near-mine exploration targets towards the development of new resources located within trucking distance of existing mines while also maintaining the necessary level of expenditure on regional programs to make new discoveries. Company-wide mineral resource disclosures are expected to be released at the end of the first quarter of 2020.
With that, I will pass it back to Ricus.
Thank you very much, Yan. In conclusion, we had a great year, both from a production and cost perspective, and did so with an improving safety record. We initiated the T90 program and made gains towards reducing all-in sustaining cost, having identified $42 million of opportunities and implementing $14 million of — in efficiencies by the year-end, and we will be accelerating this program under the current economic conditions.
Our balance sheet remains strong despite a relatively low zinc price with the $229 million of liquidity available. Our exploration program is focused on extending our mine lives and converting resources. We continue to advance our growth pipeline at all operations and prepare various strategies for the company to persist through this depressed commodity price environment.
At this time, I will hand back to the operator so that we can take some questions.
[Operator Instructions]. We have a question from Stefan Ioannou of Cormark Securities.
You sort of mentioned, obviously, you have the pricing in place for Caribou and Santander over the next, I guess, 5 remaining months now, or until May of this year. And then thereafter, if prices still aren’t working in your favor, you may look to look through other options, at least at Caribou. Could you sort of comment on what the timing might be for that? Like would it be come May, we may actually see Caribou go into care and maintenance? Or would it take longer than that to figure out?
Yes. Thank you very much. It’s a good question, and I think it’s also an opportunity to highlight the strength of Trevali is that we got 4 operations. If you look at the 2019 results, 3 of those operations were actually $1 — all-in sustaining of $1 or below for the year. And in that environment — with the current price environment, you can see with the acceleration of our T90 program that with 3 of the operations, it is very possible to get cash flow positive under the current zinc environment. That’s also the reason why we decided to fix the price. It’s given us 6 months to really study Caribou and Santander in a lot more depth.
And as I said in the script earlier, we will definitely — as soon as we get a sense of what’s possible, especially at Caribou, because if you look at the all-in sustaining cost for last year, it’s got a long way to go to be sustainable under the current price environment. And if over the next month or 2, we can’t see a step change in performance there, but also if we don’t see a uptick in price or a reduction in treatment charges, then we will make the tough call.
So expect something in the next couple of months. But at least we have that fixed price that we’ve been able to negotiate in place that gives us a bit of headroom for the next couple of months.
Okay. Great. And just I know somewhere — I think I read somewhere in the release that it sounds like Restigouche is going on the back burner, but you may look at some of the other satellites in New Brunswick to take its place, namely Halfmile. Can you sort of maybe comment how that will fit into the thinking going forward for Caribou?
Yes. I think that’s all part of the looking at if there’s a step change possibility because Caribou, if — you can also, if you read our MD&A, it’s quite clear. Caribou is all about volume. If you can get volume through the mill, we know that the mill can do close to 1.3 million tonnes a year. We — to pull that from Caribou mine alone is not possible, so you have to find ways to use the satellite ore resources or ore reserves to fill the mill. So if you can get the mill filled, then you can see the all-in sustaining cost coming down quite considerably at Caribou.
So absolutely, those satellite ore bodies are part of the solution. It’s — but I think you’ve got to think of timing, capital investment to get them going, that’s all what we’ll be studying and looking at in the next couple of months.
[Operator Instructions] There are no further questions at this time. Thank you for your participation. This concludes today’s conference call. You may now disconnect.