VANCOUVER — Trevali Mining (TSX: TV) is set to become a larger player in the zinc business with a $400-million deal to buy two zinc mines and several development assets from commodity giant Glencore (LON: GLEN).
Trevali expects the transaction will make it the world’s eighth-largest zinc producer and more than double its current production scale to 410 million payable lb. zinc annually. Trevali will acquire majority stakes in two operating mines: an 80% stake in the Rosh Pinah mine in Namibia, and a 90% interest in the Perkoa mine in Burkina Faso.
Glencore will receive US$244 million in cash and 175 million Trevali shares priced at $1.20 each, which gives Glencore a 25% equity position.
“We’ve been working closely together and we operate in a similar way,” Trevali president and CEO Mark Cruise says during an interview. “Most of us [at Trevali] have worked with major mining companies, so we speak that language, which definitely helps, and perhaps makes us different than most junior companies.
“When the Glencore-Xstrata deal was finalized, we had initial discussions where we said that, at some point, it may make sense to look at assets that were no longer a fit in the new company. We’d been focused on getting our Caribou mine up and running, so the last piece of the puzzle for this deal was when we declared commercial production there last July,” Cruise adds.
The deal is the product of a partnership Trevali has been building with Glencore over the past few years.
The companies worked in tandem to advance the Santander underground zinc-lead-silver mine, located 200 km northeast of Lima, Peru, into production in early 2014.
There, Glencore provides a 2,000-tonne-per-day mill and concentrate plant under a lease-to-own agreement, serves as contract mill operator and contract miner, and has a life-of-mine concentrate offtake agreement on the project.
The operation could generate 64 million lb. zinc, 13 million lb. lead and 800,000 oz. silver this year at cash costs from US$35 to US$40 per tonne milled.
Glencore also holds zinc, lead and copper concentrate off-take agreements at Caribou, a past-producing polymetallic deposit, 50 km west of Bathurst, New Brunswick. The underground mine produced nearly 24 million payable lb. zinc equivalent during last year’s third quarter at cash costs of US$58.88 per tonne milled.
These latest acquisitions, combined with Santander and Caribou production, could allow Trevali to produce 235,000 contained tonnes zinc in 2018, which equates to 1.6% of global production.
As part of the deal, Trevali will also acquire a 39% interest in the Gergarub zinc project in Namibia, options to acquire the Heath Steel property in Canada and a “portfolio of other exploration assets.”
Rosh Pinah is in southwestern Namibia, 600 km south of the capital city of Windhoek. The 2,000-tonne-per-day underground mine has been in production since 1969, and could produce between 100 million and 105 million payable lb. zinc in 2017 at all-in sustaining costs (AISCs) ranging from US68¢ to US72¢ per pound. The mine has a reported 14-year life.
Rosh Pinah’s proven reserves are 1.6 million tonnes at 9.8% zinc, 1% lead and 17 grams silver per tonne, while probable reserves total 3.5 million tonnes of 8.3% zinc, 1.7% lead and 22 grams silver. All resource estimates were calculated under Joint Ore Reserves Committee standards.
“I’ve had exposure by osmosis to Africa coming from the Anglo American (LON: AAL; US-OTC: NGLOY) stable,” Cruise says. “That was sort of the home territory, so to speak. We’re reasonably comfortable there, and I still have a number of colleagues that work in Africa. Namibia is a highly ranked and stable jurisdiction. The country has had numerous democratic presidents elected and no issues with it, and the mine has been operating for a long time without interruption.”
Meanwhile, Perkoa hit production in 2013 and lies 120 km west of Ouagadougou, Burkina Faso. The 2,000-tonne-per-day underground operation is slated to produce between 165 million and 170 million payable lb. zinc in 2017 at AISCs ranging from US83¢ to US87¢ per pound. Perkoa’s proven reserves total 1.7 million tonnes at 15.8% zinc, while measured resources include 3 million tonnes at 15.5% zinc.
“The reality is that these are smaller operating units for [Glencore], even though they’re massively material from a Trevali perspective. They aren’t going to really move the bottom line of a super major,” Cruise says.
“What it likely does for them is daylight value, and they see a lot of accretion potential and upside on their shareholdings. The other thing we bring to the table is exploration expertise, and all the deposits remain open for expansion. During the second half of the year we’ll get a lot more aggressive with the drill rigs. Our goal is to grow resources and show the market what these assets can do.”
To fund the transaction, Trevali intends to raise $230 million via a bought-deal financing at $1.20 per subscription receipt. BMO Capital Markets will take 40% of the financing as bookrunner, while another 30% will go to Scotiabank as co-lead. The company will also refinance its debt load with a US$190-million senior-secured credit facility that has a five-year term and carries 3.5%, plus the London interbank offered rate.
Trevali has traded in a 52-week range of 34¢ to $1.57 per share, and closed at $1.22 per share at press time for a $476-million market capitalization.
The Glencore deal will increase the company’s fully diluted share count by over 90% based on 403 million shares issued at press time.
Trevali is expected to have $150 million in post-transaction liquidity after the debt restructuring, and anticipates Santander and Caribou will jointly produce 156 million payable lb. zinc in concentrate in 2017.
“In the early days, yes, it’s clearly dilutive,” Cruise says. “But the bigger picture is that we are building an intermediate producer. Before we acquired these two assets we screened over 500 zinc opportunities globally, and these came out near the top. What’s difficult right now is acquiring a producing zinc asset, or certainly assets that can impact the forthcoming cycle.
“The window is shrinking rapidly, and that’s why we moved to close the deal. A lot of groups out there looking for zinc assets now have probably missed that window because zinc is ready to run, and you don’t want to acquire things at the top of a cycle.”