Trevali Mining - Raymond James

Canada Research Published by Raymond James Ltd

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Trevali Mining Corporation March 2, 2012

TV-TSX Company CommentAdam Low CFA | 416.777.4943 | [email protected] Tracy Reynolds (Associate) | 416.777.7042 | [email protected] Base Metals & Minerals | Exploration & Development

Trevali Closes its Funding Gap Via an Investment by Glencore

Event Before market open on March 1, 2012, Trevali announced that it has entered into a private placement with Glencore International Plc to sell 12.6 million common shares at C$1.42/share for total proceeds of US$18 million.

Recommendation We are maintaining our Outperform rating and are raising our target price to C$2.15 from C$2.05. We are increasing our P/NAV target multiple to 0.75x (prev. 0.70x) based on a reduction in the funding risk for Trevali following this financing announcement. We continue to recommend investors buy the shares of Trevali as it transitions to an operating mining company from a developer. Trevali’s objective is to commence production in 2012 at both of its polymetallic mine projects: Halfmile in New Brunswick, and Santander in Peru. Mining has commenced from the uppermost portion of Halfmile and ore is being stockpiled at Xstrata’s nearby Brunswick 12 mill for processing in late 1Q12. Trevali intends to commission Santander in mid-2012. We expect to see an appreciation in the trading multiple as the company makes this progression.

Analysis We believe that this announcement is positive for Trevali as it removes the company’s near-term financing gap. The funds will be used to advance the Santander mine, and provide working capital facilities for the Halfmile mine. In our view this is also a very favourable endorsement for Trevali from the largest player in the zinc industry (Glencore).

The moderately dilutive impact of the share issuance to our net asset value (NAV) estimate (refer to Exhibit 5), is partially offset by the recent changes to our near- to medium-term precious metals prices (see the Industry Comment published by our Precious Metals team on February 22, 2012 entitled “Precious Metals: Fourth Quarter Preview & Reviewing Our Price Deck”). Our revised NAV/share is C$2.87 (prev. C$2.91).

Valuation Trevali’s shares are trading at a P/NAV of 0.56x. Our target price of C$2.15 is based on a 0.75x multiple applied to our NAV of C$2.87 (in-line with risk and liquidity-adjusted historic developer and producer multiples).

EPS 1Q 2Q 3Q 4Q Full Revenues NAV Mar Jun Sep Dec Year (mln)

2010A C$(0.01) C$(0.01) C$(0.01) C$(0.02) C$(0.06) NAOld 2011E (0.01)A (0.04)A (0.01)A (0.01) (0.06) NA NA

New 2011E (0.01)A (0.04)A (0.01)A (0.01) (0.06) NA NAOld 2012E (0.01) 0.00 0.02 0.04 0.05 58 2.91

New 2012E (0.02) 0.00 0.02 0.04 0.05 57 2.87Source: Raymond James Ltd., Thomson One

Rating & Target Outperform 2Target Price (6-12 mos): Old: C$2.05 New: C$2.15Current Price ( Mar-01-12 ) C$1.60Total Return to Target 34%52-Week Range C$2.38 - C$0.73Market Data Market Capitalization (mln) C$258Current Net Debt (mln) -C$18Enterprise Value (mln) C$240Shares Outstanding (mln, f.d.) 161.0Average Daily Volume (000s) 646Dividend/Yield C$0.00/0.0% Key Financial Metrics

2010A 2011E 2012EP/E NA NA 34.2xP/NAV NA 0.56xEBITDA (mln) Old C$(3) C$(4) C$13 New C$(3) C$(4) C$12Zn Production (000's MT) 0.0 0.0 25.4Zn Cash Costs (US$/lb) Old NA NA US$0.63 New NA NA US$0.64

Company Description Trevali Mining Corp. (TV-TSX) is developing two polymetallic mining projects: Halfmile-Stratmat in New Brunswick, and Santander in Peru.

Canada Research | Page 2 of 10 Trevali Mining Corporation

Raymond James Ltd. | 2200 – 925 West Georgia Street | Vancouver BC Canada V6C 3L2

Details of the Transaction Number of shares & issuance price – Through a non-brokered private placement

Glencore will buy 12,620,282 common shares of Trevali for C$1.42/share, a 5% discount to Wednesday’s closing price of C$1.50/share.

Glencore’s equity stake in Trevali – Upon closing, Glencore will directly own approximately 7.8% of Trevali’s outstanding common shares. Xstrata, an affiliate of Glencore (Glencore owns 34% of Xstrata’s shares, and the two companies are planning to merge), currently holds close to 4% of Trevali’s common shares. Glencore also holds a $2 million convertible debenture facility from Trevali with the option to convert the facility into equity in September 2012 at the 30-day VWAP and a minimum conversion price of C$0.64/share (based on the recent price of Trevali’s shares the VWAP conversion would represent the issuance of 1.7 million common shares). In aggregate, Glencore and Xstrata’s diluted equity holdings in Trevali represent a stake of 12.45%.

A seat on the Board for Glencore – Upon the closing of the private placement Chris Eskdale of Glencore will join Trevali’s Board of Directors. Mr. Eskdale is a U.K. chartered accountant with an MA from Oxford University. He has been a member of Glencore’s Metals and Minerals Business Group for more than 15 years, where he manages mining investments in the zinc-copper sector. This addition will bring the number of directors on Trevali’s Board to 8.

Closing the Funding Gap From our discussion with management Trevali has approximately $10 million in cash at present, and we estimate that the company will have close to $27 million in cash following the closing of the Glencore private placement. We believe that this should be sufficient to fund the company’s near-term capital expenditures at Halfmile (approximately $4 million for underground development), and Santander ($13 million for underground development, upgrading of the tailings facility, and completion of the powerline).

Although Trevali is now in a much more comfortable financial position we do expect the company to continue to pursue arranging credit facilities to provide more financial flexibility, as well as secure a project loan from Peruvian banks for the refurbishment of the Tingo hydro-electric power station in Peru (likely in the amount of $15 million).

Potential Catalysts for Trevali’s Shares 1) Drill results from Stratmat (New Brunswick) and Santander.

2) Commencement of toll-milling concentrate production from Halfmile – expected in late 1Q12.

3) Resource update for Santander – expected in 2Q12.

4) Receipt of the beneficiation and mining permits for Santander – expected in 1Q12/2Q12.

5) Resource update for Halfmile & Stratmat – expected in 2Q12.

6) Commissioning at Santander – expected in mid-2012.

Trevali Mining Corporation Canada Research | Page 3 of 10


Historical and Future Relationship of Trevali with Glencore/Xstrata Glencore at Santander – Trevali has signed a unique life-of-mine concentrate off-

take agreement with Glencore for its Santander mine in Peru. Glencore is currently in the process of relocating an existing concentration plant from its depleted Rosaura deposit (also in Peru) to the Santander mine site. Glencore will also provide contract mining services, and for the first four years of production toll-milling using the 2,000 tonnes/day concentrator, after which Trevali will assume ownership of the mill.

Xstrata at Halfmile – Xstrata has been a significant shareholder of Trevali (approximately 4% of the common shares outstanding) since the company’s acquisition of Kria Resources (the former owner of Halfmile-Stratmat assets) in early 2011. In October 2011 Trevali and Xstrata finalized a toll-milling and concentrate off-take agreement for the Halfmile mine. Xstrata will produce zinc, lead-silver, and copper-gold concentrates at its nearby Brunswick 12 concentrator, and purchase 100% of the output.

The agreements that Trevali has negotiated with Glencore and Xstrata have enabled it to position itself for near-term production, with minimal capital expenditure, at both of its mine development projects. We expect Xstrata’s Brunswick mine to be depleted in 2013, at which time we also anticipate that Xstrata will close its Brunswick 12 concentrator, thus bringing an end to the toll-milling agreement for Halfmile. In our base case analysis we assume that the closure of the Brunswick 12 mill will necessitate Trevali constructing its own dedicated concentrator to process ore from the Halfmile-Stratmat deposits. We have assumed a capital cost estimate for this facility of $136 million.

In our view, the combination of Glencore’s equity investment in Trevali (signifying the strong relationship that these two companies share), and Glencore’s pending merger with Xstrata, has the potential to reduce this capital expenditure burden. We can envision two possible scenarios through which Trevali could benefit from a Glencore and Xstrata merger: 1) Glencore could retrofit the Brunswick 12 mill to a smaller throughput capacity (from 10,000 tonnes/day to 4,000 tonnes/day) and extend the toll-milling agreement; or 2) Glencore could sell the Brunswick 12 mill to Trevali, and Trevali could then refurbish and customize the mill to meet its requirements. In Exhibit 1 we outline the impact that these scenarios could have on our NAV estimate.

Exhibit 1: Potential Capital Cost Reduction Scenarios for Halfmile-Stratmat

ScenarioCapital Cost

($ mln)NAV

($/share)% Change from

Base Case

Base Case - construction of a dedicated mill for Halfmile-Stratmat 135.6 2.87 N/A#1 - Toll-Milling for Life-of-Mine 0.0 3.14 9%#2a - Purchase and retrofit of Brunswick 12 - high-end 100.0 3.01 5%#2b - Purchase and retrofit of Brunswick 12 - low-end 50.0 3.21 12%

Source: Raymond James Ltd.



Glencore’s Recent Market Activity Glencore’s recent market activity paints a bullish picture for commodities generally, and zinc specifically (refer to Exhibit 2).

Exhibit 2: Glencore’s Recent Market Activity

Date Company Transaction Type

Commodity Details

Feb-12 Volcan Offtake Zinc Agreed to buy zinc concentrates from Peruvian miner Volcan (VOLCABC1-VL) for zero treatment charges, and instead elected for a price participation arrangement whereby Glencore will share in 25% of the profit from increases in the price of zinc.

Feb-12 Xstrata Merger Various Agreed to buy the remaining 66% stake of Xstrata that Glencore didn't already own.

Dec-11 Rosh Pinah Zinc Corp.

Equity Zinc Announced it will purchase a 50.04% interest in Rosh Pinah Zinc Corp. Ltd., a private zinc mining company in Namibia from Exxaro Base Metals and Industrial Holdings Ltd. (EXX-JO), and a further 30.04% from other shareholders, for a total of 80.08%. The Rosh Pinah Employee Empowerment Participation Scheme Trust holds the remaining 19.92%. Rosh Pinah operates an underground zinc-lead mine in south-western Namibia with zinc concentrate production of 95,000 tonnes/year.

Dec-11 Umcebo Mining Ltd.

Equity Coal Purchased a 43.66% equity interest in Umcebo Mining Ltd., a private South African coal mining business. Umcebo has three thermal coal mines in operation and a stand-alone wash plant, with annual production of 7.2 million tonnes.

Dec-11 PolyMet Mining Corp.

Equity Copper-Nickel

Increased its equity stake in PolyMet Mining Corp. (POM-TSX) to 24.1% from ~16.4% via a private placement. Through oustanding convertible debentures, warrants, and common share purchase agreements, Glencore can increase its stake to 35.1%. PolyMet owns the NorthMet copper-nickel-precious metals ore body and the large Erie Plant processing facility in the Mesabi Range mining district in northeastern Minnesota.

Oct-11 Ironbark Zinc

Convertible Debt

Zinc, Other Base Metals

Entered into a US$50 million convertible funding facility with Ironbark Zinc Ltd. (IBG-AU) to help fund Ironbark's growth acquisition strategy. Glencore also entered into an agreement for up to 55% of the production of concentrates from Ironbark's Citronen project, one of the world's largest undeveloped zinc deposits in northern Greenland. Glencore had an existing 12% equity interest in the company.

Oct-11 Minara Resources

Acquisition Nickel Acquired the remaining 27% of Minara Resources that Glencore did not already own. Minara operates the Murrin Murrin nickel-cobalt project in Western Australia, one of the world's largest and lowest cost nickel mines.


Changes to Our Precious Metals Price Deck Our Precious Metals team made revisions to our near- to medium-term gold and silver price assumptions on February 22, 2012. Refer to Exhibit 3 or the Industry Comment entitled “Precious Metals: Fourth Quarter Preview & Reviewing Our Price Deck” for further details.

Exhibit 3: Raymond James Ltd. Precious Metals Price Deck




Net Asset Value Estimate The details of our NAV/share estimate of C$2.87 (previously C$2.91) for Trevali Mining are shown in Exhibit 4. We have updated our model to account for the equity financing with Glencore and recent changes to our precious metals prices.

Exhibit 4: Net Asset Value for Trevali Mining

Ownership US$ (mln) US$/shr Valuation Bas isProjects

Santander 100.0% 199.1 1.03 NPV @ 8% Real FY End 2012Hal fmi le Tol l ing 100.0% 13.1 0.07 NPV @ 8% Real FY End 2012Hal fmi le/Stratmat 100.0% 312.5 1.62 NPV @ 8% Real FY End 2012Tingo Hydroelectric Plant 100.0% 32.9 0.17 NPV @ 8% Real FY End 2012Huampar 100.0% 3.0 0.02 Asset acquis i tion costRuttan 100.0% 5.3 0.03 Balance sheet as at Q3 10AExploration 100.0% 50.0 0.26

Other AssetsCash and Marketable Securi ties 3.5 0.02 Balance sheet as at Q4 12EWorking Cap net of Cash and ST Debt (3.8) -0.02 Balance sheet as at Q4 12EOptions 19.4 0.10 various expiry dates

Debt and ObligationsShort Term Debt (0.0) -0.00 Balance sheet as at Q4 12ELong-term Debt (3.2) -0.02 Balance sheet as at Q4 12ECorporate SG&A (75.0) -0.39 DCF @ 8% Real FY-12EDeferred Taxes (4.0) -0.02 Balance sheet as at Q4 12EProvis ion for Contingencies - 0.00

NET ASSET VALUE 552.6 $2.87 C$2.87Ful ly Di luted Shares Outs tanding 192,544Bas ic Shares Outstanding 160,840Copper: '12E=US$3.69/lb, '13E=US$4.25/lb, '14E=US$4.25/lb, '15E=US$4.00/lb, '16E=US$3.50/lb, L-T=US$2.75/lbLead: '12E=US$1.04/lb, '13E=US$1.20/lb, '14E=US$1.25/lb, '15E=US$1.25/lb, '16E=US$1.10/lb, L-T=US$0.95/lbZinc: '12E=US$0.99/lb, '13E=US$1.18/lb, '14E=US$1.25/lb, '15E=US$1.30/lb, '16E=US$1.20/lb, L-T=US$1.10/lbSi lver: '12E=US$33.75/oz, '13E=US$34.75/oz, '14E=US$32.00/oz, '15E=US$28.30/oz, '16E=US$26.50/oz, L-T=US$19.50/ozGold: '12E=US$1,710/oz, '13E=US$1,760/oz, '14E=US$1,700/oz, '15E=US$1,500/oz, '16E=US$1,400/oz, L-T=US$1,200/oz

Trevali Mining Corp.


The breakdown of the changes to our model with respect to their impact our NAV estimate is shown in Exhibit 5.

Exhibit 5: Net Asset Value Change Breakdown

NAV C$ Impact C$ Impact %Previous NAV 2.91Equity Raise / Share Dilution 2.82 -0.09 -3%Gold / Silver Price Changes 2.96 0.05 2%New NAV $2.87 $0.04 -1%


Company Citations Company Name Ticker Exchange Currency Closing Price RJ Rating RJ EntityGlencore International Plc GLEN LSE NC PolyMet Mining Corp. POM TSX NC Xstrata XTA LSE NC Notes: Prices are as of the most recent close on the indicated exchange and may not be in US$. See Disclosure section for rating definitions. Stocks that do not trade on a U.S. national exchange may not be approved for sale in all U.S. states. NC=not covered.



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Ratings and Definitions Raymond James Ltd. (Canada) definitions

Strong Buy (SB1) The stock is expected to appreciate and produce a total return of at least 15% and outperform the S&P/TSX Composite Index over the next six months. Outperform (MO2) The stock is expected to appreciate and outperform the S&P/TSX Composite Index over the next twelve months. Market Perform (MP3) The stock is expected to perform generally in line with the S&P/TSX Composite Index over the next twelve months and is potentially a source of funds for more highly rated securities. Underperform (MU4) The stock is expected to underperform the S&P/TSX Composite Index or its sector over the next six to twelve months and should be sold.

Raymond James & Associates (U.S.) definitions

Strong Buy (SB1) Expected to appreciate, produce a total return of at least 15%, and outperform the S&P 500 over the next six to 12 months. For higher yielding and more conservative equities, such as REITs and certain MLPs, a total return of at least 15% is expected to be realized over the next 12 months. Outperform (MO2) Expected to appreciate and outperform the S&P 500 over the next 12-18 months. For higher yielding and more conservative equities, such as REITs and certain MLPs, an Outperform rating is used for securities where we are comfortable with the relative safety of the dividend and expect a total return modestly exceeding the dividend yield over the next 12-18 months. Market Perform (MP3) Expected to perform generally in line with the S&P 500 over the next 12 months. Underperform (MU4) Expected to underperform the S&P 500 or its sector over the next six to 12 months and should be sold. Suspended (S) The rating and price target have been suspended temporarily. This action may be due to market events that made coverage impracticable, or to comply with applicable regulations or firm policies in certain circumstances, including when Raymond James may be providing investment banking services to the company. The previous rating and price target are no longer in effect for this security and should not be relied upon.

Raymond James Latin American rating definitions Strong Buy (SB1) Expected to appreciate and produce a total return of at least 25.0% over the next twelve months. Outperform (MO2) Expected to appreciate and produce a total return of between 15.0% and 25.0% over the next twelve months. Market Perform (MP3) Expected to perform in line with the underlying country index. Underperform (MU4) Expected to underperform the underlying country index. Suspended (S) The rating and price target have been suspended temporarily. This action may be due to market events that made coverage impracticable, or to comply with applicable regulations or firm policies in certain circumstances, including when Raymond James may be providing investment banking services to the company. The previous rating and price target are no longer in effect for this security and should not be relied upon. In transacting in any security, investors should be aware that other securities in the Raymond James research coverage universe might carry a higher or lower rating. Investors should feel free to contact their Financial Advisor to discuss the merits of other available investments.

Raymond James European Equities rating definitions Strong Buy (1) Expected to appreciate, produce a total return of at least 15%, and outperform the Stoxx 600 over the next 6 to 12 months. Outperform (2) Expected to appreciate and outperform the Stoxx 600 over the next 12 months. Market Perform (3) Expected to perform generally in line with the Stoxx 600 over the next 12 months. Underperform (4) Expected to underperform the Stoxx 600 or its sector over the next 6 to 12 months.

Suitability Categories (SR) For stocks rated by Raymond James & Associates only, the following Suitability Categories provide an assessment of potential risk factors for investors. Suitability ratings are not assigned to stocks rated Underperform (Sell). Projected 12-month price targets are assigned only to stocks rated Strong Buy or Outperform.

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Rating Distributions

Coverage Universe Rating Distribution Investment Banking Distribution RJL RJA RJ LatAm RJL RJA RJ LatAm

Strong Buy and Outperform (Buy) 72% 56% 38% 41% 13% 15% Market Perform (Hold) 28% 38% 56% 29% 5% 3% Underperform (Sell) 1% 6% 7% 0% 4% 0% Raymond James Relationship Disclosures Raymond James Ltd. or its affiliates expects to receive or intends to seek compensation for investment banking services from all companies under research coverage within the next three months.

Company Name Disclosure Trevali Mining Corporation Raymond James Ltd - within the last 12 months, Trevali Mining Corporation has paid for all

or a material portion of the travel costs associated with a site visit by the analyst and/or associate. Raymond James Ltd. has managed or co-managed a public offering of securities within the last 12 months with respect to Trevali Mining Corporation. Raymond James Ltd. has provided investment banking services within the last 12 months with respect to Trevali Mining Corporation. Raymond James Ltd. has received compensation for investment banking services within the last 12 months with respect to Trevali Mining Corporation. Raymond Lames Ltd - the analyst and/or associate has viewed the material operations of Trevali Mining Corporation.

Stock Charts, Target Prices, and Valuation Methodologies Valuation Methodology: The Raymond James methodology for assigning ratings and target prices includes a number of qualitative and quantitative factors including an assessment of industry size, structure, business trends and overall attractiveness; management effectiveness; competition; visibility; financial condition, and expected total return, among other factors. These factors are subject to change depending on overall economic conditions or industry- or company-specific occurrences.

Target Prices: The information below indicates our target price and rating changes for TV stock over the past three years.



Price Rating Change Target Price ChangeCoverage Suspended Target Price and Rating Change Split Adjustment

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Sec

urity

Price

(C

$)Trevali Mining Corporation (TV) 3 yr. Stock PerformanceTrevali Mining Corporation (TV) 3 yr. Stock Performance

Date: February 29 2012

MO2 $2.40 MO2 $2.35MO2 $2.25

MO2 $1.95 MO2 $2.05

Analyst Recommendations & 12 Month Price ObjectiveSB1: Strong Buy MO2: Outperform MP3: Market Perform MU4: Underperform NR : Not Rated R: Restricted

Upd

ate

Date

Clos

ing

Pric

e

Targ

et

Pric

e

Ratin

g

Jan-31-12 1.19 2.05 2Nov-11-11 0.86 1.95 2Aug-30-11 1.40 2.25 2Aug-12-11 1.35 2.35 2May-13-11 1.76 2.40 2

Valuation Methodology: Our target price is based on a multiple applied to our NAV/share, and takes into account the risk and liquidity-adjusted historic producer multiples.

Risk Factors General Risk Factors: Following are some general risk factors that pertain to the projected target prices included on Raymond James research: (1) Industry fundamentals with respect to customer demand or product / service pricing could change and adversely impact expected revenues and earnings; (2) Issues relating to major competitors or market shares or new product expectations could change investor attitudes toward the sector or this stock; (3) Unforeseen developments with respect to the management, financial condition or accounting policies or practices could alter the prospective valuation.

Risks - Trevali Mining Corporation Mining companies are subject to a range of risks, including, but not limited to: environmental risk, political risk, operational risk, financial risk, hedging risk, commodity price fluctuation risk, and currency risk. Any difference between our metal price forecasts and realized metal prices will likely have an impact on our earnings and valuation estimates for the mining companies in our research coverage universe. The operation of mines, and mills is complex and is exposed to a number of risks, most of which are beyond the company’s control. These include: environmental compliance issues; personal accidents; metallurgical/other processing problems; unexpected rock formations; ground or slope failures; flooding or fires; earthquakes; rock bursts; equipment failures; consultant errors and, interruption due to inclement, weather conditions, road closures, and/or local protests. Other risks include, but are not limited to: uncertainties surrounding reclamation costs; aging equipment and facilities which could lead to increased costs; strikes; and, transportation disruptions.

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International Disclosures For clients in the United States:

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Trevali Mining - Raymond James