Nicola Mining, Gold Milling by April, Positive Cash Flow in 2016?

Peter Epstein  |

Mining & Milling Profit Share Agreements (MPSAs)

Since my Interview of CEO Espig in November, the C$ gold price is up about 16%. Nicola’s stock price is unchanged….

Please review my base case Merritt Mill performance estimate for CY 2017. From the top, the current C$ gold price, (recently at C$1,660/oz), is discounted by 20% to determine a CY 2017 gold price assumption. Next is the average annual ore grade assumption measured in oz/Mt. I believe 0.333 oz/Mt is reasonable given the terms of three existing 10k Mt agreements averaging 0.417 oz/Mt (see below). The items listed in red are fixed costs per Mt. A 15% contingency is deducted for added conservatism to obtain an estimated net profit/Mt. That figure is halved (50% / 50% partnership split) to reflect only Nicola’s attributable share. The bottom line shows an estimated net profit to the Company of $6 million. [Note: this is an estimate only,not a forecast by the Company or the author]
Screen Shot 2016-02-08 at 8.42.33 PM
An illustrative MPSA is the, “Siwash Agreement,” with Siwash Minerals Inc., see press release. Under this MPSA, the mining partner is required to deliver ore with a minimum gold grade of 0.25 oz/Mt. Siwash already has a stockpile of 3k Mt, with plans to double it, and then ship 6k Mt to the Mill. Assuming Nicola were to process 6k Mt over 60 days, that would equate to one-third of the Mill’s stated capacity. Siwash hopes to apply for a 10k Mt bulk sample permit which, if received, would represent ~ 167 tpd over a subsequent 60 day period. Given the recent increase in the price of gold, timing for both parties could prove to be fortuitous. [See picture of Merritt Mill below]

In my opinion, each input in the financial model is fairly conservative. Therefore, taken together, the inputs should produce a conservative bottom line estimate. While there’s downside to any financial metric, I believe there’s upside to the Mill utilization estimate of 162.5 tpd. This figure was derived from the average of a 4-quarter ramp up from 100 tpd in q1 2017 to 150 tpd in q2 and 200 tpd in 3q & 4q. That would place the Mill at two-thirds capacity by year-end 2017. Given nameplate capacity of 300 tpd, 175 – 225 tpd in 2017 is not a stretch.

Please bear in mind, the estimated cash flow is before growth & maintenance cap-ex. Given the Company’s operating losses, it will not be paying taxes in 2017. A very conservative 50% haircut from the estimated $6 million (to account for growth / maintenance cap-ex & “other”), would leave $3 million in free cash flow. That implies Nicola could (assuming the Mill is fully operational) be trading at just a 2.5x 2017e free cash flow multiple. Precious metal milling companies are characterized by long-term, annuity-like income streams that typically command a premium valuation in the market.

A vital component in Nicola’s MPSAs is that the Company negotiated exclusivity on each. It`s truly a win / win for each side. Nicola unlocks the value of its partners’ properties by providing an opportunity for them to monetize their ore. Without Nicola, these miners would probably not be mining at all. It`s very difficult to get a milling permit and would cost $10s of millions and take years to build. Clearly, barriers to entry are high, the Merritt Mill is protected from competition by both capital AND regulatory constraints.$51 million has been deployed in Nicola’s assets over 30 years, of which about $31 million was for acquiring land and building the Mill and associated tailings facility.Chairman of the Board and 2nd largest shareholder Frank Högel had this to say, quote,

“Nicola Mining has a powerful combination of valuable assets, strong financial backing and a world-class team. We at my firm CCM, are thrilled to be part of what we believe will be a highly successful investment in 2016. As Chairman, I speak for the entire Board when I say that we will do our best to provide frequent updates on what we hope will be very exciting news this year.”

Key to the investment proposition is that an investor in Nicola Mining (TSX-V: NIM) / (OTC: HUSIF), should know within just a few months if the Company is on track for generating cash… or not. It seems reasonable that demonstrating profitable milling operations this year, would attract a great deal of interest, possibly leading to a meaningful uptick in Nicola’s valuation.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to:


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