Nicola Mining Inc. Alex Cutulenco · with news of an exploration and material purchase agreement...

Equity ResearchMetals & Mining, Exploration | Canadian Small Cap

November 2, 2016

Nicola Mining Inc.(TSXV:NIM)

High-Grade Copper Discovery + Increasing Cash Flows from Milling Operations

Event Dating back to our Initiation Report filed in June, Nicola has hit several exciting milestones. Specifically:

• 5-hole, 1,084 meter, drill program designed to test identified target areas within the Thule Copper property, returned hugely positive results, with all holes hitting mineralization. Best of the bunch was hole THU-002 at the Embayment zone, which returned 1.11% copper over 85.92 meters.

• Additional Source of Income: Nicola surprised investors in October with news of an exploration and material purchase agreement signed with Teck Highland Valley Copper (“THVC”), a wholly-owned subsidiary of Teck Resources (TSX:TCK.B). THVC agreed to purchase Nicola’s economically gradable waste dumps, found around the Craigmont mine.

• Mill processing is ramping up, with Nicola now having visibility onto 60,000 tonnes of potential mill feed for 2017. This would translate to roughly $7 million in operating profits.

• Nicola closed a $2.2 million private placement on August 25, 2016, issuing shares at $0.12, which largely strengthened their balance sheet.

Impact & AnalysisThe impact of these events is materially positive. Considering that Nicola will soon benefit from getting additional cash flows from its wholly owned waste dumps as well as the continued milling operations, Nicola should have enough cash to fund further exploratory work, pay down debt, and still have some cash left over.

The drilling results at Thule Copper is what really excites us, given the large opportunity at stake. Results of 1.11% copper is a big deal, as far as porphyry deposits go. The search for a larger ore body, which stems off of the Embayment skarn, will soon return additional results, as NIM begins additional drilling at the Titan Queen.

OutlookWe expect Nicola to process roughly 60,000 tonnes of ore in 2017, and ramp up production to 94,500 by 2018 (given mill improvements). Using an average ore grade of 8.0 g/t AuEq, and a gold price of US$1,250, we forecast Nicola to produce $1.4mm and $3.6mm in free cash flow over 2017 and 2018, respectively. Using a 5.0x terminal EBITDA multiple, and a 14% discount rate, we are left with an implied Equity Value (market cap) of $40.2 million, a far cry from the $27.3mm Nicola is currently sitting at.

Alex [email protected]

Price Performance - 52 weeks

Market Data (TSXV:NIM)Price (November 1, 2016 close) $0.1752 Week Range $0.05 - $0.54Market Cap (mm) $26.5Shares Outstanding (basic, mm) 155.6Free Float 77%Average Daily Volume (3 months) 800,361

Total Debt (mm) $8.5Cash & Short-Term Investments (pro-forma, mm) $2.6Total Assets (pro-forma, mm) $10.3

Headquarters Vancouver, B.C., Canada

Top ShareholdersYvan Gregoire Group 12.9%Mountain Valley Capital 3.9%GC Capital 3.9%Munday Group 2.6%Egota Capital 1.9%

All figures in CAD unless otherwise stated.Source: Thomson Reuters (11/1/2016)

Business DescriptionNicola Mining Inc. (“Nicola”), formerly Huldra Silver, is a mining exploration and mineral processing company situated in Merritt, B.C. A three-hour drive north-east from downtown Vancouver and situated right next to the old Craigmont copper mine (operating from 1962-1982 with over 34 million tonnes of ore mined), Nicola holds the fully-permitted gold/silver ore processing mill, a lined tailings facility, Craigmont’s old copper waste dumps, as well as a couple exploration projects. Managed by Peter Espig, a renowned Wall Street investment banker who has helped raise over $2.5 billion in funds whilst working at Goldman Sachs, the Company is producing cash flow from ore processing, and using it to fund exploration activities at its various mining claim.

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http://smallcappower.com/wp-content/uploads/2016/06/Nicola-Initiation-Report-V2-June-2016-1.pdf

Nicola Mining Inc. (TSXV:NIM)

November 2, 2016 2

Table of Contents

Investment Highlights .......................................................................................................................................... 3Mill Operating Close to Capacity, With Enough Mill Feed to Last Until 2017 .................................................................................. 3

Additional Source of Cash Flow: Off-take Agreement with Teck Highland Valley Copper, a subsidiary of Teck Resources (TSX:TCK.B) ........................................................................................................................................................................................ 4

The Search for a Large-Grade Copper Orebody is On – Stemming off of the 1.1% Cu Drill Results ................................................. 5

Exploration Work ............................................................................................................................................................................ 6

Valuation ................................................................................................................................................................ 9Upside: Treasure Mountain Silver Deposit ......................................................................................................................................... 10

Final Thoughts .................................................................................................................................................... 11Appendix A: Recent News ................................................................................................................................. 12


November 2, 2016 3

Investment Highlights

Mill Operating Close to Capacity, With Enough Mill Feed to Last Until 2017 If you are not yet aware, Nicola is not your typical mining company. Instead of the much more well known (and dreaded) business model of raising financing in order to proceed with exploration work, Nicola attempts to fund its exploration activities with self-generated cash flows from its milling operations. Not only is this non-dilutive for current shareholders, but also rewarding due to the excess of cash flows produced. We spoke about the mill operations in more detail within our initiation report.

Nicola’s mill has a capacity of processing 200 tonnes/day of gold-silver concentrate. From our current visibility into the mill’s operations, we believe that the mill will build up to full capacity by 2017. Sources of this mill feed will come from several contracts, specifically:

• Gavin Mines Inc. (Dome Mountain Mine): 2,100 tonnes of stockpiled ore ready for processing

• There is a much greater opportunity with Dome, as their mine is capable of producing 40,000 tonnes of ore per year.

• Siwash Minerals Inc.: 1,800 tonnes of stockpiled ore, with an opportunity of 10,000 additional tonnes of mill feed for 2017

• Other miners: aggregate opportunity of an additional 10,000 tonnes of ore

Given these visible sources of mill feed, we expect Nicola to process roughly 60,000 tonnes of ore in 2017, which is equivalent to 164 tonnes/day, very close to reaching full processing capacity.

Figure 1: Mill Processing - Cash Flow Example

Source: Ubika Research

Mill Processing - Cash Flow Analysis Model Inputs:Tonnes 60,000 g to oz 0.035Grade (Au, g/t) 7.0* Au price (USD) $1,250Au oz. 14,815 CAD/USD 1.3

Sales (CAD) $24,074,505

Operating Costs (per tonne) $325Mining $110Loading/Trucking $90Milling/Smelting $70G&A $55

Operating Pofit $4,574,505

2.75% NSR $662,049 Profitability Margins:Pre-tax Cash Flow $3,912,456 OP % of Rev: 19%NIM Share (40%) $1,564,982 Cash Flow % of Rev: 7%

* Conservative grade estimate, given that Ni 43-101 compliant grade is 12.0 g/t


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In terms of production economics (ore grades, stockpiled vs. needs to be mined ore, and transportation costs), each source of mill feed would be different. However, we would like to work with an example (Figure 1, above) from Dome Mountain, which will make the inputs to our cash flow projections more convincing.

Processing 60,000 tonnes of gold-silver concentrate would bring in about $24.1mm in revenue, and $1.6mm in pre-tax operating cash flow to Nicola.

Additional Source of Cash Flow: Off-take Agreement with Teck Highland Valley Copper, a subsidiary of Teck Resources (TSX:TCK.B)Nicola pleasantly surprised investors in early October with news of an exploration and material purchase agreement signed with Teck Highland Valley Copper (“THVC”), a wholly-owned subsidiary of Teck Resources Limited (TSX:TCK.B). This partnership is hugely significant, as it not only acts as a potential cash-flow generator for NIM, but it also finally places a monetary value to the Nicola’s wholly owned waste dumps, which were left unexplored during mine operations at the old Craigmont mine.

Although we lightly touched upon this subject in our Initiation Report, the material impact of this arrangement is nothing but positive to Nicola’s valuation. With an initial estimate of 100 million tonnes of waste rock appearing at (or near) surface, this purchase agreement will bring in a minimum of $0.40 per tonne, with HVCP agreeing to reimburse Nicola for certain costs related to the exploration and mining programs at the property.

Figure 2: Thule Copper Property and Target Zones

Source: Company Presentation


November 2, 2016 5

The past-producing Craigmont copper-iron mine is located in the central part of the 100% Nicola-owned Thule Copper Property (Figure 1). The historic Craigmont Mine is part of the Thule Copper Property. The Craigmont Mine was in operation between 1961 – 1982, and produced approximately 34 million tonnes of ore averaging 1.28% copper.

Low copper prices in the 1960s-80s forced Craigmont to use a high cut-off grade of 0.7% Cu in order to make the mine economic. What originally seemed uneconomic, is now a totally different story (as copper prices have risen from US$0.60/lb to $2.11/lb currently). The property was later purchased by Huldra Silver Inc. in 2011, and the visible ore (waste dumps) left over from the Craigmont is worthwhile to process for economically gradable material.

This brings us to the next point …

The Search for a Large-Grade Copper Orebody is On – Stemming off of the 1.1% Cu Drill ResultsA kilometer west of the old Craigmont mine lies an identified target area called the Embayment Zone, an area that encapsulates a copper-rich skarn. The discovery of the Embayment Zone skarn is a strong geological sign of a much larger copper deposit being present in the area. This larger deposit is what the team at Nicola hopes to discover.

Figure 3: Thule Copper Exploration Project Area



November 2, 2016 6

The exploration work that was done at the Embayment Zone, displayed very comparable mineralization as the Craigmont skarn zone just 500m to the south-east. What this is telling us is that the Embayment Zone skarn is a fault-offset of the Craigmont zone skarn.

The Embayment is a skarn type resource base, similar to the historic Craigmont mine. Interestingly, the skarn alteration below, appears to be as large as the historic Craigmont mine zone, which has the potential to be a larger orebody than the historic Craigmont mine zone.

Figure 4: Location of Diamond Drill Hole THU-002 in the Embayment Zone. The Embayment Zone is a fault offset portion of the Craigmont Zone


Readers should be reminded that the Craigmont mine produced in excess of 34 million tonnes of high grade copper.

However, the story doesn’t end there…

Exploration Work In early September, Nicola announced the results of its 5-hole, 1,084 meter, drill program designed to test identified target areas within the Thule Copper property. Specifically, there are three target areas which have provided preliminary interest to Nicola – the Embayment,


November 2, 2016 7

Titan Queen, and Eric zones. Results of the drilling program were to everyone’s delight, having hit copper mineralization at each hole, with the most significant result coming from the Embayment zone, capturing 1.11% copper over 85.92 meters.

The significance of the above table is in Holes THU-002 and THU-003,4.

Hole THU-002: An intercept of 1.11% copper over such a long strike length is an exceptional drill hole. Given that this is a copper porphyry deposit, copper mineralization will occur in a large-sized orebody, giving a lot more resource to mine. The Embayment zone, as is outlined by the magnetic survey map in Figure 3 (red area), is much longer than the Craigmont zone. This skarn has the potential to be a mine itself, and a big one for that matter.

Hole THU-002 and THU-003: The significance of the Titan Queen holes is that it is located 1km north of the Embayment zone. The team at Nicola drilled this hole in the highly-anomalous area (as identified by the magnetic survey), and managed to hit copper. This is significant, considering that the teams which operated this are in the past, were most likely also

Figure 5: Significant Drill Hole Intersections from the 2016 Thule Property Drilling Program

Source: Sedar Filings


November 2, 2016 8

aware of the Embayment skarn alteration leading to a larger deposit somewhere close within the area, and have attempted to drill in various locations to the north-west. Except, as evident by the black holes just outside Titan Queen’s purplish bubble in Figure 5), the holes never made it close enough.

Although additional drilling will need to confirm this, it appears as though Nicola might have found the larger orebody.

Figure 6: IP Survey



November 2, 2016 9

Additional exploration activity will focus on determining the continuity of the Embayment skarn mineralization further west along strike (length of the target zone) and at similar depth (to that of the recently drilled hole: depths of 300m – 417m); as well as drilling additional holes at Titan Queen.

Valuation

No matter how good a company, an investment will always come down to valuation. That may sound a little cliché, and not necessarily accurate for the inefficient Canadian small-cap market, however, we would still like to see if Nicola is getting its fair treatment in the market.

Based on the fact that Nicola is a cash-flow producing company, generating cash from its milling operations, and most recently the waste dumps off-take agreement, this would make a

Figure 7: Value of Ore based on Ore Grades

$172$229

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DCF model most appropriate.

In terms of mill operations, we know that the operating costs involved in mining, transporting, milling, and G&A, amount to roughly $325/tonne. Given this, a naturally higher grading deposit would produce a much larger incentive (and profitability) for Nicola to process. As you can see from the diagram below, the breakeven grade of ore that is required is roughly 5.5 g/t


November 2, 2016 10

AuEq.

We forecast that Nicola will process roughly 60,000 tonnes of ore in 2017, and ramp up production to 94,500 by 2018 (given mill improvements). Using an average ore grade of 8.0 g/t AuEq, and a gold price of US$1,250, we forecast Nicola to produce $1.4mm and $3.6mm in free cash flow over 2017 and 2018, respectively. Using a 5.0x terminal EBITDA multiple, and a 14% discount rate, we are left with an implied Equity Value (market cap) of $40.2 million, a far cry from the $28mm Nicola is currently sitting at.

Upside: Treasure Mountain Silver DepositInvestors should also remember that apart from the Thule Copper property, Nicola also owns the Treasure Mountain, a 7,000-acre silver deposit located about 29 kilometers northeast of Hope, BC. Nicola Mining Inc. continues to maintain the option of reopening Level 1 in order to extract silver mill feed from Stope 2.

If silver hits US$20/oz or above, Nicola will consider mining out the 430,000 oz of silver presently there. The cost would only be $400k for recovery, and an additional $600k for trucking, but the reward would be well over $7.5 million. This amount is not built into our valuation.

Figure 8: Valuation - Cash Flow Projections



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Final Thoughts

Having recently completed a 5-hole drill program at several promising target areas within the Thule Copper property, Nicola is once again geared towards expanding their exploration efforts. Over the course of the next quarter, additional exploration activity will focus on determining the continuity of the Embayment skarn mineralization, as well as to develop further visibility into the mineralized zone at Titan Queen.

Combined with this exploration upside, are the company’s two separate lines of cash flow producing activities: mill processing and an off-take agreement with THVC. In aggregate, these lines are forecasted to bring generate $1.4mm in free cash flow for 2017, and $3.4mm in 2018. Based on our discounted cash flows model, we estimate that Nicola should intrinsically have an equity value of $40.2mm, much larger than its current $27.3mm.


November 2, 2016 12

Appendix A: Recent News

Nicola Mining Inc. Enters Into Exploration and Material Purchase AgreementNicola Mining announced that it has entered into an Exploration and Material Purchase Agreement with Teck Highland Valley Copper Partnership, a wholly-owned subsidiary of Teck Resources Limited. The Company will work with HVCP to conduct an exploration program on the historic stockpiles on the Property in order to gather information regarding the grade and other characteristics of the stockpiled material. Following the exploration campaigns, HVCP will have the right to purchase stockpile material mined by the Company.

Nicola Mining Ships and Receives Payment for Approximately 190 Dry Metric Tonnes Concentrate Nicola Mining announced that it has shipped to MRI Trading AG approximately 190 dry metric tonnes of gold and silver concentrate grading approximately 100 grams Au and 606 grams Ag per tonne, for an aggregate total of approximately – 610 troy ounces Au and 3,702 troy ounces Ag. The source of the mill feed that produced the concentrate is from Gavin Mines Inc. Terms of the Milling and Profit Share Agreement were announced in the Company’s May 31, 2016 news release. The Company has received the initial payment for the concentrate and will receive final payment upon confirmation of grade and weight.

Nicola Mining Inc. Intersects 1.11% Copper Over 85.92 Metres at the Thule Copper Property in Southern B.C.Nicola Mining reported that significant copper mineralization has been intersected on the Thule Copper Property located 14 km northwest of Merritt, British Columbia. The Thule Copper Property covers 10,084 hectares along the southern end of the Guichon Batholith and is 100% owned by Nicola. The diamond drilling program was designed to test 3 distinct zones on the Thule Copper Property, referred to as Embayment, Titan Queen, and Eric. Total diamond drilling meterage for the 2016 program at the property was 1,084 metres in 5 holes. Copper mineralization was intersected in all 5 holes, highlighted by an intersection of 1.11% copper over 85.92 metres in THU-002, through the Embayment Zone, located approximately 1 km northwest of the past-producing Craigmont Mine.

Nicola Mining Announces Closing of Non-Brokered Private Placement Nicola Mining completed a non-brokered private placement, selling an aggregate of 18,337,665 units, at a price of $0.12 per unit, for gross proceeds of $2.2 million. Each Unit consists of one common share of the Company and one share purchase warrant with each warrant exercisable into one additional share at a price of $0.18 for a period of three years.

Nicola Mining Commences Drilling Exploration and Lidar Survey Nicola Mining announced that it has commenced a drilling program on its 10,084 hectare Thule Copper Property located at the southern end of the Guichon Batholith approximately 14 km northwest of Merritt. The purpose is to expand copper mineralization from previously-known historic drilling and 2016 surface sampling. In addition to the three key target zones the Company hopes to prepare future drilling options on the Marb Zone, pending additional surface sampling.

September 7, 2016

September 15, 2016

October 3, 2016

August 25, 2016

June 29, 2016


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Nicola Mining Inc. Alex Cutulenco · with news of an exploration and material purchase agreement...

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