Nicola Mining, $51 mm Invested, Market Cap $6 mm

The following interview of Mr. Peter Espig, was conducted by phone & email in the week ended October 30, 2015. Mr. Espig is CEO of Nicola Mining [NIM.V]

CEO Espig grew up around mines & exploration projects, having spent eight years working as a diamond driller in the 1980s. Also in the 1980’s, Mr. Espig earned an MBA from top-10 U.S. business school, Columbia University. His career as a renowned turnaround specialist & financier, places him in an ideal position to advance Nicola Mining.

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Mr. Espig has structured greater than US$ 2.5 billion in private & public deals. Prior to accepting the full-time role as CEO, Mr. Espig served as an Independent Director, a role that allowed him to better understand the hidden fundamental value of Nicola’s assets and to hit the ground running. [Corporate PresentationAll figures in C$.

Can you please explain the history of Nicola’s predecessor company Huldra Silver as far back as you care to go?

Huldra Silver Inc(Huldra) was incorporated in 1980 and focused on the exploration & development of its wholly owned group of mineral tenures located in British Columbia (BC). Silver-lead-zinc Treasure Mountain (TM) 29 km northeast of Hope BC, comprises 52 mineral tenures on an area covering 3,187 hectares (7,875 acres). Between 1987 & 1989, Huldra explored 4 underground levels with 2,743 meters (9,000 feet) of cross cuts, drifts & raises and punched another 1,676 meters (5,500 feet) of underground holes. An additional 3,048 meters (10,000 feet) of surface drilling was completed.

A bulk sample of 407 Metric tonnes, “Mt” of high-grade material was shipped to Cominco’s & Asarco’s smelters for testing. The shipped material was compatible with the smelters’ requirements.

Despite low metals prices in the 1990s & 2000’s, Huldra conducted modest exploration at TM. Notably, management updated property maps, particularly mine plans, and conducted rotary drilling records. In 2007 considerable work was done to prepare a, “NI” 43-101 compliant resource. On the basis of updated, digitized data, a NI 43-101 report was completed in 2009. Total Indicated resource above a 10.0 oz/ton (311g/Mt) cut-off was estimated at 33,000 Mt @ 24.2 opt (753g/Mt) silver, plus 4.16% lead & 3.80% zinc, plus an Inferred resource estimated at 120,000 Mt @ 27 opt (840 g/Mt) silver, plus 2.79% lead & 4.36% zinc.

In 2011, camp construction at TM, including facilities able to support 50 workers, was completed. Importantly Huldra acquired 100% ownership of Craigmont Holdings for consideration of $8 million. The Craigmont property is located near Merritt BC, 70 km north of TM. Huldra’s intent was to acquire property with an existing mining & milling permit. Given amicable weather, water, electrical infrastructure and proximity to Huldra’s former mining operations, Craigmont’s property was an ideal location. The Company invested $21.6 million into a new mill plus $2.0 million into a lined tailings facility. Huldra built the Merritt Mill in 2011-2012, completing it in November 2012.

Given a new management team & Board, and a new company focus, what are KEY takeaways from the Company’s history? 

Huldra Silver is an example of a company that had viable assets and a working business plan, yet was unable to service its debt. It encountered a perfect storm of excessive debt, falling commodity prices and diminished liquidity in debt & equity markets. As a result, a new management team benefits from Nicola owning superior assets (see below) with near-term cash flow & longer-term exploration potential. Starting next year, we hope to deploy cash flow from our milling partnerships and Industrial Soil segment to fund our other promising assets and potentiality for acquisitions of distressed  assets. Essential to understand is the debt restructuring I spearheaded, slashing untenable debt of $24.5 million to under $10 million on very favorable terms. We greatly appreciate the cooperation of our creditors in this respect. 

Screen Shot 2015-11-18 at 9.48.44 AMThe economic environment continues to be illiquid and unsupportive of junior miners, creating highly attractive M&A opportunities. As a former M&A banker and distressed turnaround specialist, I understand how to acquire (companies / assets) and structure transactions. We continue to look at assets that can be acquired at meaningful discounts to capital invested. However, it’s not just the discount that matters, but also the synergies created by consolidating a valuable property with our new mill site. [Corporate Presentation]

Why did you change the name from Huldra Silver to Nicola Mining Inc.?

The name change is simple. Some may assume it was due to our predecessor entering creditor protection, causing its market capitalization to collapse, but this is not the main reason. Huldra Silver was exactly what the name implies, a silver-focused junior mining company, but Nicola has become much more than that. We have the potential to become a consolidator of small, high-grade gold & silver deposits, (and associated base metals), located throughout British Columbia. We changed the name to Nicola Mining because we are in the Nicola Region.

Legacy Huldra Silver Debt Structure:

Debt Holder Description Amount
Waterton 1 DIP Financing $3,200,000
Waterton 2 Senior Debt $7,300,000
Convertible debenture Holders Unsecured $11,000,000
Trade Payables Subordinated $3,000,000
Total   $24,500,00
Can you please describe the recently accomplished financial / debt restructuring?

Our team’s proactive restructuring of debt while in CCAA is one of the more compelling parts of the Nicola Mining story.  At the time of my taking over as CEO, the Company had defaulted on $24.5 million in debt and payable obligations that required immediate restructuring. Post Tranche 3 Financing, the Company will have a senior secured, 3% coupon note of $1,287,500 due in 3 years and a Secured Convertible Debenture of approximately $8.5 million, due in two to three years. [Management Team & Board]

Restructured Nicola Mining Debt Structure:

Debt Holder Pre-Offering Post Debt Conversion
Waterton 1  (DIP Financing) $3,200,000 $1,287,500 (3 years)
Waterton 2 $7,300,000 $0
Unsecured Convertible Debt $11,500,000 $0
Payables & CRMC Settlement $3,000,000 $0
Secured Convertible Debt   $8,500,000  (2 – 3 years)

You have described Nicola Mining as a package of 4 distinct, non-correlated assets. Can you please outline those 4 assets?

Asset # 1: The Merritt Mill is fully operational, requiring no cap-ex to commence milling of up to 300 Mt per day, “tpd.” We would  require roughly $150k in cap-ex to install equipment allowing us to utilize a back up crushing system. If installed, Nicola would be able to concurrently process mill feed from two lines. Our mining partners pay mining & transportation costs and a tailings disposal fee. We pay milling costs. Nicola sells the concentrate, with resulting profits split 50 / 50.

A key component of our partnerships is that they are exclusive. It`s truly a win / win. We unlock value for our partners properties by giving them an opportunity to monetize. In many cases, Without Nicola, the miners would probably not be mining at all. We are their only outlet. It`s extremely difficult and costly to get a milling permit so we’re in a very advantageous position.We will share profits equally with our partners to ensure a cooperative and positive partnership experience. We expect to need fewer than 10 partnerships and our churn rate to be low. Churn can be a very disruptive force. Currently we have 3 partnership agreements in place; the first guarantees delivery of 15 g/Mt gold, the second 1,306 g/Mt silver and the third, 7 g/Mt gold.

Our third Milling Profit Share Agreement is with a company a called Siwash, see press release. Siwash’s mine is low-cost, its main vein system outcrops at surface. Our partner has about 3,500 Mt stockpiled and is required to deliver a total of 6,500 Mt ending in 2nd Qtr of 2016. Siwash is applying for a 10,000 Mt sample permit, (~ 167 tpd over 60 days). Assuming we process our partner’s 6,500 Mt over the course of 60 days, that would equate to roughly 100 tpd, or 1/3 of Merritt Mill’s initial capacity.

Asset # 2: Treasure Mountain, a former operating mine, has $460,000 of remaining costs to mine Level 1 Stope 2 and another $308,000 to ship mill feed to the Merritt Mill. Proceeds from our 3 milling partnerships are expected to repay a portion of Waterton’s debt, fund exploration and bolster working capital. Nicola Mining owns 100% of Treasure Mountain’s silver, lead, zinc deposit consisting of 51 mineral tenures, 21 legacy claims, 100 cell units and five crown grants totaling 2,850 hectares (7,043 acres). The Company maintains the option of reopening Level 1 to extract silver from Stope 2. However, given depressed silver prices, our near-term focus remains on exploring 3 prospective targets.

Asset # 3: Thule Copper has, without question, tremendous blue-sky potential. I don’t use the term, “blue-sky” lightly, Thule Copper was once the largest open pit copper mine in the world. Thule’s mining leases comprise 20 mineral claims covering 8,457 hectares (20,898 acres), of which 10 claims are contiguous. Thule Copper is known to host mineralization in the form of copper-iron skarn and copper porphyry. It’s located 20 km south of Teck Resources’ Highland Valley Copper operation, 10 km from Merritt, BC. Historical workings of 34 million Mt of high-grade copper ore mined from open pit and underground operations from 1962-1982. Past producing sites are much easier to obtain permits and approvals, less likely to suffer local opposition and  are endowed with ample infrastructure in place at no cost to the Company. 

Asset #4: Industrial Soil. Our 4th asset was recently developed by Nicola Mining. It’s a portion of our property permitted to accept contaminated (industrial) soil. As mentioned, this asset and the utilization of the Merritt Mill, are the nearest-term cash flow opportunities. By 2h 2016, we expect to be cash flow positive. In the meantime, we don’t anticipate requiring equity capital, except for compelling, accretive acquisitions.

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Did Huldra Silver own all 4 assets? How much capital was deployed?

That’s a very good question. Huldra owned the Mill, Treasure Mountain & Thule Copper. Prior management spent a very considerable sum advancing these assets. A total of $51 million has been sunk into our assets. This is noteworthy given that our current market cap is just $6 million. A portion of the $51 million deployed was completed many years ago. In today’s dollars, the cost of replicating those expenditures would be meaningfully higher. 

Please explain near and intermediate-term catalysts to watch for

There are several important catalysts to watch for, milling operations, M&A, a possible non-core asset sale and Industrial Soil handling. The toll milling of miner partnerships’ ore is expected to commence by the 2nd Qtr 2016. Given the distress in the mining industry, we expect to see very attractive & accretive M&A opportunities. We are reviewing a couple of opportunities now. We have a contract in place to accept up to 300,000 Mt of industrial soil at roughly $5.50/Mt, net revenue to Nicola. We have an offer for a non-core property listed for $2.5 million.

What would be an approximate valuation of Nicola’s assets in an orderly liquidation? Does this represent a reasonable downside scenario? 

I don’t want to imply that the sale of our asset(s) has material value, in a distressed environment characterized by limited liquidity, there’s no telling what any asset is worth. We do have at least one potentially valuable hard asset, the Merritt Mill, constructed at a cost of $21.6 million. However, in this market we would rather be buyers at steep discounts, not sellers.

The opportunity for us to consolidate in this epic downturn for TSX:V listed companies is exciting. We ourselves could be an attractive takeover target, we’ve already been approached. The most important thing is to demonstrate that our assets can generate cash flow. That’s when our valuation could improve very significantly. It’s really hard to come up with a sum of the parts analysis pre-cash flow. It’s prudent to assume that the value of non-cash flowing assets in this environment is essentially zero. I believe we need to look at our assets as an NPV exercise. Screen Shot 2015-11-03 at 7.51.52 PM

Advancing these assets will require investment capital. How will Nicola fund ongoing capital expenditures? 

Funding requirements are minimal, although we will be required to spend approximately 200k on our 100% owned Thule Copper asset to maintain permits. We’re really excited about Thule given the work done to date. Other cap-ex will be contingent upon cash flow. Unless there’s an exceptionally accretive opportunity, we will be conservative with our cash.

If the market fails to reward Nicola with a proper valuation could the Company go private, declare a special dividend or spin out assets? 

No, it’s not our goal at all to, “go private,” but rather focus on getting to a point that would entice senior secured debenture holders to convert into equity. More likely, listed miners with solid BC-based assets, but lacking cash flow, will find it difficult to pay listing, accounting and administrative fees. Shareholders of these companies will lose interest and management will look to consolidate with a stronger player like Nicola Mining.

Are there any misconceptions on Nicola Mining that you would like to address?

Thank you Peter [Epstein], I think we covered a lot of ground. In terms of misconceptions, one might be that we’re merely another junior natural resource company requiring ongoing, dilutive, capital raises to fund losses. This is not the case given that we expect to generate revenues & cash flow next year. Our stock price and trading liquidity might be an indicator of that perception, but again,we believe that’s no reflection on our assets and cash flow potential.

I believe our under-valuation could be due to a lack of understanding of the new Nicola Mining. We are just starting to tell our story and educate shareholders and prospective shareholders alike. Few may notice that we’re quite advanced on Treasure Mountain. As a past producing mine, the infrastructure is in place, the capital sunk & permits are pending. Finally, our market cap is just $6 million, yet the total amount of capital spent on our assets to date is $51 million. I believe there’s a disconnect between those figures. Hopefully, over time, our market cap will better reflect the large sum of capital invested and our ability to generate cash flow.

[Corporate Presentation]

[Management Team & Board]

[Press Releases]

Disclosures: Nicola Mining has a small market cap. Small market cap stocks are highly speculative, not suitable for all investors. I, Peter Epstein, own shares and stock options of Nicola Mining. Mr. Epstein, CFA, MBA is not a licensed financial advisor. Readers should take that fact into careful consideration before buying or selling any stocks referenced by him. 

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