December 21, 2010 - 10:05am EST by
2010 2011
Price: 2.72 EPS $0.00 $0.00
Shares Out. (in M): 103 P/E N/A N/A
Market Cap (in $M): 280 P/FCF N/A N/A
Net Debt (in $M): -28 EBIT 0 0
TEV ($): 252 TEV/EBIT N/A N/A

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Duluth Metals is developing the polymetallic Nokomis deposit in Minnesota in partnership with Antofagasta. Greater clarity about the development plan is likely to demonstrate high return potential at long-term metal price forecasts. Yesterday Duluth announced the acquisition of Franconia Minerals which owns properties bordering Nokomis.





Basic Shares Outstanding

124.4mm (following FRA acquisition)


10.6mm at average strike price of C$1.62



Basic Market Cap


Average Daily Volume


Net Cash

$28mm at 9/30/10

$10mm following FRA acquisition

Enterprise Value

$326mm following FRA acquisition

Major Shareholders

Antofagasta 14.2mm shares (11.4%)

Wallbridge Mining 11.6mm shares (11.3%)


Home Page

Investor Presentation

Franconia Acquisition Presentation

Investor Contacts

Mara Strazdins,
Director of Corporate Communications
(416) 369-1500 ext 222

Christopher Dundas
Chairman & CEO


With a resource of over 800 million tonnes of ore at an average copper equivalent grade of 1.51%, Nokomis is one of the world's largest copper deposits still controlled by a junior company. This week's announcement of the acquisition of Franconia Minerals will likely increase the Nokomis resource by at least 300 million tonnes. Duluth released a Preliminary Economic Assessment in 2009 with a lot of background information that is still relevant, but the market may not appreciate the current value of the evolving project until release of a Prefeasibility Study late in 2011. Review of these key issues suggests a positive reaction is likely:

  • Technical - Aside from its large scale, Nokomis does not appear to present any unusual technical challenges. A long history of iron mining and has left Northern Minnesota with good infrastructure and an experienced mining workforce. Duluth's ore can be extracted using standard underground mining techniques.


  • Environmental - Nokomis sits only three miles from the federally designated "Boundary Waters Canoe Area Wilderness". The environmental risk associated with Nokomis sulphide ore is that once brought to the surface, sulphur in the ore could mix with water to form acid, leach toxic metals from exposed rock, and then drain into the wilderness where it would kill plants and wildlife.


    The main point in Duluth's favor is that the above ground "footprint" of the Nokomis mine will be relatively small. All digging, blasting, and crushing will take place underground. A majority of the tailings will be returned underground as fill for mined out areas. This will provide environmentally secure disposal (putting the sulphur right back where it came from) and also maintain mine stability. Duluth has purchased a nearby abandoned open pit iron mine for disposal of the remainder of its tailings. Minnesota politicians have expressed support for the project since it will bring high paying jobs to the region and significant tax revenues to the state. These links provide an overview of public opinion and concerns that must be addressed:

Formal permitting applications can only be made once the mine development plan has been determined (likely after completion of the prefeasibility study in 2011). Duluth will benefit from the experience of Polymet's Northmet project to the southwest of Nokomis. A smooth permitting process could be completed in 6-9 months. Polymet's Environmental Impact Statement was published in 2009 and received a negative response from regulators, but not a rejection. The biggest problem was that Polymet made many changes to its mine plan so that some of its data and documents could not support its final application. Polymet's operation is also a brown-field site with an existing mill and tailings facility so the environmental impact of its future plans is complicated by the legacy of old activity. Polymet is currently preparing a Supplemental Environmental Impact Statement to address the deficiencies in its original submission.

Duluth believes that regulators will look favorably on its acquisition of Franconia because it will reduce the number of facilities being planned in the region.

  • Financing - Duluth's partnership agreement (now legally established under the name Twin Metals) with Antofagasta appears to eliminate the need for Duluth to provide any additional funding:

    • In exchange for a 40% stake in Nokomis, Antofagasta committed to spend $130mm over three years to fund preparation of a Bankable Feasibility Study. In conjunction with the Franconia acquisition, Antofagasta committed an additional $30mm, but the use of this money has not yet been determined.

    • If additional funds are required then Antofagasta can maintain its purchase option by spending up to an additional $85.7mm. This appears designed to fund the JV during a period after completion of the BFS and prior to receipt of environmental permits that would allow construction to begin.

    • Antofagasta can purchase an additional 25% stake in the JV (bringing its interest to 65%) by paying a cash price equal to 25% of the after-tax project NAV shown in the Bankable Feasibility Study.

    • Antofagasta will arrange project financing for construction. The cash from exercise of the 25% option is very likely to cover the equity commitment required from Duluth during construction.

Duluth is in a very rare position as a junior company controlling a giant project without needing to raise any money for development.

  • Economic Return - The 2009 PEA showed an attractive return using "long-term" commodity price forecasts that now appear extremely low. Duluth has not provided any new guidance about development plans since forming the Antofagasta JV and announcing the acquisition of Franconia. The forecast below is based on logical implications of the company news in the past two years and general market developments. Explanation of some key assumptions follows the table.

2009 Preliminary

Economic Assessment


Commodity Prices

- copper

- nickel

- cobalt

- platinum

- palladium

- gold













Mining rate (tonnes per day)


2017 - 20,000

2018 - 40,000

2019 - 60,000

2020 to 2038 - 80,000

Ore grade

- Copper

- Nickel

- Cobalt

- Palladium

- Platinum

- Gold





0.47 g/t

0.21 g/t

0.10 g/t


100MT of High Grade Areas mined for first 5 years




0.61 g/t

0.27 g/t

0.13 g/t


Life of Mine Throughput

282.4 million tonnes over 22 years of operation

574 million tonnes over 22 years of operation

Net Smelter Return


$74/tonne avg grade

$81/tonne high grade

Life of Mine Operating costs



Pre-production Capex



Pre-tax NPV at completion of Feasibility Study (2013)



After-tax NPV (assume 75% of PT)


  • Commodity Prices. The Twin Metals JV agreement specifies that the Feasibility Study will use the average of long-term price forecasts by three consulting firms: Brook Hunt, CRU, and Bloomsbury. These firms are typically conservative and their numbers will likely be substantially below the current spot market. It's difficult to forecast a long-term "price forecast" three years in advance, but the levels in the table are estimated based on the marginal cost of bringing new mines into production. The nickel outlook probably has the greatest uncertainty. It's the natural gas of metals; most analysts are bearish due to expected rising supply from new mines. However, most of the new mines will process laterite ore using technology that has so far been a commercial disappointment. There's considerable room for upside over the estimated prices.

  • Mining Rate. The 2009 study covered only a third of the Nokomis resource so Duluth was talking about doubling the mining rate to 80,000 tpd even before the Franconia acquisition.


  • Operating Costs. The January 2009 study estimated operating costs of $22.72/tonne. An indication of inflation since that time can be obtained using the 43-101 report recently prepared by Scott Wilson RPA for Franconia Minerals Birch Lake deposit which is just a few miles southwest of Nokomis. The allocation of expenses to individual line items varies a bit, but the overall mining and milling processes are nearly identical so the Birch Lake study should be a very good current estimate of the cost level at Nokomis.

Operating Costs ($/tonne)

Scott Wilson RPA

Preliminary Assessment of the Nokomis Project

January 8, 2009

Scott Wilson RPA

Resource Estimate Update for the Birch Lake Project

December 1, 2010







Slurry pipeline







PLATSOL treatment charges








  • Pre-Production Capex. Aside from hints about doubling the throughput rate, Duluth hasn't provided much updated information about the mine plan. $3Bn is a really big number that hopefully should more than cover price inflation plus the bigger mine size. There's considerable room for improvement over this estimate. For example, the 2009 study assumed above ground storage for all tailings rather than placing them back underground as fill.

  • After Tax NPV. The 2009 study calculated a pretax NPV which is cited in all Duluth promotional materials. The Twin Metals JV agreement states that Antofagasta's 25% purchase option will be at the After-Tax NPV. I roughly estimate the tax impact at 25%.

While there is considerable scope for the feasibility study to show a higher return than these estimates, Antofagasta's option price is based on the NPV so they have a strong incentive to discourage excessive optimism.


In January 2010 Duluth signed a partnership agreement with Antofagasta that was finalized in June 2010. Antofagasta brings tremendous technical and financial strength to the Nokomis JV. The family-controlled company has a history of savvy investments. It became involved in major copper mines in the 1980s and then made a significant sale to Marubeni near the market peak in 2008. All of its current mines are in Chile, but the remaining undeveloped orebodies there are at declining grades and face significant infrastructure constraints. For example, Antofagasta has to spend $500mm just on pumping stations that will bring seawater for use at its Esperanza project. The Land of Lakes provides an appealing contrast. And as a family controlled company, Antofagasta is naturally attracted to a project that can operate for several generations.

Antofagasta has shown great enthusiasm and commitment to Nokomis, however, the partnership is structured so that they will only have to commit the largest amount of funding after a complete feasibility study and probably after environmental permits are received. They pay a higher price by waiting, but they lower their risk.


Current Value (after closing of FRA acquisition):


Net Cash


value of stake in Nokomis JV (implied value of 60% based on Antofagasta's commitment of $160mm for 40%)


Cash from option exercise


Company Value after Full Dilution


Fully Diluted Share Count


Value per share

2013-2014 Value upon Antofagasta's exercise of 25% option


Net Cash


Cash from exercise of 25% option


Value of stake in Nokomis JV (implied value of 35% based on Antofagasta's purchase of 25%)


Company Value


Fully Diluted Share Count (assume 3% increase per year from option grants)


Value per share

Gradual release of new information in 2011 about the development plan and late 2011 release of the Prefeasibility study should move Duluth towards the 2013-2014 value that would be recognized by exercise of the Antofagasta option.

Duluth has retained large exploration rights and has begun searching for "the next Nokomis".  If the first Nokomis is worth $3Bn, then finding another one would certainly be very rewarding, however this work is at a very early stage and it's hard to attribute any value at this time.


Nokomis was owned by Wallbridge Mining (TSXV:WM quote, website) and spun off to shareholders in November 2005. Wallbridge retains 11.6mm shares of Duluth, a large portfolio of Sudbury Basin exploration properties, and some very early stage British Columbia exploration properties that are being spun into a new company that will list in early 2011. With a market capitalization of $25mm and net cash of $3mm , Wallbridge currently trades for less than the $31mm value of its investment in Duluth Metals. This negative Enterprise Value has persisted for quite some time and there's no near-term catalyst to change it, however if you get comfortable that Wallbridge's remaining properties will not drain the value of its DM shares then WM would be an attractive way to invest in Duluth.


Duluth offered to acquire its neighbor Franconia on 12/20:

Franconia shareholders will have the option to receive cash (on the basis of C$0.90 per Franconia share), Duluth shares (on the basis of 0.328 Duluth shares per Franconia share) or any combination of cash and Duluth shares, subject to pro-ration, with an aggregate maximum cash consideration of C$37,979,189 and an aggregate maximum of 13,841,304 Duluth shares.

At their 12/20 closing price of $0.82, Franconia shares offer a attractive discounted means of investing in Duluth. And the return if you receive the cash consideration is also extremely attractive. Duluth is very familiar with Franconia and will realize significant benefits from the merger so the transaction is extremely likely to close.


Each factor with potential upside could also disappoint. The large scale of the project could prove unwieldy and lead to planning errors and cost overruns. Commodity prices could fall sharply, it happened in 2008 and it could happen again. The permitting process could delay development.


- Gradual disclosure during 2011 of updated development plans
- late 2011 release of a prefeasibility study
- late 2013 release of a bankable feasibility study
- receipt of environmental permits
- Antofagasta exercise of 25% option
- exploration success
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