Aquila Resources Inc

Michigan Upholds Mining Permit

Impact: Mildly Positive

Aquila has announced a positive decision regarding the appeal of its Mining Permit. This update reinforces our view that the company is well positioned to transition from developer to producer and we expect that that with continued de-risking, particularly with respect to permits, Aquila is a likely takeout target. We continue to believe Aquila is worth C$0.36/sh and we expect the company to re-rate as it progresses towards production.

  • Mining Permit upheld. As per our expectation, the Michigan Department of Environment, Great Lakes and Energy has reached a final decision to uphold Aquila’s mining permit, with the judge stating as part of the ruling “that the proposed mining operation will not pollute, impair, or destroy the air, water and other natural resources, or the public trust in those resources.”
  • One permit still under appeal, process should be expedited. The Wetlands Permit is still being contested, and the evidentiary hearing is expected to start in Q2. We highlight that the judge that upheld the Mining Permit is also hearing the case against the Wetland’s Permit. This familiarity could expedite the process. We do not include the potential for an expedited ruling in our estimates, which are based on all permitting appeals are completed by yearend allowing the company to start constructing the Back Forty Mine mid-2020.
  • Not just a permitting story. While permitting has been a near-term focus for Aquila, the company continues to advance the project. In Q3 2019 we are expecting an updated PEA, which should demonstrate the underground potential of the project, and extend the mine-life beyond the 7.25 years considered in our model. Additionally, we expect the company to demonstrate the value of its Wisconsin assets this year.
Progressive de-risking should re-rate Aquila. We are maintaining our fair value estimate of C$0.36/sh, based on 0.60x our NAVPS10% estimate of C$0.60. The company currently trades at 0.33x our NAVPS10% estimate versus peers at 0.40x; an unwarranted discount because of the de-risked, high-margin nature of the project. We believe that as the company continues to de-risk the project, including resolving the current permit appeal, it should re-rate towards our fair value estimate. Upcoming catalysts include: 1) Further permitting updates 2) PEA Update (Q3/2019) and 3) Surfacing value of Wisconsin assets (2019).

Aquila Resources Inc

Harvesting the Back Forty Cash Crop

We believe Aquila Resources (TSX:AQA; OTCQB:AQARF) is worth C$0.36/sh based on applying a 0.60x multiple to our initial NAVPS10% estimate of C$0.60/sh. Aquila is developing the high-margin Back Forty Au-Zn-Cu project in Michigan and is poised for a re-rating as it transitions from developer to producer. Additionally, the FCF expected from this project once in production, is likely to attract mid-tier producers looking to bolster their balance sheets and production profiles. We believe investors stand to benefit from the ongoing transition from developer to producer, as manifested by project de-risking with the potential to be taken out at a substantial premium to the current share price in the medium-term.
Investment Thesis:

  • High margin project to provide substantial FCF once built. We model this true polymetallic deposit as generating and average of US$52M in FCF (CFO+CFI) over its 7.25 year open-pit mine-life for an initial capex of US$294M which we model being funded by combination of remaining royalty payments, debt and equity.
  • Underground potential provides upside beyond our estimates. We would expect the mine-life to extend beyond the open-pit and transition underground as was outlined in the 2014 PEA. We currently model an in-situ value of C$57M for the underground. As well, constrained capital markets have resulted in limited exploration on the project, and we expect the underground resource to grow, both near-mine and on the wider land package (Figure 20).
  • Permitted project attractive to mid-tier producers. With few high-margin, permitted projects in quality jurisdictions, Aquila’s work to de-risk this project along with the exploration upside is likely to make it an attractive target for mid-tier producers. We model a pre-financing NAVPS of C$0.67 and with historic take-outs at 0.90x NAV (Figure 15), this points to 209% upside from the current share price.
High margins and permits warrant a premium valuation to peers. Aquila currently trades at 0.33x our NAVPS10% estimate versus peers at 0.39x; however, we believe the fact that this project is permitted in a good jurisdiction, with high anticipated margins this company warrants a premium valuation. Consequently, we are using a 0.60x multiple to our NAVPS10% estimate to derive our C$0.36/sh fair value. We believe that as the company continues to de-risk the project, it should re-rate towards our fair value estimate. Upcoming catalysts include: 1) Permitting Updates (2019), 2) PEA Update (2019) and 3) Surfacing Wisconsin assets (Q1/19).



Aquila Resources Inc

Progressing Towards Production

Impact: Mildly Positive

Aquila released a positive permitting update, as one of the legal challenges for its permits was dismissed. While the legal challenge of permits is normal course in the U.S., this result acts as another positive step to advancing Back Forty towards production. We view Aquila as an undervalued take-out candidate on the verge of a re-rating through the development of the high-margin Back-Forty polymetallic project; the backdrop of a tightening commodities market should underpin the strategic value.


  • Back Forty prevails. The Federal Lawsuit against Aquila’s Wetland Permit was dismissed putting the company one step closer to being able to start construction at its Back Forty project in Michigan. The company is currently fully permitted for construction and commencement of operations and is waiting on the resolution of two other contested permit cases, both of which we expect to be resolved in 2019.  
  • Pre-construction work continues. Backed by a recent US$7.4M streaming payment (an advance on the total US$55M agreement) from Osisko Gold Royalties and with a total US$10.5M in cash, the company is funded to continue advancing the Back Forty Project. Besides permitting updates, the next key catalyst is likely to be an update on project financing (likely a combination of debt, stream and equity).  
  • Adding value with Wisconsin assets. Aquila has two 100% owned exploration projects in Wisconsin and with mining moratorium recently removed in this state, these projects could add some exploration sizzle to Aquila. The Reef project (Au) is the nearest at 85 km west from Back Forty and Bend is a Cu-Au project also located in Wisconsin 135km away from Back Forty. Both projects provide significant exploration potential and Aquila has a first mover advantage in a good jurisdiction.  
Further de-risking and the roll-out of Wisconsin should drive the share price higher. Aquila currently trades at 0.41x consensus NAV, a slight premium to developer peers at 0.40x (Figure 1). We believe that as Aquila progresses down the path to production it should re-rate with Wisconsin likely providing additional value. Upcoming Catalysts include 1) Permitting Updates (2019), 2) PEA Update (2019) and 3) Surfacing Wisconsin assets (Q1/19). 



Aquila Resources Inc.

Positive Feasibility Study Follows Recently Received Permits

Impact: Positive

Following the receipt of permits, Aquila has announced the results of an open pit only feasibility study (FS) for its Back Forty project in Michigan, which demonstrates positive economics for a low-cost polymetallic open pit mine. Considerable upside remains for the project with the potential addition of an underground operation that was previously outlined in a 2014 PEA.
  • Feasibility Study is in line with our expectations
  • Potential addition of an underground expansion provides material upside to the FS mine plan
  • With permits in hand and a positive FS released, focus now shifts to the pre-construction phase
We expect Aquila to continue trading at a premium to zinc explorers and re-rate towards a valuation comparable to that of zinc developers and producers in North America.


Aquila Resources Inc.

Final Major Permit Received for Back Forty

Impact: Very Positive

Aquila has received its wetlands, lakes and streams permit from the Michigan Department of Environmental Quality and has now received all the major permits required for construction and commencement of operations at the Back Forty Project in Michigan.

  • With all required major permits in hand, pre-construction activities will begin immediately
  • Back Forty open pit Feasibility Study, which has been nearing completion, is expected to be published in the coming months
  • In addition to pre-construction activities, we expect to see finalized plans for an exploration program to test additional targets at Back Forty
Now that Aquila has received its final permit for Back Forty, we believe the company is well positioned to complete the feasibility study and start construction with funding in place to support pre-construction activities. We expect Aquila to continue trading at a premium to zinc explorers and approach a valuation comparable to that of zinc developers and producers in North America.


Aquila Resources Inc.

Final Permit for Back Forty Moving Towards Resolution

Impact: Neutral

Aquila continues to work towards receiving the company’s final permit, the wetland/stream/floodplain permit, in order to commence construction at Back Forty.

  • Certain EPA objections have been resolved, and have been conveyed to the Michigan Department of Environment Quality (MDEQ)
  • Aquila and the MDEQ have until June 6, 2018 to resolve remaining objections to confirm the proposed permit conditions comply with the EPA
  • Recall, as of the December 2017 the permit was deemed administratively complete, Aquila assures the remaining issues should be resolved, and conditions met
Upcoming permitting news will be an important near-term catalyst for the company, we believe Aquila is well positioned to complete the feasibility study and start construction once the final permit has been granted, with funding in place to support pre-construction activities.



Aquila Resources Inc. (TSX:AQA)

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