Marlin Gold Mining MLN - Noble Capital Marketsnobleresearch.com/reports/MLN_20170417_9814.pdf2017/04/17 · Buy Initiation Current Price $0.70 Target Price $3.00 Market Capitalization

Apr 17, 2017

Basic Materials

TSX

MLN.V

Buy Initiation

Current Price

$0.70Target Price

$3.00

Market Capitalization 121.05M

Shares Outstanding 172.93M

Float 24.82M

Institutional Holdings 0.00%

12-month Low/High $0.31/$0.75

Average 90-day Volume 39,760

Fiscal Year End Dec 31

Revenues ($ MIL)

Period 2016 2017E 2018EQ1 3.7 22.5Q2 2.2 12.5Q3 3.5 13.8Q4 20.8 13.5 30.2 62.4 65.2

Marlin Gold MiningEmerging mining company is poised to grow

Small, under-followed company is not being given credit for recent developments. Last fall, Marlin identified a high-grade zone that has led to a large increase in gold shipments. In April, the company announced drilling results that could greatly extend the life of its producing mine. We believe the market is not giving the stock credit for these developments because of its small size and share float.

The company should start generating large amounts of cash soon. Increased shipment of gold beginning in the 2017-1Q should greatly increase revenues and cash flow. This should allow the company to pay down debt associated with developing the property and fund the start-up of the next mine. We look for cash flow generation to continue to grow in future years if management can duplicate the success it is having with the initial mine.

Growth could come quickly. We view Marlin as an acquire and exploit mining company that will use cash flow to make acquisitions. We believe growth will be accelerated by the use of loans from a strong financial partner and a proposed capital structure that might include a public offering of a high-yield royalty company.

We recommend the purchase of MLN/TSX up to our price target of $3.00 and the purchase of the shares of MLNGF/OTC up to our PO of $2.25. Our PO is based on a discounted cash flow over the life of existing mines discounted back at a rate of 8% and adjusted for the Company's current cash and debt position.

Equity ResearchMichael Heim, CFA, Senior Research Analyst (314) 308-9711 [email protected]

Noble Capital Markets, Inc.Trading: (561) 998-5489 Sales: (561) 998-5491 www.noblecapitalmarkets.com

Refer to the last two pages for Analyst Certification & Disclosures

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Investment Appraisal

We believe Marlin Gold has attractive assets that are not fully appreciated by the market due to the company’s small size and stock float. However, we believe the company management has a game plan to grow the company and that the value of Marlin’s assets will become apparent as it becomes larger and begins generating cash flow above its capital requirements. We are intrigued by the company’s organization structure that includes a financial backer and a proposal to spin off a royalty company, giving investors the choice of a fast-growing mining development company as well as a high-yield royalty company. We believe management has the vision and experience to take the company to the next level and believe investors will be amply rewarded for investing in the company during its early stages.

Positive Features

1. Recent results at the La Trinidad mine. Marlin hit a high-grade zone at its La Trinidad mine in Mexico last fall which has resulted in a dramatic increase in gold shipment in recent months. On April 10, 2017, it announced results of two drill holes that encountered pay zones of 8 and 5 grams of gold per ton (as compared to the last resource estimate of 1.79 g/t for all of La Trinidad). The discovery has the potential to greatly extend the life of the mine and lower already-low operating costs.

2. Strong Financial Partner Backing Operations. Wexford Capital LP owns 81.6% of Marlin. In addition, it has periodically lent money to Marlin to finance acquisitions and mine development. We believe this structure provides stability to Marlin’s stock price and reduces financing risks.

3. Corporate Structure Provides Different Investment Options. If management moves forward with plans to spin off a royalty company, it will provide investors with the choice of a passive, high yield, play on production and prices (Sailfish) or a dynamic, high growth, operator of assets (Marlin Gold).

4. Management has had success with this structure on the energy side. Management believes the structure could operate similar to that of an energy holding company and MLP subsidiary in that the holding company could sell assets with steady passive income streams to the royalty company which would serve as an investment vehicle for holding company growth. Diamondback Energy and Viper Energy Partners, which were also formed by the Wexford team, have been a successful example of this strategy.

5. Experienced management team. The Marlin management team has a history of identifying and developing mining properties. This expertise will be critical to the company’s plans to expand and establish its proposed organizational structure.

Investment Risk:

1. Commodity price risk. Earnings and cash flow will be highly dependent on the price Marlin receives for

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Marlin Gold Mining MLN.V | CURRENT PRICE $0.70 | Buy | 04/17/2017Michael Heim [email protected] (314) 308-9711

the sale of its precious metals. Silver and gold prices are below traditional levels, but have shown some strength in recent months. Further declines in prices would adversely affect results and could result in a reduction in operations.

2. Foreign currency risk. Operations in Mexico are transacted in Pesos and US Dollars. Financial results are reported in Canadian dollars. Changes in foreign currency exchange rates may adversely affect financial results.

3. Finite asset base. Marlin’s asset base is finite and the company’s ability to operate as an ongoing concern may be dependent upon management’s ability to identify new resources through exploration and acquisition.

4. Political risk. Marlin’s current assets in Mexico lie in areas with a long history of mining and that are generally supportive of the industry. However, a change in government’s support or the rise to power of drug cartel operatives could adversely affect the company’s ability to acquire property, obtain permits, or run operations in a safe and productive manner.

5. Small float. Public float represents less than 5% of the stock and represents a float of less than $5 million. We believe the company intends to grow its profile through the issuance of equity when making acquisitions.

Corporate Strategy:

We view Marlin Gold as an acquire and exploit mining company focused on the acquisition of underutilized gold and silver mining assets. We believe the company plans to grow by acquiring mines that were closed during periods of low pricing, expand the mine’s resource potential by drilling exploratory wells, and then improve the mine’s economics by modernizing plant operations. Marlin prefers acquiring full control of assets but will own royalties and streaming assets if it is unable to purchase the assets outright. As the company brings a project to production and positive cash flow, we believe the company will use the proceeds to make larger and larger acquisitions and attempt to repeat previous successes. We believe an initial public offering of a high-yield royalty stock could accelerate the company’s growth from a small mining company to a mid-tier company. We believe Marlins strategy of selling royalty and streaming rights from the holding company to the royalty company could become an efficient form of financing for future acquisitions.

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Asset Description:

La Trinidad

La Trinidad is an open pit gold mine located near El Rosario in Northwest Mexico. It was operated by Eldorado in the late Nineties and brought back to commercial production by Marlin in 2014. La Trinidad is not a large mine complex. Measured and indicated resources are approximately 4 million tons of raw or 248,000 ounces of gold implying a mine life of 2-3 years at current production rates. However, the company continues to identify new production targets that are not yet included in the resource estimate that was completed in 2012. Importantly, the company reported extremely impressive drilling results on April 10, 2017 that were very high grade and may have identified a strike zone in the South with a length of up to a kilometer. If confirmed, such a find could increase the mine life of La Trinidad by many multiples. Marlin maintains a drilling crew with two active rigs and will spend the rest of 2017 testing the discovery.

Marlin has been stockpiling mined material at the leach pad since discovering a high-grade gold zone at La Trinidad last fall. As the company accelerates waste removal from the leach pad, the stockpile of raw tonnage has begun to decrease and the production of gold has accelerated. Gold shipments have risen from a rate of about 2,000 ounces a quarter to a rate above 18,000 ounces in the 2017 first quarter. This production rate has begun to slow as the company works through the high-grade material that has been stockpiled. Still, management now believes this will remain above 4,000 ounces per month for the rest of the year and that production results for the year will be materially higher than the 42,000 ounce estimate previously used in past presentations.

Operating costs have been declining with increased production, although costs have risen in recent months as the company works to remove wastes. We look for operating cash costs of approximately $650 per ounce and all in sustainable costs near $900 per ounce which should generate strong cash flow over the life of the mine at current gold prices near $1300 per ounce. Management hinted that production cash costs could be as low as $300 per ounce in the newly discovered strike zone south of the mine. If that proves to be the case, our projections could prove to be high.

Commonwealth Project

The Commonwealth Project is an open pit gold and silver mine located in southern Arizona. The project is in the advanced stages of development. Permitting is underway and management expects production to begin in 2020. The company is in the process of completing exploration of the property and expects to make decisions regarding plant design and start-up timing in the first quarter of 2018. We would expect commercial production within 1-2 years of start-up.

A 2014 Preliminary Economic Assessment (PEA) assuming a lower-cost plant design indicates that the project

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has an after-tax net present value of US$101 million, or approximately $0.60 per share, assuming a gold price assumption of $1275 and a 5% discount rate. The PEA estimates the cost to develop the project to be $27.2 million which we have put into our models during 2018 and 2019. The PEA assumes processing capacity of 10,000 tons per day and estimates production of 60,000 ounces of gold equivalent ounces annually. The mine has measured and indicated resources of 31 million tons of raw feed and 985,000 gold equivalent ounces (au eq oz) implying a mine life of 8-9 years.

Should management decide to go with a plant design focused on enhanced recovery, production levels and plant development costs could be higher. Under such a scenario, production could be 60,000-80,000 gold equivalent ounces annually. Management did not give an estimate of the increment cost to develop the enhanced plant design. We would expect the project return to be higher under such a scenario and would view an announcement to pursue enhanced recovery positively.

Royalty Streams

Marlin currently receives royalty payments or streams from three different mining operations – San Albino, El Compas and La Cigarra. These payments are organized under an entity called Sailfish Royalty that is 100% owned by Marlin. Management has indicated its intent to separate Sailfish through an initial public offering or a sale to an existing royalty company. Before doing so, it would like to establish 6-8 diversified income streams. Marlin will most likely sell a royalty stream from La Trinidad and Commonwealth to Sailfish. Once separated, management plans to pay out 90% of its cash receipts to Sailfish shareholders. We believe similar transactions could be completed as Marlin develops future properties. We view Sailfish as a possible financing arm for Marlin that would monetize cash flow streams once mines have been brought to production.

Share ownership

In addition to mine ownership and royalty claims, Marlin owns 21 million shares of Canarc Resources Corporation (CCM-TO) worth approximately $2 million. It also owns warrants on the shares of CCM. Marlin received the shares and warrants when it sold a property called El Compas to Canarc in 2015 in exchange for streaming and royalty interests. The property has since been resold to Endeavour Silver (EXK). The proceeds from the sale of El Compas are owned by Marlin but expected to be placed into Sailfish.

Model Assumptions

Our models assume a silver price of $18 per ounce and a gold price of $1,300 per ounce in 2017 in line with current prices. We assume prices rise at the rate of inflation every year thereafter. We look for the company to mine 1.2 million tons of raw feed in 2017 and 2018 from La Trinidad. We have not factored in production at La

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Trinidad beyond 2018, but believe new discoveries will most likely extend the life of the mine beyond 2018. We have modeled in production from the Commonwealth mine at the beginning of 2020. Our models assume the production levels and plant costs outlined in the PEA but recognize the possibility for higher results under an enhanced recovery plant design. We have assumed operating cash costs of $650 per au eq oz and all in sustained costs of $900 per au eq oz. Management estimates costs of $2.5-$2.7 million per month or $30-$33 million per year over the life of La Trinidad. Such costs would imply operating cash costs of $600-$650 per au eq oz under production of 50,000 ag eq oz annually. We recognize the possibility for lower costs should recent discoveries at La Trinidad prove fruitful.

We believe the company should generate cash flow above capital expenditures over the life of its projects at current gold and silver prices. The company has been spending approximately $20 million annually in capital expenditures. However, much of these costs have gone for mine development. We expect capital expenditures to continue at the $15-$20 million level for the next several years until Marlin brings Commonwealth to production. Beyond 2019, we have not factored in any new acquisition, mine developments or exploration costs. We assume maintenance capital expenditures of $5 million annually, but recognize that actual expenditures are likely to be well above that as the company expands its assets.

Our valuation model is based on a discounted cash flow of assets that are known and quantified through resource studies and preliminary economic analyses. We discount back cash flow at a rate of 8% which is consistent with that used for other producing mining companies. The present value of projected cash flow is then adjusted for the company’s current cash and debt position and divided by the fully diluted share count to arrive at an estimated fair value for company operations as traded on the TSX. Our estimated value is then converted at a .75:1 currency exchange rate for comparison on the OTC. We use these fair value estimates as our price targets.

Financial Position and Cash Flow

Marlin is somewhat unique among developing mining companies in that it uses debt from its investment partner, Wexford, to finance acquisitions and major mine developments. As of September 30, 2016, the company had an outstanding loan of $54 million. It has been paying the loan off in recent months as it recognizes improved operating cash flow. We view the loan as temporary financing that will rise and fall depending upon operating cash flow, acquisitions and expansion projects. The company has paid down some of the debt in recent months.

The company has not been cash flow positive in recent quarters as it develops the La Trinidad mine. However, we expect Marlin to begin generating positive cash flow in future quarters as it mines a high-grade zone discovered last fall. Our models indicated EBITDA near $20 million in 2017-2019 rising when the Commonwealth mine reaches commercialization.

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Company Profile

Marlin Gold is an emerging precious metal mining company with assets in Mexico, Nicaragua and Arizona. Marlin owns 100% of two primary mines and receives payment streams and royalties from three other projects. Marlin is backed by Wexford Capital LP, a major shareholder and financial backer. Marlin is unique in that it owns a fully owned royalty corporation (Sailfish) that it may spin out into a public company. This strategy is similar Wexford’s strategy in the energy space where they formed a company named Diamondback Energy and spun off an energy royalty company called Viper Energy Partners.

Valuation Summary

We recommend investors BUY the shares of MLN/TSX up to our price objective of $3.00 per share (MLNGF/OTC of $2.25). Our price objective is based on a discounted cash flow estimate of existing and estimated mine projects. Our valuation estimate uses an 8% discount rate and current silver and gold prices. Our over-the-counter share valuation is discounted at a ratio of approximately 0.75:1 rate to reflect the conversion of Canadian dollars (as reported in financial results) to US dollars. A decline in precious metal prices, lower-than-expected production levels, and mine development cost overruns are among the factors that could prevent the stock from reaching our price objective.

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GENERAL DISCLAIMERSAll statements or opinions contained herein that include the words "we", "us", or "our" are solely the responsibility of Noble Capital Markets, Inc. ("Noble") and do not necessarily reflect statements or opinions expressed by any person or party affiliated with the company mentioned in this report. Any opinions expressed herein are subject to change without notice. All information provided herein is based on public and non-public information believed to be accurate and reliable, but is not necessarily complete and cannot be guaranteed. No judgment is hereby expressed or should be implied as to the suitability of any security described herein for any specific investor or any specific investment portfolio. The decision to undertake any investment regarding the security mentioned herein should be made by each reader of this publication based on its own appraisal of the implications and risks of such decision.

This publication is intended for information purposes only and shall not constitute an offer to buy/sell or the solicitation of an offer to buy/sell any security mentioned in this report, nor shall there be any sale of the security herein in any state or domicile in which said offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such state or domicile. This publication and all information, comments, statements or opinions contained or expressed herein are applicable only as of the date of this publication and subject to change without prior notice. Past performance is not indicative of future results.

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IMPORTANT DISCLOSURESThis publication is confidential for the information of the addressee only and may not be reproduced in whole or in part, copies circulated, or discussed to another party, without the written consent of Noble Capital Markets, Inc. ("Noble"). Noble seeks to update its research as appropriate, but may be unable to do so based upon various regulatory constraints. Research reports are not published at regular intervals; publication times and dates are based upon the analyst's judgement. Noble professionals including traders, salespeople and investment bankers may provide written or oral market commentary, or discuss trading strategies to Noble clients and the Noble proprietary trading desk that reflect opinions that are contrary to the opinions expressed in this research report.

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Company Specific DisclosuresThe following disclosures relate to relationships between Noble and the company (the "Company") covered by the Noble Research Division and referred to in this research report. Noble has received compensation for investment banking services in the past 12 months. Noble intends to seek compensation for investment banking services and non-investment banking services (securities and non-securities related) within the next 3 months. The Company has attended Noble investor conference(s) in the last 12 months. Noble has provided capital markets advisory services in the last 12 months. Noble is not a market maker in the Company.

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WARNINGThis report is intended to provide general securities advice, and does not purport to make any recommendation that any securities transaction is appropriate for any recipient particular investment objectives, financial situation or particular needs. Prior to making any investment decision, recipients should assess, or seek advice from their advisors, on whether any relevant part of this report is appropriate to their individual circumstances. If a recipient was referred to Noble Capital Markets, Inc. by an investment advisor, that advisor may receive a benefit in respect of transactions effected on the recipients behalf, details of which will be available on request in regard to a transaction that involves a personalized securities recommendation. Additional risks associated with the security mentioned in this report that might impede achievement of the target can be found in its initial report issued by Noble Capital Markets, Inc.. This report may not be reproduced, distributed or published for any purpose unless authorized by Noble Capital Markets, Inc..

U.S. CLIENTSFor purposes of distribution in the United States, this report is prepared for persons who can be defined as "Institutional Investors" under U.S. regulations. Any U.S. person receiving this report and wishing to effect a transaction in any security discussed herein, must do so through a U.S. registered broker or dealer. Noble Capital Markets, Inc. is a U.S. registered broker dealer.

RESEARCH ANALYST CERTIFICATIONIndependence Of ViewAll views expressed in this report accurately reflect my personal views about the subject securities or issuers.

Receipt of CompensationNo part of my compensation was, is, or will be directly or indirectly related to any specific recommendations or views expressed in the public appearance and/or research report.

Ownership and Material Conflicts of InterestNeither I nor anybody in my household has a financial interest in the securities of the subject company or any other company mentioned in this report.

> NOBLE RATING DEFINITIONS % OF STOCKS COVERED % OF IB CLIENTS

BUY: potential return is >15% above the current price 58% 42%

HOLD: potential return is -15% to 15% of the current price 26% 5%

SELL: potential return is >15% below the current price 0% 0%

Additional information is available upon request. Any recipient of this report that wishes further information regarding the subject company or the disclosure information mentioned herein, should contact Noble Capital Markets, Inc. by mail or phone.

Noble Capital Markets, Inc.225 NE Mizner Blvd. Suite 150Boca Raton, FL 33432561-994-1191

Noble Capital Markets, Inc. is a FINRA registered broker/dealer.Member - SPIC (Securities Investor Protection Corporation)

Report ID: 9814

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Documents

Marlin Gold Mining MLN - Noble Capital Marketsnobleresearch.com/reports/MLN_20170417_9814.pdf2017/04/17 · Buy Initiation Current Price $0.70 Target Price $3.00 Market Capitalization