We have been covering Inca One Gold (IO.V) for almost three years now, and we had front row seats when Inca One announced its updated business strategy and moved from an exploration-focused company to become a toll milling company in Peru. Several companies have tried to execute this conversion, but only a few were effectively able to do so, and Inca One has started to merge with those ‘weaker links’ to have a more dominant position in Peru’s toll milling environment.

In this special report we will have a look at Inca One’s two acquisitions and we will discuss the advantages and disadvantages.

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The most recent acquisition of Montan Mining’s mill

Inca One announced last week it has entered into a definitive agreement with fellow toll mill operator Montan Mining (MNY.V) and Goldsmith to acquire the mill Montan Mining had an option on. That’s a very interesting and impressive deal, as Inca One is acquiring a producing mill in exchange for shares and a very moderate amount of cash.

As part of the transaction, Inca one will issue Montan Mining 7M shares (and US$354,000 in cash), and Montan has pledged to distribute those shares amongst its own shareholders. That’s a good move, as it reduces the risk of Montan holding the shares and liquidating them whenever a bill has to be paid. By distributing the shares to its existing shareholders, it reduces the risk of Montan Mining selling the shares whenever a bill has to be paid.

In addition to the 7M shares to Montan, Inca One is also issuing 12.3M shares to Goldsmith (as well as assuming US$275,000 in debt), the owner of the mill. Shareholders of Montan Mining might remember Montan actually just had an ‘option’ to acquire the mill, and Goldsmith still is the owner of the processing plant. However, Goldsmith has agreed to accept 12.3M shares of Inca One instead of the deal previously negotiated by Montan Mining.

This tells us Goldsmith seems to be pretty sure Inca One will be able to make this a success story as it has agreed to hold the shares it receives in escrow with the first 20% only becoming available six months after the closing date. Subsequently, every quarter another 20% of the 12.3M shares will become available, so Goldsmith can only freely possess of all of its shares after 18 months.

The Mollehuaca processing facility apparently has a total capacity of 150 tonnes per day but it’s our understanding the mill has only been ramped up to approximately 70 tonnes per day. It will be Inca One’s task to source a sufficient amount of ore to keep the mill running at the current steady state.

What about the previously announced merger with Standard Tolling?

In the first week of October, Inca One also announced it entered into a binding agreement with Standard Tolling (TON.V) to acquire all of Standard Tolling’s outstanding shares in an all-share offer. Inca One is offering 0.55 of its own shares per share of Standard Tolling. That represented a nice premium at the time the offer was made, but since the announcement, Standard Tolling’s share price has slipped again and is currently trading at C$0.05 per share.

The reason for the deal is simple; Inca One is still aiming to become one of the largest toll milling companies in Peru, and with the acquisition of Standard Tolling it has doubled the permitted capacity to 200 tonnes per day (and this will increase after the deal with Montan Mining closes).

Inca One has already started to truck the ore from Standard Tolling’s ore purchase facilities, and this should allow Inca One to ramp up its production rate to 100 tonnes per day again. As you might remember, Inca temporarily had to reduce its throughput to fine-tune the performance of the Chala mill and has been slowly increasing its production rate again. One of the main hiccups was the lack funds to acquire more ore, but as Inca is currently trucking the ore from Standard Tolling’s plant to Chala, this issue should be solved by now.

How will Inca One be able to unlock economies of scale and synergies?

With regards to the transaction with Montan Mining, the reason to acquire Montan’s mill is pretty simple as it consolidated Inca One’s position in the Chala district. The Mollehuaca plant is located just 30-40 kilometers away from Chala which basically means the total amount of laborers needed at the plant will be low considering the weighing of the trucks, ore purchasing and maybe even crushing could be done at Chala, where after the ore could be trucked to the Mollehuaca plant to be processed.

This does unlock economies of scale as you’d for instance need just one mill manager whilst no additional lab employees or administrative forces will have to be hired as everything will be done at the Chala ‘hub’. Additionally, as the Mollehuaca facility is closer to the mountains, Inca One might be able to tap additional sources of high-grade ore.

The Standard Tolling plant isn’t anywhere near Chala, so the synergy benefits will be a bit lower. We have not visited this plant yet but have been told by the Inca One management Standard Tolling has done a great job as for instance the on-site lab seems to be of state-of-the art quality. Additionally, Inca One will retain Standard Tolling’s ore purchasers who have done an excellent job in the north. We could see the Standard Tolling site evolve into some sort of ore purchasing hub to acquire high-grade ore from the north, but are unsure whether or not Inca One will push forward with the production plans at the current mill site as it might make more sense to dismantle the mill and re-build it in Chala.

Again, no decision has been made just yet and we’re sure Inca will make the best decision by applying common sense when looking at the economics of running three plants versus two.


By announcing not one but two acquisitions, Inca One is starting to deliver on its promise to become a 1,000 tonnes per day toll milling company in Peru. Both deals combined will result in an additional 53M shares being issued by Inca One. This might sound like a lot of ‘dilution’ but as the company is buying two permitted mills with a total official capacity of 250 tonnes per day we really wouldn’t call this a dilution of the existing shareholders as these transactions will very likely create additional shareholder value.

Inca One has made a huge step forward and is poised for a very strong 2016 with a focus on integrating the new acquisitions in the corporate structure and finally generating a positive free cash flow.

Right now it might actually make more sense to buy shares of Standard Tolling. As Inca One is offering 0.55 of its own shares per share of Standard Tolling, the value of its offer (using an IO share price of C$0.12) is C$0.066 per Standard Tolling share. However, as you can purchase Standard Tolling stock on the open market at just C$0.05, you could actually buy Inca One at a discount. If the deal indeed goes through and your Standard Tolling shares are being converted into Inca One shares, your effective cost base per Inca One share would be just C$0.091 (C$0.05 / 0.55)! Be smart, buy Standard Tolling shares and vote in favor of the transaction.

Disclosure: The author holds a long position in Inca One Gold and Standard Tolling (no position in Montan Mining). Inca One Gold is a sponsor of the website.

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