Richard Reeves Northcott Capital

1. KCR Capital
Valuation and Debt Capacity
Concepts to be Applied to Frac
Sand Projects and Companies
February 2023
Rick Reeves
Managing Director
KCR Capital, LLC
Northcott Capital Limited

2. KCR Capital
Table of Contents
Section 1: Overview of Valuation and Debt Capacity
Section 2: Valuation in Detail
Section 3: Debt Capacity in Detail
Section 4: A Representative Valuation Analysis
Appendix I: Biography & Contact Information
2

3. KCR Capital
Overview of Valuation and Debt Capacity
SECTION 1

4. KCR Capital
Overview of Valuation and Debt Capacity
4
• Valuation of any enterprise is typically understood to be the sum of the net present value (“NPV”) of
expected cash flow to its shareholders discounted at the weighted average cost of capital to the
enterprise
• Debt capacity is generally based on the sum of the net present value of expected cash flow available
to repay lenders over the tenor of their debt discounted at the cost of debt capital
• Both are based on Net Present Value which is
calculated by the formula where:
• Ct = Cash flow (+/-) for the relevant time period
• r = Applicable discount rate
• t = time period
• T = Total time periods
• The important differences in the two calculations are:
• Discount rate or “r” (which is generally higher in valuation calculations)
• Total time or “T” (which is the life of the enterprise, including reclamation for valuation and life of debt for debt capacity)
Valuation and debt capacity are related with respect to economic concepts

5. KCR Capital
Valuation in Detail
SECTION 2

6. KCR Capital
Determining the Inputs for Valuation
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• Keep in mind the old computer programming adage – GIGO (Garbage In Garbage Out)
• Cash inflows and outflows from the company or project are determined by management
expectations and engineering projections
• It is important to develop an expected base case that is neither aggressive nor conservative
• Upside and downside cases can be generated as sensitivities
• The valuation base case and debt capacity base case may not be the same, as the return profile of lenders is different than
equity investors
• For a valuation calculation, the time period should be the life of the enterprise, including reclamation
• The discount rate is the single most important variable
• The discount rate should accurately describe the economic risk-return characteristics of the enterprise
• Picking a generic discount rate ignores the economic risk-return fundamentals of the underlying assets and is usually wrong
• Using the interest cost of debt is also inappropriate as the risk return characteristics of debt and equity are fundamentally
different
As with any model or calculation, valuation models and calculations are only as good as
the inputs

7. KCR Capital
Discount Rate Starts with Selecting an Asset Pricing Model
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• Of all the asset pricing models, only one is actually derived from economic and portfolio theory: the
Capital Asset Pricing Model (“CAPM”)
• All other asset pricing models such as arbitrage and various multifactor models are based on
empirical data in lieu of economic and financial theory
• Start with the CAPM and modify the result to reflect parameters not incorporated in the very broad
assumptions of the CAPM
• The CAPM is fundamentally a relationship between the return of an asset and that of the overall
market with its economic justification based on portfolio theory; it is the logical outgrowth of the
modern portfolio theory as described by Harry Markowitz in 1952
• Supply and demand combined with risk aversion cause all investments to seek the efficient frontier of risk/reward
• The overall market is an expression of the efficient frontier
• The risk and return of other investments can therefore be expressed in relation to the market
Although often treated as an assumption, the discount rate is the proxy for economic risk
in the valuation; it should be determined using an asset pricing model

8. KCR Capital
Making the CAPM Work
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• The CAPM formula is: RA = Rf + ꞵA(Rm – Rf) where:
• RA = Expected Asset Return
• Rf = Risk Free Rate of Return (over the tenor of the investment)
• ꞵA = Beta of the Asset
• Rm = Market Rate of Return
• ꞵA is determined statistically; accordingly, the best estimates of ꞵA are based on industry groups, i.e.
a ꞵI
• A good source of ꞵI is published and updated by the New York University Stern School of Business
on the internet
• Determining an appropriate blend ꞵI introduces a qualitative component into the analysis:
• Due to the fact that return data for individual companies or industries rarely is an exact match for any specific company,
some form of blended calculation is often necessary
First of all is the determination of ꞵ, which is the relationship between asset risk and
market risk in the CAPM formula

9. KCR Capital
Additional Adjustments to the CAPM
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• While the underlying market assumptions for CAPM are valid for most S&P 500 companies (unless
they are in financial distress, etc.), those assumptions are not necessarily valid for smaller to mid-
size operators in any industry, including oil and gas
• In addition, ꞵ changes over time as the risk of industries changes due to social, technological and
political changes
• To adjust the initial CAPM estimates to the actual asset in question introduces additional qualitative
components in this analysis, possible adjustments may include without limitation (generally no more
than 2% each and often less):
• Small Firm
• Single operating Asset
• Political risk as indicated by comparative sovereign rates of return, can be substantially higher than 2% in many cases
• Technological Risk
• Discount rate assumptions are confirmed by comparison to other valuation methods including:
multiples, comparable transaction and Black-Scholes
By its nature, the CAPM assumes the company or asset has perfect access to efficient
capital markets

10. KCR Capital
Valuation Based on Multiples
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• If cash flows are treated as constant over a perpetual time period, the NPV of those cash flows is:
NPV = C/r
Where:
• C = Constant cash flow
• r = Applicable discount rate
• Valuation of multiples is basically using a proxy for long term cash flow and multiplying it times a
multiple that varies by industry and the proxy being used
• Common proxies for cash flow are:
• EBITDA – Earnings Before Interest and Taxes with Depreciation/Depletion Added back
• Net Income
• Operating Cash Flow
• Multiples typically vary between 5 and 15 depending on the industry and cash flow proxy
The use of multiples is based on the same theory as NPV

11. KCR Capital
Valuation Based on Comparable Transactions
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• For a transaction in the minerals industry to be directly comparable, it needs to:
• Be in the same commodity
• If the commodity is not an economic commodity, the transaction needs to be in the appropriate region or locality
• Be of comparable size to allow scaling of the transaction size up or down not to introduce excessive error
Since it is very uncommon for commodity companies to be the same size, as rule we look for
comparing the transactions in terms of:
• Annual EBITDA
• Mineral reserves
• Annual production
• Most professionals including myself use NPV as the primary valuation tool with multiples
and comparable transactions being a reality check on the discount rate assumptions used to
calculate NPV
Same concept as often used in real estate

12. KCR Capital
A Black Scholes Analysis to Back Up NPV
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• Black-Scholes is essentially an option valuation formula that is based on similar risk reward and
efficient frontier concepts as the CAPM; however, the mathematics and derivation is far more
complex
• Black-Scholes treats the drivers of option value as neutral to market expectation because options
are zero-sum assets:
• Unlike equity or debt, for every winner in the option markets there is a loser
• The value of a company’s equity considered to be a proxy to the value of a Call option on the entire
value of the company, including equity and debt
• The face value of the company’s debt is treated as the strike price of option
• In this calculation the total value of the company is iterated from known values of equity and debt
• The primary purpose of this analysis is to confirm the assumptions in NPV model
• If the assumptions are correct, through an iterative analysis Black-Scholes should result in numbers
within 10% of the NPV model
Black-Scholes is based on a fundamentally different theory of value

13. KCR Capital
The Black-Scholes Formula
13
• The primary drivers of value in the Black-Scholes formula are:
• Volatility of the underlying asset value
• The tenor of the option
• Prevailing interest rates
• The Black-Scholes formula is:
C = SN(d1) – e-rtK(d2) where:
• d1 = (ln(S/K) +rt)/σ(T)0.5 + ½σ(T)0.5
• d2 = (ln(S/K) +rt)/σ(T)0.5 - ½σ(T)0.5
• C = Call Value (in a company valuation, the market value of its equity)
• S = Stock or Asset Value (in a company valuation, the value of the enterprise)
• K = Strike Price (in a company valuation, the face value of its debt)
• T = The final time period (for company valuation, the tenor of the debt)
• σ = standard deviation of the underlying asset value

14. KCR Capital
Debt Capacity in Detail
SECTION 3

15. KCR Capital
Debt Capacity – Economic and Cash Coverage
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• The purpose of a debt capacity calculation is to determine the value of the cash flow available to pay
debt versus the debt amount; the NPV formula provides the basis for this
• However, in this case
• T equals the tenor of the debt
• r is the blended interest rate on all the company’s debt
• Ct may be based on more conservative assumptions as lenders have no upside
• Typically lenders want the NPV calculated in this manner to be 50% greater than the total face value
of the debt
• Other debt capacity measurements include certain ratios that like equity multiples are conceptually
base on NPV, these include:
• Total Debt to EBITDA – typically less than 4 times
• Debt to ACF (Available Cash Flow – EBITDA less taxes and sustaining capex.) – typically less than 5 times
• Annual Cash Flow to Debt Service – Typically averaging less than 1.5 times

16. KCR Capital
Debt Capacity – Reserve and Contracts
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• Lenders generally want sufficient mineral reserves to enable the debt to be restructured without
running out of material to mine
• The typical minimum is sufficient proven and probable mineral reserves equal to 1.5 times the mineral reserves mined during
the contractual life of the debt
• If reserves vary in quality, a form of calculation to equalize them is included (i.e. for metallic mines the reserves are in
quantity of the refined commodity)
• The cost basis of the reserves over time is also considered
• For non exchange traded commodities, sales contracts and relationships are vital
• Contracted sales can be viewed to assure debt service
• Without contracted sales, long-term customer relationships really matter
• Debt may be achievable for most viable operators, but the foregoing factors will determine the
willingness of lenders to support high leverage ratios
• Every company and every borrower is different

17. KCR Capital
A Representative Valuation Analysis
SECTION 4

18. KCR Capital
A Comparative Valuation with NPV and Black-Scholes
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• The value added by ALS is essentially considered to be a proxy to the value of a Call option on the
additional production from the well(s) with the variables in the Black-Scholes formula being:
• The value added by ALS is treated as the Call Price as we are viewing it as an incremental increase in equity value
• The NPV of the projected production profile without ALS is the Strike Price
• The NPV of the projected production profile with ALS the future value of the well or asset
C = SN(d1) – e-rtK(d2) where:
• d1 = (ln(S/K) +rt)/σ(T)0.5 + ½σ(T)0.5
• d2 = (ln(S/K) +rt)/σ(T)0.5 - ½σ(T)0.5
• C = Call Value
• S = Stock or Asset Value (In this case the value with ALS installed)
• K = Strike Price (In the case the value without ALS installed)
• T = The final time period
• σ = standard deviation of the underlying asset value
The comparison is based on an analysis artificial lift in a well in Utah

19. KCR Capital
A Sample NPV Calculation
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Example Well without ALS Example Well with ALS
Year 2,007 2,008 2,009 2,010 2,011 Year 2,007 2,008 2,009 2,010 2,011
Production (bbls): Production (bbls):
Monthly 7,000 7,000 7,000 7,000 7,000 Monthly 20,000 20,000 20,000 20,000 20,000
Annual 84,000 84,000 84,000 84,000 84,000 Annual 240,000 240,000 240,000 240,000 240,000
Average Price 74 100 69 75 90 Average Price 74 100 69 75 90
Gross Revenue 6,216,000 8,400,000 5,796,000 6,300,000 7,560,000 Gross Revenue 17,760,000 24,000,000 16,560,000 18,000,000 21,600,000
Less: Less:
Royalties and Overrides at 20% 1,243,200 1,680,000 1,159,200 1,260,000 1,512,000 Royalties and Overrides at 2 3,552,000 4,800,000 3,312,000 3,600,000 4,320,000
Severance Taxes at 7% 348,096 470,400 324,576 352,800 423,360 Severance Taxes at 7% 994,560 1,344,000 927,360 1,008,000 1,209,600
Net Revenue 4,624,704 6,249,600 4,312,224 4,687,200 5,624,640 Net Revenue 13,213,440 17,856,000 12,320,640 13,392,000 16,070,400
Cost Cost
Operating 15,000 15,000 15,000 15,000 15,000 Operating 15,000 15,000 15,000 15,000 15,000
Lifting 0 0 0 0 0 Lifting 225,000 175,000 175,000 175,000 175,000
G&A 10,000 10,000 10,000 10,000 10,000 G&A 10,000 10,000 10,000 10,000 10,000
Pre‐Tax Income 4,599,704 6,224,600 4,287,224 4,662,200 5,599,640 Pre‐Tax Income 12,963,440 17,831,000 12,295,640 13,367,000 16,045,400
Taxes Assumed at 39% 1,793,885 2,427,594 1,672,017 1,818,258 2,183,860 Taxes Assumed at 39% 5,055,742 6,954,090 4,795,300 5,213,130 6,257,706
After Tax Cash Flow Before Capex. 2,805,819 3,797,006 2,615,207 2,843,942 3,415,780 After Tax Cash Flow Before Cape 7,907,698 10,876,910 7,500,340 8,153,870 9,787,694
Additional Capex. 15,000 15,000 15,000 15,000 15,000 Additional Capex. 315,000 15,000 15,000 15,000 15,000
Free Cash Flow 2,790,819 3,782,006 2,600,207 2,828,942 3,400,780 Free Cash Flow 7,592,698 10,861,910 7,485,340 8,138,870 9,772,694
NPV w/o ALS 11,474,501 NPV w/o ALS 32,598,632
Discount Rate 10.6% ALS Value Added: 21,124,131 Discount Rate 10.6%

20. KCR Capital
The Black Scholes Confirmation
20
3rd Iteration
New Value of Stock (excluding small firm and control adjustments) 29,750,000
Call Value Iteration
d1 1.942220204
d2 1.169108853
Iterative Value of ALS 21,121,413
Volatility based on new V above 0.306201167
4th Iteration
New Value of Stock (excluding small firm and control adjustments) 29,900,000
Call Value Iteration
d1 2.106261595
d2 1.421574971
Iterative Value of ALS 21,130,920
Volatility based on new V above 0.302040056
The Black-Scholes Check
Risk Free Rate 5.00%
Using AfterTax Values
1st Iteration
Standard Deviation of the oil price as starting proxy for volatility 0.42
Well Value with ALS 32,598,632
Well Value without ALS 11,474,501
Tenor (years) 5
Value of ALS 21,124,131
Volatility 0.329636002
New Value of Stock (excluding small firm and control adjustments) 29,800,000
Call Value Iteration
d1 2.002515146
d2 1.265426638
Iterative Value of ALS 21,108,919
Volatility based on new V above 0.663616022
2nd Iteration
New Value of Stock (excluding small firm and control adjustments) 27,500,000
Call Value Iteration
d1 1.499453151
d2 0.015562615
Iterative Value of ALS 21,137,199
Volatility based on new V above 0.345745907

21. KCR Capital
Interpretation
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• The NPV calculation is very straight forward:
• The cash flow calculation was intentionally streamlined for brevity, and omitted several items, but none the
less enable the basic valuation analysis
• This particular example is broadly based on an actual well (name withheld) in Utah with respect to
production and life
• The cost numbers were roughly estimated
• A risk free rate of 5% and a market premium of 8.4% were used, which were current in 2007, year 1 of this
well
• The implied value added by the ALS is $21 million
• The Black-Scholes is a check calculation of the NPV assumptions:
• It is an iterative calculation with one value being held constant and the other value being allow to vary
• In this example the value of the ALS was held constant while varying the value of the well with ALS
• As the value of the well with ALS and volatility converged, the final value of the well with ALS is within 10% of
the NPV value
• These results confirm the assumptions in both calculations

22. KCR Capital
Biography and Contact Information
APPENDIX I

23. KCR Capital
Biography
23
Rick Reeves, Managing Director
KCR Capital, LLC – member FINRA
Phone: (303) 694-1550
Email: richard.reeves@kcr-capital.com
Rick formed KCR Capital (now a registered broker dealer) in the 4th Quarter of 2016; KCR Capital also has a relationship with Northcott Capital. KCR Capital provides
securitization services to Northcott Capital. Rick brings 39 years of experience in the mining sector, of which 29 years are in banking/investment banking and advisory
together with 10 years of experience in mine management and engineering.
Before forming KCR Capital and teaming with Northcott Capital, Rick led MUFG Union Bank’s mining project finance business in North and South America. Prior to his
ten years at MUFG Union Bank, Rick worked as an investment banker for Deutsche Bank and Barclays BZW, and as an independent consultant. Rick’s experience
includes: marketing, structuring and executing mineral finance transactions; mineral finance advisory; mine and mineral property valuation; and mine feasibility and
independent consulting on mine and mineral development projects in transactions that include: the privatization of British Coal, the privatization of Siderurgica del
Orinoco in Venezuela, project financing of the Antamina copper/zinc mine in Peru, the financings that supported much of the consolidation of the US coal industry in
2011, and the recent financings on behalf of Antofagasta Minerals in Chile.
Rick has a B.Sc. in Mining Engineering from the Colorado School of Mines and a M.B.A. from the University of Chicago. He is a registered Professional Engineer in the
State of Colorado, and holds Mine Manager/Foreman and Shotfirer certification in the States of Colorado and Illinois.

24. KCR Capital
Disclaimer
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The information herein provided is for information purposes only, and is not to be used or considered as a proposal or the solicitation of an offer to sell or to buy or subscribe for securities or other financial instruments. Neither this nor any
other communication prepared by KCR Capital is or should be construed as investment advice, a recommendation or proposal to enter into a particular transaction or pursue a particular strategy, or any statement as to the likelihood that a
particular transaction or strategy will be effective in light of your business objectives or operations. Before entering into any particular transaction, you are advised to obtain such independent financial, legal, accounting and other advice as
may be appropriate under the circumstances. In any event, any decision to enter into a transaction will be yours alone, not based on information prepared or provided by KCR Capital. KCR Capital hereby disclaims any responsibility to you
concerning the characterization or identification of terms, conditions, and legal or accounting or other issues or risks that may arise in connection with any particular transaction or business strategy. While KCR Capital believes that factual
statements herein and any assumptions on which information herein are based, are in each case accurate, KCR Capital makes no representation or warranty regarding such accuracy and shall not be responsible for any inaccuracy in such
statements or assumptions. Note that Nothcott Capital may have issued, and may in the future issue, other reports that are inconsistent with or that reach conclusions different from the information set forth herein. Such other reports, if any,
reflect the different assumptions, views and/or analytical methods of the analysts who prepared them, and KCR Capital is under no obligation to ensure that such other reports are brought to your attention.