Nice set up and beautiful nic . Digging to some degree or another is normal behavour for a lot of cichlid species. The gill flaring is a sign of agression , but in this case it sounds like yours is just trying to show who owns that particular patch of sand. As long as the nic doesn't get violent then all should be well, just keep an eye on him cause if he's got a tendency to be very teritorial then the flaring could escalate to all out mayhem. Fortunatly nics are pretty calm so it shouldn't be an issue , but all cichlids are different with their own personalities so just watch him and be prepared to intervene just in case.