Red Cloud: Major Royalty Reduction Improves Higginsville Red Cloud: RNC Minerals (TSX:RNX) Major Royalty Reduction Improves Higginsville Economics. Dec. 20th '19
https://www.redcloudfs.com/wp-content/uploads/2019/12/20191220-RNX-Corporate-Update.pdf
Impact: Positive
RNC Minerals announced it has restructured the royalties on its Higginsville project, reducing them from what was effectively +20% NSR to ~5% NSR at current gold prices and production levels. The net result is significantly better long-term economics for Higginsville, which is likely to result in a change to the mine plan and increased exploration at the project. We believe this is the first in a series of catalysts that should rerate the stock towards our fair value estimate of C$0.90/sh.
Highlights:
• Royalty terms significantly improved. Previously the royalty was a 1.75% NSR plus 50% participation payment on the difference between the realized gold price and A$1,340/oz. The royalty is now 1) for the first 10koz produced each year a 1.75% NSR plus a reduced 27.5% participation payment on the difference between the realized gold price and A$1,340/oz (for 11 years or 110koz Au); and 2) a flat 2% NSR on ounces sold in excess of 10koz Au per year after the first 37koz Au sold. Using the current gold price of A$2,147/oz and 30koz/year this effectively reduces the royalty from a +20% NSR to ~5%.
• Improves the long-term viability of Higginsville. The royalty previously covered ~50% of the historic resource at Higginsville (~1Moz). As result of the change, our LOM cash costs for Higginsville have decreased from US$1110/oz to US$926/oz, resulting in an 57% increase to our Higginsville pre-tax NAV and a 14% increase to our overall corporate NAV. We note that our EBITDA based target has not increased, because we had assumed no production from these tenements over the next two years.
• One down, more catalysts to come. The Higginsville royalty improvement is one of the major cost improvements the company has been guiding for and makes the Higginsville resource update even more important (H1/20). The next big catalyst is the expectation of maiden reserves from Beta Hunt (Q4/19) followed by Q4 production results (Q1/20) and 2020 guidance (Q1/20). With tax loss selling season coming to an end and major catalysts on the horizon, we believe RNC is poised for a significant re-rate.
Valuation:
Discounted valuation does not reflect the pending good news. Our fair value estimate of C$0.90/sh (unchanged) is based on 6.0x our oneyear forward, NTM EBITDA estimate of C$93.5M (was C$94.3M). RNC is trading at 3.7x 2020E EBITDA and 0.45x NAV, versus peers at 5.8x and 0.92x, respectively. Upcoming catalysts: 1) Q4 2019 operating and financial results (Q1/20), 2) Maiden Beta Hunt reserves (Q4/19), 3) 2020 guidance (Q1/20 and 4) Higginsville resource update (H1/20).