Royal Nickel Corporation (RNX.TO)(OTCQX:RNKLF) was on a tear yesterday, gapping up in the morning and closing at $1.15 on the TSX, up over 100%. It is down to the $0.80's today. I am holding the vast majority of my position (I am doing some minimal trading) through this volatility. I think traders are using generic rules that they have learned through years of trading that don't apply to RNX because of its unique situation.
Some people expect a pull back and gap fills after this run. But we need to look at the causes of that rather than the symptoms. Why do stocks pull back? Because sellers outweigh buyers. And why would sellers outweigh buyers:
- Dilution
- The threat of financing (further dilution)
- The threat of bad news to come
The company confirmed that yesterday $6 million worth of warrants were converted. Based on exercise prices, that is probably in the 15 to 20 million range of warrants converted to shares. If those were sold onto the market, it is understandable why supply would outstrip demand today. The good news is at least that portion of warrants are off the books as the float nears 400 million shares.
While dilution could be a contributing factor to the pullback today, it's the lack of threat of the other two points that makes me hold through this volatility.
I see so often that people speak about pullbacks or gap fills after a penny stock moves up a lot after any good news, but in particular after an explorer announces good drill results. Here is the difference between those other companies and RNX:
Those other companies need financing, RNX does not.
Those other companies drop in price because after good drill results, now what? Well, they need money for more drilling, or A LOT more money for capex to start up the mine. The only exception is a buyout/sale but even that would take time and management still needs to get paid. Banks and other large financiers short the stock at high prices and then cover with a private placement at a lower price and get warrants.
RNX is completely self-financed going forward. The company has said this multiple times and my own analysis of the balance sheet caused me to conclude that the $38 million and counting that is coming in from the sale of the discovery is more than enough to finance operations in the near future. There is no reason for a financier to short this stock because it knows that it cannot cover with a cheap private placement. The only shorts out there will be ones who will speculate on bad news. Which leads me to my next point.
RNX cannot have bad news right now.
Another driver for volatility on explorers is disappointing follow up assay results after very promising initial finds that lifted the stock in the first place. If Phase 1 comes in promising, everyone is buying up the stock on speculation of Phase 2. Once Phase 2 results are out, it's done for a while. Understand that RNX's news flow is not going to be like that.
RNX has had a few updates expanding the size of the Father's Day Vein Discovery and the potential strike length of the Beta Hunt mine since the first report on September 9th. There are no strictly defined drill targets nor deadlines to this story. RNX could have news at any time, and in any number of separate updates. That means it has the opportunity/threat (to long/shorts) of news at any time.
If September 25th is a bad day at Beta Hunt and there is no further discovery made at the mine, RNX is not going to say "hey, we didn't find anything today". Same thing if that were to happen on September 26th, 27th etc. into early October until a new discovery is made and the company will talk about that, instead of all the days it struck out.
Rest of Article here: Seeking Alpha Blog Vranic on RNC