Royal Nickel Corp. RNKLF

NEW: RNC Minerals Red Cloud update

[pierreg]

RNC Minerals Red Cloud update: H2 2019 Guidance Supports Likelihood for Positive Q3 Cash Flow October 16th 2019 ( https://cdn.ceo.ca/1eqe692-20191015-RNX-Production.pdf).
Fair Value Estimate 1.00 CAD per share.

Impact:

Positive RNC Minerals reported guidance for H2 2019, which supports our view that the company has started generating positive cash flow from operations. Translating this guidance to implied EBITDA should result in the stock reversing the recent share price weakness (both relative and absolute). In our view, this guidance indicates two important things: 1) that the company is now generating positive cash flow from operations and is unlikely to need further outside capital, and 2) that it is materially undervalued at this early stage of the ramp-up.

Highlights: 

• Guidance in line with Q3 operations. RNC has guided for 42-49koz of production at AISC of US$1,150-1,250/oz. This is in line with the runrate implied by Q3 production of 24.2koz. We would note this management team has been historically conservative with guidance. Additionally, the AISC cost guidance, is in line with our view the company is likely to generate positive cash flow in Q3. We believe that if this is demonstrated with Q3 financial results, it should reverse RNC’s share price underperformance.

• With gold at US$1480/oz, RNC is poised to be posting cash-flow. Using the company’s previous accounting approach (exploration, operating costs G&A and some capital included), this implies that the company is not generating positive cash flow from operations and potentially adding cash to the balance sheet. In our view this guidance implies annual run-rate EBTIDA of ~C$50-60M or less than 4x EV/EBITDA. Considering the premier jurisdiction and a long resource life, we think RNC should trade closer to peers at 5.5x. We highlight that operations are still ramping up and should ultimately reach +100koz/year at sub US$900/oz cash costs C$75M of EBTIDA at the current gold price or an EV/EBITDA multiple below 3x.

• Key to re-rating is delivering on announced guidance. The first opportunities being October monthly production and Q3 financial results, both expected in early November. We believe that as the company executes on its plan it should progressively re-rate towards peers. 

Valuation: 

Taking another step towards our $1/sh fair value estimate. We are maintaining our fair value estimate for RNC at C$1.00/sh, based on our probability weighted valuation. We plan to move to a DCF based valuation to better reflect RNC’s restart of its operations and our outlook on the company. We believe that as the company executes on its shortterm plan and lays out its longer-term plan for Beta Hunt and Higginsville it should progressively re-rate. Upcoming catalysts include: 1) Q3 2019 financial results (Q4/19); 2) Maiden reserves (Q4/19); and 3) 2020 guidance (Q1/20).