Royal Nickel Corp. RNKLF

Red Cloud Update: Q4/19 Cash Flow to Benefit from Discovery

[pierreg]

Red Cloud Update: RNC Minerals (TSX:RNX) – Q4/19 Cash Flow to Benefit from Another Nuggety Gold Discovery. Fair Value Estimate 1.00 CAD per share.
https://cdn.ceo.ca/1eqjd72-20191017-RNX-Production.pdf

RNC Minerals (TSX:RNX) – Q4/19 Cash Flow to Benefit from Another Nuggety Gold Discovery October 18, 2019

Impact: Positive RNC Minerals reported another high-grade gold discovery at its Beta Hunt Mine in Western Australia. An estimated 3,200 ounces of coarse gold has been recovered approximately 30m north of the Father’s Day vein at the 15 Level A Zone (Figure 1). We continue to believe that the high-grade gold clusters at Beta Hunt are not anomalies but are likely to be regular occurrences that have potential to provide a significant boost to the bottom line beyond our estimates and company guidance.

Highlights:

• Christmas came early. After finding 1,750oz (Sept 24) in area expected to yield 20oz, RNC has found another 3,200oz only 30m from the Father’s Day vein. These ultra-high-grade finds are excluded from the current resource and mine plan, and we anticipate when this area (Figure 1) is stoped in Q4/19 or Q1/20, it is going to deliver much higher grades than the 3.8 g/t defined in the current resource model.

• Big nuggets go straight to the bottom line. These nuggets have been uncovered as a result of normal development activity as RNC prepares this area for stoping. As a result, these finds result in minimal additional cost and we expect the 4,950 ounces found in late Q3 and early Q4 to add ~C$10M in cash flow to Q4/19. To put this in context this represents ~65-80% addition to projected Q4/19 EBTIDA, based on the recently released guidance (more here). 

• Looking for a big Q4, among other catalysts. Whether this area is stoped in Q4 or Q1, we are expecting a big Q4, particularly if RNC continues to produce the 8koz/month from normal mining activities at Beta Hunt and Higginsville. Before these numbers are released, we expect October production results and Q3 financials to show that the company has started delivering on its guidance.

Valuation: 

High grades should boost the bottom line, of an already positive cash flowing asset. Recent 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. We are maintaining our fair value estimate for RNC at C$1.00/sh, based on our probability weighted valuation and plan to move to a DCF based valuation to better reflect RNC’s restart of its operations in the near-term. Upcoming catalysts include: 1) Q3 2019 financial results (Q4/19), 2) Maiden reserves (Q4/19) and 3) 2020 guidance (Q1/20).