Royal Nickel Corp. RNKLF

Red Cloud Update: Solid Q3, Likely Precedes a Better Q4.

[pierreg]

Red Cloud Update: RNC Minerals (TSX:RNX) Solid Q3, Likely Precedes a Better Q4 . Fair Value Estimate 1.00 CAD per share.
https://cdn.ceo.ca/1es850s-20191106-RNX-Q3-Results.pdf

Impact: Positive RNC Minerals announced positive FQ3 financial results, which highlight strong QoQ production, cost reduction, and exploration results. We believe the company is positioned to meet and potentially exceed H2 2019E guidance and is well positioned to become a +100koz/year producer next year. We maintain our fair value estimate of C$1.00/sh and expect continued QoQ operating improvements and exploration updates to drive a re-rating towards our fair value estimate.

Highlights: 
• Operating improvements translate into a much better quarter.  As forecasted when Q3 operating results were released (https://www.redcloudfs.com/wp-content/uploads/2019/10/20191007-RNX-Production-1-6.pdf), RNC’s financial results showed substantial QoQ improvement (Figure 1). Most notably key profitability metrics (EBITDA, CFPS and EPS) turned from negative to positive. We expect the company to continue to execute operationally, which should result in sequential, profitability improvements over the coming quarters.

• RNC’s balance sheet now in much better shape.  The combination of the recent financing and improved operations have materially improved the balance sheet. RNC finished Q3 with C$24.8M up 267% QoQ, C$35M in debt (unchanged) and positive working capital, C$12.2M for the first time in several years. In our view, this highlights the dramatic positive change the company has gone through since July 2019. 

• Q4 likely to make H2 guidance appear conservative. The company reiterated H2 guidance (42-49k oz Au at AISC of US$1,150-1,250/oz); however, based on commentary on the call that Q4 operations todate are in line with Q3 and the 4,950 oz in coarse gold expected to be part of production, we expect higher production. Additionally, in late Q4 and early Q1, the area around the Father’s Day vein between 14 and 16 level, is expected to be stoped. Because of capping, the resource model and consequently guidance assumes the grade is between 2.5-3 g/t; however, considering that 39,612 ounces have already been mined from development in this area (Figure 2), we expect the grade to be higher.

Valuation: 
Another step towards fair value. We believe that as the company continues to execute, the stock should re-rate towards our $1.00/sh fair value estimate. We view current guidance as conservative and believe RNC’s operations are capable of +100koz/year at sub US$900/oz cash costs implying a run-rate EBTIDA of ~C$75M (excluding higher grade nuggets). This implies RNC is trading at 2.8x on EV/EBITDA basis, which compares favourably to peers at 5.6x (2020E). Catalysts include: 1) Maiden Beta Hunt reserves (Q4/19); 2) 2020 guidance (Q1/20), 3) Updated Higginsville Resource (H1/20) and 4) Q4 operating results (Q1/20).