Royal Nickel Corp. RNKLF

Red Cloud: The New RNC: Generating Alpha from Beta Hunt

[pierreg]

Red Cloud Securities: RNC Minerals (TSX:RNX) – The New RNC: Generating Alpha from Beta Hunt - RNC Minerals (TSX:RNX) - has transformed itself into a profitable Australian gold producer, that we believe has yet to be recognized by the market. RNC is ramping up production. Dec 5th '19.
https://www.redcloudfs.com/wp-content/uploads/2019/12/20191205-RNX-Initiation-1.pdf

Our View: RNC Minerals (TSX:RNX) has transformed itself into a profitable Australian gold producer, that we believe has yet to be recognized by the market. RNC is ramping up production at its 100% owned Beta Hunt and Higginsville mines in Western Australia and we expect the company to demonstrate improved production and costs over the course of 2020. In our view, the  transition to profitability has not yet been recognized by the market and we believe that the combination of improving quarterly results and technical updates (Beta Hunt maiden reserves, Higginsville resource update and 2020 guidance) should provide RNC with the momentum to re-rate to our new C$0.90/sh fair value estimate (was C$1.00/sh).

Investment Thesis:

• Transformed into a profitable gold producer. The discovery of coarse gold at Beta Hunt (2018) and the acquisition of the Higginsville mine and mill (2019), has transformed it into a focused, Western Australian gold producer (previously Ni focused). We model RNC producing 106.2k oz at cash costs of US$773/oz, generating EBITDA of C$86.3M and FCF (CFO+CFI) of C$60.1M in 2020, a significant increase over 2019, suggesting it is undervalued. 

• Coarse gold only partially accounted for; could still provide significant upside. There is evidence to suggest that the “HighGrade Contact Zone” (Figure 2) should yield higher grades. Work to date suggests that the higher grades could exist within four shear zones over four-kilometers of strike (Figure 2 & 24). At the A-zone, the company has mined ~40koz of coarse gold from development in an area with a resource grade of 2.5-3 g/t Au. Prior to stoping, this area already has a recovered grade of 5.3 g/t Au, well-ahead of the resource grade. To be conservative, we model ~10k oz/year of coarse gold discoveries but evidence so far suggests it could be higher.

• Next two quarters expected to drive the re-rating. With most turnaround stories, a share price re-rating happens progressively as improvements are demonstrated. We believe that the QoQ operating and financial improvements expected in Q4/19 and then Q1/20 should support our contrarian view and drive the share price higher (Figure 5). 

Valuation: 

Discounted valuation does not reflect the turnaround; provides a buying opportunity. Our fair value estimate of C$0.90/sh (was C$1.00) is based on 6.0x our one-year forward, NTM EBITDA (was probability weighted) estimate of C$94.3M. While we have increased the rigor used to generate our fair value, the conclusion is the same, RNC is undervalued trading at 3.2x 2020E EBITDA and 0.45x NAV, versus peers at 5.1x and 0.83x, respectively. Upcoming catalysts include: 1) Q4 2019 financial results (Q1/20), 2) Maiden Beta Hunt reserves (Q4/19), 3) 2020 guidance (Q1/20 and 4) Higginsville resource update (H1/20).