Royal Nickel Corp. RNKLF

Red Cloud: Royalty Removal Reaps Rewards for RNC, May 20th

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Red Cloud: RNC Minerals (TSX:RNX) Royalty Removal Reaps Rewards for RNC, May 20th '20.
https://cdn.ceo.ca/1fcabl1-20200519-RNX-Update.pdf

Impact: Positive

RNC announced new drill results from the Pioneer deposit and Baloo Mine at its Higginsville operations in Western Australia (Figure 1). Additionally, the company announced that it is continuing to review historical data while drilling is underway at the Jupiter project. In our view, these positive drill results could see grades increase at Higginsville when the resource update and LOM plan are released – further solidifying a turnaround that has yet to be fully recognized. 

Highlights:

• High-grade drill results at Higginsville. RNC reported high-grade drill results from three targets within the significant Higginsville land package. At Pioneer, gold mineralization was extended with the definition of a new south plunging shoot where drilling intersected 5.4 g/t Au over 17m. At Baloo, six RC holes were drilled to follow up on grade control drilling that extended high-grade gold mineralization beyond the southern pit limit, highlighted by 5.5 g/t Au over 3m. The deeper extensions of the Baloo mineralization are planned to be tested with infill diamond drilling in 2020. Additionally, drilling is ongoing at the Jupiter project, and is planned to be followed by Mitchell – two of the company’s paleochannel deposit targets.

• Better grades would push our estimates higher. For Higginsville and the recently acquired Spargos (read our note here) we model 43k oz Au production at 2.25 g/t and total cash costs of US$560/oz in 2021. Should grades increase by 20%, we project costs would decline by 15%, while our 2021 EBITDA would rise 14% and push our target up by 15%. We note that this change, does not account for Higginsville and Spargos ore displacing Beta Hunt production where the royalties are more onerous. 

• Now It is Clear Why RNC has been buying back royalties. In our view, these results highlight why the company has been so aggressively reducing royalties at Higginsville (read our note here). With A$10M expected to be spent on exploration this year, we anticipate steady positive news flow to support an updated resource and LOM plan. We incorporate the historic 1.8M oz resource at 2.2 g/t Au in our estimates, but in our view the market has yet to fully support this outlook given where shares of RNC trade relative to peers.

Valuation:  Steady operating results plus exploration success should close the valuation gap to peers. We are maintaining our target of C$1.30/sh and our BUY rating. Our target is based on 6.0x our one-year forward NTM EBITDA estimate of C$141.6M (unchanged). Despite recent strong share price performance, RNC still trades at a discount to peers at 2.4x 2021E EBITDA and 0.4x NAV (peers at 5.9x and 1.0x, respectively). Upcoming catalysts include: 1) Q2/20 Operating results (Q3/20), 2) Exploration updates (ongoing) and 3) Updated Higginsville resource (H2/20).