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RNC Minerals (TSX: RNX): A Strong 2019. Now It’s Time To Make Shareholders Money.

February 11 2020, 10:50 GMT

RNC Minerals: the turnaround story of 2019? It certainly makes a strong case for itself. Seven months ago, it was a faltering, unfocussed nickel developer, but now things are rather different. We sat down with RNC Minerals CEO, Paul Huet, to discuss the company and ask questions on behalf of shareholders and potential investors. You can watch the full interview here.CLICK HERE to watch the full interview.

Since Huet took the helm, RNC has transformed into an efficient gold-focussed producer, and the figures so far are strong and consistent: 8,000oz+ of gold per month since June 2019. The management team has delivered on everything they have said they would so far. This is encouraging for investors.

A photo of a chunk of RNC gold ore on top of a digital scale.
RNC Gold Ore

RNC’s market performance has remained lacklustre. The share price sits a CAD$0.43, and the market cap stands at CAD$261M. While this is relatively high in comparison to much of the last 8 years, it is not making many patient shareholders feel any better. It is also unlikely to be enough to attract large numbers of institutional investors, who all have individual expectations of share price before getting involved with a company.

RNC’s historical performance seems to be creating legacy issues despite the promising developments of the last 7 months. Huet has been touring the world in the past couple of weeks, dismantling pre-existing notions of what RNC is and building on the foundations that he has assuredly positioned. I feel a rebrand coming on. His primary targets are the many institutional investors, fund managers and potential strategic partners who had turned away from the convoluted nickel and gold wannabe. The retail audience and slight mania by some is a distraction. Plus, some shorting is restricting the growth of the share price.  We think institutional money and behaviour could sure this up, so would agree with the strategy of targeting institutions.

RNC has the ability to become a stable and consistent cash generator. This has its advantages. Their recent guidance confirmed this, targeting annual production figures of 90-95,000oz, excluding coarse gold, the possible introduction of an ore sorter and further engineering refinements to RNC’s plant/mill. The message from Huet is in line with his tone so far, assured but restrained confidence: 2020 could be an exciting year for shareholders.

Nickel

Huet says RNC’s 28% JV “option on nickel,” in the form of the Dumont asset, has been valued at zero by the market.

Waterton Global Resource Management, a private equity firm that specializes in the metals and mining sector, is the primary driver behind the Dumont project. Nickel had a good 2019, but the JV partners are not yet making their plans clear. We don’t think there will be an announcement on this until 2H/20.

Exploration

Huet was keen to discuss to new explorational discoveries mentioned in the guidance: Higginsville, and Baloo.

This is definitely exciting mining, all 1,800km of it. Baloo is reaching a more advanced permitting stage, while a recent high-density gravity survey at Higginsville has delineated a new geological structure: a 5km strike zone. There is not one drill hole in the structure, and Huet remarks it is very similar to the structure the Trident Mill was built for. It is also in close proximity to the mill. There is a lot of work to do, but this is encouraging.

Higginsville aeromagnetic plan highlighting major shear zones and location of the recently completed high-density gravity survey.
Figure 1: Higginsville aeromagnetic plan highlighting major shear zones and location of the recently completed high-density gravity survey (CNW Group/RNC Minerals)

When we take a look at the mineralogical features of similar mines internationally, something that could be a gamechanger for RNC is potential paleo channels. In fact, paleo slurry could have a transformative impact on the economics of RNC operations. Paleo slurry doesn’t need to crushed, refined or grinded; therefore, space will be freed up in the mill, increasing output and therefore efficiency. We will watch this space and look forward to seeing if this is something RNC has planned.

Figure 2: High density gravity image over the Burke-Barcelona mineralised corridor highlighting newly interpreted north-south structure west of the Barcelona prospect. (CNW Group/RNC Minerals)

Huet was clear about the finances of RNC exploration projects. All CAD$9-10M of exploration operations will be funded by cash flow, rather than by dilution or debt. RNC appears to have positioned itself strongly.

In terms of M&A, this is a clear case of right place, right time. RNC will consider adding to its portfolio, but only if this makes sense for the company and shareholders at the time. We will continue watching closely. Will a new acquisition be the catalyst for share price discovery?

Royalty Arrangement

Huet stated it wasn’t the right time to raise the subject.

Some investors have been curious about the future of Maverix Metals’ royalty stream, negotiated at a time when RNC was a very different company and the market was much less favourable for gold. It is understandable that Huet is keeping his cards held to his chest in this situation.

Maverix has a 6% option on gold, and a 1.5% option on Nickel. We expect to see something concrete at the end of Q1, but for now, investors will continue to speculate. It is clear Huet wants to get better terms and Maverix has publicly told us that they want to get a deal done. However, what companies say and what companies do in the midst of a negotiation is down to who thinks they are better at chess. Huet is signalling he is able turn the tap down to one of Maverix’s largest income sources, c. 25-30% of revenue, by reducing the focus on Beta Hunt until this arrangement is agreed. We’ve seen commentary from both sets of shareholders and some crude numbers; under the current terms RNC is effectively not making money on Beta Hunt and hasn’t been for some time. So, the question being asked is the following: why would RNC drill when the only company making money from it is Maverix? Likewise, Maverix shareholders want a quick resolution. But this is chess so let’s see how this plays out.

Debt Solutions

Huet stated that paying down debt is important.

While they have recently paid down CAD$3M, RNC still owes CAD$32M that is due in June. RNC is actively evaluating the best way to proceed. This could be via extending the debt repayment or restructuring it on better terms, which it’s current cashflow allows it to do. Huet is confident the consistent, strong production figures, 2P Reserve and strong financial position of RNC provides the company with more clout than before when it comes to debt arrangements.

Business Strategy For 2020

How is Huet positioning RNC for 2020?

He stated he is aware that RNC’s changed fortunes and strong assets would make them an attractive target for a take-out attempt, but Huet appeared adamant: RNC is not for sale, and is going to bring all its projects through to production to return value for shareholders. Despite these words, investors should note that the right price is the right price. Today the premium would need to be sizeable to get the attention of RNC shareholders and the Board. We just don’t see those conversations happening at below CAD$0.80.

RNC has a huge 607M outstanding shares. This might be common for the ASX, but for Canada, this is something that needs to be looked at closely. Given Huet’s mood for tidying up the ship, we think a rollback is a good option. The question is, does it happen before a much ‘chatted’ about ASX listing? We think not. That could get messy. But it will come, as the institutional buyer will demand it. They need to see the share price above $1 to meet their buying criteria, and this would be a nice and quick way to achieve that.

Moving forward, it’s full steam ahead with Exploration, debt restructuring and operational optimisation. Huet is aiming for a <USD$1,000 AISC that, if the current trend is anything to go by, is eminently feasible and we think will happen before the end of Q1/20. While times are good, Huet is looking at a standby facility, to provide a contingency plan for the company and shareholders. The quantum is unknown, c. CAD$30M-$50M. As said in the interview, put it in place when you don’t need it, because when you do need it, it won’t be there.

The ship has been steadied. Huet has completed a lot of things in phase 1 of the turnaround. What to want him to do in 2020? Comments below please, ladies and gentlemen.

Company website: http://www.rncminerals.com/


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