RNC Minerals (TSX: RNX) – 4th Quarter Results Explored

March 31 2020, 22:35 GMT+01:00

RNC Minerals (TSX: RNX)

  • TSX: RNX
  • Shares Outstanding: 608M
  • Share price C$0.31 (31.03.2020)
  • Market Cap: C$188M

In the wake of a market reset and the COVID-19 crisis, gold investors will be looking for reasons to stay positive.

Gold has traditionally been perceived as a safe haven investment. That changed several weeks ago, when even the most robust gold stocks took a historic plunge. However, in the last week, the gold price has started tracking upwards again and has recovered well to over US$1,600oz, albeit down from a peak of US$1,700 at the start of March.

Regardless of how intimidating current market conditions may be to investors, they have to spot the opportunity here, and they need to understand the timing too. The gold price dip looks like nothing more than a blip; with gold back moving up towards the (possibly farfetched) dream of US$2,000/oz gold, there are plenty of reasons for gold investors to be bullish.

As I stated in an article earlier this week, if you have decided on an investment thesis, do not abandon it out of COVID-19 induced fear. This fear is unlikely to be derived from the operational difficulties at gold companies because there don’t appear to be very many. This fear is a personal fear of the virus itself, and it is causing investors who previously settled on investment theses to throw them into the trash. There is still an awful lot of money to be made in the gold space, especially given the huge discounts current market conditions have enabled.

Gold nuggets on top of dirt.

So, RNC Minerals: one of our favourite turnaround stories of 2019. The company moved from unfocussed nickel blunderer to refined gold producer in the space of a few months. RNC Minerals CEO, Paul Huet, has sat down with us and spoken candidly on a number of occasions. With stable monthly production well over 8,000oz gold, RNC Minerals investors have finally started seeing a reward for their patience.

RNC’s Q4/19 results have been eagerly anticipated. Now there are available, gold investors will be pleased to see they have lived up to expectations.

So, what are the big headline figures?

  1. “Strong Fourth Quarter Results”
  2. Gold Production: 26,874oz
  3. Adjusted Earnings: C$14M
  4. 2H/19 AISC Guidance BEATEN
  5. NO CHANGE to 2020 Guidance

Some great facts and figures there. Let’s unpack them.

2H/19 was an excellent period for gold production at RNC Minerals. The figure of 51,090oz comfortably exceeds RNC Minerals’ 2H/19 guidance (42,000-49,000oz).

The 2H/19 AISC has also exceeded expectations: US$1,144/oz (guided range was US$1,150-$1,250/oz), and the AISC for Q4/19 is even lower: US1,131/oz, a 4% reduction over Q3/19, and a 12% reduction over 1H/19.

Investors will now want to see this AISC continue to fall towards that magic US$1,000/oz figure, and that is exactly what RNC Minerals has stated it intends to achieve by the end of 2020. The company has reiterated the position in its 2020 guidance: 90,000-95,000oz gold in 2020 at an AISC ≈US$1000/oz. This number clearly assumes that COVID-19 has no great impact on RNC Minerals’ operations; we’ll see exactly how this plays out, but Huet seems confident that recently local hires will minimise the impact. It will be interesting to observe how the intended introduction of an ore sorter could transform these economics further, though this appears to remain some way off. Early test indications suggest removal of 20-30% of the ore. That would reduce AISC dramatically.

RNC Minerals CEO, Paul Huet
RNC Minerals CEO, Paul Huet

In terms of earnings, RNC Minerals continues to impress; it looks like Huet has done a really good job here. Adjusted earnings of US$13.7M for Q4/19 are particularly impressive, especially when you consider the full-year earnings for 2019 are only US$15.9M. It is clear Huet’s turnaround is now moving into top gear and share price growth could well be on the cards. 2020 looks like it is going to be about building cash reserves to give them options with regard to the speed at which they develop Beta Hunt or indeed if they turn their attention to the 5 new drill targets.

Looking at some more detailed finances, the adjusted EPS2 was US$0.02 and US$0.03 for Q4/19 and 2019, respectively. The adjusted EBITDA was US$14.4M for Q4/19 and US$18.3M for 2019.

One of the most important issues for investors to consider right now is a company’s balance sheet, with capital being extremely expensive to access. RNC Minerals has managed to strengthen its balance sheet throughout 2019, with a strong cash position of US$34.7 million, net of a US$3 million debt repayment, and working capital of US$26.5 million. Cash is king; never forget that.

Moving on to exploration, RNC Minerals has been busy drilling. The HGO open pit “production pipeline” has grown, with recent drilling driving mine life extensions of the Baloo and Fairplay North open pits. The recent drilling, combined with a review of a historical exploration database, continues to identify a number of areas at HGO for further exploration, including the Aquarius Project (formerly Corona Project), a newly interpreted 5km structure north of Trident, as well as potential open-pit expansions to both the Mousehollow and Hidden Secret projects, as previously announced on January 23, January 29 and February 27, 2020. We look forward to hearing more about these projects as the story unravels.

There have been other operational optimisations too. At the Higginsville mill, the average availability is up to 97% from 93% in Q3/19. This is huge and should not be underestimated. The numbers should start to show in Q2/20.

RNC Minerals is working on optimising its royalty arrangements. There has been no word yet on how exactly Maverix Metals’ royalty at Beta Hunt of 6% on gold and 1.5% on nickel will develop in the future, though Huet appears fully aware of the situation and seems to be working towards the best possible outcome for RNC shareholders; this is all dependent on if Maverix Metals can be equally pragmatic. Investors will need to keep their eyes on this as it develops. At HGO, the restructured royalty (announced December 19th, 2019) has lowered costs and unlocked ‘significant production potential.’ History tells us that neither side wins in the event of a stand-off. RNC Minerals has options and is producing cash without it and Maverix needs a good year. It makes sense to unlock the value for both companies. If RNC can get an all-in offer around 4-5 that would be a good result. However, as the Morgan Stanley negotiation should us, it's always more structured than that. Also, with all this cash, would it make sense for RNC to buy out the rest of the Morgan Stanley royalty? We shall see.

Nickel ore
Nickel could become relevant for RNC in the future

In other news, on February 6, 2020, RNC Minerals filed the technical report for the maiden gold mineral reserve at Beta Hunt of 306,000oz (3.4Mt at an average grade of 2.8g/t). Investors will be happy to see RNC Minerals delivering solid numbers to the market as it inspires confidence in these testing times. On May 30, 2019, RNC announced an updated Feasibility Study on its option on nickel-cobalt at Dumont, and claims positive results (US$920 million NPV8%). An interview with Johnna Muinonen is due with CRUX Investor later this week.

The final part of RNC’s Q4/19 Results concerns management appointments: ‘as part of the next phase of RNC's growth, a number of management changes and additions were made during 2019 and early 2020, with the objective of maximizing the value of each of the assets within the Corporation's portfolio and advancing RNC's corporate strategy.’ Will they be doing the same review with the current board members?

All in all, it is nice to see RNC Minerals put its strong performance throughout 2019 into formal writing. RNC Minerals investors will be hoping the market pays attention to this progress, and RNC can start pushing its market cap back up to previous highs; after all, shareholders have been patient for long enough.

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

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