RNC Minerals (TSX:RNX) - Right back to where it should have been (Transcript)

April 6 2020, 13:36 GMT+01:00

RNC Minerals (TSX:RNX)

  • TSX: RNX
  • Shares Outstanding: 608M
  • Share price C$0.34 (06.04.2020)
  • Market Cap: C$207M

COVID-19 has affected stock markets across the land. Very few have managed to emerge unscathed, and even the historic safe haven of gold investment has been hit, though the gold price has now recovered nicely and quantitative easing should drive it even hire.

So, RNC Minerals. An amazing operational turnaround in 2019 was lacking one thing: share price growth. RNC Minerals appeared on the cusp of growth, especially given the exciting exploration and optimisation plans in its 2020 guidance, but COVID-19 has heavily impacted the share price. Investor sentiment is low, and patient investors in RNC Minerals have been left feeling frustrated.

However, in this passionate interview, Huet cuts through the COVID-19 crisis, and explains in detail why RNC Minerals could still be a fantastic bet for investors. RNC Minerals released its Q4/19 results last week, and Huet was keen to emphasise the significance of them. What are the headlines?

  • Gold Production: 26,874oz
  • Adjusted Earnings: C$14M
  • 2H/19 AISC Guidance BEATEN
  • NO CHANGE to 2020 Guidance

The operational figures are mightily impressive; there is no way of getting away from that. However, the most encouraging fact of all for investors is that there is NO CHANGE to the 2020 guidance, despite the coronavirus outbreak. This is the clearest indication yet that RNC Minerals currently appears to be available at a steep discount on its true value.

Huet unpacked some of the results for us to provide further reasons to believe. RNC Minerals' 2H/19 gold production figure of 51,090oz comfortably exceeds its own guidance (42,000-49,000oz). The Q4/19 AISC also defeated expectations: US$1,131, a 12% reduction of 1H/19. The company has reiterated the position in its 2020 guidance: 90,000-95,000oz gold in 2020 at an AISC ≈US$1000/oz, provided COVID-19 has no adverse impact on the company. It will be interesting to see how an ore sorter can further transform these economics and act as a catalyst.

Adjusted earnings of C$13.7M FOR Q4/19 are particularly impressive, especially when you consider the full-year earnings for 2019 are only C$15.9M. RNC Minerals managed to reinforce its balance sheet in 2019, holding 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.

The real promise of share price explosion comes from exploration at the HGO open-pit production pipeline. Recent drilling has created mine life extensions of the Baloo and Fairplay North open pits. RNC Minerals has identified a number of areas at HGO for further exploration: the Aquarius Project, a newly interpreted 5km structure north of Trident, as well as potential open-pit expansions to both the Mousehollow and Hidden Secret projects.

In addition to optimising its Higginsville Mill, RNC Minerals is considering its royalty arrangement with Maverix Metals at Beta Hunt, which stands at 6% on gold and 1.5% on nickel. We have no doubt Huet will deal with this in due course and in the right manner.

RNC Minerals also filed the technical report for the maiden gold mineral reserve at Beta Hunt of 306,000 ounces (3.4 Mt at an average grade of 2.8 g/t) and has produced a revised feasibility study on the Dumont Nickel-Cobalt Project. RNC Minerals' corporate strategy and business model looks strong. Huet's leadership thus far has been equally strong. The company is moving into a clear growth phase, and there is very little to make us doubt they will deliver. Right now, a share price of c. C$0.30 looks like the market has lost its mind, and when that happens, its time for investors to think about acting.

We Discuss:

3:28 - 4th Quarter Numbers: What's Been Achieved? 4:44 - 4 Areas of Advancing the Business: What's Been Done so Far and What is Being Planned for the Future? 10:20 - Morgan Stanley Royalty: 5 New Exploration Targets; What Does That Mean for Investors? 14:28 - Stockpiling and Discussing the Ore Sorter 20:08 - Maverix: What's Been Happening? 22:31 - Marketing at Present: Reaching Investors Through Digital Means 27:03 - Raises in 2020 and Purpose for the Money

CLICK HERE to watch the full interview.

Matthew Gordon: Hey Paul, how are you doing sir?

Paul Huet: Hey Matt, how are you?

Matthew Gordon: Not bad, not bad. You are holed up at the house with the kids and the wife?

Paul Huet: Yes. So look,  it's no surprise, I've been saying this for a long time. I've got a beautiful wife and 6 children, so you can imagine it's a little stir crazy in the house, but we're certainly getting through it and following the guidance from our leaders to make sure that we stay home and do our best to prevent any of this spread. But you can appreciate those young ones - they feel like there are bars on their rooms here, so they're ready like Mike Tyson to fight their way out.

Matthew Gordon: Well, I know, I know. We've got them all at home as well, and with animals to boot, but we will get through this. Look, thanks for the call. We were really pleased to see your  Q4 numbers come out. And, you know, I'd like to talk to you about some of those numbers because I keep saying to people, this is one of the turnaround stories of last year. You know, when you kind of joined as CEO in, was it May/June last year? And also, I’d like to talk about what 2020 looks like if you don't mind. If you can give us some idea of what the plan is, what the targets will be and what you're hoping to achieve? So, but let's kick off with the Q4 numbers – so you have got to be pleased?

Paul Huet: Yes, look, it's hard not to be pleased. In fact, on several metrics we did slightly better than we had anticipated. And I think the thing to remember here, Matt, is that a lot of these things that we're doing are first time; it's the first time the company has its own mill. It's the first time the company ever put out guidance. It's the first time we're held accountable to numbers. You know, let's just talk about our guidance: we outperformed our high-end guidance by 2,000oz, coming in at 51,000oz. A lot of these metrics that are normal for everyone where you seem to just go, well yes, well they should be doing, it's normal, they are big steps because the company had never done it; putting together budgets, mill availabilities. You know, our mill came up significantly by almost 4%. So on metric after metric after metric, all these things together, they pay off. And look, the best report card we have is the Gold bars at the end of the stream and the cash in the bank. So nobody can deny cash in the bank and the Gold bars.

Matthew Gordon: But you've always talked about the 4 areas of business that you would look at. Now, clearly you've got to cut costs, and have you been doing that? I mean, how have you been doing that? What are the things that are working for you on just on that first one?

Paul Huet: Yes, and thanks for asking that question because I'll tell you; what we look at is really - are our efforts working? Are the things we're doing and our plans coming together as anticipated? And in our situation, we were very clear on identifying four main areas that we believed could cut our All In Sustaining Cost (AISC) and get us to that target. We're targeting USD$1,000 an ounce, which we will get to. So when you think about those four things, one of them was G&A; we realised G&A where it's maybe at about USD$160 an ounce. There's a lot of room for improvement and we have been working on that. We've been making some tremendous changes internally:  we've reduced the office significantly. That's an area where we've made some huge changes. We talk about people; you can never underestimate the people. So we've repeated some of the metrics, but they're worth mentioning, if you talk about putting the right people in place.

When I joined, you had two new GMs come, we brought in them guys and they had a network; they brought in about 87 people, and let me tell you something, how that is impacting us so much today. We talked about how our head over rate dropped from 87% down to around 16% to 18%, but one thing we didn't mention when we were talking about that is the circle, or that network that these guys brought in, most of them were local. Graham was born in Norseman, which is just South of our operations. Those people that followed Graham were around the communities. So how does that help us today? We didn't anticipate that before, it was reducing our costs because – fly-in, fly-out. We have a lot less people flying in, flying out. We are able to sustain and keep our operations, our mill running, our doors running because we don't have such fly-in, fly-out, and the government is imposing a lot of strict metrics.

But by having Graham, we've said from day one, putting in the right team matters, and we're seeing it matter so much today. It has helped us; our productivity rates have increased by 30% in the mine. Our efficiencies in the mill have come up from 93% all the way up to 97%. So look, every little step matters. These little thing matters and they add to the bottom line. I couldn't be prouder.

Look, we said we'd focus on two areas - we said G&A people, top 20 vendors. We have been working long and hard with our top 20 vendors - that is paying off. We're only able to do this because we've turned this ship around. These things are only able to be done because we now have consistent cash flow. We have a balance sheet, we have a strong team; none of these things would have been possible had we not done all the steps and turned this company around.

The last thing we said we were going to focus on was Royalties. So those were our 4 picks. And what's the best report card? Well look at what happened with Morgan Stanley; we've taken a Royalty that had been in place for almost 20-years, Matt. We've taken a Royalty that was 7%, down to 2% - what a change. We can't ask for better results. This is phenomenal. We have since unlocked 5, not 1, not 2, five, 5. Five new areas. I've never seen something so aggressive, so exciting in such a short time.

So when you think of those 4 things, what's the report card? The trend, look at it. We started here, Matt, first half of the year, over USD$1,300 an ounce. Our first quarter running the mill, not all alone, we had to do some toll-milling in Q3, we dropped it to USD$1,183. The second quarter that we have full production on our own, we dropped another USD$50 an ounce. And look, don't ever underestimate what those bushfires and everything else did, we were doing this while we were dealing with a global catastrophe, ahead of this Covid-19. So hats off to the team here. I can't be prouder to serve as CEO of this company. These guys are doing a good job and it is flowing into our numbers, into our reduction in costs, achieving our production. There's a disconnect in the share price, but not a better buying opportunity. You're going to find around anywhere.

Matthew Gordon: Well, that's a very passionate riposte to the 2019 figures, I mean, the 2019 figures. I mean, genuinely I'm impressed with the turnaround bit, but I think, and I've not made a secret of that in the marketplace, I've been telling people that this was phenomenal. What you've done from the base you started with, to what you've done is phenomenal. I am interested though, because you have got to keep it going. You can't rest on your laurels. I don't for one second think you will ,because if you are as passionate with your staff as you are with this interview, I think that they know what you want out of this, which is to continue driving those costs down.

So can I just talk about…so Morgan Stanley - you've talked about how you've identified 5 exploration targets. What does that actually mean? So people are watching this and go, well, great, 5 exploration targets, but what is that actually going to convert into in terms of value to them or for you?

Paul Huet: So let's break it down. All right, those five, let's talk about the geophysics first. So if you look at the history of this asset, our mill, that mill was built for the Trident mine. The Trident deposit is right at the plant. It produced 1Moz, and based off memory, somebody would fact check this, but I'm certain it's 9 to 10g/t. Somebody could fact check that for me, but 9 to 10g/t: 1Moz. After we renegotiated the Morgan Stanley Royalty, we spend approximately USD$100,000s on geophysics just North of where the plant was built. We discover a brand new trend 5kms in strike. This is a brand new, not one drill hole, this is completely virgin territory, wide open, but you can clearly see it in the geophysics; there is a structure there that resembles why that plant was built. So that's one target and that's for the future.

Now let's talk, let's bring home some stuff that are even closer to us. After renegotiating Morgan Stanley, we have some drill holes in Fairplay. We're already mining Fairplay. How does that transfer into our people? When we had the bushfires in December and November, and we were dealing with that, we were very fortunate that our team was proactive getting reagents, and we also had a stockpile. When we bought the plant we had a stock pile, we burned it up. So what does Fairplay do? It adds another source. We're not reliant on only two sources, today you have Baloo, Fairplay and Beta hunt. Those stockpiles that we had to burn up during the fire seasons are being replenished. We're actually building the stuff out today. We have north of 45,000 tonnes now. That is extremely good, considering we don't know the outcome of the future. None of us can predict what's going to happen.

We're really pleased that the Australian government have been good about mining, not shutting anything down, but having that stockpile surely will help us to get through anything, or overcome some of the things we have to do. So we've got a 5km strike, new geophysics, we've got Fairplay. We're actually mining it. And you know, this Royalty has only been less than 3-months and we are already mining it in the area. The other two are pipelines that will be mined into our mine. They're actually, we've just built a new mine plan at Higginsville, or Western Australia - the whole district. These assets or projects: Mouse Hollow and Hidden Secret are now part of our pipeline, and they're actually closer to the plant than Baloo. So it’s a very exciting pipeline. And the other one is Aquarius, it's an underground target. We announced some of the intercepts over 600g/t over 200m, 250g/t over 1.9m. Extremely high grade, narrow vein, exactly what I've done my whole career. How much more exciting can that be for us? This is a pipeline of stuff that we have directly on our back door within a 50km radius of our mill. And before I step off that, the paleo channels, I know I didn’t talk a lot about it, but those are also an area where we're targeting, so unlocking that Royalty, removed handcuffs in a district that had been in jail for almost two decades too.

Matthew Gordon: Okay, so let me just…a lot of things there: Higginsville - you've already said the productivity is from was 93%, 94% up to 97%. Great news. Okay. But with these stockpiles, how quickly can you replenish, or get back to where you were or what are your plans of, you know, how big do you build that stockpile whilst you're doing everything else you need for prevention of any future catastrophe?

Paul Huet: So look, Matt, having a stockpile is very proactive in giving ourselves much needed insurance. The way to look at a stockpile is, these guys are being proactive and it's insurance, but the size of the stockpile depends on the throughput. And in our case, having an 80,000t to 100,000t stockpile is very beneficial because that's about two and a half months of runway. With that being said though, we wouldn't want to generate a stockpile of two to 300,000t, our next step should be, well, why don't you put it through the mill. And it'll flow into what I wanted to talk to you about; it's the Oris orders. We had a team on the ground. They were there, they were working on it. We did the initial test results. Unfortunately because of the pandemic, they had to leave the site, but we did get some initial results. Initially we're seeing anywhere from screening or scalping off 20% to 30%. That's a big difference. Think of anytime, if you're going to haul from any of our sources, it's, you know, once we get this completed, if we can scalp off 20% of the tons instead of moving 100,000t at USD$7 a ton, running it through the mill at USD$$29 a ton, you're going to do 80,000t instead of 100,000t, but get the same amount of ounces, well then you're really doing something smart here.

So I know it's early. We didn't complete the work, but we had started, we were excited about the initial results. It appears positive. Once we're allowed and when we're permitted, we will really step that up and follow through with it.

So back to your question, your question about stockpile, what's the rate? In our case, 80,000t to 100,000t gives us that insurance that we want, that flexibility, so that if anything happens, we need to anticipate, and our risk register, obviously we have a number one risk which is potentially getting shut down by the government. We could potentially run the mill alone because you could run that plant with six or seven people in way different areas. So the a social distance would be simple. We're anticipating the worst. Preparing for the worst, hoping for the best. Putting in these insurances will help us so that we wouldn't have to deplete our cash. You know, we're in a very unique position that, let's face it, not a lot of juniors have the cash that we have. We ended the year strong. We were actually ready for this. None of us knew this was coming, there was nobody in the world. I'm 51 years old, I've never seen anything like it. You talk to somebody who is 80 years old, they've never seen anything like it. We were ready. We're blessed that we have a strong balance sheet. We can get through this, we will get through this. Putting the stockpile just gives us that much more strength. Not having to burn up cash and making sure we've delivered.

We haven't even changed our guidance. I'm looking, every day you look at any press release out there - everybody is changing their guidance because things are evolving. They're so fluid. And that might happen to us. I'm not saying it's not, don't get me wrong here, but we haven't yet. And that's a reflection again on Graham, the team, us being prepared, readiness, having reagents there, having people that are local instead of fly-in, fly-out. So we're running with about 80% of our people here that are being brought, taking care of the mill. We were the first company to hire a nurse to put her on staff at the airport, making sure people don't come in with it. If anyone had anyone had any symptoms, we made sure we quarantine them. We are taking so many steps to be so proactive that help make sure we get through this, the health and safety of our employees, and that it doesn't disrupt our business plan and it doesn't harm us internally. So there's a lot of things here that we're doing to tick the boxes to make sure that that guidance remains in place and that we deliver.

We're known for one thing; we could do a hundred things right, and then if we make one mistake, people won't forget. We're doing everything we can to prevent that and to be as proactive as we can, anticipate as much as we can. And we have a reputation of delivering. It won't change in this company. That reputation I've had in my career will not change in RMC.

Matthew Gordon: Okay. I don't doubt that, and again, you know, I'm hearing you loud and clear. I think there's a lot of things that you said there which probably need, you know, exploring. And I know you've got to go, but you know, if you get a chance with your communications to clarify, what does going from 93%, 94% up to 97% mean in terms of dollar terms for you through the mill, when will you know - I know you've done some initial testing with the ore-sorter, 20% is big for you, 30% is obviously bigger. What does that mean for you in terms of throughput? in terms of reducing the AISC even further? You know, all these sorts of numbers. We as investors would like to understand what the impact is going to be on the bottom line.

But I think given, given the timeline, I want to finish off with a big question for you if I may, which is, you have seen the benefit of the negotiations with Morgan Stanley hitting your numbers in Q1/20. You have been in conversation with Maverix, but it's all quiet on the western front there. What's happening? When will we know? And you know, when do you think we can start to see the benefits of that? Because they, I mean the Royalty that they have is, it's one of the biggest in the world. I mean it's, I've not seen a number like it. You obviously have entered discussions presumably to reduce that or come to as a different set of terms; have you gone anywhere?

Paul Huet: Yes, so let me just start by saying we're not oblivious to it. We know that it's a very large Royalty. We get that. We get that it's our responsibility to do our very best to renegotiate this in some form or another. We have to be tactful in this situation where it has to be mutually beneficial for both companies. There has to be a plan. These things, this is not specific RNC, people do this. There are royalty companies that renegotiate things all the time. We are looking for solutions that are mutually beneficial to both companies. We haven't gotten there yet, but we're still in discussions, and that needs to progress. We need to continue on that path. Do I expect similar results to what we had with Morgan Stanley? No, I don't. For someone to think, well he's going to go from 7% down to 2%, we have about a 7.5% rate now. And I'm not disclosing anything that everybody doesn't know. People know it's 7.5%, 6% plus 1.5%. It is big. We let go to 2% like Morgan Stanley, I've never ever said that. I don't expect it to do that. I expect it can get a lot better than where it is today. And I'll just close it there, Matt, because it is something that's very important to us. I know it's important to them as well, and I'm hopeful that we will find a mutually beneficial solution for both companies.

Matthew Gordon: Let’s finish up here, the world has slightly changed in the last few weeks. A lot of the conferences that you were going to go to and continue your marketing around the world, you know, they're not happening. I think a lot more people are going online and I

think you'll probably be doing a lot more marketing online with people like us. Which obviously is a real change, but I think for the mining sector as a whole, because there's not some traditionally, you know, big marketing sector or vertical. How are you going to be able to reach the institutional investors the way that you used to without traveling around? Because we have talked in the past about trying to get that balance between retail and institutional investment into the company. How's that going? Are you finding yourself restricted in any way?

Paul Huet: Yes. So let's just look at some of the actuals; so I was looking at a report here just before the board meeting, we have actually added 15 new institutional names to our story. That's pretty significant. 15 new institutions that were not shareholders before we started this turnaround. How do we meet them? It is very important that we, if I'm asking my people, Graham and everyone in Australia to go to work every day and be healthy and be safe, and I have to be willing as a CEO to serve them as well, and step out of my comfort zone and do whatever that is I have to do. Whether it's pick up the phone and get on a video call. If that's what we need to do, then by God we will do it. We are going to take those steps. We are going to think differently.

We're coming up on a call here on April 1st, we will set up one-on-one meetings with people virtually. If people don't have that ability, we'll set up calls. We will not sit on our hands while we ask our other members of our team to go in there day in, day out and mine this ore and put it through the plant.

So for us, we just need to think differently, stay healthy. We can't be arrogant and then get out there and get sick. None of us, me getting sick or any one of my executives getting sick is not a really good solution. So we've got to stay out and think differently. And we already are. You know, my senior vice president of corporate development and investor relations, he was on the call talking about several metrics of video conferencing, things we're already doing and we're going to be doing different.

Look, we just announced here last week, 2 of our research analysts have us in their top 3 picks of the year. So for 2020, one of them I think, I believe we're number 1 pit for the year. The other one just announced a couple of days ago that were in their top 3 choices of Gold turnaround stories for the year.

We owe it to our shareholders to continue this story to continue, to deliver it, to continue to think differently, challenge ourselves, work outside of the box. Our share price will follow. You don't have success operationally with people with ending Gold bars, ending treasury without that share price following at some point. There's a disconnect today. It won't be there forever. We will be rewarded for those long hours, the sacrifices and the efforts we put forward.

Matthew Gordon: Okay. You've been building up your, this is the final one, honestly, this time - you've been building up-

Paul Huet: You keep saying that.

Matthew Gordon: . I know, I know. I'm so bad.

Paul Huet: You’ve lost a lot of credibility.

Matthew Gordon: I'm the worst. I'm the worst. You have been building up your cash position. You have been producing free cash flow. I mean, that's what I'm excited about for you guys, because you've said to me somewhere in this conversation, your guidance for 2020 is not being adjusted for bushfires, for Covid, for any reason. You haven't taken the opportunity to say, I'm going to reduce my guidance here because you feel that you can deliver and continue to deliver consistently. That's what I've heard. So that says to me, your free cash flow will continue to happen. You will continue to build a cash reserve, and that's going to give you optionality to do some things. So I've got to ask two questions: one, are you going to be raising any money this year? To your knowledge today, is that in your thinking at the moment?

Paul Huet: Absolutely not. We have no reason to be raising money, and giving up our paper at these levels - it's really not a very wise decision for me at all.

Matthew Gordon: Okay. And what do you do with this cash? You're building cash but cash is just cash. Cash which creates value is more exciting to shareholders. So today, do you have any plans for that cash?

Paul Huet: Yes, so organic growth is really, really directly in front of us. We have five new areas that we've discovered. We are going to be following up because we have cash, we are able to follow up on those expiration opportunities and we are certainly doing that. This pipeline; Aquarius, if that turns into an underground line that could be double or triple the average grade of the Beta Hunt underground deposits. That’s extremely exciting growth. That’s what I've done my whole career, Matt, my whole career, starting off as a miner in Timmins Ontario. I was drilling and blasting in those narrow veins so I know what it's like. There's tremendous opportunity in front of us and we have the flexibility and option to do something about it because of our cash position.

Matthew Gordon: Paul, thanks so much. I don’t know what time of the morning it is there, but you're full of energy. I want whatever you're drinking. Fantastic.

Paul Huet: Yes. Yes. That's life in a house with six kids.

Matthew Gordon: You've probably been up for four hours. Well I hope you make it through this period that we're in at the moment safely, with this pandemic that we're all suffering. Great news about the company last year. Well done. I'm excited to see you keep delivering this year. Sounds like you've got some big things ahead of you. I hope they have an impact. I think, like a lot of people monitoring what on earth is keeping the share price down because there's no reflection of the company that we've analysed and see in front of us. So keep it going.

Paul Huet: Before I sign off, I just wanted to say, I can't remember the exact numbers so I won't give a number, but I know that we are really pleased that our short position is almost like obsolete. It's extremely, extremely low, which is very beneficial. And I don't want to give you the exact numbers. Maybe you can research the market, one of my guys, but I know that they've been cut down to next to nothing. We looked at the top 30 short. We're not even near anywhere near that, whereas before we would always be in the top 10. So in closing, RNC is in a different position. We're very passionate about what we do. We'll continue to deliver, we'll make sure our people stay out there. And our shareholders, those that are with us that are continuing to buy, they will be rewarded. They're not going to regret it. So onwards and upwards.

Matthew Gordon: Okay. Well thanks for your time and we'll speak to you again. Cheers.

Paul Huet: Take care. Cheers.

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

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