RNC Minerals: Sky Is The Limit

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About: Royal Nickel Corporation (RNKLF)
by: Peter Arendas
Summary

RNC Minerals discovered another ultra high-grade coarse gold zone beneath the famous Father's Day Vein.

The Higginsville mine acquisition should be completed soon, providing RNC with a large land package, own processing facilities, and a mining operation with production of 40,000-45,000 toz gold per year.

The updated resource estimate for the Beta Hunt mine should be completed by the end of June.

An updated feasibility study confirmed the world-class status of RNC's 28%-owned Dumont nickel-cobalt project.

RNC Minerals (formerly known as Royal Nickel) (OTCQX:RNKLF) is an interesting company, with a 28% interest in a world-class nickel-cobalt asset and a gold mine with sky-high exploration potential. Both of the assets are located in safe jurisdictions of Canada and Australia. As can be seen in the chart below, RNC was a common penny stock only one year ago. The Dumont project was large but hardly economical at the prevailing metals prices, and the Beta Hunt mine was only a marginal gold mining operation. But, in September, the ultra-high-grade Father's Day Vein was discovered, the share price shot up, RNC quickly generated relatively lot of cash. Moreover, it made an equity financing at increased share prices and repaid its debts. Although the initial post-Father's Day Vein enthusiasm slowly faded away and RNC's share price declined back to the $0.3 level, a lot of progress crucial for the future of the company has been done over the recent months.

And, yesterday, RNC Minerals announced the discovery of a new high-grade zone of coarse gold in quartz veins, beneath the famous Father's Day Vein. It is estimated that 987 toz of coarse gold was recovered in 238 kg of rock from a series of veins (the accuracy of the estimate is +10%/-25%). According to Mark Selby, the CEO of RNC Minerals:

This most recent discovery provides further support for our geological model that predicts that the areas where the mineralized shear zone and sedimentary sulphides intersect are capable of generating "Father's Day Vein" style coarse gold mineralization, and proves that such areas extend at least 25 metres below the Father's Day Vein discovery.

Source: RNC Minerals

Only to have a gross picture, 987 toz gold equals 30,699 grams. After deducting not 25% but 30% from this estimate, to be more conservative, the resulting number is 21,489 grams of gold that was recovered from 238 kg of rock. It means that the gold grade of the mentioned ore sample was at least 90,290 g/t gold. Of course, this is only a rough number, but it further underlines the extreme potential of the Beta Hunt mine.

The Beta Hunt Mine

The Beta Hunt mine is a former nickel mine acquired by RNC in 2013. In 2014, the nickel production was resumed and, in 2015 also, a small-scale gold production began. The funny thing is that less than one year ago, the mine was for sale. RNC was close to closing the deal when it discovered the ultra high-grade Father's Day Vein, and everything has changed. On September 9, RNC announced that during a single week, it extracted approximately 9,250 toz gold, including huge specimen stones containing 2,440 toz and 1,620 toz gold. More than 30,000 toz gold was extracted from the initial development area of the Father's Day Vein. The volume of gold produced over a single month equaled the volume of gold produced over the preceding six months. What is important, RNC has identified a sediment horizon long 4 km and open at depth, where more areas of ultra-high-grade gold mineralization similar to Father's Day Vein are believed to be found in the future.

RNC Minerals focused on expanding the current Beta Hunt mine resources over the recent months. A new resource estimate should be prepared in the coming weeks, and it is generally expected that the old estimate of 239,000 toz gold indicated and 208,000 toz gold inferred (table below) will be improved significantly.

Source: RNC Minerals

RNC discovered several zones of high-grade to ultra high-grade gold. For example, in the Western Flank Zone, an interval of 27.8 meters grading 16.8 g/t gold was intersected by drill hole WFN-071. Hole WFN-029 intersected 1,017.3 g/t gold over 2 meters. In the A-zone area, hole AZ15-022 intersected 119.37 g/t gold over 6.4 meters and hole AZ14-012 intersected 8.99 meters grading 10.9 g/t. Moreover, multiple interceptions with gold grades that had only single-digit values were made at both zones. They were only single digit but notably above the current resource grades. It means that not only the volume of contained gold but also the gold grades should increase meaningfully.

Although the resource update will be an important milestone, RNC made also other important steps in order to support the Beta Hunt mine future. On May 13, it exercised the option to purchase the Higginsville Gold Operation from Westgold Resources for A$25 million ($17.5 million) and 49.8 million RNC shares. The Higginsville operation is interesting especially for its 1.3 Mtpa mill. The processing plant is relatively new, it was built in 2007. Right now, the ore from Beta Hunt is being processed under a toll milling agreement. Thanks to the Higginsville mill, RNC will be able to process the ore on its own, saving around $100/toz gold.

But it doesn't end at the processing plant. RNC acquires also an active mining operation that is expected to produce 40,000-45,000 toz gold at an AISC of $1,000-1,050/toz this year. The Higginsville mine contains reserves of 367,000 toz gold and measured, indicated, and inferred resources of 1.92 million toz gold (table above). Moreover, there is a significant exploration potential, as the Higginsville property covers an area of 38,600 ha (386 km2).

Source: RNC Minerals

To sum it up, the Higginsville acquisition will not only boost RNC's current gold production but will also help to reduce RNC's AISC/toz gold, will grow the overall company-wide gold resources significantly, and will provide a large land package for exploration. The transaction is expected to be completed by June 10.

The Dumont Project

It is also important not to forget that Beta Hunt (and soon also Higginsville) is not RNC's only asset. RNC owns also 28% of the Dumont nickel project, one of the biggest nickel-sulfide deposits in the world. An updated feasibility study for Dumont was prepared only last week.

According to the update, the Dumont deposit contains reserves of 6.082 billion lb nickel, 243 million lb cobalt, 627,000 toz palladium and 287,000 toz platinum. Moreover, the measured and indicated resources (including reserves) contain 9.75 billion lb nickel, 394 million lb cobalt, 1 million toz palladium, 461,000 toz platinum, and 47.58 million tonnes of magnetite (table below). And, there are also inferred resources of 2.86 billion lb nickel, 112 million lb cobalt, 220,000 toz palladium, 92,000 toz platinum, and 33.43 million tonnes of magnetite.

Source: RNC Minerals

The mine should be developed in two phases. In the first phase (years 1-7), the average annual production should equal 73 million lb nickel, 2 million lb cobalt and 14,000 toz palladium and platinum. This all at an AISC of $4.19/lb nickel. In the second phase, the production should increase to 111 million lb nickel, 3.4 million lb cobalt and 25,000 toz of platinum and palladium, at an AISC of $3.8/lb nickel (years 8-19). Over the 30-year mine life, the annual production should average 87 million lb nickel, 2.6 million lb cobalt, and 19,000 toz platinum and palladium, at an AISC of $3.8/lb nickel.

The initial CAPEX is estimated at $1 billion. The expansion CAPEX should equal $601 million and life of mine sustaining CAPEX $611 million. At a nickel price of $7.75/lb ($5.35/lb nickel right now), cobalt price of $25/lb ($15/lb right now), platinum and palladium price of $1,000/toz ($800/toz and $1,320/toz right now), CAD/USD exchange rate of 0.75 (0.746 right now) and oil price of $60/barrel ($52/barrel right now), the after-tax NPV(8%) of the Dumont project equals $920 million, and the after-tax IRR equals 15.2%.

The results of the updated feasibility study show that although Dumont is a world-class project, its development is improbable at the current metals prices. However, it is still a valuable asset, and the 28% interest offers RNC several options. RNC can try to sell its Dumont interest and use the proceeds to finance the Beta Hunt exploration and development. However, it is hard to say whether someone would be willing to pay a reasonable price right now. Another option is just to sit tight, and later, after the nickel prices improve, use cash flows from Beta Hunt to finance RNC's share of initial Dumont CAPEX (around $280 million).

What To Expect Next

The gold production should increase significantly at the Beta Hunt mine. In Q1 2019, RNC produced only 3,716 toz gold, but it was caused by the production ramp-down related to the ongoing 40,000 meters drill program. However, a limited bulk gold mining has been restarted in April. The full ramp-up should follow after the resource update is completed. Moreover, also some nickel production should help to boost the cash flow. According to the Q1 news release:

Limited restart of bulk gold mining is well underway at Beta Hunt. By the end of April 2019, the restart had already achieved a 40,000 ounce annualized run rate. Nickel production has also resumed and will contribute cash flow going forward.

It is possible to expect that, in Q2 or Q3, RNC's annualized overall (Beta Hunt + Higginsville) gold production rate should cross the 100,000 toz level, with some nickel production as a bonus.

After the new resource estimate is completed (expected by the end of June), RNC's exploration activities will start to focus on the ultra high-grade potential of the areas where the four shear zones meet the Lunnon sediment layer. The aim is to make further high-grade coarse gold discoveries.

The Potential Risks

Of course, no investment is completely risk-free. RNC Minerals has a huge advantage that both of its key assets are located in safe jurisdictions, Dumont in Canada and Beta Hunt in Western Australia, in the Kalgoorlie region. Right now, the biggest potential risk seems to be related to financing. Although, as of the end of Q1, RNC had a debt of only C$6.96 million ($5.2 million), it held cash of only C$752,000 ($562,000). Due to the exploration-related production ramp-down, the cash flow was negative C$5.5 million ($4.1 million) in Q1. Over the recent quarters, RNC had to use equity financings to partially finance the debt repayment and the extensive exploration program at Beta Hunt. Moreover, another 49.8 million shares will be issued as a part of the Higginsville mine acquisition. The good news is that RNC should start to be cash flow positive probably as soon as in Q2. Moreover, with Beta Hunt back in production and with the newly acquired Higginsville mine, it should be much easier to secure also a debt financing at some reasonable terms, if needed.

And, it is important not to forget the geological risks. Although RNC's model seems to be working and the exploration results keep on confirming it, there is some risk that the final results won't be as positive as expected. However, this risk keeps on diminishing with every release of exploration results. Especially if they are similar to the ones released yesterday.

Conclusion

RNC Minerals is going to own two producing gold mines soon. As a bonus, there is also the 28% interest in the Dumont project. RNC's annualized gold production rate should reach the 100,000 toz level in the coming quarters. Moreover, there is a blue-sky exploration potential at the Beta Hunt property. And, although RNC is almost debt-free, its market capitalization is only $190 million (market capitalization after RNC's share price opened trading at $0.4, following yesterday's news release). I believe that RNC's 28% Dumont interest alone is worth more than this, as $190 million represents only 1.82% of the current market value of metals contained in Dumont reserves attributable to RNC and only 1.14% of the current market value of metals contained in Dumont resources (excluding magnetite) attributable to RNC.

Given the exploration potential, the sky seems to be the limit for RNC's share price. However, it is hard to set an exact price target right now. The upcoming Beta Hunt resource estimate together with Q2 and Q3 production results should push the share price higher, maybe back to last year's highs around $0.8, if the gold price remains above $1,300/toz. Further upside will depend on further exploration results.

Disclosure: I am/we are long RNKLF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.