RNC Minerals: The Red Flags Just Keep Piling On

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About: Royal Nickel Corporation (RNKLF)
by: Gold Panda
Summary

The company recently announced its third capital increase in the past nine months and the amended terms include warrants.

RNC said in its Q2 2019 conference call just a few weeks ago that it wouldn’t need more financing in the near future.

There are several more red flags including no reserve estimate for Beta Hunt, no information on AISC and a leadership change.

Introduction

The main project of RNC (OTCQX:OTCQX:RNKLF) is the Beta Hunt gold mine in Australia. It’s a marginal project which the company had been trying to sell since April 2018 but then in September 2018 a miracle happenedRNC extracted 9,250 ounces of gold from a 130-tonne cut of rock about 500 meters underground at the mine. RNC found a 95-kilogram chunk that contained 2,400 ounces of gold and a second 62-kilogram rock which contained 1,620 ounces.

This is a very rare find and investors started dreaming what the future might hold for the company and drawing parallels to the famous Comstock Lode discovery.

However, there are many red flags for the company, and one of them is the recent funding activity. RNC is currently in the middle of its third capital increase in the past nine months, even though it said in its Q2 2019 conference call on Aug. 15 that there was no need to raise cash in the next several quarters. What’s even worse, the supposedly bought deal financing just got amended terms which now include warrants exercisable at C$ 0.50 apiece. This is a highly unusual move and a big red flag.

As things stands now, RNC is raising equity at a 20% lower share price compared to the December 2018 offering, despite a 20% higher gold price.

The project

Beta Hunt is located near the small town of Kambalda, in close proximity to the giant St Ives gold mine:

(Source: RNC Minerals)

Following the historic Father's Day Vein discovery, RNC embarked on a 40,000-meter drill program at the project. The program yielded a 395% increase in the measured and Indicated resource to 944 koz of gold as well as a 195% boost in the inferred resource to 406 koz of gold.

(Source: RNC Minerals)

However, note that resources are not reserves so it’s not clear how much of these ounces can be mined at a profit.

In May 2019, RNC announced the acquisition of the Higginsville mill and mining operations 57 south of Beta Hunt for A$50 million in cash and shares. Note that while Higginsville has measures and indicated gold resource of 1.2 Moz, the reserves stand at just 367 koz of gold.

The price paid for Higginsville seems high, but RNC claims that the mill has a A$100 million replacement cost and will save more than C$15 per tonne milled and operating costs of around $100 per ounce can be realized. With a capacity of 1.4 Mtpa, the mill can thus save RNC some C$21 million per year. Also, permitting and building a new mill would take around three years.

Red flags

One of the red flags I mentioned is that it’s unknown how much of the 944 koz measured and indicated resources of Beta Hunt can be mined. Even if we assume it's all of them, I don’t think that a gold company with 1.3 Moz in reserves deserves a market capitalization of more than $150 million. That's unless those ounces can be mined cheap, like the Fosterville gold mine in Australia, which posted AISC of below $600 per ounce in first half 2019.

However, I don’t think that Beta Hunt has low AISC at the moment. RNC recently announced that August production came in at 8,104 ounces, but didn’t disclose costs. I think that if costs were low, the company would've revealed them. Also, if costs were low, RNC wouldn’t be in the middle of another capital increase despite claiming just a few weeks ago that it didn’t need more financing in the near future. The company had C$8.8 million in cash and cash equivalents and working capital of C$8.3 million as of 30 June 2019.

Regarding the capital increase, it’s a very bad sign that the deal now includes warrants and the disconnect from the Q2 conference call will destroy trust in any future statements by the management. Not that the management lied outright, but I think investors were led to believe there would be no dilution in the next few quarters.

And regarding management, if things are going so well, why did president and CEO Mark Selby resign in July 2019? The new CEO is Paul Andre Huet, who led Klondex Mines between 2012 to 2018. I think this is a good appointment, but this won’t matter if there's something seriously wrong with Beta Hunt itself.

Conclusion

I want to point out that I’m not a geologist and that RNC has been covered by geologist and SA contributor Darp Research here. I also have an interview with him, which is available in my Marketplace Service.

However, what I do have is a degree in finance and I think that the numbers for RNC just aren’t adding up in 2019, no matter how great Beta Hunt and Higginsville look on paper. After three years investing in the mining space, I’ve learned that if an investment story sounds too good to be true, it probably isn’t true. With RNC, there have been too many red flags to ignore. I think that the company is currently overvalued as it has a lot to prove and there are several intermediate gold producers with lower market capitalizations.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.

Additional disclosure: I am not a financial adviser. All articles are my opinion - they are not suggestions to buy or sell any securities. Perform your own due diligence and consult a financial professional before trading.