RNC bets Higginsville mill, mines worth cost of dilution

RNC Minerals (TSX: RNX; US-OTC: RNKLF) chairman and CEO Paul Huet is like the hockey coach who takes over mid-season because the team is underperforming.

The Toronto-based company brought Huet in as chairman of the board in February to try and turn around RNC’s high-cost operations at its Beta Hunt nickel mine in Australia, and pinpoint the extensions of the mine’s high-grade gold mineralization. He was also tasked with lowering or eliminating the mine’s punishing royalties.

It wouldn’t be the first time Huet went behind the bench. When he joined Klondex Mines in 2012, the company had negative working capital and a single exploration asset: the Fire Creek gold project, 100 km southwest of Elko, Nevada. Within six years, Klondex sold Fire Creek to Hecla Mining (NYSE: HL) for US$462 million in a cash-and-share deal.

His first big move at Klondex was to raise more than $100 million to buy the Midas mine and mill for $83 million — more than Klondex’s market capitalization at the time. With the remaining cash, he cleared some debt, drilled off more high-grade gold, and boosted production at lower costs.

Now at RNC, Huet is calling the shots from a similar playbook.

On June 11, the company announced that it had bought the Higginsville mill and gold operations from Westgold Resources (ASX: WGX) for A$25 million (US$16.84 million) in cash and 56.9 million shares, which were worth $28.4 million (US$21.4 million) at the time. The mill was built in 2009 for A$100 million (US$67.40 million).

The cash portion of the deal was funded via a 12-month, senior-secured, $35-million debt facility (the loan can be extended another six months).

RNC ran  one toll-milling campaign in 2018 at the 3,800-tonne-per-day Higginsville mill, 50 km from Beta Hunt. In fact, the company used several toll-milling facilities in the Kambalda area before acquiring the Higginsville mill. Toll milling costs averaged between A$45 and A$50 (US$30.30 and $33.68) per tonne.

Since the acquisition, Beta Hunt’s cost per tonne has dropped to A$29 (US$19.53), and speaking at a recent Red Cloud Securities conference in Toronto, Huet said he hopes he can get this down to A$25 (US$16.84) per tonne.

Huet said the plan is to further lower costs by teaming up with other mining companies to buy in bulk from vendors, limit turnover in mining personnel, and reduce or eliminate royalties.

Maverix Metals (TSXV: MMX) owns two legacy net smelter return royalties (NSR) on Beta Hunt’s gold property totalling 7.5%. The Western Australia state government also has a 2.5% royalty on recovered gold from the mine.

At the Higginsville assets, which include the Baloo open-pit mine, Morgan Stanley owns a 1.75% NSR. Huet said he has “opened discussions” with Morgan Stanley about doing away with the royalty.

Huet said he aims to cut all-in sustaining costs (AISCs) at Beta Hunt from US$1,286 per oz. during the first half of 2019 to below US$1,000 per ounce.

He’s also focusing his efforts on exploration at Beta Hunt, where more than 40,000 metres of drilling this year has largely failed to find the extensions of the high-grade gold mineralization. Beta Hunt has measured and indicated resources of 944,000 oz. gold at an average grade of 2.9 grams gold per tonne.

RNC reported yet another high-grade “jewellery box” of coarse gold at Beta Hunt in September. About 1,750 oz. gold in 0.5 tonnes was recovered 160 meters south and 25 meters below the company’s famous Father’s Day vein discovery in the third quarter of 2018.

The Father’s Day discovery was made on Level 15, and one 167-tonne cut contained a mind-boggling 5,000 grams gold per tonne.

About 30,000 oz. have been mined from the Father’s Day vein since then. With these ounces, RNC paid off its debts at the time, including money owing to Pala Investments, run by Russian oligarch Vladimir Iorich.

Much of the cash came from selling the gold-bearing rock specimens to collectors, which Huet also did at Klondex on at least eight occasions with specimens from Fire Creek. Huet said the practice will likely stop now that RNC is no longer toll milling.

Beta Hunt is located in the central portion of the Norseman–Wiluna greenstone belt in a sequence of mafic-ultramafic and felsic rocks on the southwest flank of the Kambalda Dome. Gold mineralization occurs in the Lunnon basalt, at the footwall to the nickel-bearing ultramafics, which is characterized by intense albite, carbonate and chlorite alteration.

“Everything [at Beta Hunt] is locally faulted, so trying to drill this off and see where the intersection is between a 1-metre thick horizon and another 1-metre thick fault structure is not so easy,” newsletter writer John Kaiser told The Northern Miner in a phone interview in early October.

A muck pile at the gold discovery in level 16 at the Beta Hunt mine. Credit: RNC Minerals.

In a note dated Sept. 25, Red Cloud Securities mining analyst Derek Macpherson wrote: “Beta Hunt is likely to continue yielding similar spectacular high-grade zones. However, RNC must demonstrate it can be a profitable producer based on the current resource (excluding these higher-grade “jewellery boxes”) before the market will reward them for the additional upside.”

Huet agrees. “The plan is squarely focused on making sure that we can mine [Beta Hunt] economically at the average grade,” Huet said during his presentation at the recent Red Cloud conference. “This is critical.”

Huet made some promises, too. RNC will conduct further drilling to convert current resources to proven and probable reserves, with the first numbers expected before year-end.

The company will also provide the market with production guidance numbers beginning in 2020, and it will put two years’ worth of mill feed on-site at the Higginsville mill.

In July, Huet replaced the company’s CEO, Mark Selby, who resigned. Selby did not return requests for comment.

So far Beta Hunt seems to be operating well. Production reached 7,800 oz. gold in July, 8,100 oz. in August and 8,239 oz. in September for a total of 24,139 oz. gold — an increase from the 14,000 oz. gold the mine produced in the first half of the year.

At the same time, small quantities of nickel are being mined and work has begun on a review of the mine’s existing nickel resources and potential targets, with the objective of providing more by-product revenue, the company says. In September, the company issued a press release that noted high-grade nickel mineralization from historic drilling above the Western Flanks gold mineral resource.

In other news, RNC announced in August that mining is underway at its Baloo Stage 1 pit. The fully funded and permitted Stage 1 pit could supply the Higginsville mill with 30,000 tonnes per month until the end of 2019. The Stage 1 pit is the first of a series of pits RNC wants to put into production at Baloo. The Stage 2 permit is currently underway.

In mid-October, RNC provided guidance for the second half of 2019, forecasting production of 42,000 to 49,000 oz. gold at AISCs of US$1,150 to US$1,250 per ounce.

In addition to Beta Hunt, RNC also owns the development-stage Dumont nickel-cobalt project in the western Abitibi region of Quebec. A recent updated feasibility study says that Dumont has an after-tax net present value of US$920 million.

The first phase of development would see a nickel-in-concentrate produced at a rate of 33,000 tonnes annually, ramping up to 50,000 tonnes in the second phase. Total production is expected to be 2.6 billion lb. nickel over 30 years at life-of-mine cash costs of $3.22 per lb., and AISCs of $3.80 per pound.

“We think (Dumont) is a great asset and nickel has had a good run,” Huet said during the Red Cloud event. “We’re quite excited about it, but there is no urgency for us to sell off Dumont. We should take our time and do what’s best for shareholders … we don’t control that asset.”

RNC, as manager, owns 28% of Dumont through a joint venture with Arpent Inc., a subsidiary of Waterton Precious Metals Fund II Cayman LP and Waterton Mining Parallel Fund Offshore Master LP.

In March RNC raised $12 million in a bought-deal financing and went back to the market in August to raise another $18.5 million in a bought-deal.

The company now has 605.9 million shares outstanding — and some shareholders have questioned the amount of dilution.

“Nobody likes any dilution. Not me either. I participated in the financing. I take a lot of my personal net worth into this company in shares,” Huet told a shareholder at the conference. “In this case I believe the dilution was necessary and accretive.”

Other RNC shareholders include Eric Sprott, with 8.8%; Van Eck Associates, with 5%; and Westgold Resources, with 10%.

In a conversation after the Red Cloud event, The Northern Miner asked Huet if he might repeat the success he had with Klondex Mines. He quickly replied: “I better.”

Spoken like a true hockey coach.

RNC trades in a 52-week range of 33¢ to 91¢ per share, and at press time traded at 35¢.

Pierre Vaillancourt, an analyst who covers RNC for Haywood Securities, has a 12-month target price of 80¢ per share. Matthew O’Keefe of Cantor Fitzgerald has a one-year target price of $1 per share.