In a bid to break out of a depressed market for junior miners in general and nickel projects in particular, Royal Nickel Corp. is transforming itself into a gold and copper producer.
The Toronto-based company has spent years touting the potential of its Dumont nickel project in Quebec, but the steep decline in the price of the metal has deterred potential backers. As a result, Royal Nickel has yet to generate revenue and its share price has faded in line with the fortunes of its namesake product.
On Monday, it struck off in a new direction when it announced it was acquiring a stake in Salt Lake Mining, an Australian nickel and gold producer, as well as all of Vancouver-based VMS Ventures Inc., part-owner of a copper mine in Manitoba.
"Too many mining companies get focused on being in a certain metal or a certain geography," Royal Nickel chief executive officer Mark Selby told analysts. "Our belief has always been that it's all about cash flow."
Still, the acquisitions mark a big shift for a company that has focused on nickel since it was founded in 2007. Royal Nickel emerged immediately after Canada's two nickel giants, Inco and Falconbridge, were sold to foreign acquirers in 2006.
Despite its current penny stock status, the company's board is stacked with a who's who of Inco alumni, including Scott Hand, the former Inco CEO who oversaw the sale of the Sudbury-based nickel producer to what is now Vale SA of Brazil.
In an interview, Mr. Selby rejected the suggestion that the new acquisitions amounted to a vote of no-confidence in nickel's prospects. Dumont remains important, he said, but investors are eager to reduce risk by focusing on properties that are already producing ore and generating cash flow.
"We're now more appealing to a broader audience because we have producing assets and have gold and copper exposure in addition to nickel," he said.
He said both new properties will generate cash immediately and other acquisitions may soon follow. "These are two transactions that we think make financial sense right now," he said. "We're looking at three to four others of various sizes and shapes."
Royal Nickel will issue 32.5 million shares and pay $2.5-million in cash for 67 per cent of Salt Lake Mining, a private company that owns the Beta Hunt nickel and gold mine in Western Australia.
In addition, it will acquire VMS Ventures, a public company listed on the TSX Venture Exchange, through a legal manoeuvre known as a plan of arrangement.
VMS shareholders will receive a total of 36 million Royal Nickel shares and $3.5-million in cash. In addition, 30 million shares in North American Nickel common shares currently held by VMS will be distributed to VMS shareholders as a dividend in kind.
VMS's main asset is a 30-per-cent interest in the Reed Mine, a copper producer in central Manitoba. HudBay Minerals Inc. owns the other 70 per cent of the mine and acts as the operator.
Royal Nickel – which now prefers to be referred to as RNC – says it expects its two new acquisitions to produce at least 3,500 tonnes of nickel, 4,000 tonnes of copper and 35,000 ounces of gold in 2016. At current spot prices, gold production would be the single biggest driver of revenue.
"Mining is a cyclical business," Mr. Selby said. He said he believes the metals market is at bottom, or close to it, and the acquisitions represent good value.
He expects to see more junior miners follow the same consolidation path. "The single-asset, single-project company that made sense in a boom doesn't make as much sense any more," he said. "It makes more sense these days to have your [management] costs spread among a range of projects."