Rubicon Mining Corp (RBY) is a mining company primarily established for the sole purpose of mineral exploration. Its operations are oriented towards the acquisition, exploration and development of gold and base-metal exploration properties through the company as well as its subsidiaries. This article provides an overview to RBY's business model with a heavy focus on the Phoenix Gold Project, which in my perspective is RBY's most lucrative resource. Then I will conclude with five reasons why RBY is a speculative play for growth investors that only provides a moderate level of exposure to risk.
RBY's financial success will derive from its ability to utilize company resources as well as keen locations for discovering various gold and metal-based minerals. RBY's operations are spread through its subsidiaries and ownership in various, which are outlined below in figure 1.
Figure 1: RBY's Corporate Structure from RBY's 40-F
As you will notice RBY's operations are mainly located in Canada, which is represented by the line established in the center of figure above. The project I will be focusing on in this article is being conducted at the Phoenix Property, located in Canada.
Phoenix Gold Project
RBY's competitive advantage lies at the heart of its operations. The Phoenix Gold Property is RBY's only material mineral property and in perspective is RBY's most lucrative resource owned by the company. Figure 2 below is an image extracted from RBY's company website illustrating the quality of RBY's high grade resources that are located at the Phoenix Property. This image was captured using 270 g/t gold block model ID3 method and prepared by AMC Mining Consultants.
Figure 2: Phoenix Gold Property's High-Grade Deposits
To evaluate the feasibility of the Phoenix Gold Project, RBY provides a very in-depth economic assessment available at RBY's company website, but to provide readers with an idea of how successful this project can actually be I have provided several figures below to highlight key profitability metrics. A basic preliminary economic assessment pertaining to the high-grade deposits from RBY's Phoenix Gold Project reveals statistics that are highly favorable. As you will notice, several of these statistics have been provided below in a chart I extracted from RBY's November 2012 Investor Presentation. Note that the variation among the values provided below in figure 3 is the result of two assumptions regarding the price of gold. For clarity, I will refer to gold at $1,100 and gold at $1,500 as scenario 1 and scenario 2, respectively.
Figure 3: RBY's Preliminary Economic Assessment
At a discount rate of 5%, scenario 1 reveals a net present value ((NPV)) of $433 million, which is highly favorable considering the estimated tax pool loss on the start up of the project is only estimated to be $400 million. NPV is a simple calculation that is widely used by financial managers for evaluating the well being of a potential project and often serves as the decision criteria for accepting or rejecting a project, but since we already know RBY is accepting this project the before tax internal rate of return is a more appropriate calculation to focus on considering we now know this project can be highly profitable. Notice the pre-tax internal rate of return ((IRR)) is 20% higher in scenario 2 as opposed to scenario 1. The primary variable if you think of this as a function is the price of gold. In scenario 2 at $400 higher, the major impact on the outcome of this project is a significant increase in cash flows, which dramatically reduces the payback period from the start of the project by nearly 65%. In conclusion, the price of gold is a major determination to the extent of the Phoenix Gold Project's profitability. Figure 4 below shows an NPV sensitivity analysis illustrating this idea in further detail.
Figure 4: Phoenix Project NPV Sensitivity Analysis
Figure 4 above reveals that the Phoenix Gold Project is most sensitive to variations in the price of gold, its grade, and the exchange rate.
Five reason why RBY is a speculative buy at only $2.40 per share:
- RBY is in the 95th percentile of high-grade deposits, which is higher than a majority of its peers.
- The results from the preliminary economic assessment on the high-grade Phoenix Gold deposits were positive. This is a major indication that probability is favorable of a outcome that is both successful and profitable.
- The resources of the Phoenix Gold Property alone makes RBY a potential acquisition candidate.
- RBY's management is heavily focused on optimizing the outcome of its projects. Potential changes that are under consideration to enhance the performance and augment of the profitability of the Phoenix Gold Project include introducing more advanced equipment to increase productivity, evaluating increased throughput in order to optimize ounces of gold produced, and altercations to mining shafts in order to gain access to additional mining locations.
- RBY's operations in Canada provide a strategic advantage over its peers when it comes to risk.
- RBY operates in a relatively low risk environment in contrast to other mining companies. Its operations in Ontario, Canada decrease RBY's overall exposure to regulatory risk and provide a corporate tax rate of only 29.7%.
RBY presents a feasible opportunity to investors seeking a speculative play with high growth prospects, yet little downside risk. Given the properties RBY owns, the access to highly lucrative resources only increases the probability of RBY being targeted for purchase by another company. In conclusion, RBY produces high-grade deposits, reveal positive preliminary economics, and operates in a low risk work as well as regulatory environment.
Sources: TD Ameritrade, Bloomberg Market Data, sec.gov, rubiconminerals.com, Google Finance, and The Wall Street Journal.