This analysis concerns Rubicon Minerals (RBY). In it we take a look at RBY's current and only possibly viable project, the Phoenix Gold Project. However it should be noted, it has larger area's to scour for minerals, but are nowhere near an estimated resource being obtained, and even further away from being near production for these sites.
To view a quick visual info graphic review of this research, please click below.
Currently, the estimated resource for the Phoenix Gold Project is as in the table below.
As can be seen, there is a total estimated resource of nearly 2.8 million ounces of gold. But what should be noted is that the estimated resources are "indicated" and "inferred". Now what does this mean?
Well an indicated reserve is one that involves a greater element of risk, since the existence and quantity of gold is estimated on the basis of geologic information and judgment. The estimation is made partly from sample analysis and partly from reasonable geologic projections outwards from exploratory drill-holes into or through one or more producing horizons. Often analysts assume these deposits are estimated to have a better than 50% chance of being economically and technically producible. Furthermore, there is a 50% chance that quantities recoverable will be greater than that estimated.
While an inferred reserve is a gold deposit in unexplored extensions of established areas of production. This means these deposits are outside present production mines but within formations proved to be productive and generally considered too speculative to have economic considerations applied to them just yet. These estimates have been made by geologic projection and involve substantial risk.
Considering 83% of the estimated gold is assigned to the inferred reserve is somewhat worrying. But having said that, these reserves certainly can still exist and may be upgraded down the track into indicated reserves.
Nevertheless, let's look at the current valuation of the project. In Rubicon's economic feasibility study of the Phoenix Gold Project, it undertakes a valuation to determine the NPV of the project. This is undertaken with a discount rate of 5% and assumes no risk for the indicated and inferred resource estimate. It determines a value of $433 million with a gold price of $1,100 per ounce. With a $1,500 gold price it determines a considerably higher valuation, at $933 million. As most of the financing for this project has been obtained by RBY, we recalculated this value to $1.12 billion. So with gold up at around $1,600 per ounce, the valuation makes RBY look like a compelling investment.
But the problem for us is this valuation does not take into account the high risk of the current resource estimate as discussed earlier. We will re calculate this valuation to take this into account. Our valuation model will be based on the Rubicon study, however we shall adjust accordingly. Let's keep in mind, the current market cap of RBY is $601 million. For our valuation we will also leave our discount rate at 5%. This is very low, as many consider gold a much safer investment. We could push it up, but for our purposes here, we think it's best to leave it low to demonstrate what we are about to.
Let's look now at the resource estimate again. There is a 50% chance of the indicated resource actually being economically and technically producible. The next highest rating on a mineral resource is a "measureable" resource, which is estimated at 90% likely of being producible. Therefore, we will split this difference (50% to 90%) and say there is a 70% probability of the indicated resource. The indicated resource has a less than 50% chance of being extractable, and there is no category below inferred. Therefore, we split this difference (0% to 50%) and say there is a 25% chance of the inferred resource.
The table below shows our new estimate:
As we see, with such a large amount of the estimated resource being of the high risk inferred gold estimate, it brings down the total estimate to 913,150 ounces of economically producible gold. As such we perform the valuation as previously stated but only with the amount of gold based on our probability analysis above. With a $1,500 gold price we come to a value of $583 million.
In our opinion, besides the Phoenix Gold Project, RBY does not have any other real potential properties in play at this stage to add any substantial value to RBY's total value. With a probable NPV of $583 million vs a market value of $601, we see an investment in RBY as too high risk at this stage. The market appears to have got the price right currently with our probability resource based DCF value coming in very near to the current market cap.
We also note that there is currently a dispute that has been put forward by an Aboriginal community association regarding the Phoenix Gold Project site. We are unsure if it has any real weight to it, nevertheless, it's a risk in the way that may slow things down and adds to the above resource estimate risk.
Finally, lets point out that this is not necessarily a bad investment at this stage, we are just saying at this stage it is quite high risk at the moment and investors may be better off looking at other junior explorers with better resource estimate numbers, and/or wait until RBY shore up their estimates and more resource moves from the higher risk inferred category into indicated and measured resource categories. There is clearly still the potential for greater gain if the estimates prove accurate, as if so, at a gold price of $1,600 the NPV of the project shoots up to $1.24 billion. But based on risk, for now we would stay out.
Investment now is for those who believe in a continued strong gold price, and a resource estimate that will hold true.