Rubicon Minerals (RBY) reported some new information on its F2 zone on March 9th, 2010. See here for details.
As an investor in Rubicon, I’ve been trying to make sense of the information available to me about this discovery. It will be some time before a 43-101 compliant resource statement is available because it’s an underground deposit and more drilling needs to be done to meet those exacting standards.
Still, it would be nice to have some idea of how much gold might be in the core F2 zone. The stock has run up several hundred percent from its lows of last year. I have to ask myself whether there is more upside or whether the run up has gotten my holdings to a fair valuation that I should monetize.
To me, this becomes, in large part, a question of whether the market has an accurate read on how much gold Rubicon has at its core F2 zone. Yes, Rubicon has other Red Lake properties that also show great promise along with extensive positions around the Pogo property in Alaska and in northeastern Nevada.
But, the driver of share price is, in my estimation, the F2 zone at their Phoenix project in Red Lake, Canada.
To date, Rubicon has drilled 108,500 meters in, and in the vicinity of, the F2 zone as stated in the press release of 3/9/2010 linked to above. 320 intercepts have been reported that meet the minimum criteria Rubicon Minerals has set. This criteria is stated as follows: >10 gram gold X meter product and > 3.0 g/t gold.
One thing about drill intercepts, being cylindrical, is that grade is fungible. By that, I mean that 1 meter of 10 gram/ton gold in a drill core intercept has the same amount of gold in it that 2 meters of 5 gram/ton or .5 meters of 20 gram/ton gold have. This observation opens the door to the possibility of normalizing the drill data in such a way that a rough, ball park estimate of the gold content at the core F2 zone becomes feasible. Making such a rough, ballpark estimate is my goal in assessing my current position in Rubicon Minerals.
Before I go further, I need to state some important cautions. First, to say something is economically significant is not necessarily the same thing as saying that it is economically viable. The 3 gram / ton criteria Rubicon sets as its threshold of economic significance cannot, with the data currently available, be said to show that an economically viable mine could be constructed there. That’s what feasibility studies are for and this is most decidedly not a feasibility study.
Second, this analysis should in no way be construed as an assessment of resources or reserves, either indicated or inferred. Such an analysis requires more data than is currently available and sophisticated analysis of that data. That is what 43-101 studies prepared by competent professionals are for. I am not a competent professional. I am an investor trying to get a glimmer thru a glass darkly that will allow me to decide what to do in relation to my investment in this company. I’m reaching for a rough, ball park estimate and you use the information I present at your own peril if you take it for more, or less, than what it is.
Here’s the general idea. If you took a thin straw and used it to penetrate a roughly basketball shaped object and then analyzed the contents of the straw once it’s removed, those contents and that analysis tell you something about what the basketball shaped object is composed of and how much of what is there. If you do it once, you know something but not necessarily a lot. If you do it hundreds of times, you get to a point where you have a reasonably good idea of what’s in the object and the relative percentages of materials of which it is composed.
I think 108,500 meters of core drilling and 320 intercepts amounts to a lot of straw sticking and analysis and tells us a lot about what’s in the core F2 zone at Rubicon’s Phoenix project.
That’s an opinion, by the way, and an unprofessional opinion at that. It should be viewed with skepticism and incite you to research the matter for yourself. One thing that should be considered, at the least, is the idea of selection bias. Diamond core drilling is expensive and explorers consciously try to drill where there is gold to maximize their return on investment. I think enough holes and drill intercepts have been reported to make selection bias not a very large element of my analysis as that relates to the core F2 zone but I could be wrong about that.
In preparing my assessment, I’m going to determine what the reported drill intercepts would mean, on a volumetric basis, if the data were normalized to present all the intercept data at the grade specified; i.e., 3 grams / ton gold. The formula I’m going to use for that is as follows:
A = reported grams per ton for the intercept
B = specified grade; i.e., 3 grams/ton gold
C = meters of intercept width
A/B * C = grade normalized equivalent meters of intercept (GEM for Grade Equivalent Meters)
Once I’ve made that normalization for each intercept that Rubicon has reported, I’m going to come up with a percentage of the total meters drilled that are grade equivalent normalized meters.
For instance, if I come up with 1080.5 meters of grade normalized equivalent meters then it’s going to be pretty straightforward to say that, expressed in terms of a 3 grams / ton grade, 1% of the volume of the 108,500 drill hole meters were at grade.
Here’s how that works for a few of the intercepts reported by Rubicon.
If I do this for all 320 reported intercepts, I find out that 6,841.16 GEMs exist in the 108,500 meters drilled to date. 6,841.16 / 108,500 = 6.3% of the volume of the drill holes was at grade.
Rubicon’s reported drilling occurs mostly in the 9X box as illustrated on their web site. That box covers a zone 1600 meters deep and 1200 meters of strike length. On a level plan presented in their news release of 3/9/2010 Rubicon presents an interpretation of the main structural corridor within this 9X box. It looks to me to be about 300 meters wide on average although it is somewhat irregular in shape.
So, in applying a volumetric analysis, I’m going to use the dimensions of 1600 meters deep, 1200 meters long, and 300 meters wide and call that the core of the F2 zone. To figure out how many tons of material is in that volume, I’m going to use a value of 2.65 tons per cubic meter which is approximately correct for quartz.
By calculation, I come up with 576,000,000 cubic meters of material. That equals 1,526,400,000 tons of material. Multiplying that tonnage by 6.3% (the normalized percentage of economically significant volume in the drill holes to date) yields a value of 96,163,200 tons at grade. There are approximately 31.1 grams per troy ounce of gold so that works out to approximately 9.2 million ounces of gold in that tonnage at 3 grams per ton.
Okay, so there might be as much as 9.2 million ounces of gold in the core of the F2 zone. What does that mean in relation to the price of Rubicon’s stock price.
Rubicon has 213+ million shares outstanding and trades, as I am writing this, for $4.41 per share for a market cap of approximately 940.5 million. If I think the core F2 zone has approximately 9.2 million ounces, that means the core F2 zone, considered solely, is being valued at slightly less than 102 dollars for each ounce of in the ground gold I think might be present in the core F2 zone.
That’s a pretty rich valuation for ounces in the ground. Is it a reasonable valuation? Well, Goldcorp (NYSE:GG) paid what is generally thought to be about $250 an ounce for in the ground ounces when they bought the Bruce Channel Deposit of Gold Eagle which is in close proximity to the F2 zone of Rubicon’s Phoenix property. But, that does not necessarily mean that the ounces in the ground at the F2 zone would be worth as much as that even to Goldcorp.
I think it’s impossible to know for sure what an in-ground ounce is worth absent a feasibility study or much more knowledge than I have. But, on the face of it, I wouldn’t think that 102 an ounce for in the ground ounces is overvalued either. This is Red Lake. It is high grade and there are many other parts of the Phoenix property that have 15 g/t assays that are not part of the core F2 zone, like the Hanging Wall target and the Phoenix Zone, just to name two.
Additionally, Rubicon owns much more land in the Red Lake district than just the Phoenix project in addition to its Alaskan and northeastern Nevada properties. Adams Lake and the DMC property come to mind as well-positioned and exciting possibilities now that Titan-24 analysis has been run on them.
So, for now I’m going to choose not to sell my Rubicon holdings. I think 102 dollar ounces in Red Lake still have some room to move up and I fully expect there to be more than 9.2 million ounces on the Phoenix project taken as a whole.
Disclosure: Author is long Rubicon call options at various prices and expirations.