Rubicon Minerals' Tipping Point

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 |  About: Rubicon Minerals Corporation (RBYCF), Includes: GG
by: Dennis Boyko

A tipping point (physics) is the point at which an object is displaced from a state of stable equilibrium into a new equilibrium state qualitatively dissimilar from the first.

[Wikipedia, October 2010]

There is a high probability that many investors in Rubicon Minerals (RBY) (“Rubicon”) are making Rubicon buy/sell investment decisions on the basis of incorrect information; namely, the number of contained ounces of gold in the company’s F2 Gold system. A current equilibrium in the Rubicon stock price exists although at least some market participants are using wrong information regarding gold resources. Based on Rubicon’s exploration and development plans, several tipping points affecting the Rubicon stock price have a reasonable probability of occurring between October 12, 2010 and the end of Q1 2011. The tipping point event will necessarily trigger a rapid adjustment in the Rubicon stock price -- in my opinion; the odds strongly favor a rapid rise in stock price.

There are a few ways for investors to take advantage of the current mispricing of Rubicon shares. Let me explain.

Background

Rubicon Minerals is the 100% owner of the Phoenix project in the Red Lake gold camp in Ontario, Canada. The Red Lake camp is also the location of Goldcorp’s (NYSE:GG) Red Lake mine which has a long history of high grade gold production as well as being one of Goldcorp’s lowest cost producing mines.

The Phoenix project is located approximately 6 kilometers from the Goldcorp mine and hosts the F2 Gold system Rubicon discovered in 2008 the geology and chemistry of which closely mirrors that of the Goldcorp Red Lake mine complex. As of October, 2010, Rubicon has not provided a NI43-101 compliant resource estimate for the F2 Gold system although earlier NI43-101 reports on the Phoenix project indicated fewer than 100K ounces of Inferred resource. Somehow, presumably on the basis of the F2 Gold system discovery, Rubicon has attained a market capitalization on the order of C$1,000 million.

The September 2010 Technical Report Update on Exploration Activities (to July 31, 2010) for The Phoenix Gold Project (NTS 52N/04), by Peter T. George (Geoex Limited) states:

Based on GEOEX’s review of the available information for the F2 Gold System, the Author [Peter George] concludes the following:

· The current phase of exploration is being conducted to a high standard and that, as drilling progresses, drill density in some areas provides confidence in the continuity of gold bearing structures and zones. In deeper areas, further drilling will be required to improve the confidence of the geological interpretation and continuity of gold mineralization.

· Drill data to the end of July 31, 2010 pertaining to the F2 Gold System indicates that this zone represents a significant discovery which merits continued exploration and development. Given the proximity of other showings and prospects on the Phoenix Gold Project and the fact that many of these share similarities with the F2 Gold System, these areas merit additional exploration as high priority targets. (see p. 82 of 108)

Rubicon stated at its 2010 AGM (May 31, 2010, here .pdf ) that it is working towards a Q1 2011 go-forward decision to start mining the F2 Gold system in 2012. To this end, Rubicon has a 335m shaft built and is in the process of completing a 450m drift from the 305m level of the shaft into the F2 Core zone which, according to a September, 2010 Rubicon presentation (here .pdf), is expected to be complete in October 2010.

Bear in mind that because the F2 Gold system outcrops under a lake, the drift into the F2 Core zone will be the first in situ inspection of the F2 Gold deposit. Rubicon is also planning to complete bulk samples of the F2 Core in the December / January timeframe. By the end of Q1 2011, Rubicon expects to have completed a total of 240,000 meters of F2 drilling. As well, the company is targeting completion of the permitting required to support 2012 production by Q1 2011. Per the 2010 AGM, grid power availability on site is planned for Q3 2011. The necessary road access to the mine site already exists.

As of September 2010, Rubicon had C$89M in cash - not enough to start production in 2012, but certainly enough to support a 2012 production go forward decision in Q1 2011 as well as delivery options on the production equipment. Given the infrastructure already in place at Phoenix, which includes good road access from the nearby town, a tailing pond, shaft, hoist, drift into the F2 Core zone (expected October, 2010) as well as planned grid power access by Q3 2011, capital expenditures required to start production are expected to be modest and the risks correspondingly low as well.

In view of such a promising future, why in September, 2010, did Rob McEwen, the beneficial owner of more than 21% of Rubicon, decide to sell 100% of his Rubicon holdings? In response Rubicon arranged a secondary offering to support the sale of Mr. McEwen’s shares (here .pdf ). The secondary offering was completed as planned on October 5th at the announced price of C$4.16 a share. The September 2010 Technical Report by Peter George was released in support of this secondary share offering. Note that Rubicon is not selling any shares in the secondary offering nor does it benefit from the secondary offering. The exact details of who purchased the Rubicon shares is to be determined. It is widely believed in the Rubicon stock forums that Mr. McEwen sold his Rubicon position to raise cash for other mining projects in which he is actively involved as a member of the top management whereas his involvement with Rubicon has always been limited to that of a passive investor. Mr. McEwen’s gain on his Rubicon investment has been reported to be as much as 16 times his original investment.

Market Disconnect

During a September 29, 2010 interview, on the BBN program Market Draw (here), Charles Oliver, senior portfolio manager at Sprott Asset Management, responded to a listener’s question regarding the possibility of a Rubicon takeover bid (approximately 13:10 minutes into the video segment). Mr. Oliver’s comments strongly suggest that there are significant differences among analysts as to the amount of gold contained in the F2 Gold system. Because of this uncertainty, Mr. Oliver’s fund had sold its investment in Rubicon - Sprott Asset Management’s investment was above SEC’s reporting threshold in 2008 - locking in a significant profit in the process.

If we apply Rubicon’s current stock price, and assuming a fully diluted share count of 221.6M shares, as well as a share price of US$4.00, and a conservative market capitalization of US$300 per ounce of gold in situ, we see market expectation in the Phoenix project of roughly 3M ounces of gold. However, given the prices paid in recent acquisitions by Kinross (NYSE:KGC) and Goldcorp, plus the expected high grade ore in the F2 Gold system, a market capitalization of US$450 per ounce of gold in situ would not be unreasonable, which in turn suggests a market expectation of a deposit size of roughly 2M ounces.

Non-conventional analysis based on Rubicon disclosures and general knowledge of Red Lake type gold deposits suggests a much higher estimate of in situ gold ounces. One such estimate is available from this author, (see the GoldMinerPulse Rubicon Minerals Report here), and still others at the popular Yahoo Rubicon board suggest the gold content is more than 10M ounces.

Analysts are uncomfortable with unconventional analysis no doubt because there are so few Rubicon precedents for a company with a billion dollar market capitalization, with drill results approaching 240,000 meters with many high grade intercepts and all without a supporting NI43-101 complaint resource disclosure. Interestingly enough, the Goldcorp’s multi billion dollar take over of the Gold Eagle Bruce Channel deposit, which is less than 15 kilometers from the Phoenix deposit, is one such example - Gold Eagle did not have a NI43-101 compliant resource disclosure and to this day Goldcorp has not issued a resource estimate on the Brue Channel deposit. The differences between Gold Eagle and Rubicon are in Rubicon’s favor - Rubicon has more drill results, better infrastructure, and is more advanced in development. Analysts unlike gold mining companies are not good gamblers, it seems. The trigger for Goldcorp’s takeover of Gold Eagle is widely believed to be a result of Agnico-Eagle's (NYSE:AEM) taking a greater than 10% stake in Gold Eagle.

No matter whose approach you take, the current market stock price for Rubicon is almost certainly wrong as it seems to represent a compromise between investors who believe that the F2 Gold system contains significantly more than 3M ounces of gold and others who believe the stock is fully valued and/or overvalued all of which suggests that some investors are making Rubicon buy/sell decisions on the basis of misinformation.

Rubicon Stock Price Tipping Points

A future tipping point in Rubicon stock price will occur when a more definitive or a traditional resource estimate is disclosed. When this happens analysts and investors will adjust their expectations according to the company’s in situ gold ounces, triggering a rapid stock price adjustment either down or, more likely in my view, up. Although Rubicon has not announced any plans to release such an estimate, it would not be unreasonable to expect one at the end of Q1 2011 to support their go-forward decision on 2012 production.

A tipping point may also be triggered by an expert opinion similar to the one described in the 2008 Gold Eagle Mines news release, “Bruce Channel Exploration Target Potential”, which contains the following quote:

In Mr. George’s opinion, the exploration target potential of the Bruce Channel, based on the drilling completed to the end of 2007, is 14.1 million tonnes to 16.5 million tonnes grading between 20 grams gold per tonne to 25 grams gold per tonne, yielding an in-situ potential of between 9.0 million to 13.3 million ounces of gold.

Coincidentally, the Gold Eagle Mines opinion was prepared by the same Mr. George who wrote the September, 2010 Rubicon Technical Report in support of the secondary share offering prompted by the sale of Mr. McEwen’s 21% holdings.

Another tipping point might occur in Q1 2011 when the results from the December / January bulk samples of the F2 Core zone are expected to be released. Mr. Oliver, the Sprott Asset Management senior portfolio manager, feels that ore grade is the biggest uncertainty. Mr. George, with 40 years of continuous experience in the mining industry, also believes a bulk sample is a critical requirement for producing a reliable deposit grade estimating of for an F2 type system. Results of an F2 Core zone bulk sample will reduce uncertainty. According to Mr. Oliver, the current grade expectations of analysts range from 1/3 to ½ ounce per ton.

A takeover bid could also be a tipping point trigger with Goldcorp, given its existing infrastructure at Red Lake, a most likely candidate although, as Mr. Oliver noted, Goldcorp is already very busy with its recent acquisitions, including Gold Eagle Mines and Andean Resources (OTC:ANDPF). The gold mining industry has been very active in terms of acquisitions in 2010 as high grade deposits in mining friendly environments are becoming harder to find.

Interestingly, the price of gold is unlikely to be a Rubicon stock price tipping point. A year ago Rubicon was trading at roughly today’s prices while the price of gold has increased by close to 30%. In the same period, Rubicon has only released drill results that have extended the area of mineralization in terms of strike and vertical extent as well as hitting new higher grade intercepts. Such a lack of tracking relative to gold is further evidence that Rubicon investors are uncertain as to its true value.

Playing the Rubicon Tipping Point

A passive low risk strategy suggests holding cash in reserve and go long or go short Rubicon according to tipping point information as it is released by the company. Rubicon is a highly liquid stock making quick position changes relatively simple. Even the sale of more than 21% its shares hasn’t resulted in a significant hit to the company’s stock price.

A more aggressive strategy is to take a long position in Rubicon based on the belief that the unconventional analyses is closer to the truth which means significant upside stock price appreciation.

An equally aggressive strategy would be take positions in the Rubicon March 2011 US$5 call options or the Canadian C$4 or C5 call options for April 2011. The $5 call options are trading for roughly 10% of the early October 2010 stock prices. Therefore, holding a call options is roughly equivalent to buying the stock and using a 10% trailing stop loss.

Although one could argue that Rubicon had the same potential a year ago, the major difference is that one year ago Rubicon had not announced a planned date for a production go-forward decision and had also not announced plans for the in situ bulk sample of the F2 Core zone. Also, gold prices are approximately 30% higher which given the relatively flat Rubicon stock price over the same period, suggests that investors expectations of the true Rubicon gold resource counts have dropped. Therefore, October 2010 has significantly more potential tipping points for investors making this the right time to consider a Rubicon play.

Disclosure: Long RMX.TO