On Monday, February 14th 2011, Rubicon (RBY) announced that the company expects to file an amended 43-101. That day the company’s share price closed at $5.15 after trading in a range of $4.80 to $5.57. That close was $.44 lower than the close of Friday, February 11th when it closed at $5.59 per share. The $.44 per share lower close over 214.29 million shares translates to a loss of market cap of $94 million in one day on anticipation of the 43-101 amendment. Shares have subsequently recovered to $5.27 per share at the close on February 18th, 2011.
As a Rubicon investor, I’ve been trying to figure out what prompted the review of Rubicon's report by the British Columbia Securities Commission (BCSC) and the likely knock on effects if an amendment reduces the inferred resource. So far, there has been no official statement of the issues involved or the likely magnitude of any restatement. This makes an evaluation of one’s position in Rubicon difficult and introduces additional uncertainty for anyone thinking of initiating a position.
On November 29th, a news release from Rubicon announced an initial resource estimate of 4 million ounces in the inferred category grading 20.1 grams per ton. Even though 4 million ounces is a lot of gold, I was not at all surprised by this initial resource. My own back-of-the-envelope calculations off the reported exploration drilling had indicated to me that Rubicon probably had over 8 million ounces of gold at its Phoenix project. The back-of-the-envelope method I used was the subject of a prior article that was published here on Seeking Alpha.
Additionally, Rubicon's long-awaited 43-101 included a statement of geologic potential that showed the F2 portion of the Phoenix project might contain 13 – 16 million ounces of gold over all. This was not surprising to me either as my own estimate of over 8 million ounces only covered the F2 deposit to a depth of 1450 meters. It seemed reasonable to me that the deposit might contain 13 – 16 million ounces if projected to a depth of 2500 meters. (Key results are summarized in a Rubicon press release on November 29th, 2010 and a full technical report available here on January 13th, 2011. It's the first technical report on Rubicon's Phoenix gold project to contain a resource estimate.)
Other mines in the nearby vicinity extend to those depths, so it seemed reasonable to me that the F2 deposit could extend that deep given the structural, geochemical, and lithological similarities between the F2 zone of Rubicon and the Red Lake, Campbell and Couchenour mines of Goldcorp (NYSE:GG).
The announcement of a potential amendment to the 43-101 was surprising on that basis. I had thought the 43-101 to be a reasonable initial estimate of the resources and potential at F2, since it seemed consistent with the results of my own analysis.
There have been analysts, two in particular, with views that differed from my own. They seemed to have expected a much lower initial resource estimate. Looking at these variances may hold clues about which findings in Rubicon's 43-101 might have prompted the review.
I need to say here that I have not had access to the original reports of these analysts. I’ve had to work off quotes from the reports that I believe to be accurate but do not personally know to be accurate. I haven’t seen the exact details of the methodology(s) they used to come to their conclusions. But a surface examination of their positions, as I understand those positions, I find instructive. Andrew Kaip, a professional geologist who is an analyst with BMO, has, I think, said Rubicon’s resource at F2 might be as much as 1.5 million ounces. I’ve also seen information that indicates Toll Cross Securities is calling for the resource to be in the neighborhood of .5 to 1 million ounces.
While I do not know the exact methods these analysts have used, a couple of possibilities seem likely to me. First, they may be using highly constrained block modeling similar to that which might be used when a company is planning the production of a particular part of a mine. But, coarse gold Archean deposits such as F2 can vary considerably from zone to zone. I think it more appropriate to use these highly constrained types of block modeling on a very localized, zone controlled, basis that takes into account the specific characteristics of the particular zone to which it is being applied. I am not at all convinced of their efficacy when highly constrained block models are applied to a very large deposit like F2 during the exploratory drilling phase. During this exploratory drilling phase I don't see how enough very detailed, zone specific information would have been available to these analysts. This makes it very difficult for me to believe that these estimates are very accurate-- if I am correct in my surmise that this is what these analysts used.
Second, the dip and azimuth information on the drill holes hasn’t, to the best of my knowledge, been available to analysts prior to the public filing of Rubicon’s 43-101 here dated January 11th, 2011. As such, I don’t see how these analysts could have been in a position to accomplish 3D modeling of the drilling results at F2. Both of these estimates seem to predate the 43-101 filing. Without 3D modeling, it is difficult for me to see how they could have made determinations of continuity with sufficient specificity to reasonably take exception to the conclusions of Peter George of Geoex, the independent person who prepared the 43-101 for Rubicon.
Additionally, I have monitored third party reports of Mr. Kaip’s estimates as the exploratory drilling at F2 has progressed. I haven’t noticed any change in Mr. Kaip’s estimates during this period. I found that odd as my own amateur estimates based on the diamond core drilling reports varied significantly during the time in question. As the conditions under which drilling was conducted changed and as different parts of the deposit were reported, my estimates varied. I am unclear as to how Mr. Kaip's estimates could have remained so invariant during the period in question. At the very least, it admits the logical possibility that Mr. Kaip made his mind up about how much gold was at F2 rather early on in the exploration process.
In short, I haven’t found any basis, on what I understand of these analysts’ positions, to think Mr. George’s 43-101 prepared for Rubicon Minerals to be seriously flawed. I do recognize that these analysts that have a much lower view of Rubicon’s ounces at F2 could be right. But from where I am sitting, it appears more probable to me that they have confused an undue restrictiveness of interpretation and model with being intellectually rigorous. Fair enough I guess. As they say, that’s what makes a market.
However, I’m back at the conundrum I started with. What finding of the 43-101 might require an amended report to be filed? My own view is that Mr. George’s experience with coarse gold Archean deposits, developed over decades, led him to calculate the resource he calculated. Yet others, without that same experience in coarse gold Archean deposits, or simply with preferences for a different methodological approach, find some of the assumptions he made objectionable, at least on first review.
For instance, Mr. George calculated the resource in a couple of different ways for comparative purposes. He prepared one resource estimate using a polygonal method and two different ways using block modeling. He came to the conclusion that the polygonal method was more likely to be an accurate assessment of the initial resource. Since one of the block models showed 3.2 million ounces while the polygonal method showed 4 million ounces, it seems possible to me that questions have been raised about his use of the polygonal method and/or some of the assumptions he used in his application of the polygonal method to the data from F2.
On this basis, it might be argued that some of the assumptions he used beg the very question the 43-101 process is designed to answer; i.e., what is an accurate characterization of the deposit at F2. It’s clear to me from Mr. George’s statement of the geologic potential in the range of 13 – 16 million ounces that he’s convinced that F2 is one of those monster coarse gold Archean deposits that produces at high grades for decades at low cost. I guess it's possible that being convinced of it could lead him to make assumptions that reflect what he believes to be true.
On the other hand, I was under the presumption that that is precisely what a qualified person independent of the company is supposed to do under the 43-101 regulations. I personally find Mr. George's experience to be compelling and I've read several of the 43-101 reports he has prepared. I have found them all to be tightly reasoned and based on the empirical facts at hand as well as the considerable empirical experience garnered from the actual mining that has occurred in coarse gold Archean deposits of the Canadian shield over decades.
In the end, it may be the case that Rubicon’s initial 43-101 resource statement will be amended and it may even be the case that the 4 million ounces will be reduced. If that happens, I expect there to be a short term hit to the share price. But, I’ve followed this company’s progress for a couple of years and have examined the drilling results as closely as I could from my outside position as an investor and admittedly amateur analyst.
I was convinced before Rubicon's 43-101 was made public that if it walks like a duck and quacks like a duck and flies like a duck, it’s in all probability a duck. The results I’ve seen so far tell me that this is indeed one of those monster coarse gold Archean deposits that will produce at high grades for decades, at low costs.
To my mind, a short term reduction in the 43-101 ounces in the inferred category will not provide any reason to think otherwise. I’m monitoring the situation as closely as I can and I plan to deploy more capital to long positions in Rubicon stock and/or options as circumstances warrant.
Disclosure: I am long RBY.