Rubicon Minerals' Tipping Point published October 11, 2010 suggested:
- "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."
This October 11, 2010 article suggested a number of tipping points that could cause a rapid price change in Rubicon's stock price:
- "A future tipping point in Rubicon stock price will occur when a more definitive or a traditional resource estimate is disclosed."
- "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."
- "A takeover bid could also be a tipping point trigger..."
A November 29, 2010 news release read: Rubicon Announces 4.0 Million Ounce Inferred Gold Resource Estimate Grading 20.1 g/t gold (0.59 oz/ton gold) at its Phoenix Gold Project, Red Lake, Ontario and the Rubicon stock price did respond as anticipated.
|Nov 23, 2010||$4.18||920,500|
|Nov 24, 2010||$4.29||571,000|
|Nov 26, 2010||$4.43||1,125,400|
|Nov 29, 2010||$6.04||11,489,900|
|Nov 30, 2010||$5.90||6,344,600|
|Dec 1, 2010||$5.95||2,439,700|
|Dec 3, 2010||$5.83||1,755,700|
source: Stock Closing Prices data is from Yahoo Finance
Investors or traders Rubicon buying stock or stock options in the mid October to November 28, 2010 time window realized a very nice gain.
As of early June 2011, I believe conditions are right for a Rubicon Tipping Point Redux. Consider the following facts related to the Rubicon F2 deposit:
- Grade uncertainty continues and translates into resource ounce uncertainty: In general, preparing a grade estimate for a coarse gold deposit is an extremely difficult task (see Coarse Gold Discussion below). Estimates for the F2 deposit grade range from 15.69 g/t (capped block model) to 20.34 g/t (uncapped polygonal model) in the April, 2011 technical report. Grades for the exploration potential (which are in addition to the Inferred resource in the April, 2011 technical report, ranged from 21.2 to 29.2 g/t. The grade uncertainties translate into a resource ounce uncertainty since resource ounces equals ore grade times ore tonnage.
- 102,930+ meters of drill results are not included in April, 2011 resource estimate: The April 2011 resource estimate was an amendment of the resource estimate announced November 29, 2010 which was based on the 166,886 meters of drill results available July 31, 2010 (see April 2011 Annual Information Circular). The total drilling on the F2 deposit as of the end of April 2011 was 269,816 meters (see Management Information Circular for June 29/11 annual general meeting). The drill results since July, 2010 contained some excellent intercept widths and grades. For example: a June 1/11 news release reported: 1.06 oz/ton over 13.4 feet and 4.32 oz/ton over 11.5 feet; an April 11, 2011 news release reported: 1.15 oz/ton gold over 56.8 feet including 5.25 oz/ton gold over 11.8 feet.
- Bulk samples to be reported: Rubicon has completed two 1000 ton bulk samples from the F2 deposit. For various reasons, Rubicon decided to process the entire bulk samples and not just two 10 ton sub samples. The complete bulk samples have been sent to a custom mill for processing in April 2011. Results are awaited.
- Preliminary Economic Assessment ((PEA)) expected end of Q2/11: Rubicon targets the release of a PEA in Q2, 2011 (see Management’s Discussion & Analysis For the Three Months Ended March 31, 2011, filed June 8/11 at sedar.com) The mill results for the bulk samples are expected to be included in the PEA. However, it is unclear if the PEA will include a resource estimate update that includes some/all of the 102,930 meters drilled since the July 2010 cut-off date of the April 2011 amended resource estimate.
- Permits and permissions for start of production are proceeding: Rubicon has the required mining permits, either in hand or else expected by end of Q2/11, to complete mine development. Grid power for a significant portion of its total power needs will be available in Q3/11 and additional grid power may become available to minimize usage of diesel power generation onsite. Consultants with First Nations, Metis and local stakeholders are proceeding (see Management’s Discussion & Analysis For the Three Months Ended March 31, 2011, filed June 8/11 at sedar.com)
It is also worth noting that the Rubicon corporate presentation (May 2011 and earlier versions of this presentation) has a slide titled Scale and Pattern F2 Delineation Area Versus 34 Level Red Lake Mine. The slide notes F2 and the Red Lake mine level 34 both have multiple orientations of gold zones. The zones are to scale and do appear to be of comparable in size. The slide also notes that "the 34 level represents a section through the High-Grade Zone which contained 4,369,000 ounces at a grade of 2.43 oz/ton as of September, 2006". The April, 2011 technical report on F2, authored by Peter George, a Qualified Person with extensive experience in Red Lake type coarse gold deposits, offered the following:
Rubicon site geologists with extensive experience on the Phoenix Project and at other operations in the Red Lake area have properly interpreted the F2 Gold System data on the basis of host rock lithology, lithogeochemistry, alteration, and overall nature of the mineralization. The interpretation has resulted in a number of stacked, sub parallel zones typical of the gold mineralization in the Red Lake area with the RLC (Goldcorp’s Campbell and Red Lake Mines) being the best comparative example. In general the F2 Gold System sub-zones strike 45o (true) (Mine Grid North) and near surface dip steeply west. The sub-zones plunge steeply to the southwest.
Coarse Gold Discussion
Simon Dominy, a world expert on coarse gold deposits, suggests that experience with a similar gold deposit as well as full access to bulk samples, drill results, cores, 3D models, and the like is mandatory to properly understand a coarse gold deposit and make a credible estimate of the ore grade. The abstract of "Estimation and Reporting of Mineral Resources for Coarse Gold-bearing Veins" by Simon C. Dominy, et al, published by the Canadian Institute of Mining available at emg.geoscienceworld.org/cgi/content/abstract/9/1/13 ) offers:
Coarse gold-bearing veins are characterized by high grades that are localized and erratic. Effective sampling of coarse gold-bearing veins is difficult because of the low concentration and erratic nature of the gold particles. Diamond drilling is an effective measure of geological continuity, however, grade distribution can only be reliably obtained from underground development (including close-spaced sampling, bulk sampling, and trial mining). Comparison between surface and underground drilling, underground linear/panel and bulk sampling indicate that drilling and linear/panel samples generally understate bulk sample grades. Bulk samples are likely to be the closest estimators of true grade. It is unlikely that anything above an Inferred Resource category can be estimated from surface drilling alone, and at best the grade will only be a global estimate. Underground development, in-fill drilling and bulk sampling/trial mining will be required to delineate Indicated and Measured Resources. Closely spaced development and bulk sampling is likely to be the only way to determine Reserves. The resource estimation process must driven by a clear geological model that should attempt to understand both geological and grade continuity. [emphasis added]
The F2 bulk sample results, which are expected to be part of an end of June 2011 PEA, will provide solid evidence of the F2 deposit grade from the core area and from an edge area. Given the extreme difficulty of sampling a coarse gold deposit with just drill results, I believe that the bulk sample grades from F2 will be in line with the geological exploration potential grades provided by Peter George, a person with extensive experience in coarse gold deposit in general and Red Lake specifically. That is, I am expecting the bulk sample grades to be in the 21.2 to 29.2 g/t range.
Mining analysts, that do not have practical experience with coarse gold deposits, may be expecting the 15.69 g/t grades suggested by the traditional capped block model since the capped block model is a reasonable approach for the more common disseminated type gold deposits. I base this conclusion on the published comments from two bank/brokerage house mining analysts after Rubicon provided its first F2 resource estimate as well as the apparent question from a security regulatory agency which forced the April 2011 resource estimate amendment. Please see What's Behind Rubicon Mineral's 43-101 Amendment and Share Price Reaction? for more discussion.
Although a capped block model works well for disseminated gold deposits, which have a relatively uniform gold distribution, the work of Dominy suggests such comfort is misplaced if applied to coarse gold deposits. And yet, at the apparent demand of the British Columbia Security Commission ((BCSC)), the original F2 resource estimate was amended to include the lower (capped) ore grade estimates. It is my opinion that this BCSC action, coupled with cries from the mining analyst community, is largely responsible for the current uncertainty in the likely F2 ore grade.
Since ore grade translates directly into resource ounces as well as improved PEA NPV and IRR numbers, and since I also believe that Peter George is in the best position to make an experience based estimates of F2 grades, I expect there is an excellent probability of an upside surprise for Rubicon stock price once the PEA, which is expected to include the bulk sample results, is released sometimes around the end of Q2, 2011.
I also believe that there is a reasonable probability that some of the 102,930+ meters of drilling data will be used to prepare a revised F2 resource estimate as part of, or in support of, the PEA work. Additional drill results are expected to allow some of the Inferred resource ounces to be upgraded to Indicated resource ounces while also adding new Inferred resource ounces. Again, additional resource ounces, translates into better NPV numbers.
Undeveloped high grade gold deposits like F2, which are relatively large and open at depth and on strike, which are located in a politically safe jurisdiction, which come with excellent existing infrastructure and which have close to 100% permitting complete for mine development completion work are quite rare. This causes me to believe Rubicon will be on a gold producer's takeover list (e.g. Goldcorp, Newmont, Barrick, Agnico-Eagle, Kinross, etc.) once the PEA results are released.
Combined with the recent sell-off in gold mining stocks in general, and the above conclusions specifically, I believe Rubicon shares and/or Rubicon in the money July or October call options are an excellent way to play the Rubicon PEA news event and a possible post PEA take over.
Disclosure: I am long AEM, ABX, RBY.