In this article, I will give a description of Rubicon Minerals (RBY) and the reasons why I believe this stock is undervalued. The references I am using in this article are taken from the latest presentation available on Rubicon's website here, dated February 2012, and the last interim report dated September 2011 here (pdf).
The company is primarily involved in the acquisition and exploration of mineral property interests in Canada and the United States.
The key property = Phoenix project in the Red Lake gold camp
It is located in Ontario, Canada. The Phoenix project has a large land position of about 100sq-miles. The work is currently focused on the F2 deposit. In December 2011, the Ontario Ministry of Northern Development and Mines ("MNDM") accepted its Production Closure Plan. The current mine plan is based on a life mine of 12 years, utilizing 2.0 million ounces (with a conservative assumption of 72% recovery) of the currently identified resource (indicated + inferred). Production is expected in 2013-Q4.
Rubicon is getting some interest from key companies:
- In July 2011, Agnico-Eagle Mines (AEM) invested $70M, almost 10% of the company.
- In August 2011: Franco-Nevada (FNV) acquired underlying royalty for $23.2M.
I believe a potential buyout by Goldcorp (GG) in the future is likely. GG is also located in the Red Lake mine, and its mine is the number 1 gold producing mine in Canada. In October 2008, GG bought Gold Eagle for C$1.35bn. Its main asset was adjacent to GG. RBY's main deposit is located around 6km from GG.
- Only F2 deposit is taken into account in the valuation (other properties in Nevada, Alaska, are excluded).
- Gold price assumed at $1600/oz.
- Gold recovery is assumed to be 72% which is conservative.
Management estimates the NPV pre tax of the project at 48% for $1500 gold.
- Market risk: this trade is a leveraged trade on gold. I believe the risk is low in the current economic environment. Unless governments around the world fix their debt problem, cut budgets and stop printing money directly or indirectly, gold is unlikely to go significantly lower than the $1600 level which I used for the valuation. The recent gold price action after Ben Bernanke announced lower rates until the end of 2014 was significant. The 1525-1600 is likely to act as a strong support in the medium term.
- There is no Proven and Probable reserves yet. From the last interim financial statements: "Although a large portion of this mineralized material has been defined as mineral resources pursuant to the criteria of National Instrument 43-101, the Company has not yet been able to define any mineral reserves on any of its properties."
- Political risk is low: Ontario is one the friendliest environments in the world.
- Dilution by stock options: the total number of stock options is 10.5M (p13), and the average life is 2.88 years.
- Financing: RM has just announced a bought deal so there is little risk there will be further dilution in the medium term, after the expected closing on 29th Feb. 2012.
Recent Price Action
After reaching resistance in the last month at $4.50, following the announcement of the bought deal, the price retraced at $3.77. The level where Agnico-Eagle Mines invested is C$3.23 (roughly the same level in USD) and acted as major support over since July 2011. So technically I believe the downside is also limited.
Given the interest of several big players in the project and the current market price I believe the company is undervalued at $3.77.