(*Note that the company uses Canadian dollars to report its financials, and to make things easier for myself and for the reader, I have followed suit when referencing the company's financials. I will give a final valuation analysis in U.S. dollars after I have worked through the details in Canadian dollars. I am using an exchange rate of USD/CAD = 1.122).
(**Note also that due to the recent secondary offering, the company's shares outstanding total 363.1 million, making the company's valuation $410 million as of the end of trading on March 21st. You may see the company's market capitalization listed as $326 million, which is the valuation if you look at the previous share count of 288.8 million shares multiplied by the current $1.13 share price. After the secondary offering, there are an additional 74.3 million shares outstanding.)
Back in September, I wrote an article in which I suggested that investors consider investing in Rubicon Minerals (RBY) given that it was preparing to begin developing its Phoenix gold project in Ontario. This project not only had the potential to generate near-term cash-flow, but it had enormous exploration potential given that it is located in the Red Lake Gold Mining District, which has seen over 20 million ounces of gold produced historically.
Nevertheless, I did note that an investment in Rubicon Minerals was somewhat risky for the following reasons. First, while it offered decent value relative to its projected cash-flow, this didn't in itself justify an investment - the company had to find more gold in order to be compelling. Second, the company had to raise a lot of capital and this would undoubtedly be punitive to shareholders.
Since then shareholders have been taken for quite a ride, with the stock plummeting to just $0.65/share from $1.33/share. Then it soared to over $1.70/share.
Then, about a month ago, the company announced that it would be raising C$100 million in order to finance the construction of its Phoenix mine in Ontario. This sent the share price plunging: the stock, which had already doubled for the year, ended up falling about 20% on the day. Now with gold mining shares hitting a peak in the past few days, the stock is down even more - over 20% in just the last week.
This decline, which has now reached 33% from the February peak, has created a buying opportunity. While the capital raise, which wound up reaching C$115 million, adds supply to the market, it also ensures that Rubicon Minerals has the capital it needs in order to bring its Phoenix gold mine into production. Furthermore, the company now appears to be far more compelling given its projected DCF. While there are more shares outstanding, a look at the company's updated PEA suggests that there is good value with the stock trading at a $410 million valuation.
Not only that, but I think that from a trading perspective there is even more opportunity. The market has placed a lot of value lately on companies successfully bringing low-cost projects into production. Investors can take a look at a company such as Tahoe Resources (NYSE:TAHO), which significantly outperformed its silver mining peers as it came closer to bringing its low-cost Escobal mine into production, and the shares flied after production commenced to the point where I felt it necessary to argue that the stock had reached a point of overvaluation. As a value investor, I wouldn't want to hold Rubicon Minerals if the shares are overvalued. However, from a trading perspective, I think that there can be significantly more upside than a prudent valuation assessment indicates: assuming that the company brings the Phoenix Gold mine into production without any significant delays or unexpected costs, investors could ascribe more value to the shares than is warranted. For this reason, I have decided to calculate the value of the Phoenix Gold mine using three discount rates - 5%, 8%, and 12% - as opposed to my usual 2 - 8% and 12%. More aggressive traders should feel justified in holding Rubicon Minerals until it reaches a 5% discount rate, whereas from a value perspective this would be too rich my taste.
As we look at the Phoenix Gold mine, it will become evident that it is a low risk operation that offers leverage to the gold price, and upside even if there is little to no change in the gold price, and therefore I think the shares can be purchased here.
The Phoenix Project
The Phoenix gold mine in Ontario is going to be a relatively low cost underground gold mine. Earlier this year Rubicon Minerals released an updated preliminary economic assessment that shows that the project is economical at the current gold price (about C$1,500), and even at gold prices much lower than this, as I show below.
According to the new report, the mine contains 1.12 million ounces of measured and indicated resources at 8.52 grams per tonne, and 2.22 ounces of inferred resources at 9.26 gpt. The total of 3.24 million ounces is significantly less than the estimated 2.19 million ounces that the company plans on producing. I must note, however, that inferred resources are more speculative, and there is some risk in Rubicon Minerals' mine plan insofar as it takes inferred resources into consideration. The good news is that given the relatively high grade of the inferred resources this risk is mitigated.
The company plans on mining an average of 165,300 ounces of gold annually for 13 years at an average cost of C$823/ounce. However investors should note that this production varies from year to year, as the following chart details.
|Year||Ounces Produced||Cash Costs||Sustaining Costs||AISC|
Unfortunately for investors who look at DCF in valuing mining companies, a lot of this production and lower production costs come towards the end of the mine's life. Nevertheless, there is still value in Rubicon Minerals' shares even if we use a conservative discount rate.
The following table values the Phoenix Gold Project on a DCF basis using three discount rates and three gold prices so as to highlight various valuation scenarios. Note that all amounts are in millions of Canadian dollars.
Discount Rate/Gold Price
Note also that these figures take into consideration the fact that Rubicon Minerals sold a gold stream to Royal Gold (NASDAQ:RGLD). Royal Gold has agreed to pay Rubicon Minerals $75 million (U.S. Dollars) in five installments as the company progresses the Phoenix Gold mine towards production. The agreement entitles Royal Gold to the right to purchase 6.3% of the gold produced at 25% of the spot price up to 135,000 ounces delivered, and 3.15% of the gold produced at 25% of the spot price thereafter. Note that this essentially means that Royal Gold has a 6.3% stream on the currently planned mine, and a 3.15% stream on any additional gold that is produced.
Valuing Rubicon Minerals
Added to the above valuation matrix we have the company's sizable cash and equivalent position which includes C$78 million in cash, $75 million (C$84 million) owed by Royal Gold, and C$115 million from the recent secondary offering for a total of C$277 million. If we take the company's C$22 million in liabilities into consideration, we add C$255 million to the figures in the above matrix to get the following:
Discount Rate/Gold Price
If we translate these figures into U.S. Dollars we get the following:
Discount Rate/Gold Price
Given the company's $410 million valuation we get the following up/downside potentials:
Discount Rate/Gold Price
Given these figures, the recent downward spike in Rubicon Minerals shares makes the stock a compelling buy even if we use a conservative 12% discount rate. The stock offers tremendous upside potential even if the gold price modestly rises 20%, and if it falls to new lows, the stock has relatively limited downside risk compared to the upside potential.
Given this, and given that there is a very good chance that Rubicon Minerals will reach commercial production next year, I think the stock is very compelling at the current price of $410 million.
Furthermore, as I suggested above, I think that as production approaches, and as it becomes a more tangible reality, I think that the stock will draw more investor interest. For this reason, I think it is entirely possible for the stock to trade up to its fair value with a 5% discount rate, and possibly higher. Therefore, while I think the stock has between 13% and 42% upside from a value perspective, from a trading perspective, I think the upside potential could be 72% in the coming year or so presuming gold prices remain relatively flat. Consequently, the stock is especially compelling now that sentiment has been damaged due to the recent secondary offering.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in RBY over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.