Should You Buy Rubicon Minerals on Weakness?


After the market closed on Wednesday, Rubicon Minerals (NYSEMKT:RBY) announced that it is going to issue $100 million Canadian (about $90 million U.S.) worth of stock in order to help fund its large Phoenix Gold project in the Red Lake mining district in Ontario. As a result, the stock tumbled on Thursday roughly 20 percent to $1.32.

Is this just a temporary correction that will be erased as production comes closer to becoming a reality, or is this the start of a prolonged downtrend?

On the one hand, there will be about 25 percent more shares outstanding, and basic supply-and-demand economics would dictate that this increased supply will lead to a lower share price. On the other hand, the company is now extremely well capitalized to bring its Phoenix project into production. This is the second capital raise in a short period of time — the first being the sale of a royalty to Royal Gold (NASDAQ:RGLD) — and it speaks to management’s confidence in the project.

Ultimately I think the weakness in Rubicon Minerals’ share price presents an opportunity, although it is quite possible that we will see lower prices in the next week or so. Rubicon Minerals stock has soared so far this year, with the shares up an incredible 53 percent year to date, even with the correction. Shares were up a whopping 93 percent before the announcement, and so one could argue that a correction was overdue regardless of the stock issuance.

Now the company is set to construct the $225 million Phoenix mine. In addition to the $90 million raised through this secondary offering, the company also has $75 million due from Royal Gold, which will be paid in installments as the mine is constructed. The company also had $83 million in working capital as of the end of September.

With the company’s burn rate of about $25 million per quarter, that gives it roughly $215 million in working capital presently, or enough to build the mine presuming that some of the company’s capital expenditures have gone toward the $225 million initial capex.

With the 65 million shares to be issued in the secondary offering, the the company will have a total of 353 million shares outstanding, giving it a valuation of $465 million. The Phoenix Gold project should be able to produce 165,000 ounces of gold annually for about 13 years at $800 per ounce. With taxes included (about 37 percent including federal and provincial), the mine should generate $52 million in free cash flow at $1,300 gold. So $465 million isn’t very expensive.

In all, the company should generate about $675 million in cash flow given the current mine plan, which is significantly higher than the company’s current valuation. Furthermore, the shares will offer leverage to the gold price, and so if you are bullish on gold, you should expect the cash flow to be significantly higher than this.

Finally, investors should take note that the company owns 100 square kilometers in the Red Lake mining district in Ontario, which has been historically an excellent place for investors to find and produce gold. It is possible that the company will be able to locate and produce far more than the 2 million ounces or so that are expected to be produced in the next 13 years.

Ultimately the stock had run too far too fast, and management took advantage by issuing shares after the stock had nearly doubled in price. Thus, the law of supply and demand tells us that the stock should trade down for the time being as the additional shares find homes in the portfolios of new investors. But I think this is only a temporary setback, and one that longer term investors should take advantage of.