Rising Star Buy: Rubicon Minerals

This article is part of our Rising Star Portfolios Series.

On Monday, I'll buy $1,000 (about 6% of my first-year capital) worth of Rubicon Minerals (AMEX: RBY  ) . With a tremendous gold deposit in the very prolific Red Lake, Canada, mining zone, this company's undervalued based on its peers and recent takeover transactions in the gold space.

A proven winner
Since I first recommended this company in a special report in July 2010, the stock has risen almost 60%. I liked Rubicon because it had discovered a very high-grade gold deposit in Red Lake; it had a successful gold investor named Rob McEwen on board with a 21% ownership stake; and by the end of 2010, it would announce the initial estimate of the size of its gold resources -- a potential catalyst.

Since then, a few things have changed. In September, McEwen sold his stake to concentrate on other ventures. But any concerns about his departure soon proved unfounded; in November, Rubicon announced a 4 million-ounce gold resource, at the top end of the 2 million-4 million ounces I estimated the market would expect. This alone puts Rubicon in the big leagues, because only 7% of the world's gold deposits contain 3 million ounces or more. But Rubicon also dropped a bombshell when it said that total potential ounces at this gold system could reach 13 million-16 million ounces. This would make the deposit (named Phoenix) absolutely world-class -- and Rubicon very cheap.

The market loved the news, and the stock jumped 36% in one day. Since then, it has retreated 15%, giving us a nice opportunity to open a position. Although the stock trades much higher than when I found it, the uncertainty over the size of the gold deposit is cleared up, and the opportunity could be immense. But there's more: Rubicon controls 100 square miles around the Phoenix project, as well as promising land in Alaska and Nevada. All told, despite the price rise, this stock is still cheap, with bags of upside potential.

How cheap, exactly?
Investors generally evaluate gold assets via their price per gold ounce. At $5.35 per share, Rubicon's $1.1 billion market capitalization, divided by its gold resources of 4 million ounces, equals $275 per gold ounce in the ground. I have excluded cash holdings, because they will go to mine construction and exploration. Still, having infrastructure already in place will lower the cost of building a mine. All told, with gold trading at $1,350 per ounce, this figure looks compelling on its own.

But it's even more compelling based on peer and transaction values. Another Canadian firm, Lake Shore Gold (PINK: LSGGF), has 2.5 million ounces of gold resources and is valued at $1.5 billion, or $600 per ounce. San Gold (PINK: SGRCF), with 2.6 million ounces, sells for $960 million, or $370 per ounce.

The kicker? Rubicon's average gold grade is 20 grams per tonne, more than double that of either other company, which makes its gold more profitable to mine. 

Finally, there are recent transactions in the gold world. The average enterprise value per ounce of five transactions from 2008 to 2010 was $462, well above where Rubicon trades now. And if Rubicon truly does have 13 million-16 million ounces of gold in the ground, it trades for just $75 per ounce at the midpoint of that range.

Upcoming catalysts
Rubicon is on the fast track to open a mine on the Phoenix deposit. It is working on a preliminary economic assessment that will delineate costs, activities, and permitting needed to construct a mine. It plans first production by the fourth quarter of 2012 -- an ambitious schedule, but one that should increase the stock's value as it transforms from an explorer to a producer.

Risks
Shares in exploration companies often decline in the years between a discovery and mine construction, as investors lose patience and the company issues stock to pay for the new mine. Rubicon has an excellent cash position of $86 million as of September, but it might need to raise more funds from the capital markets, which could result in dilution. And clearly, a collapse in the price of gold or other mining difficulties would lower the company's value.

Foolish bottom line
Rubicon Minerals' past success is just the beginning. As it enters into production and the size of its large deposits is further delineated, the market will take notice. There is also plenty of upside potential from potential new finds in its large Red Lake holdings and other properties. Finally, it is a prime acquisition candidate, and buyout premiums in a rising gold market could be substantial. All those strengths make Rubicon a wonderful way to gain exposure and leverage to gold.

This article is part of our Rising Star Portfolios series, where we give some of our most promising stock analysts cold, hard cash to manage on the Fool's behalf. We'd like you to track our performance and benefit from these real-money, real-time free stock picks. See all of our Rising Star analysts (and their portfolios).

Andrew Sullivan, CFA, owns shares of no companies listed above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (5) | Recommend This Article (31)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 21, 2011, at 2:32 PM, Jbay76 wrote:

    You should link up with Sinchiruna, who has laid it down with respect to RBY and other mining companies.

    Good article though, thanks!

  • Report this Comment On January 21, 2011, at 4:25 PM, modeltim wrote:

    These are trading days that try investors souls. Down almost 5% today and still falling in after hours.

    I'm long and loyal. RBY will deliver once the WS manipulation of PMs subsides as it surely will.

  • Report this Comment On January 21, 2011, at 5:58 PM, r2lmorrow wrote:

    Something is seems fishy. If RBY is just working on a preliminary feasability study, then the likelyhood of completing permitting and entering into production by the end of 2012 is pretty unlikely. And first, the company would need to convert the gold resources into actual gold reserves to really understand the economics of the project. Generally, the stated reserves are less than the possible resources. Buying a mining stock based on resources vs. reserves is highly speculative. a resource means that there is gold on the property, a reserve means that you can likely mine it and make some money.

    RBY would have to have this reserve declaration before the Government is going to grant any permit or any lender is going to provide capital to support construction. The $83M in cash that they have would likely be half depleted through the permitting process and the additional drilling and engineering studies needed to declair reserves and support a bankable feasability study needed to raise capital. Essentially, they would have to borrow almost all of the capital or raise a lot more through stock offerings, so if you are thinking that your stock comes with $83M in the bank - that will be gone in no time.

    If you are going to sink $1000 into RBY, please understand that this would be a very risky investment. Until RBY declares reserves on Phoenix, the size of the deposit in NOT cleared up and the fact that Mr. McEwan bailed out is not a good sign - think BreX! Maybe you will get lucky?

  • Report this Comment On January 22, 2011, at 2:57 PM, Bittersweet614 wrote:

    I am "in" on RBY. I read his report about this company in October and jumped in @ $3.50/share. Then Re-upped in November just after the 4 million ounce announcement (Should have waited another week when it went down .50/share).

    I think this has some real multi-bagger potential and I am waiting for the great days ahead from RBY.

  • Report this Comment On January 25, 2011, at 10:51 AM, rfaramir wrote:

    r2lmorrow,

    "If RBY is just working on a preliminary feasability study, then the likelyhood of completing permitting and entering into production by the end of 2012 is pretty unlikely."

    The author did call the "first production by the fourth quarter of 2012 -- an ambitious schedule".

    On resource-to-reserves, thank you for the explanation. I knew some of the difference, but you made it clear.

    "if you are thinking that your stock comes with $83M in the bank"

    No, the author said "I have excluded cash holdings, because they will go to mine construction and exploration" and "excellent cash position of $86 million as of September, but it might need to raise more funds." So I think you two are on the same wavelength, really.

    I also am already in on this one. After this assessment, I may increase my position.

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