A revised geological model and updated resource estimate that eviscerates much of the tonnage and grade at Rubicon Minerals’ (TSX: RMX; US-OTC: RBYCF) F2 gold deposit means that more exploration would be needed at depth and along strike to develop an economic mining operation there, and the company is evaluating strategic options that could include a sale.
The company started trial mining the F2 deposit on its Phoenix property in Ontario’s Red Lake district last year, but the geology was more complex than previously thought, and underground operations were stopped in November so that Rubicon and its independent consultants could analyze geological models.
The company has announced that contained gold ounces in the updated 2016 indicated resource category have plunged 91% from the 2013 resource estimate, while contained gold ounces in the inferred category have fallen 86%, compared with the earlier estimate.
The revised model and updated resource prepared by SRK Consulting was based on information from recent development, trial stoping, chip sampling, underground structural mapping and 94,600 metres of infill drilling within a concentrated shallow area of the deposit, all of which were not previously available, Rubicon said.
“At current and projected gold prices, there just aren’t enough tonnes and grade above the 305 level to economically support stand-alone trial stoping,” Michael Winship, Rubicon’s interim president and CEO, said on a brief conference call.
The updated resource estimate puts indicated resources at 492,000 tonnes grading 6.73 grams gold per tonne for 106,000 contained oz. gold, down from the 2013 estimate of 4.12 million tonnes grading 8.52 grams gold for 1.13 million contained oz. gold. The revised numbers were based on a cut-off of 4 gram gold per tonne.
Inferred resources have fallen from the 7.5 million tonnes grading 9.26 grams gold for 2.22 million contained oz. gold in 2013, to 1.52 million tonnes averaging 6.28 grams gold for 307,000 oz. gold.
In a press release and conference call, Rubicon’s management team explained that information from the new drilling and recent trial stoping had changed the understanding of the gold mineralization’s variable spatial distribution, and the new geological information “highlighted the complexity of controls on the distribution of the gold mineralization, its grade and its continuity.”
“The distribution of the higher-grade mineralization is controlled by the intersection between the east- to west-trending D2 structures and the north-trending, high-titanium basalt unit. The new data shows that the high-grade gold mineralization is less continuous than indicated in the 2013 SRK resource estimate, which was based upon less widely spaced drilling data that was drilled sub-parallel to the D2 structures.”
“Although this new resource estimate is disappointing, we still believe in the potential of the F2 deposit and the land package we hold in Red Lake,” interim CEO Winship told investors and analysts on the call, adding that exploration work in the future “would require a recapitalization of the company.” Winship joined Rubicon’s board of directors in 2011 and was appointed interim president and CEO in October 2015, replacing Michael Lalonde.
Nicholas Nikolakakis, Rubicon’s vice-president and chief financial officer, noted on the conference call that the company’s $26.9 million of cash, of which $22.4 million is unrestricted cash, means that “the company has a definitely workable cash balance to see us through the strategic review process.”
Winship added that the company has ongoing discussions with its lenders, which include the Canada Pension Plan Investment Board (CPPIB).
In May 2015, Rubicon entered into a financing agreement with CPPIB Credit Investments for a US$50-million secured loan facility. The loan facility contained a covenant to achieve commercial production — defined as 60 consecutive days of production at 875 tonnes per day of processed mineralized material from the Phoenix gold project — by Feb. 12, 2016.
Allan Candelario, Rubicon’s vice-president of investor relations, failed to provide answers to questions from The Northern Miner (TNM) before press time regarding a breach of the production deadline outlined in the CPPIB debt covenant, or why Rubicon proceeded with mine development at F2 on the basis of a preliminary economic assessment alone, rather than taking the more conventional steps of doing a prefeasibility or feasibility study.
Financing for the Phoenix project and construction of F2 has also come from Royal Gold (TSX: RGL; NASDAQ: RGLD), which in February 2014 entered into a $75-million gold stream with Rubicon. Royal Gold’s shares fell 10.2%, or $5.42, to $47.70.
In a brief note to clients entitled “Royal Gold Singed by the Phoenix,” analyst Andrew Kaip of BMO Nesbitt Burns said that the Phoenix gold stream downgrade “highlights the risk in investing in projects without adequate technical information and, in our view, will probably feed into investors’ concerns regarding the overall risk profile of the Royal Gold portfolio of streaming assets, which is dominated by Mt. Milligan. Additionally, the updated mineral resource may trigger an impairment of the Phoenix stream.”
John Tumazos, founder of Very Independent Research and a senior analyst, told TNM that the implications of the F2 case far exceed the impact on Rubicon, its lenders and its shareholders, and risk tainting the wider industry.
“The interpretation of any high-grade resource loses credibility and real value after a situation like Rubicon’s,” he said in an interview after Rubicon’s conference call. “It makes everybody in the business lose some credibility with investors, whether it’s management, qualified persons, engineering firms, investment analysts — everybody has egg on their face.”
As far as the prospects of a lawsuit are concerned, Tumazos says there may not be anything left for subordinate creditors after the company pays back its debt.
“In order for a plaintiff to have an economic victory the company has to have money to distribute,” he says. “A 90% reduction in the resource estimate undermines the ability of creditors or equity holders to get paid.”
Tumazos calculates that most of the company’s $228-million worth of fixed assets on its balance sheet as of Sept. 30 has been sunk into underground shaft and tunnel development, with the mill representing one-third of its fixed assets. The mill could command 10¢ on the dollar in the current gold-price environment.
Rubicon shares declined 64%, or 9¢, on the news to finish at 5¢ per share on 17.1 million traded, and last traded at an all-time new low of 3¢, for a market cap of $12 million. The stock briefly traded at $5.82 in late 2010.
“This is a real shock as to what you’ve done here with this company … this is hurting me tremendously,” a private investor commented during the question and answer session of Rubicon’s Jan. 11 conference call. “I paid a lot of money for this stock and now you’re talking about a recapitalization. What does that mean?”
In response, Winship said the firm is looking at alternatives.
“I can assure you we’re disappointed — as management and the board — at what’s transpired,” Winship said. “We certainly have moved quickly, as we realized through the trial stoping period [in the second half of 2015]. We made press releases in October and November, as we understood the implications, and … we just recently, in the last few days, received the resource estimate. We’re looking at the various strategic alternatives as we said in the press rele
ase … whether it’s a divestiture or to find a way for Rubicon to go ahead as an exploration company … we can’t provide you a lot more detail at this time on those various strategic alternatives.”