Rubicon plunges as gold resources slashed 88%
Junior miner Rubicon Minerals Corp. has slashed i ts gold resources by an astounding 88 per cent, confirming the company will go down as one of the worst Canadian mining meltdowns in years.
The stock plunged 64 per cent on Monday, as this news crushed any remaining investor confidence in the formerly high- flying company. Rubicon has hired financial advisers to try to salvage value for shareholders, but there is little confidence that they will succeed. Rubicon closed at five cents in Toronto trading.
“We’re very disappointed, as management and the board, at what’s transpired,” interim chief executive Michael Winship said on a conference call.
Toronto- based Rubicon was one of the hottest junior mining stories of the past decade, but the company made fatal errors while developing its Phoenix gold project in Ontario’s Red Lake camp. Those mistakes were overlooked by many investors for years.
But there was no hiding from them on Monday, as the company released a new resource estimate for the Phoenix project that identified a mere 413,000 ounces of gold. In Rubicon’s prior estimate, released in 2013, it thought the project held 3.3 million ounces, or about eight times more.
While miners occasionally lower expectations for a project after doing more work, it is almost unheard of for resources to fall this much from one study to the next.
Rubicon said new data on Phoenix showed that highgrade gold mineralization is “less continuous than indicated” in its prior estimate. Specifically, much of the high-grade material appears to be on different geologic structures than the company previously thought.
“They just got it wrong,” said Steve Parsons, an analyst at National Bank.
The Phoenix project is very complex. Like many gold projects in the Canadian Shield, the mineralization is inconsistent and a great deal of drilling is required to identify all the gold.
Experts said Rubicon did not do enough exploration to fully understand the project. The company thought it had a mineable deposit, and it began building a mine without even completing a feasibility study. A feasibility would have required much more drilling and would have provided the company with a greater understanding of the project. But even without one, Rubicon was able to raise more than $700 million from investors in a very hot gold market.
Once Rubicon got underground and saw the Phoenix deposit first- hand, it finally acknowledged that the project was more complex than previously thought. It suspended underground work last November.
Rubicon hoped to come up with a new development plan for Phoenix in the second quarter of 2016. But Monday’s disastrous resource update has quashed those plans, as the company decided that more exploration work is needed. After this setback, it will be extremely difficult for Rubicon to raise enough money to develop a viable mine.
BMO Capital Markets and TD Securities have been hired as financial advisers to study strategic alternatives, including a sale or a restructuring. Recovering value for shareholders could be extremely difficult, experts said. Potential buyers may be reluctant to buy the Phoenix project after it became so tainted over the last few months.
And Rubicon faces insolvency risk, as it has just $22.4 million of cash against $ 65 million of debt. The Canada Pension Plan Investment Board loaned the company US$50 million last year.
Rubicon’s collapse is also a setback for metal streaming company Royal Gold Inc., which gave the company US$ 75 million in exchange for rights to purchase future gold output from the Phoenix property. The stream is likely worthless today.
Metal streaming companies have enjoyed higher trading multiples than mining companies, because they are perceived as having less risk. But the failures at the Phoenix project show that the streamers also carry risk when they invest in junior companies with undeveloped projects.