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Yesterday the gold market witnessed the latest casualty of a new gold producer – Corp. (RBY.US RMX.CA) when they announced negative news in regards to their newly commissioned Phoenix Mine in eastern Canada.
All new mines in the world usually take 2-4 years to construct. It’s a massive exercise stripping large amounts of dead overlying rock (pre-stripping) that cover the hidden deposit in the case of an open pit (meaning they therefore lose money every time one of those big yellow dump trucks hauls a load of dead rock to the waste pile) or in the case of an underground mine it’s an exercise to drive a tunnel and/or sink a shaft deep below surface extracting lots of waste rock to get at the valuable metals in the actual deposit.
Simultaneously in both types of new mines a lot of time and money is being spent on the surface infrastructure needed to extract the metals and dispose of the waste in an environmentally safe manner.
I am aware of few mines in the world that after taking that long to build the mining company flipped a switch and the mine went smoothly into production ramping up to full capacity within a few quarters.
In today’s world even well-respected mine builder couldn’t get it right on their highly prized Eleonore Mine they recently put in to production in eastern Canada. Once got underground to see the deposit first-hand they learned that the mineralization was folded and faulted which for a brief time forced them to mine lower grades because they had to mine more adjacent waste rock until they could make new adjustments to efficiently mine their deposit.
A key part of this exercise is having enough money in the treasury to get through any of these teething problems. Usually in the budgets drawn up prior to the commencement of construction a certain part of the money raised is allocated to a contingency in which monies are supposed to go towards unforeseen problems.
If investors learn of teething problems they likely won’t be happy but they also don’t normally panic and throw the company’s stock out the window if they feel comfortable that problems were anticipated and factored in to the overall budget.
In a normal to bull market these investors are more tolerant but in a bear market like the one we have now been in for several years a large number of investors have a very low level of tolerance and at the first hint of negative news there is instant panic selling as if a major catastrophe has happened.
If a well-regarded miner like couldn’t accurately predict the problems they would encounter while building their new mine how can other hopeful mine builders like Pretivm (PVG.US) (AKG.US) Guyana Gold (GUY.CA) Roxgold (ROG.CA) True Gold (TGM.CA) (MVG.US MAG.CA) B2 Gold Corp. (BTG.US BTO.CA) Torex Gold (TGX.CA) Dacian Gold (DCN.AU) (HUM.LN) TMAC Resources (TMR.CA) (DNA.CA) (CNL.CA) (GOR.AU) or AUE.CA) amongst others guarantee that their new mine will go into production smoothly even after surrounding themselves with supposed top notch and high priced engineering specialists
Many investors choose to invest in this type of a gold company because they believe that a bigger company will come along and take over their little company at a substantially higher price. Or when the company puts the mine into production the market will re-rate the company’s shares to a higher valuation
Going back to ’ news yesterday it isn’t so much that the market is feeling that the problem they announced is catastrophic or will be really expensive to solve or the fact that the CEO left the company (these both obviously had some impact) but rather the market is concerned that this latest event (following some negative news last month that they were having some underground mine development problems) will stress their balance sheet and edge the company towards the tipping point of an outright failure. Given the uncertainty investors need to do their usual due diligence placing particular importance on whether or not the company has enough money in the bank to get through these and any unforeseen problems.
To note in the background both well regarded royalty companies - Franco Nevada (FNV.CA) and (RGLD.US) have each put $75 million into the coffers of Rubicon to help build this new mine and most recently the Canada Pension Plan Investment Board also lent Rubicon $50 million to help complete the mine build and ramp up. Having strong partners like these that know the inherent risks of building new mines offers the chance that they will likely be there for additional help if needed. The question is whether or not they will.
There is no doubt that the problems that Rubicon has faced so far are not optimum but they are likely fixable. But potentially larger problems could arise in the future from the grade reconciliation exercise which is currently underway. The results of this exercise could significantly impact the economic viability of the mine. It’s impossible to forecast those results and/or how those results could impact the stock. We simply need to wait for more information. I will be watching and waiting for those results.
Building a mine in today’s environment is challenging and it’s unlikely that any company will be able to construct a mine without running into unforeseen problems. Rubicon is no exception to that. Despite their challenges Rubicon’s story still has potential but it is one that requires more information to act on. Therefore I will be following the company closely to see how this situation plays out.
Steve Todoruk
P.S. You can contact Steve to schedule a complimentary portfolio review of your resource stocks by dialing 800-477-7853 or stodoruk@sprottglobal.com.
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