Market unimpressed with Rubicon’s PEA for F2

Rubicon Minerals (RMX-T, RBY-X) fell $1.12 or 23.9% to close at $3.56 per share with more than 4 million shares traded in Toronto after the company released a preliminary economic assessment of its 100%-owned F2 gold system, part of its Phoenix gold project in Ontario’s Red Lake district.

The PEA considered developing the F2 gold system as an underground mine with a throughput rate of 1,250 tonnes per day for production of 180,000 ounces of gold a year at an average cash cost of US$214 per tonne, and  a mine life of twelve years.

At a base case gold price of US$1,100 per oz., F2’s pre-tax internal rate of return works out to be about 28%, while the pre-tax net present value, at a 5% discount rate, is calculated at US$433 million. Initial capex comes in at about US$214 million, including a 30% contingency or about US$50 million, with payback from the start of production forecast at 3.3 years.

Average mined gold grade is anticipated to be 13.87 grams gold per tonne with metallurgical recovery of 92.5%.

“The declining size of the project appears to be the main reason for the falling share price,” Canncord Wealth Management wrote in a brief note on June 30. “The dilutive life of mine grade of 13.87 grams gold per tonne is much lower than last March’s average inferred grade of 17.29 grams gold, suggesting mine dilution that could be more than 15%. The declining grade will impact the NAV of the project, and while Rubicon still has room to explore and ad to the resource, shareholders sentiment is definitely to the downside.”

The study was based on an updated resource estimate, with F2’s indicated resources reaching 1.03 million tonnes grading 14.5 grams gold per tonne for 477,000 ounces of contained gold and inferred resources of 4.23 million tonnes grading 17.0 grams gold for contained gold of 2.32 million ounces.

Calling the PEA “a very good start,” Rubicon’s president and chief executive, David Adamson, noted the deposit remains open in all directions and that the PEA “outlines a number of areas for potential future optimization.”

He also pointed out that the study’s 30% contingency on capital costs demonstrated that the company is taking a “reasonably conservative approach” in terms of cost escalation across the industry.   

At presstime in Toronto Rubicon was trading at about $3.47 per share within a 52-week range of $3.31 per share (July 27 2010) and $6.50 per share (Nov. 30 2010).

The company has about 214.3 million shares outstanding.