Although we did not expect a road map to commercial production with the Q2/15 results, we had hoped for some details on progress to date at the Phoenix underground (UG) gold project in the Red Lake District of NW Ontario. Our concerns revolve around the progress of UG development in the ramp up to commercial production (Q1/16E) and the potential optimized mining methods (impacts on dilution and throughput). We acknowledge that there are legitimate reasons to delay guidance as management seeks to provide achievable targets. But nonetheless, the delay of guidance to potentially October 2015E (Q3/15 results) has generated enough consternation to force our hand.
We revised our model to accommodate a slower and lower, throughput ramp up to steady state levels (1.65 kt/d vs 2.0 kt/d), higher FY2015 capital spend to commercial production (C$162 M vs C$135 M) which was offset only slightly by a change in the ramp up head grade (H2/15E, +18-20% to 6.0-6.5 g/t Au, +2 koz to 10 koz). We modeled a small equity financing (C$30 M, C$1.30) to support its balance sheet in H2/16 due to the slower throughput forecast. The revisions led us to lower our target price (C$0.20 or 13%) to C$1.30. The implied return (
Lower gold price and commercial production delayed to Q1/16E (prev. Q4/15E)
We lowered our target price (C$0.30 or 16-17%) for Rubicon Minerals due predominantly (83%, C$0.25) to a change in our long-term gold price forecast (down 1.8%) to US$1274. The remainder of the downward target price revision (17%, C$0.05) is related to pushing back commercial production to Q1/16E (vs. previous estimate of Q4/15E). We maintain our SPECULATIVE BUY recommendation as our target price still implies a 25-27% return.
The company is commissioning the 1.25 kt/d processing plant with the first pour in hand (see research note published on June 24, 2015, "First pour at Phoenix gold project achieved"). The company's objective for underground mining is to optimize the stoping method (to improve stope designs going forward) in a controlled environment prior to ramping up to permitted capacity. We will review our assumptions and forecasts if needed after the release of an operations update in early Q4/15E.
• The drop in the gold price alone pushed our valuation (NPV@7%, 1.02x) for the F2 Zone of the Phoenix high grade underground gold project in the Red Lake District down 13% to C$665-670 M. We arrived at our revised valuation (~C$660 M, down an additional 1-2%) by pushing back our forecast for commercial production to Q1/16E. Previously, we forecast full ramp-up to permitted capacity (1.25 kt/d) by Q1/16E.
• The drop (70%) in our 2015 pre-production forecast from 22 koz of payable gold production to 7 koz due to the push-back on commercial production to Q1/16E led to an additional C$20 M cash flow drain that lowered our end of year 2015 working capital position to C$22 M (prev. C$42 M). This impact was responsible for our remaining C$0.05 drop in our valuation.