Battle North Gold Corp. (fka BNAUF)

[jhernandez]

http://www.fool.com/investing/general/2011/01/21/rising-star-buy-rubicon-minerals.aspx

Rising Star Buy: Rubicon Minerals

By Andrew Sullivan, CFA | More Articles
January 21, 2011 | Comments (0)

TMToyota Motor
CAPS Rating 3/5 Stars

Down $81.97 $-1.39 (-1.67%)

+ Watch TM

on My Watchlist
More about TM

* This Risk Could Cost You Big Bucks
* General Motors: Wait Till Next Year
* BROWSE ALL TM ARTICLES

Don't let it get away!

Keep track of the stocks that matter to you.

Help yourself with the Fool's FREE and easy new watchlist service today.

* Click Here Now

This article is part of our Rising Star Portfolios Series.

On Monday, I'll buy $1,000 (about 6% of my first-year capital) worth of Rubicon Minerals (AMEX: RBY). With a tremendous gold deposit in the very prolific Red Lake, Canada, mining zone, this company's undervalued based on its peers and recent takeover transactions in the gold space.

A proven winner
Since I first recommended this company in a special report in July 2010, the stock has risen almost 60%. I liked Rubicon because it had discovered a very high-grade gold deposit in Red Lake; it had a successful gold investor named Rob McEwen on board with a 21% ownership stake; and by the end of 2010, it would announce the initial estimate of the size of its gold resources – a potential catalyst.

Since then, a few things have changed. In September, McEwen sold his stake to concentrate on other ventures. But any concerns about his departure soon proved unfounded; in November, Rubicon announced a 4 million-ounce gold resource, at the top end of the 2 million-4 million ounces I estimated the market would expect. This alone puts Rubicon in the big leagues, because only 7% of the world's gold deposits contain 3 million ounces or more. But Rubicon also dropped a bombshell when it said that total potential ounces at this gold system could reach 13 million-16 million ounces. This would make the deposit (named Phoenix) absolutely world-class – and Rubicon very cheap.

The market loved the news, and the stock jumped 36% in one day. Since then, it has retreated 15%, giving us a nice opportunity to open a position. Although the stock trades much higher than when I found it, the uncertainty over the size of the gold deposit is cleared up, and the opportunity could be immense. But there's more: Rubicon controls 100 square miles around the Phoenix project, as well as promising land in Alaska and Nevada. All told, despite the price rise, this stock is still cheap, with bags of upside potential.

How cheap, exactly?
Investors generally evaluate gold assets via their price per gold ounce. At $5.35 per share, Rubicon's $1.1 billion market capitalization, divided by its gold resources of 4 million ounces, equals $275 per gold ounce in the ground. I have excluded cash holdings, because they will go to mine construction and exploration. Still, having infrastructure already in place will lower the cost of building a mine. All told, with gold trading at $1,350 per ounce, this figure looks compelling on its own.

But it's even more compelling based on peer and transaction values. Another Canadian firm, Lake Shore Gold (PINK: LSGGF) has 2.5 million ounces of gold resources and is valued at $1.5 billion, or $600 per ounce. San Gold (PINK: SGRCF), with 2.6 million ounces, sells for $960 million, or $370 per ounce.

The kicker? Rubicon's average gold grade is 20 grams per tonne, more than double that of either other company, which makes its gold more profitable to mine.

Finally, there are recent transactions in the gold world. The average enterprise value per ounce of five transactions from 2008 to 2010 was $462, well above where Rubicon trades now. And if Rubicon truly does have 13-16 million ounces of gold in the ground, it trades for just $75 per ounce at the midpoint of that range.

Upcoming catalysts
Rubicon is on the fast track to open a mine on the Phoenix deposit. It is working on a preliminary economic assessment that will delineate costs, activities, and permitting needed to construct a mine. It plans first production by the fourth quarter of 2012 -- an ambitious schedule, but one that should increase the stock's value as it transforms from an explorer to a producer.

Risks
Shares in exploration companies often decline in the years between a discovery and mine construction, as investors lose patience and the company issues stock to pay for the new mine. Rubicon has an excellent cash position of $86 million as of September, but it might need to raise more funds from the capital markets, which could result in dilution. And clearly, a collapse in the price of gold or other mining difficulties would lower the company's value.

Foolish bottom line
Rubicon Minerals' past success is just the beginning. As it enters into production and the size of its large deposits is further delineated, the market will take notice. There is also plenty of upside potential from potential new finds in its large Red Lake holdings and other properties. Finally, it is a prime acquisition candidate, and buyout premiums in a rising gold market could be substantial. All those strengths make Rubicon a wonderful way to gain exposure and leverage to gold.