RMX up .77 to 3.84 today on the AEM news.... TD report below...
Rubicon Minerals Corp.
(RMX-T, RBY-A) C$3.06
$70mm Strategic Investment by Agnico-Eagle
Event
After the close yesterday, Rubicon announced that Agnico-Eagle Mines
(AEM-N,T) has agreed to make a $70mm strategic investment in the
company through a non-brokered private placement. Under the terms of the
agreement, Agnico-Eagle will purchase a total of 21.7mm shares
at $3.23/share, representing a 9.2% stake in the company.
Impact – POSITIVE
We view the transaction as being mutually beneficial.
From the Agnico-Eagle perspective, it acquires a meaningful stake in a
company that owns what we consider a high-quality development project in a
premier gold district in which it already has exploration interests, and it does
so at what is arguably a very attractive valuation of 0.5x NAV5%. We expect
Agnico-Eagle’s investment to become significantly profitable on paper in
trading today.
From the Rubicon perspective, it benefits from the strong endorsement of
what is generally regarded as one of the best-managed gold companies in the
business. Moreover, the agreement includes a provision for the company to
access Agnico-Eagle's geological and engineering expertise, which should
benefit the company as it progresses into advanced engineering and beyond.
We expect the market reaction to be dramatic, given the Gold Eagle Mines
precedent (see Exhibit 1). Clients will recall that when Agnico-Eagle made a
strategic investment in that company in June 2008, the stock closed up 17%
the first day of trading and was up 34% before Goldcorp, the dominant player
in the camp, agreed to acquire the company for $1.5 billion one month later.
We have always regarded Rubicon as a likely takeover candidate and the
Gold Eagle deal (when gold was priced at ~56% of today’s level) implies a
potential transaction price of $7/share. Nevertheless, we maintain our
valuation methodology and adjust for the financing. Our NAV5% falls to
$6.10/share (from $6.18), with the strategic investment partially offsetting
more accretive financing assumptions in our model. We maintain our target
price of $7.50/share and reiterate our SPECULATIVE BUY recommendation.
Gold & Precious Minerals
Recommendation: SPEC. BUY
Unchanged
Risk: SPECULATIVE
12-Month Target Price: C$7.50
Unchanged
12-Month Total Return: 145.1%
Market Data (C$)
Current Price $3.06
52-Wk Range $3.05-$6.50
Mkt Cap (f.d.)($mm) $752.8
Dividend per Share $0.00
Dividend Yield 0.0%
Avg. Daily Trading Vol. (3mths) 757294
Financial Data (C$)
Fiscal Y-E December
Shares O/S (f.d.)(mm) 246.0
Float Shares (mm) 183.9
Net Debt/Tot Cap --
Cash ($mm) $102.0
NAVPS (current)(f.d.) $6.10
All figures in C$, unless otherwise specified.
Action Notes July 28, 2011
Equity Research 59 of 67
Details
Transaction Terms
• Agnico-Eagle will purchase 21,671,827 common shares at $3.23/share for total proceeds to Rubicon of
approximately $70mm through a non-brokered private placement.
• Closing of the transaction is expected to occur on or about July 28 and remains subject to customary
closing conditions. Both boards of directors have approved the transaction.
• Agnico-Eagle will own 9.2% of the issued and outstanding shares of Rubicon, with rights to maintain its
level of ownership in subsequent financings.
• As part of the transaction, the companies have also agreed to negotiate a technical services agreement that
will provide Rubicon with access to Agnico-Eagle's geological and engineering mining team.
Exhibit 1. Gold Eagle Mines Share Price History (January-July 2008)
$4
$6
$8
$10
$12
$14
Jan-08 Feb-08 Mar-08 Apr-08 May-08 Jun-08 Jul-08
Share Price
(A) June 25 - Gold Eagle
(GEA) shares close at $7.88
(B) June 26 - Strategic
investment announced -
GEA shares jump +17%
to close at $9.21
(C) July 30 -GEA
shares close at
$10.57
(D) July 31 - Goldcorp
announces acquisition
of GEA for
$12.62/share
Source: Bloomberg, TD Newcrest.
Another Strategic Investment for Agnico-Eagle in the Red Lake Camp
Agnico-Eagle’s investment in Rubicon draws strong parallels, in our view, to the Gold Eagle transaction
completed three years ago, which ultimately led to the acquisition of the company shortly after.
On June 26, 2008, Agnico-Eagle announced a $50mm strategic investment in Gold Eagle through a nonbrokered
private placement. Gold Eagle’s principal asset was the high grade-Bruce Channel Discovery located
in the western part of the Red Lake Trend. At the time of the deal, Bruce Channel had no estimated resources
but an independent report published in May 2008 cited in-situ potential of 9.0-13.3mm oz gold. Gold Eagle
had drilled approximately 97,000m (<200 holes) on the property, with results averaging 11.8 g/t over 2.8m.
Almost one month after, on July 31, 2008, Goldcorp announced a friendly agreement to acquire all outstanding
shares of Gold Eagle in a transaction valued at $1.5 billion. Based on guidance from Goldcorp, we estimated
the transaction implied a conceptual resource in the range of 3.0-5.0mm oz. On this basis, Goldcorp acquired
the project for between US$300-500/oz during a period when spot gold was trading between US$900-920/oz.
Action Notes July 28, 2011
Equity Research 60 of 67
Gold Eagle Transaction Highlights Upside for Rubicon
We believe that under similar transaction terms and market conditions, the Gold Eagle deal would imply a
potential acquisition price for Rubicon of $7/share. However, in our view, this value would not reflect the
comparatively advanced stage of development at the F2 Gold System or fully account for the benefits of the
existing infrastructure at site.
Furthermore, a potential acquirer could optimize the value of the project by developing at a larger scale than
what was contemplated in the June PEA. The deposit could support an expansion in mill throughput to 1,850
tpd (from 1,250 tpd), which would generate estimated annual production of ~300,000 oz/year (from 210,000
oz). We believe this level of output would be meaningful to most intermediate and senior gold producers,
particularly given the potential for relatively low-cost production in what we view to be an attractive mining
jurisdiction.
Outlook
We anticipate the following events over our 12-month target price horizon:
• Continued infill and expansion drilling to upgrade and grow the resource base – Ongoing
• Project optimization of the mine plan and process flowsheet – Ongoing
• Completion of project permitting – Q3/11
Valuation
Rubicon is currently trading at 0.50x our corporate NAV5%, which is a discount to the development stage
companies in our precious metals coverage universe that trade at an average of 0.60x NAV5%. We believe that
companies with advanced-stage projects typically command premium multiples within this group.
Exhibit 2. P/NAV Peer Comparison
0.50 0.50 0.50
0.55 0.55
0.62
0.71
0.89
0.00
0.20
0.40
0.60
0.80
1.00
XRC CAN RMX CNL GUY IMZ THO XG
Source: TD Newcrest estimates.
Action Notes July 28, 2011
Equity Research 61 of 67
Justification of Target Price
We generate our target price of $7.50/share through the application of a 1.2x multiple to our corporate
NAV5%, which we calculate using a US$1500/oz LT gold price and a modeled share base that incorporates
the equity dilution associated with project financing. Our premium target multiple reflects our view of the
advanced stage of the company’s flagship project and its residency in a premier mining jurisdiction.
Key Risks to Target Price
Gold price; foreign exchange rates; forecast risk relating to resources, their size, grade, amenability to mining
and potential for conversion to reserves, ore recovery factors, as well as the operating parameters for projects;
capital and operating costs; the costs of consumables, labor, and other inputs; the cost and availability of
financing; changes to the governing fiscal and legislative regimes; the timing of key developments; market
conditions; permitting risks; environmental risks and risks related to indigenous people, opposition to mining
and security issues; as well as staffing and key personnel retention risks.
Investment Conclusion
We maintain our 12-month target price of $7.50/share and reiterate our SPECULATIVE BUY
recommendation. |
