Rubicon inks $75-million gold stream with Royal Gold

VANCOUVER — A US$75-million gold-streaming deal with Royal Gold (TSX: RGL; NASDAQ: RGLD) has given Rubicon Minerals (TSX: RMX; NYSE-MKT: RBY) almost half the money it needs to finish building an underground gold mine at its Phoenix project in Ontario.

Rubicon is halfway through building Phoenix, a high-grade underground gold mine in Ontario’s prolific Red Lake district. The company has sunk $150 million into the site to date, but as 2013 drew to a close Rubicon slowed and eventually halted most work at Phoenix to preserve cash.

Rubicon estimates it needs another $150 million to finish building and commissioning the operation. The company has $78 million in the bank, but a conservative fiscal approach means Rubicon wants to hold onto those funds.

As such the company’s management has been out looking for funding — and that effort just paid off.

Royal Gold is providing Rubicon with US$75 million to advance Phoenix, delivered in staged payments over the next 12 months. The money gives Royal Gold the right to buy 6.3% of the gold produced at Phoenix until 135,000 oz. have been delivered, at which point the stream shrinks to 3.15% of output. For each ounce Royal Gold will pay Rubicon 25% of the spot gold price.

“We believe that we received a good deal, both in absolute terms and compared to recent streaming and royalty transactions,” said Rubicon’s president and CEO Michael Lalonde in a conference call. “We are confident we can raise the rest of the money on good terms. We will not compromise our balance sheet or put the asset at risk.”

As Lalonde referenced, Rubicon needs to raise another $75 million to $100 million. Rubicon chief financial officer Nick Nikolakakis says the company could probably finish Phoenix with another $75 million, but Rubicon is looking for $100 million to cover extra expenses. As for where they hope to find that money, Lalonde and Nikolakakis say the company is assessing a wide range of options, but low capital cost is the top priority.

“This deal was done at an attractive cost of capital and an attractive cost to net-asset-value multiple,” Nikolakakis said. “Our goal now is the same: to secure funding at the lowest cost of capital available to us. We are not going to pursue a deal at any cost. We will take our time and take a disciplined approach to raising the rest of the funds to complete the Phoenix project.”

The Royal Gold deal is structured so that Rubicon can raise up to US$100 million in debt ranked as senior to the gold-stream deposit. If Rubicon raises more than US$50 million, Royal Gold’s per-ounce purchase price declines slightly.

Phoenix is a steeply dipping gold deposit that averages 7.8 metres wide. The plan is to mine the deposit via longhole stoping, producing as much as 2,250 tonnes of ore per day to feed a 1,250-tonne-per-day mill that will be expanded to 2,500 tonnes per day. Gravity and carbon-in-leach processing should recover 92% of the gold from Phoenix ore, which will carry an average grade of 8.1 grams gold per tonne.

Phoenix is expected to produce 165,300 oz. gold  annually at an all-in sustaining cost of US$805 per oz. Resources at the site stand at 4.1 million indicated tonnes grading 8.52 grams gold, plus 7.5 million inferred tonnes averaging 9.26 grams gold for 3.3 million oz. The project does not carry any reserves because Rubicon is building Phoenix based on a preliminary economic assessment completed in mid-2013. There is no feasibility study.

The known resource gives the Phoenix mine a 13-year lifespan. Using a US$1,385 per oz. gold price at a 5% discount rate, the project carries a $531-million net present value and should generate a 27% internal rate of return.

The main shaft at Phoenix is complete and reaches 730 metres depth. Lateral development is underway on the 244-metre level to enable diamond drilling, while vertical development has commenced on the 122-metre and 305-metre levels as part of the ventilation system.

The major components of the semi-autogenous grinding and ball mills were delivered in 2013, and Rubicon has already poured most of the associated concrete. The mill building is also complete, as are most roads, a 200-person camp and a new power line and substation.

Mine development is a month or two ahead of mill construction, which means completing the mill is the so-called “critical path.” Lalonde says once work on the mill restarts Phoenix will be ready to produce gold within 12 to 14 months.

On news of the Royal Gold deal Rubicon’s share price gained 9¢ to close at $1.69, marking an 88% gain since the start of 2014. The company has a 52-week share price range of 69¢ to $2.69, and 289 million shares outstanding.

Royal Gold’s share price gained $2.41 on the deal to close at $71.58. The streaming and royalty company, which recently announced a $10.8-million net profit for its latest quarter, has also had a good start to 2014, gaining 38% since January. Royal Gold has a 52-week trading range of $40.80 to $74.58, and 64 million shares outstanding.