Present at the Creation

A few days ago, a new diversified gold exploration company was created by the merger of various entities owned by Robert McEwen, and the original management of Rubicon Minerals. The holdings of Rubicon concentrated on the Red Lake, Ontario area.

The creation of this company, with a market capitalization of $170 million Canadian, and $130 million U.S., is the brain child of Robert McEwen who had made his reputation by creating Goldcorp, which is today listed on the New York Stock Exchange (GG-NYSE). In actuality, Goldcorp was created by a major gold discovery in the Red Lake area, which enables Mr. McEwen to create a $7 billion market cap company from an original $50 million valuation some eighteen years before. About two years ago, Mr. McEwen resigned from Goldcorp and stated that he intended to spend the subsequent years in the original business which he developed, the gold business, but in the exploration side.

The logic is as follows. The price of gold has appreciated from $300 to $700 in this century. The demand for gold is likely to increase because the newly acquired and recognized value of the gold as a monetary metal. Several countries B China, Japan, Russia, and Saudi Arabia B have sizeable U.S. dollar positions, two of them running at the rate of one trillion dollars, namely China and Japan. These countries have stated that they intend to diversify from the dollar, up to 50 percent of their holdings.

The Fed not raising rates means more weakness in the U.S. dollar and that is bullish for gold. India is the largest gold consuming nation. Money supply is up 20% in 3 years. GDP is expected to grow 9.2% in 2007. These are powerful stats that should mean continued support for gold prices.

How long will it be before China lifts exchange controls and allows all those remimbi's they have been creating to be sold for some other currency to facilitate investing overseas? If the mainland Chinese are bidding stocks to 45 times earnings, it is an indication of how high they will eventually bid up gold mining companies in New York and Toronto when exchange controls are lifted.

The U.S. money supply is up 5.5% for the last twelve months and 16.7% for the last three years. Raw goods and intermediate goods are now climbing at above 7% and this will soon impact consumer prices. With inflation in the pipeline, will foreigners want to buy U.S. bonds which will be heading down? This will also hurt any dollar support in the future from this source and therefore be supportive of gold.

Diversify to what? The Euro market is the most logical alternative, but at the same time besides the Euro, which fluctuates just as much as the dollar, the interest in the Swiss franc or gold has increased. With the U.S. balance of payment running at least $250 billion a year, and the natural fear of holders of the U.S. dollar is the loss of buying power, part of the surplus dollars which are sizeable are going into the most famous monetary metal, namely gold. If this is the case, there is now an upward surge in gold prices and output pressure on gold prices that has not been in the picture in the past.

Derivatives: With a global market starting in a low interest rate and, so far, low inflation environment, one has to wonder about the future of gold. Easy money almost everywhere leads to leverage and speculation. Nowhere is this more prevalent than in the global derivative market. It is not out of the question that third party defaults and risk aversion designed instruments that collapse and go sour may someday overwhelm the financial markets.

The Logic of Entering the Exploration Business in Our Around 2006 and 2008.

The current climate is ideal for exploration because of the price increase and the demand that is growing for a variety of reasons.

Looking at it in a different manner, the detailed breakdown of the hedge book stems from cuts in the forward sale of gold and gold loans. The pricing also means that the cumulative market-to-market calculation for comparable hedge books deteriorated between September and December, reaching $10.4 billion compared to $3.9 billion in December, 2003. Allied to this is the fact that hedge producers received weighted average price of $525 an ounce, as against un-hedged producers $616 per ounce. The average spot price for the last quarter, December 2006, was $613 per ounce.

This atmosphere, growing price, growing awareness of long-term ownership of gold by major companies, such as Barrick, Gold Fields, and Anglo Gold Ashanti, indicates that the attitude towards gold is positive and the desire to mine new gold is even more desirable. The new Rubicon mine is in the gold exploration business. In fact, it's one of the most diversified exploration companies, covering Alaska, Nevada, and the Red Lake district of Ontario. In a need for rapid increase of fresh gold in the market, exploration activity increases, and the reward for publicly-owned companies in finding new gold is greater than at any other time in history.

In other words, if we have a company such as Rubicon Minerals, with 130,000,000 shares outstanding, selling in Canadian $1.30 and U.S. $1.10 per share, represents a very small value to the possibility, and of course hypothetical possibility, of finding gold.

The Arithmetic for Gold Exploration

Assume the identification of 1,000,000 ounces of gold.

Accordingly, in 5 years there can be a combined revenue of $325M revenues, or $2.50 per share. Five million ounces of gold can produce $12.50 per share value, almost 10 times the price of the stock.

The Current Picture

Rubicon Minerals has a stake in a large untried territory in Nevada, which it values at $6 million. It has 513 acres of land package in the area of the world-class Pojo Mines in Alaska. Pojo, owned by Tek, is going into production in 2008 and it's considered to have a possibility of at least half a million ounces of gold. Value: $35M.

The major and original position of Rubicon is a large land position of Red Lake, where actually the birth of the original Goldcorp took place. Subsequent to the Goldcorp discovery, a number of other companies have discovered gold. Some of them actually have been acquired, by Goldcorp Corporation, which was under new ownership. Some experts consider the total possibility of 20-40 million ounces of gold, of which of course Rubicon would like to take its share.

Gold exploration requires a dry geography, a team of operators, and money. The following table lists the three territories under Rubicon Minerals' management and we allocate some values to the individual territories.

Since Rubicon is now an American exchange listed company, with diversified holdings, with a $25 million cash reserves, the current position of the company is interesting. The company can expand by acquiring other territories. The company can merge with other gold exploration companies, and in fact the company can liquidate partially its holdings, let's say in Red Lake, increasing the cash position of the parent company and accelerate exploration by old and new holdings elsewhere.

The Arithmetic

Furthermore, because of the very minute capitalization of the company, the resulting effect of gold discovery can be meaningful and impressive.

The Valuation of the Company

In the following table we have attached various values to the holdings of Rubicon.

As we see that the current price in U.S. terms of $1.40 is quite conservative compared to the potential and the possibilities which are ahead of Rubicon. There is also a fair chance that with the backing of the quite capable management, with its strong cash position and backing of a meaningful investor and 45% owner of the company. Rubicon will be expanded in the current gold boom to be a bigger exploration company. We expect further deals, exchange of assets, capital injection, acquisition of assets, in the years to come.

Accordingly, we consider Rubicon an interesting speculation of the talents of management, the monetary backing of management, and the possibility of exploiting the current ownership of the company. We look for a much higher gold price, and consequently our previous valuation may be quite conservative.

   Andrew Racz

(Article 49 - posted March 1, 2007)

e-mail: mlikar@aol.com

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