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Stockhouse Short Report: A production first approach to gold mining

Peter Kennedy Peter Kennedy, Stockhouse Featured Writer
0 Comments| October 27, 2011

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Shares of Ruby Creek Resources Inc. (OTC:BB: RBYC, Stock Forum), a company headed by former Vancouver-based mining engineer Robert Slavik, have been on a roll lately.

In the past week alone, the stock is up 15%, a move that coincides with a promotional report in the Micro-Cap Review Magazine. It describes the company’s placer mining properties in Tanzania East Africa, and may or may not be a paid advertisement.

It’s tough to tell whether or not the report in the Micro-Cap Review has been paid for because a disclaimer at the end says only that the publication “MAY have been paid to publish this advertorial or corporate profile.”

Nevertheless, word of the report has likely helped to push the stock along the road to $1.50 on Wednesday, up from $1.30 last week, giving the company a market cap of $57 million, based on 40 million shares outstanding. The stock trades in a range of $1.60 and 52 cents.

That seems high for a company with no historical revenue and only $2.5 million in cash (versus $3.6 million in liabilities and $6.5 million in accumulated losses) at the close of the quarter ended May 31, 2011. In that period, it reported a net loss of $1.76 million or 5 cents a share, compared to a year earlier loss of $1.3 million, or 10 cents.

Ruby Creek was incorporated in British Columbia in 2006, but has since moved its head office to New York. Slavik, the company’s President, director and CEO, is a graduate of the school of engineering and business administration at the British Columbia Institute of Technology in Vancouver. (He also has a regulatory history in B.C. But more about that later).

In Micro-Cap Review, Ruby Creek is described as Tanzania’s next gold producer and among an outperforming class of stocks which have either discovered new large deposits through exploration or have rapidly increasing production rates.

Documents filed with the U.S. Securities & Exchange Commission reveal that Ruby Creek is the majority partner (70% ownership) in a group of properties that cover 1,500 square kilometers and are located in southern Tanzania about 150 kilometres north of the Mozambique border.

Alluvial (or river bed) gold in the region has traditionally been extracted from surface rock by artisanal miners.

Ruby Creek paid $12 million to acquire the rights from joint venture partners, including Douglas Lake Minerals Inc. (OTC:BB: DLKM, Stock Forum), and vendors Mkuvia Maita and Carlos Kapinga. They are known collectively as the gold plateau properties and cover what the company believes is an ancient lake or Delta.

To secure the mineral and mining rights to an area known as the Mkuvia property, Ruby Creek agreed to pay Douglas Lake $6 million in cash and shares. In regulatory filings, the company said it has paid $250,000 in cash and issued four million shares at an agreed value of 80 cents a share.

But rather than spending hundreds of millions of dollars to prove up economic reserves, Ruby Creek says it plans to take a “production first’’ approach to mining, a move that seems risky and raises questions about the company’s ability to meet its production targets, or to produce anything at all.

This seems like a risky strategy. It is certainly a departure from usual practices in an industry where extensive exploration and drilling is undertaken before production starts, a move that gives the company and its shareholders some certainty as what is available in the ground to be mined economically at prevailing commodity prices.

According to Micro-Cap Review, Ruby Creek has the equipment in place to produce 600 plus ounces of gold per month by the end of 2011. It anticipates that up to 35,000 ounces is achievable by calendar 2012 at a cost of under US$400 an ounce.

But in a July 2009 technical report, Douglas Lake said there is no definitive way to determine how much gold can be recovered due to the vagaries associated with placer operations and their grade.

What the Micro-Cap Review doesn’t mention is Slavik’s regulatory history.

In 1990, the British Columbia Securities Commission banned the Ruby Creek CEO for one year for late filing of insider trading reports.

He was also barred from acting as a director or officer of a reporting issuer for a period of one year.

Those penalties were imposed after Slavik, a former director of Star One Resources Inc., failed to file promptly required insider trading reports for the period between June 20 and December 31, 1988.

(On August 24, 1988, according to an agreed statement of facts, he was on a trip to Europe when he was informed (by fax) that he had an obligation to file insider reports. The fax was sent to him by the then president of Star One).

In September 1988 alone, Slavik bought 888,600 shares and sold 441,800, the commission said. But he did not file insider trading reports for the six-month period until May, 10, 1990. That was two days after the RCMP had charged him with late filing.

For his part, Slavik argued that he had intended to file insider reports but failed to do so because of other priorities to which he gave precedence in the mistaken belief that late filing would not be significant.

But the commission decided otherwise.

In August, 2010, Ruby Creek was subject to a cease trading order by the BCSC for failing to file interim financial statements for the interim period ended May 31, 2010. However, that order was later revoked on September 13, 2010.

The BCSC also slapped a cease trading order on U.S. Bulletin Board listed Douglas Lake after the junior issued a news release in February 10, 2009 in which it announced a mineral resource estimate for its Mkuvia property, which is now part of the Gold Plateau joint venture.

As noted by Stockhouse in a September 10 report, the company did so without filing a technical report to back the estimate as required under National Instrument Standards of disclosure for mineral properties.

The company subsequently agreed to retract the resource estimate, saying it was unreliable because the property sampling program was not conducted or supervised by a qualified person and because there were too few samples taken to project results over a mineralized area.

Meanwhile, in Micro-Cap Review, the company says its “intent is to mine the deposit instead of the equity market.’’ However, Ruby Creek has indicated in regulatory filings that it may require additional financing to fund operations until its Tanzanian operations commence production and are producing positive cash flow.

However, the company has said it can offer no assurances that it will achieve this goal.



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