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Life hasn’t gotten any easier for the operator of Canada’s largest gold mine.
Aerial image of the Detour Lake Gold Mine
2013 should have been a good year for Detour Gold (TSX:DGC), the Canadian company that started commercial production at its Detour Lake mine in northern Ontario, officially, on September 1. While that in itself is a significant achievement for any gold company, investors are not in a celebratory mood.
Detour Gold is down 85 percent year to date, well off of its 52-week high of $26.50, and nowhere near the heady peak of $37.81 seen in September, 2011, when Detour was making all the right moves toward its goal of becoming a significant mid-tier gold producer with an outstanding deposit.
Of course, investing in a gold producer rather than an explorer will not yield the 10-bagger every gold investor dreams about, but neither should such an investment be expected to go so negative, even in today’s gold price-challenged environment. Yet that is exactly what happened to Detour Gold and now it appears that the captain steering the ship has been made to own up to the miserable stock performance.
Panneton quits
On Monday Detour Gold announced that its president and CEO, Gerald Panneton, has resigned, and that its chief financial officer, Paul Martin, will fill in until a replacement can be found. In a press release, the company did not offer any clues as to why Panneton quit, saying only that its board of directors wished to thank him for heading up the company since 2006.
“On behalf of the Board, I wish to extend our genuine appreciation for his dedicated service which has been instrumental in bringing Detour Gold from its early years as an exploration company, through the development of the Detour Lake gold mine and, ultimately, its achievement of commercial production on September 1st,” executive chair Michael Kenyon said in a statement.
However, investors quite rightly saw Panneton’s departure as a loss of confidence in the company, and they dumped the stock in droves. According to the Globe and Mail, DGC lost 30 percent of its value on Monday, hitting $2.97, lower than Detour Gold’s 2007 IPO price of $3.50 a share, before recovering to $3.77. On Tuesday, a down day for gold and gold stocks, DGC continued to slide, finishing the day minus 7.4 percent at $3.49.
The Globe quotes Panneton as saying that “It would be fair to say that none of us are satisfied with the share performance. What we need to do is to deliver on our operating parameters to improve that situation.”
No slouch of a deposit
It certainly isn’t the value of its property that has investors shying away from Detour Gold. The Detour Lake mine hosts 15.6 million ounces of gold reserves, making it one of the largest gold mines in North America. The open-pit operation is projected to produce, on average, 657,000 ounces annually for the next two decades, or longer, if exploratory drilling is able to extend the deposit along strike and at depth, reads a project page on Detour Gold’s website.
But costly to mine
However, recent results show that Detour Gold is currently under-producing and its mine is costly to operate. According to its third-quarter results, Detour Lake produced 75,672 ounces in Q3, at an average cost of $1,214 per ounce. While gold prices last quarter were higher than the $1,242 mark reached yesterday, the ever-more razor-thin margins are not inspiring investor confidence.
And, like other gold producers, Detour Gold has been forced to revise its production forecast amid weaker bullion prices. The company now expects to produce between 240,000 and 260,000 ounces in its first year of production, compared to an earlier estimate of around 270,000 ounces.
Detour Gold defended its high start-up costs, saying “these costs are reasonable as the operation has not yet reached throughput design capacity of 55,000 [tonnes per day]. Operating costs are expected to gradually decrease as the Company continues to improve the efficiency of the operation.”
Analysts weigh in
Analysts covering Detour Gold seem to agree that its liquidity is a concern. At the end of the third quarter, the company had about C$161 million in cash and short-term investments. But according to Paradigm Capital, the balance is getting tight at prices below $1,300 per ounce, and “has become critical” with the current drop to around $1,250. In a research note, Paradigm said it expects at current spot gold prices, Detour Gold’s cash would be depleted by the end of 2015 and that if gold drops to $1,200, cash would be exhausted by the end of 2014.
Paradigm also makes note of the $650 million in debt hanging over Detour Gold. “The timing of this downturn in the gold price has occurred at pretty much the worst possible time for Detour Gold,” the firm stated.
Canaccord Capital was more negative in its assessment, revising its target price from $8.00 to $2.50 and recommending that investors sell the stock. Citing concerns over grade and ramp-up timelines, Canaccord said it believes “a prudent approach would be to materially discount the previous mine plan.” The firm also said it expects further share dilution through a $235 million equity raise, which it expects will be necessary for Detour to reduce its debt levels and meet short-term obligations.
However, the Globe quoted Martin as saying that the company is not anticipating raising more equity at this point, having brought in $176 million through a share offering in June.
BMO Research cautioned that Detour’s financing needs cannot be adequately assessed without seeing the 2014 mine plan and budget which is currently underway. However, BMO said it expects the company to have adequate cash and working capital near-term, without doing a financing. It continued to rate Detour Gold “outperform”, but reduced its target price to $9.50 from $12.
Securities Disclosure: I, Andrew Topf, hold no direct investment interest in any company mentioned in this article.