Detour Gold determined to go it alone, as reserves pushed to 14.9M oz. gold

Toronto-based Detour Gold (DGC-T) will resist takeover attempts as the junior focuses on increasing and developing its resources at the Detour Lake project in northern Ontario, already the largest pure gold play in North America, says president and CEO Gerald Panneton.

A recent announcement that drilling had increased gold reserves by 31% to 14.9 million oz. at Detour Lake fueled speculation that seniors including Barrick Gold (ABX-T, ABX-N), Goldcorp (G-T, GG-N) and Agnico-Eagle Mines (AEM-T, AEM-N) may be angling to add the growing resource to their assets.

If inferred resources and other pockets of mineralization can be converted to reserves, Detour Lake would swell to 25.6 million oz. gold, a whopper by any company’s measure.

“We are pleased to be a target, but the company is not for sale,” Panneton told The Northern Miner in mid-February. “We have top-notch people working on the project, many from senior companies, and we are very comfortable building the project ourselves.”

If a takeover attempt does materialize, the decision to sell will rest with shareholders, two in particular. Paulson & Co., the New York-based hedge fund, holds 12.8 million shares, or 15.4% of the company, while Fidelity Management holds another 8%.

“The message I am getting from shareholders is: ‘don’t sell the company until we are in production,'” said Panneton, who is expecting Detour Lake to pour its first gold in early 2013.

In the meantime, the junior is in full development mode. Since last November, Detour has spent $100 million developing the project and will spend another $400 million before this year is out. With $970 million in cash raised last year, the company is well financed to complete the work. Caterpillar‘s (CAT-N) financial services arm Cat Financial has agreed to underwrite up to US$105 million to fund the acquisition of mining equipment.

Detour Lake is on track to process 60,000 tonnes per day based on a gold price of US$850 per oz. used in the feasibility study, but that rate could expand to as much as 100,000 tonnes per day if the gold price remains above US$1,000 per oz. when operations begin.

Panneton, determined to fund any expansion of the processing plant from cash flow rather than equity, is prepared to be patient.

 “Our goal is to be in the position in 2013 to have our permitting completed so that we can make a decision depending on the gold price,” Panneton told analysts in a conference call detailing the reserve increase. “At $850 (per oz.) gold we will not go ahead with the expansion.”

Indeed, the low-grade deposit – just like any other large tonnage, low-grade resource – is highly sensitive to gold prices. If gold were to dip below the US$625-per-oz. breakeven price, it wouldn’t be the first time price volatility determined the operation’s fate. Placer Dome mined the deposit in the 1980s as an open pit, but had to cease operations in 1987 when gold fell below the US$600-650 per oz. range used in the feasibility study. The major reopened the mine as an underground operation in 1988, but closed it again 10 years later when gold tumbled below US$275 per oz.

Detour acquired the property from Pelangio Mines in January 2007 with the plan to develop a large open-pit mine. In just over three years, the company produced a positive feasibility study for a 649,000-oz.-per-year mine with help from an explosive gold price that more than doubled from US$630 per oz. to US$1,300 per oz. during the same period.

The provincial government granted the permit to commence construction and establish a power line in late 2010, allowing Detour to begin construction of a 1,000-person camp and clear the right-of-way to install the first 135-km segment of the power line from the site to the Island Falls power station. First Nations groups, including the Wahgoshig and Moose Cree, have also given the $1-billion project their blessings.

Investors are clearly impressed with the recent progress. During a mid-winter lull when many gold stocks were flatlining or in decline, Detour’s share price jumped from $24 to $30 apiece.

The company will spend $14 million on exploration this year. Half will be devoted to expanding reserves on the main deposit, while $3 million will be spent on the Block A property held in a 50-50 joint venture with Trade Winds Ventures (TWD-V). The remainder will be used to investigate high-grade targets on Detour Gold’s 500-sq.-km exploration permit.

The Block A property lies immediately west of the proposed pit along the same Sunday Lake volcanic-sediment contact that hosts Detour Lake. A recent resource calculation for Block A outlined an open-pittable, indicated resource of 1.9 million oz. gold and an inferred resource of 762,000 oz. at US$1,000 per oz. gold. This year’s 30,000-metre drill program is designed to increase confidence levels in the pit shell and test other targets.

More regional exploration will focus on targets within 40 km of the mill site, particularly on the Lower Detour deformation zone to the south of Detour Lake.

“Our property in the south follows about 40 km along a similar contact of volcanics and sediments that could be a mirror image of the northern break,” says Panneton. “It is not easy to access – you need a winter road or helicopter access in the summer – but it’s within 30 km of the mill, so it is prime for us.”

Historical drilling on the Lower Detour zone, including exploration drilling completed by former mine owner Placer Dome, is sparse but includes several high-grade intersections of up to 58 grams gold per tonne over 3 metres. A Mobile Metal Ion (MMI) survey of roughly 5,000 samples combined with a 60 line-km induced polarization (IP) survey currently underway will provide drill targets.

Panneton says that, ideally, exploration along the structure will uncover a high-grade deposit (say 2 million tonnes at 10-15 grams gold) that could be sent to the mill at Detour Lake without having to increase processing capacity.

Other exploration work budgeted for this year includes a 75 line-km IP survey at the western end of the Detour Lake property to follow up on positive MMI results from 2010. And a few kilometres east of the proposed mine along the same structure, Detour Gold is running a 60 line-km IP survey to be followed by a minimum of 2,500 metres of drilling on its way to earning a 50% interest in the Sunday Lake property from Conquest Resources (CQR-V).

– The author is a freelance writer specializing in mining issues, and principal of Toronto-based GeoPen Communications, www.geopen.com.