Detour Gold slammed by revised mine plan

Shares of Detour Gold (TSX: DGC) plunged 30% after the company forecast life-of-mine costs could rise at its Detour Lake open-pit gold mine in Ontario, 300 km northeast of Timmins.

The preliminary cost review — which will be ready in June — puts life-of-mine (2018–2040) cash costs at US$810 to US$850 per oz., up from US$747 per oz. envisioned in the 2017 mine plan.

The new mine plan also delays development of the north pit to 2026, which defers 150,000 oz. gold to beyond the 2019–2023 time frame.

To balance out near-term production, the revised mine plan calls for an increase of 50,000 oz. gold per year from 2019–2020 (brought forward from the 2021–2022 time frame envisioned in the March 2017 mine plan). This could “smooth” projected gold production over the 2019–2023 period to an average 600,000 oz., lowering the variation in production under the 2017 LOM plan.

The company also negatively revised its 2018 guidance to reflect the mine sequencing changes and projected lower mill throughput, higher operating costs and more capital expenses. Free cash flow this year could reach US$55 million, which is down from US$115 million.

An ore-storage structure at Detour Gold’s Detour Lake gold mine. Photo by Trish Saywell.

This year the company expects gold production of 595,000–635,000 oz., down from the previous guidance of 600,000–650,000 oz. gold. Total cash costs could reach US$700 to US$750 per oz., up from US$670 to US$730 per oz., while all-in sustaining costs are expected to jump to US$1,200 to US$1,280 per oz., from the earlier guidance of US$1,050 to US$1,150 per oz. gold.

The news, released after markets closed on April 26, sent Detour’s shares down 30%, or $4.35, to $10.05 the next day, with 7.6 million shares traded.

On April 30, the company’s shares fell to $9.28, down 76.5¢, or 8%, with 4.6 million shares traded. Detour hit a 52-week low of $9.11 per share on May 1, but traded at $10.36 at press time on May 3. (The company’s 52-week high was $18.88 per share in May 2017.)

“I appreciate that we have changed or modified our mine plan numerous times in the past,” Paul Martin, Detour’s president and CEO, said on a conference call on April 27. “However, this has been the result of two things: The addition of West Detour in 2016 into reserves, and secondly, for permitting challenges related to the expanded footprint in 2017, and now in 2018. While the permitting challenges are frustrating, it is the reality of operating a large open pit in today’s world.”

The deferral of the north pit development (and 150,000 oz. gold) to 2026 (development was previously expected to start in 2019) was done “to reflect the reality that we still do not have full alignment with Moose Cree,” Martin said. “Simply said, we need a mine plan that reduces the risks associated with relying on obtaining required permits within a one- to three-year time frame. Otherwise, we risk further changes to the mine plan.”

On a more positive note, the company has “modest” net debt of $108 million, Martin said, and Detour will continue to whittle it down, as it has over the past two years. (In the first three months of 2018, Detour repaid $10 million of debt and ended the quarter with cash and equivalents of $152.5 million.)

Detour Gold general manager of operations Chuck Hennessey (left) with president and CEO Paul Martin in the processing plant at the Detour Lake gold mine in Ontario. Photo by Trish Saywell.

“There are no financing pressures, and the mine generates in excess of $1 billion over the next six years — so we expect no concerns from our banking syndicate, given our strong covenant performance.”

Reactions from mining analysts varied.

While Barry Allan of Laurentian Bank Securities kept his target price on the stock at $20 per share and argued that the market “assumed a worst-case scenario in the absence of detailed cost guidance, and has unduly penalized Detour’s shares,” other analysts were decidedly more negative.

“The investor base has lost all confidence in management, and with modest free cash flow at current gold prices in the near-term and no real meaningful growth, most investors are exiting,” Kerry Smith of Haywood Securities said in a note to clients on April 30. “Given the inability over the past five years to achieve benchmark costs and productivities, Detour no longer deserves a premium multiple.”

Smith cut his price target on the stock from $26 per share to $15.50.

Brian Quast of BMO Capital Markets lowered his target price on Detour’s shares from $26 to $15, while Farooq Hamed of Raymond James cut his from $20 to $16.

“Looking past the production profile change, the preliminary guidance given on the revised mine plan suggests that the previous mine plan reflected optimistic operating parameters,” Hamed said in his note to clients, adding that given the decline in the stock price, “There may be a value or potential acquisition argument to be made. However, we believe uncertainty ahead of the full LOM release in June will continue to weigh on the stock.”

Inside the Detour Lake plant in Ontario. Photo by The Northern Miner.

Rahul Paul of Canaccord Genuity lowered his price target to $21, from $24 per share. “The company estimates a $0.8 billion to $1.5 billion reduction in pre-tax LOM cash flow” at US$1,300 per oz. gold, 1.25 C$/US$,” the analyst notes in his report.

“While indicating that further analysis with regards to LOM capital and operating cost efficiencies is required, management doesn’t expect material changes to preliminary metrics released,” Paul said. “Most notably, the revised plan features 3% lower head grade, slightly lower recoveries, 5% lower production and around 10% higher costs, over the period.”

In addition to breaking the news about its revised mine plan, Detour also reported first-quarter results.

Despite lower mill throughput (mining rates averaged 250,000 tonnes per day, down from 2017, due to the loss of its rope shovel for 50 days and lower availability of the primary crusher) gold production reached 150,000 oz. on the back of record head grade of 1.17 grams gold per tonne. Total cash costs were US$744 per oz. gold and all-in sustaining costs came in at US$1,072 per oz. gold.

Earnings from operations in the three months ended March 31 reached US$51 million and net earnings were US$9.9 million, or 6¢ per share. Adjusted net earnings were US$28.2 million, or 16¢ per share.