Detour Gold slumps on weak 2014 outlook

Detour Gold (TSX: DGC; US-OTC: DRGDF) took a beating after publishing its first commercial earnings at the Detour Lake gold mine in northeastern Ontario, with its shares plunging 20% to a yearly low of $6.16, before closing at $6.35. But that drop likely resulted from the company’s move to lower its 2013 production guidance and provide a weak 2014 forecast.

 Detour, which is optimizing its first mine, reported a third-quarter net loss of US$11.8 million, or negative US9¢ per share — slightly better than the negative US15¢-per-share consensus. Adjusted earnings per share were negative US9¢, below BMO Research’s negative US5¢ estimate, BMO analyst John Hayes noted.

Revenues for the quarter came in at US$100.5 million from gold sales of 75,600 oz. at an average realized price of US$1,340 per oz. Of those sales, 24,700 oz. came from commercial production, which was declared on Sept. 1, 2013.

In September Detour recorded cash costs of US$1,214 per oz. and unit costs of US$22.48 per tonne milled. The new producer says these costs are “reasonable,” as the operation is still ramping up. It notes that operating costs should improve gradually, as mill throughput increases to full capacity of 55,000 tonnes per day. 

During October throughput rates averaged 45,000 tonnes per day, the company says, and gold production was 29,541 oz. from 1.4 million tonnes grading 0.72 gram gold per tonne. Gold recoveries averaged 91.6%.

“Recoveries were at feasibility level for October despite the lower grade of ore processed, which in our view, bodes well for the life-of-mine recovery,” Hayes says. He adds that what may be concerning is the company’s move to trim its 2013 production guidance and release softer-than-expected 2014 numbers. 

Detour anticipates producing 240,000 to 260,000 oz. gold in 2013 compared to 270,000 oz. earlier, with total cash costs at US$1,100 per oz.  

In 2014 it forecasts generating 440,000 to 500,000 oz. gold at all-in sustaining costs (AISC) of US$1,150 to $1,250 per oz., whereas analysts had estimated higher production averaging 535,000 oz. at lower costs. “At the mid-point of the range, production is 9% below BMO Research’s estimate of 515,519 oz., while costs are 15% above our AISC estimate of US$1,043 per oz.,” Hayes says.

The analyst points out that several factors could have dampened the company’s 2014 numbers, including “timing issues with access to higher-grade ore . . . [and] lower mined grades due to mining dilution or slower ramp-up on mill throughput.”

Detour intends to publish a more detailed guidance in January 2014 as well as an updated mine plan for Detour Lake in the first quarter. The company will decide whether to expand the mill from 55,000 to 61,000 tonnes per day at the end of 2014. 

In mid-October Detour settled three construction liens filed against it by North America Construction for $24.3 million, of which it has already paid $19.3 million, with payments of $2.5 million due in June 2014 and June 2015.

Detour had US$156 million in cash and equivalents at the end of September.

Hayes rates Detour Gold as “speculative outperform,” but has lowered his target price to $12, from $16.