Detour’s bright future holds 11.4M oz. gold

A newly released feasibility study on Detour Gold’s (DGC-T, DRGDF-O) Detour Lake gold project in northeastern Ontario has made it “one of the largest gold operations in Canada and one of the largest investments in the province,” company’s president and CEO Gerald Panneton said in a conference call on May 25.

The study updated the project’s reserves to 347.5 million tonnes grading 1.02 grams gold per tonne for 11.4 million oz. of contained gold — a 30% increase from the 8.8 million oz. gold indicated in the prefeasibility study.

“With 11.4 million oz., the Detour Lake deposit is Canada’s largest undeveloped gold reserve and ranks sixth among the top ten largest gold reserves in North America,” Panneton said in a press release.

The deposit has another 510.8 million measured and indicated tonnes grading 1.08 grams gold for 17.7 million oz. gold, and 133.6 million inferred tonnes at 0.80 gram gold for 3.4 million oz. gold. The resource was based on a cutoff grade of 0.5 gram gold.

According to the study, the company could build a 55,000-to 61,000-tonne-per-day open-pit mine at Detour Lake that would produce 649,000 oz. gold per year over 16 years, for an initial price tag of US$992 million.

Detour plans to start project construction late this year after obtaining the necessary provincial permits and agreements with the Aboriginal communities. Panneton says he sees no problems in getting the agreements as the company maintains good relations with these communities, and would create about 500 jobs over the 16 years.

At a base case gold price of US$850 per oz., the study calculated a pretax internal rate of return (IRR) of 14.4% and a pretax net present value (NPV) of US$1.03- billion using a 5% discount rate, with a payback period of 5.9 years. The mine is expected to generate $4.1 billion in pretax operating cash flow at US$850 per oz. Using a 5% discount rate, Detour Lake has an after-tax IRR of 12.4% and an aftertax NPV of US$691 million.

The study envisages the use of a conventional gravity, cyanidation and carbon-in-pulp processing facility at the project. Detour Lake’s metallurgy is simple as the gold is mostly native which allows for good recovery, explains Panneton. The overall gold recovery rate is 91.2%.

Average operating costs over the life of the mine are pegged at US$437 per oz. gold, with a strip ratio of 3.3-to-1. Average production costs for the first three years would be US$386 per oz. with gold production totaling 1.9 million oz. for that period.

With $308 million cash on hand, the debt-free company says it could carry the development of the project through mid-2011.

Detour would then need to raise capital for the estimated US$580 million to sustain the project, of which nearly 65% would be spent in the first four years for mining fleet and tailings expansion, among other costs.

“There are a lot of different alternatives that we could use (for financing) that we keep in our back pocket,” Panneton says, noting the company is looking to raise 40-50% in equity and the remainder in debt.

One such option would be to issue 15 million to 20 million more shares, Panneton explains, however, stressing the fact he wants Detour to stay under 100 million shares outstanding.

The deposit sits in the Abitibi greenstone belt, 8 km west of the Ontario-Quebec border and 180 km northeast of Cochrane, Ont. It is infrastructure-supported with a road and rail access and an easy way in to the provincial electrical grid. Detour plans to build a 230-kilovolt transmission line from the mine site to the Pinard Transformer Station near Fraserdale, Ont., by using an existing 135 km right of way connection to the power grid.

For the study’s database, it included drilling data from pre-Detour Gold programs and its previous drilling programs that took place in 2007, 2008 and 2009, which amounted to 880,991 metres of drilling in 5,853 holes. Detour drilled 334,452 of those metres.

UBS Investment Research analyst Dan Rollins writes in a May 27 note: “Given drilling continues to indicate mineralization is open at depth and along strike to the west, we believe further reserves additions are likely and have assumed 1.1 million oz. will be added over the life of the project taking the mineable reserves to 12.5 million oz. from 11.4 million oz.”

He added that UBS increased its 12-month price target from $27.50 to $28.00 per share due to the positive feasibility study, maintaining a “buy” on the stock.

On news of the study, Detour Gold’s shares jumped 42¢ to close the day at $21.37 on 1.3 million shares traded. The company has a 52-week trading range of $8.29-$24.65 and 70 million shares outstanding.