Detour on track for production in early 2013

CIBC mining analyst Cosmos Chiu, who recently returned from a site visit to Detour Gold’s (DGC-T) gold project in northern Ontario, forecasts first production at the mine in February 2013 with commercial production after the mid-year mark, and has a twelve-to-eighteen month price target on the company of $42 per share — significantly higher than its current $25.90 per share trading price.

“We came away from the mine tour more comfortable with the development,” Chiu and fellow analysts Barry Cooper and Kevin Chiew, who also cover the company, wrote in research note after the analysts’ tour on Aug. 24. “There are numerous indications that care had been put into its design, including the parallel grinding lines, the placement of the secondary crushers after the crushed ore stockpile, and the general flow of the plant.”

The analysts also pointed out that the company has enough resources to pay for the remaining pre-production capex of about $380 million over the remainder of the year. Detour Gold has a cash position of about $462 million and a yet-to-be finalized line of credit worth $100 million.

And based on the net asset value and the earnings power of the Detour Lake project, the company’s shares are also “very attractively priced” the analysts continued.

“Once built Detour Gold will immediately move into intermediate producer status by passing the junior producer stage,” the research note outlines. “We think that this size of production enjoys a sweet spot amongst investors who see it large enough to be liquid and meaningful yet small enough to provide future growth.”

The analysts also reason that the next phase of development could be expanding the mine through organic growth. “A scaleable project can appeal to both investors as well as corporate suitors, which may find this opportunity in a safe haven a target for consideration,” they argue.

The Detour Lake project near the town of Cochrane has a 15.6 million oz. reserve at an average reserve grade of about 1 gram gold per tonne.

According to CIBC the company plans to target operating with four shovels and twenty trucks by the end of this year and as of July 31 Detour had already mined 8.5 million tonnes of overburden/till, 3.2 million tonnes of waste and 0.3 million tonnes of ore. The company also targets having as much as 3 million tonnes of ore at an average grade of 0.85 gram gold available for processing before the start of operations, the analysts note.

Commercial production in 2013 should reach about 250,000 oz. gold, they add. And when non-commercial ounces are thrown in, total production probably will be closer to 350,000 oz., they say.

In terms of costs, Chiu and his colleagues forecast that in the first year cash costs likely will come in at about $26.50 per tonne of material milled, which compares with Osisko Mining’s (OSK-T) $28.50 per tonne in the second quarter. But they expect that costs on a per tonne basis at Detour Lake will fall to about $20 with economies of scale and after scaling the operational learning curve.

“With lower than average life of mine head grades in 2013, we think investors should be thinking that costs are likely to be about US$1,000 per oz. gold for next year before efficiencies materialize in 2014 and costs drop below US$800 per oz. Sub US$700 per oz. costs should be expected for life-of-mine figures, but we do not expect sub US$600 per oz. costs during the life of the operation.”

John Hayes of BMO Capital Markets estimates life-of-mine production of about 14.1 million oz. gold at an average total cash cost of US$605 per oz. gold. Production is expected to average about 650,000 oz. gold over a mine life of about 22 years. At a spot gold price of US$1,670 per oz., Hayes notes, Detour’s shares are trading at a price to net asset value (NAV) of 0.73 times (at a 27% discount) to the 10% NAV estimate of US$36.72 per share. At spot gold, he continues, intermediate producers within BMO Research’s coverage trade on average at a price to NAV of about 1.02 times tothe 10% NAV.

Over the last year Detour has traded within a range of $18.45 and $39.95 per share. The company has about 112.6 million shares outstanding.