Detour sinks on CEO’s exit

Detour Gold’s (TSX: DGC; US-OTC: DRGDF) CEO and founder Gerald Panneton has resigned without the company providing an explanation for his sudden departure, sending shares spiralling amid speculation that it may need more funds to ramp up its relatively new gold mine.

Detour fell nearly 33% on the announcement to a yearly low of $2.88 before closing Nov. 25 at $3.77. The company’s shares have lost 85% year-to-date, which was likely a factor in Panneton’s departure.

The Toronto-based gold producer has named chief financial officer Paul Martin as interim CEO, while James Mavor, Detour’s vice-president of finance, will serve as chief financial officer, while the company searches for a new CEO.  

In a brief release, Detour’s executive chair Michael Kenyon thanked Panneton for his contributions to the company since 2006. Penneton, a veteran geologist, was instrumental in developing the company’s Detour Lake gold project in northern Ontario into a mine that reached commercial production early this September.

Kenyon said he believes the current management will advance Detour Gold’s objectives despite the “near-term challenges.” These goals include expanding the Detour Lake mine to nameplate capacity, completing a life-of-mine and reserve update in early 2014, and publishing a new technical report. Meanwhile, the firm will work on finalizing its 2014 budget.

Desjardins analyst Michael Parkin described the resignation as “negative,” noting the company “is tasked with ramping up the large Detour Lake mine to full capacity, and we view any significant change in the management structure during a ramp-up period as potentially problematic.”

Parkin predicts the gold price needs to average at least US$1,300 per oz. next year for Detour to avoid raising more funds. He estimates that at current gold prices, the company may need to arrange US$70 million to US$100 million in funds over the next year, assuming it passes the September 2014 deadline for the completion test attached to its $90-million credit facility.

He contends that if the producer fails the test — which requires certain mining and milling rates, among other requirements — it will need to repay the loan, further stressing its balance sheet.

On a positive note, Parkin is pleased that Pierre Beaudoin —the company’s current chief operating officer — remains in his role, as he believes Beaudoin is an important part of the ramp-up. 

BMO analyst John Hayes agrees, noting that if Beaudoin remains at his post, “there should be no disruption to operations.” He adds that BMO Research spoke with Martin and Beaudoin, and was told there were “no issues” with the Detour Lake mine or “discussions about a near-term financing.” Hayes says Detour should have enough cash and working capital in the near-term. 

Detour ended the September quarter with US$156 million in cash and equivalents and US$120.6 million in working capital. Hayes projects that at the current spot gold price of US$1,242 per oz., the company should have a working capital of $52 million at the end of 2014. Detour will need to finish its 2014 budget before it can fully assess its “potential financing needs,” the analyst adds.

 Hayes has cut his target price to $9.50 from $12, partly to reflect the lower spot gold price. He maintains a “speculative outperform” rating on the stock.

Detour is targeting 2013 gold production of 240,000–260,000 oz., down from 270,000 oz. earlier, with expected total cash costs of US$1,100 per oz.