Analysts give thumbs up to Detour’s new mine plan

A revised life-of-mine (LOM) plan that incorporates an additional mine face, enhances flexibility and further de-risks Detour Gold’s (TSX: DGC) Detour Lake gold mine in northeastern Ontario has elicited a round of applause from analysts surveyed by The Northern Miner.

The revised plan incorporates a second feed source from the West Detour deposit, reduces the front-end waste-to-ore strip ratio in the first nine years from 4.8:1 to 4.0:1 (eliminating 160 million tonnes of waste) and lowers the maximum mining rate from 140 million tonnes to 124 million tonnes. 

Plant throughput capacity will rise to 23 million tonnes post 2018, up from 22.3 million tonnes (post 2017), and the company will process 1 million tonnes per year of fines from low-grade stockpiles (LG fines) starting in 2019.

The company will also use the West Detour pit for waste and tailings.

“West Detour was the piece of the puzzle that we needed to make this work,” Paul Martin, the company’s president and CEO, says in a telephone interview from New York, adding that de-risking is “critical” for a single-asset company.

“The actual study concept started at the end of 2014, when we were looking at lower gold prices and wanted to reduce capital exposure, investment in the fleet and look at de-risking the operation, and lowering the mining rate,” he says. 

Mining the Detour Lake pit in parallel with the West Detour pit results in an optimal mine production plan, the company says, while processing LG fines adds a third ore source. 

Under the plan, the 23-million-tonne-per-year plant throughput capicity would consist of 60,000 tonnes per day from run-of-mine and 3,000 tonnes per day from LG fines. The plan assumes a gradual ramp-up between 2016 and 2019.

Mining rates could peak at 124 million tonnes per year over the mine life, with the next nine years at an average 114 million tonnes per year.

The biggest change from the prior study, Detour says, is an increase in mining costs over the mine life to $2.76 per tonne mined, compared with the previous $2.60 per tonne mined, mainly from lower assumed productivity and increased operating costs for the smaller West Detour fleet.

Capital costs over the mine life are forecast at $1.1 billion, excluding closure costs, of which $104 million is for West Detour. Capital costs over the next three years are an estimated $314 million, $80 million of which is for West Detour.

Adding the West Detour mining face and processing LG fines increases proven and probable mineral reserves 10% from 445.5 million tonnes at year-end 2014 to 514.3 million tonnes at year-end 2015.

The same day Detour announced its revised mine plan, it also provided guidance for 2016, forecasting that production would increase 12%, and all-in sustaining costs would decline 15%, using the midpoint of its guidance.

This year the company expects to produce 540,000 to 590,000 oz. gold at total cash costs per ounce sold of US$675 to US$750, at all-in sustaining costs of US$840 to US$940 per oz. Its guidance is based on a US$1,075 per oz. gold price, a U.S. dollar to Canadian dollar exchange rate of $1.33, a C75¢-per-litre diesel fuel price and C4¢-per-kilowatt-hour power cost.

The gold miner said it has set aside $12 million for exploration this year, of which $8 million to $10 million will be used for definition-drilling Zone 58N, which is also known as “Lower Detour,” an underground, high-grade gold target 6 km south of the processing plant.

In a research note, Eric Lemieux of PearTree Securities reasons that Detour could be an appealing takeover target.

“Recall the Canadian Malartic transaction by Agnico-Eagle and Yamana that highlighted the potential attractiveness of high-tonnage, low-grade operations when they achieve nameplate capacity,” the analyst writes. “We re-highlight that Canadian Malartic took two years to reach nameplate capacity and that Detour Gold began commercial production in September 2013. With the strong fourth-quarter 2015 results and the new mine plan …  Detour Gold could be an attractive acquisition target, as it has a similar evolution of de-risking.”

When asked to comment on Lemieux’s remarks, Martin retorted: “We’ve all gotten over being flattered that we’ve been a takeover target. We just stick to our business and let other parties do whatever they choose to do … we want to hang on to this asset for as long as we can, and we’re focused on building the next great Canadian mid-tier gold-mining company.” 

Martin added that the company is getting a positive reaction to the revised LOM plan from the analyst community, current shareholders and potential shareholders. “It obviously doesn’t hurt when your share price is performing well,” he continues. “We have the dubious distinction of being the fifth-largest gold producer by market cap at the moment, and we only have a single asset.”

A survey of five analysts showed that they raised their target prices on Detour after the company unveiled its mine plan.

Macquarie Research changed its target price on Detour from $21 to $23 per share; CIBC to $22 from $21 per share; Raymond James to $20 from $19.25 per share; Haywood Securities from $18.75 to $19.50 per share; and BMO Capital Markets from $16.75 to $17 per share.

At press time, Detour traded at $15.38 per share within a 52-week trading range of $9.08 to $17.12.

“Revisions in the new LOM plan include a weaker long-term Canadian dollar assumption, a lower price for diesel and electricity, a lower mining rate and the commencement of mining at West Detour in 2018, which increases the mine life by three years, and adds 1.5 million oz. of LOM production,” Brian Quast of BMO Capital Markets said in a research note.

“West Detour gives the company an additional mine face, which we believe enhances the robustness of the operation. The lower assumed mining rate helps reduce risk by lowering capital requirements and generally moderating the project.”

Cosmos Chiu of CIBC said in a note that the new LOM plan “delivers similar LOM production levels and operating costs to the prior LOM plan, but with lower operational risk [reduced maximum mining rate, lower strip in earlier years and use of smaller equipment] and greater operational flexibility [with multiple ore sources].”