Detour expects lower 2014 cash costs

Detour Gold (TSX: DGC; US-OTC: DRGDF) estimates production this year to double and cash costs to improve at its Detour Lake gold mine in northeastern Ontario.

The Toronto-based producer — which had a tough run in 2013, with its gold count falling below forecasts, an eroding share price and a long-time CEO resigning — is targeting output of 450,000 to 500,000 oz. this year at total cash costs of US$800 to US$900 per oz.

Commenting on the guidance, Desjardins analyst Michael Parkin said the production target is in line with his and other analysts’ estimates, but the cash-cost estimate exceeds both his and consensus expectations.

“We were expecting total cash costs of US$992 per oz., while the Street was looking for total cash costs of US$1,098 per oz.,” he writes.

Parkin has increased his $6.75 target to $7.50 and rating to “buy speculative” from “hold speculative.” 

The main cost reducer comes from the six-year power contract that Detour recently finalized with the Ontario Power Authority. The contract, part of the province’s Industrial Electricity Incentive Program, will keep Detour’s electricity rates fixed at 5¢ per kilowatt hour, down from 8¢ per kilowatt-hour before. This translates into cost savings of $20 million a year, or a minimum of $120 million over the next six years.

The single-asset miner says production during the second half of the year should be 20% higher than the first half, as the mill reaches design capacity of 55,000 tonnes per day in the fourth quarter. It adds that the higher-grade ore from Domain 2 and 11 would deliver half of the mill feed in 2014.

If all goes to plan, the company assumes it can process 19 million tonnes averaging 0.87 gram gold per tonne this year to generate 490,000 oz. The waste-to-ore ratio is estimated at 3.3 to 1, and gold recovery at 92%.

“We note that Detour’s September 2012 mine plan outlined a grade of 0.98 gram gold per tonne for 2014, and the reserve grade at Detour Lake is 1.03 grams gold. We believe there is room for the company to positively surprise [the market] on throughput and grade in 2014,” Haywood Securities analyst Kerry Smith wrote in a note. He has a “buy” recommendation and an $8.50 price target.

Detour updated its mine plan and year-end 2013 reserves and resources in early February, and they were little changed from September 2012 estimates.

At the end of 2013, Detour Lake had gold reserves of 15.5 million oz. from 476 million tonnes grading 1.02 grams gold, at a US$1,000 per oz. gold price.

Last year, the company mined 12.2 million tonnes, of which it milled 11.2 million tonnes averaging 0.75 gram gold with an 86% gold recovery. It produced 232,287 oz., missing the revised 2013 forecast of 240,000 to 260,000 oz., chiefly due an unplanned mill shutdown in December, which prevented the company from processing the higher-grade ore.

From last year’s production, 105,898 oz. gold was produced after the mine reached commercial production in August.

Annual gold sales were 212,522 oz. at an averaged realized price of US$1,318 per oz. Total cash costs are estimated at US$1,100 per oz. The actual figure will be released with the full-year financials in March. 

Detour spent $196 million to sustain the mine last year. It projects 2014 expenditures of US$131 million, including US$40 million to improve the tailings, US$35 million in capitalized stripping costs and US$33 million to buy mining equipment.

The firm is also planning a small exploration drill program on the three mineralized zones found on the Lower Detour Area in 2013, says Laurie Gaborit, director of investor relations. The area is 6 km south of the Detour Lake mine and returned high-grade gold intercepts last year, including 4.4 metres of 17.3 grams gold.

 “Our strategic goal on the property is to find a high-grade deposit . . . then we can truck the ore to the mill because we already have the infrastructure in place,” Gaborit adds. 

Response to the 2014 guidance was relatively muted, with the stock adding 3¢ to close at $6.18, down 73% from its 52-week high of $23.51 on Feb. 1, 2013.