Detour gains 7% after achieving 2014 guidance

Detour Gold (TSX: DGC; US-OTC: DRGDF) has started the year off on the right foot. It shares rose 7% after it reported hitting its 2014 operating targets and provided a conservative guidance for 2015.

For the December quarter, the gold miner produced 116,770 oz., bringing the full-year output to 456,634 oz., within the previously revised 450,000 to 480,000 oz. range. Total cash costs for the quarter are estimated at US$875 per oz. sold and at US$930 per oz. annually, within the expected US$900 to US$975 target.

“We’ve delivered on the guidance and made significant strides forward in 2014,” Paul Martin, Detour’s president and CEO, said on a conference call. The company has had its “fair share of challenges” Martin admitted, before applauding his team for working through them.

The firm has struggled to ramp up its Detour Lake gold mine in Ontario since it first poured gold nearly two years ago, cutting its output guidance three times in 2013 and once in 2014. Last July, Detour reduced the top end of its output target by 20,000 oz. and bumped up its total cash cost target by US$100 per oz.

Despite the revisions, the operation has shown signs of improvement. And investors have been taking note, driving up Detour’s shares by 131% last year.

In the fourth quarter, the mill processed 4.7 million tonnes at a 0.85-gram gold head grade. Mill throughput averaged 51,142 tonnes per day, with 51 days above design capacity of 55,000 tonnes per day. This compares to an average mill throughput of 49,186 tonnes per day in the third quarter.

Over the two quarters, mill availability climbed 2% to 83%, but was still below expectations, while average mining rates increased nearly 4% to 214,000 tonnes per day.

The higher mining rate came from a 40% jump in drill productivity from September to December, leading to an improved drilled-and-blasted inventory, the company explains. A 10,000-tonne increase in the annualized mining rate translates into a 10,000 oz. increase in production, it adds.

In December, the mill reached 99% of its design capacity, with 87% availability, while mining rates averaged 234,000 tonnes per day — up from the third quarter’s average of 206,000 tonnes per day.

Martin said the improvements in 2014 have given the company a “high level of confidence,” and  that “we have the right sized mill and the ability to exceed nameplate capacity once we finally wrap our arms around obtaining higher mill availability.”

This year Detour is guiding gold production of 475,000 to 525,000 oz., with the heaviest output of up to 155,000 oz. expected in the fourth quarter, as it accesses higher-grade ore.

Total cash costs are between US$780 and US$850 per oz. sold, with all-in sustaining costs of US$1,050 to US$1,150 per oz.

“Our initial thoughts are that the production guidance is not aggressive and that the market will be pleased with it,” Desjardins analyst Michael Parkin writes.

To hit the midpoint of that range or 500,000 oz., Parkin says Detour would need to mine 238,000 tonnes per day, “a mere 2%” more than its average mining rate in December. Meanwhile, the mill would need to process 19.7 million tonnes of ore, 54,000 tonnes a day, at a grade and recovery of 0.86 gram gold and 91.5%.

Martin acknowledges the 2015 production forecast is conservative, but says the company can reach the upper end of that target, while hitting the lower end of its cost guidance. He says that the positive reconciliation of the block model in 2014 and the higher milling rates are among several reasons that validate the company’s original design criteria. Detour has also processed the low-grade stockpile fines, which could give it profitable ounces that are not in the current mine plan. 

The company, which realizes most of its operating and capital costs in Canadian dollars, could benefit from a weaker loonie and dipping diesel prices, Martin adds. A 1¢ change in the exchange rate moves Detour’s cash position by U$4 million. Similarly, a 10% change in diesel price generates the same impact.

Detour has budgeted 2015 sustaining capital expenditures of up to US$100 million — above analysts’ average estimate of US$87.4 million. Parkin says the waste-to-ore strip ratio of 3.5 to 1 could explain the higher spending, given the firm expects capitalized stripping costs of US$20 to US$25 million in 2015.

The 2014 financial results — including a reserve and resource update — should be due out in March, followed by an updated mine plan in the year’s second half.

Detour is set to pour its one-millionth gold ounce in the third quarter. “This is a tremendous milestone, by any measure by any company,” Martin said.

On the operating results, the miner gained 85¢, or 12%, to close Jan. 15 at $12.30 per share. It exited 2014 with cash and short-term investments of US$135 million.

Parkin has upgraded his price target to $15, from $13.25. He has a “buy” on the stock.