Detour Gold taking the direct route towards production

The landscape around Cochrane Ontario is prototypical of the land in northeastern Ontario: a flat horizon dense with coniferous trees, broken only intermittently by a still black lake.

But once you pull up to the gates to Detour Gold’s (DGC-T) Detour Lake project, the tranquility of the northern landscape collapses in a swarm of cranes, bulldozers, pick-ups and back fillers.

It is the sort of industrial landscape one would only expect if a company was building Canada’s biggest gold mine – and in fact that is just what Detour is in the process of doing.

Once the rebar and poured concrete finishes taking shape Detour will have erected a facility equipped to process 55,000 tonnes of ore, with a ramp-up to 61,000 tonnes planned after four years. Gold production is set to get underway at the beginning of 2012 and will average 650,000 oz. of gold per year at cash cost of just US$437 per oz.

But Detour’s president and chief executive Gerald Panneton has his eye on an even larger numbers.

The buzz around the camp during a recent Northern Miner site visit was that with a gold price north of US$1,000 per oz. Detour will surely mill ore at a lower cutoff grade than that laid out in the feasibility study.

That study considered a cutoff of 0.5 grams per but Detour wisely decided to construct a mill capable of handling a cutoff 0.34 gram grams gold per tonne.

Panneton says the 0.5 grams was used with an eye towards maximizing revenue and generating a quicker payback period but with gold prices sitting at such lofty heights it can add 3 million oz. to its resources by simply dropping the cutoff grade.

“This is our new reserve in 2012 with US$1,000 per oz. gold,” Panneton says. “By January next year we can be at 18 to 20 million ounces of resources without changing the pit size.”

The inclusion of lower grade ore would also make mining ore more efficient as it would lower the mine’s project strip ratio to 2.2:1 from 3:1 and wouldn’t sacrifice much of the average grade that it has outlined at the current cutoff. The company says a drop in cutoff grade would put the average grade at 0.82 grams gold.

The project currently boasts proven and probable reserves of 449.5 million tonnes grading 1.03 grams gold for 14.86 million oz. of gold.

With such large reserves already outlined and much more likely on the way, it is little wonder that CIBC’s mining analyst Barry Copper wrote that Detour will not only be the largest gold producer in Canada but could become the country’s biggest of all time.

As for other exploration targets on the company’s massive 500 sq. km land package, Panneton is cool to the idea of expending too many corporate dollars on a hefty exploration drilling in the near term when so many ounces can be gained by simply optimizing a pre-existing pit.

“What’s the point of doing exploration unless you’ve already delivered on what you said you were going to do?” he asks rhetorically before emphasizing that the first phase of the $1.3 billion mine construction is on time and on budget.

A brief history of mine

While Detour is set to move more earth than has ever been moved at the site it is by no means the first company to mine here.

The former Placer Dome ran an open pit operation back in the 1990s – the water filled remnants of which can still be seen on the eastern flank of the pit outline.

But Placer had only limited success here because, Panneton says, it didn’t understand the true nature of the deposit.

“It’s a low grade deposit,” he says, “so whoever tried to mine high grade had problems. It’s easier to mine it as a low grade deposit.”

Detour’s ties to the project begin with Pelangio Mines which began the acquisition from Placer Dome in 1998 after Placer had closed the mine because head grades weren’t good enough for underground mining.

Gold was below US$300 per oz. and Pelangio was able to by the project for just $1.5 million, money it borrowed from Franco Nevada (FNV-T), to be repaid in royalties and exploration expenditures.

The company found a way to keep it together and hold on to the project through the lean years between 1998 and 2002, when the gold mining business was out of fashion.

Then the worm turned, the commodities secular bull run began and Pelangio got to work on re-envisioning the deposit.

The idea that the site hosted a small open pit with an untapped underground mine was turned on its head as Pelangio believed the only way to mine it was via massive open pit.

But new visions brought new obstacles as the company lacked both the capital and the expertise to embark on such a project.

So the Hunter Dickinson Group was brought in, or more precisely Gerald Panneton, Detour’s current chief executive.

Panneton built his reputation as a late stage exploration specialist for Barrick Gold (ABX-T, ABX-N) and he quickly confirmed that Detour Lake had the potential to yield far more than the 1.7 million ounces that were currently in the resource estimate.

During 2006 Panneton got to work on re-calculating a resource using previously drilled core interpreted with a new model. The endeavor proved a success as the updated estimate bolstered resources to 2.03 million oz. of gold.

The update proved that Panneton was on the right path and soon Detour Lake would be on the fast track towards becoming a mine once more.

A year after the resource update Pelangio sold the deposit to Detour Gold for $5 million in cash and 20 million shares (which represented a 50% interest in Detour) at the time the shares were worth $3.50. That meant the initial $1.5 million investment was now worth $75 million.

Not a bad return on a project that Placer had all but thrown onto the scrap heap.

Still room to explore

And while Panneton’s focus is currently on constructing a mine and optimizing the current pit, that doesn’t mean he isn’t bullish on the exploration potential of the area in the long term.

“We control 550-km of greenstone belt,” he says, “It’s like having the land between Val d’Or and Noranda. So we don’t need to buy anything because we can find gold on our own ground.”

And should the region bear more fruit than the current deposit, Detour will have little trouble making the gold extraction economic.

“We think and we hope it’s like the Abitibi – a big mine and then small ones around it,” Panneton says. “Anything we find within 30-km of the mill is economic, so the first step was to build the mill and the next step is to find every freaking bit of gold within 30-kms.”

In the nearer term, however, Detour is quite content to march along the deposit’s western extension which remains open in that direction.

Indeed the lower cutoff grade isn’t the only route to more ounces at the project as Placer discovered what is known as the QK zone further to the west and plunging to deeper depths than where the current reserves are situated.

Detour is currently looking at the Placer core, which returned high grade intercepts of over 4 grams per tonne. Placer did a resource estimate on the zone which outlined 200,000 oz. of gold at an average grade of 6 grams per tonne.

The depth and the grade of QK mean the zone would likely be mined via underground methods out in the future.

Getting into the infrastructure

Power is a central issue when constructing any mine, but when building a project on the scale of Detour Lake it becomes even more essential.

The trick was to ensure a stable power supply that could accommodate additional power needs should the facility expand…. and get it all at a reasonable price.

Fortunately for Detour the answer lay 135-km west of the mine site in the form of the Island Falls hydro plant.

All that was left for Detour to do was to connect to the grid, an action that Panneton says will save it $500,000 per month or $6 million pe
r year as compared to generating its own power at the site.

To unlock such savings, however, Detour had to erect hydro lines at a pace of 10-km per week for 14 weeks with the power line arriving at the site at the beginning of September.

The cost for power will come in at 3¢ per kilowatt hour at night and 8¢ during the day for an average of 5¢ per kilowatt hour.

The plant will draw 10 megawatts of power, and energy costs are slated to make up 12% of the plants operating costs. That is a low number considering that for many plants power can account for 30 to 40% of operating expenses.

Beyond power costs, the company expects that the housing, feeding and transportation of workers from Cochrane will cost it $235 per oz. of gold produced.

When all costs are taken into account Panneton says Detour Lake will end up with a very enviable breakeven price of US$625 per oz. of gold.

One massive pit

Flying by helicopter over the ground gives the bests sense of the scope of the future mine.

Placer’s old pit is now a small lake, but from the air it looks little more than a pond next to the massive swath of cleared land to the west of it which is set to host a 3-km long, 1 km wide and 650 metre deep open pit.

Handling all of the ore that comes out of the hole in the ground will be a 10 story crusher – which will make it the largest in Canada – with the capacity to crush 100,000 tonnes of rock per day.

But the crusher won’t be the only structure of magnitude on the site. The leach tanks will join those already operating at Osisko Mining’s (OSK-T) recently commissioned Canadian Malartic mine as the largest anywhere in Canada as well.

While the tanks’ size equals Malartic’s there is a structural difference to the tanks here. Panneton explains that the joints of the tanks are bolted instead of being welded as they are at Malartic.

He says this is an example of how Detour Lake has benefited from Osisko going first on building Canada’s next large scale gold mine as the bolts will seek to address leaking issues that Panneton says were encountered at Malartic.

For its part Osisko says it has had to do equipment modifications and repairs that are normal in the context of commissioning a new mine.

Another key strategy in the construction process being used to minimize hassles down the road is the use of a “wrap-around” technique whereby two independent, side-by-side milling systems will be constructed.

The idea will be to build one of the lines first and as it is running the second line will be constructed. The strategy not only ensures the quickest route to producing gold but also will allow for the second line to benefit from any tweaks and adjustments made to the line built before it.

As for variability in the hardness of the rock, which can cause headaches for new mines when too much soft rocks makes what miners call a “cake” in the SAG mill, Panneton says Detour will be able to avoid the problem largely thanks to the fact that the mine is composed of 75% hard rock.

Dealing with ore variability will also be helped along by a recent improvement on the original plan by adding a secondary crusher – a move that can also be connected to Canadian Malartic.

Osisko announced it will add a pre-crush circuit so that it can increase throughput expansion to over 60,000 tonnes per day. It plans to have the units installed early next year at a cost of $32 million

Detours decision to include a secondary crusher will increases the SAG’s efficiency by 20 to 30% and will help ensure the milling circuit is robust enough to deal with varying hardness in the rock meaning Detour won’t have to do any blending.

With the giant open pit making mining relatively straightforward, and much of the operational issues at the future plant be taken into account by the Detour team, the only thing left is paying for it all.

In early August, Detour announced that it had that front covered as well as it announced the completion of a bought financing deal that raised $428 million and a financing deal with Caterpillar Financial service s for $40 million. The deal with Cat comes on top of the $105 million the company had already lent Detour for the purchase of its mobile mining fleet.