Detour Lake gets a jump on commercial production

Earlier-than-expected commercial production at the Detour Lake mine has caught analysts by surprise. Detour Gold (TSX: DGC; US-OTC: DRGDF) reported the milestone at the open-pit gold mine in northern Ontario on Aug. 12, noting that the operation produced 41,428 tonnes of ore per day for the previous 60 days.

The mine is expected to produce 657,000 oz. gold a year over the next 21.5 years.

Calling the news “a nice surprise,” Kerry Smith of Haywood Securities admitted he had expected that Detour would reach the landmark around October.

Detour forecasts its wholly owned mine will produce 270,000 oz. gold this year — down from its previous guidance of between 320,000 and 360,000 oz. — at total cash costs for the rest of the year of US$1,100 per oz., which is slightly higher than the US$800 to US$1,000 per oz. it had previously forecast.

Michael Parkin of Desjardins Securities wrote in a research note that Detour did not provide details in its press release regarding what caused the higher-than-expected cash costs, but after following up with management, he learned that “the jump in expected total cash costs will be temporary, due to the hiring of a contractor to assist with waste stripping in the open pit, adding about US$100 per oz. to the 2013 commercial production-period cash costs.”

He continued that “it is a one-time cost, mostly related to the hiring of a third-party contractor for a few months to catch up on waste stripping. Detour had been slightly behind schedule on waste stripping since 2013. The waste stripping is to ensure the higher-grade Domain 2 zone is accessed in the fourth quarter of 2013.”

Detour says operating costs are being reported as it completes its ramp-up and increases nameplate capacity from 75% to 90%.

“It is worth noting that the mill operated at a rate of over 50,000 tonnes per day for 17 straight days during the 60-day commercial period, which is 91% of design capacity,” Parkin said. “During the last four days of the 60-day period, the mill processed 52,900 tonnes per day, which is 96% of design capacity . . .  we currently assume an average milling rate of 43,500 tonnes per day and 49,500 tonnes per day in this year’s third quarter and fourth quarter.”

Smith of Haywood expects the operation will achieve its 90-92% availability target by year-end. He forecasts gold production in 2014 will reach 610,000 oz., and says the company has “sufficient liquidity to survive in the current gold-price environment,” with $203 million in cash and $114 million in working capital. Debt stands at $541 million.

Detour’s shares closed at $11.33 on Aug. 15. Over the last year Detour has traded within a range of $7.17 to $29.07.  

Parkin of Desjardins has a target price of $14 per share, while John Hayes of BMO Capital Markets has a $16 price target on the stock, and comments in a research note that the company’s shares will “re-rate as production becomes established.” 

Management believes there is potential to extend the deposit because it is open along strike to the west and at depth. There has been little exploration and drilling outside of the gold mine and the Block A deposit, 1 km northwest of Detour Lake, and the company is undertaking a prefeasibility study on Block A.

In the first three months of the year Detour said it tested several exploration targets along a major east–west structural break, less than 5 km south of the Sunday Lake deformation zone that hosts the Detour Lake mine.