Detour Lake on track for production in early 2013

When Detour Gold’s (DGC-T) gold project in northern Ontario moves into production in the first quarter of next year — and eventually reaches an average production rate of 657,000 oz. gold a year, for a total of 14.1 million oz. over its 21.5-year mine life — it will rank among the largest gold operations in North America.

CIBC mining analyst Cosmos Chiu, who returned from a visit to the Detour Lake site in late August, forecasts first production in January 2013 with commercial production early in the third quarter, and has a 12- to 18-month price target on the company of $40 per share.

“We came away from the mine tour more comfortable with the development,” Chiu and fellow analysts Barry Cooper and Kevin Chiew, who also cover the company, wrote in an Aug. 26 research note after the analysts’ tour. “There are numerous indications that care had been put into its design, including the parallel grinding lines, the placement of the secondary crushers after the crushed ore stockpile and the general flow of the plant.”

The analysts also point out that the company has enough resources to pay for the remaining pre-production capex of $380 million over the remainder of the year. Detour Gold has a cash position of $462 million and a line of credit — which isn’t finalized — worth $100 million.

Based on the net asset value (NAV) and the earnings power of the Detour Lake project, the company’s shares are also “very attractively priced,” the analysts maintain. Over the last year Detour Gold has traded within a range of $18.46 to $39.65, and at press time its shares were trading at $26.09 apiece.

“Once built, Detour Gold will immediately move into intermediate producer status by passing the junior-producer stage,” they outline in the research note. “We think that this size of production enjoys a sweet spot amongst investors, who see it as large enough to be liquid and meaningful, yet small enough to provide future growth.”

The analysts also reason that the next phase of development could be expanding the mine through organic growth. “A scalable project can appeal to both investors as well as corporate suitors, which may find this safe-haven opportunity a target for consideration,” they argue.

On Sept. 4, the company unveiled an updated mine plan that includes an increase in operating costs for the project. Projected total cash costs over the mine’s life, after royalty and silver credits, have climbed to an average of US$749 per oz., up from an earlier estimate in January 2011 of US$542 per oz.

Total cash costs for 2013 are forecast between US$800 and US$900 per oz. — figures the company will report after commercial production is reached. Company guidance for 2013 is production, including pre-commercial production, of between 350,000 and 400,000 oz. gold.

The updated mine plan is based on a reserve of 480 million tonnes averaging 1.03 gram gold per tonne for 15.6 million contained oz. gold.

Detour Gold estimates that over the first three years of operation — including in 2013 — the project will generate more than $1 billion in operational cash flow.

Estimated pre-production capital costs of $1.45 billion remain unchanged under the updated mine plan.

In a research note after the new mine plan was revealed, Chiu and his colleagues lowered their price target from $42 to $40 per share, and decreased their NAV “modestly” by about 4%, but maintained their “sector outperform” rating “with the expectation that production ramps up to 575,000 oz. at $800 per oz. total cash costs by 2014.” At today’s spot price, they add in the Sept. 4 note, Detour Gold has potential to generate $4-per-share cash flow in 2014.

“As the previous technical report was largely based on the mid-2010 feasibility study, investors should not be surprised by the changes in cost assumptions for operating and sustaining capex,” they write, noting they had already captured the majority of the cost increases in their model after the analyst tour on Aug. 24.

John Hayes, a mining analyst at BMO Capital Markets, commented in a note after the updated mine plan was announced that his 10% NAV estimate at spot gold has decreased by 6%. He holds an “outperform” rating on the stock with a price target of $35 per share.

“The company’s January 2011 feasibility mine plan showed production at higher grades early in the mine life,” Hayes comments. “The key feature of the updated mine plan is that the higher-grade ore is mined in years 18-plus, presumably as the pit dives deeper on the higher-grade ore zones.” He also notes that the project remains on budget and on schedule into the later stages of construction, and that the “level of preparedness and planning offers encouragement that the operational challenges at other recent mine start-ups could well be avoided at Detour Lake.”

Analysts Adam Graf and Anja Soderstrom of Dahlman Rose say in a research note that higher operating costs, coupled with lower grades in the early years, have had a net negative impact of about $10 per share to their model. The new production plan “reflects lower grades in early years, and showcases industry-wide cost creep,” the analysts write. Nevertheless, they add, “construction is on budget and on target, and the company looks to achieve previously envisioned throughput levels.”

The Dahlman analysts have a “hold” rating on the stock.

Detour Gold plans to stockpile material grading between 0.3 and 0.5 gram gold per tonne over the the mine’s life, or roughly 240 million tonnes averaging 0.39 gram gold, which it believes could be processed during the life-of-mine, if Detour Gold expands its processing plant facilities.

Under the updated mine plan the waste-to-ore ratio over the mine life is estimated at 3.7 to 1.

The plan also involves stockpiling 2.3 million tonnes of ore at an average grade of 0.85 gram gold by the end of 2012. That ore can be used if commissioning runs ahead of schedule.

Detour Lake will be mined as a conventional open pit with an initial fleet of 20 haul trucks, two hydraulic shovels, two electric rope shovels and nine drills.

The processing plant under construction is a conventional gravity, cyanidation and carbon-in-pulp facility that will operate initially at a rate of 55,000 tonnes per day, before ramping up to 61,000 tonnes per day in 2015.