Detour shares drop on lower 2017 guidance

Detour Gold (TSX: DGC) shares plunged after the company warned it expects to produce less gold than planned next year from its only gold mine, near Cochrane, Ontario.

On Nov. 1, Detour said its flagship Detour Lake gold mine should deliver between 540,000 and 590,000 oz. in 2017, below the life-of-mine (LOM) plan of 614,000 ounces.

“We are disappointed with the preliminary outlook for 2017, and we know we have let our board and investors down,” Detour’s CEO Paul Martin said on a conference call.

Of the 50,000 oz. reduction, 30,000 oz. is due to the face position of the mine’s Campbell pit, after slower development in 2016. Roughly 10,000 oz. relates to slightly lower recovery and higher dilution assumptions. Detour also removed 10,000 oz. for downside risk until it finalizes the 2017 guidance in January.

Lower drilling productivity and equipment availability issues in the first quarter lowered mining rates in the pit. Despite quarter-over-quarter improvements, the mining rate year-to-date averaged 243,000 tonnes per day. This is 5 million tonnes behind the budgeted mine plan, Martin says.

As a result, this delayed bench development in the Campbell pit. Two low-grade benches, slated to be mined in 2016, were pushed into 2017. One higher-grade bench, planned for 2017, was moved to 2018. In total, Detour will mine five benches next year.

Detour Gold’s flagship Detour Lake gold mine, near Cochrane, Ontario. Credit: Detour Gold.

“When we reviewed that mine plan for 2017, there was unfortunately bench 148 that we can’t reach, which has 65,000 oz. gold,” Laurie Gaborit, Detour’s director of investor relations, says in an interview. “It’s a calendar issue because we should have gotten it at the end of 2017 — November or December. But now we can only get to it in early 2018.”

Mining rates are still the “single biggest issue” at Detour Lake, Haywood Securities analyst Kerry Smith argues. “Detour needs to address this consistent mining deficit. The mine was targeting to exit 2016 at 275,000 tonnes per day, and it looks unlikely at this point.”

Mining rates averaged 256,000 tonnes per day in the third quarter, unchanged from the same period last year, as heavy rains in August flooded the pit and delayed access to the higher-grade Calcite zone. After this, the firm sliced its 2016 guidance in September to 525,000 to 545,000 oz. — its second reduction this year.

In 2017, Detour is guiding mining rates of 250,000 to 270,000 tonnes per day, or 92 million to 102 million tonnes per year. To help achieve these rates, it aims to add equipment to the ancillary and ore rehandling fleets, as well as improve efficiency of the haulage fleet.

Detour estimates higher site costs next year, including operating and sustaining capital. Costs should come in $75 million above the $640-million LOM estimate. The increase includes $45 million of accelerated capital, $10 million for a ROM fleet and $20 million for an accounting charge to process 2 million tonnes of medium-grade, stockpiled ore.

Expected 2017 all-in sustaining costs are US$1,050 to US$1,150 per oz., up 8% to 12% from 2016’s revised guidance.

The preliminary 2017 outlook does not include processing medium or low-grade fines. Detour aims to process 400,000 tonnes of stockpiles — screened at minus 2 inches — by the end of December. Preliminary tests have shown screening increases the stockpile grade. The results, expected by year-end, will determine the costs of incorporating the fines into the mine plan and possibly using the by-product to build road and tailings construction, Gaborit says.

West Detour delay

Detour anticipates gold production in 2018 of 600,000 to 670,000 oz., compared to the LOM plan of 658,000 ounces. The forecast  depends on Detour’s progress in 2017. It also excludes the 13,000 oz. previously expected from the West Detour pit, which sits 1 km west of Detour Lake.

The exclusion comes after Detour reported one of its aboriginal partners recently elected a new chief and council that would need time to get familiar with the West Detour project, which could delay the environmental assessment that was slated for year-end.

Detour is evaluating several scenarios on how a delay from three months to a year could affect West Detour’s start-up and costs.

“We have to do our homework and look at all those cases,” Gaborit says. Detour aims to make the delay as short as possible, she adds. The company should release more details with its finalized 2017 guidance.

Ball mills at Detour Gold’s flagship Detour Lake gold mine in northern Ontario. Photo by Salma Tarikh.

Third-quarter financials

Detour Lake churned out 127,758 oz. at all-in sustaining costs of US$1,042 per oz. in the September quarter. Output was above the company’s quarter guidance range of 120,000 ounces.

Haywood’s Smith had projected output of 145,000 oz. at all-in sustaining costs of US$900 per ounce. Production and costs missed targets due to several factors, including an eight-day plant shutdown; pit flooding that restricted access to higher-grade ore; and limited material movement over the year versus budget, which lowered bench development, he says.

Revenue grew 7% year-over-year to US$152 million, as Detour sold 113,845 oz. gold at a realized price of US$1,281 per ounce. However, compared to the first two quarters of 2016, revenue dipped due to lower sales despite higher realized gold prices.

Cash flow from operations before working capital changes was US$47.9 million — or US27¢ per share in the third quarter — missing average analysts’ estimates of US34¢ per share.

Adjusted earnings were US$1.3 million, or a cent per share, below the US3¢ per share that analysts had expected. Detour reported a net loss of US$13.3 million, or US8¢ per share, a year ago.

Analyst reactions

After Detour’s third-quarter financials, lower production outlook and uncertainty at West Detour, many analysts cut their price targets.

Raymond James analyst Phil Russo says the lower guidance could hurt Detour’s free cash flow by US$166 million in 2017, and US$69 million in 2018. Despite the decline, Russo says the company’s balance sheet is strong, with cash and short-term investments of US$116 million at the end of September. He trimmed his $38.50 target to $35 per share, while keeping an “outperform 2” rating.

Macquarie Research analyst Michael Siperco lowered his target to $33 from $43, citing lower near-term cash flow forecasts. He kept his “outperform” rating, similar to BMO analyst Brian Quast, who cut his target price to $36 from $43. Haywood’s Smith slashed his $49 target to $38, but Smith has a “buy” rating.

Detour shares closed Nov. 4 at $20.69, down 21% since Nov. 1.