Detour turns to equity markets as share price falls 65%

VANCOUVER — The soup has gotten a lot thinner for many companies in recent months, with falling metal prices and skittish investors driving equity valuations down across the board. And that reality set in for newly minted Canadian producer Detour Gold (DGC-T) in late May when the company was forced to raise $153 million via equity, even as its stock price hovered near a four-year low.

Detour’s impressive journey at its Detour Lake gold project in northeastern Ontario has been well-documented. The company spent $2 billion developing the mine since it acquired the asset in 2006, and saw its stock hit a 52-week high at $30 per share in late 2012, as gold prices sat comfortably around US$1,800 per oz.

Since early November, however, Detour has lost 65% of its market capitalization, with its shares dropping $18.18 to $9.81 at press time.

Though the company is on track to hit a nameplate capacity of 55,000 tonnes per day at Detour Lake by the third quarter, a weakening gold price — which sat at US$1,368 per oz. at press time — and a slower-than-expected ramp-up has created a more tumultuous outlook.

During the first quarter Detour milled 1 million tonnes grading 0.64 gram gold per tonne for 17,000 oz. gold production, with recoveries hovering around 80%.

Due to delays in ramping-up, Detour rolled back its 2013 production guidance in early May. The company’s original estimate had pegged gold production at between 350,000 oz. and 400,000 oz. gold at total cash costs ranging from US$800 to US$900 per oz. Detour has now reduced its guidance to between 260,000 oz. and 320,000 oz., at total cash costs ranging from US$800 to US$1,000 per oz.

The company also reviewed its 2013 spending program and identified $10 million in potential cost reductions over the rest of the year, including the deferral of exploration, drilling, and completion of a prefeasibility for its nearby Block A project.

Detour had to raise a lot of working capital as a result of the production shortfall, and at a notably lower share price than previous financings.

The company should be able to cover its operating costs and a portion of its sustaining capital — estimated at US$180 million for the year — on the back of second-quarter production expected to clock in at 60,000 oz. gold.

But with US$57 million in working capital at the end of the first quarter, the company had to increase its cash buffer to avoid further shocks from lower gold prices or ramp-up delays.

In mid-February Detour closed a senior-secured credit facility worth $135 million that was comprised of a $90-million revolving credit facility and a $45-million letter of credit. But the company could only rely on debt for so long before it turned to equity markets, where it issued 17.5 million shares priced at $8.75 per share. This is the lowest price for an equity placement by Detour since early 2009, when it issued shares at $12.10.

The good news for Detour is that the company remains on track to hit commercial production by year-end, and life-of-mine guidance remains intact at 14.2 million oz. gold at total cash costs of US$721 per oz. Even at lower gold prices the project has held up to economic scrutiny, with a 2010 feasibility study at US$850 per oz. gold returning a US$1-billion pre-tax net present value and 14.4% internal rate of return at a 5% discount rate.

President and CEO Gerald Panneton noted during a first-quarter conference call that Detour achieved more than 36,000 tonnes per day in late March, including a 12-hour shift at 22,000 tonnes. The company’s goal is to bump its mill availability from 66% — which it saw in the first quarter — to a 92% level by the third quarter.

Detour had 118 million shares outstanding at press time for a $1.2-billion market capitalization.