Heavy rains dampen Detour’s 2016 production guidance

Detour Gold (TSX: DGC) has run into a minor setback at its Detour Lake mine near Cochrane, Ont., causing the miner to revise its 2016 production and cost guidance again in less than two months.

On Sept.6, Detour trimmed its production target to between 525,000 and 545,000 oz., from 540,000 to 570,000 oz. following heavier than usual rainfalls in mid-August, which flooded the bottom west end of the pit, delaying access to the high-grade Calcite zone.

On a conference call the next morning, Detour’s management said it received more than 4 inches of rain in two days, which would have been manageable, if it didn’t receive another 2 inches of rain in the following week, creating the “biggest rain event or run-off event” in Detour’s history.

“Over the last seven years, we have seen nothing like this even the spring run-off was not like this,” Pierre Beaudoin, the company’s chief operating officer, says.

Haul trucks drive through the mud at Detour Gold’s Detour Lake mine near Cochrane, Ont., in June 2016. Credit: Detour Gold.

Detour initially started producing from the large-scale, open-pit operation — sitting 300 km northeast of Timmins — in February 2013, following 27 months of construction.

It estimates gold production in the third quarter of 120,000 oz. versus initial quarterly guidance of 125,000 to 150,000 oz. That’s below the second and first quarters’ 139,359 oz. and 127,136 oz.

Output, however, should jump in the fourth quarter to between 138,000 and 158,000 oz., dependent on “timely access” to the Calcite zone and on positive results from the larger-scale test of processing medium grade fines, set to start later this month, Detour says.

Detour obtains medium grade fines by screening the run of mine stockpile at minus two inches, with preliminary tests showing overall grades improving from 0.65 to 1.1 grams gold.

Meanwhile, the company had expected the Calcite zone, grading 1.1 to 1.3 grams gold, to be the main source of higher-grade ore in the second half of 2016. However, it now anticipates mining from that zone to begin in the fourth quarter, with production likely to start in 2017.

“So a part of our assumption is that we’re able to mine it, but not necessarily be able to process it before the end of the year, which is causing this issue with the gold grade over Q3 and Q4,” Beaudoin explains.

Grade should average 0.8 gram gold per tonne in the third quarter, down from the second quarter’s 0.92 gram gold, before recovering to 0.9 gram gold in the fourth quarter. Gold recovery in the third quarter should be slightly below the previous quarter’s 89%, before averaging 90% in the last three months of 2016, the company’s CEO Paul Martin says.

Throughput should remain relatively unchanged at 60,000 tonnes per day during the last two quarters of 2016.

To accelerate the dewatering process, Detour has already increased its pumping capacity by half, and is on track to boost it further by next week.

Detour intends to finish dewatering by the end of September. It is currently reviewing its water management plan, noting given the rarity of the event it might not be able justify the required capital to maintain the large pumping capacity.

The latest production revision follows the July downgrade from 540,000 to 590,000 oz. That resulted from slower mining in some areas of the Campbell pit during the first half of 2016, removing a potential 15,000 to 20,000 oz. in the second half of the year.

Raymond James analyst Phil Russo anticipates Detour’s full-year production at 528,000 oz. “We expect the resulting decline in corporate free cash flow for the year at around $24 million at spot prices,” he notes, adding Detour still has a “solid” balance sheet.

Russo has an “outperform 2” rating on the stock and a $38.50 per share target.

Desjardins analyst Michael Parkin comments: “Future plans will not prevent this [water inflow] from happening again, but overall we remain positive on the outlook.” He has cut his price target by 50¢ to $36 per share, while reiterating a “buy” on the stock.

Detour has also increased its all-in sustaining costs per oz. range to US$970 to US$1,020, up from July’s US$920 to US$980, largely due to lower production. Its initial 2016 target was US$840 to US$940 per oz.

Using the new guidance, Detour projects to generate about $50 million of cash flow before interest, at a US$1,300 per oz. gold price. “We’re seeing that we will have more than adequate cash flow to allow us to continue our debt reduction program,” Martin says. The company plans to reduce its debt by US$300 million by year-end.

Since reporting the revised guidance, Detour shares have fallen nearly 5% over two trading days to close Sept.8 at $30.90.