Detour turns to equity markets in face of volatile gold price

VANCOUVER — The market has come calling for many companies in recent months, with volatile metal prices and skittish investor sentiment driving equity valuations down across the board. And reality set in for newly minted Canadian producer...

Topics

Commodities

Regions

Tags

Companies

VANCOUVER — The market has come calling for many companies in recent months, with volatile metal prices and skittish investor sentiment driving equity valuations down across the board. And 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 hovered near a four-year low.

Detour's journey at its aptly named Detour Lake gold project in northeastern Ontario has been well documented. The company spent roughly $2 billion developing the mine since it acquired the asset in 2006 and saw its stock hit a 52-week high at roughly $30 per share in late 2012, even as gold prices sat comfortably around US$1,800 per oz Since early November, however, Detour has lost 65% of its market capitalization as its shares have dropped $18.18 to sit at $9.81 at the time of writing.

Though the company remains on track to hit a nameplate capacity of 55,000 t/d at Detour Lake by the third quarter, a weakening gold price — which sat at US$1,368 at press time — and a slower-than-expected ramp up has created a more tumultuous landscape moving forward. During the first quarter, Detour milled 1 million tonnes of ore at an average grade of 0.64 g/t Au for roughly 17,000 oz of gold production, with recoveries hovering around 80%.

Due to delays in ramp 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 of gold at total cash costs ranging from US$800 to US$900 per oz.

Following delays, Detour 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 remainder of the year, including the deferral of exploration and drilling activities, as well as the completion of a pre-feasibility for its nearby Block A project.

And that is how Detour found itself in a position where it was necessary to raise a significant amount of working capital at a share price that is notably lower 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 of gold. But with working capital of US$57 million at the end of the first quarter, it remained necessary for the company to increase its cash buffer in a bid to insulate itself against further shocks from 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 was forced to issue 17.5 million shares priced at $8.75 per share. In context, that is the lowest price for an equity placement by Detour since early 2009, when it issued shares at a price of $12.10.

The good news for Detour is that, despite delays, the company remains on track to hit commercial production by the end of 2013, and life-of-mine guidance remains intact at 14.2 million oz of gold at total cash costs of US$721 per oz Additionally, 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$1.03 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 t/d 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 the time of writing for a $1.16 billion market capitalization.

To read more Northern Miner articles, click here

Comments

Your email address will not be published. Required fields are marked *

Mar 27 2024 - Mar 28 2024
Apr 08 2024 - Apr 09 2024
Apr 15 2024 - Apr 16 2024
Apr 16 2024 - Apr 16 2024