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Detour: New Mine Plan Offers 'Best Value-Maximizing Alternative'

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(Kitco News) - Detour Gold Corp. (TSX: DGC) has updated the life-of-mine (LOM) plan for its Detour Lake operation, making changes aimed at reducing large annual fluctuations in the amount of gold that is mined but conceding some higher costs that were contained in the previous plan.

However, the company’s chief operating officer also pledged to work on reducing those expenses. And while Detour has said the new plan is the best way to create value for shareholders, one analyst said a statement in the company’s news release also suggests that Detour would at least consider offers to be acquired.

The company was the focus of extra attention recently when Paulson & Co, led by billionaire hedge-fund manager John Paulson, called for the underperforming Canadian miner to put itself up for sale, in part due to the low stock price.

The company’s main asset is the Detour Lake Mine in northeastern Ontario. The company said the mine has proven and probable reserves of 16 million ounces of gold, with a mine life of 22.6 years. Officials said they plan to implement a number of operational improvements.

“Detour Gold is moving forward on an achievable plan to create long-term value for all of our shareholders, with whom we have always maintained an open dialogue. Our board has made important changes and is committed to making further changes, as necessary, to ensure Detour Lake becomes a consistently profitable operation,” said Alex Morrison, board chairman. “With our new mine operating plan in place and a team led by our new chief operating officer, Frazer Bourchier, to execute it, we are confident that we are on track to position the company as a leading intermediate gold producer.”

Bourchier has focused on the revised plan since joining Detour in January. The company has an interim chief executive officer – Michael Kenyon.

“The impact of the changes we are making will not be evident immediately, but we intend to deliver consistent execution under Frazer’s leadership,” Morrison said.

A company news release described the plan as the “best value-maximizing alternative” currently available, but said the board also acknowledges that “change in our industry takes time.” Meanwhile, the release also left other options open.

“If any bona fide strategic alternatives become available to the company that compete with the value delivered by this standalone plan, the board would pursue the best course of action to maximize shareholder value,” the press release said.

Some analysts said this phrase seems to indicate the company’s willingness to in fact consider offers to purchase Detour.

“We believe that the DGC is referring to a sale process, as recently strongly suggested by shareholder Paulson & Co.,” said Credit Suisse, while also noting that the company appears to have chosen optimization over a sale.

“DGC stated that the [board of directors] is committed to improve upon Detour Lake’s past operating performance and that the board believes new COO Frazer Bourchier and interim CEO Michael Kenyon … have the necessary expertise to implement the revised LOM moving forward,” Credit Suisse said.

Meanwhile, BMO Capital Markets commented that the plan offers more clarity on annual costs. Analysts said they envision updating their valuation following a conference call hosted by Detour this morning and a “teach-in” to answer questions on Friday.

Detour Aims To Make Annual Production More Consistent

The company said the LOM reduces the large annual variation in projected gold production under the prior plan.

“Specifically, the gold production profile is more consistent over the next 12 years at approximately 614,000 ounces per year and subsequently increases to approximately 725,000 ounces per year for the next 10 years,” Detour said.

Average annual life-of-mine gold production is expected to be approximately 659,000 ounces at average total site costs of $843 per ounce sold. For the period from 2019 to 2023, average annual gold production is seen at around 608,000 ounces at average total site costs of $983 per ounce sold. The company estimates life-of-mine capital costs of $2.5 billion, excluding deferred stripping. The plan assumes a ramp-up in processing-plant capacity.

Compared to the previous life-of-mine plan, Detour projected a 9% increase in average mining unit costs over the mine’s life mostly due to lower truck haulage efficiency and more trucking hours, leading to higher diesel consumption and increased mobile equipment maintenance costs. The company sees an 8% increase in average milling unit costs over the mine life primarily due to higher anticipated key reagent consumption (cyanide, sulfur dioxide and lead nitrate) and increased labor and maintenance costs. Detour also looks for a 16% increase in average general and administrative unit costs over the life of the mine mainly due to higher site infrastructure costs for water management and site services, inflationary impacts and increased personnel on site.

However, the company projects total site costs per ounce sold will decline over the next several years from an expected $1,179 in 2019 to $803 by 2023, with average for 2018 through 2040 put at $843.

“The company will continue to target unit cost reductions over the next five years with increased productivity through improved operational efficiency,” Bourchier said. As part of this, Detour is also assessing “automation opportunities” not currently included in the life-of-mine plan, he added.


Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.

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