A gold mine slated to be Canada’s biggest is watching its costs closely until it reaches full capacity.
Detour Gold’s interim-CEO, Paul Martin, told Reuters on Jan. 28 that the company’s board of directors has given him the green-light to hedge up to 50-percent of the mine’s output to ensure there is stable cash flow for the rest of the mine’s start-up.
Kelly Smith, an analyst for Haywood Capital Inc., explained that by hedging, or selling the mine’s output ahead of time at a fixed price, Detour guarantees its income.
Smith says this is a good strategy for a mine that is just starting operations and has lots of overhead, but it’s potentially bad for investors.
“If gold prices go lower, it was a smart thing to do,” said Smith, “but if gold goes higher, it wasn’t such a smart thing to do.
“An investor doesn’t want a mine to speculate on the price of gold. But in this case, they’re doing it as a measure to protect their revenues, and ensure that they can cover their costs while they go through the ramp up.”
Smith said the mine has been plagued by the usual troubles of an operation of its size that is in the “ramp-up” phase.
Part of Detour’s problem is that they began building the mine as gold prices started to fall from their 2011 peak of almost $1,900, as the chart below shows.
(gold data from: http://www.investing.com/commodities/gold-historical-data)
Detour has an average cost per ounce of gold produced of $1,214 USD, so if gold price drop below $1,200 like they did in late 2013, the mine is losing money. Which is why shareholders are tentative, says Smith.
DETOUR GOLD (Text)
“It’s marginally undervalued, however they (Detour) need potentially more capital to complete the ramp up,” said Smith.
The northern Ontario mine’s full year-end statements are due early February, but the company announced in a press release last week that it missed its minimum target of 240,000 ounces of gold produced by about 8,000 ounces.
And that potential need for more capital isn’t helping share prices either. If Detour needs to raise capital by issuing more stock, they’ll dilute existing share prices. So despite Smith’s valuation of Detour at $8.50 a share, the share price remains at around $6.30, and probably won’t move much until its year-end reports are released.
“When they start the plant up there are always things that you have to fix,” said Smith. “So you’re constantly stopping and starting the plant, you’re making repairs, you’re fine tuning, and all of that costs money.”
The gold mine began operations in June of last year and according to it’s own definition only began commercial scale operations on Sept. 1.
But shareholders began to grumble when the company’s third quarter results showed disappointingly narrow margins. Then the company’s founder and CEO Gerald Panneton resigned in November after a meeting with the board of directors and stock prices took another dip.
But on Jan. 27 interim CEO Paul Martin, Detour’s former CFO, said in a press release, that the second year of operation will “serve as a stepping stone towards further production increases and cost reductions.
Detour 2014 Guidance (Text)
“The significant shutdown in December impacted our progress but I am please to report that we are mow back on track with milling rates having returned to pre-shutdown numbers,” Martin said.
The challenge for Detour in the next year, said Smith, is making sure they have the cash to cover their expenses until they mine is fully operational.
Until then they’re in a vulnerable position.
“They’re just right at that critical point in their start-up,” Smith said. “They say they’ll have it (operating) at design capacity in Q4, and we’re seven, eight months away from that.”