Detour GoldHRG's ownership of DGC looking better all the time.
September 29, 2009
Detour Gold Is On Track To Bring Its Big Detour Lake Gold Project Into Production At Over 550,000 Ounces Per Year By 2013
By Charles Wyatt
Detour Gold first came to the attention of Minews last year, when we turned our attention once again to Ingrid Hibbard’s Pelangio Mines. A year earlier she had decided to sell one of her company’s projects, Detour Lake, to the Hunter Dickinson Group, as she felt Hunter Dickinson would be in a stronger position to take Detour through development and into production. At the time the resource was only two million ounces, but Ingrid knew that it had plenty of potential to expand. Pelangio, for its part, already had another promising project on the prolific Ashanti gold belt. This West African gold province is 300 kilometres in length and compares favourably with the Abitibi greenstone belt which hosts Detour Lake. The sale netted Pelangio 20 million shares in a new company called Detour Gold, and C$5 million in cash. Those shares gave Pelangio a 42 per cent holding. By July 2008 this holding was worth C$425 million, as the shares of Detour Gold had risen by 130 per cent to C$21.25. At that stage the resource at Detour Lake had increased to 10.8 million ounces of gold in the measured and indicated categories.
But both parties had problems with this arrangement, as Pelangio – now renamed PDX - effectively had control of Detour without the responsibility, while the value of the underlying shareholding did not weigh that heavily in the rating of Pelangio. Gerald Panneton, chief executive of Detour Gold, therefore decided that the best solution was for Detour to buy PDX on the basis of 0.2571 Detour shares for every PDX share. By that time, in March of this year, the shares of Detour Gold had fallen back to C$5.10. But every company was in the same boat. The advantage to PDX shareholders was that they then had a direct interest in Detour Gold and no longer had to contemplate a market capitalisation at a significant discount to the value of the Detour shares. Detour Gold, for its part, had removed a major overhang on the share price, and it then did the sensible thing by cancelling the PDX shares.
The shares of Detour Gold are now at C$12.15, which will bring a smile to the erstwhile shareholders of PDX, and Gerald Panneton has been in London to introduce the company to new investors. There’s plenty to talk about, too, as the company now has reserves of 8.8 million ounces, while its total resources amount to 17.3 million ounces. Detour Lake is now the largest undeveloped gold project in Canada. The task ahead of Gerald is to maintain interest in the project over the coming years, as it will take until 2013 to bring it into production, as long as everything goes to plan. Detour Lake starts off, however, with a number of factors in its favour as far as infrastructure is concerned - vital when a project in the north of Ontario is being considered. It is 185 kilometres by road from the town of Cochrane, of which the last 34 kilometres are gravel, and Cochrane has a railroad. It is also 135 kilometres from the hydro electric power station at Island Falls. Last, but not least, there is an existing camp, and an airstrip on site.
The results of a pre-feasibility study on Detour Lake were announced recently and they proved very encouraging. It was based on a gold price of US$775 per ounce, a net smelter royalty due to Goldcorp of two per cent, an average gold grade of 1.15 grammes per tonne, and an estimated gold recovery of 91.5 per cent. Mining at a rate of 45,000 tonnes per day would give a mine life of 14.5 years at the current reserve figures, and the cash costs of production are expected to average US$404 million over this period from production of 560,000 ounces per year. This is big stuff, but it is worth noting that the pre-tax net present value of the operation, with a five per cent discount, is US$621 million, compared with the company’s market capitalisation of C$645 million, while the internal rate of return is 13.5 per cent with a payback period of 6.2 years. The pre-production capital requirement is US$844 million and Gerald Panneton is now going to spend the rest of this year optimising all the figures before moving on to full feasibility.
First off he points out that the US$76 million budgeted for the powerline and main sub-station can be reduced by US$26 million to US$50 million as a government grant can be obtained towards it. Connection of this 230 kV powerline will also reduce costs significantly, as diesel has been costed into the study at US$0.66 per litre, while the cost of power will be C$0.051/kwh from the powerline. The other interesting aspect which will be worked on during the optimisation is the grinding size achieved by the mill. Adjusting the size of the grind could enable an increase in throughput, a reduction in power consumption, all at the cost of a drop in recoveries from 91.5 per cent to 90 per cent. That might well be a price that is worth paying.
Another aspect that is being considered is development of the tailings facility. There is already a tailings dam in place with capacity for a year, but this will have to be enlarged, while other tailings deposition scenarios are being considered to reduce the costs for the tailings infrastructure. While all this optimisation is continuing Detour Gold is also carrying out drilling to increase the reserves and resources even further. For a start the total resource of 17.3 million ounces, which includes the reserves, does not include resources in the inferred category of 5.2 million ounces. These will be upgraded. Then there is a further one kilometre of ground on strike between two known deposits which has not even been drilled yet. News will therefore be forthcoming about increased resource estimates and also, even more important, about progress with permitting and with agreements with the First Nations Bands in the area over land access.
The latter may prove to be a bit more difficult than Gerald Panneton seems to think. For a start there are three different Bands in the area, all of whom will have to be satisfied and all of whom know that as Detour Lake gets bigger the cards in their hands get stronger. And they are not mugs. As Jim Walchuck of Encanto Potash pointed out recently, the Chief of the Muskowekwan Band has a Masters degree in economics. Fortunately Derek Teevan has been appointed as vice president aboriginal and government affairs and he was previously in charge of impact and benefits with First Nations around De Beers’ Victor mine, also in Northern Ontario.
He may still have his work cut out, as his boss, who was previously with Barrick in Africa, gave Minews the clear impression that the local communities would be told how they would be accommodated during the environmental assessment period and life of mine and what payment would be made. He may have to soften his stance to achieve an amicable agreement, but news on this will come out as the big Detour Lake project makes steady progress towards production. In the meantime, however, investors will be looking to see which of the majors is showing interest in the project. Companies with gold resources of this size rarely stay independent right through to production and the pre-feasibility study will have give interested parties a lot of useful information.