Tuesday, December 25, 2012

Detour Gold (DRGDF) Gets Ready To Shine

Detour Gold (DRGDF / DGC.TO) deserves applause for moving toward production.  The management team is mature.  The CEO is a geologist and the rest of the team has experience in project development and mineral processing.  I don't think I could ask for more from the leadership of a growing mining company.

The company owns its Detour Lake project outright and their 43-101 report data is available.  This site has almost half a billion tons of 2P reserves at an average grade of 1.05g/ton.  That's not bad given declining grades worldwide, so full production is justified.  They estimate the total cash cost of production at C$749/oz, which is about $100 higher than gold's long-term average price.  This mine is clearly viable so long as the world market has elevated expectations for the price of gold.  Any bullion price crash would hurt Detour Gold's valuation.  BTW, their projected IRR of 12.4% after tax is far below the 25% threshold favored by major institutional investors in the resource sector.

Shareholders should be concerned about the possibility of dilution.  Detour Gold has issued 117M shares but this can be diluted to 139M with options and convertible notes.  The most significant short-term concern is the set of options expiring in less than one year with a weighted average strike price of C$10.25.  Those option holders will probably get very lucky if the share price is still over C$23 one year from now.

The company is viable for now but it isn't enough of a home run for my money.  I would need to see a higher IRR and lower cash cost of production in a mining stock.

Full disclosure:  No position in Detour Gold at this time.