Detour Gold Shuns M&A to Avoid Barrick’s Plight

Detour Gold Corp. (DGC), a miner backed by billionaire hedge-fund manager John Paulson, is avoiding acquisitions that have hurt competitors to focus on its C$1.5 billion ($1.46 billion) project in northern Ontario.

The company has set “deliverable” targets at Detour Lake, potentially the biggest gold mine in Canada, Chief Executive Officer Gerald Panneton said. The value of some miners is “dilapidated” because they issued shares to fund acquisitions that diverted management’s attention, he said.

“A mine is a headache, pure and simple, so if you have 10 mines, how many headaches do you have?” Panneton said in a March 5 interview at Bloomberg’s Toronto office. “If you have one mine and you are focusing, you have a better chance of success.”

Shares of gold-mining companies have underperformed the metal for each of the last six years amid surging production costs, project budget blowouts and startup delays. Barrick Gold Corp. (ABX), the world’s largest producer, where Panneton worked for 12 years, said Feb. 14 it took a $3 billion writedown on a Zambian mine it bought in 2011. Another Toronto-based competitor, Kinross Gold Corp. (K), said a day earlier it took a $3.09 billion writedown at the Tasiast gold project, an African mine acquired in 2010.

Index Beater

“There is a great deal of gold at Tasiast -- we view it as a cornerstone asset and an important part of our future,” Steve Mitchell, a Kinross spokesman, said yesterday by e-mail.

Andy Lloyd, a spokesman for Barrick, declined to comment yesterday beyond recent remarks by CEO Jamie Sokalsky, who said last month that the operating performance at Lumwana and the writedown was “disappointing.”

Detour rose 1.3 percent to C$19.50 in Toronto today. It has declined 26 percent in the past 12 months, compared with a 30 percent drop in the 55-company Standard & Poor’s/TSX Global Gold Sector Index. (SPTSGD) In that time, gold futures have decreased 7.1 percent. Gold for April delivery climbed 0.2 percent to $1,577.70 an ounce at 4:24 p.m. in New York.

Hedge fund Paulson & Co. owned 11.7 percent of Detour as of Jan. 31, 2012, according to data compiled by Bloomberg. Panneton said he speaks “on a regular basis” with Paulson, which is supportive.

Detour expects to secure a C$90 million revolving credit facility by the end of this month and doesn’t plan to sell more stock to fund the startup of Detour Lake following a C$114 million share sale listed in December, Panneton said.

Buy Ratings

All 12 of the analyst recommendations on the stock that have been compiled by Bloomberg are a buy. The consensus 12- month forward target price is C$36.57, 90 percent more than the company’s closing price.

Panneton’s plan to focus on Detour Lake for the next five to 10 years makes sense, said Kerry Smith, a Toronto-based analyst at Haywood Securities Inc.

“This wouldn’t be the best time for him to look at buying something else,” Smith said yesterday in a telephone interview. “What would be more accretive for him would be to find ounces around Detour that he could run through the mill that would be better grade than what he’s got.”

Investors are waiting to see how well the mine’s production ramp-up goes and for the company to confirm it’s arranged the line of credit, said Smith, who has a target price of C$42.25 a Detour share.

First Gold

The Detour Lake mine, where the company poured the first gold last month, is expected to reach commercial production by the third quarter, Panneton said. Output started 27 months after construction began and six years from when Detour first sold shares to the public in Toronto.

The project is forecast to produce an average of 657,000 ounces a year for more than 21 years at a total cash cost of $749 an ounce, the company said in September. Detour is projecting annual free cash flow of $360 million, or about $3 a share, once the mine is running at full speed, Panneton said.

“I like the stock, I think it’s one of a handful of big mines that have a long mine life that produce a lot of ounces that are located in stable jurisdictions,” Smith said. “They’ve got a good commissioning team, so I’m not anticipating any issues.”

http://www.businessweek.com/news/2013-03-07/detour-gold-shuns-m-and-a-to-avoid-barrick-s-plight