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Q3 Update

Detour Gold (OTCPK:DRGDF) has released a quarterly update on its Detour Lake project, so it's an excellent moment to provide an update after my earlier article on this company.

The third quarter of this year is the first quarter wherein Detour Gold has reached the commercial production status, so Q3 was quite pivotal as now Detour Gold can record gold sales as revenues instead of offsetting it against development expenses.

Detour produced 75,672 ounces of gold in Q3 (which is a 31% increase compared to Q2) thanks to an increased availability rate of the mill and a higher throughput per day (on average 53,800 tonnes per operating day). The company has also started to pre-strip the so called Domain 2-zone which holds higher grade ore and should be beneficial for the company's production profile in the near term.

My view on this update

I'm optimistic about the progress made at the Detour Lake project. The company reiterated its 2013 guidance of 270,000 ounces of gold, and as Detour produced 150,410 ounces in the first nine months of the year, I'm expecting a production of 120,000 ounces in Q4, which would be a great achievement and another 58% increase compared to the Q3 output.

As Detour had a cash position of approximately $155M at the end of September, I hope the company will no longer have to issue new shares to fund the ongoing development activities at the Detour Lake project. I'm looking forward to see the updated balance sheet and more specifically to see the developments of the working capital position.

The Debt Position

My main issue with Detour Gold is its debt position. As you can see on the next image, Detour Gold will have to pay $300M over the next 3 years and is facing a balloon payment of $515M in 2017.

(click to enlarge)

I'm not worried at all about the 2013-2016 interest payments and lease repayments, but I am unconvinced Detour Gold will be able to repay the $500M convertible loan without finding additional funds. So if the price of gold remains at the current level, I think Detour Gold will have to issue more shares or borrow money to repay a part of the $500M in 2017.

I'm glad the operational side of the project is going well without any severe hiccups, but at the current gold price of $1300/oz, Detour Gold will have to save all its cash to be able to repay the debt by 2017, so it is very unlikely the company will add a second development project to its portfolio or to pay a dividend before 2018.

Conclusion

Detour Gold seems to be on the right track, and the real benefit of economies of scale will start to kick in from next year on. The big question mark in the Detour story is the question if Detour will be able to repay in excess of $800M in debt by the end of 2017. The situation might be very tight and I expect a share issue later on if the company is unable to re-negotiate its debt repayment schedule, which reduces the balloon payment due in 2017.

On the positive side, Detour Gold offers excellent exposure to the gold price, so gold bulls should definitely consider taking a position in Detour. But I personally won't take a position until the company has reached full production and is building up a cash cushion.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Source: No Detour For Detour Gold