Update: Detour Gold's Earnings

Jul.30.14 | About: Detour Gold (DRGDF)

Summary

Detour Gold reported a second quarter loss of $36 million or $0.23/share on revenues of $139 million.

The company continues to increase production as it ramps up its Detour Operation to nearly 700,000 ounces of annual production.

The company's production and costs are largely in line with my estimates from May, with costs being slightly higher than expected.

The Detour Mine is moving in the right direction although I remain concerned about its valuation, especially since the stock has risen since m May article.

Detour Gold (OTCPK:DRGDF) recently announced its second quarter earnings figures. The company reported $139 million in revenues and a net loss of $36 million. Despite the loss the company's newly producing Detour Mine is heading in the right direction as production rises and costs fall. Specifically production reached 117,000 ounces for the quarter, or 10,000 more than the company's Q1 production. The company's goal is to exceed 700,000 ounces at the mine's peak, or 175,000 ounces per quarter, and to average 660,000 ounces per year over the mine's 21 year life. Production costs came down slightly quarter over quarter to $941/oz. from $976/oz., although the company reported a loss due to depreciation and expansion expenses. Despite the fact that costs came down they were slightly above management's prediction of $800-$900/oz. for 2014.

As I argued in my May article Detour Gold is a quality company bringing its enormous Detour Mine to full production, which is not an easy task considering its enormous size. The stock had collapsed last year as falling gold prices and higher than expected production costs led investors to question the mine's viability. However, since then, the stock has generally risen, and I suggested that it had risen too far even if the company was able to meet its targets. The company's Q2 figures are slightly worse than estimated, although these estimates aren't wildly off base.

I remain more concerned, however, that Detour Gold shares remain overvalued given the current gold price environment as investors are optimistic about the company's upcoming period of strong profitability. I suspect that investors are also pricing in a takeover bid from a major gold producer. The fact that there was so much interest in Osisko Mining earlier this year has led investors to the belief that major gold miners want to own large, long-life mines in safe jurisdictions, and Detour Gold qualifies. The stock has continued to climb, and while it is down 3% on this earnings release, it is up 16% since I suggested that investors take profits. I stand by this conviction, although continued evidence that operations are improving lead me to reaffirm my belief that a major gold producer could still buy the company out.

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