Does the Latest News Make This Gold Miner a Buy?

Risks abound, but the improved outlook for gold and Detour Gold Corp.’s (TSX:DGC) attractive valuation make now the time to buy the miner.

The Motley Fool

You’re reading a free article with opinions that may differ from The Motley Fool’s premium investing services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

It has been a tough year for investors in intermediate gold miner Detour Gold (TSX:DGC). Even after gold’s latest rally, it is down by 16% over the last year. The miner’s poor performance recently triggered a boardroom spill led by dissident shareholder and famed hedge fund manager John Paulson, who owns a nearly 6% interest in the miner. This saw the removal of CEO Michael Keyon and the replacement of five incumbent board members. That — along with firmer gold and an improved outlook for the precious metal — has sparked speculation that Detour’s value will soar in coming months.

Paulson, unlike many other hedge fund managers, had invested heavily in gold and retained those investments despite poor fundamental indicators, such as a firmer U.S. dollar and higher interest rates boding poorly for the precious metal’s outlook. Now that gold has rallied significantly since the end of November 2018, he is attempting to position Detour, so it can take full advantage of firmer prices and generate a solid return on his investment.

Quality gold mining assets

Detour owns and operates the Detour Lake open pit mine in northeastern Ontario, which has been assessed to have gold reserves of almost 16 million ounces at an average grade of 0.97 grams gold per tonne of ore (g/t). A key problem being experienced by the miner is poor production results since the start of 2018. Third-quarter production totaled 151,402 gold ounces, which, while 8% greater than the equivalent period a year earlier, was 2% lower than the previous quarter. That quarter-over-quarter decline in production can be attributed to lower recovery rates and mill outages caused by equipment failures.

The issues impacting production also caused costs to blowout. All-in sustaining costs (AISCs) for the period were US$1,377 per gold ounce sold, which was a worrying 33% greater year over year, impacting Detour’s profitability. That, along with weaker gold price, had a sharp impact on the miner’s bottom line for the quarter with net earnings of $0.07 per share more than a third lower than for the same period in 2017.

These matters, along with weaker gold and a poor outlook for the yellow metal, were weighing on Detour’s market value.

Nonetheless, the miner has implemented a program aimed at alleviating these issues by investing in improved maintenance. Detour is also focused on introducing efficiencies aimed at reducing its AISCs, which will also fall as capital expenditures decrease once the projects focused in improving operational practices are completed.

Detour is also in the process of evaluating drilling targets at its Burntbush property located 70 km south of its Detour Lake mine. Those activities boost the exploration upside associated with the miner and over time should lead to further discoveries that will boost its mineral resources and reserves.

Solid balance sheet

Detour finished the third quarter 2018 in a healthy financial condition, holding US$156 million in cash and US$249 million of long-term debt, which is a very manageable 0.3 times trailing 12-month operating cash flow. That solid balance sheet means the miner is well positioned to continue funding the programs aimed at improving its operations while maintaining its exploration drilling program, which is targeting satellite gold deposits near the Detour Lake mill.

Is it time to buy Detour?

While I have been bullish on Detour in the past, there are signs that the boardroom spill will distract much-needed attention from the operational improvements required to reduce AISCs and boost profitability. There are signs that AISCs will fall going into 2019, and this — along with firmer gold — does bode well for greater profitability and higher earnings. Because Detour’s shares have lost more value than many of its peers over the last year, it has created an opportunity for investors to acquire an attractively valued gold miner with a solid balance sheet and high-quality flagship asset located in a stable mining-friendly jurisdiction.

Just Released! 5 Stocks Under $50 (FREE REPORT)

Motley Fool Canada's market-beating team has just released a brand-new FREE report revealing 5 "dirt cheap" stocks that you can buy today for under $50 a share.

Our team thinks these 5 stocks are critically undervalued, but more importantly, could potentially make Canadian investors who act quickly a fortune.

Don't miss out! Simply click the link below to grab your free copy and discover all 5 of these stocks now.

Claim your FREE 5-stock report now!

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Matt Smith has no position in any of the stocks mentioned.

If You Thought Apple and Microsoft Were Big, You Need to Read This.

The steel industry produced the world's first $1 billion company in 1901, and it wasn't until 117 years later that technology giant Apple became the first-ever company to reach a $1 trillion valuation.

But what if I told you artificial intelligence (AI) is about to accelerate the pace of value creation? AI has the potential to produce several trillion-dollar companies in the future, and The Motley Fool is watching one very closely right now.

Don't fumble this potential wealth-building opportunity by navigating it alone. The Motley Fool has a proven track record of picking revolutionary growth stocks early, from Netflix to Amazon, so become a premium member today.

See the 'AI Supercycle' Stock

More on Metals and Mining Stocks

Metals
Metals and Mining Stocks

3 Unstoppable Metal Stocks to Buy Right Now for Less Than $1,000

Gold prices are expected to keep rising or stabilize in the next few months, and the precious metal stocks rising…

Read more »

Tractor spraying a field of wheat
Metals and Mining Stocks

Where Will Nutrien Stock Be in 1 Year?

Nutrien stock has had a rough few years, and this next year may not be easy. But long-term investors may…

Read more »

nugget gold
Metals and Mining Stocks

Gold Stocks vs Silver Stocks: Which Have the Shinier Outlook?

Gold and silver are on a roll in 2024.

Read more »

Safety helmets and gloves hang from a rack on a mining site.
Metals and Mining Stocks

Is Kinross Gold Stock a Good Buy?

Kinross (TSX:K) stock has certainly been showing strength lately, but is it enough to bring investors on board?

Read more »

nugget gold
Metals and Mining Stocks

China Hits Gold: What Mining Investors Need to Know

China Gold International Resources (TSX:CGG) stock and other great gold plays look enticing as the recent China find looks to…

Read more »

nugget gold
Metals and Mining Stocks

Bullish on Precious Metals? These Are Promising Gold Investments

Consider Agnico Eagle Mines (TSX:AEM) and another top mining stock to play the run in gold into 2025.

Read more »

Paper Canadian currency of various denominations
Metals and Mining Stocks

This Billionaire Is Selling Micron and Picking up This TSX Stock

Prem Watsa may have sold some Micron, but he's putting the funds towards something with even more growth potential.

Read more »

nugget gold
Metals and Mining Stocks

Must-Watch Gold Stocks Before Year-End

Gold prices have been going up for the better part of the year, and it is highly probable that this…

Read more »