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Paulson-Backed Detour Plots Supersizing Gold Mine

Detour Gold's Lake Mine
Detour Gold Corp., whose biggest shareholder is billionaire John Paulson’s hedge-fund firm, plans to reach full production at its Detour Lake mine in northern Ontario by the end of the year while it considers options to boost output on its 630 square-kilometer (243 square-mile) property. Source: Detour Gold Corp. via Bloomberg

Everything about Detour Gold Corp. is big, from its shovels that scoop up 100 tons of rock at a time to its index-leading share price. Now it’s exploring ways to make Canada’s largest gold mine even bigger.

The company, whose biggest shareholder is billionaire John Paulson’s hedge-fund firm, plans to reach full production at its Detour Lake mine in northern Ontario at the end of the year while it considers options to boost output.

“Our priority remains the ramp up, but it’s not our sole priority,” Chief Executive Officer Paul Martin said in an interview at Bloomberg’s Toronto office. “The next step is to look at our near-term organic growth opportunities.”

Detour Lake, built for C$1.5 billion ($1.4 billion) on the company’s 630 square-kilometer (243 square-mile) property, is grand by several parameters. Trucks with capacity to each carry 300 tons of rock rumble through the growing pit and the inside of the mill is as large as two football fields, according to Martin.

The size is partly a function of the mine’s lower grades: the company must move about 4 tons of rock to get 1 gram of gold. That means the more ore Detour can mine and process, the more profitable the operation becomes.

While gold’s decline last year -- the biggest drop in more than three decades -- spurred some producers to trim output and target the most profitable ounces, that doesn’t make sense for Detour.

‘Incentivized to Increase’

“At a big mine like this, it’s economies of scale,” Martin said. “The lower the gold price goes, you’re actually incentivized to increase production.”

The mine’s size and relatively long production life of 21 years make Toronto-based Detour stand out among single-mine producers. That’s especially true after Osisko Mining Corp. agreed April 16 to a C$3.7 billion takeover by Canadian competitors Yamana Gold Inc. and Agnico Eagle Mines Ltd. The deal followed a bidding war sparked by a hostile bid for Osisko from Goldcorp Inc.

Osisko’s Canadian Malartic mine in Quebec is similar to Detour Lake in size, location, the length of its operating life and because both are bulk-tonnage pit operations, Martin said.

The bidding war for Osisko may have helped push up Detour’s share price. The stock has increased 169 percent this year, making it the top performer on the benchmark 244-company Standard & Poor’s/TSX Composite Index. That’s a turnaround from 2013, when Detour plunged 84 percent. It fell 1.1 percent to C$11.01 in Toronto today.

‘Reasonably Interactive’

Paulson & Co. held about 16 percent of Detour as of March, compared with 11.7 percent at the end of January 2012, according to data compiled by Bloomberg.

Paulson himself has visited the mine twice, Martin said.

“They’re reasonably interactive for the size of their investment,” he said.

Armel Leslie, a spokesman for New York-based Paulson & Co. with WalekPeppercomm, declined to comment on the investment.

While Detour may become a target for larger producers looking to diversify into or expand in North America, that probably won’t happen this year, said Michael Siperco, a Toronto-based analyst at Macquarie Capital Markets.

“It’s too early to discuss an acquisition, as Detour needs to continue to ramp up the mine and prove out the mill,” Siperco said yesterday by e-mail.

Detour’s Challenge

Detour isn’t looking for a sale, said Martin, who was named interim CEO after Gerald Panneton resigned last year, and appointed to the position permanently in February. He argues the company’s shares are undervalued relative to other producers, even after a strong run this year.

The average of 17 analysts’ target prices for Detour is C$14.07, 26 percent more than the current share price. Analysts have 14 buys, one sell and four hold recommendations on the stock, according to data compiled by Bloomberg.

Detour’s challenge right now is to get “fully ramped up,” said Kerry Smith, a Toronto-based analyst at Haywood Securities Inc. That process is going relatively smoothly, he said.

“The ramp up at Detour has gone significantly quicker than the ramp up at Osisko,” Smith said yesterday in a telephone interview.

Detour has hedged some of its gold production to help protect against the risk of price volatility this year while it irons out startup wrinkles at the mine. The board has given management permission to hedge as much as 50 percent of the sales in 2014, and Detour was currently at about 30 percent, Martin said.

‘One Year’

“Our shareholders get it, they get that this is one year out of a 20-plus-year mine life, that we’re looking for stability while we get through the ramp up.”

The company’s options to grow output at Detour Lake include finding and developing mineralized zones on its property that could yield slightly higher grades. The mine plan already includes an expansion of the mill that would allow for processing of 61,000 tons a day, from a design capacity of 55,000 tons.

Martin also said the company will consider acquisitions -- at some point, adding more projects may make sense to decrease risk.

“It’s in the peripheral vision right now,” Martin said. “As we get through 2014, that all becomes much more prevalent.”

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