VOX: Detour Gold: ‘The ultimate risk-reward name’ in gold miners – by David Milstead (Globe and Mail – November 13, 2014)

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Unsatisfied with a mere bet on bullion? Desirous of a big, fat, chunky wager on gold prices?

May I suggest Detour Gold Corp., a mining stock whose zigs and zags make the volatility in the gold price look picayune by comparison. Detour is a single-asset company, with a young mine near Detour Lake in Northern Ontario. In the past 52 weeks, it’s traded as low as $2.88, upon the surprise resignation of its chief executive officer, and as high as $15.62 in June, when gold prices were above $1,300 (U.S.) an ounce. Detour stock was $6.60 (Canadian) at the beginning of November. It closed at $8.67 on Wednesday.

Despite that rapid rise this month, analysts believe it has plenty of room to run. The average 12-month target price is $13.56, an upside of 56 per cent (one of the higher possible returns among large and mid-size miners, according to Bloomberg data). And some of the bulls are well above that average: Analyst Richard Gray of Cormark just lowered his target price from $23.50 to $18.75. He calls Detour “the ultimate risk-reward name in the gold sector, and right now the upside (reward) far outweighs the current downside (risk).”

Well, let’s dwell on those risks before we give the impression that Detour investors are just one pitch away from a home run. In Saturday’s Globe Investor, we detailed the major issue in the mining industry: Companies that took on significant debt to fund expansions or acquisitions are in a perilous place when gold falls. Analysts are now using prices of $1,100 (U.S.)-an-ounce and below in their models.

RBC Dominion Securities analyst Stephen Walker includes Detour on a list of miners that would need to make cuts or deferrals to discretionary spending at that price level for gold, which currently trades about at $1,160. The company has more than $600-million in long-term debt and lease obligations, and has yet to be consistently free-cash-flow positive.

Rahul Paul of Canaccord Genuity Corp., who has a “buy” rating and an $11 (Canadian) target price, notes that while the balance sheet, which also features $137-million (U.S.) in cash, “is in significantly better shape” than a year ago, “the debt levels offer limited protection in the event of a significant and prolonged decline in the gold price from current levels.”

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