Canadian gold stocks: Detour Gold

Target price raised as Detour strengthens its balance sheet

Analyst Michael Parkin updated his model after Detour Gold Corp. (DGC-TSX, $9.97) completed a bought-deal share offering that strengthened its balance sheet.

Mr. Parkin is sticking with both his “buy” and top pick recommendations, along with his above-average risk rating.

In addition, he’s raising his 12-month price target to $12 from $9.50 a share of the gold stock. He writes:

Detour Lake, the company’s only producing asset, has proven and probable gold reserves of 15.5 million ounces.

Detour has completed its $173 million bought deal, selling over 18.6 million shares at $9.25 each.

This included the more than 2.4 million shares the underwriters picked up, exercising their over-allotment option to the full amount.

We’ve updated our model to include the impact of the financing. And, with the overhang of the bought deal now removed, we expect the shares, which have been trading at a discount, to re-rate more in-line with Detour’s peers.

We’re therefore raising our multiples for net asset value, and for cash flow per share for the next 12 months, by 16.7 and 27.3 per cent, respectively.

Detour’s equity financing was dilutive to our per-share estimates of both its net asset value and cash flow. Moreover, the number of the gold corp stock shares issued was more than we’d expected.

But so was the amount of money raised. And with a freshly cashed-up balance sheet, Detour has little risk of needing to return to the market to raise capital while it ramps up production.

By our estimates, the company should be financially secure until the end of 2015.

This is, of course, as long as the Canadian dollar remains at a 10 per cent discount to the U.S. dollar over the second quarter of 2014 through to the end of 2015, unless gold prices fall to roughly US$950 an ounce.

But at this point, that number is well below our base-case range of US$1,225-$1,250 an ounce.

In the meantime, we’re deriving our target price of $12 for Detour from a weighted combination of two valuation methods.

We apply a 0.70 times multiple to our net asset value estimate on a cash-adjusted basis, giving this a 60 per cent weighting in calculating our target price.

For the other 40 per cent, we apply a 14 times multiple to our estimate of cash flow per share for the next 12 months.

At its current price of $9.97 a share, Detour offers a potential upside of 20.4 per cent based on our target price.

Detour now trades at 10.9 and 5.9 times our cash flow per share estimates for 2014 and 2015, respectively. It also trades at 0.60 times our estimate of net asset value, on a cash-adjusted basis.

We view the premium price-to-cash-flow multiple as unsustainable, but justified in the near-term.

This is because of the expected improvement in the company’s earnings potential as it ramps up the Detour Lake mine.

Given that is has only one producing asset, we’d expect that once its mine is fully ramped up, Detour will trade in a range of seven-10 times cash flow per share over the next 12 months. We see this happening from 2015 onwards.

We believe Detour shares offer excellent upside potential as they’re now trading below this price-to-cash-flow range on estimated cash flow for 2015, as production ramps up.

 

Digested from a March 7 report by analyst Michael Parkin, Desjardins Capital Markets

Headquartered in Toronto, Detour is an emerging mid-tier gold producer which is now ramping up its wholly owned Detour Lake mine in northeastern Ontario.

 

Investor’s Digest of Canada, MPL Communications Inc.
133 Richmond St.W., Toronto, ON, M5H 3M8. 1-800-804-8846

 

 

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