Detour Gold shares plunge in biggest drop in five years after outlook cut
Investors pulled out of Detour Gold Corp. en masse Friday in the latest setback for Canadian junior gold miners struggling to take advantage of rising gold prices.
Detour’s shares were down 30 per cent in afternoon trading, its worst decline in five years, after the company issued a quarterly report that forecast severely impacted cash flow for the year.
Detour now expects to produce about 10,000 fewer ounces of gold in 2018, as prospects dim and costs increase at its new Detour Lake operation. That should reduce free cash flow for the year to $55 million, from a previous estimate of $115 million.
The company’s revised guidance led analysts at Credit Suisse, Scotiabank and Eight Capital to downgrade the stock to a “hold” and reduce their price targets to an average of $16.40.
Craig Stanley at Eight Capital said the reduced cash flow is serious, but not dire by any means; he thinks the market is overreacting.
“You would have to have a significant decrease in the Canadian-dollar gold price to see them getting into any kind of trouble,” he said. “They have more than enough cash right now and their debt is manageable.”
Friday’s collapse left DGC trading under $11 a share.
So far this year, Canada’s gold sector has been struggling to keep pace with rising prices. The S&P/TSX Capped Gold Index has been virtually flat for the year (down 2 per cent) even as the U.S.-denominated price of gold has risen 13 per cent, to US$1,320 an ounce.
Rising gold prices should give shareholders some comfort, but Stanley said the domestic gold sector has suffered from “general apathy,” as investors find more interesting places to park their cash.
“We’re at quite a high level of disconnect between the equities and the underlying price,” said Stanley, who believes the sector could be getting more attention if gold prices breach US$1,370.
Another junior gold miner that has faced difficulties in 2018 is Eldorado Gold Corp. (ELD). The company also posted Q1 results on Thursday, narrowly beating estimates. (Shares were up 1.2 per cent on Friday.)
Eldorado recorded a gain of US$8.7 million, or 1 cent per share compared to estimates of 0.5 cents, but the stock is down 30 per cent year to date, due to technical issues at its Kisladag mine in Turkey and prolonged arbitration proceedings related to its Skouries mine in Greece.
The company also received notice on April 18 from the New York Stock Exchange that it no longer met the minimum US$1 share-price requirement, which may force Eldorado to execute an unpopular 5:1 stock consolidation.
“Historically that’s been something that has not been positive,” said Stanley.
Investors looking to get into the junior gold sector should steer clear of Detour and Eldorado, said Stanley, who has a “hold” on both stocks, and instead look into healthier players like B2Gold Corp. (BTO), which is forecasting impressive cash flow through 2019 thanks to a newly built mine in Mali.
Another top pick is Osisko Mining Inc., which will be coming out with an update on a new project next month. “The stock has been under pressure along with all the other juniors,” Stanley said, “but hopefully we’ll some positive news here.”