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Analysis by consultancy Ernst & Young suggests that private capital investors accounted for 21 per cent of mining deal activity globally in the nine months to Sept. 30 last year, against just 12 per cent for the same period in 2011. (Sean Kilpatrick/The Canadian Press)
Analysis by consultancy Ernst & Young suggests that private capital investors accounted for 21 per cent of mining deal activity globally in the nine months to Sept. 30 last year, against just 12 per cent for the same period in 2011. (Sean Kilpatrick/The Canadian Press)

Schizas’ Mailbag

Wait for a gold rally before buying this miner Add to ...

Lou:

I had bought shares in Detour Lake then noted the recent bought deal of 17,500,000 share to raise capital. I sold immediately, my thinking being that the dilution by some 15 per cent would certainly bring the price down. Lo and behold, not so. Instead it held its price and went up? What gives?

Dan

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Hey Dan,

Thanks for the assignment.

Detour Gold Corp. needed new money to get the Detour Lake Mine that they have been developing since 2007 into commercial production. Management had estimated that gold would be selling for $1,600 per ounce but unfortunately Mr. Market has not been that generous. If a company needs cash they can sell debt or equity to accomplish their objectives. In this case management decided to sell shares at $8.75 to reach their goals for 2013. The market reaction that ran counter to your assumption about dilution setting off a selling spree may be related to how close DGC is to commercial production at their Detour Lake Mine. Removing the uncertainty of how the firm would proceed motivated investors to go long.

The company had their first pour from Detour Lake this year and anticipate reaching commercial production in the third quarter. Management expects year-end production in 2013 to reach between 260,000 and 320,000 ounces. Detour Lake has an estimated mine life of 21.5 years with average production of 657,000 ounces per year and cash cost per ounce of $745. The company expects to increase their reserve base from 15.6 million ounces to 20 million ounces with continued exploration drilling.

An examination of the charts will provide you with better to particulars to help you decide how best to proceed with this opportunity.

The three-year chart tells the tale of what happens when the price of the underlying commodity that a company produces hits the skids. The stock takes a far worse beat down than the commodity itself. There are a number of patterns worth mentioning. The breach of support along the 200-day moving average in December of 2012 followed by the death cross that surfaced in January of 2013 were indications that investors were getting off of the ride. When the shares failed to hold support at $19.00 in April of 2013 it was all over but the crying.

The six-month chart provides a close-up of the downtrend that has gripped DGC in 2013. At this time the MACD and the RSI are not generating a strong buy signal. Although I like the story, the charts are not supporting a buy decision right now. Put the stock on your watch list but keep in mind we need a recovery in the demand for gold to give DGC and the entire gold mining sector a break.

Make it a profitable day and happy capitalism!

Have your own question for Lou? Send it to lschizas@globeandmail.com.

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