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Detour Gold's hike in reserves fuels takeover talk

Gold bars


Detour Gold Corp. likes to bill itself as the exploration company holding Canada's largest undeveloped gold deposit.

This week, the estimates of the size of that deposit got significantly larger, causing analysts to upgrade their stock targets while renewing speculation that the company could be in line for a takeover by a major producer.

Based on its latest drilling results, Detour says proven and probable gold reserves at its northeastern Ontario exploration site have risen 31 per cent to 14.9 million ounces. But including inferred and other less definitive estimates of the deposit's size, the ore body could ultimately hold 25.6 million ounces, a motherlode worth about $34-billion (U.S.) at current prices and the fourth-largest in North America by the company's estimates.

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The increase in reserves allowed a five-year extension, to 21 years, in the projected life of the mine Detour is constructing. However, these calculations may be conservative because they were based on a gold price of only $850 an ounce, well below the current market level of $1,330 an ounce.

Among the firms raising their share price targets in response to the company's announcement were CIBC, TD Newcrest, and Canaccord Genuity, with projections that the shares could be worth $42 to $44 over the next year. If these levels are reached, it would give Detour a potential upside of about 50 per cent over the next year.

Part of that gain could come from a takeover. Given the size of the ore body, Canaccord analysts said in a note to clients that Detour's lure as an acquisition target has been enhanced.

"We believe this makes the company an obvious acquisition target for some of the seniors, given the potential to add over 800,000 ounces per year in production" to a buyer's output, the firm said.

Another factor that might entice a bid is that Detour, with an easily digestible market capitalization of $2.3-billion, trades at a significantly lower value, relative to its assets, than senior, more established producers.

Among the firms that Canaccord says might be interested in buying Detour are Barrick Gold, Goldcorp and Agnico-Eagle. Barrick is the most logical purchaser because reserves at its Hemlo mine in Ontario are dwindling and the company could "use another Canadian asset to utilize the tax shield from Canadian corporate expenditures."

Detour already has a savvy fan in the investment community. Its largest shareholder is likely Paulson & Co., the New York-based hedge fund that played the mortgage market blowout for big profits and recently scored another home run on its huge bullion hoard.

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According to Bloomberg, Paulson held 12.8 million shares, or a 15.4 per cent stake, based on filings made Dec. 31. The stake was up 2.5 million shares from its previous disclosure.

Analysts expect Detour's mine to start commercial production in the first half of 2013. Most of the funding for the operation is in place.

The company plans to process about 60,000 tonnes of ore per day, but analysts believe that figure could be raised by up to 50 per cent, at modest capital costs.

Detour has two other possible ways of enhancing the value of the deposit that might reward shareholders. If gold maintains a value of at least $1,000 an ounce, Detour said this week that it could mine lower grade ore and generate higher reserves. The company also plans additional drilling to test a western extension of its deposit.

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About the Author
Investment Reporter

Martin Mittelstaedt has had a varied reporting career at the Globe and Mail, covering politics, the environment and business. He opened up the Globe's New York bureau for the Report on Business, and has also been on the banking and capital markets beats. He's written extensively on investing themes. More

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