Canada’s struggling gold sector claimed another scalp this week, when Detour Gold Corp.
, Stock Forum
) President and CEO Gerald Panneton abruptly resigned, raising speculation that his departure may have followed a dispute with other members of the company’s board.
While the stock has bounced back since his resignation was announced earlier this week, Detour Gold has not been a stellar investment for people who bought in at the end of 2012 when the stock was trading at over $24.
Trading at $4.09 on Thursday, Detour Gold has a market cap of $563.7 million, based on 138.2 million shares outstanding. The 52-week range is $25.98 and $2.88.
Analysts have said Panneton’s exit has only served to amplify their concerns in a gold market climate that is creating problems for Detour and other gold miners at a time when it is engaged in the expensive process of ramping up production at its flagship gold mine in northern Ontario to a design rate of up to 650,000 ounces annually.
A key issue is the company’s ability to finance ongoing capital expenditures for stripping activities and mining equipment (trucks) over the next few years as well as $650 million of total debt. That includes $500 million worth of convertible debentures due in 2017.
“By our estimates, we believe it would take a sustained gold price of $1,500 an ounce to generate sufficient free cash flow to repay this debt on schedule,” wrote Paradigm Capital in a November 26, 2013 research report.
But with gold trading at US$1,245 an ounce this week, it becomes much more challenging for Detour to generate sufficient cash flow needed to service its debt.
“The debenture repayment will be a longer-term overhang on the stock until either gold prices are higher or the terms are renegotiated,” Paradigm said, adding that if the gold price continues to fall, the company could be out of cash by the end of 2014.
Analysts are awaiting further clarification about the company’s intentions going forward.
However, unless the price of gold rebounds, they believe the company will soon be forced to undertake a large and dilutive recapitalization to lower debt levels, potentially at a significant cost to equity holders.
Meanwhile, Canaccord Genuity Precious Metals Analyst Rahul Paul is warning that downside risks to equity holders remain very high and that investors should avoid long term exposure to this stock until the market gets further clarity on the path going forward.