After New Gold (NGD) released its Q4 2019 financial results and its updated life of mine plans for the Rainy River and New Afton mines, along with the 2020 production and cost guidance, its share price declined by 10%. The decline was caused especially by the high projected 2020 AISC. On the other hand, the updated life of mine plans show that New Gold hides a lot of value. But it will take some time to unlock it.
The Q4 gold equivalent production equaled 66,856 toz gold, 140,475 toz silver and 18.3 million lb copper, or 101,423 toz of gold equivalent. In comparison to Q3, the gold equivalent production declined by 21.3% and in comparison to the excellent Q4 2018 even by 31%. However, this is not new information, the production volumes were reported back in January.
Due to the lower production volumes and higher sustaining CAPEX expenditures, the Q4 AISC increased to $1,862/toz gold, which is a new negative record. The Q4 2019 AISC was even by more than 100% higher than in Q4 2018. The good news is that the total cash cost was $942/toz of gold equivalent. After the CAPEX expenditures return back down, the AISC will decline as well. However, it won’t be easy to push it below the $1,000/toz level, which was New Gold’s plan declared only several quarters ago and reiterated in the updated life of mine plan.
Overall, New Gold’s 2019 production guidance was met. Moreover, the AISC was even lower than projected by the lower boundary of the cost guidance. The guidance envisioned AISC of $1,330-1,430/toz gold; however, the actual 2019 AISC was $1,310/toz.
The low production volumes were reflected also by low revenues that amounted to only $139.2 million in Q4. It means a 17% decline compared to Q3. Also, the operating cash flow was negatively impacted and it declined to $47.9 million which is the worst result recorded over the last two years. A positive feature of the Q4 financial results is the fact that New Gold was finally able to break a long streak of negative quarterly net incomes. Over the previous quarters, the income was affected by various impairment charges. But in Q4, it climbed to $300,000. It is not a big number, but it is a positive number. Despite it, the Q4 EPS equals approximately $0.
New Gold’s cash position has worsened significantly. The volume of cash, cash equivalents, and short-term investments declined from $178.8 million as of the end of Q3, to $83.4 million as of the end of Q4. The decline was attributable to the accelerated CAPEX spending, as well as to debt repayment. The volume of total debt declined to $714.5 million, or by 6.1% quarter-over-quarter. On the other hand, the net debt increased by 8.4%, to $631.1 million, as the volume of cash on hand declined more than the volume of total debt.
As the weak Q4 numbers were expected, there are other factors behind the negative market reaction that pushed New Gold’s share price to its lowest levels since July.
The life of mine plans look good. The Rainy River mine should produce 289,000 toz gold per year at an AISC of $967/toz on average over its 8-year mine life. As a big portion of the growth and sustaining CAPEX has been already expended, the remaining values are $586 million (sustaining) and $56 million (growth). As $128-162 million of sustaining CAPEX is budgeted for this year, the average for the remaining seven years should be only around $60 million. The updated mine life also attributes to Rainy River an after-tax NPV(5%) of $421 million at a gold price of $1,300/toz, silver price of $16/toz and USD/CAD exchange rate of 1.3 and an after-tax NPV(5%) of $859 million at a gold price of $1,550/toz, silver price of $17.5/toz silver and USD/CAD exchange rate of 1.3. It is also expected that at a gold price of $1,550/toz, Rainy River should generate free cash flow of approximately $600 million over the 5-year period between 2020 and 2024.
The updated life of mine plan for New Afton is based on the C-zone development that should help to expand the mine life at least until 2030. The CAPEX to develop the C-zone is estimated at $460 million. Over the 10-year time period, the average annual production should equal approximately 92,000 toz gold and 75 million lb copper, or 260,200 toz of gold equivalent. The AISC is projected only at $681/toz of gold equivalent. The new life of mine plan attributes an after-tax NPV(5%) of $735 million, at a gold price of $1,300/toz, silver price of $16/toz, copper price of $3/lb and USD/CAD exchange rate of 1.3 and $766 million at a gold price of $1,550/toz, silver price of $17.5/toz, copper price of $2.75/lb and USD/CAD exchange rate of 1.3. Unlike at Rainy River, at New Afton, the majority of free cash flow should be generated in later years, as the C-zone won’t be fully developed and ramped-up until 2025.
The life of mine plans look good and they don’t explain the 10% share price decline that followed after the news release. The problem is the 2020 production and cost guidance. New Gold should produce 313,000-343,000 toz gold and 75-85 million lb copper. It equals to 465,000-515,000 toz of gold equivalent. It means that the projected production volumes are good. The problem is the AISC. It was originally expected that after the increased 2019 sustaining CAPEX expenditures that pushed the AISC up to $1,310/toz of gold equivalent, the AISC should decline notably in 2020. However, as New Gold moved Rainy River-related expenses worth approximately $40 million from 2019 to 2020, and at New Afton sustaining CAPEX should almost double compared to 2019, New Gold estimates its 2020 AISC to be $1,260-1,340/toz of gold equivalent. Adding to it the negative impacts of the gold hedging (in H1 2020 – 72,000 toz gold capped at $1,355/toz, and in H2 2020 – 96,000 toz gold capped at $1,415/toz) and New Gold probably won’t be able to generate a meaningful volume of free cash flow this year. The good news is that New Gold’s notes mature only in 2022 and 2025. If New Gold shows strong performance in 2021, the refinancing shouldn’t be a major problem.
New Gold’s shares have been in a downtrend since the announcement of the Q4 operational results, back in the middle of January. The share price slowly declined below the 10-day as well as the 50-day moving average, moreover, the quicker moving average crossed the slower one to the downside, further boosting the negative sentiment. The decline culminated by a 10% drop on the day when the Q4 financial results, the 2020 production and cost guidance, and the Rainy River and New Afton life of mine plans were released. However, the RSI still hasn’t reached the oversold levels which indicates that further downside is possible in the near term. Moreover, the share price shortly dipped below the support level at $0.76. Another support stands at $0.66 and then at $0.6. It is hard to say which one of these supports will hold. But after the bottom is reached, New Gold will become an attractive investment for the short-term speculators that will try to ride the stock several tens of percent higher, as well as for the long-term investors.
What I like about New Gold’s Q4
- A long series of negative net incomes was finally broken.
- The Rainy River and New Afton updated life of mine plans look good.
What I don’t like about New Gold’s Q4
- The gold production was low.
- The net debt increased slightly.
- The 2020 cost guidance doesn’t leave too much room to generate positive free cash flow.
- The technical analysis indicates that the downwards share price movement may continue in the near term.
Disclosure: I am/we are long NGD. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.