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TABLE OF CONTENTS Dec 23 - 29, 2013 Volume 99 Number 45 - 0 comments

Blackwater looks far-off for New Gold

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By: Anthony Vaccaro

It looks as though New Gold (TSX: NGD; NYSE-MKT: NGD) will have to wait for more robust gold prices to get its Blackwater project into production.

The company released a feasibility study on the big-tonnage project in south–central B.C., and despite the study substantiating early work done on the project, its high price tag and low grade mean the company will likely have to wait for gold prices to rebound before it puts shovels in the ground.

Using a US$1,300 gold price and a US$22 per oz. silver price, along with a 5% discount rate, the new feasibility study envisions a mine that generates a net present value (NPV) of $991  million with an internal rate of return (IRR) of 11.3%.

BMO Capital Markets Brian Quast labelled the results “neutral,” noting that changes from the preliminary economic assessment (PEA) released last year were minor.

A slight change to the downside included life-of-mine silver recoveries, which dropped to 49% from the previous estimate of 53%.

Offsetting those lower recoveries, however, was a cut to operating costs. The anticipated reduction is a consequence of designing a smaller pit that would bring the strip ratio down to 1.88 to 1, from the previous 2.36 to 1.

The project has proven and probable reserves of 344.4 million tonnes grading 0.74 gram gold and 5.5 grams silver, for 8.17 million oz. gold and 60.8 million oz. silver.

But lower costs on the operating side didn’t transfer over into capex, as the estimate went up by $110 million, and is forecast at $2.5 billion. Most of the added building costs are connected to the new plan to expand the tailings dam.

BMO’s Quast expects a future mine would ring in average annual production of 472,000 equivalent oz. gold, with cash costs of $603 per oz. His previous estimate was for annual production of 468,000 oz. at cash costs of $630 per oz.

And while the updated forecast boosts Quast’s projected post-tax NPV for Blackwater by $26 million, he wrote in his research note that the amount is enough to push the needle on valuation.

“While [the new forecast] is an 80% increase in the NPV for the project, it does not impact valuation for the company as a whole, given Blackwater accounts for only 1% of the company’s total NPV,” he wrote.

Blackwater’s negligible impact on the company’s bottom line at this point, combined with falling metal prices since Quast’s last valuation, resulted in the analyst cutting his target price to $7 per share from the previous $8.50. He maintained an “outperform” rating on the stock.

Another analyst agreeing with Quast’s assessment was CIBC’s Alec Kodatsky. In his research note, Kodatksy was not optimistic  that a mine would be built at Blackwater soon.

“Given the scale of the capex, the pre-tax return profile and NGD’s desire to fund development largely from operating cash flow, we think Blackwater only goes ahead at higher gold prices. This places increased priority on Rainy River, which is expected to have more modest capital requirements,” CIBC analyst Alec Kodatsky wrote in his report.

New Gold acquired Rainy River Resources and its Rainy River project in northwestern Ontario earlier this year. The project is set to get most of New Gold’s attention, as it drives towards an updated feasibility study for early next year.

In Toronto on Dec. 13 — the day the Blackwater feasibility study was released — New Gold’s shares were up 3¢ to $5.16, on 830,000 shares traded.

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An aerial view of New Gold's Blackwater gold project in British Columbia. Credit: New Gold
An aerial view of New Gold's Blackwater gold project in...

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