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TABLE OF CONTENTS Feb 3 - 9, 2014 Volume 99 Number 51 - 0 comments

New Gold nears decision day at Rainy River

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By: Matthew Keevil

VANCOUVER — It’s been a busy six months for producer New Gold (TSE: NGD; NYSE-MKT: NGD), with a pair of economic studies providing some insight on where the company may develop its next gold mine.

Back in December New Gold released an updated feasibility study on its Blackwater gold project in B.C., and the company has now followed up with a report on its recently acquired Rainy River gold project located 65 km west of Fort Frances in northwestern Ontario.

New Gold acquired the latter project in a friendly, $310-million takeover of explorer Rainy River Resources in June 2013, paying a 42% premium.

The project had already hit a feasibility study completed, but it used a relatively high US$1,400 per oz. gold price, and New Gold so has tweaked a few variables to take into account a lower gold price.

Anticipated initial capital expenditures for the project have risen over the past nine months, with development costs jumping 24% to US$885 million.

However, this increase is offset by lower anticipated sustaining costs, which have dropped 17% to US$348 million for the project’s open-pit and underground components.

Most notably, the mine’s equipment would now be bought instead of leased, which would result in higher initial capital and lower sustaining capital.

New Gold’s biggest change to Rainy River’s reserve count comes by including the new Intrepid zone, which was discovered 1 km east of the main ODM deposit in October 2012. Intrepid’s addition has boosted the project’s underground ounces, which now total 4.2 million tonnes grading 4.96 grams gold per tonne and 10.31 grams silver per tonne for 700,000 contained oz. gold and 1.4 million contained oz. silver.

Open-pit reserves have declined slightly to 100 million tonnes grading 0.96 gram gold and 2.49 grams silver, for 3.1 million oz. gold and 8 million oz. silver.

Underground and open-pit reserves were calculated using 3.5-gram-gold and 0.3-gram-gold cut-off grades.

With increased underground reserves, New Gold could boost Rainy River’s daily underground mining rate from 1,000 tonnes to 1,500 tonnes.

Overall mill throughput would remain unchanged at 21,000 tonnes per day, with the processing of some of open-pit ore deferred earlier in the mine’s life in order to better focus on higher-value underground material first.

Annual gold and silver production over Rainy River’s early years would be relatively unchanged when compared to a study published in April 2013.

New Gold anticipates an average of 325,000 oz. gold and 480,000 oz. silver per year over the first nine years of operation.

Average head grades would be 1.44 grams gold and 3.1 grams silver, with recoveries pegged at 91.9% for gold and 63.7% for silver.

Due to a higher strip ratio under the new plan — 3.5 versus the earlier 2.8 — total cash costs would increase to US$613 per oz. from US$468 per oz. for the first 10 years. Gold and silver production over a 14-year mine life are estimated at 3.4 million oz. and 6 million oz., with  total cash costs of US$663 per oz. and all-in sustaining costs of US$765 per oz.

At a base case of US$1,300 per oz. gold and US$22 per oz. silver, the project features a US$314-million after-tax net present value (NPV) at a 5% discount rate, along with an 11.3% internal rate of return (IRR) and a 5.5-year payback period.

That compares to a US$931-million after-tax NPV, a 23.7% IRR and a three-year payback period under Rainy River’s initial US$1,400 per oz. base-case study.

Executive chairman Randall Oliphant noted in a press release that Rainy River “provides our company with an asset that meets all of our key criteria, including: solid returns with strong leverage to higher gold prices; manageable capital costs; a robust, long-lived production base with continued regional exploration potential; below industry-average costs; and [being] located in a great mining jurisdiction.”

Assuming gold prices rise to US$1,450 per oz., Rainy River would provide a US$520-million after-tax NPV, along with a 15% IRR and 4.4-year payback period.

Gold prices would have to move above US$1,600 per oz. gold for the project to hit an after-tax IRR higher than 20%.

BMO Capital Markets analyst Brian Quast — who has an “outperform” rating on New Gold stock  along with a $7.50-per-share price target — writes in a Jan. 16 research note that “while project economics look skinny at today’s prices, New Gold has the balance sheet to finance construction internally, and the company has previously stated an intention to move forward with the project at gold prices above US$1,000 per oz.”

Meanwhile, Alec Kodatsky at CIBC World Markets maintained his $7.25-per-share price target and “sector performer” rating on New Gold after Rainy River’s feasibility study, and noted in a Jan. 16 report that “although no formal development decision has been made, we believe that in the current gold environment, [the company] is likely to move Rainy River ahead, with Blackwater being pushed out.”

New Gold reported cash and equivalents of US$429 million at the end of the third quarter after generating adjusted net earnings of US$20 million, or 4¢ per share.

The company foresaw 400,000 oz. gold production in 2013, at all-in sustaining costs of US$900 per oz.

New Gold shares have traded within a 52-week window of $4.99 and $10.98, and closed up at 19¢ after Rainy River’s feasibility study, en route to a $6.38-per-share close at press time.

The company has 503 million shares outstanding for a $3.2-billion market capitalization.

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