VANCOUVER — It’s been a rough ride for precious-metal producers over the past year, but New Gold (TSX: NGD, NYSE-MKT: NGD) executive chairman Randall Oliphant counselled investors to focus on gold’s upside during a presentation following the company’s annual production report on Feb. 6.
New Gold’s shares were down for the first time over the past five years in 2013, as it dealt with operational issues at its Mesquite gold–silver mine in California and its Cerro San Pedro gold–silver operation in Mexico. Despite the setbacks New Gold had a banner year thanks to its New Afton copper–gold project in B.C., as it reported record low cash costs that place it amongst the best in the business.
“In addition, I think we knew we’d be inheriting a bit of a discount by taking on another project like Rainy River at a time when everyone was afraid of new things and capital costs,” Oliphant added in reference to a US$310-million deal the company completed last August for the Ontario-based gold project.
“We thought it was an opportunity to buy something when a lot of development companies were selling at a discount. We saw reluctance amongst a lot of people when it came to a willingness to buy something, and that gave us first choice,” he added.
A strong fourth quarter allowed New Gold to hit the high-end of its 2013 guidance, as the company produced 397,700 oz. gold at all-in sustaining cash costs of US$883 per oz. New Afton is New Gold’s main driver, and pitched in 85% of the company’s copper production of 85 million lb. New Gold also produced 1.6 million oz. silver during the year.
A particular strong fourth quarter saw New Gold hit historically low cash costs, as it cranked out 106,600 oz. gold and 24 million oz. copper. All-in sustaining costs per oz. gold dropped to US$816 during the period.
“I think we had some successes and disappointments this year, with production at Mesquite and Cerro San Pedro being less than expected, but New Afton frankly shot the lights out and exceeded any expectations we had,” Oliphant said.
New Afton completed its maiden year of production, and hit a mill throughput target of 12,000 tonnes per day, which resulted in a 15% year-on-year boost in copper production. Recoveries were also good for gold and copper at 85% and 86%.
New Afton is expected to perform even better in 2014. Both gold and copper production should benefit from throughput that is consistent with that achieved during the fourth quarter of 2013, when the mine hit highs of 14,000 tonnes per day. New Gold predicts that New Afton’s performance should result in all-in sustaining costs dropping by between US$65 and US$85 per oz. in 2014.
“One thing that we like — and particularly considering what happened to the gold price in 2013 — is to be amongst the lowest-cost producers in the world,” Oliphant continued. “We think this puts us in a great position to weather any kind of gold market, and when you combine that with our growth pipeline we’re in a position to take our production to nearly three times what it is today, which will allow us to take advantage of the higher gold prices we think are coming.”
Last year New Gold also updated the economic studies at Rainy River and its B.C.-based Blackwater gold asset. The company still anticipates developing Rainy River first, since the project carries a US$885-million development price tag, compared to Blackwater’s US$1.9-billion development budget.
With both projects looking to be a few years down the road, New Gold’s 2014 guidance appears stable, with the exception of the increased contributions from New Afton. Declining output at Cerro San Pedro is expected to be offset by a 23% increase in gold production at New Afton, with the company estimating between 380,000 and 420,000 oz. gold in 2014 at all-in sustaining costs of between US$815 and US$835 per oz. Annual copper production is expected to increase by 12% to a range of 92 million to 100 million lb.
CIBC World Markets analyst Alec Kodatsky — who maintains a “sector perform” rating on New Gold and a $7.25-per-share price target — noted in a Feb. 6 research comment that “New Afton remains the highlight, and we are less concerned with developments elsewhere in the operating portfolio, with the pursuit of profit at the expense of ounces being the correct choice. Rainy River appears to be the chosen project, with a formal decision expected later this year.”
New Gold finished 2013 with US$414 million in cash and US$100 million available in an undrawn credit facility. Shares have traded within a 52-week window of $4.99 and $10.17, and dropped 39¢ after the company’s quarterly report, en route to a $6.02 close at press time. New Gold has 503 million shares outstanding for a $3-billion market capitalization.
“Our cash position allows us a lot of flexibility to take advantage of what’s happening in the market. We’re also glad we took advantage of the high-yield market in 2012 to give the company a lot of financial flexibility on unrestrictive terms,” Oliphant concluded.
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