Mining’s old guard needs strong medicine
A new report details subpar investor returns in the mining industry over the last decade, particularly big cap diversified companies which have not adapted to new realities.
New Gold’s 2014 midpoint guidance has it producing 400k ounces of gold at all-in sustaining costs of $825 per ounce. This production profile, which is the product of a well-diversified portfolio of mines, places NGD among the mid-tier elite. But perhaps most impressive about this company is its spectacular pipeline of growth projects.
Growth is something that New Gold has long been quite proficient at, especially since 2008 when a three-way merger formed the company we see today. Peak Gold, Metallica Resources, and New Gold were each junior-level companies that brought fantastic projects to the table. And as a result of subsequent acquisitions and organic growth, NGD has seen gold production soar by nearly 50% over the last 6 years.
New Gold now operates four mines located in Australia, the United States, Canada, and Mexico. These countries have long been top-rated jurisdictions for geopolitical safety. And with their attractive geology, they’ve been party to enormous mining investment over the years. In 2013 they ranked as the world’s #2, #3, #7, and #8 gold producers respectively, and combined for about 25% of global output.
New Gold’s Mexican and Australian mines are located in historic districts that have seen mining for centuries. They currently rank as its smallest operations measured by production volume and resources. But with strong histories of discovery and reserve renewal, they should be solid producers for years to come.
New Gold’s newest operation is its New Afton mine located in British Columbia, Canada. New Afton achieved commercial production in mid-2012, and it has grown to become NGD’s cash cow. With a substantial revenue credit from a strong copper coproduct, New Afton’s gold is produced at operating costs well in the negative. And since it is still in the very early stages of its life, it will be spinning out cash for a long time to come.
New Gold’s largest mine by volume is its Mesquite mine located in California. NGD procured Mesquite via its 2009 acquisition of Western Goldfields. And as part of this deal not only did it gain a large gold deposit that now contains over 5m ounces, NGD gained the services of industry titan Randall Oliphant.
Randall Oliphant, who currently serves as New Gold’s Executive Chairman, has an impressive resume that includes a stint where he served as the CEO of Barrick Gold. Oliphant has served on the boards of numerous mining companies. And he is currently the Chairman of the World Gold Council. This guy knows the gold-mining industry inside and out. And under his guidance and the day-to-day leadership of CEO and industry veteran Robert Gallagher (of Placer Dome and Newmont Mining cloth), New Gold is targeting growth that will transform it into one of gold’s elite senior producers.
This growth will come from a project pipeline that truly is something to behold. New Gold’s Rainy River, Blackwater, and El Morro projects hold a combined 15m ounces of proven and probable reserves. And they are collectively capable of producing a staggering 900k ounces of gold per year.
The Rainy River project, located in Ontario, Canada, is the most advanced of the group. New Gold got its hands on this project via its October 2013 acquisition of aptly named Rainy River Resources. And what a prudent acquisition it was for Oliphant and team.
Many of the larger gold companies had long had their eyes on this project, New Gold wasn’t the only one that recognized Rainy River’s incredible potential. This project’s prospects didn’t pass investors by either, with Rainy River valued at over C$1b just a few years ago. NGD took advantage of 2013’s wretched market conditions though, and snatched it for a price tag of only C$310m.
Per the latest feasibility study, this mine will be developed as a combination open-pit/underground operation. The plan is to produce 325k ounces per year over the first 9 years of a 14-year mine life. And with all-in sustaining costs projected at only $736/ounce, plenty of margin is to be had even at today’s gold prices.
A ground-up mine build of this size won’t be cheap though, with pre-development capital estimated at approximately $840m. Fortunately New Gold’s strong balance sheet, including $588m in working capital as of its latest filing, gives it a good start. And I suspect it won’t have a problem financing the balance given Rainy River’s excellent economics.
New Gold has already gotten the ball rolling with $105m tagged for capex this year. Over half will go towards property, plant, and equipment, with most of the rest going towards detailed engineering, environmental monitoring, and permitting. NGD hopes to procure all the necessary permits by the first half of 2015. And assuming it is able to procure financing in a timely manner, it is targeting commissioning for late 2016.
Once up and running, New Gold plans on using Rainy River’s cash flow to help fund the build of its large Blackwater mine in British Columbia. NGD gained this project via its 2011 acquisition of Richfield Ventures (for C$510m). And with nearly 10m ounces of resources, Blackwater ranks as one of the world’s largest undeveloped gold deposits.
This isn’t just any 10m-ounce deposit though, it’s one that’s been proven up via a full feasibility study that was completed just last year. Based on a proven-and-probable reserve base of 8.2m ounces, Blackwater is drawn up as a massive open-pit operation capable of producing an average of 485k ounces per year over the first 9 years of a 17-year mine life. It would be one of Canada’s largest gold mines!
On the capex front Blackwater will not be cheap to build. Per the feasibility study, pre-production capital will be in the neighborhood of $1.8b. This is certainly not excessive for a mine this size, but you can understand why New Gold must stagger Blackwater’s development behind Rainy River’s.
With Rainy River and an expansion at New Afton currently seeing the majority of new-development capex, Blackwater won’t see a ton of work for now. But New Gold has gotten the ball rolling on permitting, with a target of it being development-ready by the time Rainy River is firing on all cylinders.
Raising capital for Blackwater’s mine build will naturally be a major undertaking. But as long as the price of gold cooperates, it shouldn’t be too difficult. New Gold will have substantial free cash flow from operations by then. And the economics outlined in Blackwater’s feasibility study ought to make banks and investors quite comfortable dolling out cash via debt and/or equity financings.
It is projected that Blackwater’s all-in sustaining costs over the first 9 years will average only $685/ounce, easily in the lower quartile of industry average. And at $1300 gold it is projected that the entirety of the capex will be paid back in 6.2 years. This mine would make New Gold one of the elite 1m+ ounce-per-year gold producers.
Rounding out New Gold’s pipeline is the spectacular El Morro project located in Chile. New Gold is actually a 30% carried-interest joint-venture partner, with Goldcorp running as majority owner and operator. El Morro holds a world-class gold/copper deposit that’s been proven up and is ready for development. To give you an idea of its size, New Gold’s portion of production alone is 90k ounces of gold and 85m pounds of copper per year over a 17-year mine life.
El Morro’s economics are also smashing, with gold cash costs being well in the negative after the copper credit. Even with a nearly $4b price tag, building this mine is a no-brainer (Goldcorp will fund 100% of capital). Sadly Goldcorp has run into geopolitical issues that have put a halt to construction. It is confident it can get things resolved, but there’s no timeline as to when this will happen. Fortunately New Gold’s interest is structured to where it has little financial risk with this project.
In all New Gold’s development pipeline is second to none amongst its peers. Rainy River and Blackwater in particular are the product of savvy acquisitions by a management team that is bullish on gold and has big plans for the future. And as long as gold stays strong, investors ought to be richly rewarded as New Gold rolls out its growth plans.
New Gold’s stock is one that’s long responded well to its underlying metal. And it’s even responded well amidst gold’s recent rough patch. It has of course fallen on balance along with the rest of the sector. But when gold has shown signs of life, NGD has consistently exhibited good positive leverage.
As you can see in this chart, NGD (in blue) has a very similar-looking pattern to that of gold (in red). And this is to be expected for a company that lives and dies by the yellow metal. The higher gold goes, the higher New Gold’s profits and thus the higher its stock price. And inversely as gold falls, so do New Gold’s profits and hence its stock price.
Gold has had four meaningful uplegs subsequent to its 2011 all-time high. The first two occurred in that healthy consolidation period in the year or so following its apex. In both uplegs gold gained 15%. And in both NGD responded well with good positive leverage of 1.9x and 2.5x. This leverage to gold is a nice reward for owning a much-riskier gold-mining equity.
The most recent two uplegs occurred coming out of gold’s brutal Q2 2013 correction. Still loathed by nearly all and the ultimate contrarian play, gold has mustered two surges over the last year in its quest for normalcy and in finding a base to catapult higher. While gold gained 18% and 16%, NGD responded well with respective gains of 37% and 36%.
Again NGD exhibited solid positive leverage in excess of 2.0x in these latest two uplegs. But I expect even better leverage going forward once investors really start getting interested in gold stocks again. New Gold has the rare combination of excellent management, solid operations, a strong balance sheet, and a spectacular development pipeline. There aren’t many gold stocks out there better than this one!
To add to its allure New Gold is bucking the industry trend by actually lowering its year-over-year operating costs. This is an impressive feat, especially considering it is already one of the lowest-cost producers out there. In Q1 NGD’s cash/all-in sustaining costs were exceptional, coming in well below guidance at $254/$674 per ounce. And this allowed it to see a 39% increase in net cash generated from operations over a year ago.
New Gold is a gold stock we really like at Zeal. We profiled it in depth in our latest research report focusing on our favorite mid-tier gold stocks. And we’ve recently recommended this stock in both our weekly and monthly newsletters.
Believe it or not, New Gold is one of only a handful of quality mid-tier gold stocks available to investors. And after extensive research we corralled this group into a report that fundamentally profiles these elites, explaining why we believe they are positioned to thrive as gold pushes higher. To see the profiles of New Gold and 11 other excellent mid-tiers, buy your report today!
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The bottom line is New Gold has quickly grown to become one of the world’s leading mid-tier gold miners. Its producing assets are located in some of the world’s top mining jurisdictions. And they collectively deliver their gold at some of the lowest operating costs in the industry.
But perhaps most intriguing about New Gold is its unrivaled growth pipeline. This pipeline contains interests in three world-class gold deposits. And if NGD can develop them into producing mines, it’ll more than triple the output it delivers today. NGD will continue to be an investor favorite given its strong tendency to positively leverage its underlying metal.
Scott Wright
