New Gold Could Be a Big Winner with Target for Million Ounce Annual Output

When a company says it's planning to produce a million ounces of gold a year within three years, my ears perk up. Such brazen statements are either promotional hubris or real projections, and in the case of New Gold (NGD), it certainly tends towards the latter. In 2008, New Gold exceeded its stated target of 250,000 ounces by 22,000 – a noteworthy accomplishment in view of the goal for 2014.

New Gold, formed through a merger with Peak Gold and Metallica Resources in 2008, benefits from the experience and expertise of the best minds from all three companies. The board of directors is a who's who of the mining industry, with eminent names like Pierre Lassonde of Franco Nevada and Ian Telfer of Goldcorp (GG) teamed up to oversee New Gold’s evolution into the big leagues.

Strategic initiatives such as the $50 million buyback of secured debentures characterize the studied stewardship of New Gold’s shareholders’ interest, and the company’s nimble approach to developing mines economically while suspending unprofitable operations quickly add up to indicate a lean and dynamic leadership. The buyback reduced the company’s debt load to CA$142 million.

Robert Gallagher’s 15 years as a Placer Dome executive and most recent 7 with Newmont (NEM) have equipped him perfectly for leading the combined company into its desired role as major producer. The decision to temporarily suspend operations at the Ampari mine in northern Brazil because of higher production costs associated with elevated levels of sulphide ores in an oxide-optimized production circuit demonstrates a commitment to economic efficiency that investors should find reassuring.

In a press release dated January 22nd, he said:

New Gold exceeded production guidance for 2008 with excellent operational performance at Peak Mines and Cerro San Pedro, despite challenging markets and cost pressures. The company made some difficult decisions in 2008 in response to the uncertain market conditions and took the necessary steps to strengthen our financial position and ensure that we are well positioned to deliver on our growth strategy and guidance for 2009.

New Gold determined that it would be more cost-effective to process the remaining oxide ore (including transition material) with the underlying sulphide resource in a new process facility for which a Preliminary Economic Assessment is being prepared. Ampari still contains an estimated 302,000 ounces of gold in the 43-101 compliant reserves category, and an additional 745,000 ounces in resource. Production will resume upon completion of the newly installed processing circuit.

The New Afton mine in British Columbia continues to advance towards a projected startup date in the second half of 2012. In recognition of global economic uncertainty, New Gold reduced its capital expenditure on the mine from $286 million down to $79 million for 2009, and will continue development of access and infrastructure. New Afton continues to advance towards a projected startup date in the second half of 2012 and contains over 1.63 million ounces of gold in measured and indicated resources, 5.4 million ounces of silver, and 1.48 billion pounds of copper.

New Gold is forecasting 2009 gold production of between 190,000 and 210,000 ounces at a cash cost between $465 and $485 per ounce net of by-product sales, which will represent a substantial improvement over 2008’s average of $576 per ounce.

The big wild card for New Gold in 2009 will be its treasury. The company has roughly $220 million cash ($250 M at Sept 30 2008 - $30 M to pay off $50M in debt), though it is probably more than that after a very good Q4. Cash is worth a lot right now. They are one of the big sharks in the pond searching for junior producers – or those with the immediate potential to produce – 100K-200K oz per year. (This is much the same strategy as the old Peak Mines had.) Valuations for those companies have been slaughtered even worse than New Gold’s.

The key to a large valuation increase for New Gold (aside from a big increase in the gold price) would be an accretive acquisition. This board of directors has had some great success in M&A in the past – Pierre Lassonde of Franco-Nevada and Newmont fame, and Ian Telfer of Wheaton River Minerals fame. Paul Sweeney was a key man at Canico Resources, a Brazilian nickel play that Vale (RIO) bought for $20/share.

With some operating success now under their belt, and a strong treasury, New Gold has an opportunity to be one of the gold sector’s biggest winners in 2009.

Disclosure: James West holds no interest in New Gold.

Comments

[Clint007]

I agree with your article on NGD, Thanks!
To prove your say, see the institutional buying: www.thestreet.com/quot...

and also this article:US should increase its Gold reserves to 107,153 tons
2009-02-01 06:00:00
Commodity Online
MUMBAI: Global gold prices zoomed to touch a high of $926 per ounce as the week ended on recessionary fears that are driving several nations and economies to an unprecedented crisis. Gold prices are zooming thanks to shortage of the yellow metal and the devaluation of all leading currencies in the world.

An analysis from Quantum Gold Fund says the currency- gold ratio has been steadily falling in USA which means more and more paper money is printed which is backed by fewer gold assets.

A comparative study of currency in circulation issued and the corresponding gold held by Central banks in developed countries such as US & UK shows that currency-gold ratio is steadily falling. “We divided the gold reserves (in tonnes) held by central bank with the currency in circulation (in bn dollars) of that country. And the result was not surprising. Gold held by such central banks relative to the currencies issued by them has fallen considerably over the last few decades, especially in US,“ Quantum Gold Fund said.

For e.g.: In the U.S, in 1973 gold held by central bank was 8,584 tonnes and currency in circulation was $61 bn. If we divide the gold held by the currency in circulation, we get a ratio of 141.2 i.e. 141.2 tonnes were held per 1 billion of currency in circulation. In 2007, the U.S central bank held 8,133 tonnes and the money in circulation was $759 bn. The ratio has now become 10.7 i.e. only 10.7 tonnes of gold held per billion dollars in circulation.

The falling trend indicates that more and more paper currency issues in circulation is backed by less and less gold. The backing comes only in form of the faith in the Government, which is fast dwindling due to the financial crisis and the massive bail outs, especially in US.

The Quantum Gold Fund says that gold is seriously undervalued and therefore investors should buy gold before it gets expensive.

”A proxy currency such as "GOLD" holds intrinsic value, since the supply of it is limited and which is not in control of any Central Bank. Gold has a unique characteristic of "store of value", vis-à-vis paper currencies. Paper currencies tend to lose value over a period of time due to inflation (loss of purchasing power) caused by over supply as it leads to a situation where more and more currency is required to buy the same amount of goods,” it says.

If the U.S were to get back to the ratio of gold held per billion dollars in circulation as to its 1973 level of 141, then they would have to increase its gold reserves to 107,153 tonnes as against current holdings of 8,133 tonnes, an increase of more than 13 times.

With the financial crisis not over yet and the recession looming large, central banks would continue to inject more and more money into the financial system.

Thus the debasement of the currencies will continue making Gold more and more attractive as a hedge against the dwindling purchasing power and the loss of faith and confidence in paper currencies.

2009 Feb 03 01:03 PM