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New Gold Inc. (NYSEMKT:NGD)

Q2 2013 Earnings Call

July 31, 2013 9:00 AM ET

Executives

Hannes Portmann – VP, Corporate Development

Randall Oliphant – Executive Chairman

Robert Gallagher – President and CEO

Brian Penny – EVP and CFO

Ernie Mast – VP, Operations

Analysts

Dave Katz – JPMorgan

Rahul Paul – Canaccord Genuity

John Bridges – JP Morgan

Anita Soni – Credit Suisse

Don MacLean – Paradigm Capital

Alec Kodatsky – CIBC

Mike Parkin – Desjardins Securities

Steve Parsons – National Bank Financial

Operator

Good morning. My name is Denise and I’ll be your conference operator today. At this time, I would like to welcome everyone to the New Gold 2013 Second Quarter Results Conference Call. All lines have been placed on-mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. (Operator Instructions) Thank you. Here is Hannes Portmann, Vice President, Corporate Development. You may begin the conference.

Hannes Portmann

Thank you, operator, and good morning everyone. We appreciate you joining us today for the New Gold 2013 second quarter earnings results conference call and webcast. On the line today, we have Randall Oliphant, Executive Chairman of New Gold; Robert Gallagher, our President and CEO; Brian Penny, our CFO; and Ernie Mast, our Vice President of Operations will be available during the Q&A period at the end of the call.

Should you wish to follow along with the webcast, it is available on our homepage at www.newgold.com. If you are participating in the webcast, you can also type your questions through the interface.

Before Mr. Oliphant provides us with an overview of the results, I would like to direct your attention to our caution related to forward-looking statements found on slides three, four and five of the presentation.

Some of today’s commentary may contain forward-looking information relating to New Gold. In this respect, we refer you to our detailed cautionary note regarding forward-looking statements in the presentation. You are cautioned that actual results and future events could differ materially from those expressed or implied in forward looking statements. Slides three, four and five provide more information and should be reviewed. In addition, we refer you to the section entitled Risk Factors in New Gold’s latest MD&A and other filings available on SEDAR, which sets out certain material factors that would cause actual results to differ.

Regarding references to mineral resources and other technical terms defined in National Instrument 43-101, we refer you to our detailed cautionary note to U.S. readers concerning estimates of measured, indicated and inferred resources in the presentation.

I will now turn the call over to Randall.

Randall Oliphant

Thank you, Hannes. Good morning everyone. Thank you for joining us today to discuss our second quarter results. As anticipated, the quarter delivered increased production at lower costs. Importantly, our 2013 guidance for quarter over quarter production at lower costs remains intact and we very much look forward to a strong finish to 2013.

Slide six provides a few of our second-quarter highlights. During the quarter, our four operating mines combined to produce over 102,000 ounces of gold. Our quarterly gold production was 8% higher than both the prior quarter and the first quarter of 2013. Similarly at $430 an ounce, our cash costs were down compared to both comparative periods with this decrease being achieved despite lower realized copper and silver by-product prices.

Consistent with the gold industry initiative for greater transparency in cost reporting, we are pleased to report our consolidated all-in sustaining costs for the quarter of $931 an ounce. We believe this positions us at the very low end of the range for the industry and importantly, our all-in sustaining costs are expected to decrease further through the second half of 2013 and into 2014.

As indicated during our first quarter earnings call, we were anticipating stronger performance from New Afton in the second quarter of 2013 and beyond. I am pleased to report that New Afton has once again delivered on our expectations and there’s firing on all cylinders. The mine strong operating performance resulted in a 46% increase in gold production and a 58% increase in copper production when compared to the first quarter of this year. Led by New Afton we anticipate a 30% increase in gold production in the second half of the year when compared to the first six months of 2013 coupled with an expected decrease in costs that should lead to increased earnings and cash flow as we move through the balance of 2013.

With this planned strong finish, we are proud to reiterate both our gold production guidance for the year of 440,000 to 480,000 ounces, as well as our guidance for all-in sustaining costs of $875 an ounce. On May 31st, we announced our friendly takeover bid for Rainy River Resources and a week ago, Rainy River Resources shareholders holding 86% of the outstanding shares tendered to our bid. Our offer received overwhelming support from Rainy River shareholders and we believe that many of the remaining holders will tender in advance of the bid’s the expiry on August the 8th. We ended the quarter with a strong cash position of $563 million which provides our company with continued financial flexibility.

Slide seven compares our second-quarter operating and financial results with those of the second quarter of 2012. The increase in gold production was driven by strong contributions from New Afton and Peak. These were partially offset by lower production at Cerro San Pedro and Mesquite through the mining of lower grade ore as planned. All four of our operations are anticipated to increase production in the second half of this year with significant increases expected at New Afton, Cerro San Pedro and Mesquite. We also continue to feel well-positioned as one of the lower-cost producers in the industry whether measured on a cash cost or all-in sustaining cost basis.

Unfortunately, the quarter brought with it some challenges. The average prices for each of the three commodities we produce were down significantly. This overall drop in prices was exacerbated for New Gold because much of our production, particularly from New Afton was shipped in late June, a period of notably weak prices. The combination of these lower realized prices and the continued mining of lower grade material at Cerro San Pedro and Mesquite impacted our earnings and cash flow generation.

Net earnings were $15 million or $0.03 a share. After adjusting for a non-cash $21 million pre-tax gain on the mark-to-market of the company share purchase warrants and a pre-tax foreign-exchange loss of $13 million, adjusted net earnings were $4 million or $0.01 per share. As we produce and sell concentrate at both New Afton and our Peak mines, our quarterly realized prices and net earnings can fluctuate depending on the timing of concentrate settlements. At the end of each quarter any shipments that have yet to settle or recognize its revenue based on the prevailing commodity prices at the time.

During the second quarter we were impacted by both the decrease in gold and copper prices from March 31 through the settlement of our first-quarter shipments as well as the requirement to recognize our unsettled second-quarter concentrate shipments and almost the lowest commodity prices of the quarter. In aggregate, this impacted our net earnings and adjusted net earnings by a $0.03 per share.

Adjusted net cash generated from operations was $43 million which excluded the one-time $66 million charge related to the settlement of our legacy gold hedge position in May of this year. Our hedge had required us to deliver 5500 ounces of gold per month at $801 an ounce. Now all of our gold sales are at the spot price which is expected to benefit cash flow in future quarters. As part of our quarterly financial review, we also assess the carrying value of each of our assets, concluding that the market value exceeded the book value in each instance.

Slide provides an overview of our operational performance on a mine by mine basis. New Afton, Cerro San Pedro and Mesquite and Peak combined to deliver higher aggregate production at lower overall costs and all-in sustaining costs when compared with the first quarter of this year. As will be further detailed on the next slide, New Afton had a great quarter. Each month of the quarter delivered steady increases in gold and copper production, culminating in June production of 7860 ounces of gold and 7 million pounds of copper.

Production at our two heap-leach operations Cerro San Pedro and Mesquite were impacted by planned mining of lower grade ore early in the year. Those of you who have followed New Gold closely are familiar with the quarterly fluctuations of these mines resulting from grade movements and the fact that over the longer timeframe they average out and deliver on expectations. This year is no different as both Cerro San Pedro and Mesquite are moving into higher grade areas in the second half of the year which should result in higher production and lower costs.

Production at our Peak mines increased by 12% when compared to the second quarter of the prior year and 23% compared to the first six months of 2012. This was due to a combination of increased ore tons processed and higher recoveries with gold grades remaining consistent. Our focus at Peak remains on the cost side where the combination of the continued depreciation of the Australian dollar and improved operational efficiencies should result in lower costs going forward.

On a consolidated basis, the company's total cash costs and all-in sustaining costs are well below industry averages and are expected to steadily decline through the remainder of the year in connection with planned increases in gold, silver and copper production.

Slide nine highlights the key operational achievements at New Afton during the second quarter. As planned, during the first quarter we successfully completed underground infrastructure, including the commissioning of the underground gyratory crusher. This has allowed the mining rate to catch up to the milling rate. In certain instances, the miners even outpace the mill allowing us to once again build the surface stockpile which gives us even greater operational flexibility.

When comparing the first and second quarter of 2013 at New Afton, every key operational metric improved. Throughput increased by 19% to average in excess of the 11,000 ton per day nameplate capacity. In addition, both the grades and recoveries of gold and copper increased remarkably resulting in significantly increased production of both metals. We are particularly pleased as New Afton has continued to build on this momentum in July with further increases being seen in average daily throughput and recoveries.

Slide 10 provides an overview of the attributes we find most compelling about our recent acquisition of Rainy River. By utilizing the flexibility provided by our strong balance sheet we were able to minimize the dilution to our shareholders. Those of you who have followed our company for some time have an appreciation for just how important this is to us. The limited share issuance combined with Rainy River’s robust project characteristics lead to the acquisition being significantly accretive on a per share basis for our shareholders.

Through the addition of Rainy River, we've grown our reserves and resources substantially and importantly, we have done so in Canada. Geographically this is right on strategy and we feel fortunate that so much of New Gold’s future is in a resource focused country with such a rich mining history.

Rainy River also provides us with another exciting grow growth asset. The project has been significantly advanced over the past couple of years under the stewardship of a top-notch team. Not only does Rainy River provide us with additional flexibility as we consider the timing of development of our now two great projects but also gives us control of the second underexplored and prospective land package. We like owning assets where the primary resource generates robust growth returns and any additional resources found come with limited incremental infrastructure requirements and thus even greater returns.

The ongoing work at the New Afton C-Zone is an example of where such additional value could be unlocked for the benefit of our shareholders. We view this as just one way that our shareholder -- that our company can create value going forward.

Slide 11 is the current timeline to closing Rainy River. Last week we announced that Rainy River shareholders holding 86% of the outstanding shares tendered to our offer. We have acquired those shares and extended our offer to August the 8th to give Rainy River shareholders an additional opportunity to tender. New Gold has committed to completing a compulsory acquisition or other form of subsequent transaction to acquire the remaining Rainy River shares.

By tendering during the extension period, Rainy River shareholders have the opportunity to receive the purchase price for their shares in mid-August rather than waiting until the conclusion of the second step transaction which could take up to 60 days more.

Slide 12 highlights the impact of the addition of Rainy River to New Gold’s reserve and resource base. Once completed, on a per share basis, the addition of Rainy River project will grow our gold reserves by 44% and our measured and indicated gold resources by 20%. The combination of New Afton, Rainy River and Blackwater all located in Canada now represents over 60% of our overall measured and indicated resource base.

Side 13 provides an overview of our three exciting development projects. Rainy River currently has 4 million ounces of gold in reserves with an additional 2 million ounces in the measured and indicated resource category. As highlighted earlier, exploration potential continues to exist, notably at the Intrepid Zone as well as multiple other regional targets. Most importantly, the combination of Rainy River’s capital costs, 225,000 ounce annual production potential and below industry average cash costs should generate significant cash flow and the robust growth returns.

Blackwater currently has over 8.6 million ounces in the measured and indicated resource category for direct processing material and a further 900,000 ounces to be stockpiled for processing late in mine life. The feasibility study remains on target for completion by year-end of this year. The feasibility study will build upon the September 2012 preliminary economic assessment which outlined an open pit mine with a potential to produce over 500,000 ounces of gold in the mid-$500 per ounce range resulting in very strong economics.

Finally, our fully carried 30% interest in El Morro continues to provide our shareholders with further gold and copper leverage both from the current resource base and the continued exploration potential. Goldcorp, our 70% partner and the project operator, is currently supporting the Chilean environmental agency’s efforts to address the temporary suspension of the project’s environmental permit. At the same time various alternatives for power source that would supply the project in the northern part of Chile, including El Morro are being considered. We look forward to further progress being made on both of these fronts through the balance of 2013 and into 2014.

On slide 14 we outlined the path forward over the coming 6 to 12 months for Rainy River and Blackwater. Our objective is progress the two projects simultaneously through completion of the respective technical and economic studies as well as the continued investment of their environmental assessments. This process has multiple benefits as it allows both projects to be moved forward towards the construction ready point and it provides our team with additional time to assess the changing market conditions between today and mid-2014. In the near-term the team shall focus on completing a detailed review of the Rainy River feasibility study as well as the scheduled completion of the Blackwater feasibility study late this year. We plan to continue our regional exploration efforts as successful results could be incorporated into the mine plans further benefiting the projects.

An example of this is the potential inclusion of the Intrepid Zone into the plans at Rainy River. At the same time permitting work for both projects will continue. It is anticipated that a project sequencing and related capital allocation decisions should be made in the middle of 2014. Consistent with the process undertaken prior to the development of Cerro San Pedro, Mesquite and New Afton as thorough multifaceted project evaluation will be completed. The ultimate project sequencing decision will be based on, among other factors, project economics, commodity prices, capital costs, permitting considerations, other potential opportunities available to us, as well as general market conditions. The three operating mines in our portfolio that were built or restarted by our development teams are generating strong returns. We have every intention of maintaining this track record as we ultimately move forward with these two exciting grow projects.

On slide 15, we are pleased to reiterate the company’s production guidance for the year and to provide an update on the impact of the movement in copper and silver prices and what it’s had on our cash costs. 2013 gold production remains on track to increase by 12% from 2012 to a range of 440,000 to 480,000 ounces. The cost guidance we set out in early 2013 of $265 to $285 an ounce included in put assumptions of $3.50 per pound copper and $30 an ounce silver which were both below the spot prices at the time. As a result of year-to-date realized prices as well as current spot prices being lower, our costs have been impacted.

Our mine site operating costs remain in line with our expectations. However our by-product revenues are below those we anticipated when guidance was set in early 2013. Consistent with our estimate as part of the first-quarter reporting should spot commodity prices and exchange rates prevail for the balance of the year, our cash costs should be approximately $350 an ounce. Of the estimated $75 an ounce increase, $45 an ounce is related to lower copper prices and $25 is due to silver.

At the same time, our all-in sustaining cost guidance of $875 an ounce for the year remains unchanged. When this estimate was set out earlier this year we noted that without the benefit of the World Gold Council definition, we were very conservative in our allocation of growth versus sustaining capital. With the ability to more accurately refine our estimates after receiving the formal cost definition as well as through certain sustaining capital cost savings, we are proud to be in a position to maintain our guidance for all-in sustaining costs despite the slight increase in our cash costs noted previously. Overall, we believe New Gold remains well-positioned as one of the lowest cost producers in the industry.

Slide 16 outlines our catalysts for 2013. Through the first half of the year we outlined our operational guidance with increased production and lower costs. We announced an updated mineral resource at Blackwater with increased gold resources as well as significant increase in the New Afton C-Zone resource. Most recently we acquired control of Rainy River and plan to consolidate our ownership and complete the acquisition early in the fourth quarter. Looking ahead, we should have further exploration update at each of Blackwater, Rainy River, and New Afton.

The feasibility study at Blackwater remains on target for completion by the end of the year. At New Afton, the team is continuing to work on maximizing the mining and milling rate with the interim goal of reaching a sustainable 12,000 pounds per day by the end of the year. In addition, we plan to provide an update on what we see as our scope to reach even higher run rate and we will target this by towards the end of this year or early next year.

Finally, at El Morro progress continues to be made through the consultation process in Chile for the reestablishment of the environmental permit. When combining these catalysts with the planned 30% increase in gold production at lower cost in the second half of this year, we believe our positive momentum should only build through the balance of 2013.

Slide 17 outlines the factors that separate New Gold. Collectively our assets are in what we believe are the right jurisdictions. We have substantial gold resources across a diversified asset base in countries with mining histories. We view our organic growth pipeline as unrivalled. We are not aware of another gold company that can see us half of the growing as production by 2.5 times over a similar time horizon to New Gold. We are one of the lowest-cost producers in the industry whether measured on a cash cost or all-in sustaining cost basis. This provides us great flexibility and allows us to view times of lower commodity prices as times of opportunity rather than times of panic or uncertainty.

We control two new underexplored and prospective districts. At a time where quality deposits in reasonable places are becoming ever more elusive, we feel particularly fortunate to have such a dominant land position in both Rainy River and the Blackwater areas. As a group, we are tremendously committed to our company and directly invest it alongside all of you. We take no satisfaction in being an outperformer when it is based on our share price being down less than others. Our investment in New Gold has decreased this year. Working to improve our share price and generate a return for all of you remains our primary motivation. We believe all the pieces are in place to do so and we will continue to execute.

Thank you all for your continued support and should you have any questions we would be happy to answer them at this time. Thank you.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Dave Katz with JPMorgan.

Dave Katz – JPMorgan

I was hoping that you guys could talk a little bit about the average realized gold price in the quarter. It was substantially below where the spot price was. What caused them and how do you expect the average realized price to move in relation to the spot price in the future?

Brian Penny

Thanks Dave. This is Brian speaking here. During the quarter as Randall said in the introduction, we shipped concentrate – the concentrate at New Afton was shipped at the end of May and in June. And the shipments this quarter were priced out at loss point in time prices for the quarter. So that affected the average realized price. So towards the final settlements on the first quarter we were settled for less than the revenue was booked at the end of first quarter. So those were the primary drivers. On the copper side we put in place swaps, so we sort of locked in the copper price, so less on the copper side, it was all in the timing and on the gold side you have these two factors that affected it.

If you look at where we are today and the ounces that we had provisionally priced at the end of the quarter, we probably have a mark-to-market gain of about $3 million. So you could see a higher realize price in this quarter if gold stayed steady at these prices. So those were the factors, Dave and it does affect us from time to time, it’s just that at the end of the quarter we had a tremendous drop in prices.

Dave Katz – JPMorgan

And normally when you would price the majority of what you sell based on the end of the quarter price?

Brian Penny

It was just so happened that this quarter at New Afton we had two large shipments and we tried to spread them out on a monthly basis but this quarter it was fortunate that they came in when the prices were falling.

Dave Katz – JPMorgan

And then on Rainy River, assuming that you pay the entirety the 198 in cash, given that or at least pros to that, one would be curious about this effect on liquidity, I think you would have to take into account the cash, is that at Rainy River, so would you be able to provide the balance as of 30th of June?

Brian Penny

The pro forma balance at June 30 is about $460 million.

Operator

Your next question comes from [Elliot Golder] with Wm Smith & Co.

Unidentified Analyst

This is essentially built on Rainy River, I didn’t get the first year of production going, how much additional money will the company have to borrow?

Randall Oliphant

In order to the build the – it depends on how we sequence Rainy River and our Blackwater project. I mean at current prices we could build Rainy River out of our existing cash flow, if we were to build both Rainy River and Blackwater at the same time it depends on what the gold prices are going to average over the course of next four years. But we've got lots of flexibility to build Blackwater first, build Rainy River, if the gold prices are such that we want to build both of them at the same time we believe that there's lots of capital available.

Unidentified Analyst

A follow up question, if you do start to build Rainy River and Blackwater at the same time, at today’s prevailing gold price, how much money we have to borrow?

Randall Oliphant

We haven’t provided our production guidance going out that many years forward but given where we are today we feel very comfortable that we can find the financing in place whether it’s through borrowing money, asset sales, things like that, we don’t see any particular challenge. But to give you a specific amount, I don’t think would be appropriate. So we haven’t provided our production guidance and cost guidance for the next few years.

Operator

Your next question comes from Rahul Paul with Canaccord Genuity.

Rahul Paul – Canaccord Genuity

How big is your surface stockpile at New Afton?

Ernie Mast

Hi, it’s Ernie Mast, thanks for the question. Currently the surface stockpile is about 3 days and we anticipate getting it up to five years during the month of August.

Rahul Paul – Canaccord Genuity

The grades, the gold and copper grades are they similar to what you put for the mill in Q2?

Ernie Mast

We are anticipating similar grades.

Rahul Paul – Canaccord Genuity

And then just to follow up, the mill has been performing quite well. I am just wondering if you have any planned maintenance shutdowns for the rest of the year.

Ernie Mast

We do have a shutdown in August, however, it’s going to be a two-day shutdown and it’s just to do some liner work. Currently the mill runs well over 90% availability.

Rahul Paul – Canaccord Genuity

And moving on to El Morro, you’ve mentioned in the past that alternatives for a power source are being considered. I am wondering if you could provide us a little more color on that trend specifically if any progress has been made.

Robert Gallagher

It’s Bob Gallagher here. The team down at El Morro continues to evaluate a number of alternatives for power supply at this time.

Rahul Paul – Canaccord Genuity

And just curious do you need to identify your power source first before the bulk of the capital is spent? Obviously assuming that the permitting situation has evolved.

Robert Gallagher

Obviously we need a source of power before we can build a – commit to building the mine but that really is not expected to be an issue.

Rahul Paul – Canaccord Genuity

What did the feasibility study assume?

Robert Gallagher

In terms of?

Rahul Paul – Canaccord Genuity

Power supply.

Robert Gallagher

To purchase power from a third party.

Operator

Your next question comes from John Bridges with JP Morgan.

John Bridges – JP Morgan

Just wondered how much metal have you got on the pipeline at the moment, so we can perhaps get a better handle on what the next concentrate adjustment will be?

Brian Penny

Well as I mentioned earlier, we have somewhere between 20,000 and 30,000 ounces of gold that are subject to provisional pricing and if that were to settle at today’s prices it would enhance the quarterly earnings for this quarter by about $3 million.

John Bridges – JP Morgan

And the copper involved?

Brian Penny

The copper is basically – it’s about 15 million pounds at New Afton and again that has been – sort of that quarter prices. So we don’t anticipate any change from quarter to quarter.

John Bridges – JP Morgan

Was there any concentrate adjustment at Peak?

Brian Penny

Yeah it was but it’s not that big.

John Bridges – JP Morgan

And then you pointed out the benefit of the weaker Aussie dollar, just remind us – are there any hedges around that, that has to be worked off?

Brian Penny

No, we have no hedges because we’ve always look at our investment in Australia as a bit of a natural hedge. We have the copper exposure and the Aussie currency and they tend to move in opposite directions. So it’s a natural hedge and those are the easiest and best to manage.

Randall Oliphant

John, maybe just for further clarification on these realized prices, over the long term we get the average price. Unfortunately the accounting rules is concentrate – the accounting rules say that you have to set up the year-end spot prices as what you record as revenue. But effectively we get paid, we realized -- in the first quarter we recorded the spot price but actually received the second quarter price and for the second quarter, you actually get paid the third quarter price. So it all evens out over the course of the long term and that’s – what you can get is you can have decreases as we had in the second quarter because you set up your effectively receivables at the March 31 price but as Brian mentioned, now in the third quarter, we will probably a benefit because prices have increased from what they were at the end of the second quarter. So it all averages out but it fluctuates from quarter to quarter.

Operator

Your next question comes from Anita Soni with Credit Suisse.

Anita Soni – Credit Suisse

The exploration budget for this year, how do you think that’s going to play out from the expense side of the equation? Just as with regards to the fact that the exploration increased quarter over quarter.

Brian Penny

The exploration budget is – it’s pretty much unchanged from what we disclosed last time. On Blackwater we plan as 20, 30 million which is half capital, half expense. New Afton, we plan as spending about $15 million primarily on the C-Zone, Peak about $10 million and as a result of the acquisition of Rainy River, we are going to add at about $4.8 million during the period. And the reason it’s up during the quarter Soni is that it’s because it’s summer and it’s the best time to explore up at Blackwater than (inaudible).

Anita Soni – Credit Suisse

And that would probably continue into the – early in the second and third quarter and then tapering in the fourth.

Brian Penny

Yes.

Anita Soni – Credit Suisse

In terms of the asset by asset – thank you for posting the MD&A, I just quickly went through it. On Cerro San Pedro, the grades is up and the recovery is down, is that going to continue for the course of the year, is that more of a – how is the trend in terms of grade and recovery?

Ernie Mast

It’s Ernie here. The trend for grade and recovery, grades they will increase a little bit and recoveries, remember it’s a heap-leach operation, so recoveries are evaluated on a longer term basis. So we expect to get some of those ounces. We continue to get ounces out of inventory as time goes on.

Anita Soni – Credit Suisse

So similarly on your Afton grade and recovery are both up and the tons are up. So in terms of the grade and recovery, you’ve got – expected I guess increasing grade or the grade is going to continue on?

Ernie Mast

In New Afton, we are expecting similar grades and we are continuing to do some optimization of the floatation circuits. So we should see higher recoveries in Q3 and Q4.

Anita Soni – Credit Suisse

And on Mesquite, the grade was a bit weak and recovery weak, is there clearly some relationship between the grade and recovery or not side of the equation?

Ernie Mast

Usually there is a small relationship between grade and recovery but as mentioned in the webcast that we were through a lower grade, it’s only the ore body.

Anita Soni – Credit Suisse

So how do you expect that to play out for the course of the year?

Ernie Mast

We will see an increase in the grades and recoveries at Mesquite as we move into a higher grade ore, zone of the ore-body.

Anita Soni – Credit Suisse

And [strip] was up this quarter, is that going to continue – is that a blip at 3.5 –

Ernie Mast

That’s correct. Yes it is.

Anita Soni – Credit Suisse

And then lastly on Peak, similar grade and recovery was down, tons were up, how does that play out for the rest of the year?

Ernie Mast

We should see grades remain consistent and recoveries stay up and throughput will be up as well.

Anita Soni – Credit Suisse

Deferral of CapEx, so the capital cost reductions that you talked about with the -- maintain your all-in sustaining cost number, was that – I mean are any of those – any of the reductions on the – sustaining side of the equation, are they longer term or was it more of the reclassification from gross to sustaining?

Brian Penny

No, most of the changes from – have been deferred items from this year to next year. With the phase life development at DSP, would take them a longer time to do that, access that ore-body. So what was originally planned to be spent this year, we spend half this year, half next year. And on the Peak side, we have lower CapEx because we did little bit development in the first half of the year, and we think that, that is behind us and obviously we are critically looking at all that stuff. But we don’t anticipate any material changes going forward.

Anita Soni – Credit Suisse

And then last, could you give us a breakout of the quarterly capital spend? I know you have given us the actual total aggregated capital but what would you classify out of this asset as sustaining with growth?

Brian Penny

Basically let’s assume everything is sustaining and we’ve talked about which growth. Basically we have three items in growth. At New Afton, we have the C-Zone developments, the West Cave as well as the exploration there. So that’s on the growth side. At Cerro San Pedro with the phase five development because that’s adding mine life, it’s in the growth side. And then obviously all the expenditures associated with Blackwater are on the growth side. So those are the three items that are in there and it’s further disclosed in our MD&A and I realized it was just filed recently, but it’s in detail there and if you have any further questions, please don’t hesitate to call.

Operator

Your next question comes from Don MacLean with Paradigm Capital.

Don MacLean – Paradigm Capital

Couple questions, one is just an update on the New Afton grade reconciliation and if Mark actually happens to be on the line, wondering if he could give us any kind of an update on how things are coming in the Capoose and maybe if you have some grasp of the Intrepid, how things – how that looks?

Ernie Mast

It’s Ernie here. I will answer the question on New Afton grade reconciliation, we are reconciling – very good, very well with the model, slightly higher gold than anticipated. So we are studying to see how that will play out.

Robert Gallagher

It’s Bob here on Capoose exploration, we got a little bit of a late start there because of the snows and couple of drills have been active, we are waiting for the outstation in those.

Don MacLean – Paradigm Capital

And can you make any comments on Intrepid, you mentioned one of the positive upside?

Robert Gallagher

I really can’t say much on that at this time. I don’t think we’ve disclosed anything on that. I will hold the comments on there.

Randall Oliphant

I am sorry, Don, Mark Petersen isn’t with us today.

Operator

Your next question comes from Alec Kodatsky with CIBC.

Alec Kodatsky – CIBC

Just with respect to the all-in sustaining number, maybe I will ask a different way. Of the $75 reduction, how much of that is money that’s just not being spent any more in the company and how much of is a reclassification?

Brian Penny

Both half and half.

Alec Kodatsky – CIBC

And just with regard to I guess the work that you do in both on Rainy River and Blackwater, is there any work ongoing as far as changing the development plans versus what might be discussed before – I understand you’re clearly drawing in Intrepid with Rainy River but just in terms of sequencing or the size of the operation, are any of those being evaluated just with the work that’s going or is it too complicated in light of trying to do a feasibility study to entertain the certain things right now?

Randall Oliphant

It’s Randall Oliphant speaking. We are basically going ahead at Blackwater with the plans that we had in the PEA. We looked at different 30,000 tons first and then another 30 later and what we found is that the construction cost for a project like that is much more expensive than just building 60,000 tons a day. So the feasibility study is largely just refining what we had in the PEA. We are going through a detailed review of the Rainy River feasibility study, and we got a lot of confidence in the people we put it together but we want to just go in and double check everything and as we mentioned, between the drilling that we are doing and what Rainy River has done since they completed the feasibility study, look for ways to enhance it through potentially adding in some higher grade material earlier in the mine life. But largely the projects are exactly as we laid them out. Our plan is to complete this work largely by the end of this year, 2014 is largely a permitting year. And as we work through there we will see what the metal prices are and what the environment is and that’s when we will make the decisions of build them both, build one first, build the other one maybe a bit later.

The nice thing about these assets is we control them and the nice thing about Canada is we choose the timing of when we go to build them and unlike a lot of countries where you have to – you get a permit, you have to start construction within a particular time period and we will see what other opportunities are available. But the optionality on when we construct these things, the optionality on the upside on the metal, the ability to expand them, we think has each of those elements has a lot of value.

Operator

Your next question comes from Mike Parkin with Desjardins Securities.

Mike Parkin – Desjardins Securities

With Mesquite, would you be looking for the grade and recovery to be pretty much the strongest in the fourth quarter or it should be fairly flat for like up but flat for Q3, Q4?

Randall Oliphant

We see a strong increase in the fourth quarter on the grades and recoveries.

Mike Parkin – Desjardins Securities

On your need – your kind of swap strategy on your concentrates, will that be something that you guys are looking to potentially carry on or just kind of short term strategy?

Brian Penny

On the copper side, we have had some place for some time, we will carry that on. On the gold side, we need to think about that, as you see it consistently, so if we change and introduce the strategy now we are changing something mid-course. There is movement from quarter to quarter, so but over the long term we should get pretty close to the average. So keep it simple as far as I am concerned.

Operator

Your next question comes from Steve Parsons with National Bank.

Steve Parsons – National Bank Financial

A question for you on probably related to Blackwater and Rainy River, you are in the process of reviewing the feasibility for Rainy and working through the feasibility for Blackwater, and probably going out and getting quotes and delivery times and all that, what are you seeing on I guess pricing, what’s the breakthrough you are seeing on pricing and if you are seeing breaks and you are seeing even pressure easing in further, would you look to delay the Blackwater feas to maybe to capture more of those price breaks in the study?

Robert Gallagher

It’s Bob here Steve. Thanks for the question. We’re just really getting into the capital cost estimate now. We have done – we fixed all the concepts and get into the capital cost. And the initial numbers that are coming in, which are specifically the mining equipment haven’t change since the PEA. So there’s not much sense waiting around there, with strong economics of the project favors, going ahead with it.

Steve Parsons – National Bank Financial

What would you use – what are you using as a hurdle rate for let’s say Blackwater and Rainy River?

Robert Gallagher

Steve, when we did the PEA, we showed that at 12.75 gold the project generated a 14.1% rate of return. So we can plug numbers into our models but the real rate of return will be of course with gold averages in 2017 and 2033 and what the Canadian US exchange rate is over that period and what the diesel cost is and what the tax regime is going to be but we see what an all-in cost including capital and acquisition well below $1000 now, that this will generate good returns for our shareholders. So prices are higher, we showed at 17.75, which I think was the spot price when we did the PEA. It was 26 point something percent but we all are on much more than a hurdle rate of return. And we look at is sort of pay back because it is hard to predict what the gold price is going to be 15 years from now. And if you look at New Afton it’s probably representative of the types of things that we have done where we will probably recover that capital in three or four years and then have another 10 years whatever the metal prices are going to be. We are fortunate that at CSP, probably recovering its capital cost in one year, Mesquite probably in two years but the PEA was done at Blackwater, at well below where we are today.

Operator

There are no further questions in the queue at this time. Mr. Oliphant, I’ll turn the call back over to you.

Randall Oliphant

Thank you very much Denise. We appreciate you spending some time with us this morning and listening to our updates. As you know you are always welcome to give us a call or send us an email at any time and we would be happy to answer your questions. Should we not speak again in the short term, the entire New Gold team wishes you a great rest of the summer. Hope you get a chance to enjoy yourself and relax and – we expect to be a strong start to the fall in September. Thank you very much for joining us.

Operator

This does conclude today’s conference call. You may now disconnect.

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