New Gold - Production Increase Helps The Company To Weather The Storm

Aug. 5.13 | About: New Gold (NGD)

Introduction

In this article I'll have a look at New Gold's (NYSEMKT:NGD) second quarter results and its achievements. I'll also have a short look at the company's outlook which will result in my investment thesis at the end where I'll propose a possible option play as well.

The Q2 Financial results

New Gold increased its production by 8% to in excess of 102,400 ounces of gold, good for a total revenue of $183.5M, up from $176.5M over the same period last year. The higher revenue was somewhat surprising as the gold, silver and copper price declined by 14%, 23% and 6% respectively. The increase in revenue was caused by the production at the company's New Afton mine which produced 21,800 ounces of gold compared to zero last year. This production increase compensated for the 15% lower production at the Cerro San Pedro Mine in Q2.

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The company announced adjusted net earnings of $4.5M or just $0.01/share (and a non-adjusted profit of $0.03/share), which is obviously quite disappointing but entirely caused by the much lower precious metals prices.

The company recorded a cash cost of $430/oz and an all-in sustaining cash cost of $931/oz, which is relatively high, but lower than for instance Kinross Gold (NYSE:KGC).

Outlook

The company has reiterated its guidance to produce between 440,000 and 480,000 ounces of gold at an all-in sustaining cost of approximately $875/oz. As New Gold is developing its Blackwater project in British Columbia and is in the process of acquiring Rainy River Resources, the company's production profile will increase even further over the next few years.

The Balance Sheet

The company has a working capital of almost $690M which puts New Gold in a very comfortable position even though the working capital is down from $740M at the end of December last year. This was mainly caused by an increase in the mining interests of almost $70M.

New Gold's book value is $5.78/share, but as we all know, the book value of a mining company isn't very important. If New Gold would have to take an impairment charge of $1B on its mining interests, the book value would drop by in excess of $2/share.

Investment Thesis

If you believe in the price of gold and the company's future success at the Blackwater and Rainy River project, New Gold could be an interesting addition to your portfolio.

I wouldn't buy the shares right now, but it could be interesting to write some put options. I'm looking at the January 2014 Put 5 options which have a 0.25 premium (as at the market closing on Friday). Writing one of those gives you an annualized return of approximately 8% per annum (before broker commissions), and the worst what can happen is that you'll be assigned shares at a price of $4.75/share ($5.00-0.25).

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.