Randall Oliphant - Executive Chairman
Mike Jalonen - Bank of America/Merrill Lynch
New Gold Inc. (NGD) Bank of America/Merrill Lynch 19th Annual Canada Mining Conference (Transcript) September 12, 2013 2:00 PM ET
Mike Jalonen - Bank of America/Merrill Lynch
It’s New Gold which is near 0.5 million ounce producer. I am very pleased to have Randall Oliphant, Executive Chairman to come speak on the company’s behalf and basically Randall should be no stranger to everybody in the room, having been CEO of Barrick before and has over the last, almost decade now, Randall built New Gold to the current level which is quite an impressive feat, but Randall (inaudible) yourself.
Thank you, Mike, and good afternoon ladies and gentlemen. I feel fortunate to be able to tell you the New Gold story and I am sure people are quite disappointed with the current drop in gold price today and in gold equities, but that doesn’t change at all our convection about where our company is going. We hope great optimism about the price of gold, the price of copper going forward, but we also feel very fortunate this is the time of opportunity where we’ve been able to take advantage of some of these lower valuations to further build our company.
I would like to thank Bank of America/Merrill Lynch for including us, Mike for your support of our company and all of your colleagues for some of the great ideas that have been presented in their friends that we’ve known for a long, long time. Also with me in the room today is Hannes Portmann who is over there, he is our Head of Corporate Development. I think most of you know Hannes, he is probably help to all these questions on our company and describing just where we are. And as we always say, you can contact us anytime if you had one clarification of things, if you have comments or any sort of questions.
On the slide in front of you is what I believe differentiates New Gold as what we see is something that’s unique about our company, some principles that are very important to us. First of all, we focus on assets that are in politically secured places, but nice thing about the company is New Gold stage of development and being an intermediate company as there is still lots of opportunities for us in politically secured places.
We just feel far more comfortable with the challenges in our industry to be able to at least eliminate political risk from the equation to work in places that were familiar where we have synergies.
The other thing is we focus on low cost production that gives us the best defensive position. It means that we generate the most cash, generate the best earnings in terms of realizing our objective of generating returns to shareholders. We think another thing that differentiates us is the gold industry is really a no growth industry. Gold production really hasn’t grown over the course of the past 10 years or so and New Gold today has a portfolio that can take our production to almost three times what it is today, all with assets with lots of potential to not only generate returns but to find more ounces.
But the acquisition of Rainy River which we did earlier this year, it gives us control of two of the newest gold districts and largest gold districts in Canada, Blackwater in British Columbia is an entirely new discovery, already 9 million ounces, Rainy River is 4 million ounces of reserves and a lot more in resources. And we think that having those types of districts gives us lots of ability to find more gold, but of course no acquisition cost.
We think that we have significantly invested team and I will walk through some of the members of our team, but I think one of the things again that sets New Gold apart from other companies at our stage of development is the level of insider ownership where we actually have a Board who are primarily shareholders themselves who really care about shareholder returns and that will drive us as opposed to size or any other objectives.
I talked about focusing in politically secured jurisdictions. And here you can see where each of our assets are and where they rank in terms of the location out of about 65 different locations have mines all of ours are in the top six. Blackwater, New Afton and Rainy River are all in Canada. They are all long live assets. They all have potential to extend their lives beyond that because of the exploration potential which we’re actively demonstrating now. Mesquite in California as again has life of over 10 years, very low sustaining capital, generates a lot of cash for our company.
Cerro San Pedro is in Mexico, it’s probably other than New Afton our biggest cash flow generator, unfortunately it’s only got about four years of life left, but this mine generates more cash annually than it cost to build it, it’s over a $100 million a year whereas it costs $90 million to build. But Cerro San Pedro was doing its job, it’s low cost, it generates lots of cash and it’s giving us some money, initially it’s built New Afton and now to take on Rainy River and Blackwater.
The only joint venture that we have is El Morro, it’s actually in Chile where Gold Corp is the operator and owns 70% of it. We feel very fortunate with El Morro and that Gold Corp puts up all the cost of develop this mine and get to recovery at out of the portion of our share the cash flow once the mines comes into production.
The Peak Mines in Australia is another cash flow generator for us. This mine has been in production since 1992 with all it had about an eight year mine life and after 20 years of production it still has a year. It seems to be almost perpetual. It’s pretty low maintenance, sends us dividends every year and as another one of those cash ounces going to help us build our portfolio.
I talked about critical risk and with Rainy River, this shows that with about 5% dilution to our shareholders we managed to increase our reserves and resources by 44% and 20% respectively, but most importantly that’s on a per share basis which is how we measure everything. And you can see that today we have 62% of our resources right here in Canada.
Another thing we pride ourselves on and we see that something that presents opportunities for us is our low cost. And you can see on an all end sustaining cash cost basis New Gold expect to complete 2013 at about $875 an ounce which is in the order of $200 an ounce less than our industry and what is safely the is although we're doing a lot of one-off capital in 2013 that all in sustaining cost should go down by about $50 a year for each of the next 3 years, which will bring our all in cost down to probably below at industry adjust cash cost.
In terms of our pipeline, as Mike mentioned we expect to produce both 440,000 to 480,000 ounces this year, but between Rainy River, Blackwater and El Morro projects that we own, we can add about 8,000 ounces to our production profile taking us to almost 3 times the production level that we have today with projects that are in house.
And what's exciting about all of these is they all have expiration potential. Rainy River as I mentioned is the brand new district, where they are already finding more ounces, Blackwater we have more than doubled the resource, when we bought that company we found other deposits and El Morro seems to be another emerging gold and copper district, whether it’s a blockade mine, another 4 million ounces of gold that double the gold rate of the resource, another deposits in the region.
We tried to maximize the size of the land positions that we have, because in a New Gold district, nobody really knows where all the gold came from. We know that it’s statistically unlikely that you find a 4 or 9 million ounce deposit and there is nothing else in the region. So you steadily built up the size of our land position where Blackwater is now over 1,000 kilometers, Rainy River about 169 square kilometers. We've identified lots of additional targets in the region and we have drilled that work.
I mentioned our team that I thought was a differentiating factor. I think you know a lot of the people on the team, but if you don’t, Bob Gallagher, our President, has a lot of experience in building mines and operating mines all over the world, most recently, running all of new mines of Australian and Asian operations. Brian Penny, our CFO, was one of the founders of Kinross and was their CFO for about 10 years and knows lots about being CFO of a gold company and particularly a growing one; and Ernie Mast has lots of experience in developing mines.
I won't go through all of our Directors. Jim Estey is here with us today, sitting beside [Hannes], who was the Chairman of UBS in Canada but we really view this group of people as a team, whether it's capital markets for somebody like Jim, David Emerson’s expertise in dealing with [BC] issues and diplomacy. Martyn Konig, who has successfully built up and sold gold companies and has run bullion desk. Pierre Lassonde from Franco has lots of experience in this industry and Ray Threlkeld is sort of the geologist on our team, who has been involved with so many discoveries and so many successful mine development.
Together, the team own about $100 million worth of stock. So when we talk about a Board that represents shareholders, they are all significant shareholders themselves. In terms of our operation, our production is expected to increase in 2013 over 2012 and the primary reason for that is our New Afton mine, which is the newest and arguably generates much cash as our previous three operations combined, just came into production in the middle of last year, and this will be a first full year production.
That will take our cash cost, which were last year $426.21 an ounce down to about $350 an ounce this year, which will make us, if not the lowest cost gold producer in the world but certainly one of them, and as I mentioned earlier including all of our admin cost exploration and sustaining capital about $875 an ounce.
The second quarter was pretty important for New Afton. I think its when it hit it stride and really showed what it was capable of doing. In that quarter you can see how the gold rate increase, the recovery rate increase, the gold production increase, it was running at above 11,000 tones a day which is the design capacity and really showed how this can generate a tremendous amount of money for our company.
We are targeting to take our production to 12,000 tons a day by the end of this year and we feel very comfortable that the mine will get there. Another thing we are doing at New Afton is we’re exploring something called the C-Zone, and what's the C-Zone is all of the reserves and all the development in New Afton is what's called the B-Zone and down in to the side there is another area of mineralization called the C-Zone, where we started drilling to look forward ways to increase the reserves and extend the mine life.
And you can see when you look at the ounces of gold and pounds of copper, we’ve added about 700,000 ounces of gold, about 0.5 billion pounds of copper. And that is relative to a gold reserve of about 1 million ounces a day and about 1 billion pounds of copper. So it looks like we’ve got scope to continue to increase the life and the overall reserve base at New Afton and you can see since that update we’ve continue to have successful holes drilled and these holes are actually at higher gold grades and copper grades than what we have in the existing New Afton reserve.
So when we put it altogether, we are very proud of the team. It was one of the few mines that I am aware of that started up and hit commercial production six weeks early, which it did last year, came in within 7% or 8% of budget which I think is almost unheard of in the gold industry. Last year we were able to expand the reserve from 12 years to 14 years. The C-Zone is already three times bigger at this time than it was at the beginning of the year, but we’ve continued to drill successfully since that update.
As I mentioned we’ll at 12,000 tonnes a day by the end of 2013, but what’s really exciting to us is what can we do beyond that 12,000 tonnes a day. We’ve actually had a day where we ran at 18,000 tonnes which isn’t representative of what it can do going forward, but what we know is there is a lot more scope in the mill. In fact the mill will be the thing that determines just how much gold and how much copper we’ve produced, because we know that we have far more draw bells in this blockade mine than we need to be to produce the tonnes from underground.
Our conveyer can handle 14,500 tonnes a day, our crusher can do 20,000 tonnes a day. So mining will not be the constraint, but rather can this mill do 12,000, 13,000, 14,000, 15,000 tonnes a day because the way that we can see to add a lot value is to accelerate that production, accelerate that cash flow and then combine with what we are doing in the C-Zone to add to the life that maybe we take the current 14 years pull it into 10, but then expand it back out to 20 with additional exploration. But clearly at this point of all of our operations New Afton is the most valuable and the one most likely to add significantly to that value.
In terms of our pipeline, we talked about Rainy River which is in Ontario again a New Gold district that we acquired with the company of Rainy River. Blackwater is in central of British Columbia, just north of our New Afton property and of course El Morro is in Chile. The thing that made Rainy River really attractive to us is it was an assets that we thought we knew probably anybody in the world other than Rainy River themselves, but of course, we know Ray Threlkeld’s ability to discover mines to work on feasibilities and come up with reasonable capital cost and operating profile.
There is other target in the area which we are continuing to explore. We’ll be working on an updated feasibility study for Rainy River, which will incorporates most of the intrepid zone which is what was discovered after they started doing their initial feasibility study which should add to a additional grade earlier in the mine life.
Blackwater, again lots of exploration work happening there. We’ll have updates for you later this year, but already it’s 8.6 million ounces plus another 900,000 ounces of lower grade stock pile that will stay for later in the mine. El Morro as you maybe aware is got a temporary suspension of it’s environmental permit. Gold Corp. are working actively with the Chilean government to resolve that, because it’s really a challenge of local people against their own government who approved this environmental permits. I think that will all be resolve by later this year or very early next year.
So you can see the targeted production levels for each of these, each one a larger gold producer than we what we have today particularly with Rainy River and Blackwater. So not only do we have New Afton with all of it's potential, but then Rainy River coming on stream and then Blackwater that will produce more than what in terms of gold and New Gold does in the entire company today.
What we are trying to do is complete the Blackwater feasibility study by the end of this year, the updated Rainy River feasibility study by either the end of the water or early next. And we're continuing to explore at those projects and you can see how much money we plan to spend through the balance of this year. What we are hoping to do is get these to construction ready status and then will be in the permitting process. We expect permit for Rainy River probably about this time next year, for Blackwater probably by the end of next year, and we'll see where we are at that time.
What we know is we have two projects that generate robust returns. We'll see where the gold price is in terms of whether we go ahead with both of them or prioritize one ahead of the other. But we'll be ready to go and the nice thing about assets in Canada is we get to choose the timing of when we go to develop these projects. What we do know is they both generate very robust returns even in gold prices lower than where we are today and will be significant mines for not only our company but for Canada as well.
In terms of value creation, as I mentioned, our focus is how do we make our shares more valuable. And what we’ve shown here is since New Gold came into it's current form which was in March of 2009, how have we done relative to the gold price, how have we done relative to gold industries, and what is that led to that old performance. And we think what it is, is fundamentally making our assets more valuable than they were about 4 years ago.
Now we've worked very hard at our operations Mesquite, Cerro San Pedro drilling peak. I think what's happened is the mine life there has been longer than anybody expected. They’ve been wonderful from a cost perspective, in part helped by copper and by silver. Together they produced a little under 400,000 ounces of gold at about $450 an ounce, which is well below industry [cost].
At New Afton, four years ago, was valued by the analyst who follow our company and the numbers are on the left hand side as the average of that is about $120 million. It was interesting that people saw this blockage mine, questions whether or not it could perform the way it was advertised, whether or not the financing was in place to develop the mine and you can see today it's valued much more highly than what it was then as team has executed beautifully on it. We think that there is lots of scope to continue to increase that value by again, as I mentioned, accelerating the cash flow and expanding the mine life.
El Morro was sort of a lost project, we can extract it, but once Barrick and Goldcorp both one again involved in it, I think people realized that it was about the best undeveloped copper gold porphyry out there, at today’s prices could generate about $1 billion a year of cash flow. So although the capital cost is high at $3.9 billion, there is lots of potential to find other deposits there. And as I mentioned, there is a whole blockade scenario with an ore body that's about double the grade it was in the reserve. So we think as El Morro gets de-risk and closer to production similar to what’s happened at New Afton, we continue to add a lot of value.
Blackwater, it's nice that an acquisition made in 2011 is valued higher today than what it was before, but we think again similar to New Afton, as we move this along the line, closer to production, closer to the cash flow and find more ounces, we can continue to make that far more valuable than the value that’s paid for today.
Then Rainy River which I guess we just closed the month or so ago, the $310 million already has an NAV according to the market, significantly higher than that, but again through advancing this project and finding more goals, we believe that we can increase that value too.
So we are going to follow the same game plan that we’ve been doing which is in a low risk way continue to add value to each of the assets and we believe as we continue to build the NAVs the stock price will follow.
At the beginning of each year and 2013 was no different. We lay out a bunch of objectives that what we hope to accomplish things that are catalysts that will further propel the company forward. We’ve already given guidance and have been delivering against higher production and lower cost than we’ve ever had in the history of our company. We are going to achieve that this year. We updated the Blackwater resource again so it just keeps growing.
We updated the New Afton C-Zone and we continue to drill and we’ll be further update there. We own 97.5% of Rainy River and we’re just closing at to get to 100% of that. We’ve a lots of exploration updates on what's going on at Blackwater, Rainy River and further exploration at New Afton.
We’ll complete the Blackwater feasibility study this year. We’ll demonstrate how New Afton can do probably more than the 12,000 tons a day that we are hoping to achieve by the end of year and El Morro will be back on track with the resolution of the environmental permit.
So put together we think that 2013 is a particularly exciting year for our company. It will mean highest production we’ve ever had, lowest cost we’ve ever had, the best growth profile we’ve ever had, the biggest resources, biggest reserves and we continue to find more ounces.
So as I said at the outset, our focus is crystal clear, we are focused in politically secured jurisdictions where it becoming ever lower cost each year that goes on. We think we’ve got a pipeline which is probably the best in our industry. We’ve got two new districts which we believe will be finding ounces for decades to come and we believe that we have the right team to be able to execute on this and strategically carry this company forward.
So with that Mike, I am happy to answer any questions that anybody has got.
Mike Jalonen - Bank of America/Merrill Lynch
Okay. We have time for some questions. Maybe I will start it off, Randall. Certainly the hallmark of the presentation this morning every company was, how they are looking at further cost reductions, this gold plumping of course and just I noticed in your presentation, I don’t see anything like that, at the same time as you mentioned you are a very low cost producer to begin with. So just what your though process is potential cost reductions that you need to take in?
Well, thank you Mike and that’s question I get from a lot of people and we’re somewhat confused by it and that we think about what capital do we need to spend when we do our budgets in the first place and we don’t know how people can reduce capital expenditures without any implications because we didn’t have five trucks ordered when we only need two. And we sincerely don’t understand or we’ve always tried to keep our head office as small as possible and Bob Gallagher and I talk about this.
We talked about it just recently as Monday of if you never create the problem, then you don’t have to solve the problem. I mean here we have 20 people in our head office, we’ve got a similar number in Vancouver. We really don’t understand when somebody says we can reduce our head office staff by a 100 people what doesn’t get done or what they did. So we’ve always try to maintain for the smaller company attitude to what do we absolutely have to do, we know exactly who every person works with us does.
We do generate cash flow, whether it’s $1000 we look at scenarios like that of our cash balance just continuous to grow, and so being lien and spending a little with possible sort of been the mantra of our company from the beginning, and I don’t think we are spending any money that we don’t absolutely have to.
Mike Jalonen - Bank of America/Merrill Lynch
Okay, I think I will ask another one, there is one over in the left (inaudible) over the podium.
Just with regards to the Blackwater and I know it’s impossible to predict how this plays out, but if you had to put a guestimate through 2017 what would you expect that capital expenditure to be pro forma total?
We are working on our feasibility study now, but having said that we completed a preliminary economic assessment in September of last year and we haven’t seen anything coming out of the feasibility study that changes any of those number. So it was going to be over $1.8 billion in capital then included about $346 million of contingency. It was cost (inaudible) arguably the most expensive time in the history of mining to build a mine using early 2012 number, and we think that’s probably a realistic number going forward.
The expenditure there however was weighted very much to the last two years before production. So before Rainy River, we said it will be in production in 2017 and a big money would be spend in 2015 and 2016 probably in the order of $1.4 billion of $1.5 billion of that $1.8 billion. So, in terms of the timing of that, it's quite away down the road. Alright are there any more? Okay. Thank you
Mike Jalonen - Bank of America/Merrill Lynch
I think, one more from Scott.
If I could just a follow up, is that binary situation yea or nea or could you modify it and start it at a smaller scale and then move up overtime?
Yeah. We looked at that Scott. I think in June of last year we looked at a bunch of different scenarios, should we do 60,000 tons a day, 30,000 and then expand by another 30,000 or work to some other number. And what we found is that phased approach would actually cost us about $300 million more. Because to mobilize, put everything in place, build the 30,000 ounce mine and then bring everybody back to build another 30,000 tonnes a day to ultimately get to 60,000 tonnes a day was just going to be a lot more expensive. And so, I think that's what interesting about having Rainy River in the portfolio. Rainy is about 45% the size of Blackwater in almost every respect. 225,000 ounces versus 500,000 ounces; 7 million or 8 million of capital versus 1.8 billion.
So if we want to build a smaller project Rainy River is the one to build, we can build sort of almost half of the Blackwater. But the rate of return is about 75 gold on that 1.8 billion or about 14% after tax. So it's still a robust, if gold price is even lower than where we are today. So, our plan is to build to 60,000 tonnes a day Blackwater, the smaller Rainy River project, and then we’ll just phase them in when we’ve got the money and when the time seems right.
Mike Jalonen - Bank of America/Merrill Lynch
I think we're out of time for questions, but if you can all join me to thank Randall and New Gold for an excellent presentation. Good luck to Randall.