In this article I'll have a closer look at New Gold (NYSEMKT:NGD) which has released its 2013 financial results and its official guidance for 2014. I'll start with providing my view on the financial results and the status of the balance sheet. Thereafter I will discuss the outlook for 2014 which will result in my investment thesis at the end of this article.
All images in this article were sourced from the company's press release.
My view on the financial results
New Gold produced almost 400,000 ounces of gold and 1.6 million ounces of silver in 2013, which resulted in total revenue of $779.7M which is a 1.5% increase compared to the numbers in 2012. Unfortunately the company's production cost and depreciation/depletion costs increased sharply which was the main reason for the 50% reduction in gross profit to $166.8M. Add an impairment charge of $272.5M and it's clear how New Gold ended the year in the red with a net loss of $191M or $0.39/share.
As most of my readers know, I also prefer to have a look at the cash flow statements of companies, which is especially true when impairment charges have been recorded as an impairment usually is a non-cash charge which has no influence on the cash flow of a company. So when looking at the cash flow statements of New Gold, you can see the company generated an operating cash flow of $182M before changes in working capital and $195M if you don't include the costs incurred by the Rainy River acquisition. As the capital expenditure for the year was $289M (excluding the Rainy River acquisition once again), New Gold was actually free cash flow negative in 2013. However, the negative free cash flow was limited in Q4 which actually bodes well for 2014 as the sustaining capital expenditures will decrease.
My view on the balance sheet
Moving over to the balance sheet, New Gold had a very comfortable working capital position of $568M and a current ratio of 7.3. As such, I don't expect New Gold to run into any near-term financing problems as a current ratio higher than one indicates the company has sufficient current assets to cover its current liabilities.
As of at the end of 2013, New Gold had a book value of $5.4/share which means the company is trading at a premium of approximately 10% on its book value which is very acceptable for a mining company, especially considering the fact that New Gold has an attractive growth profile.
Outlook for 2014
New Gold will produce approximately the same amount of ounces this year and has provided an official production guidance of 380,000-420,000 ounces of gold at an all-in sustaining cash cost of $815-835/oz. This expected cost is a decrease compared to the cost in 2013 and is caused by lower operating cost and a decrease in sustaining capital expenditures, mainly at the New Afton and Peak Mines projects. This guidance is obviously good news for shareholders as it once again confirms that New Gold is one of the lowest-cost producers operating in safe regions.
As such, I expect the free cash flow to increase which will obviously be beneficial to the quality of the company's balance sheet and will increase the working capital position of New Gold. This working capital will very likely be used to fund the construction works at the Rainy River project.
New Gold reported decent results, and I'm especially looking forward to the decrease in capital expenditures which should be beneficial for the free cash flow status of the company.
In my most recent article on New Gold, I recommended to write a P6 January 2014. As New Gold expired under $6 in January, you probably were assigned the shares. I think it would now make sense to write a Call 6 or 7 expiring in August 2014 for an option premium of respectively $0.85 and $0.45. I also recommended to write a P5 expiring in May 2014 and I hope it will expire out of the money as the shares are currently trading at $6.11.
Disclosure: I am long NGD. 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.