New Gold (NYSEMKT:NGD) was pleased to report that it has increased the size of its gold resource at its British Columbian New Afton Mine by 24%. The company also increased its copper resource by 29%. This is impressive and adds value to the project, although this is not sufficient to alter my bearish thesis.
I estimated that the project is worth about $800 million. If the company can produce everything that it found at the current production rate then it can add four years of production at over $100 million in cash-flow. But this cash-flow will be discounted out 11-14 years, and so its value drops significantly. I estimate that at current gold and copper prices, using an 8% discount rate the discovery can add up to $200 million in NPV. But this doesn't consider the fact that the resource, not the reserve was increased. Resources, unlike reserves, have not yet been deemed economical to mine, although given the low production costs at New Afton the risk that these resources cannot be mined is fairly low.
Nevertheless for a $3 billion company another $200 million in value or so doesn't change the fact that the company is overvalued. It also doesn't change my general concern that the company claims to be a very low-cost producer yet its financials tell a different story, and the company's reported production costs include New Afton, which reports its costs as negative in terms of gold production due to copper offsets despite the fact that it is really a copper mine. So unless there is a discovery that dwarfs that which was announced, or unless the gold price rises significantly and New Gold shares don't follow suit, I am continuing to avoid the stock.
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