New Gold (NYSEMKT:NGD) currently has 4 mines in production: New Afton, Mesquite, Peak Mines, and Cerro San Pedro. These mines will produce 380,000 to 420,000 ounces of gold in 2014 at all-in sustaining costs of $815 to $835 per ounce, including total cash costs of $320 to $340 per ounce. With gold hovering around $1,300, and most gold producers struggling to break even at current prices, having all-in sustaining cost of around $825 gives New Gold investors some re-assurance that the company can keep generating profits even if gold turns down again.
And New Gold is going to need those profits because they have a very strong growth pipeline that they need to fund. Before I get into that let's talk about New Gold's current operations.
The New Afton copper-gold mine is located in British Columbia, Canada. The mine began production in June 2012 and on average is expected to produce 85,000 ounces of gold and 75 million pounds of copper per year over a 12-year mine life. However, the mine has been far exceeding those expectations, as 2014 production is expected at 107,000 ounces of gold and 81 million pounds of copper. Using copper as a by-product credit, New Afton's all-in sustaining cost were negative $671 per ounce for the first six months of the year. That's a margin of almost $2,000 per ounce using a gold price of $1,300. There aren't many gold mines out there that can produce at a negative all-in sustaining cash cost.
Earlier this year, New Gold announced that they planned to expand the mill at New Afton from the current 12,500 tonnes per day to 14,000 tonnes per day. Not only do they expect to produce more gold and copper but they also project higher recoveries for both due to the addition of tertiary grinding and increased flotation capacity.
(Source: New Gold)
The project remains on budget and on schedule with a total capital estimate of $45 million, the majority of which is scheduled to be spent in 2014, and the mill expansion complete by mid-2015.
One reason New Gold felt comfortable expanding the mill was the additional resources that were discovered (C-zone) below the current mine plan ore (B-zone).
(Source: New Gold)
There was a 10 fold increase in gold and copper resources in the C-zone during 2013. Measured and Indicated resources now stand at 693,000 ounces of gold and 516 million pounds of copper.
(Source: New Gold)
Mesquite, Peak Mines, and Cerro San Pedro
New Gold's three other mines in production aren't nearly as strong as New Afton, as they have higher costs. In fact, New Afton masks the weakness at the other three mines. You can see below that Mesquite, Peak Mines, and Cerro San Pedro have an all-in sustaining costs of $1,000-$1,200.
(Source: New Gold)
Some might say that if it wasn't for New Afton then New Gold would be just another average costs gold producer. This is a little short-sighted though. First let's talk a little about these three other mines that New Gold operates.
Mesquite is a gold heap-leach operation located in California which commenced production in 2008. The mine is expected to produce 118,000 ounces of gold in 2014 at an all-in sustaining cost of $1,320 per ounce. Production has been lower in the first half of the year due to increased waste, but the mine is expected to have a strong second half. All-in sustaining costs have also been lower than projections. 2014 will be the peak year for sustaining capital at Mesquite, and the 2015 mine plan should see grades moving more in line with reserve grades. That should translate into lower all-in sustaining costs for 2015. Mesquite will never be a low cost operation like New Afton, but it will still produce over 100,000 per year for another 8+ years and is in a safe mining jurisdiction.
Peak Mines is a gold-copper underground mining operation located in Australia, the mine has been in production since 1992. It currently has a 6+ year mine life, but should be able to expand that since it's typical for underground mines to have shorter current mine lives due to the nature of the deposit. Peak Mines could have a 6+ year mine life for the next 20 years. For 2014, the mine is expected to produce 100,000 oz of gold and 15 million pounds of copper at an all-in sustaining cost of $1,075. It's a decent and stable mine just like Mesquite, but again, it's not a New Afton.
Cerro San Pedro is located in Mexico and is a gold-silver heap-leach operation. Production began in 2007, but operations are now winding down. For 2014, the mine is expected to produce 75,000 oz of gold and 1.2 million oz of silver at an all-in sustaining cost of $1,135. At one point Cerro San Pedro was New Gold's most important mine, now it has 2 years of production left and it looks like New Gold has no plans to try and find more resources.
The "New" New Gold
In a few years New Gold will have a much different look. One that will transform it from a 400,000 ounce low cost producer to a 1 million ounce low cost producer. In terms of mid-tier gold companies, nobody comes close to the quality and size of projects that New Gold has in the pipeline. Not only that, but the geographic areas that New Gold's operations and projects are located are very safe. Most of its production will come from Canada, with the rest coming from the US, Australia, and Chile.
Rainy River, Blackwater, and El Morro will produce 900,000 oz of gold in total per year along with El Morro producing 85 million pounds of copper annually. All three of these are long life mines, and when you combine them with New Afton, Mesquite, and Peak, New Gold will go from a mid-tier gold producer to a major.
(Source: New Gold)
New Gold acquired Rainy River Resources in 2013 for $310 million. I owned Rainy River Resources at the time, as I believed it was one of the best junior companies out there as its Rainy River project was a very high quality gold asset.
Reserves: Gold 3.8 million ounces - Silver 9.4 million ounce
Resources: Gold 6.2 million ounces - Silver 14.6 million ounces
Rainy River is located in Ontario, Canada and is going to be a combined open pit and underground operation. For the first 9 years annual gold production will average 325,000 ounces at total cash costs of $613 per ounce and all-in sustaining costs of $736 per ounce. Development capital costs are $885 million inclusive of a $70 million contingency and targeted commissioning is in late 2016 with first year of full production in 2017.
(Source: New Gold)
At current gold prices the Rainy River project has a modest after-tax IRR of 11.3% and 5.5 year payback period. That's not outstanding but there is definitely leverage to the gold price. But you have to look at the other aspect of all of this. The exploration potential for Rainy River is enormous and the project is in a great mining jurisdiction. Positive preliminary assay results support the potential for additional underground resources both west of planned open pit and southeast of Intrepid deposit, with additional drilling for these areas planned in third quarter of 2014.
New Gold is moving forward with Rainy River, and through June 30, 2014, C$180 million of capital purchase commitments have been made which primarily consist of the initial mining fleet as well as the milling equipment. The company continues to target first production from Rainy River late in 2016 with a full year of production anticipated in 2017.
Blackwater is located in British Columbia, Canada. The project was acquired by New Gold in June of 2011 through New Gold's acquisition of Richfield Ventures Corp. Blackwater will be an open pit mine with a 17-year mine life. Development capital costs are $1.865 billion inclusive of a $190 million contingency. For the first nine years the mine will produce on average 485,000 ounces of gold per year at total cash costs of $555 per ounce and all-in sustaining costs of $685 per ounce.
Reserves: Gold 8.17 million ounces - Silver 60.8 million ounces
(Source: New Gold)
New Gold plans to build Rainy River first, as it has much more manageable cap ex compared to Blackwater. Blackwater should come online a year or two later. Gold companies are being conservative in their spending given the current price environment. If gold starts to take off in the next 6-12 months, then I would imagine that New Gold would up its time-table for Blackwater and could develop both projects simultaneously.
IRR and payback period for Blackwater and Rainy River
Some might look at the IRR and payback period for Rainy River and Blackwater and ask what is so special about these projects? But I caution not to rely too heavily on these numbers when you are dealing with projects this size being built in a $1,300 gold price environment. When they are completed, Blackwater and Rainy River will produce a total of 810,000 ounces of gold per year at an all-in sustaining cost of roughly $700 per ounce. That's almost $500 million per year (before tax) in income at $1,300 gold. When you consider that cash flow, along with the exploration and expansion potential at both projects, and the fact that both projects are located in Canada, you create a very strong and desirable set of mines. Throw into the mix a rising gold price environment that will more than likely occur over the next few years, then you can start to really see the potential here.
The El Morro project is a world-class asset located in Chile. It's an advanced stage, copper-gold mine in which New Gold holds a 30 percent, fully carried interest in, with owner-operator Goldcorp holding the remaining 70 percent interest.
Reserves: Gold 2.01 million ounces - Copper 1.72 billion pounds
Resources: Gold 2.66 million ounces - Copper 2.02 billion pounds
El Morro has been held up the last 2 years due to a dispute with the local indigenous people who claimed that Goldcorp hadn't fully consulted with them on the project. Chile's Supreme Court had frozen the project in 2012, but then lifted the ban in October 2013 as they felt Goldcorp did uphold its duty. A month later, after accepting an appeal from a local indigenous community, Chile once again halted the project. Finally in April of 2014, an appeals court in Chile unanimously voted against the new injunction that the group of local indigenous communities had filed against the El Morro project.
Even though Goldcorp has been victorious in the courts, there could still be more appeals. In the end I expect El Morro will be built. There is always the risk that it won't but the odds are low of that. The courts have ruled in Goldcorp's favor, and El Morro is a massive low cost gold and copper project located in a great mining jurisdiction.
There hasn't been an updated feasibility study released for the project in the last few years, but as of 2012 the development of El Morro is expected to take five years at a capital cost of $3.9 billion (100% basis). Goldcorp will fund New Gold's 30% share of capital costs, or approximately $1.2 billion, and New Gold will repay its share of capital out of the project's cash flow.
New Gold's 30 percent share of annual production is expected to be over 90,000 ounces of gold and 85 million pounds of copper over an initial 17-year mine life. Life-of-mine cash costs are expected to be approximately ($700) per ounce of gold on a by-product basis and approximately $550 per ounce of gold and $1.45 per pound of copper on a co-product basis. Metals price assumptions used to calculate the average life-of-mine El Morro cash costs are $1,200 per ounce of gold and $2.75 per pound of copper.
Total Production and AISC potential
Below is a breakdown of what New Gold's production profile will look like in 3-5 years. I included the mill expansion at New Afton, as well as assumed steady production and cash cost at Peak and Mesquite.
|Rainy River||325,000 oz||$736|
|El Morro||90,000 oz||85 million pounds||($700)|
|New Afton||95,000 oz||84 million pounds||($700)|
|Peak Mines||100,000 oz||15 million pounds||$1,000|
|= 1.195 million oz||= 184 million pounds||=$546|
Rainy River, Blackwater, and El Morro are big projects that require lots of capital to construct. However, New Gold should be able to pull this off without significant dilution and/or debt financing. El Morro is going to be fully funded by Goldcorp, so New Gold doesn't have to spend any money on construction. Rainy River and Blackwater will be staged developments, with Rainy River being built first. Currently New Gold has $414 million in cash and Rainy River is projected to cost $885 million. Cash flow from operations over the next few years should be enough to cover the difference, if not the company has a $150 million undrawn credit facility that it can tap.
(Source: New Gold)
It might be possible to completely fund Blackwater with operating cash flow because by the time New Gold starts building the project in 2017 or so, Rainy River should be in production with El Morro not far behind. You can see that by 2017 New Gold expects $600 million in operating cash flow. Should New Gold have to tap the debt market that shouldn't be a problem either. The company has $300 million in debt due in 2020 and $500 million due in 2022. They could raise $500 million to $1 billion and still be in solid shape given the annual cash flow they will be generating.
New Gold is in a position to grow production from roughly 400,000 oz of gold in 2014, to almost 1.2 million ounces in 3-5 years. The projects that it owns are unrivaled compared to other mid-tier gold producers. New Gold should be able to fully fund these projects without the need for significant shareholder dilution and/or debt offerings.
Disclosure: The author is long NGD. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.