New Gold (NGD) Q2 2016 Results - Earnings Call Transcript

| About: New Gold (NGD)

New Gold, Inc. (NYSEMKT:NGD)

Q2 2016 Earnings Conference Call

July 28, 2016 09:00 AM ET

Executives

Hannes Portmann - EVP, Business Development

Randall Oliphant - Executive Chairman & Director

David Schummer - EVP & COO

Brian Penny - EVP & CFO

Analysts

Rahul Paul - Canaccord Genuity

Robert Carlson - Janney Montgomery

Steve Parsons - National Bank Financial

Don MacLean - Paradigm Capital

David Haughton - CIBC World Markets Inc.

Frank Duplak - Prudential

Anita Soni - Credit Suisse

Steve Butler - GMP Securities

Trevor Turnbull - Scotiabank

Operator

Good morning. My name is Michelle and I will be your conference operator today. At this time I would like to welcome everyone to the New Gold Inc. Second Quarter Results. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session. [Operator Instructions] I would now like to turn the call over to Mr. Hannes Portmann, Executive Vice President, Business Development. Please go ahead.

Hannes Portmann

Thank you, operator and good morning, everyone. We appreciate you joining us today for the New Gold 2016 second quarter earnings results conference call and webcast. On the line today we have Randall Oliphant, Executive Chairman and David Schummer, our COO, Brian Penny, our CFO and I will also be available during the Q&A period at the end of the call. Should you wish to follow along with the webcast, please sign in from our home page at newgold.com. If you are participating in the webcast, you can type your questions online through the interface.

Before Mr. Oliphant provides us with an overview of the results, I would like to direct your attention to our cautionary language related to forward-looking statements found on Slide 3 of the presentation. Today's commentary includes forward-looking statements relating to New Gold. In this respect we refer you to our detailed cautionary note regarding forward-looking statements in the presentation. You are cautioned that actual results and future events could differ materially from those expressed or implied in forward-looking statements. Slide 3 provides additional information and should be reviewed.

We also refer you to the section entitled Risk Factors in New Gold's latest MD&A and other filings on SEDAR which set out certain material factors that could cause actual results to differ. In addition, at the conclusion of the presentation there are a number of end notes that provide important information and should be reviewed in conjunction with the material presented.

I will now turn the call over to Randall.

Randall Oliphant

Thank you, Hannes. Good morning, everyone. Thanks for joining us today for New Gold's second quarter earnings call. Slide 4 provides few of the highlights from the quarter. Higher quarterly production from New Afton, Mesquite and Peak resulted in consolidated gold production of 99,000 ounces and copper production of over 25 million pounds. Costs during the quarter were significantly lower than 2015 due to the combined benefit of higher production, lower sustaining capital and the continued implementation of business improvement initiative.

As the result, all of our operations delivered all-in sustaining cost below $1,000 an ounce. With our strong first half operating results and current commodity prices in foreign exchange rates. We are very pleased to be in the position to lower our 2016 cost guidance by $75 an ounce. The significant decrease in cost, enabled our company to generate a very robust all-in sustaining cost margin of $550 an ounce or 43%. This represents the highest quarterly margins since 2014.

Our strong margins led to 39% increase in cash flow to $75 million or $0.15 a share despite the gold price only increasing 6% and the copper price decreasing by over 20%. We finished the quarter with cash of $220 million. In addition to our solid cash balance, we should receive the remaining $75 million stream deposit from Royal Gold in the coming months. Finally, at Rainy River construction activity continues to move forward. After spending $107 million during the quarter overall construction is currently 40% complete. We continue to make good progress with respect to the challenges encountered at the water management and tailing management facilities in the first quarter.

We submitted revised construction designs for the water management facility and anticipate receiving permanent amendments to begin remediation work in the coming weeks. We also plan to submit our final redesigns for the tailing management facility by mid-August and expect to final approvals early in the fourth quarter.

Slide 5 provides the summary of our second quarter consolidated and mine-by-mine operating results. All of our operations had a solid second quarter with every operation generating free cash flow with all-in sustaining cost below $1,000 an ounce. At New Afton both gold and copper production increased relative to the second quarter of 2015. Gold production increased as the benefit of 16% increase in mill throughput more than offset planned decreased in gold grade.

Despite $406 an ounce decrease in by product revenues, New Afton's cost during the quarter increased by only $104 an ounce. At Mesquite, gold production increased by 14% to 26,000 ounces due to an increase in gold grade which was partially offset by lower or tonnes placed on the leach pad. Both cash cost and all-in sustaining cost were significantly lower than last year.

Cash cost benefited from a combination of higher gold production and lower diesel prices. Sustaining cost decreased by $3 million to $12 million during the quarter. Peak had a very strong quarter. Gold production of 31,000 ounces was more than doubled last year. This was due to higher grade in recovery. Copper production of 3.6 million ounces was consistent with last year. Peak's cost during the quarter were significantly lower than 2015 due to the increase in production and the depreciation of the Australian Dollar.

As planned, Cerro San Pedro's gold production decreased to 17,000 ounces as the mine was in the final months of active mining. Cerro San Pedro finished active mining in June and is now transition to residual leaching. Cost remained low and will continue to benefit from a much smaller team and very limited capital expenditures.

On Slide 6, we provide an update on our 2016 production and cost guidance. We're proud to have delivered such strong second quarter results from all of our operations. As a result of our solid first half production we are well positioned to meet full year gold production guidance of 360,000 to 400,000 ounces. First half's copper production was higher than planned and we anticipate exceeding the high end of our guidance range. Silver production is expected to be at or slightly below the low end of our guidance.

Based on our strong operating results and at current commodity prices and exchange rates, we expect our cost to decrease by $75 an ounce versus our original 2016 guidance ranges. We now expect total cash cost of $360 to $400 an ounce and all-in sustaining cost of $750 to $790 an ounce. As we look to the second half of the year, we expect gold production to be similar to the first half, copper production to be approximately 5 million pounds less, silver production to be slightly higher and sustaining capital to be about $5 million more.

Slide 7 provides a summary of our quarterly financial results. Revenue for the quarter was $180 million up 7% from 2015 due to higher gold and copper sales, as well as higher gold price. This more than offset 21% decrease in the copper price. Operating margin for the quarter increased by 38% due to the increase in revenue coupled by lower operating expenses. The decrease in operating expenses was due to the combined benefit of Canadian and Australian Dollar depreciation, the plant slowdown of mining activity at Cerro San Pedro and the company's ongoing business improvement initiatives which are being led by Dave and his team.

The company reported adjusted net earnings of $14 million or $0.03 a share. The increase in earnings relative to 2015 was primarily due to the increase in operating margin and a decrease in finance cost, which were partially offset by an increase in depreciation. New Gold reported a net loss of $9 million or $0.02 a share in the quarter. The change relative to 2015 was primarily due to non-cash foreign exchange movements.

The current quarter included $5 million pre-tax foreign exchange loss while 2015 included foreign exchange gain. The current quarter also included non-cash pre-tax charges of $10 million in the revaluation of the Rainy River gold stream and $8 million on the revaluation of the gold price auction contracts.

Underpinned by our solid operating performance, we generated quarterly cash flow of $79 million or $0.15 a share, we were able to increase our quarterly cash flow by 39% despite the gold price increasing by only 6% and the copper price declining by over 20%. Slide 8 provides an overview of Rainy River. Development activities continue to advance and overall construction is currently 40% complete. We spent $107 million during the quarter bringing our total spend on the project to $500 million or more than half of our total development capital estimate.

As we work to progress construction through the balance of the year. Our total 2016 capital program of $500 million remains unchanged. The photos on the right shows a significant progress that continues to be made. Installation of mechanical, piping, electrical and instrumentation equipment started during the quarter. The first Ball mill shell has been placed in the grinding building and total concrete placement is now over 75% complete.

Slide 9 provides a further details on our development progress at Rainy River. Plant site earthworks and the power line construction are substantially complete. The pre-leach thickener tank is 90% complete and the leach tank is over 30% complete. In addition to the progress that has been made on the construction site, our mining activities continue to advance.

During the second quarter the team moved approximately 5 million tonnes of waste and overburden and is now mining at the rate of approximately 68,000 tonnes per day. Earlier this year, we encountered some challenges during the construction of the water management and tailings management facility. During the quarter, we made significant progress on both fronts. We received approval to begin pumping on initial amount of water to water management facility for storage, we also submitted our revised construction designs for the water management facility.

We anticipate receiving the permit amendments in the coming weeks to enable remediation work to begin. Finally, we plan to submit our final redesigns of the tailing management facility by mid-August and expect final approvals early in the fourth quarter. Overall, I remain very pleased with construction progress that's made at Rainy River which is now another three months closer to production.

We continue to target first production from mid-2017. With the potential to produce over 300,000 ounces and generate significant cash flow. It will be a very meaningful addition to our portfolio of operating mines.

Slide 10 summarizes our company today and our future. The portfolio of operating assets we have today have an average mine life of seven years. Our new projects including Rainy River are more than double this. Today our assets produce an average of 100,000 ounces. The new projects average four times this. They're not only moving to bigger scale, but importantly are also moving to lower cost operations which should have a compounding positive impact on our cash flow.

Our ability to invest the free cash flow we're generating today into longer life, larger scale and lower cost assets make me very excited about our future. In closing, Slide 11 highlights New Gold investment thesis from which we have not deviated. We have a portfolio of assets and top-rated jurisdictions with our focus increasingly in Canada.

Our board and management team have the experience to execute on our plans and importantly are significantly invested in our company and directly aligned with our shareholders. Our low cost enabled us to deliver robust margins in the second quarter with all four of our operations generating free cash flow.

In an industry that's challenged for growth given the lack of investment over several years, we're uniquely positioned with Rainy River and Black Water. And finally, by reinvesting the free cash flow generated from our operations into organic projects, we believe, we are well position to continue our track record of long-term value creation.

I'd like to thank you again for joining us today and for your continued support of New Gold. That concludes our formal remarks and now we will be happy to answer any of your questions.

Question-and-Answer Session

Operator

[Operator Instructions] your first question comes from Rahul Paul from Canaccord Genuity. Your line is open.

Rahul Paul

Question on Rainy River, have you completed all the work required to concern the proposed teams design change i.e. is that chance that additional work might be to further design changes in additional permit amendments.

David Schummer

No, we'll make that submission here in the next couple of weeks that work is complete at this point from a design standpoint.

Rahul Paul

Thanks, Dave and then could you talk a bit more about the required schedule to amendment, that you mentioned that is required to deposit mine based in certain creeks. How sensitive of nature is that from an environmental and community standpoint?

David Schummer

Well I think it's something everyone considers and the schedule for that is middle of next year as we reach completion of the project at this point.

Rahul Paul

But do you expect it to be a fairly sensitive issue that might take some time to address the confidence.

David Schummer

I'm confident in the schedule that we have and the people that we have working on it, at this point for sure.

Hannes Portmann

Rahul, it’s Hannes speaking, maybe just to add one thing. Schedule 2 is not an uncommon schedule or amendment you need to get, it goes through environment Canada, but this is something that's always been part of the plan to get prior to start up and that's still the plan today.

Rahul Paul

Okay and then, is there anything that you plan to do, to hedge out the Canadian Dollar exposure with the remaining capital spend at Rainy?

Brian Penny

Interesting, right now we did historically purchase Canadian Dollars and use them to pay the Rainy River bills as they come due. We will continue on that program, we'll be opportunistic as the cash flow comes out of our operating assets, we'll convert them to Canadian Dollars because virtually all of the remaining expenditures are in Canadian Dollars, so we'll continue with that program.

Rahul Paul

Okay, thanks Brian and then one last question as we get closer to production at Rainy River, are you still comfortable with your operating cost assumptions as per the feasibility study?

Brian Penny

Absolutely at this point.

Rahul Paul

Okay, thanks. That's all that I had guys.

Operator

Your next question comes from Robert Carlson from Janney Montgomery. Your line is open.

Robert Carlson

What was the average selling price for gold during the quarter and secondly could you comment little on your hedging?

Brian Penny

Well, as Hannes [ph] $12.67 was the average realized price for the quarter. It was a little bit above market mostly because the timing of sales near the end of the quarter were higher than at the beginning of the quarter. As far as our hedge program to provide you some history and background of that, in January when gold was at $10.50 or so, we looked at our cash flow certainty, we put together min-max program with a $1,200 and ceiling of $1,400. Just to provide us the flexibility that we would have the cash flow to support the development of Rainy River. The program is working perfectly as designed, the first three months expired on exercise, yesterday was option expiry date, so July has expired on exercise, but it gives us the certainty to keep proceeding with Rainy River on plan because the cash flow supports the requirement of operating cash flow to close the GAAP on that one.

Robert Carlson

Great, thank you. Well done.

Operator

Your next question comes from Steve Parsons from National Bank. Your line is open.

Steve Parsons

I just would take a moment to better understand the timing and scope of work that's required for the tailings management facility. Post receipt of the amendment permits which I understand sounds like it's going to be early Q4. So, really - specifically I'm looking for whether or not you can work with the clays and work with I guess putting together the engineered structures the clay liner, the clay core whether you can do that work in the winter months, when freezing could have an impact on those engineered structure, so can you do any of that work in advance we're seeing in permits and that for help keep the timeline in check?

David Schummer

I can appreciate that question Steve, thanks. The dam is actually designed as a rock fill embankment and it will incorporate geomembrane liner that's the type of work, we can actually do through just about any kind of weather and we use the big trucks to bring the rock in and place it, where with the smaller gear can get it to for construction, we do all that in advance and I think one other point is that, as we do the water management facility berms and finish those off, they actually comprise part of the tailings facilities structure. So we have that going for us as well. So I'm confident at this point.

Steve Parsons

Okay, so there's not, is there a clay liner for the tailing then?

David Schummer

Not on the contingency dam. There is on the final tailings dam, yes. That part is going to take place during the period where it's not going to be an impact from weather and we naturally incorporate some time for challenges with respect to weather for our schedule.

Steve Parsons

And how much of that work needs to be done I guess in late spring next year before you start production mid-2017.

David Schummer

On the tailings facility from January till October.

Steve Parsons

Got it. Okay and with respect to the permit to draw initial water from one of the local rivers. When you initial water, is this water you think that's going to be enough for start-up or you still need additional sources of water for start-up?

David Schummer

It's about 2,000 cubic meters and we're going to have 750,000 cubic meters by the end of this year and it will be adequate water to support process facility. By the time we start up, we'll have about 3.3 million cubic meters in the facility.

Steve Parsons

Got it. Okay, that's it from me. Thanks for that.

Operator

Your next question comes from Don MacLean from Paradigm Capital. Your line is open.

Don MacLean

Dave, a couple of things. One is, you're 40% into Rainy River have you now touched on enough of the areas at this point that, you're pretty confident that you're not going to see any other major changes come through, major changes have come when you've encountered something that wasn't expected because you were into it for the first, but if you now but sort of feed on ground and estimates for everything that's important, that you're feeling comfortable this is the last increase you have to do.

David Schummer

Yes, I'm comfortable and we have led all the contracts. Most recently the mechanical piping, electrical and instrumentation I'm spending a lot of time up there as our VP of Projects and we got a great team on the ground, Don.

Don MacLean

You're going to have to spend like hell on the second half, it looks like you've got $500 million spend and you're $190 million, your way through.

David Schummer

Yes, we're still targeting $500 million and it's really a function of the fact that we just let the MPEI contract that I just mention and that's what steepens up the progress curve and we are targeting about 5% to 6% progress per month on going forward.

Don MacLean

Okay and sort of what percent committed are you now, overall for the project?

David Schummer

About 80%.

Don MacLean

Great and then just standing back and looking at the sustainability of that, that was really impressive operating performance at Peak and Mesquite, but how sustainable is that in your opinion, Dave?

David Schummer

Well we had a great quarter at 31,000 ounces as mentioned. It's not likely sustainable at that rate. We actually did some re-sequencing and perseverance due to the positive geotech performance that we have been experiencing and we mine slightly higher grades that I would expect the grades to return back to what we typically see there in the five plus gram rate.

Don MacLean

Mesquite you had a higher grade but lower throughput will that rebalance itself and maintain that kind of level or would we expect a bit less?

David Schummer

We're going to be - it will probably come in at the lower end of guidance to be honest with you Don, but nothing that I'm overly concerned about this point. Offsetting that's a beauty having a portfolio obviously, offset by higher performance at Afton and Peak.

Don MacLean

Okay and then last one for Brian. Can you just give us a bit on color where things stand as far as cushion for funding Rainy River is looking out and vis-à-vis your covenants that's all that sort of stuff?

Brian Penny

Remember in January when we went to the banks and ask them to increase the ratios at $10.50 gold everything has improved positively since then, we're well within the ratios, the credit facility is available, if we need it. The Accordion is available if we need it, subject to consent of banks, but we're in great shape. FX has deteriorated little bit, but the change in the price of gold and copper has more than compensated it. So our flexibility is, has continues to improve and every month that goes by, we're in better and better shape.

Don MacLean

So if you were to try to give us a sense of what the cushion is in millions of dollars.

Brian Penny

What I think could happen at today's spot prices. How it probably will unfold this in the summer of next year, when we start-up Rainy River. We'll probably have a little bit of cash in the bank, the revolver may not be drawn or drawing for a little bit, but we'll be in great shape.

Don MacLean

Okay, good. Thanks, Brian. Thanks guys.

Operator

Your next question comes from David Haughton from CIBC. Your line is open.

David Haughton

A question if you don't mind probably for Dave. Moving 68,000 tonnes a day at Rainy, have you been, is that a waste, or have you access to the ore yet? And if so, is the ore behaving as expected?

David Schummer

Very minimal access to the ore at this point, but I'm very pleased with the performance with respect to the assumptions, we're doing a great job moving material up there, David.

David Haughton

Okay and following on from Don's question, huge step up in the spend rate. I presume it would be a combination of an equipment and also quite a bit of this material handling. Will we likely see any revisions to these numbers push it into 2017?

David Schummer

No, I don't anticipate that at this point, David.

Hannes Portmann

David, sorry. It's Hannes. We spend about $50 million in the month of June, so just using that as a bit of run rate exiting into the second half of the year, six months of that is $300 million and that's pretty much gets us to the $500 million for the year.

David Haughton

That's a good data point, thank you Hannes. And I guess that then means that, the receipt of the $75 million from the Royal looks like it's going to happen in the September quarter then.

Brian Penny

Well we put into disclosure Dave, we think it will be there in the third quarter but it may go into the first week of October, so but it's around that timeframe.

David Haughton

All right, close call then. Okay thank you very much guys.

Operator

Your next question comes from Frank Duplak from Prudential. Your line is open.

Frank Duplak

Just had a question, as you look at your capital structure. Are you guys thinking that perhaps there is an opportunity here to maybe refinance your debt and save yourself up you know the Blackwater project given the, you could be sort of close on cash and maybe a little bit of revolver draw as you get into middle of 2017. Are you guys thinking about that yet or not quite on the radar screen?

David Schummer

We always look at opportunities to improve the company, but our prime focus right now is delivering Rainy River. At some point in the future we'll look at our capital needs for Blackwater and figure that all out, but we're very, very comfortable with where we are today.

Frank Duplak

Thanks, appreciated.

Operator

You're next question comes from Anita Soni from Credit Suisse. Your line is open.

Anita Soni

Just a few quick questions on Rainy River. So as we approach I guess commercial production in next year, I just want to understand the performance parameters that will help you determine, when you will achieve commercial production and second I guess and the timing. So I guess, if when you're going to do that and then also in terms of the depreciation, once Rainy River hits the book, how should we be thinking about, how depreciation works is it the acquisition cost plus the capital that's been sunk and then I have another question after that one.

David Schummer

To answer your questions, as far as commercial production, we'll treat it the same way, we did with New Afton basically once we hit 60% design capacity for 30 [ph] declare commercial production. So there's the answer to your first question, as far as how will depreciate it? In addition to the purchase price, all the capital expenditures, there's an element of capitalized interest and probably a best way to model that is on a unit or production basis. I think that will get you in the right ballpark. And the third question?

Anita Soni

I'm sorry, unit of production so then based on the reserves, right or?

David Schummer

Yes based on improvement and probable reserves.

Anita Soni

Reserves okay and then, when you enter design capacity, is that solely on the mill or are you expecting, is that also a requirement of the mine to be running at 60%?

David Schummer

It's usually based on the mill, but in order for the mill to run the mine has to feed it at the appropriate level.

Anita Soni

All right, although sometimes you can have stock piles built up ahead, but anyway and then the last question would be with regards to sustaining capital portion in 2017. So assuming the remainder of $940 million that haven't been spent to-date is all, pre-production is there also then a component of sustaining capital in 2017 or does the entire $940 million encompass all the spend in 2017.

Hannes Portmann

Yes, Anita its Hannes. As you know from years past, we always guide one year out, so we haven't provided 2017 guidance for really any of the operations, there certainly will be an element of sustaining capital at Rainy and sort of second half of 2017 and we'll specifically define and guide that number as part of our usual Investor Day new release and presentation early next year, as a proxy you can certainly look to the feasibility study that's in the public domain which we shouldn't deviate all that far from.

Anita Soni

All right and then just one last question pertaining to feasibility study. When we're looking at the sustaining capital that's in the feasibility study, does that include the capitalized stripping and also development work in the underground? I'm just trying to revisit some of my sustaining assumptions.

David Schummer

Yes.

Anita Soni

Okay, all right. Thank you, that's it.

Operator

Your next question comes from Steve Butler from GMP Securities. Your line is open.

Steve Butler

Just wanted to clarify, the question that Don has asked of the Rainy River of the CapEx on a go forward basis, what percentage is actually committed at this point guys.

Hannes Portmann

It's about 80%, Steve.

Steve Butler

Oh, it was 80%, okay. Thanks Hannes, that's it.

Randall Oliphant

Hey Steve, it's Randall. Welcome back.

Steve Butler

Thank you very much. It was great last night to be back.

Operator

Your next question comes from Trevor Turnbull from Scotiabank. Your line is open.

Trevor Turnbull

Sorry, I joined a bit late and maybe you've already gone through this, but looking at the CapEx on Rainy, when do you officially kind of consider that to have started and we talk about, we've been asking this 60% to get the money from Royal, can you remind us what the final number, 60% of what CapEx figure and then finally what have you spent to-date, since the start of CapEx spending.

David Schummer

When we talk about the cost to build the project, it's when we received our approved EA, so it's January 1, 2014. The Royal Gold agreement starts 60% from January 1, 2015. We spent about $16 million in 2014 and to-date the number is not.

Brian Penny

$501 million.

David Schummer

$501 million. So you know at $50 million a month, we should be there sometime in September but the paperwork will take us to October.

Trevor Turnbull

Right, sorry so you said you spend $60 million in 2014?

David Schummer

Yes.

Trevor Turnbull

And you spent $501 million since.

Brian Penny

Since the beginning of 2014.

Trevor Turnbull

Okay and then sorry, so then the final CapEx number is, you're using what for the calculation?

Brian Penny

Well, would be the $940 million minus the $60 million, so $880 million.

Trevor Turnbull

$880 million. Okay, all right. Thank you very much guys.

Operator

At this time, I have no further questions in queue. I'll turn the call back over to presenters for closing remarks.

Hannes Portmann

Thank you to all of you for joining today and for your continued support of New Gold. That concludes our formal remarks. If you have any further questions please don't hesitate to reach [Ends abruptly]

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