New Gold CEO Discusses Q2 2012 Results - Earnings Call Transcript

| About: New Gold (NGD)


Q22012 Earnings Call

August 1, 2012 5:00 pm ET


Hannes Portmann - Vice President, Corporate Development

Randall Oliphant - Executive Chairman and Director

Brian Penny -Executive Vice President and Chief Financial Officer

Robert Gallagher - President and Chief Executi8ve Officer


Dave Cass - JPMorgan

Steve Butler - Canaccord Genuity

Steve Parsons - National Bank Financial

Lauren McConnell - Paradigm

Trevor Turnbull - Scotia Bank


Good afternoon. My name is Kyle, and I will be your conference operator today. At this time, I would like to welcome to the 2012 second quarter's results conference call.

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].

Thank you. I would now like to turn the call over to Mr. Hannes Portmann, Vice President of Corporate Development. Sir, you may begin your conference.

Hannes Portmann

Thank you, operator, and good afternoon everyone. We appreciate you joining us today for the New Gold 2012 second quarter earnings results overview. On the line today, we have Randall Oliphant, Executive Chairman of New Gold, Robert Gallagher, our President and CEO, and Brian Penny, our CFO will be available during the Q&A period of the end of the call.

The operator will provide instructions for those wish to ask questions at the conclusion of the presentation. Should you wish to following along with the webcast, it is available on our homepage at If you are participating in the webcast, you can also type your questions through the internet. They will be addressed during the Q&A period.

Before Mr. Oliphant provides us with an overview of the results, I will go through an abbreviated version of our forward-looking statements, which are also provided in greater detail on slide three and four of the presentation.

Some of today's commentary may contain forward-looking information for 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 their respective conclusions, forecasts or projections. We refer you to the section entitled Risk Factors in New Gold's latest MD&A and other filings available on SEDAR which sets out certain material factors that could cause the results to differ.

As well, regarding references to mineral, resources and other technical terms defined in National Instrument 43-101, we refer you to our detailed cautionary note to U.S. readers concerning estimates of measured, indicated and inferred resources in the presentation.

I will now turn the call over to Randall.

Randall Oliphant

Thank you, Hannes. Good afternoon, everyone. Thank you for joining us today to discuss our second quarter results, which we believe provide us with a strong momentum as we head into the second half of 2012.

Slide five provides few of the second quarter highlights. Before I speak about our operations and development projects, I would like to mention two people who recently joined New Gold.

We are absolutely delighted to have to have The Honourable David Emerson join our Board of Directors, and Ernie Mast joined our management team as Vice President of Operations.

David Emerson has extensive experience in both, Canada's public and private sectors. During his time with the Government of Canada, he served as Minister of Foreign Affairs, Minister of International Trade, and Minister of Industry. We look forward to working with David and believe our company should benefit significantly from him joining the board.

We are also very excited to have Ernie become part of our management team. He has a tremendous amount of experience with both, operating and development stage projects. Ernie was most recently President of Inmet Mining's Panamanian operations and prior to that, worked in progressive more senior roles with Falconbridge, Noranda and Xstrata. Ernie will oversee the company's four currently producing mines. We feel fortunate knowing our operations are in good hands.

During the quarter, our operating mines combined produced over 95,000 ounces of gold at a cash cost of $472 an ounce. After providing shareholders with an average realized margin of over $1,000 an ounce for the first time in 2011, we are proud to have maintained this level for both the first and second quarters of 2012.

A few very important milestones were achieved during the quarter. We announced the successful start at New Afton, delivering on the targeted June timeline laid out over three years ago. The first ore was processed through the mill on June 28. Since that time, the team has done a wonderful job in steadily ramping up the operation. It is to their credit that we are able to announce that we have achieved commercial production ahead of schedule.

In the month of July, we processed an average of 7,428 tons per day through the mill, representing 68% nameplate capacity. Over the last five days, the mill has produced over 11,000 tons a day and is thus running at nameplate capacity as we speak.

In June, we won the El Morro lawsuit, as the Ontario Superior Court of Justice dismissed Barrick's claims questioning the validity of the exercise of the right of first refusal. As the timeframe to appeal the decision as now lapsed, we look forward to moving ahead with Goldcorp. as our partner with the continued development of this great project.

At Blackwater, we continue to find more gold. We announced an updated mineral resource which increased the resource to 7.1 million ounces of indicated gold resources, plush an additional 2.5 million ounces of inferred. Since acquiring the project in mid-2011, the indicated resources have increased by almost 300%. We are excited with the progress being made at Blackwater, and are focused on the completion of the preliminary economic assessment in September.

Slide six of the presentation shows New Gold's history of margin expansion. While we face the same cost pressures that have impacted the broader industry, the nature of our mines and the by-product commodities they produce have allowed New Gold to maintain its cost well below the industry average. When combining this with the trend of rising gold prices, you can see that the growth in margins created for the benefit of our shareholders since 2008.

We are particularly pleased that through a $71 an ounce decrease in cost, we are able to maintain our margin at over $1,000 an ounce despite a decline in the realized goal price between the first and second quarters of this year.

Importantly, as outlined in our guidance at the beginning of the year, the first two quarters were anticipated to be our highest cost quarters of 2012, averaging today $507 an ounce. As a result, our shareholders should expect even lower cost and higher margins as we move through the second half of this year.

Slide seven provides an overview of our operational performance on an asset-by-asset basis. Both Mesquite and Cerro San Pedro continued the strong start 2012, with another solid quarterly performance. Our Peak Mines had a better quarter with the 47% increase in gold production versus the second quarter of 2011 at a cash cost of $645 an ounce. This was significantly lower than the first quarter of 2012. We anticipate Peak continuing its momentum into the second half of this year.

Slide eight compares our second quarter operating and financial results with those of the second quarter of 2011, and the first quarter of 2012. Our second quarter gold production was up 8% from the levels achieved in the second quarter of last year. This increase in production is primarily attributable to our Peak Mines, where a combination of higher grades and increased recoveries led to higher quarterly production.

New Gold maintained its cost well below the industry average during the quarter. The increase in cost over the second quarter of 2011 was primarily attributable to lower by-product revenues due to lower realized silver and copper prices.

We are pleased to see cost come down by over $70 an ounce from the first quarter of this year. With the start of production at New Afton, cost should move even lower in the second half of this year. The company remains on-track to meet its production and cost guidance for the year. The combination of solid gold production at low cost and the continued strength of the gold price led to strong financial results.

Earnings from mine operations and adjusted net earnings were broadly consistent with both, the prior year quarter and the first quarter of 2012. We are proud to have delivered an increase in adjusted earnings over the first quarter of this year despite an $89 per ounce decrease in our average realized gold price.

Net cash generated from operations increased relative to both, comparative quarters despite an $8 million working capital use of cash. The increase in cash flow is attributable to a combination of solid operating performance and lower cash tax expense than the prior year quarter.

On slide nine, we provide an update on New Afton. We couldn't be more happy with the progress that was made during the quarter. The team's efforts culminated in the official start-up production on June 28, delivering on the company's originally stated timeline.

With a steady increase in the underground mining rate, the ore stock trial reached 1 million tons are about three months of full production at the time of the mill start up. As a result of the steady increase in throughput, we reached commercial production at New Afton defined as 30 days of operations that's 60% of the 11,000 ton per day capacity or 6,600 tons per day.

Commercial production originally was scheduled for August, but was achieved ahead of schedule on July 31. New Afton's start-up comes at a great time for us with prices of gold and copper showing continued strength. Over its currently estimated 12-year life, New expected to produce an average of 85,000 ounces of gold and 75 million pounds of copper annually at low cost.

At today's commodity prices, New Afton has the potential to generate over $240 million of after tax cash flow per year. This should more than double the company's 2011 operating cash flow.

With the start up production now behind us, New Gold's exploration team has commenced drilling of the C-zone block of mineralization that lies below into the side of the New Afton reserve block. We have budgeted $5 million for this exploration in the second half of 2012 and remain very excited about the potential.

We would like to acknowledge the put forth by our strong operating and development teams and we hope you can appreciate the significance of this milestone for or company.

One slide 10, we provide a few reason of highlights related to continued exploration and development of our Blackwater project. On July 18, we announced an updated mineral resource estimate. We were pleased to see the resource grow once again. Indicated resources increased by 30% or 1.7 million ounces of gold and inferred mineral resources grew by 7% or 0.2 million ounces of gold.

This latest resource now includes drilling through May 14 and brings the global resource to almost 10 million ounces. We plan to use this updated July resource estimate as the basis for a preliminary economic assessment which is targeted for completion in September of this year.

There are currently 19 drills at site aggressively drilling those deposits to further explore our 1,000 square kilometer land position. As a result of our exploration success, we are now targeting to complete over 250,000 meters of drilling in 2012 versus our previous budget of 210,000 meters. We will provide further exploration update through the second half of this year.

The recent exploration results demonstrates strong continuity of gold mineralization as the mineral resource continues to expand, particularly to the North and Northwest. These assays have also returned some of the highest silver grades found on the deposits to date.

This northern zone offers excellent potential for expanding the gold and silver mineral resources at Blackwater and is an area of focus for our company. We feel very fortunate to have the Blackwater project in our portfolio due to a significant gold resource, annual production potential and favorable location in Central British Columbia.

On slide 11, we are pleased to update you on El Morro. We announced the Ontario Superior Court of Justice rendered its decision regarding the ownership interest in El Morro late in June. The court dismissed Barrick's claims and confirm that New Gold and Goldcorp will continue as partners in the project.

New Gold holds a fully carried 30% interest in the El Morro project and Goldcorp, the project developer and operator holds the remaining 70%. Our 30% interest in El Morro continues to provide the company with a meaningful share of a large world class project with a proven partner in Goldcorp.

Our El Morro 17 years reserve base is a great start. Its exploration potential is even more exciting. As evidence of this found in both the high grade resource that lies below the La Fortuna deposit, as well as the namesake El Morro deposit that has had limited drilling to date but show similar characteristics to La Fortuna.

Development activity at the site during the second quarter was limited due to the previously announced temporary suspension of the projects environmental permit. On June 22, the Chilean Environmental Authority initiated the process to address the deficiencies identified by the Chilean court.

Since the temporary suspension, Goldcorp's focus has been on working with the environmental authority and addressing the court's concerns as well as project engineering and related activities in order to maintain the current project schedule. We continue to feel fortunate to have such a meaningful share of one of the best undeveloped projects in the world and look forward to timely resolution of the projects environmental permit.

Slide 12 looks at production, cost and margin. In the 2011 to 2013 period, our New Gold's 2012 started a schedule to bring the company's cost down by $30 an ounce compared to 2011. The impact of New Afton in 2013 should be even more significant.

As New Afton meets its full production capacity, the company's gold production is expected to more towards 0.5 million ounces at cost below $200 an ounce. The combination of growing production and expanding margins should lead to an exponential increase in New Gold's cash flow.

Slide 13 shows a few of the key catalysts that we felt would drive the company forward in 2012. Halfway through 2012, we are pleased to have successfully delivered on five of our key objectives.

These include two Balckwater resource updates that both increased gold resources. The successful production start at New Afton and the El Morro law suit which confirmed our partnership with Goldcorp.

The most recent and arguably most important is the successful announcement of commercial production at New Afton yesterday. We now look forward to the completion of the Blackwater preliminary economic assessment. We believe this PEA will be an important step in demonstrating just how impactful this project would be on the company's future gold production and cash flow.

At El Morro we continue to work with the environmental authority to address any remaining stake holder concerns. At the same time, detailed engineering and project planning will continue.

Throughout the balance of the year, there will also be regular news surrounding continued Blackwater exploration as well as exploration of the additional block mineralization at New Afton. As you can see, there will be no shortage of news in the second half of 2012 and we look forward to further advancing our projects and delivering at the operational level.

Slide 14 is one that we like to close on. It lays out what we, as shareholders, ourselves believe to be the principle characteristics that make us proud to be part of New Gold. Our board and management team have a breadth of experience in this industry and a track record of shareholder value creation.

As introduced earlier, the additions of both David Emersion and Ernie Mast should only serve to make our team stronger. We have a strong balance sheet and continually look for ways to increase our financial flexibility as was evidenced by our April debt offering.

Our fixed assets are located in jurisdictions with rich mining histories where we feel very comfortable investing in the future growth potential.

As shown a few slides ago, both our gold production and margins are expected to continue to increase in the coming years. This combination should results in exponential growth in cash flow for the benefit of our shareholders.

We have a track record of delivering NAV per share growth that outpaces the increase in the gold price. We have delivered on multiple important catalysts and see many more before us in both the near and medium term.

In closing, I would like to thank all of you for your continued support and I assure you that we will continue to work hard to maximize the return on your investment in New Gold.

Thank you very much for your time. Operator, at this time, we would be happy to answer any questions that people may have. Thank you.

Question-and-Answer Session


[Operator Instructions] Your first question comes from the line of Dave Cass from JPMorgan. Your line is open.

Dave Cass - JPMorgan

Hi, guys, hope you are doing well. Two questions. First on federal Cerro San Pedro. I noted that the cost, they came down substantially in the second quarter but the guidance remained the same and would imply that the cost were much higher in the second half of the year. Am I understanding that right, and if so what’s behind that?

Randall Oliphant

Well, you are absolutely right. Cerro San Pedro has very well. The cost or a very part of the cost there but with the recent volatility in silver prices, we haven’t changed our guidance. If silver prices stay where they are, we should come in well below the guidance range indicated in the press release.

Dave Cass - JPMorgan

And would you see anything similar in any of the other mines?

Randall Oliphant

No, they are all tracking very well, the other mines.

Dave Cass - JPMorgan

Okay, and then, on Blackwater. I know that you guys haven’t provided any official guidance for the cost and I guess they are working to determine that but it seems and especially after some of the cost inflation we have seen in the industry over the last year that there could be a substantial number. What are your thoughts right now in terms of financing that?

Randall Oliphant

Dave, its Randall Oliphant speaking. We left a variety of different capital cost. We can't give you one rate now because Tim, Bob and his team are working towards completing the PEA which should out in a little over a month from now. But we think that within any reasonable range we can finance this in terms of cash that we are generating from our operations.

Put that broadly we expect to generate in the order of $0.5 billion a year cash flow with New Afton up and running. So you can see over the four years period, that's $2 billion dollars here in cash flow plus we have got a significant cash balance now.

So we expect to finance this internally.

Dave Cass - JPMorgan

Okay, thank you very much.

Randall Oliphant

Thank you, Dave.


Your next question comes from the line of Steve Butler from Canaccord Genuity. Your line is open.

Steve Butler - Canaccord Genuity

Guys, good afternoon, congratulations on the 15 days earlier than I expected commercial production at New Afton and this is a nice milestone, so congrats. The mining rate underground was 5,700 odd tons per day. I believe it was sort of current run rate. Number of drawbells, can you remind us again, how many drawbells you will need for full production at sustainable mining equaling $1 million rate, guys?

Hannes Portmann

Yes, Steve, it's Hannes Portmann. Thanks for the question. It's 50 drawbells would be what we would require to sustain the 11,000 tons day coming from underground, but with the stockpile remaining at 946,000 tons as of the July, we have more than more than enough over to go through, while the mining rate continues to pick up through the rest of the year.

Steve Butler - Canaccord Genuity

The recoveries, guys? 80% to 85% in the early days. Obviously recoveries are work in progress to get up to design rates. Is the gold and copper recoveries expected to be as good as about 88%, 89%, roughly and gold?

Randall Oliphant

That's obvious, Steve. Yes. That's where we are headed.

Steve Butler - Canaccord Genuity

Brian, a quick one for you. As we now have New Aften pretty much commercial how with the interest expense rule through portions that's now I guess substantially will be expensed versus capitalized as we go forward and what sort of levels are you looking at expensed interest compared to the fourth quarter.

Brian Penny

Another excellent question. As you remember, we restructured the senior secured notes, replaced them with secured notes, and basically we will allocate this as general purpose debt and we will allocate a portion of that to our spend at Blackwater. So we will continue to capitalize the portion of that interest. So probably half will go through the P&L and the other half will be capitalized, primarily on Blackwater.


Your next question comes from the line of Steve Parsons, National Bank Financial. Your line is open.

Steve Parsons - National Bank Financial

A couple of quick questions on New Afton as a follow-ups. Could you talk a little bit about the concentrate grade that's being produced, so how is that grade looking and is there penalties so far is that material or all on spec?

Robert Galllagher

Yes. We are running 20 to 25. We are kind of running up and down the great recovery curved there as we fine-tune the circuit board. We are below any penalty limits. We still got our flash rotation cell to put on which should give us another kick there as well, so we have got potential improvement there.

Steve Parsons - National Bank Financial

Okay. As it relates to, you talked a bit about as how you are tracking related to throughput rates recoveries. How are unit costs tracking in the mind and in the mill?

Randall Oliphant

Basically as expected, we haven't changed our guidance for the year and our current experience is matching pretty well.

Steve Parsons - National Bank Financial

Okay. Where are the sites were a several months ago. One thing that was noticed was the feed coming off the conveyer around the mine was very fine and I guess I believe at that time because the feed was already it would help with no throughput rates. Are you still processing that fine material or are you getting to more of the cost of running mine stuff? How is the feed in the mill?

Robert Gallagher

It's representative of what's coming out of the drawbells.

Steve Parsons - National Bank Financial

So no bias from fine material?

Robert Gallagher



[Operator Instructions].Your next question comes from the line of Lauren McConnell from Paradigm. Your line is open.

Lauren McConnell - Paradigm

Great quarter. Congratulations on getting New Afton up? Just wondering if you are able to provide any specific timing on the environmental permit for El Morro?

Robert Gallagher

Hi Lauren, thanks, it's Bob here. It's really process, we are going go-karts with the with the government is going back and consulting with a couple of groups of residents in the highlands, because of the nature of the process, it's pretty hard to estimate how long it's going to take, but with a five-year time line getting the construction completed, we don't anticipate there will be much of a delay.

Lauren McConnell - Paradigm

Okay. Perfect. And I know our unit costs were mentioned for New Afton, but I'm just wondering if when you'd provide more of an update more specifically?

Robert Gallagher

We will be in full production there quarter, so our third quarter cost will the New Afton call as well.


There are no further questions at this time.

Hannes Portmann

Kyle, there are two questions that came through from the webcast which I will read out. The first one is, will Blackwater preliminary economic assessment be followed by a pre feasibility study and then a feasibility study or could this be shortened to move directly to feasibility study.

Robert Gallagher

It's Bob here. We will from the PEA directly into feasibility study. We will have the drilling the feasibility study done by the end of this year and feasibility study out by the next year.

Hannes Portmann

The second question is, with Barrick's recent news on the Pascua-Lama, what is the current expectation of what Goldcorp. will do regarding El Morro?

Robert Gallagher

The impact question is probably better addressable to Goldcorp than to us. We have been working again to resolve the environmental permit issue. They have been continuing to refine the engineering and scoping of the project, we haven't heard anything from both, so they all changed your plans from what they articulated, but the best answer what those products is probably be last event.

Hannes Portmann

Operator, if there's no further questions, we would like to thank ladies and gentlemen all of you who have taken time out on a beautiful summer afternoon to join us for this call. We really believe that the second quarter of 2012 was a big milestone for us, both with how our operations performed.

The start-up of New Afton hitting commercial production, finding lot more gold that Blackwater winning the El Morro lawsuit, we couldn't have imagined that going better, but what it really does is, position us well to have another good year in 2012 and set us up particularly well for 2013.

As I think all of you know, we are always available to answer any questions. If there's things that you would like to talk about that weren't discussed on this call, but I would like to, on behalf of all of my partners here, to wish you a wonderful summer. Thank you again for your support and thank you again for your time.


Pardon the interruption, sir.

Hannes Portmann



You do have another question from Trevor Turnbull from Scotia Bank.

Hannes Portmann

Sure, Trevor. What's up?

Trevor Turnbull - Scotia Bank

Sorry to delay everyone getting out to the patio. I just wondered if there is any sort of lag or timing we should think about with concentrated at New Afton, is it going to be pretty much in line with production or should we have to worry a bit about timing on that?

Brian Penny

Hi, Trevor, it's Brian speaking. Generally, there will be a little lag to put option, but it's not significant. We have the ability with our (Inaudible) agreements to take 90% as an advanced payment, but when it's loaded on the ship, and during the start up period, we intend on doing that. So for your modeling purposes, it shouldn't be a significant difference.

Trevor Turnbull - Scotia Bank

Perfect. Okay. That's all I had. Thanks, Brian.

Hannes Portmann

Thank you, Trevor, and once again thanks to all of you who have joined us this afternoon.


This concludes today's conference call. You may now disconnect.

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