New Gold CEO Discusses Q3 2012 Results - Earnings Call Transcript

Nov. 1.12 | About: New Gold (NGD)

New Gold Inc. (NYSEMKT:NGD)

Q32012 Earnings Call

November 1, 2012 5:00 pm ET

Executives

Hannes Portmann - Vice President, Corporate Development.

Randall Oliphant - Executive Chairman and Director

Ernie Mast - Vice President of Operations

Analysts

Michael Jalonen - of America Merrill Lynch

Steve Parsons - National Bank Financial

Trevor Turnbull - Scotia Capital

Steven Butler - Canaccord Genuity

Dan Rollins - RBC Capital Markets

Robert Carlson - Janney Montgomery Scott

Andrew Kaip - BMO Capital Markets

Operator

Good afternoon. My name is Megan and I will be your conference operator today. At this, I would like to welcome everyone to the 2012 third quarter 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, Hannes Portmann, Vice President of Corporate Development, 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 third quarter earnings results overview. On the line today, we have Randall Oliphant, Executive Chairman of New Gold, Robert Gallagher, our President, CEO, Brian Penny, our CFO and Ernie Mast, our Vice President of Operations will also be available during the Q&A period at the end of the call.

The operator will again provide instructions for those who wish to ask questions. Should you wish to follow along with the webcast, it is available on our homepage at www.newgold.com. If you are participating in the webcast, you can also type your questions through the interface.

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 slides three, four and five 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 notes 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 the risk factors in New Gold's latest MD&A and other filings available on SEDAR which set out the material factors that would cause results to differ.

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.

s well, it should be noted that the results of the Blackwater Preliminary Economic Assessment are preliminary in nature and include inferred mineral resources that are considered to speculative geologically to have economic consideration applied to them that would qualify them as mineral reserves.

I will now turn the call over Randall.

Randall Oliphant

Thanks, Hannes. Good afternoon, everyone. And thank you for joining us today to discuss our third quarter results. The quarter saw us deliver on key objectives both at our operations and our development projects. Slide six provides a few of the key third quarter highlights.

During the quarter, our now four producing mines combined to deliver the strongest operational quarter of the year so far. We produced over 100,000 ounces of gold at a cost of $443 an ounce, our lowest cost so far in 2012. We are also very pleased to report that for the first time in the company's history, we are able to provide our shareholders with an average realized margin of over $1,100 an ounce.

At the same time a few very important milestones were achieved at our growth projects. After the first ore was processed through the mill on June 28, New Afton achieved commercial production on July 31, running at 60% of its 11,000 tons per day design capacity. While we are pleased that this significant achievement, the New Afton team deserves credit for continuing to push towards even more important goal of reaching full design throughput. On behalf of the entire New Afton team, we are proud to announce that on September 21, the New Afton mill achieved full production, over one month ahead of schedule. An average of 11,000 tons per day were processed over a 30 day period.

We also continue to make progress at Blackwater. During the quarter, we reported the results of the Blackwater PEA. The impact the project should have on our future growth pipeline is even more significant than we had not envisioned when we acquired it in mid-2011. We feel very fortunate that our portfolio is bolstered by a project in a great jurisdiction that should produce over 0.5 million ounces of gold at low cost. The PEA results further establish Blackwater as our company's new flagship asset.

We are proud of the strong operating results and our company's ability to progress our key growth projects. Ultimately however, we also need to measure ourselves based on the performance of our equity. We are pleased to report that during both the third quarter and through the first nine months of the year, New Gold was once again able to outperform both the gold price and the gold equity indices.

Slide seven of the presentation shows New Gold's production, cash cost and margin profiles for the first three quarters of 2012. The start of New Afton, together with the continued strong performance of our other operations, provided the company with gold production growth in the quarter. It is rewarding to see our cost show a steady quarterly decline which is quite counter to the broader industry trend.

New Gold is faced with the same cost pressures that have impacted the broader industry. However, the nature of our mines and the byproduct commodity they produce have allowed New Gold to maintain its cost well below the industry average. When combining this with the continued strength of the gold price you can see the growth in margins created for the benefit of our shareholders. What’s exciting to us is that the fourth quarter is expected to be the strongest through the year, as New Afton continues to hit its stride. As a result, this chart should continue to move in the right direction. Importantly, the company is once again on track to achieve both production and cost guidance for the year. We look forward to a strong finish to 2012.

Slide eight provides an overview of our operational performance on a mine-by-mine basis. Mesquite, Cerro San Pedro and Peak began the second half of the year with another strong quarterly performance, all making solid contributions the company's earnings. The increase in gold and copper production in the third quarter was primarily driven by the successful start-up production at New Afton,

New Afton produced over 14,000 ounces of gold during the quarter with gold sales of 6600 ounces. Sales were lower than production as precommercial production was offset against capital cost and a portion of the production remained in inventory due to the timing of concentrate sales. With New Afton having now reached design capacity, we anticipate the fourth quarter being our strongest of the year.

On slide nine, we provide an update on our first three months of production at New Afton. Since achieving commercial production on July 31, the mill's performance has quickly progressed with ever-increasing throughputs. This culminated in the mill reaching full production on September 21, over one month ahead of schedule. We are pleased to have achieved production ahead of schedule and only modestly above our 2009 capital budget, and arguably the most capital intensive period in our industry's history is a testament to the team at New Afton as well as to the projects great location.

Gold and copper in recoveries have been in line with the company's expectations and have shown a steady increase as the mill circuit is continually optimized. After the scheduled addition of a Knelson concentrator and flash flotation units in September, we have begun to see recoveries move higher in the mid-80% range. With recoveries moving higher and the mill reaching design capacity, we are also pleased that our planned forecast for milling it progressively higher grade ore in the coming months and into 2013.

Our cost per ton for the quarter has also met expectations. Our cash cost should continue to come down as a result of higher expected throughputs, grades and recovery. One of the groups that is most excited about New Afton's startup was our exploration team. The start of production has enabled the team to commence drilling of the C block of mineralization that lies below and to the side of the New Afton reserve block. Two drills are actively exploring the block and the team remains excited about the potential.

Once again, we would like to acknowledge the efforts put forth by our strong development team and we hope you can appreciate the significance of this milestone for our company.

Slide 10 compares our third quarter financial performance with that of the first two quarters of 2012 as well as the third quarter of 2011. Overall, 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 have remained broadly consistent with the previous periods. The third quarter of 2012 was impacted by a larger non-cash depreciation charge primarily due the start of production at New Afton. Adjusted net earnings per share have also remained consistent. The third quarter was similarly impacted by increased depreciation.

Cash generated from operations before working capital increased by 13% compared to the same quarter of 2011. The increase was driven by a combination of higher gold sales and lower cost. The difference in net cash generated from operations when comparing third quarters of 2012 and 2011 was primarily due to $36 million working capital difference.

Cash flow in the third quarter of '11 benefited from a significant slowdown in Peak's inventories while the third quarter of 2012 was impacted by $24 million working capital use of cash. $15 million of this related to a New Afton concentrate receivable where funds were not collected prior to the end of the quarter but instead were collected in early October.

Slide 11 compares New Gold's share price performance with the gold price and key gold indices. When looking at both the third quarter and year-to-date periods, we were proud that the market has been supportive of the continued progress we are making at both our producing mines and our growth projects. Importantly, we believe that all the facets that have provided the strong momentum remain in place. We maintain our focus on generating industry-leading returns.

With New Afton now having transitioned into production and providing the company with both near and medium term production and cash flow growth, slide 12 provides an overview of New Gold's next he growth projects. Blackwater and El Morro combined to provide New Gold shareholders with significant gold and copper resource exposure. While development activity at EL Morro during the quarter was limited due to the previously announced temporary suspension of the projects environmental permit, the project continues to provide New Gold's shareholders with a fully carried 30% interest in a world class asset in Chile.

Blackwater and El Morro combine to provide the company with over 15 million ounces of gold resources and about 4 billion pounds of copper. Once in production these projects are expected to produce about 600,000 ounces of gold and 85 million pounds of copper annually at low cost. We feel fortunate to have assets of such great scale in our portfolio.

Slide 13 further demonstrates and summarizes some of the key parameters highlighted in the Blackwater PEA, which we released on September 20. Blackwater is planned to be a conventional truck and shovel open pit mine with a 60,000 ton per day planned. Production is expected to start in 2017. During the first five years, the project is scheduled to produce an annual average of 569,000 ounces of gold at $467 per ounce. Using a base case gold price of $1275 which is over $400 lower than where gold trades today, the project is expected to yield an after-tax 5% net present value of $1.1 billion and IRR of 14%.

At a gold price of $1775, the price at the time of the PEA release the project is expected to yield an after-tax 5% NPV of $2.8 million and an IRR of 26%. Importantly the PEA resource only included the drilling that we done up to May 14 of this year and since that time, our expiration team has continued to drill the deposit aggressively. We look forward to incorporating these additional results in to the project's feasibility study which is scheduled for 2013.

As demonstrated by the PEA, the impact Blackwater should have on our production and cash flow growth in the coming years is tremendous. We are very pleased with the progress we have made thus far and look forward to advancing the project further for the benefit of our shareholders.

On slide 14 we provide our timeline for the Blackwater project. We have delivered on our key 2012 milestones, including the completion of the PEA and the filing of the project description. Our focus now turns to the completion of the feasibility study in 2013.

At the same time, exploration efforts continue on our over 1000 square km land package. Our exploration initiatives cover Blackwater, the area within and around the Capoose Gold Silver Project, which is located 25 kilometers away from Blackwater, as well as the multiple expiration targets that have been identified through New Gold's 2012 property wide reconnaissance program.

We have completed the infill drilling program at Blackwater and now focus our attention on the recently identified northwest silver zone. We look forward to updating you further as we move through the end of this year and into 2013.

Slide 15 is slide familiar to many of you who have followed the company. It highlights the changes in the consensus, analyst, average net asset value of our company since the merger of New Gold and Western Goldfields about three and half years ago. As the graph demonstrates, the continued appreciation of underlying NAV underpins the relative outperformance of New Gold's share price over this time.

The year started with some institutions reducing their commodity prices assumptions and thus lowering NAVs across the sector. Since that time however, with the early start up of New Afton and the delivery of our Blackwater PEA, the total NAV of these two assets has increased by over $300 million. It is gratifying to reestablish our upward tend in NAV appreciation. We believe that by delivering and continuing to deliver operational success, both at New Afton and our other operations and advancing the development of Blackwater, there is significant scope to further increase our NAV per share.

Slide 16 summarizes some of the key elements that characterize New Gold. Our board and management team are all remarkably dedicated to shareholder value creation and are proud to be invested in this company alongside all of you. We continually work towards increasing our financial flexibility to maintain a strong balance sheet. Recent evidence of this can be seen in our early redemption of our convertible debentures in October.

Our assets are in mining friendly jurisdictions where we feel comfortable making investments. We feel fortunate to have a fully funded organic growth pipeline that can see our production more than double in the next four and half years. Similar to the recent consensus NAV increases at New Afton and Blackwater, we believe that by executing on our strategy there is much more room for the underlying NAV to continue to grow. We have delivered on multiple catalysts this year and see many more in the near and medium term. For all of these reasons, we believe New Gold is a compelling investment in the gold sector.

In closing, I would like to thank you for your continued support and at this time we would be happy to answer any questions that you may have. Thank you.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Dan Rollins with RBC Capital Markets. Your line is open.

Randall Oliphant

Dan, did you have a question?

Operator

Dan Rollins, your line is open.

Randall Oliphant

Operator, I think you move to the next question, please.

Operator

(Operator Instructions) You next question comes from the line of Michael Jalonen with Bank of America. Your line is open.

Michael Jalonen - of America Merrill Lynch

Randall, can you hear me?

Randall Oliphant

I can. Thank you, Mike.

Michael Jalonen - of America Merrill Lynch

Okay. Great, don’t know what happened to Dan. Just a question. You guys have maintained your guidance for the whole year which is fabulous compared to other companies but I notice, for the production for this year for gold, is the range is still 40,000 ounces between the high and the low. I was just wondering if given New Afton's off to a good start whether you would tighten that? Would your production be at the upper end or the lower end of that range or in the middle?

Randall Oliphant

At the moment, Mike, we are still aiming at that that range. New Afton is ramping up. The throughput is higher than what we expected it to be at this time. I don't think we can really point to a direction there but we will certainly be within the range.

Michael Jalonen - of America Merrill Lynch

I guess only asked because you only have to 106,000 ounces in the fourth quarter, which is what 1,500 ounces better than the third quarter to be at the bottom of the range. So I guess it seems to me, well, it is good to be conservative, I guess. So, okay, well thank you.

Operator

Steve Parsons with National Bank Financial, your line is open.

Steve Parsons - National Bank Financial

Just a quick question. Should be a pretty easy question. I am, just take it straight, looking at the total cash cost of future operations, I did the weighted average on it, I am getting 3.48 versus the 4.43 you are reporting. Is there something is going on there that I am not getting the cap?

Randall Oliphant

Well, Steve, I think you are probably doing is you are taking production and costs and for our overall cost per ounce, we take sales against the cost.

Steve Parsons - National Bank Financial

Okay, fair enough.

Randall Oliphant

So New Afton production numbers, I think we said we produced 14,000 but our sales were 6,600. So you have got a lower weighting for the big negative number.

Steve Parsons - National Bank Financial

Got it, understood. Okay, that’s all I had. Thanks a lot.

Operator

Your next question comes from the line of Trevor Turnbull with Scotia Capital. Your line is open.

Trevor Turnbull - Scotia Capital

Thanks, guys. Just a couple of quick ones. Did you tell us how much copper was considered commercial production out of New Afton specifically?

Brian Penny

No, during the period, we produced 11.1 million pounds. We sold during the operating period 5.8 million and sold in the preproduction period 2.5 million ounces of copper.

Trevor Turnbull - Scotia Capital

Great, thanks, Brian and may be also for you as well, can you give us a sense of what's left in the CapEx for the fourth quarter?

Brian Penny

For the fourth quarter, basically, are you talking New Afton or company wide?

Trevor Turnbull - Scotia Capital

I was speaking company wide.

Brian Penny

Company wide, basically, there is a little better than the $100 million. We have about $30 million to spend to complete the program that we have previously outlined at Blackwater and about $50 million to complete the program at New Afton, as well as the some of the drifting we are doing out to the east end of the ore body to give us more flexibility in how we draw that cave down in the future.

Trevor Turnbull - Scotia Capital

Right, and $30 million at Blackwater, that is all CapEx, none of that is expensed exploration?

Brian Penny

Yes.

Trevor Turnbull - Scotia Capital

Okay, and then just more generally. With respect, now that now at New Afton is in commercial production and starting to get up towards the desired throughput levels, can you remind us, you have excess capacity in much of much of the stream, in terms of the crushing and the milling and so forth. I guess some of the excess capacity isn’t until you get the underground Gyro pressure but what's the limiting factor now on how much New Afton can do? Is that simply that the rate of caving underground?

Ernie Mast

Yes, it is Ernie Mast here. Once we get the mine fully commissioned, we will have to analyze the difference between the mine and the mill. In the mill the bottleneck looks like it’s a ball mill and in the mine, probably just something as simple as ore logistics.

Trevor Turnbull - Scotia Capital

Okay, and sorry, so the ball mill currently or at full capacity can do how much?

Ernie Mast

Well, we ran the mill over 13,000 tons a day. We are still in ramp up experimental phase and seeing what kind of grind size we get with that in recoveries. So, we do have upside though definitely on the design.

Trevor Turnbull - Scotia Capital

Okay and that reminded me, I guess in my last question, there was a comment about life of mine recoveries at New Afton and it wasn't clear what it said. I think 88% to 90%. Is that referencing gold or copper?

Ernie Mast

Yes, that’s referencing both.

Trevor Turnbull - Scotia Capital

So, the range life of mine for both gold and copper, is at 88% to 90%., and that you are in the low 80s now. Is that, again just trying to get the grind size to the optimal setting, to get to get to the optimal life of mine recovery?

Ernie Mast

Well, actually in October, we were more than mid-80s and it’s just a ramp up issue. Currently, we treated a little bit lower grade ore and we treated some stockpile ore that may have oxidized a bit as well.

But we are fully confident we will get to those designed levels.

Operator

Your next question comes from the line of Steven Butler with Canaccord. Your line is open.

Steven Butler - Canaccord Genuity

Good evening, guys. Beated to the top on the New Afton. Just to clarify then. Because I saw the slide, Randall, where you only showed $8 million of operating income from New Afton but clearly that just reflects if you can clarify 6,600 ounces of gold and only 5.89 million pounds of copper. Is that correct?

Randall Oliphant

That’s correct.

Steven Butler - Canaccord Genuity

For commercial production, commercial sales, I should say.

Randall Oliphant

Yes, and obviously, with the same operating cost, your margins are below less than would with the full period.

Steven Butler - Canaccord Genuity

Sure, and the mill guys, I guess you are suggesting the mill continues to operate after September when you attain the wonderful 11,000 ton mark. Is it still operating at that pretty good level through the month of October?

Brian Penny

Yes, it has. It delivered more than that, in fact.

Steven Butler - Canaccord Genuity

Okay, and grades in the first half of October, you quoted them 0.79, and 0.77, is that a decent number to use for fourth quarter, forward-look or would you expect to degrade this to tweak a bit higher in the fourth quarter for an average?

Brian Penny

No, we expect to grades to go up for October where we were around 0.8 for copper and we expect that to go up during the fourth quarter.

Steven Butler - Canaccord Genuity

On the C block, Can you guy refresh my memory as to what the, I assume that we are talking about there is an inferred resource there in the C block and maybe just clarify its size.

Randall Oliphant

That’s inferred resource. I don’t have the numbers in front of me what it is. We are drilling down in to that now from underground.

Operator

Yours next question comes from the line of Dan Rollins with RBC Capital Markets. Your line is open.

Dan Rollins - RBC Capital Markets

Hi, hope you can hear me now guys.

Brian Penny

Loud and clear.

Dan Rollins - RBC Capital Markets

Perfect. Just got a question on Peak. The guidance for the year on the cash cost are around 640 to 660. Through the first three quarters, you were running around 772 and actually much higher, about 150 quarter-over-quarter. What's driving the cost there, given you did have a significant improvement in Q2 over Q1? I am just wondering what's driving the cost higher again?

Brian Penny

It’s a question for both Ernie and myself but the simple answer is we are expecting higher grades in the fourth quarter which obviously increases denominator and that will result in substantially lower cash cost.

Dan Rollins - RBC Capital Markets

Okay, and was there an aspect in Q3 of just lower than expected sales versus production as well for byproduct revenue? Or was that sort of on par of what you were expecting?

Brian Penny

It was pretty on par with our expectation recognizing we changed our offtake agreement about a year ago and we shipped weekly and we (inaudible) we had a quick buildup in the inventory in the sale and we are managing that a lot better under this new arrangement. So there shouldn’t be much noise with inventories building or (inaudible), going forward.

Dan Rollins - RBC Capital Markets

Okay, and then just on the realized the gold prices, there is a results, I just want to confirm, you still have material hedged at Mesquite. Is that correct?

Brian Penny

Yes, it's 5,500 ounces a month at 801 an ounce and it expires at the end of 2014.

Dan Rollins - RBC Capital Markets

Okay, so you guys actually had a very good quarter on beating the average price of the core then?

Operator

Your next question comes from the line of Robert Carlson with Janney Montgomery Scott. Your line is open.

Robert Carlson - Janney Montgomery Scott

Hi, guys, just first, congratulations on the production and growth. I guess my question comes on the tax side. It seems like everyday we do good on the top line, it is taken away from us on the bottom line. Can you comment of this? Is this all coming from Chile or where?

Brian Penny

Are you referring to cash taxes paid or tax expense on the income statement?

Robert Carlson - Janney Montgomery Scott

On the tax expense.

Brian Penny

During the quarter, we had an unusual event happen in Chile where they changed the category 1 tax rate from 17% to 20%. As a result we had to look at our deferred tax liability we set up in the balance sheet regarding El Morro and we had to increase that by basically 3% across the board. That increased our tax expense in the period by roughly $10 million. It’s a non-cash item. So it doesn’t affect our cash flow but it is a result of a change in the tax rate in Chile. So that’s why the rate is a bit crazy when you look at the effective tax rate unadjusted. It's approaching the 60%.

Robert Carlson - Janney Montgomery Scott

It's hard (inaudible), the trend going forward, here about the Chilean government, except from Argentina, it seems like it is just getting worse. Any comments there?

Brian Penny

I think the overall effective tax rate in Chile has always been about 35%. It's actually a very favorable tax regime where you pay a lower rate even at this 20% rate. As long as you continue to keep the money in Chile or reinvest, you don’t pay any more than that.

They you pay the balance when you go to dividend the money out. So it leaves you with an effective tax rate of about 30% which is pretty competitive internationally. Arguably more favorable than anywhere else that we operate because as long as you are reinvesting, you are not actually paying the full corporate tax rate.

Robert Carlson - Janney Montgomery Scott

Okay. Do you get any resolution with El Morro, perhaps first half of next year?

Brian Penny

Yes, we hope so.

Operator

(Operator Instructions) Your next question comes from the line of Andrew Kaip with BMO Capital Markets. Your line is open.

Andrew Kaip - BMO Capital Markets

Brian, we have just got one follow up question on the question on the tax. Looking at the adjusted reconciliation for earnings. Does that $9.2 million reflect any to the Chilean tax, or is that the tax impact of the adjustments?

Brian Penny

That’s primarily the affect of the Chilean tax increase because most of the adjustment are capital in nature and we can't set up a tax receivable because we don’t have the taxable capital to offset it against.

Andrew Kaip - BMO Capital Markets

Okay, so you have incorporated then.

Brian Penny

The bulk, it's all the Chilean stuff.

Andrew Kaip - BMO Capital Markets

So they have been incorporated into your adjustments.

Operator

There are no further questions over the phone line. So I will turn the call back over to the presenters.

Hannes Portmann

There is one question that came in from the webcast. So I will just read it aloud. With your increased cash flow is a dividend on the horizon or is excess cash targeted for Blackwater and/or El Morro development?

Brian Penny

In terms of dividends, this is something we really want to get to be in a position where we can pay dividends and we are increasingly getting there. For instance when we retired our 10% senior notes earlier this year and replaced them with the 7% notes, we considered the possibility to pay divided. We have got greater clarity in terms of our requirement for cash now that we have got Blackwater PEA done and now that we are seeing New Afton turned from a consumer of $250 million here to a generator of $250 million.

What we plan to do over the course of the coming months look at the opportunities that are in front of us, what we can do with our cash and what is the best use to be, to pay a dividend and of course if we introduce one, we would want it to be significant and we want to and for it many years against what does that do the financial flexibility should we another deposit at Blackwater, should we see a corporate development opportunity.

At the moment, in the near-term, we are looking more for opportunities outside the company, but this is increasingly becoming top of mind and probably it is something that we will talk about more either later this year or early into 2013.

Hannes Portmann

Operator if there is no more questions, we would like to thank everyone for joining us today and for your interest in our company. Of course, if you have any further questions please do not hesitate to reach out to us. As we may not all be together again before the end of this year, we wish you and your families a very happy and healthy holiday season. Thank you very much for joining us today.

Operator

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

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