Brighter Days Are Finally Here For New Gold?

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About: New Gold Inc (NGD)
by: Peter Arendas
Summary

The Rainy River mine produced 77,202 toz gold in Q4 2018, which is a new record high.

The mill throughput finally approached the nameplate capacity.

New Gold reached the 2018 gold production target and exceeded the copper production target.

Some important news regarding future Rainy River and New Afton C-Zone development should be released later this month, together with the 2019 production guidance.

On January 8, New Gold (NGD) announced its Q4 2018 production results. Although various information was provided by the news release, the investors were once again interested especially in the Rainy River mine. Rainy River is New Gold's newly built mine that was meant to become its new flagship asset. However, the ramp-up process was more complicated than expected, the company had to deal with various issues, and after several capital cost overruns, the project disappointed also operationally, as the gold production volumes were much lower than originally projected. However, the Q4 results confirm the positive trend indicated by the Q3 results.

(Source: Own processing, using data of New Gold)

Although the Q3 results were disappointing once again, due to the poor July and August performance, the positive September results indicated that the Rainy River mine finally got on the right track. The Q4 results confirm that the positive September performance was no fluke, and it was maintained also over the last three months of 2018. As shown in the chart above, the mill throughput rate averaged 20,668 tpd in Q4. It represents a significant 21.8% improvement when compared to Q3. This means that the mill operated almost at its nameplate capacity of 21,000 tpd, which is great news after the issues experienced over the preceding four quarters. Also, the gold grades were very good, setting a new quarterly record of 1.42 g/t, which is more than the open pit reserves grade of 1.17 g/t. It means that the feed grades will probably go back down to the 1.1-1.2 g/t level during the next quarters.

Gold recoveries improved slightly to 89%, which means another quarterly record. However, according to New Gold, recoveries over 90% were reached during the second half of December, and further improvements are expected in the coming quarters. As a result of the improved mill throughput, feed grades and recoveries, the Q4 Rainy River production climbed to 77,202 toz gold. This is a production level at which the unit production costs should experience a significant decline and the resulting cash flow a notable increase. The Q4 financial results will be released on February 14, which is more than 5 weeks away, but given the production results released on January 8, together with the gold prices that were stronger in Q4 than in Q3, there is a good reason for some optimism.

The New Afton mine did well as usual, producing 18,778 toz gold and 20.8 million lb copper in Q4. The Cero San Pedro residual leaching continued without any surprises. As a result, New Gold produced 97,428 toz gold and 20.8 million lb copper in Q4. In comparison to Q3, the gold production increased by 25.7% and copper production decreased by 4.1%.

(Source: New Gold)

New Gold's 2018 production guidance was met. The overall 2018 gold production climbed to 315,483 toz, which means that the upper half of the projected range of 275,000-330,000 toz was reached. Copper production of 85.1 million lb even exceeded the upper limit of the copper production guidance that was set at 75-85 million lb.

Some further information was provided in latest news release. Maybe the most important one is the deferral of Rainy River underground mine development. According to the news release:

The Company has adopted a disciplined approach to capital allocation as well as mine life optimization and accordingly, management has deferred the 2019 underground mine development plan to 2020. During 2019, the Company will launch a comprehensive review that includes alternative underground mining scenarios with the overall objective of reducing capital and improving the return on investment for the underground portion of the life of mine.

It is hard to predict what the implications for the future of the Rainy River mine are going to be. However, right now, postponing the underground development and saving some much-needed money seems like a sensible step. Some of the questions should be answered later this month when the 2019 production guidance will be released. This news release should contain also some more information about the New Afton C-Zone development. The C-Zone is crucial for New Afton, as it should expand its mine life to 2030.

Chart NGD data by YCharts

Conclusion

The market welcomed the Q4 2018 production results very positively, and New Gold share price jumped up from $0.96 to $1.14, or by 18.75% (chart above). Shares of New Gold that lost almost 80% of their value in 2018 experienced a great start to 2019, as they are 50% up year to date. If the 2019 production guidance and the more detailed information regarding further Rainy River and New Afton C-Zone development are positive, the momentum may continue. If the strong Q4 2018 numbers are confirmed also in Q1 2019 and the gold and copper prices are reasonably strong, I can definitely see New Gold shares trading at $2 by early summer.

Disclosure: I am/we are long NGD. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.