New Gold: A Turnaround Story Playing In Slow Motion
Summary
- New Gold posted revenue of $139.2 million for Q4’19, down 11.6% from the same quarter a year ago and down 17.3% sequentially.
- On February 25, 2020, New Gold sold a 46% cash flow stake in New Afton mine to Ontario Teachers’ Pension Plan for an upfront cash infusion of $300 million.
- NGD could be a good opportunity on any weakness below $0.80.
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Image: The Rainy River gold/silver mine in northwestern Ontario. Source: New Gold, Inc.
Investment thesis
The Canadian-based New Gold, Inc. (NYSE:NGD) is mainly a gold producer with two producing mines in North America, the New Afton, and the Rainy River mines. The company also owns the Blackwater project. The project presents proved and probable reserves of 8.2 Au M Oz and Ag 60.8, respectively.
The company’s limited assets portfolio tends to make it riskier and weaker, primarily when one mine has not performed well as it has been the case for the Rainy River.
As I have said in a precedent article, New Gold shows some potential of growth, particularly entering 2020, when the Rainy River mine turns fully operational, and CapEx will drop, allowing the company to generate enough free cash flow. However, we are not quite there.
The investment thesis for New Gold is complicated because it involves many vital ifs that could turn an investment now either way. The company has significant potential growth, and the recent gold price increase to a multi-year high is helping tremendously in this transition period, especially at the Rainy River mine.
The company has experienced liquidity issues, and the bought deal last year harmed the stock price and its shareholders. The recent agreement with the Ontario Teachers’ Pension Plan that I will develop later in this article has clarified the debt issue significantly and turned New Gold as a future takeover target.
The company is on a path to a prolonged recovery punctuated by unavoidable relapses here and there. Thus, while I do not see any particular interest in investing long term in the company yet, I believe the stock is an excellent tool for short term and mid-term trading.
Gold production details for the fourth quarter of 2019
The company announced on January 17, 2020, the gold equivalent production results for the fourth quarter of 2019. The gold production numbers were disappointing, as the chart below is indicating, compared to 4Q’18.
Production was 101,423 Au Eq. Oz. for 4Q’19, down 8.3% compared to the same quarter a year ago.
The gold price realized in 4Q’19 was $1,366 per Au Oz and $2.69 per Cu Lbs.
Details per metal are indicated below:
Gold production was low, especially for Rainy River.
Below is the quarterly gold production for both mines since 4Q’17. We can see that gold production at the Rainy River suffered some severe setbacks in 4Q’19.
The company stated a couple of months ago that the milling facility at the Rainy River has now exceeded its design criteria, while mining activities are ramping up. The construction permit has been received, and the construction activities are expected to ramp up in the second half of the year.
AISC is a concerning issue for Rainy River due to higher CapEx and reached a record of $2,429 per Au Eq. Oz in 4Q’19.
Based on a gold equivalent of 486,141 GEOs for 2019, the company is at the midpoint of its guidance.
New Gold Inc. - Balance Sheet In 4Q 2019. The Raw Numbers
| New Gold NGD | 1Q’18 | 2Q’18 | 3Q’18 | 4Q’18 | 1Q’19 | 2Q’19 | 3Q’19 | 4Q’19 |
| Total Revenues in $ million | 193.2 | 195.3 | 147.1 | 157.4 | 167.9 | 155.1 | 168.4 | 139.2 |
| Net Income in $ million | -29.5 | -302.0 | -168.5 | -727.7 | -13.4 | -35.7 | -24.7 | 0.30 |
| EBITDA $ million | 59.9 | -305.5 | 73.4 | -614.9 | 64.9 | 32.4 | 51.6 | 70.1 |
| EPS diluted in $/share | -0.05 | -0.52 | -0.29 | -1.26 | -0.02 | -0.06 | -0.04 | 0.01 |
| Cash from Operating Activities in $ million | 65.1 | 66.0 | 51.1 | 62.9 | 74.3 | 50.2 | 91.1 | 47.9 |
| Capital Expenditure in $ million | 68.7 | 50.1 | 56.4 | 39.4 | 50.4 | 37.8 | 62.6 | 102.3 |
| Free Cash Flow in $ million | -3.6 | 15.9 | -4.7 | 23.5 | 23.9 | 12.4 | 28.5 | -54.4 |
| Total cash $ million | 191.3 | 167.4 | 129.0 | 103.7 | 132.3 | 109.7 | 178.8 | 83.4 |
| Total Long-Term Debt in $ million | 1008 | 959 | 940 | 781 | 781 | 782 | 728 | 715 |
| Shares outstanding (diluted) In million | 578.7 | 578.7 | 578.7 | 579.1 | 579.1 | 579.1 | 610.7 | 675.0 |
Data Sources: Company release and Morningstar/YCharts
Balance Sheet Discussion
1 - Revenues of $139.2 million in 4Q’19
New Gold posted revenue of $139.2 million for Q4’19, down 11.6% from the same quarter a year ago and down 17.3% sequentially. After adjusting for certain charges, the net loss was $28 million or $0.04 per share in Q4’19, compared to a loss of $0.08 per share in the same quarter in 2018.
Robert Chausse noted in the conference call:
we're very comfortable with our liquidity and meeting our commitments for 2020 and beyond. We see a company, and again, I'll dip into the next session, we see two Canadian assets generating free cash starting next year at current pricing
2 - Free cash flow was a loss of $54.4 million in 4Q’19
The generic Free Cash Flow is the cash from operating activities minus CapEx. It is an excellent financial gauge to evaluate the validity of the business model.
Free cash flow for 4Q’19 was $54.4 million. Unfortunately, the FCF turned negative this quarter after four positive quarters in a row.
The free cash flow of 2019 is now a profit of $10.4 million despite significant CapEx due to the Rainy River and New Afton mines.
3 - Net debt is still high but will go down very soon.
New Gold is showing a net debt of $631.1 million up sequentially.
One crucial step: On February 25, 2020, New Gold sold a 46% cash flow stake in New Afton mine to Ontario Teachers’ Pension Plan for an upfront cash infusion of $300 million, which the company intends to use to cut its debt. The sale will also provide an option for the Pension fund to convert its interest into a 46% joint venture in four years.
It is an unusual partnership in which New Gold is selling a large part of its future cash flow from its New Afton mine over the next four years.
The deal is positive because it allows New Gold to help reduce its debt, while it makes the company a potential takeover target, according to Canaccord Genuity Capital Markets analyst Dalton Baretto.
Finally, New Gold has a gold stream obligation with Royal Gold (RGLD) on Rainy River, totaling $164.5 million as of December 31, 2019.
The crucial takeaway is that the company has a $400.3 million senior unsecured notes (due November 15, 2022,) which cannot be covered by cash flow. With this cash influx, the company will be able to pay off the notes and keep only the senior unsecured notes due May 15, 2025, for $300 million at face value.
For more details, read the financial statement, page 33, and down.
4 - Guidance 2020.
Source: NGD Presentation
Conclusion And Technical Analysis
New Gold looks like a turnaround story but in slow motion. The company took steps to reduce its massive debt load, and I find that very smart and it changed the perception I had about the miner. With gold between $1,500 and $1,700 per ounce, Rainy River will be free cash flow positive starting 2021.
The potential of the Blackwater project is now resurfacing. It is a large project with CapEx of about $1 billion and probable reserves of 8.2 Au M Oz and Ag 60.8, respectively.
This whole setup with much lower debt and excellent growth potential is placing the company as the right candidate for a takeover.
Technical analysis
I am proposing two scenarios for NGD. The first scenario is short term with a descending channel pattern in blue quite well defined. Line resistance is $1.05, and line support is about $0.75.
The immediate strategy is to sell a large part of your position at $1.05 and accumulate starting $0.75 with potentially a lower support at $0.68 and $0.60.
The second scenario is still a descending channel pattern but more pronounced that is shown in red in the graph above. Line support is $0.60, and line resistance is around $0.98.
The general strategy that will have to be updated daily, especially now with the coronavirus outbreak and its negative effect, is to accumulate below $0.70 if possible with a potential of $0.60 (use accumulation when buying and never buy all at once) and make a substantial profit from $0.95 to $1.05 if possible.
However, it would be a good idea to keep a small long-term position for a potential takeover in 2020.
Author’s note: If you find value in this article and would like to encourage such continued efforts, please click the “Like” button below as a vote of support. Thanks!
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This article was written by
I am a former test & measurement doctor engineer (geodetic metrology). I was interested in quantum metrology for a while.
I live mostly in Sweden with my loving wife.
I have also managed an old and broad private family Portfolio successfully -- now officially retired but still active -- and trade personally a medium-size portfolio for over 40 years.
“Logic will get you from A to B. Imagination will take you everywhere.” Einstein.
Note: I am not a financial advisor. All articles are my honest opinion. It is your responsibility to conduct your own due diligence before investing or trading.
Analyst’s Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in NGD over the next 72 hours. 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.
I trade short term NGD but I may keep a small position long term betting on a takeover in 2020.
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