New Gold: A Weak Proxy For Gold
Summary
- New Gold posted revenue of $142.3 million for Q1’20, down 15.2% from the same quarter a year ago, and up 2.2% sequentially.
- Gold production was 103,435 Au Eq. Oz. in 1Q’20. It was down 16.1% from the same quarter a year ago.
- I think the stock is an excellent tool for short-term and mid-term trading.
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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) released its first-quarter results on April 29, 2020. The preliminary results were published a few weeks ago, and we knew already that the production was weak because the company was required to curtail operation at the Rainy River.
New Gold announced a two-week suspension of operations at its Rainy River mine, northwest of Fort Frances. The company said Friday that about 70 per cent of its workforce of 550 is made up of local residents who make frequent trips across the border to Minnesota.
The issue with this gold miner continues to be the company’s limited asset portfolio and a shaky financial position that has been solved in part recently. The company exploits and produces gold from only two producing assets, and it makes this investment riskier compared to other gold miners. The last quarterly result is an example of that weakness, where we can see that an unpredictable event like the COVID-19 can significantly reduce production.
New Gold shows some potential for growth, particularly in 2020, with the Rainy River mine turning fully operational, which will help to lower CapEx and generate faster free cash flow, which has been a weakness until now.
The investment thesis for New Gold is a tricky one because the financial situation is not particularly well established, as we will see later in this article. However, management is innovative and makes an effort to improve the company's balance sheet. The recent partnership at the New Afton mine is a good example that illustrates this continuous effort.
Hence, while I recognize that the company has improved its position and could perform very well with gold prices now over $1,700 per ounce, I am not still prepared to invest long term in this company.
Nonetheless, I think the stock is an excellent tool for short-term and mid-term trading.
Renaud Adams, the CFO, said in the conference call:
We’ve now on a clear path forward to achieve operational profitability and growing free cash flow and closing of our recent strategic deal with prior strategic deal with Ontario Teachers’ significantly improve our financial position and balance sheet, while exploration and revaluation at Blackwater continue to provide optionality to our shareholders.
Gold production details for the first quarter of 2019
The company announced on April 15, 2020, the gold equivalent production results for the first quarter of 2020 about two weeks before releasing the first-quarter results. The gold production numbers were somewhat disappointing, as the chart below is indicating.
Production was 103,435 Au Eq. Oz. for 1Q’20. It was down 16.1% compared to the same quarter a year ago, mainly due to a 12-day suspension of operations at the Rainy River Mine. AISC for the first quarter of 2020 was $1,446 per ounce, which is still very high.
The gold price realized in 1Q’20 was $1,458 per Au Oz and $2.56 per Cu Lbs.
Details per metal are indicated below:
Gold production was low, especially for Rainy River, after production being curtailed for about 12 days.
Below is the quarterly gold production for both mines since 4Q’17. The company stated that the Rainy River Mine produced 51,106 GEOs (50,381 ounces of gold and 61,265 ounces of silver) for the first quarter. However, the period included 12 days of the temporary 14-day suspension of operations announced on March 20, 2020. Operations resumed on April 3, 2020, and will gradually be ramped up.
The New Afton mine produced 52,329 GEOs (16,409 ounces of gold and 18.5 million pounds of copper) for the quarter.
Rob Chausse said in the conference call:
During Q1, the company produced 103,435 gold equivalent ounces. The amount consisted of 18.5 million pounds of copper, 50,381,000 gold ounces from Rainy River and 16,409 gold ounces from New Afton. Total gold of 66,790 ounces. Lower gold production as compared to the prior year quarter is primarily due to planned lower grades at Rainy River and the 12 days at the Rainy River Mine was suspended.
New Gold Inc. - Balance Sheet In 1Q 2020. The Raw Numbers
| New Gold NGD | 3Q’18 | 4Q’18 | 1Q’19 | 2Q’19 | 3Q’19 | 4Q’19 | 1Q'20 |
| Total Revenues in $ million | 147.1 | 157.4 | 167.9 | 155.1 | 168.4 | 139.2 | 142.3 |
| Net Income in $ million | -168.5 | -727.7 | -13.4 | -35.7 | -24.7 | 0.30 | -28.3 |
| EBITDA $ million | 73.4 | -614.9 | 64.9 | 32.4 | 51.6 | 70.1 | 41.3 estimated by Fun Trading |
| EPS diluted in $/share | -0.29 | -1.26 | -0.02 | -0.06 | -0.04 | 0.01 | -0.04 |
| Cash from Operating Activities in $ million | 51.1 | 62.9 | 74.3 | 50.2 | 91.1 | 47.9 | 51.3 |
| Capital Expenditure in $ million | 56.4 | 39.4 | 50.4 | 37.8 | 62.6 | 102.3 | 65.3 |
| Free Cash Flow in $ million | -4.7 | 23.5 | 23.9 | 12.4 | 28.5 | -54.4 | -14.0 estimated by Fun Trading |
| Total cash $ million | 129.0 | 103.7 | 132.3 | 109.7 | 178.8 | 83.4 | 400.4 |
| Total Long-Term Debt in $ million | 940 | 781 | 781 | 782 | 728 | 715 | 750 |
| Shares outstanding (diluted) In millions | 578.7 | 579.1 | 579.1 | 579.1 | 610.7 | 675.0 | 676.0 |
Data Sources: Company release and Morningstar/YCharts
Balance Sheet Discussion
1 - Revenues of $142.3 million in 1Q’20
New Gold posted revenue of $142.3 million for Q1’20, down 15.2% from the same quarter a year ago, and up 2.2% sequentially. After adjusting for certain charges, the net loss was $28.3 million or $0.04 per share in Q1’20, compared to a loss of $0.02 per share in the same quarter in 2019.
Robert Chausse, the CEO, noted in the conference call:
Overall, our quarter was impacted by lower grades and higher sustaining capital when compared to prior year quarter.
2 - Free cash flow was a loss of $14.0 million in 1Q’20
The generic Free Cash Flow is the cash from operating activities minus CapEx. It is an excellent financial gauge that I regularly use to evaluate the validity of the business model.
The free cash flow for 1Q’20 was a loss again of $14.0 million after turning negative the precedent quarter.
The yearly free cash flow is now a loss of $27.5 million due to significant CapEx at the Rainy River and New Afton mines.
3 - Net debt is still going down.
New Gold is showing a net debt of $350 million.
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. The sale provides an option for the Pension fund to convert its interest into a 46% joint venture in four years.
New Gold also has a gold stream obligation with Royal Gold (RGLD) on Rainy River, totaling $163.2 million as of March 31, 2020.
With the recent cash influx, the company is now able to pay the $400.3 million senior unsecured notes (due November 15, 2022,) which could not be covered by cash flow. With this cash influx, the company can now pay off the notes and keep only the senior unsecured notes due May 15, 2025, for $300 million at face value.
Conclusion And Technical Analysis
New Gold is a mixed bag, and there is nothing sensational to write about it, sorry to say. Yes, financials are getting better, and it is a good thing. However, both mines are not producing enough gold to get excited about the company's future, even if we consider one serious potential for future growth called the Blackwater project.
If it was not for the $1,700 per ounce for gold, I wonder what the company would be as we speak? Then, it is crucial to watch the gold price like a hawk. A simple look at the AISC is enough to understand what the deal is here.
Thus, If the gold momentum continues unabated, then NGD could eventually trade higher. Still, this strategy is risky if you do not trade frequently and set your sell targets within a reasonable frame.
Technical analysis
NGD Is forming a symmetrical wedge pattern with line resistance at $0.91 and line support at $0.68. I see intermediate support at $0.80. The strategy is basically to accumulate at $0.80 or lower and sell at or above $0.91.
If the gold price turns, bullish NGD could eventually cross the resistance and may finally retest $1.10. However, I do not see this scenario as the most likely unless the gold price reaches or crosses $1,750 per ounce.
If the gold price turns bearish for a while, NGD could eventually cross support and retest the range $0.55 to $0.40, at which point I recommend buying.
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.
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I trade short term the stock.
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