New Gold Inc. (NGD) CEO Renaud Adams on Q2 2022 Results - Earnings Call Transcript

Aug. 04, 2022 11:04 PM ETNew Gold Inc. (NGD), NGD:CA1 Comment
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New Gold Inc. (NYSE:NGD) Q2 2022 Results Conference Call August 4, 2022 8:30 AM ET

Company Participants

Ankit Shah - VP, Strategy and Business Development

Renaud Adams - President and CEO

Rob Chausse - CFO

Patrick Godin - COO

Conference Call Participants

Trevor Turnbull - Scotiabank

Mohamed Sidibe - CIBC

Operator

Good morning. My name is Chris, and I'll be your conference operator today. Welcome to the New Gold Second Quarter 2022 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference call and webcast is being recorded. [Operator Instructions]

I would now like to hand the conference over to Ankit Shah, VP of Strategy and Business Development. Thank you.

Ankit Shah

Thank you, Chris, and good morning, everyone. We appreciate you joining us today for New Gold's Second Quarter 2022 Earnings Conference Call and webcast. On the line today, we have Renaud Adams, President and CEO; Rob Chausse, our CFO; and Patrick Godin, our COO. Should you wish to follow along with the webcast, please sign in from our homepage at newgold.com.

Before the team begins the presentation, I'd like to direct your attention to our cautionary language related to forward-looking statements found on Slides 2 and 3 of the presentation. Today's commentary includes forward-looking statements relating to 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 those expressed or implied in forward-looking statements. Slides 2 and 3 provide additional information and should be reviewed.

We also refer you to our section entitled Risk Factors in New Gold's latest MD&A and other filings available on SEDAR, which set out certain material factors that could cause actual results to differ. In addition, at the conclusion of the presentation, there are a number of end notes that provide important information and should be reviewed in conjunction with the material presented.

I will now hand the call over to Renaud.

Renaud Adams

Thanks, Ankit, and good morning, everyone. Production and mine sequencing were impacted by heavy rainfall resulting in the flooding of the pit. While significant progress has been made to date to restore the situation and optimize each step moving forward, we have to replan our last 6 months, and Pat will provide more detail on that one.

The equipment was relocated and the capital waste stripping events resulting in the strip ratio for the quarter of nearly 8:1. When you can access ore at the bottom of the pit resulting from the flooding, then you have managed your waste as a dissolved part of the same overall. Our in-pit mineral reserve at the start of the year was at nearly 44 million tonnes of ore or approximately 1 gram a tonne gold including in-pit, all of which contained in the mining strip ratio of 2.32:1, which has been further reduced now as a result of the Q2 execution, a very attractive plan moving forward.

On a very positive note, our gold grade milled becomes down positively to reserve model in Q2, and our mill recovery is up for the first half of the year compared to the prior year. We've made great progress in preparing Intrepid for mining to start in the fourth quarter of this year, and Pat will discuss more in detail about it. Low-grade higher cost recovery level was low, earlier than planned, impacting our short-term mine plans and production for the year but with no impact on the future.

At the start of the project, there was already a gap in the production that was identified as the transitions from the Lift 1 to the B3 and eventually, the rewarded C-Zone. Some zones were made as an assumption to support at that gap and pillar zone in the Lift 1. We've done extremely well in depleting the Lift 1. And we had a little more difficulties with some zone at such recovery level and some pillar and recovery area.

But as such, the future has no impact and the closing of the recovery level represented the execution as a core value in protecting the health and safety and minimize the cost and distraction to what are the true value of the C-Zone project. Returning the mill at its full capacity, processing ore of the high quality, better rate, better recovery and a very low cost to be mined at the very minimal sustaining capital, benefiting from in-pit tailing with no need for further tailings rates, all of which has not been impacted to date.

During the third quarter, B3 development advanced on plan with focus on ramping up the production in the fourth quarter, and our C-Zone continued to advance with first ore planned for second half of 2023. Pat again will provide more detail on those.

Our 2022 operational and cost guidance were updated to reflect the changes in respect of plan and related cost impact and other factors, and Rob will touch on it. We continue to maintain a very healthy balance sheet while also paying down $100 million of our debt in the quarter with no additional due until 2027. And we'll continue to maintain the strong cash and liquidity position, allowing us to execute on our plans and position both assets for free cash flow generation.

We continue to be very encouraged with our drilling program and in particular, with the underground program in New Afton that is truly focused on providing potential organic growth as we move forward. We had originally thought having been capable to put a comprehensive update on our plan in the Q2. But given some further delays in assets, we are now ramping up and plan to release a comprehensive update on our exploration and drilling program in the third quarter.

I will now turn in to Rob Chausse, CFO.

Rob Chausse

Thanks, Renaud. And I'll start on Slide 7, which provides our revised operational outlook with details that are in line with our July press release. This short-term guidance reflects our lower production profile for 2022 and our continued capital investments, which has resulted in higher AISC. The company's mid- to long-term strategy of increasing production and decreasing cost remains intact.

Moving on to the next slide, which provides our operating highlights for Q2. Details are consistent with the July press release. During the quarter, the company produced 70,500 gold equivalent ounces. The amount consisted of 7.4 million pounds of copper, 42,500 gold ounces from Rainy River and 9,900 gold ounces from New Afton for a total of 52,430 gold ounces.

Lower equivalent gold production as compared to the prior year quarter is primarily due to lower grade and tonnes processed at both of our operations. Operating expense per equivalent ounce was higher than the prior year quarter primarily due to lower production, which resulted in lower sales volume.

Consolidated all-in sustaining costs for the quarter were $2,373 per equivalent ounce, higher than the prior year quarter primarily due to lower sales volume at our operations and higher sustaining capital spend. I'd highlight that New Afton sales in the quarter were lower than production due to timing of shipments with approximately 7,500 gold equivalent ounces deferred to the third quarter. The impact was approximately $700 per gold equivalent ounce on New Afton's AISC and $140 on the consolidated AISC. The sale was completed in July.

We continue to invest in sustaining capital at our operations during the second quarter with the impact of sustaining capital spend per ounce being $950 in the quarter.

During Q2, we experienced inflationary challenges that have been experienced across the industry particularly with regards to fuel, electricity, grinding media and cyanide. The financial impact of these noted categories were approximately $10 million or 7% on AISC for the quarter. Going forward, we continue to work on minimizing any inflationary impacts through optimization at our operations.

Turning to Slide 9 for our financial results. Second quarter revenue was $115.7 million driven by sales of 51,200 gold ounces at an average realized price of $1,879 per ounce and sales of 4.4 million pounds of copper at $414 per pound.

Q2 revenue was lower than the prior year quarter primarily due to lower sales volumes as already mentioned, and noted in our production release due to the timing issues at New Afton sales of 7,500 gold equivalent ounces would defer to the third quarter and as noted, it was completed in July.

Operating cash flow before working capital adjustments was $27.4 million or $0.04 per share for the quarter, lower than the prior year quarter due to lower sales volumes. The company recorded a net loss of $37.9 million or $0.06 per share during Q2 compared to a net loss of $0.02 per share in Q2 '21. After adjusting for certain charges, net loss was $16.7 million or $0.02 per share in the quarter compared to $0.04 -- earnings of $0.04 per share in the second quarter of 2021.

Our Q2 earnings adjustments include adjustments related to our gains and losses related to unrealized adjustments on the Rainy River stream mark-to-market and the free cash flow royalty at New Afton. And you can look at our MD&A for additional details on those non-GAAP measures.

Our CapEx and leases for the quarter were $78.8 million. $59.9 million was spent on sustaining capital and $18.9 million on growth capital. Sustaining spend was primarily related to the planned tailings work at both operating assets, capital stripping at Rainy River and B3 mine development at New Afton. Our growth capital was focused on project development, specifically C-Zone and New Afton and the underground Intrepid Zone at Rainy River.

Slide 10 provides our capital structure. During the quarter, we redeemed the remaining $100 million of our 2025 senior secured notes. Cash on hand at June 30, '22 was $277 million and liquidity was $649 million. The decrease in cash from the prior year quarter is primarily due to the above-noted bond repayment along with continued capital investments at our operations.

Now I'll turn the call over to Pat.

Patrick Godin

Thank you, Rob. So we direct you to the Slide 13 where I will start to cover the Rainy River highlights. So in Q2, so mostly in the open pit, we achieved the production of 110,000 tonnes per day. That is slightly lower than the previous years and previous quarters mainly due to the heavy rainfall and the major watering that we had to deal with in the region here in Fort Frances region.

So the company also has to support our stakeholders mainly to sandbag houses and to support people because we have to deal with major floods. So that caused, as previously explained by Renaud, some issues with the open pit operation where the bottom of the pit was flooded mainly the north lobe that was in the mining sequence to be extracted during this period.

So we relocated the equipment in the upper part of the pit to at least increase and maximize the value of our teams. And it's accelerating -- it helped to accelerate this strategic during the quarter.

The mill averaged 23,000 tonnes per day. It is slightly lower compared to the previous year. However, mainly due to the fact also that we had to handle a lot of material and repair some mechanical issues, 50% of the pit was mainly coming from the low-grade stockpiles. That is what is explaining the lower grade. However, what is a positive note that the recovery was 90% for 0.69 gram per tonne. I think plant has performed very well in terms of gold recovery during this period.

As discussed previously at the beginning of the Q3, our production guidance for year-end was between 230,000 to 250,000 ounces and approximately 50% of the total year production will remain in the second half of the year. And actually, we are trending positively in terms of production at Rainy River in the pit.

Intrepid is going really well in terms of development, and we'll cover that later. And we developed 774 meters and development remain on track to start the commercial production in Q4 of this year. What is important before go to Slide 14 here is to keep in mind that mine is remaining in the ground. So in this -- the value of the ore body will be -- will show up in the next quarter going forward.

On the Slide 14, I just want to take a few time -- a little bit of time to explain to you what happened in terms of water events. So you have on the right side the graph of the precipitation. So the dark gray line is the normal precipitation curve. The light gray is the worst ever of the year. And the green line is what we have -- the precipitation that we are facing this year in the region.

You can see that in May and June, we received a lot of rain. And compare it also to other regions, if you compare, by example, in the last 2 years. Here, the rain is a bucket. So it's heavy rain, and it's more difficult to manage in terms of the -- when we have continuous precipitation on the ground.

So -- and it was really intense and combined with snowmelt, it was -- for us, it caused a lot of issues, mainly in the pit but also in the water management on site. That team, they did an excellent work to control the impact on the environment where we were fully -- in full compliance.

So consequently, we worked really hard. We did some slight improvement and adjustment to the water treatment to increase our treatment capacity by 40%. We also add to the pit an additional dewatering line and dewatering system so to double our capacity in terms of pumping.

And the construction of the tailing dam is on time. It's a continuous project for us. We are raising the tailing dams every year. And actually, what is the project that is ongoing and we intend to complete all the infrastructures for the end of October, beginning of November.

We'll guide you to the Slide 15 now, where you can see the open pit as it stand at the beginning of this week. You can see that the north lobe is dry. So it's all the water, it's where we are mining now. So we are in bench -- the bench 140 is completed, and we'll mine the 130 during August.

And it's positive for us because the grade is good. The work index is higher, but the grade is excellent. And what we are looking at also in terms of opportunities to the pit is we readjust our strategy. We reduced slightly our mining rate to be -- to reflect the fact that it's narrower in the pit, at the bottom of the pit and also that we have longer distance.

We optimize also our mining sequence to reduce the rehandling. So we are mainly relinked to mix the material to optimize the mill recovery and the processing throughput. But in terms of rehandling, we want to -- we are targeting to feed the mill with 85% of ex-pit material so to be much more efficient and reduce our cost and our fuel consumption.

I'll guide you to the Slide 16, where I'm covering Intrepid. So in terms of Intrepid, actually, we have access to the ore. We developed the same level. And what is nice is that we record what we see and what we expect is what we get.

So in terms of volume, we are still on. In terms of grade, we are slightly higher. So the level 175 and above, the first mining horizon is really for production. We will -- the contractor is mobilizing actually. We already started the drilling for the first stop at the beginning of this week. And we will be on time, we are slightly in advance to start the extraction of the ore in the next weeks.

We also work hard to make our mining more efficient and more fluid. So we changed our mining method. We -- originally, we contemplated the use of cemented fill approach. We want to as much as we can to stay away from cement in terms of cost and in term of inflation. So we will replace the mining method with pillar with raw fill or another combining method. So it will be a combination of both. So it will be more efficient, it will be also in terms of cost and also in terms of manpower.

So I'll guide you now to the Slide 18, covering New Afton. New Afton, during the quarter, the underground mine average 6,500 tonnes per day. We also -- I mean one of the key factor here is that we stopped the mining at the recovery level during this quarter, earlier than planned, mainly because it was more difficult in terms of reconciliation and mainly in terms of health and safety because we were facing mud rush.

We have also an exceptional year in -- actually in terms of rain. So -- and we're not -- the ore will remain in place. And we are actually contemplating to recover the material that we left in place ultimately in the lower level extraction.

On the mill point of view, the mill is operating really well. We process slightly more than 11,000 tonnes per day. The additional tonnage is coming from a low stockpile and is actually totally depleted. So the gold is we average 0.37 grams per tonne. And in the copper, we're reporting 42. And the recovery is in the bracket that we are used to present to you.

The C-Zone development, I will cover that again later in more detail. But we are performing really well. We reached the C-Zone in May, at the beginning of May. So it was a great achievement for our teams.

And the exploration is going really well at New Afton. So we -- during the quarter, underground, we completed 73 holes. And we are actually completing the analysis and the resource model for the Upper East extension. And this information will be communicated to you before the end of Q3.

On the Slide 19, the B3. B3 is -- I think it's a great achievement for the team at New Afton. They did really well on this. They are on time. During the quarter, the guys did lot more than 5 rounds per month, so it is excellent.

The undercut is totally completed. So what is interesting for us is the fact that the guys did very well with B3, it will lead us the possibility to extract earlier at B3 and to increase the throughput of B3 to compensate the tonnes and higher quality tonnes than the ones that remain in place in the recovery level.

So the -- and the construction activities remain on schedule. So we're still planning, as you can see in the figure on the lower left. What is in green is the draw point that needs to be completed in terms of construction. The development will be completed slightly end of December, beginning of -- the end of September, beginning of October and construction is on time.

Also what we did on the B3 is the lesson learned from the upper case are we learned from that. And we think by prevention it was an excellent incident from the team. We have additional ground support and cables. And we did also cabling of the apex pillar. It will reduce drastically the rehabilitation by the time to complete the full recovery of the B3.

So going forward, it's an investment that we did upfront that will save a lot of time and will be much more efficient in terms of the transition of the mining recovery at the end of B3.

On the picture, you can see our second electric -- our electrical truck battery vehicle. That is we are -- we utilized actually to rehandle the material from the lower part of the mine.

In terms of C-Zone, as I said previously, we achieved -- we reached the C-Zone in May. So it was really good to see that. We are on time to complete the undercut -- to initiate the undercut in mid-2023. And we are still on track to extract the ore in Q4 2023.

In terms of progress -- construction, progress and development progress, the mineral sizer is fully commissioned. So it's -- we are much more efficient in terms of material handling. We completed all the major construction contract to install the crusher, to install dewatering system. And also, the team did an amazing work in terms of the optimization of the extraction level.

B3's longitudinal approach is with continued pace for design for the draw points. In terms of the C-Zone, it will be transverse and we will have a rebounds approach. What that means is we intend to start from one extremity to the other. We will start from the middle.

So we will -- the development will be much more efficient. The construction will be much more efficient. We did that mainly because of the shape of the ore body in this and it will be a big part that I'm very confident in the future, the C-Zone will deliver on time, and we derived the approach for that.

So I will hand over to Renaud to close the call.

Renaud Adams

Thank you so much, Pat and such a pleasure to receive Pat in our organization. I've known Pat for as long as I worked in this industry. And -- but it is truly the first time that we had the chance to combine our effort and mutual experience in value creation. So I'm very much looking forward to his partnership.

So in closing remarks and as I mentioned in my opening comments, we intend to release in the third quarter a comprehensive exploration update and with more colors around our intentions on organic growth at New Afton over the next years to come.

We've talked about optimization, and we talked about a cost initiative and we've heard Pat discussing. I have many times repeated the -- my vision of the next while for this company and reaching our goals over the 2020 to '26 and how I believe that everything has remained intact.

When you're looking at the Rainy River asset in earlier this year, we filed a 43-101, which was supporting our increase in reserve on the ground and the central zone with a slightly different approach in the open pit execution, allowing for a little more smoothing but also a lot of rehandling.

And we know the cost pressure on certain consumption. At Rainy River, the increase in the fuel price has been, for sure, the most impactful increase in the consumable. But when I look forward and with the strip ratio -- remaining strip ratio of approximately 2:1 and looking at the tremendous opportunity of reusing the rehandling, over 20 million tonnes has been added in the rehandling in our 2022, '26 plan as it stands.

And there is no doubt in my mind that it provides a significant opportunity for optimization as we deplete the remaining capital waste and reduce even further the strip ratio, tremendous opportunity, our optimization in sequencing and we heard Pat talking about those things.

So as we move forward, it is really all about our ability to extract the remaining 44 million tonnes at nearly approximately 1 gram a tonne gold at the lowest cost possible. And the starting point is definitely going after the rehandling and lowering our fuel costs moving forward.

More optimization remain possible in some consumables. And we continue to work on those in the grinding medias and oxygen and -- as well in the cyanide and the tires consumptions, all of which could provide even further optimization.

It could be very challenging at some times to control the prices of some consumables. So we're going to go after the consumption. We're going to work hard in reducing the most impactful consumables in internal consumption and continue to work our force with procurement and more global procurement possibilities.

So I remain extremely positive at the Rainy River when I look at the period of' '20 to '26 and our abilities to extract at lower cost and be more efficient as we move forward and allow Pat and his team to implement efficiencies, so we improve on our overall OAE while we reduce our consumption of the main cost drivers.

As we move forward and continue to optimize the mill and return to the more capacity of 27,000 tonnes a day that we have enjoyed back in 2020 remains a tremendous opportunity to ramp up the underground and use incremental or traditional value. And Pat touched on our progress on the underground.

Everything is in place to be successful. And where we had some challenges in the last couple of years, our intention and vision remains to position this asset for high free cash flow, and that has not been impacted.

At New Afton, you've heard Pat on the tremendous progress on the B3. And the C-Zone, as I mentioned in my opening comments, the reward of the C-Zone project has always been a great future where you would return the operations to very low cost, higher grade, better recovery and higher free cash flow and this has not been impacted.

We had some issues in a short while in the last couple of years with some secondary zone that we were trying to bring to production to help in offsetting the gap, all of which is all short term. When I look forward, as we ramp up the B3 and as we reach the C-Zone, none of the original vision of returning these assets to high free cash flow has been impacted. And as I mentioned, we're going to benefit the in-pit tailing, the position and simplify our operations.

The short-term objective is that we all remain committed to execute on our 2022 updated guidance. And on that, I will close the comments portion of the call, and I will turn it back to the operator for the Q&A portion of the call here.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from Trevor Turnbull, Scotiabank.

Trevor Turnbull

Yes. I just wondered if you could talk a little bit about how next year is going to look at New Afton. You'll have B3 starting to come into production. Obviously, the C-Zone getting there in 2023.

But your comments talked about really how things will look much different in 2024 with the C-Zone fully in production. And I guess I'm just wondering how we get from the second half of this year into 2024. Just kind of how does that bridge look in terms of the cost at New Afton?

Renaud Adams

Everything that Pat is working on is to bring the B3 ramping up to its max capacity. So '23, we feed the mill with better quality ore than currently, right? Stockpile will be over by then. And we're going to be feeding the mill with the B3. So all the efforts and accelerating the B3 and bringing it up to the max capacity has the objective to feed the mill on January 1 at the highest capacity possible at the B3, which originally has been set between the 8,000 and 10,000 tonnes a day, which eventually will be also increased and the overall tonnes from underground as we ramp up the C-Zone.

So you got it right. And all efforts at this stage is to bring B3 to its max capacity. Early stage, we're reviewing certain aspects of our costs. But in terms of capital, once you reach your capacity in the B3, you're reducing all this aspect of the sustaining cost moving forward, of course.

And then you complete your capital project of the C-Zone which again, from reaching and outbidding and starting the production in the Q4 will not necessarily suck all capital on day 1. There will be some remaining ramp up. But when you start looking '24 and forwards, this is where you really are bettering your work. But again, all efforts on the B3 now for 2023. I hope that answered your question.

Trevor Turnbull

And I guess with respect to that effort with the B3, does that -- is there in a perfect world, if everything goes the way Pat would like it to at the B3, does that mean 2023 won't really need any of the low-grade stockpiles?

Renaud Adams

Low-grade stockpile will be done by then. So that's an easy answer on that. So really moving forward, it is all about feeding the mill on the '23 period onwards. It's all about feeding the mill with low-cost lock cage types.

Trevor Turnbull

Okay. That's good. And then maybe just one other question with respect to Rainy and the Intrepid zone. You talked about having some production later this year, and we saw the pictures in the presentation. I just wondered if you could talk a little bit about how fast you expect it to ramp up from that first production and then to the capacity that you're trying to reach?

Renaud Adams

I will pass it over to Pat for more comments on that.

Patrick Godin

Thank you, Trevor, for the question. Intrepid is not a big operation. So we are targeting something around 1,000 tonnes per day. So -- and we will -- I think it's going to -- the ramp-up will be pretty short because if you look at the design of the stock, we will mine one and drill one stock. So we'll have more mostly 3 to 4 stock ongoing. One will be in extraction. One will be in backfill. The other one will be in drilling and blasting and in the mining sequence. So I think that we will reach the throughput of 1,000 tonnes per day pretty quickly in Q4.

Operator

[Operator Instructions] Your next question comes from Mohamed Sidibe, CIBC.

Mohamed Sidibe

So my question is on the CapEx guidance with 46% of CapEx spent to date, which is the midpoint of guidance. Should we expect an uptick of spend in the second half? And if so, what would be the drivers of that, please?

Renaud Adams

Yes. The -- as you have seen in the strip ratio, you look at the sustaining capital. But Q2, obviously, when you mine at 8:1 on the capital that has the higher impact globally. But I think at the end of the day, we're still targeting to be within the guidance for the sustaining capital.

Our gross capital is pretty limited to the work we're doing in the Intrepid. So it has not -- the 10% more or less has really a low impact. But it's all about the sustaining capital and believe that we're going to be within our guidance at the end of the day.

Operator

There are no further questions at this time. Please proceed.

Ankit Shah

Thanks, Chris, and to everyone who's joined us today, thank you again. As always, should you have any additional questions, please do not hesitate to reach out to us by phone or email. And enjoy the rest of your summer. Thanks very much.

Operator

Thank you. Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.

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