A Look at New Gold’s Earnings Report

 Gold

On February 27, New Gold released its fourth-quarter and full-year earnings report. The company’s net loss came in at $255 million, which was primarily due to an impairment charge of $206 million at its Cerro San Pedro project. The company decided that it wouldn’t be economical to develop a certain part of the mine, and so it decided to write-down a part of the carrying value.

Other than this charge and a couple of minor charges, New Gold reported adjusted earnings of $17 million, or $0.04/share. This figure reflects several things. First, the prices of all of the commodities New Gold produces — gold, silver, and copper — all fell year-over-year, which had a negative impact on its profit. As the prices of these three commodities rebound, this should be reflected positively in New Gold’s earnings.

Second, New Gold benefited from weakness in foreign currencies — particularly the Canadian Dollar and the Australian Dollar. The company operates mines in both of these regions (the New Afton mine in Canada and the Peak Mines project in Australia), and therefore, many of the company’s costs were lower relative to the U. S. Dollar, which is the currency in which the company does its book keeping. The weakness in the Canadian Dollar also improved the economics of two of the company’s major development projects: Rainy River and Blackwater.

Third, the company saw increased copper production at its New Afton mine in Canada. The New Afton mine began production 2012, but it didn’t reach its full capacity until last year. Going forward, this is going to be a low-cost copper and gold producer that will increase the company’s cash flow and profitability for years to come.

Fourth, overall the company reported relatively low production costs.  Using copper and silver as by-products that subtract from the cost of gold mining the company reported cash-costs of just $300/ounce, and all in sustaining costs (a metric that includes more of the company’s expenses than cash-costs) of just $900/ounce. This is a very low figure compared with the rest of the industry, which is seeing all-in sustaining costs at around $1,100 – $1,200. Furthermore, unlike many of its peers, New Gold spent a great deal of money on development and exploration in 2013, meaning that its all-in sustaining costs could have been lower.  This development and exploration is going to pay off in the future.

Ultimately, New Gold had a strong quarter and year financially insofar as it remained profitable from an operational standpoint. While it lost money due to write-downs, these are one-time expenses that we won’t see again. It was weak insofar as it, like its peers, suffered the consequences of a lower metal price environment.

Going forward, the company’s production should remain relatively flat in the near term, as its expansion goals are in constructing mines at its development projects — Rainy River and Blackwater in Canada, ad El Morro – a JV project with Goldcorp (NYSE:GG) — in Chile. This will take a long time and a lot of capital, but longer term, this will pay off.  The company will begin developing its newly acquired Rainy River project later this year, and we should see production by 2016 or 2017.  The company has the capital and cash-flow to fund this project.

New Gold’s other two development projects are more expensive and they may have to sit on the back burner for a while, although if the gold price rises New Gold’s cash flow and borrowing power will rise as well.  Furthermore, New Gold has outstanding warrants, which entitle the warrant holder to purchase a share of New Gold at $15/share on or before June 28, 2017. This will give the company over $400 million, presuming its shares are trading above $15/share at that time (they trade at $6/share now.)

Ultimately, New Gold offers an interesting investment proposition, as it has cash flow now from its four operating projects that produce about 400,000 ounces of gold annually with low costs. At the same time, the company has large development projects that give it enhanced leverage to the gold price and a growth pipeline that is in many ways unparalleled in the industry. Investors will not find that the shares are inexpensive on a cash flow basis, although given the company’s incredible pipeline, they should appreciate its leverage to the gold price and growth potential, and these make the shares appealing at the current valuation (the market cap is about $3 billion.)

More aggressive investors may want to consider buying the aforementioned warrants. They are essentially deep out of the money options that don’t expire for 3 years, 4 months. Furthermore, they are publicly traded under the symbol NGDAF.

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