New Gold: Early Years of a Strong Gold Production Growth

Source: http://www.flickr.com/photos/digitalcurrency/

Source: http://www.flickr.com/photos/digitalcurrency/

The Vancouver, Canada based intermediate gold mining company New Gold (NYSEMKT:NGD) begins a phase of significant capital expenditure at its Fort Frances, Ontario based project, Rainy River in 2014. As assets from the original three-way merger continue to decline and start coming offline in the coming years, the company would be in a transition period in the next couple of years. Production and cost profiles are expected to be flat during the transition period; while rising capital spending will leave NGD with limited ability to return capital to shareholders. From operating cost, mine life, and geographical perspective, the company should emerge with a higher quality asset base after the transition period. However, since New Gold is in the early stages of transition, development and capital risks remain high in the interim.

NGD reported a 4Q13 adjusted EPS of $0.04, slightly better-than-consensus estimates of $0.03. The headline loss of $0.51 per share was adjusted for one-timers including $206 million after tax impairment charge related primarily related to Cerro San Pedro. There were no surprises on the earnings release as the company had pre-guided production and costs at its investor day on February 6, 2014.

New Afton: The Star Performer

New Afton remains the star performer for New Gold and continues to generate most of the cash flow for the company. In September last year, New Afton achieved its targeted increase to 12,000 tons per day three months ahead of schedule. In the fourth-quarter, the mine performed even better and achieved an average throughput of 12,500 tons a day. The planned expansion of New Afton to 14,000 tons per day is also value accretive for the company. At a cost of $45 million, the planned expansion is expected to be completed by mid-2015.

Rainy River: The Next Major Catalyst

Going forward, the successful delivery of company’s Rainy River project remains the next major long-term catalyst for the company. Meanwhile, attaining all the required permits and approvals to begin construction of Rainy River remains the key for future share price performance in the short-term. Once completed, the project is expected to produce over 225,000 ounces of gold annually, at below industry average costs.

Strong Balance Sheet

New Gold also has a strong balance sheet. The company ended the fourth-quarter with $414 million in cash and cash equivalents, and $863 million in total debt. In addition, the company also has a credit facility of $150 million of which $106 million remains undrawn. The company has a debt/equity ratio of 0.29, better than the industry average of 0.36. Similarly, the company’s debt/asset ratio of 0.19 is also better than the industry average of 0.20. NGD has a current ratio of 6.05, significantly higher than the industry average of 2.24.

Conclusion

New Gold is a low cost gold, copper, and silver producer. The company boasts a low overall cost profile particularly due to New Afton. NGD operates in low risk political jurisdictions and has a potential for significant gold production growth in the coming years.Although the company’s new development projects have high leverage to gold, overall it has a cash flow profile with less leverage to gold. In addition, the company has a relatively good FCF yield from existing operations.

However, we think all these positive attributes are reflected in NGD’s multiples. The company is trading at a current price/earnings of 15.6 and forward price/earnings of 24.0. It has a price/book ratio of 1.0, slightly less than the industry average of 1.2. NGD has a price/sales ratio of 3.5 and price/cash flow ratio of 16.4, compared to industry averages of 2.5 and -5.0 respectively.

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