New Gold’s Fourth Quarter Was Extremely Strong

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

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

On Thursday, New Gold (NYSEMKT:NGD) released its fourth-quarter and full-year operational results. Mining companies typically release operational results before they release financial results, and these results tend to move mining stocks as much as, if not more than, financial results. Upon releasing its operational results, New Gold shares fell by nearly 6 percent despite the fact that the broader sector traded flat on the day. Investors were likely disappointed in the company’s announcement that its annual gold production fell slightly on a year-over-year basis and that 2014 production would be flat vis-à-vis 2013 production.

Nevertheless, New Gold’s fourth-quarter results were better than the market reaction would have investors believe. The company reported gold production of 106,000 ounces for the quarter with costs of less than $900/ounce.  This figure was due primarily to robust production at the company’s New Afton mine in British Columbia. The New Afton mine began producing in 2012. Production reached 87,000 ounces of gold last year with 25,000 in the fourth-quarter (100,000 ounces annualized.) In addition, the mine generated 72 million pounds of copper production.

While production declined year-over-year, this was due primarily to a decrease in gold production at the company’s Mesquite mine in California, which fell from 142,000 ounces to 107,000 ounces. This was the result of lower grade ore being mined.

Going forward, the company expects production to be flat, but it expects costs to come down. The company already produces gold at less than $900/ounce, which means at $1,250/ounce gold it is generating over $350 per ounce produced. Next year, the company predicts that its costs will come down to $815 – $835/ounce, which means that the company will make over $400/ounce or $160 million before taxes at 400,000 ounces of production and $1,250/ounce gold.

New Gold’s low production costs have meant that the company remained profitable in what was a relatively terrible year for gold miners. Furthermore, New Gold didn’t have to write-down the value of its reserves unlike many of its peers. Thus, despite its relatively high debt load of $860 million, the company is in good financial shape, and it is able to withstand continued gold price weakness should the bear market persist.

Most importantly, however, the company made significant strides towards growing its production long term. Just recently, it released the results of a feasibility study for its largest mine — Blackwater. In doing so, it was able to more than double its total gold reserves. Furthermore, the company released an updated feasibility study on its recently acquired Rainy River mine, which will produce a whopping 300,000 ounces of gold annually once it goes into production in 2017.

So while the market expressed concern over New Gold’s lack of immediate growth, we in fact have a company that is well-positioned to not only generate cash-flow now, but to grow substantially over the next several years.

Consequently, I think that the short term market weakness presents a buying opportunity to long term investors. The stock is down significantly from its 2011 high of $14/share, closing Thursday at just $5.43. Investors looking to take a position will find that there is technical support at around $5/share.

More aggressive investors might want to consider buying the publicly traded warrants (or, NGDAF.) Each warrant give the owner the right to purchase one share of New Gold at $15 in 2017. Thus, the warrants are like out of the money options except that they have a longer duration than most options available on the market. Its $15/share is a steep price target from just $5.43. However, keep in mind that only 2 years ago the shares traded at $14 each.

Furthermore, by the time these warrants are about to expire, the company should be producing at its Rainy River mine, which will bring the company’s total annual production up to 700,000 ounces annually up from 400,000 ounces. For those investors who think that the gold price will be meaningfully higher in the coming few years, the New Gold warrants give investors a great way to leverage this position.

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