New Gold, Inc. (NGD) Q3 2013 Earnings Call October 29, 2013 9:00 AM ET
Operator
Good morning. My name is Shirley and I will be your conference operator today. At this time, I would like to welcome everyone to the New Gold Incorporated 2013 Third Quarter Results Conference Call. All lines have been placed on-mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. (Operator Instructions) Thank you. Mr. Hannes Portmann, Vice President of Corporate Development, you may begin your conference sir.
Hannes Portmann - VP, Corporate Development
Thank you, operator, and good morning everyone. We very much appreciate you joining us today for the New Gold 2013 third quarter earnings results conference call and webcast. On the line today we have Randall Oliphant, Executive Chairman of New Gold; Robert Gallagher, our President and CEO; Brian Penny, our CFO; and Ernie Mast, our Vice President of Operations will also be available during the Q&A period at the end of the call.
Should you wish to follow along with the webcast, please sign-in from our Homepage at www.newgold.com. If you are participating in the webcast, you can type your questions through the interface.
Before Mr. Oliphant provides us with an overview of the results, I would like to direct your attention to our cautionary language related to forward-looking statements found on Slide 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.
Slide 3 provides more information and should be reviewed. We also refer you to the 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 turn the call over to Randall.
Randall Oliphant - Executive Chairman
Thank you, Hannes and good morning everyone. Thank you for joining us today to discuss our third quarter results. The quarter included many important milestones for our Company, but as previously disclosed it also brought with it operational challenges.
Slide 4 provides a few of the quarterly highlights. During the quarter our four operating mines combined to produce over 94,000 ounces of gold. Importantly, this production was achieved at the lowest cost in our Company's history. The quarterly cash cost of $280 an ounce and all-in sustaining cost of $779 now. We are proud to be one of the lowest cost producers in our industry.
A key driver of this success is our New Afton mine. New Afton is already our most significant cash flow contributor and is positioned to grow even further. During the quarter New Afton achieved its targeted increase and throughput three months ahead of schedule. A week ago we hosted a group of 25 investors and analysts at New Afton to give them an opportunity to see firsthand the significant progress that has been made in only its first year of operation.
We are both delighted with what the team at New Afton has already accomplished and excited about the initiatives being evaluated to add even more value to this operation. New Afton combined with our three other operations did generate adjusted net earnings of $0.04 a share and adjusted net cash flow of $54 million in the third quarter.
Subsequent to the end of the quarter we closed the acquisition of Rainy River. We feel fortunate that the combination of Rainy River, Blackwater and our fully carried interest in El Morro provides our Company with one of the most robust organic growth pipelines in the business. We also continue to feel well positioned as our solid cash balance of over $400 million and our continued cash flow generation provide us with flexibility as we consider the sequencing of our development project.
Slide 4 shows the operating results for each of our mine, for both the three and nine month periods ended September 30th. In short, New Afton is doing great. Production of both gold and copper has been up in each quarter of this year as the mine continues to hit its stride. There is a block caving operation producing both gold and copper which results in New Afton being a high margin mine, no matter the cost standard one chooses to focus on.
At Cerro San Pedro, we announced in August that a portion of our pit wall had moved. The movement occurred above a higher grade bench that we were mining at the time. With the safety of our employees of primary importance we shifted our mining away from the impacted area and more towards the bottom of the pit. Unfortunately this new area contained lower grade and yielded lower recoveries resulting in less gold and silver production than originally planned.
So this is just a disappointing temporary setback. Our mine plan has us moving back towards the top of the pit, which has historically stronger recoveries in early 2014. Further, as part of this next phase of mining we plan to mine the displaced wedge of material and higher grade bench in late 2014 and early 2015. On the cost side however, Cerro San Pedro remained very competitive with all-in cost well below the industry average despite the lower production of gold and silver in the quarter.
Mesquite's production was also below expectation. The area we were mining during the third quarter did not reconcile well to our model, which resulted in grades being below expectation. We have since moved to a different area of the pit that has a better history of reconciliation. We continue to anticipate Mesquite having a strongest quarter of the year in the fourth quarter.
Similar to Cerro San Pedro, Mesquite continues to have below average all-in sustaining cost due to its comparatively low capital requirements.
Peak’s performance was solid. Production of both gold and copper remained steady with year-to-date gold production 10,000 ounces ahead of last year’s pace. As previously noted, our focus at Peak is on cost. We have made good progress during the quarter as our cash cost were down by $92 an ounce and all-in sustaining cost were down by $170 an ounce when compared to the second quarter of this year. We will continue to look for opportunities to bring cost down further.
Slide 6 provides a summary of our quarterly financial results. Revenue remained consistent with the prior year, despite significant decreases in the average realized prices of the three commodities we produced. Our ability to maintain our quarterly revenue at almost $200 million was due to New Afton’s strong contribution, which offset the lower revenue from Cerro San Pedro and Mesquite.
Earnings from mine operations were lower than the prior year quarter. New Afton’s earnings contribution was up significantly. However, the challenges at Cerro San Pedro and Mesquite, as well as the lower commodity prices resulted in the earnings contribution from the other three operations being below that of the third quarter of 2012, quarter-over-quarter earnings from mine operations increased by 52%.
Net earnings were $12 million or $0.02 a share. After adjusting for items including the non-cash charge to earnings resulting from the monetization of our hedge earlier this year, onetime Rainy River transaction cost, gains on foreign exchange and gains on the mark-to-market of the Company’s share purchase warrants, adjusted earnings were $20 million or $0.04 a share.
Adjusted net cash generated from operations was $54 million which excluded onetime transaction cost incurred as part of the completion of the Rainy River transaction. The adjustment of $18 million includes the aggregate advisory, legal and consulting fees, as well as the requisite change of control payment. After adjusting for these non-recurring items, the cash flow generation of our business increased when compared to the prior year quarter despite lower commodity prices.
Slide 7 provides an overview of our updated 2013 production and cost outlook. Gold production at New Afton and Peak remained consistent with the guidance set at the beginning of 2013. Similarly our targeted full year consolidated copper production remains unchanged. However, as we disclosed last week, our gold production at Cerro San Pedro and Mesquite is no longer anticipated to reach the targets set at the beginning of the year.
At Cerro San Pedro, we now anticipate producing between 95,000 and 100,000 ounces of gold for the year. At Mesquite we are targeting production of between 110,000 and 115,000 ounces. When combined with New Afton and Peak’s original production targets, this results in targeted consolidated gold production for 2013 of 390,000 to 400,000 ounces of gold.
Silver production at Cerro San Pedro is expected to be 1.3 million ounces. While we are disappointed to have updated our outlook for the first time in our Company’s history, our attention now turns to delivering on this new target and finishing the year strongly.
Primarily as a result of New Afton’s strong performance, the lower gold production target has a limited impact on our full year cost outlook. Total cash cost through the first nine months were $399 an ounce. We anticipate with a lower cash cost fourth quarter to have full year cash cost of approximately $375 an ounce. All-in cost through September was $905 an ounce and we expect to end the year at approximately $900 now. Both of these cost measures continue to position us well and weigh below the industry average.
Slide 8 highlights some of the key operational achievements at New Afton during the quarter. Arguably the most significant milestone for our Company during the quarter was New Afton achieving its targeted increase and throughput three months ahead of schedule. The design capacity of New Afton was 11,000 tonnes per day, and our goal is to steadily increase this to 12,000 tonnes per day by the end of the year.
I am very pleased to report in the month of September we averaged a daily throughput of 12,396 tonnes. The increased throughput coupled with quarter-over-quarter increases in gold and copper grade, and steady recoveries resulted in record quarterly production at New Afton. We now look forward to further evaluating the next step up in throughput. As highlighted in our news release a week ago and presented to our New Afton tour attendees, we are now looking at opportunities to move towards a sustainable 14,000 tonnes per day.
The mining side of the operation appears to already have the flexibility to achieve this target. On the processing side, we’re currently evaluating low capital cost additions to the mill circuit with the goal of maintaining recoveries in the high 80s or low 90s while operating at even higher throughput. We plan to provide further updates on the timelines of this next throughput increase, as well as related capital cost as part of our Investor and Analyst Day in early 2014.
Slide 9 provides an overview of our exploration efforts at New Afton. Together with our evaluation of our further throughput expansion we see this as an additional avenue through which we could increase the value of New Afton. Our two primary areas of focus are the East Cave Extension and the C-Zone. The East Cave represents the lateral extension of the area we are currently mining. Our exploration efforts in this area during the second half of 2012 led to an extension of our mine life and we look forward to updating our year-end resources for the work completed this year.
At the same time, we continue to drill the C-Zone which is down plunge from the currently operating B-Zone. We updated the C-Zone resource in May but have since received assets for an additional 36 holes which will be included in the year-end update. In total, across the two primary targets, our 2013 New Afton exploration program included the completion of 99 holes totaling 44,000 meters.
Slide 10 provides an overview of our three development projects. So each project is unique in its own, right. They share certain characteristics that are important to us. First, they all have significant gold resource bases which collectively amount to over 17 million ounces. They all have continued exploration potential that should enable us to build on these already sizeable gold resources. They are in jurisdictions where we want to invest and operate our business.
And finally they each have robust production potential at below today’s industry average cost. Most recently we had some particularly positive news at our El Morro project where a week ago the environmental permit was officially reinstated. This takes away an overhang and allows our 70% partner Goldcorp to further evaluate its exploration and development plans for El Morro.
On Slide 11, we outline why we believe New Gold’s future is particularly bright. We are fortunate to have a portfolio of projects that could grow production from approximately 400,000 ounces to-date to over 1 million ounces in the coming years. We feel well positioned because upon receive the permit the development timelines and related capital commitments for Rainy River and Blackwater are at our discretion, and we are 100% carried at El Morro.
As previously indicated our plan is to advance both Rainy River and Blackwater in parallel with the goal of getting both to construction ready status approximately a year from now. We will have updated technical and economic studies late this year or early next for both which will enable us to compare and contrast our projects using consistent input.
At the same time our permitting efforts should either be complete or significantly advanced by late 2014. We plan to make our development and sequencing decision based not only on the relative project economics and permitting status, but also on the prevailing market conditions at the time.
As we have done with Cerro San Pedro, Mesquite and now New Afton, we will work hard to ensure that the capital we deployed generates robust returns for shareholders. We look forward to providing multiple project updates through the end of 2013 and into 2014.
Slide 12 is one that many of you will be very familiar with. On the left hand side we outline the consensus values described to our assets in March of 2009 when New Gold and Western Goldfields merge and what they are today. The right hand side shows our relative share price performance over the same period. We continue to believe that as we work to unlock incremental value at each of our assets the share price should overtime respond favorably.
New Afton is a good example. The mine has increased in value by over 10 times as we have transitioned it from a development project that people questioned through our most significant cash flow generator that has now successfully expanded throughput by 10% in its first year of operation.
Our recent New Afton results and tour have led to further increases in the consensus net asset value. Further we believe that the combination of an expansion to 14,000 tonnes a day and our exploration efforts have the potential to unlock even more value.
In addition to the strides we have already made at Blackwater and Rainy River projects which are both valued well above what we paid we see scope to follow a similar value creation path as we did with New Afton. As we systematically move these projects along the development timeline and ultimately into production, we believe their value should progressively increase.
Slide 13 outlines the factors that we believe differentiate New Gold and that make us believe in the value of our own personal investment in this Company. We believe our jurisdictional risk profile is among the lowest in our industry. Our Board and management team have been in this business for a long time and have created value for shareholders in both robust commodity markets and also during challenging times. Our low cost profile enables us to generate healthy margins and cash flow even when gold prices go through periods of temporary weakness.
At the same time, our pipeline provides us with organic growth opportunities in the business that as a whole is not growing. And finally we have a track-record of value creation that we are very proud of and that we see our Company continuing. We thank you for your continued support of New Gold.
At this time, if you have any questions we’d be happy to answer them. Thank you.