RBC note...GLTA Following a stretch of share price depreciation after the Aug. 11 disclosure of negative grade reconciliation at its Rainy River mine, RBC Dominion Securities analyst Josh Wolfson raised his rating for New Gold Inc. (NGD-N, NGD-T) to “sector perform” from “underperform,” believing it “better reflects the company’s risk profile in the context of [its] now reduced valuation.”
“Details of the magnitude of this grade variance were not disclosed, but management noted the affected east lobe area was previously expected to contribute 50 per cent of production in 2H21 and 15 per cent thereafter,” he said. “A high degree of uncertainty regarding the implications of this update is outstanding, and post-event shares have changed by negative 15 per cent as compared to the index’s 1-per-cent performance (and NGD year-to-date is down 44 per cent vs. index down 10 per cent.
“To assess the potential impact of this risk factor, we applied varying scenarios of negative grade reconciliation to determine the potential impact on the Rainy River mine plan. Assuming negative reconciliation is not greaer than 30 per cent at the eastlobe, we see a reasonable potential for open pit grades to be more than 0.90 grams per ton in 2H and remain at or above 1.00 g/t in upcoming years, supporting annualized production of 280,000 ounces in 2022. These grades would represent an improvement from 1H21 results, and still support a positive FCF inflection event in 2H21+. Production upside to greater than 300koz by 2024 could be achieved as underground production begins to ramp-up more meaningfully.”
After trimming his earnings expectations through 2023, Mr. Wolfson cut his target for New Gold shares to US$1.50 from US$1.75, which is below the average on the Street of US$2.01.
“Despite interim elevated uncertainties at Rainy River, we view the outlook for New Gold as reasonably balanced in the context of its valuation today,” he said. “Positively, the company’s balance sheet positioning and FCF outlook remain attractive in our view, and potential upside could be realized with an optimized Rainy River underground mine plan under evaluation by yearend 2021. This is offset by interim elevated risks at Rainy River where grade reconciliation risks could be a factor beyond the east lobe, outstanding deliverables at both Rainy River’s underground build-out and the New Afton C-Zone project completion, plus New Afton higher-risk deliverables of permitting for deposition of in-pit tailings plus rehabilitating the existing impacted tailings dam. In light of this balanced outlook, we are revising our rating.”