Eyeing sharply higher cash flow, New Gold Inc. (TSX: T.NGD, Stock Forum) (NYSE: NGD, Stock Forum) hit a significant milestone last weekend when it launched its New Afton gold mine in south central British Columbia, about 350 kilometres northeast of Vancouver.
A fiery TNT blast was the highlight of opening day celebrations, hosted by New Gold which traded at $12.14 this week, giving the company a market cap of $5.61 billion, based on 462 million shares outstanding.
The stock price rally from $7.50 in mid-May has been good news for large shareholders such as Van Eck Associates Corp. (8.34%) and Fidelity Management (7%) who are poised for more upside according to eight investment analysts who rate the stock a buy, according to Bloomberg data.
Bob Gallagher (right) with Chris Cottier of Macquarie Private Wealth
In an interview with Stockhouse, New Gold President and Chief Executive Officer Bob Gallagher said he is pleased that the company achieved its objectives by bringing the $760 million underground operation on stream largely on budget and within the targeted time line.
Built beside a former open pit mine that was operated by Teck Resources Ltd. (TSX: T.TCK.A, Stock Forum) (TSX: T.TCK.B, Stock Forum) from 1978 to 1987, New Afton has been developed as a block cave operation and is expected to produce an average of 85,000 ounces of gold and 75 million pounds of copper annually over a 12-year lifespan.
New Gold and its predecessors got control of the site after Teck allowed the claims on which the mine is located to lapse.
Output from New Afton will not only raise New Gold’s annual gold production to 480,000 ounces, it will also add another $250 million to the $230 million in annual cash flow that is already being produced by the company’s mining operations in the United States, Australia and Mexico.
“I think that we have demonstrated to the market that we can build these big projects and that we can build them on time and on budget,’’ Gallagher said.
At a time when many mining companies are struggling to contain costs, New Gold achieved its goals, largely because of the New Afton’s location about 10 kilometres west of Kamloops, a major service hub for the resource sector, including Teck Resources’ fabled Highland Valley Copper mine.
Abacus Mining & Exploration Corp. (TSX: V.AME, Stock Forum) and Polish partner KGHM Ajax Mining Inc. are developing a nearby copper-gold project that is currently undergoing an environmental review. Subject to permitting, construction of a 60,000-tonne-per-day processing plant and open pit mine is due to commence next year.
Proximity to infrastructure and manpower meant that New Gold did not have to carry the cost of setting up a construction camp, and due to a slowdown in B.C.’s forest sector, its wasn’t difficult to find qualified people to help build the mine.
Now that New Afton has finally reached the commercial production stage, New Gold officials will quickly set aside the champagne glasses and move back into mine planning mode.
This week the company is set to release a preliminary economic assessment for its next mine, the Blackwater project in central B.C.
It was discovered in 2009 by Richfield Ventures, a company that New Gold acquired last year. Blackwater is located about 130 kilometres southwest of Prince George, and is thought to host a gold resource (in all categories) of about 10 million ounces.
A preliminary economic assessment released this week, is guiding the market to expect development costs of about $1.8 billion, and annual production of 507,000 ounces gold and 2 million ounces of silver, potentially doubling New Gold’s production to over one million ounces annually, Gallagher said.
The company plans to kickstart the environmental review process by filing technical reports with the B.C. and Canadian environment assessment offices. By the end of 2013, Gallagher said he hopes to have completed an economic feasibility study, and pending the outcome of the environmental review, the plan is to start construction in 2015, with production slated to begin in 2017.
“What the investment community likes about our growth is that it is fully funded and that our existing cash and cash flow from operations will pay for the construction,’’ Gallagher said.
As Blackwater starts to move ahead, New Gold is looking ahead to development of its 30%-owned El Morro gold-copper project in northern Chile. “We are fully funded on that too,’’ Gallagher said.
Under an agreement with partner Goldcorp Inc. (TSX: T.G, Stock Forum) , which holds the other 70% of El Morro, Goldcorp is covering New Gold’s share of the construction costs in the form of a loan. “Once that mine is in production, 80% of our share of the cash flow will be used to repay our debt with Goldcorp,’’ Gallagher said.
“It will take us about four or five years to [achieve payback] and then we will own 30% of it,’’ he said.
At current metal prices, El Morro should deliver about $300 million in annual cash flow to New Gold’s account. Gallagher said he expects the mine to in production by 2018.