New Gold: Lower Grade And Tonnes Processed At New Afton (NYSE:NGD)
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Part I – Introduction
Canada-based New Gold Inc. (NYSE:NGD) released its first-quarter 2022 results on May 2, 2022.
Note: This article is an update of my article published on March 16, 2022.
1 – 1Q22 Results highlights
Revenues for the first quarter of 2022 increased from $164.9 million to $174.70 million due to higher gold and copper prices. The company posted a net loss of $7.8 million compared to an income of $15.10 million in 1Q21.
NGD: Quarterly highlights 1Q22 Presentation (New Gold)
2 – Investment Thesis
The investment thesis has been a challenging exercise for New Gold. I have warned many bullish investors not to turn overly bullish on this company because of the inherent risks attached to a gold miner with only two producing assets.
The stock took a turn to the worst last year after announcing a 2Q21 loss of $15.8 million and warning about its full-year production guidance due to grade uncertainties at the Rainy River mine in Ontario (East Lobe zone). Since then, the stock never really recovered from this bad news despite some progress in dealing with the issue.
It is now evident that investing in a small gold producer like New Gold involves additional risks due to a lack of diversity, and long-term investment in this company must be taken with extra caution.
However, a small long-term investment in this company can be considered reasonable and could payoff based on the company’s solid balance sheet with no net debt and good growth potential.
NGD is primarily a good trading stock, and it is crucial to trade LIFO, a large part of your long-term position (a minimum of 50% is suggested). Taking regular profits off and buying on weakness while keeping a core long-term position for a much higher target is the way to profit here.
3 – Stock Performance
NGD has underperformed the VanEck Vectors Gold Miners ETF (GDX). NGD is now down 38% on a one-year basis.
Part II – Gold Production Details For The First Quarter Of 2022
Note: The gold production has been covered in my preceding article and, besides some minor updates (e.g., AISC), has not changed. The balance sheet and TA analysis have been added to complete the analysis of the first quarter of 2022.
The quarterly gold equivalent production was surprisingly low this quarter. Increased COVID-19 cases impacted the Rainy River production at the site, which created technical issues. Also, the cold weather affected drilling productivity. At the New Afton mine, the lower production was due to a transitioning to the B3 ramp-up and C-zone.
- Total gold equivalent production was 87,696 Eq. Oz for 1Q22, down 8.7% compared to the same quarter a year ago and down 21.4% sequentially.
- New Gold produced 68,101 Au Oz, 109,511 Ag Oz, and 8.2 Mlbs of copper.
NGD Quarterly Gold Production history (Fun Trading) NGD Quarterly Metals production 3Q21 to 1Q22 (Fun Trading) Copper is produced at the New Afton mine only. Below is the chart of the gold grade per Tonne. Grade per tonne in 1Q22 was 0.92 G/T for Rainy River and 0.38 G/T for New Afton. The grade at the New Afton mine is going down, and it is concerning. NGD Quarterly Grade per tonne history per mine (Fun Trading) NGD Gold production per mine (Fun Trading) NGD Quarterly gold production per mine history (Fun Trading) New Gold recorded a record-high AISC for 1Q22 of $1,795 per ounce, well above the industry’s average. NGD: Quarterly AISC history (Fun Trading) Finally, On March 31, 2022, New Gold published new mineral reserves for the Rainy River mine. LOM is ten years, and the average annual gold production from 2022 to 2027 is expected to be 302K Au Oz (309K Au Eq. Oz). AISC per GEO is estimated at $1,047. CEO Renaud Adams said in the conference call: I’m very pleased with the result of our updated technical report at Rainy River which has extended the mine life to 2031. Updated mined plan illustrated an attractive average production profile of 310,000 gold equivalent ounces over the period of 2020 to 2027 and over 250,000 gold equivalent ounces for a whole life of mine with full transition from open pit to underground during the period of 2021, ’26 for an estimated growth capital of only $71 million to complete the underground pre-production work for both Intrepid Zone.
New Gold Inc. – Balance Sheet In 1Q22 – The Raw Numbers
| New Gold NGD | 1Q21 | 2Q21 | 3Q21 | 4Q21 | 1Q22 |
| Total Revenues in $ million | 164.9 | 198.2 | 179.8 | 202.6 | 174.7 |
| Net Income in $ million | 15.1 | -15.8 | -11.3 | 150.9 | -7.8 |
| EBITDA $ million |
71.2 |
47.6 |
49.5 |
212.9 |
46.5 |
| EPS diluted in $/share | 0.02 | -0.02 | -0.02 | 0.23 | -0.01 |
| Cash from Operating Activities in $ million | 53.3 | 110.3 | 54.3 | 105.7 | 67.8 |
| Capital Expenditure in $ million | 53.8 | 80.0 | 55.4 | 58.1 | 75.6 |
| Free Cash Flow in $ million |
-0.5 |
30.3 |
-1.1 |
47.6 |
-7.8 |
| Total cash $ million | 190.9 | 203.9 | 203.0 | 541.0 | 494.7 |
| Total Long-Term Debt in $ million | 489.6 | 490.1 | 490.6 | 491.0 | 491.5 |
| Shares outstanding (diluted) In millions | 682.8 | 680.8 | 680.8 | 687.5 | 681.3 |
Data Sources: Company release
Note: More historical data are available for subscribers only.
Analysis: Balance Sheet Discussion
1 – Revenues of $174.7 million in 1Q22
NGD: Quarterly Revenue history (Fun Trading) New Gold posted revenue of $174.7 million for 1Q22, up 5.9% from the same quarter a year ago and down 13.8% sequentially. Adjusted earnings were $10.3 million or $0.02 per share in 1Q22.
Operating expenses were $1,029 per GEO for the quarter and year ended March 31, 2022.
Total cash costs for the quarter were $1,069 per GEO. The average realized gold price of $1,897 per ounce, and the average realized copper price of $4.53 per pound.
NGD: Quarterly Gold Price history (Fun Trading)
Rob Chausse, the CFO, noted in the conference call:
The lower equivalent gold production as compared to the prior year is primarily due to lower grade and tonnes processed at New Afton. Our operating expense per ounce was in line with our prior quarter.
Consolidated all in sustaining costs for the quarter were 1,778 per equivalent ounce, higher than the prior quarter primarily due to higher sustaining capital spend, and lower sales volume at New Afton partially offset with higher sales volume at Rainy River.
2 – Free cash flow was a loss of $7.8 million in 1Q22
NGD: Quarterly Free cash flow history (Fun Trading) Note: The generic free cash flow is the cash from operating activities minus CapEx.
The free cash flow for 1Q22 was a loss of $7.8 million, with a trailing 12-month free cash flow of $69.0 million.
3 – Net debt-free as of March 31, 2022
NGD: Quarterly Cash versus Debt history (Fun Trading)
New Gold continues to be net debt-free this quarter, which is reassuring. As of March 31, 2022, the debt is $491.5 million, and the total cash is $494.7 million. The total liquidity position was $807 million at the end of March 2022.
NGD: Quarterly Debt details (New Gold)
However, on May 16, 2022, New Gold announced redemption of the outstanding $100 million aggregate principal amount of its 6.375% Senior Notes due 2025. NGD paid with cash.
The Company has approximately $326 million of cash (or $388.5 million including investment) and a strong liquidity position of about $702 million.
Note: New Gold’s total investment in 1Q22 was worth $63.2 million compared to $59.5 million in 4Q21. The most significant investment is in Artemis Gold and the Blackwater project. This amount is included in the total cash above.
NGD: Investments (New Gold press release)
4 – 2022 guidance unchanged
New Gold kept the company guidance set in the previous quarter.
Total gold equivalent production for 2022 is expected to be 380K-440K GEOs, with gold production of 295K-335K ounces.
Copper production is expected to be 35-45 million pounds.
Production is expected to strengthen in H2 2022 with approximately 55% of the annual output.
Technical Analysis And Commentary
NGD: TA Chart short-term (Fun Trading)
NGD forms a descending wedge pattern with resistance at $1.38 and support at $1.15. The overall strategy that I promote in my marketplace, “The Gold And Oil Corner,” is to keep a core long-term position and use about 50% to trade LIFO (see note below) while waiting for a higher price target for your core position between $2.50 and $3.
I suggest selling about 50% of your position at or above $1.38 and accumulating between $1.25 and $1.13. NGD is excellent trading stock and is particularly liquid, making it easier to trade.
The gold price is now struggling to stay above $1,850 per ounce due to the Fed’s action against the rampant inflation that threatens the world economy. The market expects the Fed to hike the interest rate by 50-point and potentially more in the following months. In this case, the gold price will struggle to stay above $1,800, in my opinion. However, on the plus side, the war in Ukraine is supporting gold.
Thus, I believe we will have a few opportunities to buy NGD at $1.25 and lower where we can safely accumulate.
Watch gold and silver prices like a hawk.
Note: The LIFO method is prohibited under International Financial Reporting Standards (IFRS), though it is permitted in the United States by Generally Accepted Accounting Principles (GAAP). Therefore, only US traders can apply this method. Those who cannot trade LIFO can use an alternative by setting two different accounts for the same stock, one for the long term and one for short-term trading.
Warning: The TA chart must be updated frequently to be relevant. It is what I am doing in my stock tracker. The chart above has a possible validity of about a week. Remember, the TA chart is a tool only to help you adopt the right strategy. It is not a way to foresee the future. No one and nothing can.
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