Shares of New Gold (NGD) did not show too much reaction to the recent gold’s attempt to get past $1600 per ounce. This is not too surprising since New Gold hedged a material part of its gold production for 2020 at prices that are materially below $1550 per ounce that we see now in the market.
In order to protect the company from the downside below $1300/oz, the company capped 12,000 oz/ month at $1,355/oz for the first half of 2020 and 16,000 oz/month at $1,415/oz for the second half of 2020. However, the company’s own operating performance will still be the most important catalyst for the shares this year. New Gold has recently reported its preliminary Q4 2019 results, providing investors and traders with a chance to evaluate whether the company is making progress on the operational front.
Source: New Gold preliminary results
The company reported Q4 2019 production of 101,423 gold equivalent ounces (GEO) and full-year 2019 production of 486,141 GEO, in line with the previous guidance of 465,000–520,000 GEO. Back in October, New Gold warned that Q4 2019 production numbers will be softer due to lower grades at both mines. In the fourth quarter, Rainy River produced 51,915 GEO (the mine produced 76,095 GEO in Q3 2019) while New Afton produced 49,507 GEO (the mine produced 52,807 GEO in Q3 2019).
Gold grade at Rainy River dropped from 1.14 g/t in Q3 2019 to 0.85 g/t in Q4 2019 but gold recovery and mill availability remained stable, highlighting the progress that the new management team made at the mine. The company stated that all-in sustaining costs (AISC) will increase significantly in the fourth quarter (which is not surprising given the decrease in gold grade) but come slightly below the annual guidance of $1690-1790 per ounce.
New Gold commented: “As operational performance has improved over the past five quarters, the focus is now shifting from stabilizing operations to optimizing operational and cost performance”. The cost performance will improve automatically once the heavy sustaining capital spending aimed at positioning the mine for the future is over, but cost improvements will remain critical for the company’s success even in the $1500+ gold price environment.
As New Afton also suffered a decline in grades (the mine’s primary production is copper which is then converted into GEO to present consolidated numbers to investors), AISC for the quarter will also increase, coming at the low end of the annual guidance of $810-890 per GEO.
On the financial front, New Gold stated that its available liquidity at the end of the quarter was $335 million and included $83 million of cash and cash equivalents. The company finished the third quarter with $179 million of cash and cash equivalents. So New Gold suffered a material cash burn in the fourth quarter due to its spending on the mines as well as lower production levels.
The most important day for New Gold’s shares will be February 13, when the company will report: 1) fourth-quarter and year-end financial results; 2) 2020 operational outlook; 3) updated mineral reserves and resources; and 4) results of the updated life of mine plans for Rainy River and New Afton. In short, investors and traders will get a clear picture of where the company is heading, both operationally and financially.
In my opinion, New Gold shares are unlikely to continue their local upside trend above $1.10 before the company releases its annual results and shares the new life of mine plans for its two mines. This is critical information, and it’s hard to make any fundamental evaluation of the company’s perspectives without it.
The fourth-quarter preliminary results show that the quarter will be weak from the financial point of view, but this was clear back in October 2019 when the company shared its Q4 2019 guidance. Thus, I do not think that lower production results in the fourth quarter will have any material near-term negative impact on the company’s stock. At this point, I’m neutral on New Gold shares and I’m waiting for February 13 which is set up to be a true judgment day for the stock.
If you like my work, don’t forget to click on the big orange “Follow” button at the top of the screen and hit the “Like” button at the bottom of this article.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I may trade any of the above-mentioned stocks.
Recent Comments