New Gold Inc (NGD) 2021 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the New Gold Inc. Third Quarter 2021 Earnings Call and Webcast Conference Call. (Operator Instructions) This call is being recorded on Friday, November 12, 2021.

And I would now like to turn the conference over to Mr. Ankit Shah, Vice President, Strategy and Business Development. Please go ahead.

Great. Thank you, operator, and good morning, everyone. We appreciate you joining us today for New Gold's Third Quarter 2021 Earnings Conference Call and Webcast. On the line today, we have Renaud Adams, President and CEO; and Rob Chausse, CFO.

Should you wish to follow along with the webcast, please sign in from our home page at newgold.com.

Before the team begins the presentation, I'd like to direct your attention to our cautionary language related to forward-looking statements found on Slides 2 and 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. Slides 2 and 3 provide additional 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 Rob.

Thanks, Ankit, and good morning. Slide 5 provides our operating highlights for Q3. The details on that slide are consistent with our October production press release. During Q3, the company produced approximately 105,600 gold equivalent ounces. The amount consisted of 15.6 million pounds of copper and 58,600 gold ounces from Rainy River and approximately 13,600 gold ounces from New Afton, total gold ounces of approximately 72,000 ounces. The lower equivalent gold production as compared to the prior year quarter is primarily due to lower tonnes processed at Rainy River and New Afton.

The operating expense per equivalent ounce was higher than the prior year quarter due to the strengthening Canadian dollar and the Canadian wage subsidy received in the prior quarter. Consolidated all-in sustaining costs for the quarter were $1,408 per equivalent ounce, higher than the prior year quarter, primarily due to the higher operating expense, as previously noted, partially offset by lower sustaining capital.

Turning to Slide 6 for our financial results. Third quarter revenue was approximately $180 million, driven by sales of 66,982 gold ounces at an average realized price of $1,788 per ounce and sales of 14 million pounds of copper at $4.28 per pound. The Q3 revenue was 4% higher than the prior year quarter, primarily due to higher metal prices.

Operating cash flow before working capital adjustments was $81 million or $0.12 per share for the quarter, in line with the prior year quarter.

The company recorded a net loss of $11.3 million or $0.02 per share during Q3 compared to earnings of $0.02 per share in Q3 of the prior year.

After adjusting for certain charges, net earnings were $23.4 million or $0.03 per share in Q3 compared to net earnings of $12.4 million or $0.02 per share in the third quarter of 2020. This difference is driven by higher metal prices and lower finance costs.

Our Q3 adjusted earnings includes adjustments related to unrealized adjustments on our Rainy River stream mark-to-market and our free cash flow royalty at New Afton. Our MD&A provides additional details on the non-GAAP measures discussed in this presentation.

With regard to capital expenditures, our total CapEx for the quarter was $58 million. $34.9 million was spent on sustaining capital and 23.1% on growth capital. Sustaining spend was primarily related to planned tailings work at both operating assets and B3 mine development at New Afton. Growth capital was focused on project development, specifically the C-zone, and the thickened and amended tailings project at New Afton and the underground Intrepid zone at Rainy River.

Slide 7 provides our capital structure. Cash on hand as at September 30, 2021, was $151 million, and liquidity at the end of the quarter was $477 million.

With that, I'll turn the call over to Renaud. Thank you.

Thanks, Rob, and thank you, everyone, for joining us today. So first, let me start by saying that I had the chance recently to spend quality time at both assets, and I really continue to be amazed by the tremendous level of hard work and commitment of our employees and contractors as we continue to build our company on a solid foundation and core values.

In terms of our third quarter, on a consolidated basis, I believe that we responded very well to the challenges experienced in the third quarter, positioning us to meet our updated guidance. I'm really pleased with the global reductions of our all-in sustaining costs of over 9% compared to the first half of the year with Rainy improving by almost 16%, and I really want to thank everyone at New Gold for their continued effort.

At Rainy, I'm on Slide 10. Another quarter of nearly 150,000 tonnes per day mined, in line with our objective to achieve approximately $151,000 tonnes per day for the year. The mine is now, on average, 150,000 tonnes per day for over a year and is now well set for further optimization as we progress towards 2022.

It is now about redirecting our efforts in 2022 from ramping up and stabilization to continue to deliver volume but in a more optimized way, unlocking further opportunities for cost reductions, improved OAEs, all linked to our mobile maintenance capital program.

As originally planned, the mine executed on a much lower strip ratio of 1.83:1 in the quarter, in line with our objective to average approximately 2.7:1 for the year. So accordingly, we expect to remain at the low strip ratio in the fourth quarter.

The highlight of the quarter at Rainy was share around the negative grade reconciliation in the east slope part of the pit, forcing a revised production guidance. But September responded very well to our short-term adjusted grade approach for the zone, and our overall production was -- for the quarter was in line with our revised plan. With a much lower contribution from the east slope plan for the fourth quarter, we expect an increased grade in the fourth quarter over the 0.89 grams a tonne achieved in Q3, which was already approximately 10% higher than the first half of the year. In terms of grade control, we continue to see in-line reconciliations for zone outside of the east slope area, reconfirming our confidence when looking at our future production profile. The second RC drill arrived on site, and more drilling is taking place to continue to assess the east slope area in prep for 2022 production plan.

The mill averaged 25,245 tonnes per day, lower the same period of last year of 27,000 tonnes per day, mostly due to extended maintenance in the crushing area. But looking forward, I'm very confident that the mill will return to its permitted capacity of 27,000 tonnes a day. But also, I'm looking forward to seeing potential improved recovery as we continue to optimize the grinding, gravity and back-end circuits.

With completion of all deferred construction work in 2020, the mine achieved a reduction of sustaining capital in Q3 compared to the same period of 2020, contributing to lower all-in sustaining costs of $1,307 per gold equivalent versus the $1,469 achieved for the same period of 2020 but also a reduction of nearly 16% compared to the first half of the year. So we remain on track to meet our updated production and cost guidance.

The underground development of the Intrepid zone continues during the quarter with the objective to initiate long-haul stopping mining in late 2020 once the first long-haul panel is fully developed in waste and ore. We also continue to advance our optimized underground mine plan study that will potentially include additional conversion of underground mineral resources into mineral reserve, all located directly below the pit. The result of the study are expected to be released in the first quarter of 2022, along with our year-end Mineral Reserves and Mineral Resources update.

At New Afton, I'm on Slide 12. As a result of the delay in receiving the B3 permit in 2021, the contribution of tonnes mined from B3 zone was lower than originally planned, resulting in a lower tonnes mined compared to same period of 2020. Other contributor to lower tonnes mined included the limited mining capacity on the recovery level as the marketing activities continue in the remote mode following the event of last February.

As we complete 2021 and enter in 2022, our focus remains on, first, safe and efficient ramp-up of the B3 zone. This is really important to us as it will be the main contributors of 2022, a safe mining of the recovery level reserve prior transitioning to the in-pit tailings plan for 2022, so we don't leave anything behind us. And of course, the safe and efficient exhaustions of the east cave area. The overall grade for the quarter were comparable to the same period of 2020 as the grade mine from the east cave continued to perform super well in the quarter. But the middle recoveries at the mill were also comparable to slightly better for gold to the same period of 2020 despite an increase in supergene ore volume mill. The average of nearly 13,000 tonnes per day mill was lower compared to same period of last year but in line with our mining rates in the quarter and our plan to optimize metal recovery while processing higher volume of supergene ore.

So overall, we remain on track to meet our goal equivalent production guidance with an all-in sustaining costs expected to be in the higher end of the guidance range.

Our C-zone season underground development advanced by nearly 800 meters in the fourth quarter, and the thickened and amended tailings facility was nearly commissioning at the quarter end.

In terms of exploration, we had 6 more holes totaling nearly 3,900 meters that were completed in the quarter in the Cherry Creek Trend to explore for deep porphyry style system. The drilling program is expected to be completed by the end of the fourth quarter. Following the very encouraging and exciting results of our underground drilling program testing artificial intelligence target, more drilling were added and should also be completed by year-end, so really looking forward to our next exploration update to market in the first quarter of 2022.

This will complete the presentation portion of the call. So I would now hand it back to operator for the Q&A portion of the call. Operator?

(Operator Instructions) Your first question comes from Anita Soni from CIBC World Markets. Ms. Anita Soni?

Sorry, I didn't hear you. I was switching from the webcast to the phone. There was some delay in dialing in. I was just wondering in the - at Rainy River, did you give us any -- could you give us an update and some color on the amount of east slope material that you expect to see next year and perhaps into 2023, if there's any?

What I can say at this stage, Anita, is you would appreciate that we continue to assess and optimize our plan. But if you refer to the 43-101, and quite frankly, the plan remains like somewhat pretty similar, you have about 25% of the ore mine for '22 and '23, completion in the second half to '23 of the east slope area. So as we advance and complete, we'll -- yes. So we're obviously in our guidance early in 2022 and update all our plans, but this is what you could see so far as 43-101.

All right. And then secondly, could you comment on the inflationary pressures that you guys are, if any, that you're seeing and just give us some color on the magnitude, just overall, and then where are the sources of that in terms of labor, consumables...

Sure. There's no material inflationary pressures. We -- any sort of major capital items and components related to steel, et cetera were ordered and received pre this inflationary period, if you will. Ultimately, I think our inflationary pressures come down to access to maybe contractors, et cetera. And labor is within line, that 2% to 3% that we're seeing. So as it stands right now, we're not seeing any material impacts on our business related to inflation.

Your next question comes from Josh Wolfson from RBC.

Josh, you might be on mute.

Sorry about that. For the upcoming optimized mine plan at Rainy River, you mentioned looking at opportunities for upside for resource conversion. Is there any changes in sequencing that we should potentially expect? Or is there any ability to maybe incorporate some upside more near term rather than mine life extension?

The purpose of the study really is to create some sort of standalone underground mining, Josh, as we complete the stockpile that is currently 2028. So it's really a continuity because if you look at the current plan in the 43-101, we had already incorporated the top part of the center zone below the pit and the 42-101, together with the stockpile. So really, the study is a kind of continuity of the mining standalone (inaudible) with a continuity and just keep mining deeper in the central zone and on the Intrepid as already in the reserve.

So it's not so much about, as you say, unfortunately, in corporations at the early stage more than creating an extended life of mine beyond 2028. There will be some here-and-there opportunity, but the main purpose of the study is an extension of life of mine beyond 2028.

Got it. And when the initial east slope issues had come out, there were some discussion maybe of looking at mining some of that material underground. Is that something which could still make sense or that could be incorporated in this plan? Or is that not a priority right now?

It's not a priority right now. There is not much of the east slope in the open pit to complete in '22, '23. I think we were -- as I said previously, we're continuing to refine and optimize our plan as we advance towards '22. But at this stage, I think it's fair to say that it still makes more sense to catch it open pit and carry our underground plan as previously planned.

Got it. And when -- last question, when you're looking at year-end reserves, Rainy -- first off, I guess, what sort of price assumptions are you expecting to incorporate? And then how should we think about the impact of east slope as well as maybe some exploration efforts that have materialized this past year?

The -- we're looking at use of $1,400 for our reserve exercise at the year-end, and the exploration at Rainy is still somewhat at the early stage, so not expecting an impact from the exploration program of '21. But as we continue in '22 and '23 and so forth, we'll see and continue to hope for additional resources out of our exploration program, but this will not be the case for '21.

Got it. And then to understand the impact for east slope, is it fair to assume some loss of ounces just from that in depletion?

Very honestly, Josh, I mean, this is exactly the assessment that it's taking place. No, we're not -- we're decoupling completely -- first of all, we're decoupling completely the open pit from the underground. It's a different complete mining, as you know, an approach and in the mining the systems rather than on the volume in bulk. So it's a complete difference, so we're not mixing both here. And for the remaining ounces of slope, that's exactly the assessment we're doing with more drilling and RC and so forth, and we'll be prepping for our 2022 guidance but don't have all of the answer as we speak.

Your next question is from Dalton Baretto from Canaccord.

Sorry, I think I was on mute again. Can you hear me? It seems to be a theme on this call. My question is also on the east slope. I wanted to ask, do you understand exactly why you have a grade reconciliation issue at this point in time?

Well, the only thing I can say is for the benches that took place -- the mining that took place on benches in the Q3, I think it's fair to say that you're never exactly the right on the model reconciliation day-to-day every hours. But I think it's fair also to say that, unfortunately, for the Q3 period, the benches that took place, fortunately, the reconciliation compared to the resource models were showing less tonnes and ounces.

Now why is it like this? Is it just like a localized type of systems? It sometimes happen in some areas for a period of time, and then it switches. So globally, we've been doing extremely well over the last 3 years. All the other areas on a global basis continue to perform very well with the model. But with nearly -- if you look at our Q3, a big portion of the Q3 was really focused on mining in that specific area. So when you experience a negative reconciliation and most of your mine plan is from one specific area, it does highlight as a big variance, of course. If it would be more distributed over, in the year, you will have like more flexibilities and so forth.

So we really need to complete all this RC drilling to look at this on a global basis because there is nothing telling us that things cannot even shifted like as you go. So I've seen those localized situation in my career, and sometimes it's very localized over a few benches, sometimes a little more. But I think our model has responded very well globally. But unfortunately, that very far east area has just not responded well in terms of tonnes and grade. There is nothing really specific more to say. We just need to, at this stage, to continue to drill underneath and assess the remaining ounces and see how does that compare with the model. But it's a one resource model apply to across the deposit. And sometimes, you have a positive, sometimes negative. But if we follow effort on this one area, as we experienced in Q3, unfortunately, the variance hit us stronger. But let's see with the completion of the RC, and I'll definitely be in a better position as we complete the year and enter '22 to have all the specifics to that question.

Okay. And then maybe as a bigger-picture question, I wanted to ask you about M&A, pretty topical in the gold space right now. On the A side, on the acquisition side, are you seeing anything in the vicinity of Rainy River that could potentially complement the underground once the open pit is done? And then part B, on the M, merger side, if you were to consider a merger of equals, what would you look for in a partner?

Thanks for that very specific question on a Friday morning. I can answer the first one. I think the first one, when it comes to the vicinity, this is an exercise that it's a continuous like exercise for us to draw radius around our operations and always look for opportunities for resources that could eventually be. Unfortunately, at Rainy, I would qualify it like somewhat like not really advanced volume ounces type of stories. It's still more within our land package that we see the best opportunity. New Afton is a bit of a different situation, considering the very prolific areas and multiple opportunities and resources around the assets -- but Rainy. And I would keep my comments for myself when it comes to more specific merger. I mean, you understand that as we advance our focus now is really to deliver on our plan. We see our cash balance that would continue to improve over the years. We have the streams, and so I think we are extremely well equipped to provide eventually as we advance some growth opportunity to our shareholders, but I would not go any further than that. But thanks for asking.

Your next question comes from Mike Jalonen from Bank of Montreal.

Bank of Montreal? I don't even bank there. But still at Bank of America, 32 years. I'm actually drawn to Slide 13, your investment proposition. A couple of questions there. I noticed the 25% GOE growth 2020 versus '22-'26. By my math, that's about an average of 546,000 ounces for that period. Will that also be guidance for 2022?

This is really for the period, the period like going towards '26. If you look at our production profile at Rainy, you see a constant grade increase over the period of '20 to '26, so you have the C-zone that is coming at place. So as we advance for, let's say, this year towards '22, first step-up increase at Rainy and you continue to increase over the period going towards the '26 and you incorporate the C-zone to this, what we're seeing is in that to increase the 25% plus to our current situation. That's the way to look at it.

So the lowest deal would be '22, the highest would be '26 of that 5-year period?

The period of '24-'26, specifically '25, '26, very similar, if you will. But...

I'm asking because '22 is in the average. So that's why I was asking.

Yes. We're very close to year-end here, so we'll have a very comprehensive guidance. And as we complete the study for -- underground study for Rainy River and enter the year and complete our year-end reserve -- Mineral Reserves and Mineral Resources update, and eventually, we'll update as well our 43-101, so we'll re-provide a more specific detailed plan for the remaining life of mine.

Okay. Maybe going back to Dalton's question. on the foreign gold company, looking at Slide 13, I'm going, "All right. Palladium is gone. Oh, look, they're located in Canada, 100%. Wow, we should look at New Gold." So...

I appreciate your comment because we're definitely continue to work hard in positioning this company, and we definitely see a very interesting profile down the road. And as we improve the production, put the capital execution behind us and focus on harvesting of the C-zone, this company has a very interesting profile down the road. And in the right jurisdiction, and as you say, we're becoming more and more a rare commodities, if you will.

Your last question comes from John Tumazos from John Tumazos Very Independent Research.

How much of the full year CapEx is the capitalized stripping account in dollars? And could you talk a little bit about what normal CapEx might be in the next several years, please?

I just want to make sure that I got your question right, with the stripping, sorry. If you could, the first portion of the question could be [repeated].

How much of the CapEx is the capitalized stripping in dollars?

So if we look at Rainy, in particular, you have from the sustaining capital of year-to-date of $77 million, about 1/3 of it is around the capitalized item, just confirming that. A big portion is obviously the tailing -- the sustaining tailing construction, and the other part has a lot to do with the maintenance, the mobile maintenance and so forth.

So as we move forward, very important to re-highlight here that by the end of '23, the biggest part of the stripping will be completed. So that's it. Yes. It's about $29 million of capital is mining costs so far out of the $77 million for the 9 months. And as you advance in time, 2 things are going to happen. You're going to come to new year-after-year up to 2025 to complete the raise at the tailings every year, like we did this year, '22, '23 and with the last raise in '25. Your stripping exercise in the pit will be mostly completed at the end of 2023, as highlighted again in our SEC report. So that would be a further contributor to quite reductions in our sustaining. And as we deplete the pit as well and start operating with less equipment, you will have as well significant reductions on your mobile maintenance capital program.

So we're shooting this year towards like the $110 million. Next year, we have another phase, very similar to this year, as highlighted in our plan. And as you advance '23, '24, you'll start seeing and dropping the stripping and the maintenance cost and the tailings drop in '25 -- at the end of '25. So that's really the big contributor to the cost reductions as well as we increase our production. On a combined basis, it's a significant margin down the road for us.

Are there particular thresholds that the investors should look to for New Gold to have a dividend, for example, a particular level of debt reduction or the Rainy transition to underground when the capital needs will be less?

Yes. The -- to be answered as we advance. I mean, we've received that question quite a bit. When you look at our presentation and in cash building on our cash balance as we advance at the current metal prices, you could be in excess of the $1 billion of free cash flow generated over the next '22-'26 period. And as you know, we also have the streams and other, and we are cash positioned. So yes, we will be building. I think it's important that we keep in mind as well the importance of the growth component in our company as well. So we're not in a position now to answer this with specificity what's going to exactly happen and how this cash balance will be used towards like gross debt repayments and dividend and all that. This is all to come for us. The most important now is to deliver on our plan. And as we advance and build, we'll see strategically how this best use for our cash position.

There are no further questions at this time. You may please proceed.

Great. Thank you so much, and thanks again to everyone for joining us this morning. As always, should you have any additional questions, please don't hesitate to reach out to us by phone or e-mail. Have a great weekend.

Ladies and gentlemen, this concludes your conference call for today. We thank you very much for participating and ask that you please disconnect your lines.