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When a company says it's planning to produce a million ounces of
gold a year within three years, my ears perk up. Such brazen statements are
either promotional hubris or real projections, and in the case of New Gold (NGD), it certainly tends
towards the latter. In 2008, New Gold exceeded its stated target of 250,000
ounces by 22,000 – a noteworthy accomplishment in view of the goal for
2014.
New
Gold, formed through a merger with Peak Gold and Metallica Resources in 2008,
benefits from the experience and expertise of the best minds from all three
companies. The board of directors is a who's who of the mining industry, with
eminent names like Pierre Lassonde of Franco Nevada and Ian Telfer of
Goldcorp (GG) teamed up to
oversee New Gold’s evolution into the big leagues.
Strategic
initiatives such as the $50 million buyback of secured debentures
characterize the studied stewardship of New Gold’s shareholders’
interest, and the company’s nimble approach to developing mines
economically while suspending unprofitable operations quickly add up to
indicate a lean and dynamic leadership. The buyback reduced the
company’s debt load to CA$142 million.
Robert
Gallagher’s 15 years as a Placer Dome executive and most recent 7 with
Newmont (NEM) have equipped him
perfectly for leading the combined company into its desired role as major
producer. The decision to temporarily suspend operations at the Ampari mine
in northern Brazil because of higher production costs associated with
elevated levels of sulphide ores in an oxide-optimized production circuit
demonstrates a commitment to economic efficiency that investors should find
reassuring.
In
a press release dated January 22nd, he said:
New
Gold exceeded production guidance for 2008 with excellent operational
performance at Peak Mines and Cerro San Pedro, despite challenging markets
and cost pressures. The company made some difficult decisions in 2008 in
response to the uncertain market conditions and took the necessary steps to
strengthen our financial position and ensure that we are well positioned to
deliver on our growth strategy and guidance for 2009.
New
Gold determined that it would be more cost-effective to process the remaining
oxide ore (including transition material) with the underlying sulphide
resource in a new process facility for which a Preliminary Economic
Assessment is being prepared. Ampari still contains an estimated 302,000
ounces of gold in the 43-101 compliant reserves category, and an additional
745,000 ounces in resource. Production will resume upon completion of the
newly installed processing circuit.
The
New Afton mine in British Columbia continues to advance towards a projected
startup date in the second half of 2012. In recognition of global economic
uncertainty, New Gold reduced its capital expenditure on the mine from $286
million down to $79 million for 2009, and will continue development of access
and infrastructure. New Afton continues to advance towards a projected
startup date in the second half of 2012 and contains over 1.63 million ounces
of gold in measured and indicated resources, 5.4 million ounces of silver,
and 1.48 billion pounds of copper.
New
Gold is forecasting 2009 gold production of between 190,000 and 210,000
ounces at a cash cost between $465 and $485 per ounce net of by-product
sales, which will represent a substantial improvement over 2008’s
average of $576 per ounce.
The
big wild card for New Gold in 2009 will be its treasury. The company has
roughly $220 million cash ($250 M at Sept 30 2008 - $30 M to pay off $50M in
debt), though it is probably more than that after a very good Q4. Cash is
worth a lot right now. They are one of the big sharks in the pond searching
for junior producers – or those with the immediate potential to produce
– 100K-200K oz per year. (This is much the same strategy as the old
Peak Mines had.) Valuations for those companies have been slaughtered even
worse than New Gold’s.
The
key to a large valuation increase for New Gold (aside from a big increase in
the gold price) would be an accretive acquisition. This board of directors
has had some great success in M&A in the past – Pierre Lassonde of
Franco-Nevada and Newmont fame, and Ian Telfer of Wheaton River Minerals
fame. Paul Sweeney was a key man at Canico Resources, a Brazilian nickel play
that Vale (RIO) bought for
$20/share.
With
some operating success now under their belt, and a strong treasury, New Gold
has an opportunity to be one of the gold sector’s biggest winners in
2009.
Disclosure: James West holds no interest in New
Gold.
James West
www.midasletter.com
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