The New Face of New Gold

Call me an old-fashioned purist, but plastic surgery baffles me. In some circles, it's hard to find a face that hasn't been nipped, tucked, or Botoxed. In Vancouver, Canada, where you'll find more mining-company headquarters than liposuction clinics, one miner is undergoing an extensive facelift of its own.

Meet the new face of New Gold (AMEX: NGD  ) . This budding intermediate gold miner this week revealed a 41% increase in gold production for the fourth quarter of 2009, and record annual production of more than 301,000 ounces in 2009. Production costs continue to fall as volumes improve, shedding 17% in the fourth quarter to $462 per ounce after by-product credits. The company now forecasts robust 2010 production in the range of 330,000 to 360,000 ounces, for about $455 per ounce.

The first phase of New Gold's facelift consisted of a game-changing $1.6 billion business combination in 2008 with Metallica Resources (in which I owned shares) and Peak Gold. Through this move, New Gold launched itself from a promising junior with only one operating mine into a viable gold producer with three operating mines, plus solid cash flow prospects to fund further development. Of all the available vehicles for mining sector consolidation, I view such a merger-of-equals approach as the most intriguingly underutilized.

The next phase brought a merger with Western Goldfields in 2009, adding another producing gold mine: California's Mesquite mine. New Gold's Amapari mine was placed on care and maintenance in January 2009 to undergo a comprehensive strategic review, so the addition of Mesquite played an important role in maintaining the company's growth momentum.

With a trio of cash flow generators in place, New Gold's attention is now focused upon unlocking value from its core development projects at New Afton in British Columbia, and the 30%-owned El Morro project in Chile. Fools may recognize El Morro as the subject of a contentious battle between majors Barrick Gold (NYSE: ABX  ) and Goldcorp (NYSE: GG  ) over Xstrata's 70% stake in the project. Barrick has filed suit to block Goldcorp's back-door deal, but New Gold avows that the Barrick suit lacks merit.

Construction at New Afton is developing underground mine works, and production is forecast to commence in the second half of 2012. For context, Taseko Mines' (AMEX: TGB  ) nearby Prosperity project will commence around the same timeframe, but it's substantially larger in scale, and it boasts eight more years of projected mine life than New Afton.

Fools are encouraged to keep a close eye on recent developments in Mexico at the Cerro San Pedro mine, which is located in the vicinity of another consolidation battleground (where Goldcorp recently defended its home turf against encroachment by rival Newmont Mining (NYSE: NEM  ) ). Mining operations were momentarily halted in December following a challenge to the mine's environmental permits. Although New Gold quickly scored a temporary injunction to resume mining activity pending a series of hearings, the production outlook for this mine remains uncertain until these matters are fully resolved.

Once Cerro San Pedro receives the all-clear, I expect New Gold shares to resume their long-term growth trend, alongside continued demand for gold as a safe haven currency. While those matters remain pending, this Fool finds even more attractive investment options within the silver sector. The gold-to-silver ratio has once again spiked to more than 65 to 1, and primary silver producers like Coeur d'Alene Mines (NYSE: CDE  ) and Silver Wheaton (NYSE: SLW  ) present noteworthy opportunities at these levels.

Gold is a hot topic on the blogs at Motley Fool CAPS. Join the free service today, and see just how many Fools are taking the long view when it comes to investing in gold. The "Gold" tag at CAPS lists 47 potential investments, and you'll find Christopher's comments on most of them.

Fool contributor Christopher Barker can be found blogging actively and acting Foolishly in the CAPS community under the username TMFSinchiruna. He tweets. He owns shares of Coeur d'Alene Mines, New Gold, Silver Wheaton, and Taseko Mines. The Motley Fool has a gilded disclosure policy.


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