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New Gold Inc. (NYSEMKT:NGD)
Q2 2019 Earnings Call
Aug. 1, 2019, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, and welcome to the New Gold Second Quarter Results Conference Call and Webcast. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. To ask a question during this time, simply press * then the number 1 on your telephone keypad. To withdraw your question, press the # key. Thank you. I will now turn the call over to Anne Day. Please go ahead.

Anne Day -- Vice President, Investor Relations

Thank you, Operator, and good morning, everyone. We appreciate you joining us today for New Gold's Second Quarter 2019 Earnings Conference Call and Webcast. On the line today, we have Renaud Adams, President and CEO; and Rob Chausse, CFO. Other members of the management team have also joined us and will be available during the Q&A period at the end of the call. Should you wish to follow along with the webcast, please sign in from our homepage at newgold.com.

Before the team begins the presentation, I would like to direct your attention to our cautionary language related to forward-looking statements found in 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.

Slide two provides 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.

Please note that all amounts are presented in U.S. dollars. 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 Renaud Adams.

Renaud Adams -- President and Chief Executive Officer

Thank you, Anne, and thank you all for joining us today. So, let me start by saying how pleased I am with the progress realized today at each of our assets. Rainy River is now well positioned to deliver on its 2019 objective. The milling facility has now reached and exceeded its design criteria, while mining activities are now ramping up. We have now received all the construction permits, and the construction activities are expected to ramp up in the second half of the year, at the time where the operation is performing extremely well.

The New Afton Mine continues to deliver strong operational performance, while efforts are now deployed in developing our future. We continue to evaluate potential new scenarios at Blackwater, while we focus on increased grade, lower strip ratio, and reduced capital requirements.

A special thanks to our team in Mexico, as we continue to deliver on our environmental, social, and closure obligations. We have maintained a disciplined approach and preserved our liquidity, as we now enter a more aggressive capital execution in the second part of the year. We continue to advance our strategic long-term plans at Rainy and the New Afton Mine, with the objective to enhance our long term outlook and improve our cash flow generation over the next years to come.

Lastly, as part of normal business, we continue to assess our financial requirements, including our liquidity needs and debt obligation. As we have mentioned many times since the new management has joined the company, we are in the process of repositioning the company for longer-term success, with a focus on enhancing our per share valuation. As part of that, a number of options are being considered. I will give a more detailed overview of each of the assets, but for the time now, I'm going to ask Rob Chausse, CFO, to address our Q2 financial highlights.

Rob Chausse -- Chief Financial Officer

Thanks, Renaud, and good morning. With details that are consistent with our early July production press release, slide five provides our operating highlights. Also, data discussed today is on a continuing ops basis, and all dollar amounts are U.S. dollars.

During Q2, the company produced 132,500 gold equivalent ounces. The amount consisted of 21.6 million pounds of copper, 66,000 gold ounces from Rainy River, 19,000 gold ounces from New Afton, for a total of 85,200 gold ounces. Higher gold production as compared to the prior year quarter is primarily due to higher productivity at Rainy River.

Our operating expense per equivalent ounce was 7% higher than the prior year quarter, due to an increase in the operating waste tonnes mined during Q2 2019 at Rainy. All-in sustaining costs at Rainy River and New Afton for the quarter were $1,314.00 per equivalent ounce and $711.00 per equivalent ounce respectively, both in line with Q2 of last year. Consolidated all-in sustaining costs for the quarter were $1,087.00 per equivalent ounce, also in line with the prior year quarter.

Turning to our financial results on slide six, second quarter revenue from continuing operations was $155 million, driven by sales of approximately 84,000 gold ounces at an average realized gold price of $1,304.00 per ounce, and sales of 18.3 million pounds of copper at $2.74 per pound.

Our Q2 revenue was 2% higher than the prior year quarter, due to production increases related to the ramp-up at Rainy River, partially offset by lower copper sales. Our operating cash flow before working capital adjustments was $60.3 million, or $0.10 per share for the quarter, lower than the prior year quarter, primarily due to the higher strip at Rainy River during the current quarter.

The company recorded a net loss from continuing operations of $35.7 million or $0.06 per share during Q2, compared to a net loss of $0.54 per share in Q2 2018. The prior year quarter included impairment charges. After adjusting for certain charges, net loss was $7.2 million or $0.01 per share in Q2, compared to a net loss of $10.8 million or $0.02 per share in the second quarter of 2018. Our Q2 adjusted earnings includes adjustments related to other gains and losses, including the unrealized loss on our gold price option contracts. Our MD&A contains additional details on the non-GAAP measures and other data that I've discussed.

Slide seven provides a breakdown of our Q2 2019 capex. Our total sustaining capital for the quarter was $36.9 million. Spend was primarily related to the tailings work and purchases of mobile equipment. Growth capital was focused on project development at our operations.

Slide eight on liquidity. As of June 30, 2019, we had approximately $110 million in cash and approximately $395 million in available liquidity. Another item of note is that in the second quarter of 2019, the company entered into additional gold price option contracts by purchasing put options at an average strike price of $1,300 per ounce and selling call options at an average strike price ranging from $1,355.00 per ounce to $1,415.00 per ounce, for a total of 168,000 ounces of gold production for 2020. Lastly, we continue to expect to meet our previously issued guidance.

And with that, I'll pass the call back to Renaud.

Renaud Adams -- President and Chief Executive Officer

Thank you, Rob. I'm now on slide number 10. We are extremely excited with the progress today at Rainy, as we continue to access, fix, de-risk, and position the asset for sustainable and profitable mining. We have managed to deliver on our production and cash cost to date, and we are well-positioned and on track to meet our annual guidance.

In June, the milling facility reached and exceeded its operational objective in terms of throughput recovery, while the facility was positioned to deliver on its overall availability objective during the second half of the year. Unfortunately, the milling operations were stopped for 10 days due to water buildup in the tailing facility, which has been previously disclosed and well documented. During the 10-day shutdown, we have made use of most of the downtime and have performed significant repair, plant maintenance, and corrective action. As a result, the mill is now extremely well positioned to deliver on its objective of full throughput and availability. And while we have shut down the mill for 10 days, we have managed to deliver on our projects and objectives.

In terms of capital expenditure, our sustaining capital spend to date was below the prorated guidance of $210 million to $230 million sustaining capital for the year, which explains the lower all-in sustaining costs to date versus guidance. In the second half of the year, our sustaining capital execution will ramp up, as we plan to substantially complete the remaining construction projects, including tailing dam raise water treatment; mobile maintenance and warehouse facilities; wick drains at the waste dump; equipment, and others. We remain on track on achieving our all-in sustaining costs guidance for the year, while delivering on our capital project.

On slide 11, as previously mentioned, the highlight of the quarter was the performance of the mill, which reached and exceeded its operational objective. We now consider the milling facility in position to operate at the targeted level in terms of throughput recovery and availability. We have just completed the SAG mill reline with the new configuration, which could support extra throughput down the road.

You could appreciate, on the top right corner, the performance of the mill since the start of the year. This is a great recovery model. As you could see, the sensitivity to grade is very important, but the performance to date shows that the potential of maintaining the recovery at or above the 90% mark at the grade as low as one grams a tonne. Further improvement down the road will include the gravity circuit commissioning, the pebble crusher commissioning, and further cost reductions in the future.

On slide number 12, in term of mining, the highlight for the quarter includes the planned shutdown of the shovel PC8000 for 25 days. So, basically, we've managed to reproduce the same mining grade as the first quarter, but with two-thirds of the shovel capacity for 25 days. The Phase 1 mining was delayed and the Phase 2 was prioritized due to the lower drill availability, some water in the pit, and the planned PC8000 shutdown.

The removal of the overburden was also prioritized, which required an in-pit rehandling of waste rock in the presence of clay and an overburden. So, a lot of work was achieved in the second quarter with reduced capacity. But as we move forward in the second half of the year, the mining rate is expected to increase as we replace two inefficient drills by four new units, while we will continue to work on operational excellence and benefits from the wider benches in Phase 2. Also, cost reduction will now be considered a priority.

On slide 13, the resource model performance continued to be in line. We're extremely pleased with the excellent reconciliation between the grade controlled and the resource model with a gain on tonne and ounces, while the grade was in line with the resource model. We're going to continue, as we move forward, to improve on our dilution model and the segregation of the low-grade from the medium and the high-grade ore.

On slide 14, during the quarter, the company advanced a comprehensive mine optimization study focused on accelerating free cash flow generation, which includes a review of alternative scenarios to create a more profitable pit, with a focus on medium and high-grade, and elimination of lower margin ounces, which would reduce open pit waste and sustaining capital requirements. We'll benchmark the industry best practices in mining and milling to reduce our costs, optimizing the mine plan by decoupling construction rock needs from mining operation. We'll use the milling capacity -- excess capacity to process the tonnes from the stockpile during the open pit mine life. A review of alternative underground scenarios to further enhance profitability, including reducing overall underground development requirements, and updated life of mine is anticipated to be completed in the fourth quarter.

On slide 15, in late June, this site performed two site tours. And you can find in our website a very detailed presentation on Rainy River, which include operational detail and looking forward information regarding our long-term and new plan. Just as a reference on the slide 15, we're showing what could be potentially a new picture. You can see from the current Phase 3 compared to the potential medium-grade and high-grade shelf, a significant reduction of the total tonnes to mine, which is really focused on eliminating more waste while maintaining and recovering most of the medium and high-grade ounces.

A little more detail on slide 16 shows even more obvious the difference between the current pit shelf and what could be an optimized pit shelf. So basically, we continue to recover most of the medium and high-grade mulch, and not chasing any more of the lower grade, reducing significantly the waste, which will have a big impact on the sustaining capital down the road, as we all know how expensive it is to dispose the waste at Rainy River. The no chasing of the low-grade ounces would also have a reduction in the total needs for a tailings requirement down the road.

On slide 17, we're just showing a quick snapshot, as we continue to improve our potential design for the underground. On the top corner, you can see the current plan as of the recent lastly 2018 technical report. Our focus now is to eliminate as much as we can, as all the development requires, again, to chase what we consider to be too much lower grade. Our new plan now will incorporate shorter ramp, less development, while we will continue to focus on better ounces.

And on slide 18, you could appreciate that a much higher cut-off grade, we continue to benefit significant continuity for the underground operation. Again, more details to come, as we perform and unlock the best scenario for Rainy River down the road, and again, with the new life of mine plan for the fourth quarter of this year.

In terms of exploration, on slide 19, the drill testing for potential repeat of the mineralized lenses north of Intrepid ore body commenced at the end of May, with four core holes totaling 2,500 meters completed at the end of the quarter. The assay results are expected early August and will then be assessed to define the follow-up drilling plan. The drilling activity will pause during the bird nesting season and restart during the second half of August to continue through Q3 and assessment of the result in Q4. Exploration activity during the bird nesting will shift to regional exploration reconnaissance with the Rainy River Northeast trend, on a 15 kilometers of prospective geochemical and geophysical anomaly along major scale fault zone, with the objective to define a drill-ready target by yearend.

On slide 20, another solid operational performance from the New Afton Mine in terms of metal production, and operating expenses, and cash costs. New Afton is well positioned to deliver on its annual guidance. Like Rainy River, New Afton Mine's sustaining capital from the first half of the year was slightly below the prorated capital guidance for the year, and we are expecting to ramp up on our activities in the second part of the year. The growth capital is also expected to increase in the second half as we advance in the C-zone development and the thickened and amended tailings scheduled payments.

On slide 21, and again in late May, the site performed two site tours. And you could find on our website a very detailed presentation on New Afton. We continue to advance our 2019 strategic review, with the objective to deliver an updated mine plan in the fourth quarter of this year or potentially the Q1 2020, should SLC zone resources be included. The new mine plan will focus on an update on capex and opex, permitting schedule, detailed plan for tailing disposal, and stabilization of current and old tailings.

In terms of exploration, on slide 23 and 24, the SLC infill drilling to upgrade the resources inventory to measured and indicated category and updated resource estimate is not complete. The D-zone exploration drilling to define potential down plunge extension of the C-zone resource is ongoing and expected to be finalized at the end of the third quarter.

The regional exploration at Cherry Creek trend target commenced with a geochemical and geophysical IP survey completed in July. The first pass reconnaissance of exploration drilling expected to start in late September or early October, once the permit has been received. Looking forward to seeing the first results of the drilling campaign in the fourth quarter of this year.

In slide 24, on the Blackwater, we have now received the federal and provincial EA on the full-scale project. We continue reevaluating the project size, while we focus on a higher grade, while maintaining a low strip ratio and lower initial capital. The objective of this exercise is to find a scenario that would enhance the project, that would show potential improved return at an average gold price not exceeding $1,300.00 an ounce.

In closing, I would like to thank all our employees, partners, First Nation Indigenous partners, and Board of Directors for their continued support and hard work as we continue to deliver on our 2019 objective and long-term plan at each of our assets. I'm extremely pleased with the project -- sorry. I'm extremely pleased with all the realization today, and I'm really looking forward to a very successful 2019 and beyond.

I will now ask the operator to initiate the Q&A portion of the call. Operator?

Questions and Answers:

Operator

Thank you. As a reminder, if you'd like to ask a question, press * then the number 1 on your telephone keypad. And your first comes from Nick Jarmoszuk of Stifel.

Nick Jarmoszuk -- Stifel -- Analyst

Hi, good morning. Question for you on the recent run in the equity and potential strengthening of the balance sheet. Any thoughts on issuing equity to fund some of the cash burn and sustaining capex for the second half of the year?

Rob Chausse -- Chief Financial Officer

We continually assess all of our financial requirements, obviously including capital and balance sheet, debt, etc. So, as part of that, we will continue to look at all available options and assess day in and day out in it.

Nick Jarmoszuk -- Stifel -- Analyst

Okay. On slide eight, the third bullet there, can you talk about what you can do with the LCs to move them out of the credit facility?

Rob Chausse -- Chief Financial Officer

That's really about a couple of options, but one of them is moving them to a surety bond and handling them that way outside. Other options are obviously within the banking syndicate and having a separate LC align, but I think either of those -- of those two, I think the surety bonding is one of our more favorable routes.

Nick Jarmoszuk -- Stifel -- Analyst

And what would you estimate the collateral you'd have to post for the surety bonds would be?

Rob Chausse -- Chief Financial Officer

It would be similar to what we have in place now for the LC, but the Rainy asset, primarily.

Nick Jarmoszuk -- Stifel -- Analyst

So, you'd have to -- I'm a little confused there. So, would you have to post $115 million of collateral, or . . .

Rob Chausse -- Chief Financial Officer

Potentially. But I'm not sure because we haven't pushed that. We need our technical reports in place before we can get into any serious discussions on surety bonding. But that's the objective, to move to surety bonds with as little collateral as possible.

Nick Jarmoszuk -- Stifel -- Analyst

Okay. And then the bullet point before that, that optimization scenario, can you talk about where you are in the discussion process there and when you could have some sort of news for the market?

Rob Chausse -- Chief Financial Officer

Yeah. Again, the technical reports that are coming out of our sites within the next few months in the fourth quarter are really driving timing around that. So, I would suggest early next year to be some more momentum around -- or early to mid next year with more momentum around that effort around balance sheet strengthening.

Nick Jarmoszuk -- Stifel -- Analyst

Okay. And then, question for you on Rainy River. The gold grade has declined from 1Q to 2Q, but recoveries have improved. If we're looking at the 2019 estimates, it's suggesting that grade is gonna be declining in 3Q and 4Q. Also, the recoverability you're looking for, 90% to 92% -- should we anticipate recoveries dipping into the high 80s, or do you think you're gonna be able to maintain something in the 90s?

Renaud Adams -- President and Chief Executive Officer

We're pretty comfortable that we continue to improve, and we're pretty confident we will maintain our recovery at or above 90% through the remaining of the year.

Nick Jarmoszuk -- Stifel -- Analyst

Okay. That's all I have. Thank you.

Renaud Adams -- President and Chief Executive Officer

Thank you.

Operator

Once again, if you would like to ask a question, press *1. And your next question comes from Anita Soni of CIBC.

Anita Soni -- CIBC -- Analyst

Good morning, guys. Just a quick question on the grade profile going into the second half of the year. So, are you -- and this is at Rainy River. So, it's held up in the first half. Are you expecting that to revert more toward one gram per tonne, or is that going to continue on for a while?

Renaud Adams -- President and Chief Executive Officer

Yeah. We have guided 1.1, roughly 1.1 grams a tonne for the whole year. We've been maintaining above that mostly as the mining of the Phase 1. Phase 1 was not completed in the first quarter, and the first half will be completed in the second half. But absolutely, we definitely see the overall grade declining. Can we average slightly better than the 1.1 for the year? Yes, possibly. But yes, especially in the Q4, once the Phase 1 is depleted, we still could see a grade at or slightly below the one grams a tonne to average at or above the 1.1 for the year.

Anita Soni -- CIBC -- Analyst

And that's the source of the -- I guess, the cost increase, because you've maintained your cost guidance for the year and you're running well below that. So the grade decline would be --

Renaud Adams -- President and Chief Executive Officer

Yeah.

Anita Soni -- CIBC -- Analyst

Yes, OK. And then you also --

Renaud Adams -- President and Chief Executive Officer

Yes. We expect -- just to complete on that, you're absolutely right. But we definitely see an interesting opportunity to reduce our milling cost and G&A as we increase the throughput at the mill as well. So, that's going to definitely help the mining, as well as the mining ramp-up, with more will benefit as well the economy at scale. But you're right. So, at this stage, and we remain prudent and maintain our cash costs guidance.

Anita Soni -- CIBC -- Analyst

All right. And then, just a quick question on the hedges that you put on for 2020. Is that the extent of what you're gonna be hedging for the remainder -- or for next year, or is there any intention of putting anything else on?

Rob Chausse -- Chief Financial Officer

I think as far as gold, it's probably -- we don't have anything hedged with regards to copper or currency. But yeah, it's in and around 50%, or under 60% of our expected production. So, I don't expect us to add any more right now.

Anita Soni -- CIBC -- Analyst

All right. And then -- and am I understanding that right, that basically, it's capped in the first half of the year at, I mean, I guess a quarter of your production or half of the production in the first half of the year is capped at about $1,355.00?

Rob Chausse -- Chief Financial Officer

Yeah, so it's 12,000 ounces a month in the first half of the year, and then at $1,355.00, and it's 16,000 ounces a month in the second half of the year at $1,415.00.

Anita Soni -- CIBC -- Analyst

Okay. That's it for my questions. Thank you.

Renaud Adams -- President and Chief Executive Officer

Thank you.

Operator

Thank you. We have no further questions at this time. I will turn the call back over to Anne Day for any additional or closing remarks.

Anne Day -- Vice President, Investor Relations

Thank you, Operator, and thank you, everyone, for joining us today. Feel free to reach out if you have any further questions. Have a good day. Thank you.

Renaud Adams -- President and Chief Executive Officer

Thank you.

Operator

Thank you. This does conclude today's conference call. You may now disconnect.

Duration: 29 minutes

Call participants:

Anne Day -- Vice President, Investor Relations

Renaud Adams -- President and Chief Executive Officer

Rob Chausse -- Chief Financial Officer

Nick Jarmoszuk -- Stifel -- Analyst

Anita Soni -- CIBC -- Analyst

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