New Gold (NGD) Q2 2020 Earnings Call Transcript

New Gold (NGD)
Q2 2020 Earnings Call
Jul 30, 2020, 8:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by and welcome to the New Gold 2020 second-quarter earnings conference call. [Operator instructions] I would now like to hand the conference over to your speaker today, Anne Day, vice president of investor relations. Thank you. Please go ahead, ma'am.

Anne Day -- Vice President of Investor Relations

Thank you, operator. And good morning, everyone. We appreciate you joining us for New Gold second-quarter 2020 earnings conference call and webcast. We have with us today Renaud Adams, CEO; and Rob Chausse, CFO, who will present our Q2 operational and financial results.

After the presentations have been completed, we will open the lines for a brief Q&A period. Before the team begins the presentation today, we 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 presentations.

You are cautioned that 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. Please note that all amounts are presented in U.S.

dollars. In addition, included in 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 -- Chief Executive Officer

Thank you, Anne. And thank you, all, for joining us today. We're extremely pleased with our overall operational and financial performance in this unprecedented quarter, a quarter that included enormous challenges presented by COVID-19 but also a quarter that would be remembered for its significant achievement. While positioning the safety of our employees and our key partners as our priority number one, we were able to report strong operational performance.

During the quarter, the company has been able to execute enormous key strategic opportunities, including the closing of the $300 million partnership with the Ontario Teachers' Pension Plan, the divestment of the Blackwater project for CAD 190 million cash and an 8% Gold Stream, and the restructuring of our balance sheet through the $400 million bond offering due 2027 that funded the redemption of our senior notes due 2022. Over the balance of the year, our operations will return to pre-COVID level and will complete all non-recurring capital project at Rainy River and advance the development of the season as we position the company for free cash flow generation beginning in 2021.New Gold's future will be supported by profitable operation, a stronger balance sheet and as our current hedges expire at year-end, we will be fully exposed to gold price. I will now turn the call to Rob Chausse, CFO for a quick financial review of our second-quarter results. Rob?

Rob Chausse -- Chief Financial Officer

Thanks, Renaud. And good morning. Turning to Slide 5 which provides our operating highlights for Q2 2020, details are consistent with our July production press release. During the quarter, the company produced approximately 98,000 gold equivalent ounces.

The amount consisted of 16.9 million pounds of copper, 48,800 gold ounces from Rainy and 15,500 gold ounces from New Afton for a total of 64,294 gold ounces. Lower gold production as compared to the prior-year quarter is primarily due to lower grades at Rainy and New Afton. Our operating expense per equivalent ounce was higher than the prior-year quarter due to lower metal grades and lower sales volumes. Consolidated all-in sustaining cost for the quarter were 12.83 per equivalent ounce, 18% higher than the prior-year quarter due to the previously mentioned lower grades and also higher sustaining capital.

Turning to Slide 6 for our financial results. Second-quarter revenue from continuing operations was $128.5 million driven by sales of approximately 60,850 gold ounces at an average realized gold price of $1,560 per ounce, and sales of 15.3 million pounds of copper at $2.51 per pound. Q2 revenue was 17% lower than the prior-year quarter due to lower grades, partially offset by higher gold price. Our operating cash flow before working capital adjustments was $51.6 million or $0.08 per share for the quarter, lower than the prior-year quarter primarily due to lower grades.

The company recorded a net loss of $45.6 million or $0.07 per share during Q2, compared to a loss of $0.06 per share in Q2 2019. As a result of the previously announced transaction during Q2, our Blackwater asset was reclassified as held for sale as a result of $38 million unrealized impairment loss was recorded. After adjusting for the Blackwater impairment and other certain charges, net loss was $3.3 million or $0.00 per share in Q2, compared to a net loss of $7.2 million or $0.01 per share in the second quarter of 2019. Our Q2 adjusted earnings also includes adjustments related to the unrealized adjustments on our gold price option contracts, our Rainy River stream and the free cash flow royalty we recently entered into.

Our MD&A has details on these non-GAAP measures discussed here. Slide 7 shows our capital expenditures, breakdown of our capital expenditures for Q2 2020. Our sustaining capital and leases for the quarter was $41.1 million. Spend was primarily related to tailings work and Wick Drains at Rainy River and B3 mine development and advancement of the planned tailings dam raise at New Afton.

Growth capital was focused on project development at New Afton. Liquidity on Slide 9. During the quarter, New Gold completed a $400 million senior notes offering yielding 7.5% due in 2027 that was used along with cash on hand to fund the full redemption of the outstanding 6.25% senior notes due in 2022. The redemption was completed on July 10.

Please refer to the Company's June 24 and July 10 news releases for further information. As at June 30, we had approximately $700 million in cash, and approximately $965 million in liquidity. After adjusting for the bond redemption, which occurred post quarter end in July, the liquidity was approximately $560 million. And also taking into account the first payment related to the Blackwater transaction, which is expected to close in the near-term, liquidity is approximately $664 million pro forma.

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

Renaud Adams -- Chief Executive Officer

Thank you, Rob. I'm on Slide 10. Before I discuss some key aspect of each of our assets, I would like to make some quick comments around the management and permit. Recently and after few months of hard work in collaboration with Precision Biomonitoring, three COVID-19 rapid-testing devices were purchased and received at Rainy River with the purpose to significantly improve our capacity of screening and detection of potential infected people, and in particular when it comes to asymptomatic cases, which, obviously, are difficult to detect with only physical screening.

Only proactive testing would allow for rapid and timely and detection. The training and calibration of the unit is currently under way prior to rolling out for permanent use at Rainy River, but also potentially extended to surrounding communities and New Afton over time. On another note and as mentioned by Rob, a new goal is now well-positioned with sufficient liquidity of approximately $560 million to support operations during this crisis. On Slide 11.

We're extremely pleased with the outcome of the divestment of Blackwater, which marks a significant milestone in the repositioning of New Gold. The transaction further enhanced our balance sheet with total cash payment of can even CAD 190 million, while keeping a significant upside in the asset via a gold stream production and an equity position. The asset is now our core focus of the dedicated management team with a proven track record that would unlock its potential, which will greatly benefit New Gold shareholder. Current reserve at Blackwater stand at 8.2 million ounces of gold, which could represent a potential 460,000 ounces of gold delivered to New Gold via the gold stream over time.

On Slide 12. We're pleased to provide our revised 2020 outlook. The total estimated gold production of 284,000 to 304,000 ounces of gold combined with estimated copper production of 65 million to 85 million pounds of copper. Production estimates for the year at Rainy River has been lowered, mainly related to the impact of COVID-19 in the first half of this year, resulting in lower tons and slightly lower grade mill for the full year.

While at New Afton gold and copper production estimate for the full year had been lower mainly due to lower plan gold and copper grade. Coming more comments on the greater New Afton section of the presentation. The combined operating expenses and cash cost per gold equivalent ounce is estimated respectively at $780 to $860 and $830 to $910 per ounce for the year. The increase, which is minimal at Rainy River in operating expenses and cash costs on the per-gold-equivalent basis at both asset compared to original plan, were mainly due to lower sales resulting from lower estimated production.

The total capital for the year at Rainy River has increased by less than $10 million due to a portion of the tailings management area construction that was originally scheduled for completion in 2021 and our plan for completion in 2020. At New Afton, total capital estimate remain consistent with original estimates. On Slide 13. At Rainy River, the mine operations resume on April 3.

Focusing on the safety and well-being of our employees, local and partners against the transmission of COVID-19. By June, the mine had returned to pre-COVID performance while the mill perform at pre-COVID level from day one called suspension including successful execution of the planned shutdown. In particular, our team at Rainy River was able to safely ramp up the operation while delivering an excellent performance on cost with cash costs of $890 per gold equivalent ounce. The unit costs and cash costs year to date are trending lower than the original plan.

Finally our capital project are under way and expected to be completed in 2020 with an additional tailings at capital less than $10 million that has been brought forward from 2021. A total of $67 million has been spent to-date in sustaining capital over a revised guidance of $145 million to $160 million. It is expected that the capital execution will be more intense in the third quarter and will reduce in the fourth quarter. On Slide 14.

I'm very pleased with the operational performance achieved in the second quarter, considering that the challenge of ramping up the mine and mill operation posed a 14-day, self-imposed suspension in using a gradual and safer introduction of the non-local workforce. In particular, the mine return its pre-COVID daily rate of 140,000 tons per day in June and is now at range and is targeted 150,000 tons per day in July. The highlight of the quarter includes a lower head grade now, which was due to a higher proportion of the medium grade or tonnes processed due to the gradual ramp up in mine operation. The mill availability of 90% was in-line with plan, while the recovery of 89% was slightly ahead of plan, despite the lower grade process.

On Slide 15. I thought I would just provide some more colors around the mine plan and the execution to date as of the end of Q2, but also as we see it at the end versus the original plan. As you could see, the first half of the year, there was more mining taking place in the North Slope versus the East Slope. Now, I would like to clarify that the East Slope is the area of the pit that was some sort of controlling higher grade in the second half of the year.

Early in the year, there was some relocation of a power line that needed to take place in the east side and as we are executing the Wick draining with the COVID-19, there was a bit of a delay in the Wick Drain execution and limiting a bit the West overburden mining. But globally, the mine is planned to mine about 50 million tons or 55 million tons originally planned. We'll be well-positioned at year-end, we are now mining on the east side, but as a result of some delays, the East Slope will most likely end at the level of 290, about 40 meters above what was originally planned as level of 250 and as a result, some better grade from the East Slope will not be seen in 2020 and will be kind of postponed to 2021. But overall, it's, it's a very good execution with about 10% less tonnes for the year.

When considering all the impact for the first half as a result of the COVID, we're extremely pleased with the execution, even though the end result for 2020 is a slightly lower grade mine compared to original plan. On Slide 16. At New Afton, I'm extremely pleased as well to report that the mine reached a significant safety milestone, achieving three million person hours, lost-time, injury-free. Congratulations at the whole team at the New Afton.

The lower production reported for the quarter and year to date, mainly due to lower gold and copper grades from the East and West Gate. The lower grade expected, as well as over the balance of 2020. The mine delivered an excellent performance on costs with cash costs of $644 per gold equivalent ounce. The unit cost and the cash cost year to date trending lower than the original plan.

Finally, while capital project were slightly delayed in the first half of the year, it is expected that all project initially planned will be completed during the second half, an aggressive but absolutely achievable task. On Slide 17. The overall mine and mill productivity is slightly lower than prior quarter due to a lower availability resulting from mine and mill maintenance shutdown with the original completion date expanded due to the COVID-19 safety protocols. The overall mill availability was lower at 92% as a result of that in the quarter.

I'm very pleased with the underground development of the B3 C-zone achieving a 1,253 meters in the quarter with approximately now 95% of the planned levels realize in the year to date. The recoveries remain in line with our original plan despite the lower grades. And on Slide 18, about the lower grades. This is a quick snapshot comparing the plan in the first half of 2020 with the actual.

As you could see in 2020, it's some sort of the cocktail that mix as you know the extraction from the blockade, some areas of rehabilitation that are as we rehabilitate, included in the execution; some pillars as well recovery and one area in the East Gates called the recovery. So the blending of all this sources formed the plan of 2020. To the right, you see the actual and as you could appreciate in some areas like in the East Cave Line 41 we have suffered more dilution and plan resulting in the lower grade but in another area we have benefited at a better rate. The West execution and the East Cave recovery level we're at the lower productivities limiting some access as well to better grade.

So in the global, while we are experiencing some higher dilution, resulting in a lower grade in some areas we have also benefited in. On the West Gate, for example, where we benefited a much better grade. Moving forward to the end of the year and based on the current texture in the mine, we've taken the approach that the lower grade will remain to the end of the year. But we are currently absolutely actively engaged improving the situation and as we move forward of course, improving our productivities as on the East Cave recovery for instance, the pillars recovery, while we are assessing and hopefully improving the dilution situation and some in the area.

So in closing, a lot has been said and done since the launch of our repositioning strategy in late 2018. The Rainy River Mine is not performing at design and planned criteria. And as we complete our capital execution in 2020, the mine will be positioned and poised for a bright future and short-term high free cash flow generation starting in 2020 as our gold hedge it down at the end of 2020 combined with projected increase productions and lower cost at Rainy. The New Afton ceded allotment is well under way with absolutely continued focus on delivering a self-funded execution.

With the restructure balance sheet, proper runway on our long-term debt, cash on hand and significant liquidity, we are now well-positioned to enter our next phase of value creation. This conclude the presentation portion of the call. I will now turn it over to the operator for the Q&A portion of the call. Operator?

Questions & Answers:

Operator

[Operator instructions] And your first question comes from the line of Nick Jarmoszuk of Stifel.

Nick Jarmoszuk -- Stifel Financial Corp. -- Analyst

[Technical difficulty] maybe you could talk about how you guys think about free cash flow generation and its application to either paying down debt and the exploration opportunities at Rainy River/New Afton.

Renaud Adams -- Chief Executive Officer

Yeah. Let's start with the exploration. I can tell you that we're absolutely excited and ready to go. I think at this stage, it's a matter of a permit completion.

We do acknowledge and understand that in BC, there has been some prior to giving to permitting operating operations and others. I think it's a matter of time. But we have an excellent project ready to go, a program ready to go at New Afton and as soon as we receive the permit, we'll be significantly engaged in completing this drilling and unlock the value. In drilling this exploration you have to drill to figure it out, but we're very excited with the quality of the target in New Afton.

At Rainy River, we're also ready to go in the Northeast exploration program, but as well, we are waiting for some permitting there, which most likely will be in this year. I wouldn't term our free cash flow. I mean, this is the opportunity here. Rainy River is well-positioned.

We know our cost will be way lower in 2021. We're fully exposed to gold price. We continue to focus on executing a self-funded approach at the New Afton while we'll be benefiting and unlocking the free cash flow. I can pass it to Rob.

If you had any extra comment there?

Rob Chausse -- Chief Financial Officer

Yeah. I think with existing cash we are going to look to reduce our debt in the near term. And then, as we generate free cash, we'll continue to look at debt reduction along with other opportunities. But for here now, I think we're looking at the near-term debt reduction and then moving forward, we'll let the market dictate how we approach our balance sheet.

Nick Jarmoszuk -- Stifel Financial Corp. -- Analyst

Do you have a target for how much debt you would like to pay down?

Rob Chausse -- Chief Financial Officer

Yeah. We're looking to take down about $200 million in the near term and that would come from our existing liquidity and leave us with a very strong liquidity balance after that.

Nick Jarmoszuk -- Stifel Financial Corp. -- Analyst

OK, thank you.

Renaud Adams -- Chief Executive Officer

In our program of exploration, if we were to execute, let's say starting tomorrow, I think we'll be capable to probably execute our toward maybe the $10 million in the second half. And of course it depends on the results, but we intend starting as soon as we get the permit including in 2021 to have exploration and drilling the significant part of our organic growth.

Nick Jarmoszuk -- Stifel Financial Corp. -- Analyst

That's great. Thank you.

Renaud Adams -- Chief Executive Officer

Thank you.

Rob Chausse -- Chief Financial Officer

Thanks.

Operator

Your next question comes from Lee Halla of Scotiabank.

Lee Halla -- Scotiabank -- Analyst

Yes. Hi. Sorry. Actually my question just got answered.

Renaud Adams -- Chief Executive Officer

OK. Thanks, Lee. I thought we couldn't hear you. We are panicking a bit.

Thank you.

Lee Halla -- Scotiabank -- Analyst

Thanks, everyone.

Renaud Adams -- Chief Executive Officer

Thanks.

Operator

[Operator instructions] We have a question from a newcomer. Please state your name and company followed by your question.

Matt Fields -- Bank of America Merrill Lynch -- Analyst

Oh, hey, this is Matt Fields from Bank of America. I'm sorry, I jumped on late. I might not have heard it. In the recent bond deal, you said that you would be looking to take out, redeem $200 million of 2025 notes later in the year presumably when you've got proceeds from the Blackwater sale.

Is that still your intention to redeem $200 million of that issue? And apologies, if someone has asked this already.

Rob Chausse -- Chief Financial Officer

No worries. Yes, that's still our intention and we'll take a measured approach. But, yes, the $200 million is definitely our target.

Matt Fields -- Bank of America Merrill Lynch -- Analyst

And the timing is still this year?

Rob Chausse -- Chief Financial Officer

Yes, I would expect to happen this year. Yes, near-term.

Matt Fields -- Bank of America Merrill Lynch -- Analyst

OK, thanks very much.

Rob Chausse -- Chief Financial Officer

Thank you.

Operator

And at this time there are no further questioners in queue. I would like to turn the call back over to Ms. Anne Day.

Anne Day -- Vice President of Investor Relations

Thank you, operator. And thank you, everyone, for joining us today. I appreciate your time. If you have any further questions please contact me.

I would be happy to help. Thanks very much. Bye-bye.

Renaud Adams -- Chief Executive Officer

Thanks.

Operator

[Operator signoff]

Duration: 28 minutes

Call participants:

Anne Day -- Vice President of Investor Relations

Renaud Adams -- Chief Executive Officer

Rob Chausse -- Chief Financial Officer

Nick Jarmoszuk -- Stifel Financial Corp. -- Analyst

Lee Halla -- Scotiabank -- Analyst

Matt Fields -- Bank of America Merrill Lynch -- Analyst

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