New Gold (NGD) Q3 2020 Earnings Call Transcript

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New Gold (NGD -0.81%)
Q3 2020 Earnings Call
Nov 05, 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 third-quarter 2020 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.

Anne Day -- Vice President of Investor Relations

Thank you, operator, and good morning, everyone. We appreciate you joining us today for New Gold's third-quarter 2020 earnings conference call and webcast. We have with us today Renaud Adams, CEO; and Rob Chausse, CFO, who will present our Q3 operational and financial results. After the presentation has been completed, we will open the line for a brief Q&A period.

Before the team begins presentations today, 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 a 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 the forward statements.

Slide 2 and Slide 3 provide additional information that 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 presented are in U.S. dollars.

In addition, included in the presentation, there are a number of end notes that provide important information and should also 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 are extremely pleased with the significant turnaround that took place at New Gold in the first nine months of 2020, and in particular, with our overall performance and significant milestones achieved in the third quarter. With the restructured balance sheet and significant cash and liquidity on hand and a performing asset, we are now well positioned to enter our next phase of value creation. As per our third-quarter performance, during the quarter, we continued to work on implementing enhanced safety protocols with regards to COVID-19, including the use of rapid testing devices, and our operating asset remains COVID free at quarter end.

We're very pleased with our overall operational performance for the quarter and are tracking well to meet our revised consolidated annual guidance with AISC that are expected to be below guidance. The Rainy River Mine ramped up toward a 2021 target capacity of approximately 150,000 tonnes mined per day, and the mill delivered a record 27,000 tonnes per day, reaching the maximum monthly average throughput allowed under the existing mill permit. With both the mine and the mill operating at a capacity and the unit cost tracking toward a 2001 2021 planned level, the mine will now shift to unlock additional opportunities to further optimize in mine and mill productivity and unit cost performance that will drive strong free cash flow in '21 and beyond. The improved performance at our new Afton mine and currently, all team has been mobilized to advance all key projects, including the B3 and the C-Zone development, the Thickened and Amended Tailings constructions, the stabilization of the historic tailings facility and the detailed design work for C-Zone tailing storage facility.

And exploration drilling on the Cherry Creek target was recently launched with the overall objective of testing the potential of near-mine resources that could extend the mine life of New Afton and utilize existing infrastructure. During the quarter, the company completed the divestment of the Blackwater Project to Artemis Gold for total cash consideration, CAD 190 million. The initial cash payment of CAD 140 million was received during the quarter with the remaining CAD 50 million payment due on August 24th, 2021. Under the terms of the agreement with Artemis, the company retained an 8% gold stream and a 6% stake in Artemis -- equity stake in Artemis.

Under the current Artemis plan, the stream represents nearly up to 450,000 ounces of gold to be delivered to New Gold. The company also transferred approximately 90 million in letters of credit related to mine closure costs to surety bonds, increasing the funds available under the credit facility. Lastly, the company extended its secured credit facility with a syndicate of eight top-tier financial institutions. The facility will now mature on October 9, 2023, and has a new maximum borrowing limit of 350 million.

At the end of the quarter, the company has a healthy cash position of approximately 415 million and a strong liquidity position of approximately 720 million based on the amended credit facility. In short, quite a quarter for New Gold and its stakeholders and more to come. I will now hand it over to Rob Chausse, CFO, for a quick financial review of our third-quarter results. Rob?

Rob Chausse -- Chief Financial Officer

Thanks, Renaud, and good morning. Jumping into Slide 5, which provides our operating highlights for Q3 2020. The details are consistent with our October production press release. During the quarter, the company produced 115,500 gold equivalent ounces 115,536 gold equivalent ounces, so now consisted of 18.2 million pounds of copper, 63,000 ounces of gold from Rainy River and 15,955 gold ounces from New Afton, totaling 78,959 gold ounces.

The lower gold production as compared to the prior year quarter is primarily due to lower grades at both Rainy River and New Afton. The 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 costs for the quarter were $1,313 per equivalent ounce, in line with the prior year quarter. Turning to our financial results on Slide 6.

Third-quarter revenue from operations was 173.7 million, driven by sales of approximately 76,000 gold ounces at an average realized price of $1,613 per ounce and sales of 17.5 million pounds of copper at $2.99 per pound. Q3 revenue was 3% higher than the prior year quarter due to higher metal prices, partially offset by lower grades. Operating cash flow before working capital adjustments was $84 million or $0.12 per share for the quarter higher than the prior year quarter, primarily due to higher revenue and lower operating costs. The company recorded net earnings of 15.7 million or $0.02 per share during Q3 compared to a loss of $0.02 per share in Q3 '19.

After adjusting for certain charges, net earnings was 12.4 million or $0.02 per share in Q3 compared to a net loss of 10.2 million or $0.02 per share in the third quarter of '19. The difference was driven by higher revenue and lower operating cost in depreciation. Our Q3 adjusted earnings includes adjustments related to the previous announced Blackwater transaction, redemption of notes, the unrealized adjustments on gold price option contracts, the Rainy River stream, and our free cash flow royalty. Our MD&A has details on all of these non-GAAP measures.

Slide 7, capital expenditures. Slide provides a breakdown for our Q3 2020 capex. Our total sustaining capital and leases for the quarter was 46.1 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. Moving to the next slide on capital structure. Renaud touched on a couple of these items. But during the quarter, New Gold completed the $400 million senior notes offering, yielding 7.5% due in '27 along with cash on hand to fund the full redemption of the outstanding notes due in 2022.

The redemption was completed in Q3. And also during Q3, the company increased liquidity by $90 million by the transfer of reclamation bonding to surety bonds. Also in early Q4, the company extended its credit facility to '23. I would encourage you, if you want details on those various transactions, to look to our news releases on our website.

At September 30, again, we had approximately 416 million in cash and approximately $720 million in liquidity, as Renaud noted. With that, I'll turn the call back to Renaud.

Renaud Adams -- Chief Executive Officer

Thank you, Rob. I'm on Slide 10. New Gold is committed to the highest standards and procedures with regards to ESG. We have and will continue to execute using the best-in-class environment, social and governance principle, and in particular, with regards to the water and tailings management, the social commitment in working with our surrounding community while applying strong governance and accountability.

On Slide 11, as mentioned in my opening remarks, the Rainy River Mine is now well positioned to enter the next phase of value creation with strong free cash flow starting in 2021 and beyond. The mine and the mill productivity is now creating at capacity with the unit cost trending toward 2021 targets level, and all key capital projects substantially complete with some savings realized around the tailing construction. The production expected to achieve the mid-range of guidance with the operating expenses and cash costs at or below guidance as a result of lower cash cost realized in Q3. The sustaining capital expected at the low end of the guidance with an AISC below guidance due to the lower cost and capital spend with no capital expected to be pushed to 2021.

On Slide 12, I just want a quick stop here and point out the significant improvement we've done on both sides, on the technical side, but also on the unit cost, which really will drive -- the combination of both will drive the strong free cash flow for next year, starting next year. With the mine ramping up now to the 150,000 tonnes a day with the mill operating at a full capacity, equally important was to position the cost structure, and we're extremely pleased that the asset is now operating to the 2021 target. And quite frankly, with more upsides to come. On Slide 13, there remained a significant upside with regards to the reserve growth and extension of the underground life of mine.

There is approximately 1.7 million ounces of growth in the resource category in the underground, and the current plan contemplates to stop mining in 2028 once the stockpile on surface are exhausted. But this exercise was done at a gold price of $1,275 an ounce. And as we move forward and start looking at the higher gold price, we expect to yield at $1,400 gold price in our reserve of December 31st, 2020. We see significant upside and -- to recategorize some resources into reserve and extend the life of mine as we will turn the asset into a stand-alone underground asset.

So more to comment on this. Question, it's just a matter of time. Could we start converting this year? Is it something we would do toward more like mid-next year? It's a matter of time. We need to couple this with some sort of a stand-alone milling scenario, but we're well positioned to definitely look at the upside and hopefully extend the life of mine in the reserve at Rainy River.

We've also initiated or reinitiated the underground decline with about 150 meters out of the 550 meters toward the first Intrepid zone. The idea behind this is to really take 2021 to fine-tune our approach and long-hole method and be totally optimized as we would start mining underground in 2022. Just a quick note on Slide 14, and I'd like to point out in the third bullet, honest mistake, "was" should be "will be. " But we have received the permit to start drilling at the Rainy River.

And we are now in the last, perhaps and hopefully, we'll start drilling very soon with an 8,000 meters of the first Phase 1 drilling program. The first target is in the northeast of the current deposit, and we'll target two broader areas that has shown significant geochemical and the soil anomalies. More to come on this. Slide 15.

At New Afton, improved operational performance with more than 18 million pounds of copper produced in the third quarter. We are now on track to achieve the mid-range of the guidance with AISC expected to be at or below the revised guidance due to lower sustaining capital spend. The sustaining and growth capital are tracking to below guidance. I'd like to point out that the decision was made in Q3 to reallocate the development crew of the B3 to complete the access in the east cave recovery as we need it as well to secure strong operating results.

As a result of that, we're expecting up to potentially $10 million of sustaining capital to be pushed in 2021, but the B3 productions remain on schedule for H2 2022. And the C-Zone development, we had advanced the TAT project as well and thickener construction and other COVID 2019 delay. The thickener is being built currently in China. We originally thought we could advance more in Q4 of this year, but we are now potentially looking at up to $20 million gross capital to push to 2021, but it doesn't really change our expected schedule with regards to the C-Zone.

On Slide 16, just a few of the KPIs here. For 2020, definitely, the development underground was the key aspect of the C-Zone and B3 development. We're tracking extremely well with the C-Zone. We're actually ahead with only 500 meters remaining on our 2020 target.

As I mentioned before, we're trending slightly below with the B3, but Q4 and the Q1 next year, we'll be putting a lot of effort and we're more than comfortable that we would catch up and be in a strong position to commence the B3 zone in 2021 as planned. On Slide 17, the Cherry Creek Phase 1 drilling program was launched in late October with the 10,000 meters of drilling program plan as Phase 1. The Cherry Creek target represented 12 kilometers trends of prospective geochemical and geophysical anomalies located as close as 3 kilometers from our New Afton mill. There were a 45-line kilometers geophysical IP survey completed in 2019 combined with geochemical survey completed as well.

We felt extremely strong with those targets. There's a lot of work that's been compiled to date together with assessment of the geology, and the target is well positioned in the porphyry world. We see here a significant near-surface epithermal gold and porphyry copper potential. More to come, but now we have initiated the drilling, and we're going to be up to three drill and again, with a 10,000 meter targets for this year.

In closing, we have now turned a corner, definitely, turned a corner and are now entering a new profitable path. With an optimized balance sheet, coupled with significant remaining financial upsides from the divestment of the Blackwater asset, Rainy River Mine positioned for profitable operation and the C-Zone development supported by a self-funded approach, the company is definitely now well positioned for significant value creation as we look forward. This concludes the presentation portion of this call, and I will now turn it over to the operator for the Q&A portion. Operator?

Questions & Answers:

Operator

[Operator instructions] At this time, there are no questions. I will hand the call back to Anne Day for closing remarks.

Anne Day -- Vice President of Investor Relations

Thank you, operator, and thank you, everyone, for joining us today. As always, should you have any further questions, feel free to reach out, and we'd be happy to accommodate. Have a good day. Thank you.

Operator

[Operator signoff]

Duration: 21 minutes

Call participants:

Anne Day -- Vice President of Investor Relations

Renaud Adams -- Chief Executive Officer

Rob Chausse -- Chief Financial Officer

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