New Gold (NGD) Q4 2020 Earnings Call Transcript

New Gold (NGD 4.65%)
Q4 2020 Earnings Call
Feb 19, 2021, 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 fourth-quarter 2020 earnings conference call. [Operator instructions] It is now my pleasure to turn the call over to your speaker today, Ms. Anne Day. Ma'am, please go ahead.

Anne Day -- Vice President, Investor Relations

Thank you, operator, and good morning, everyone. Thanks for joining us today for New Gold's fourth-quarter earnings conference call and webcast. We have with us today Renaud Adams, CEO; and Rob Chausse, CFO. Rob will present our Q4 operational and financial results, followed by Renaud, who will discuss our operational 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, 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 2 and Slide 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 more important information and should be reviewed in conjunction with the material presented. I will now turn the call over to Rob Chausse.

Rob Chausse -- Chief Financial Officer

Thanks, Anne. Good morning. Renaud, did you want to open up with something?

Renaud Adams -- President and Chief Executive Officer

No, that's fine. Go ahead, Rob.

Rob Chausse -- Chief Financial Officer

OK. Good morning. Just jumping straight into Slide 5, which provides our operating highlights for Q4 and year-to-date, details are consistent with our January production press release. During Q4, the company produced 120,567 gold equivalent ounces.

The amount consisted of 18.5 million pounds of copper and 66,734 gold ounces from Rainy River and 16,362 gold ounces from New Afton, totaling 83,096 gold ounces. The higher gold production as compared to the prior year quarter is primarily due to higher grades at Rainy River and New Afton. Operating expense per equivalent ounce was lower than the prior year quarter due to production and higher production and sales volume. Consolidated all-in sustaining costs for the quarter were $1,491 per equivalent ounce, 20% lower than the prior year quarter, primarily due to lower sustaining capital at Rainy River.

Moving to Slide 6 and our financial results. Fourth quarter revenue was approximately $199 million driven by sales of approximately 86,500 gold ounces at an average realized price of $1,623 per ounce and sales of 17.5 million pounds of copper at $3.34 per pound. Q4 revenue was 43% higher than the prior year quarter due to higher metal prices and higher grades. Our operating cash flow before working capital adjustments was $95 million or $0.14 per share for the quarter, higher than the prior year quarter, primarily due to higher metal prices.

The company recorded a net loss of $21.1 million or $0.03 per share during Q4 compared to earnings of $0.00 per share in Q4 of 2019. After adjusting for other certain charges, net earnings was $27.9 million or $0.04 per share in the quarter compared to a net loss of $28 million or $0.04 per share in the fourth quarter of 2019. Difference is driven by higher revenue, lower operating cost and depreciation. Our Q4 adjusted earnings also includes adjustments related to the previously announced redemption of notes, unrealized adjustments on our gold price option contracts, Rainy River's stream mark-to-market and our New Afton free cash royalty.

Our MD&A has additional details on the non-GAAP measures discussed here. Moving to Slide 7, our capex. This slide provides a breakdown of our Q4 2020 capital expenditures. Our total sustaining capital and leases for the quarter was $69.2 million, and the spend was primarily related to tailings work and wick drains at Rainy River and B3 mine development and advancement of the tailing dams raised at New Afton.

Growth capital was focused on project development at New Afton. Slide 8 provides details of our capital structure. At December 31, 2020, we had approximately $185 million in cash and approximately $490 million in liquidity. During the fourth quarter, New Gold completed a $200 million redemption, with cash on hand of the outstanding 6.375% senior note due in 2025, leaving a balance of $100 million on those notes.

Also in early Q4, the company extended its credit facility to 2023. I would refer you to the company's press releases for further information on those specific transactions. Slide 9 provides our 2021 consolidated guidance. Renaud will provide details by operation, but on a consolidated basis, the company is expecting to produce between 440,000 and 490,000 equivalent gold ounces.

By metal, the estimated gold production range is 322,000 to 352,000 ounces, and the estimated copper production range is expected between 56 million and 66 million pounds. When compared to the prior year, production guidance includes an increase in production from Rainy River mine, offset by lower production at the New Afton mine. The consolidated cash costs are expected to be in line with the prior year, with lower costs from the Rainy River mine and higher from the New Afton mine. The all-in sustaining cost ranging between $1,230 and $1,330 per equivalent ounce are expected to decline as compared to the prior year primarily due to lower sustaining capital requirements at Rainy River.

Growth capital is expected to increase over the prior year primarily related to the New Afton C-zone project development and the Intrepid underground at Rainy River. With that, I'll turn the call back to Renaud.

Renaud Adams -- President and Chief Executive Officer

Thanks, Rob, and thank you, everyone, who's joining us today. I'm on Slide 11. And before I start, it's with a mixed feeling that I'm addressing you today. The year started on a tragic way at New Gold with the fatality that occurred at the New Afton mine.

And when I looked at the New Afton team, the New Afton family, I see a very, very strong group of people so committed to the health and safety and well-being, a favorable one working at the New Afton. And we've come along for operating the block cave at New Afton and delivered so much over the years, including tremendous milestone achieved in the health and safety. The mine ended the year with more than 3.6 million hours worked without LTI injuries. This represents over 1,050 days, significant milestone, reductions in every aspect of frequencies and an incident trending way below the Canadian industry.

And as a company, in general, we've reduced over 45% our overall frequencies and incidents. New Gold comes with a significant commitment. And as per the Slide 11, when you look at everything we do from the environment and social and our four main area of focus on the water tailings and climate and indigenous, this is all, in fact, at the end of the day, going back to one thing, it's our tremendous commitment to the health, safety, environment and well-being and everything that has an aspect of people in it. But the mine was hit on February 2 with a mud rush that occurred at the recovery level, resulting in a fatality.

And this hit the whole family of New Afton, family, in particular, and more families and the whole group of New Afton and New Gold. It hit hard because it hits you right in the middle of where it hurts the most, your core value and people. And with the same strength and solid foundations and commitments, we have to get back on our feet and move on and find a way to move on, understanding the tremendous hurt of an incident like a fatality like this. But it doesn't take away that we have been and will remain always focused on the health, safety and put our people first.

And we're going to learn from this accident. And as we've done in the past when it comes to adversity, we'll overcome and continue to move on, on our solid commitment. When I turn back as a CEO, and I said it's a mixed feeling, when I turn back and I look at 2020, I see only tremendous achievement in everything we did, in everything we do, the significant progress and turning and repositioning this company. And it started with the health and safety, as I said.

We've achieved significant milestones and continue to derisk in every single environmental aspect. We're positioning the mine for success. We've reduced our debt. We restructured our balance sheet, and we did so while we preserve a very healthy balance sheet in cash and liquidity, and we're moving forward in a very bright way.

It's mixed feelings because we've done so much. But yes, we started the year on a tragic way, and we have to bounce back. And it's always the fine line as we put our people first because we understand what it did and how it hurts. And as the CEO of this company, I could assure everyone that the New Afton Family has been and will remain extremely committed to the health and safety.

And with the same creativity that's been so part of the story of overcoming technical issues, we'll find a way to move on. I'm on Slide 12. When I look at Rainy River and I look back, 2020 was all about repositioning the mine and making sure, by the end of 2020, the mine will be positioned to enter 2021 at an increased production, reduced cost and free cash flow stream starting in '21 and for the remaining of the mine. This is how it's been designed.

So look at the result of 2020, achieved the high end of the gold equivalent production. Tremendous effort in controlling and reducing our unit costs resulted in a lower cash cost, but below the revised guidance. We've completed all the capital projects on the deferred constructions and now moving on to sustaining capital and what I would call the more regular sustaining moving forward. And we've done all this by advancing a little bit of 2021 as well and ended the year at the lower end of the sustaining capital, resulting in an AISC below the guidance.

Now as we're going to see moving forward, we're extremely well positioned now at Rainy, and we're looking at the future in a very, very bright way. On Slide 13, you could see how we've transformed the mine with two main focus, operational costs. And for the last two quarters, the mine to mill has been operating at a design of about 150,000 tonnes mine and 27,000 tonnes mill. And we've done so by also focusing on our unit costs and positioning the cost structure of the asset to compete or even better with the 43-101 assessment that we've made early in the year.

So if I move forward and I look at the Slide 14 and I look at our operational outlook for 2021, I see a tremendous improvement. And while we've made those assumptions in the 43-101 late in the year, and you're looking at the COVID situation, and we bounced back from it and repositioned the mine, 275,000 to 295,000 ounces equivalent, a significant reduction in cost, cash cost below the 800 and AISC at the midpoint, slightly below the $1,200 million an ounce equivalent, reduction of sustaining capital, this is a significant improvement over 2020, and this will bring a good margin and free cash flow. The first part of the year, I will see the mine in a higher strip ratio and a little bit of a lower grade as we continue our effort of stripping. But in the second half of the year, we should be back into Phase II and benefit better grade and lower strip ratio.

The mine will continue to operate on an average of about 151,000 tonnes all year around, but there would be a bit of a shift from higher stripping, lower grade to lower stripping and higher grade in the second half. The mill will be kept at its full capacity and will continue to improve on the recovery side. Very good upside is the underground mining. We've made a decision in 2020 to accelerate the development of the Intrepid Zone, originally planned for mining in '23.

And we'll spend the first part of 2021 really understanding and fine-tuning our block model and long haul mining method with the view that maybe we can accelerate the Intrepid Zone. And now that Intrepid is pretty much all within the reserve and will be part of the '22, '28 mine plan, there is an opportunity here to accelerate the Intrepid Zone. Capital projects, as I mentioned, mostly sustaining capital, tailings increase, capacity tailings and stripping and some basic maintenance on the main component, with the reductions of nearly 50% compared to previous year. On Slide 15, significant progress with regards to how do we bring back as many ounces as possible in the mine plan on the ground and potentially extend the life of the mine.

At the end of 2020, as you could see on the upper figure, the Intrepid Zone was basically all transferred back to reserve as a result of higher gold price used. So now we have basically the whole Intrepid Zone now back into the reserve and will be incorporated in the 2022-2028 mine plan, would provide better grade at the earlier stage than the current plan and may extend the life of the stockpile as we would be incorporating more underground during the period. Originally, Intrepid has only a small portion included in the current plan, but now we're moving the whole Intrepid into the reserve. And as you could see at the bottom right, there is still a significant amount of resources that are outside of the reserve, but within the reach of potentially being included in the mine plan, extending the life of mine beyond '28 as a stand-alone underground.

To do so, we'll be carrying in 2021 an economic study, looking at the feasibility of bringing back. And of course, with the milling scenario, that would be adjusted as a potential stand-alone underground. So more to come on this, but significant progress to date. Almost replaced the mining deflation of 2020 by operating Intrepid and a little bit around the open pit as well, but the big upside here is eventually to migrate back from resource to reserve a significant amount of ounces from underground in 2021.

On Slide 16, exploration continues at Rainy River. We've launched it in the fourth quarter. We have the first 4,000 meters that are complete and assay spending. And we intend to release before or late Q1 an exploration update, which we will be ramping up.

Our work will be wrapped up all the result today at Rainy River and will incorporate as well the New Afton. So more to come on the exploration front. I'm on Slide 17. OK.

So looking back at the New Afton in 2020, New Afton is engaged, of course, in the development and constructions of the B3 zone and the C-zone. And significant progress were made in 2020 and, first, achieving the midrange of our gold equivalent production. We've done so with the unit cost within our cash cost toward the lower end. We've advanced significantly the B3 zone.

And by the end of the end of 2020, we were well positioned to initiate the B3 zone in the first half of 2021, and this continued. On the growth capital side mostly around the C-zone development, we ended the year at 110% of the development. We were fully engaged in the construction of the Teck and amended tailing facilities by the end of '20, working hard on the stabilization as well. In short, we're now fully engaged on all front.

There was some capital that were deferred to 2021. But overall, at the end of '20, we were extremely well positioned to continue to deliver, with the view that 2021 is about getting B3 up to speed, initiate the B3 and ramp it up and be in position at the end of '20. So we enter 2022 with the B3 as a lead or source for New Afton as we continue to build on the C-zone. On Slide 18, while I will not talk of the detail of the accident, as the investigation continue at New Afton, I thought I would provide with the 3D sketch to better picture of where the incident occurred.

As you could see, the recovery zone is a very small zone sticking out at the bottom of the Lift 1 with quite a decoupling space with the B3 and the C-zone. And as a result, all activities in the B3 and C-zone has resumed with the view to initiate the B3 sequence in mining in the second quarter, while we complete the permitting and development to get ready. The C-zone as well, as you could see, even further down the development has resumed as well with the view to deliver on our capital plan in 2021. The Lift 1 located above is as well -- most of the area of the Lift 1, in fact, has no interactions with the recovery zone.

So as a general view, the recovery zone at this stage is in the remote marking, and the assumption is made that will remain remote marking for the rest of the year and, therefore, extend the remaining extraction of recovery zone and most likely in the first half of '22. And the Lift 1 will now be ramping up to over the next week toward the Q2, where we expect to be back in the pre-incident mining rate. On Slide 19, looking forward for New Afton in 2021. There is two aspects of it.

There is the operational, of course, and there is building the future. So on the mine plan, there was a revised mine plan that was released this morning. And basically, what is the mine plan about is obviously a limitation around the recovery level. So from the original thought of 2021, and as previously disclosed, the recovery level was expected to be more toward the 3,000, 4,000 tonnes a day.

And now with average, probably more around the 1,700 tonnes a day and, therefore, would extend next year. That would be basically replaced by some stockpile on surface as the Lift 1 will ramp back to what we expect to be the pre-incident mining rate at some point in Q2 and would represent about 60%, 65% of the tonne. And the plan to initiate B3 in the second quarter hasn't changed. A little bit of ramping up from the incident, of course, but B3 is expected to represent 20% to 25% of ore for the year.

In terms of capital projects, more sustaining this year as we complete the B3 development and put it in production. And on the growth capital side, it's all about C-zone increased capital because we're now engaged in all fronts, and we expect the C-zone to be significantly derisked by the end of 2021. On Slide 20, a lot of work has been done so far from the first phase of exploration on the Cherry Creek at the bottom right figure. We are awaiting a lot of assaying and interpretation pending.

And as I said, we should be in positioned to release an update exploration, a story by the end of the first quarter. We continue to work underground as well, but it's really from '22 when we have better angle from the ramp going down to C-zone that we'd be more actively looking for potential continuity of the C-zone and SLC at depth. Meanwhile, there is a bit of delineation taking place, but I think it's fair to say that the exploration program of 2021 will be mostly focused around the Cherry Creek area, with some underground picking up more in 2022. So more to come in our exploration update plan for late Q1.

On that, that will complete the most formal part of the call, and I'll pass it back to the operator for the Q&A session. Thank you.

Questions & Answers:

Operator

[Operator instructions] Your first question comes from Anita Soni from CIBC World Markets. Your line is open.

Anita Soni -- CIBC World Markets -- Analyst

Rob and Renaud, and I'm just wondering about the capital numbers that you've provided for both New Afton and Rainy River. There's quite a wide range, particularly on the New Afton. So can you just give me an understanding, like in what cases you would spend a lower amount, in what cases you would spend the higher amount? Like why is that range there?

Renaud Adams -- President and Chief Executive Officer

Well, you see like the capital project for New Afton is a four-year project, right, so as we experienced in 2020 at Rainy River, for instance, where we were in position to accelerate some '21, for instance. And so you look at the New Afton, generally speaking, we made our estimate based on average productivities and time line around, but because most of it is all about development, and there is always a possibility where you could improve on your performance and you want to do maybe more development or maybe you advance more stabilization than planned. And because those activities occur over four years, so you have a lot of room based on performance. And equally important, we're doing very well on the COVID as well.

We're case-free in New Afton and Rainy as we speak. But there are some aspect out there that sometimes you don't 100% control. So we feel comfortable with guidance being set in the mid-range of what we could achieve, but we have a bit of room should we better perform to increase some aspect as well. Rainy River is somewhat more focused on the tailings, so we have a good handle on that one.

Stripping-wise, looking at the gold price and so forth, so there's maybe a bit of flexibility around how we want to operate the pit as well. Maintenance-wise, depending how it goes is it can reaccelerate a bit some aspects. So I would say that, that would be the thinking behind, Anita. And again, if you look at our mid-range of capital, it's probably where we feel comfortable to achieve, but we have the proper room should be better perform or maybe something out there slowing us down a bit.

Anita Soni -- CIBC World Markets -- Analyst

Yes. I'm just wondering if capital allocation, an eye to sort of hitting that free cash flow inflection point, I think, as most people had expected this year was part of planning. Like do you really have any kind of focus on whether or not you go free cash flow negative? Or are you trying to maintain positive?

Renaud Adams -- President and Chief Executive Officer

It's all about the price you apply to it, but if you look at Rainy River today, beside the CAD 10 million, CAD 12 million of accelerating the Intrepid, you're in an AISC slightly below the 1,200. So it's a significant margin, right, and will bring a lot of free cash flow. And we have the second payment this year as well for Artemis then. So yes, we remain very confident that will be.

Again, we don't control the metal prices. We all know what's happening with the copper as well. New Afton is all about achieving a self-funded approach over the four years, no doubt. But globally, Anita and all, when I look at the current prices and the work we have to do at New Afton, can we be close to the neutral cash flow and benefit from the Rainy and the second payment? So definitely, we're targeting free cash flow this year.

Anita Soni -- CIBC World Markets -- Analyst

OK. And then another more technical question typical of me is just can you give us an idea of where your mining, milling, G&A costs are hitting for both of those assets.

Renaud Adams -- President and Chief Executive Officer

I don't have this handy right now, but I would say if you look at Rainy River, you're looking at our plan for the year, and you're looking at, for instance, the 43-101, where we have shown on a year-by-year basis. I would say it remains a very good reference when it comes to Rainy. New Afton is a bit of a different situation considering the new plan. So again, if you use the 43-101 reference on a year-by-year, yes, we would be unit cost higher as the current situation, but we should be back on our feet in 2022.

So I don't have the answer, but please refer to the 43-101.

Anita Soni -- CIBC World Markets -- Analyst

Sure. And then on the unit cost, as you mentioned for New Afton, would that be a little bit I noticed you said remote mucking. So I was increasing that by a little bit because it's only about 10%, 15%. And then also the processing side, looks like the processing rate is a little lower than what you were pushing last year.

So similarly, is it a little a little bit higher on that side if you took the ratio of...

Renaud Adams -- President and Chief Executive Officer

It's more on the unit, it's on a unit basis, right? So when you do a recovery zone at plan and remote mucking at 1,700 tonnes a day, when you were supposed to do manual mucking at 3,000, 4,000, there is an impact there. There is an impact, obviously, and a global incident and ramp-up and the impact of the downtime, of course, globally. But once you're back on your feet in term of, let's say, Lift 1 productivities in the second half, what we have planned for the B3 unit cost, again, all reference to 43-101, we still feel very strong. Fuel-wise, I think we could achieve better than originally planned.

So we'll be very close in some aspect. But unfortunately, we'll be impacted a bit on our unit cost for the underground as a result of what's happening there.

Anita Soni -- CIBC World Markets -- Analyst

And last question for me is the capital spend. Is there any kind of sort of weighting between the quarters that we should be aware of? Typically, people tend to underspend in Q1 and then really try to make it up in Q4. So I'm just curious if it's an even spread that you're looking at. Or is there obviously, New Afton things had to be pared back in Q1.

But outside of that, is there anything we should be aware of?

Renaud Adams -- President and Chief Executive Officer

No. I think our disclosure addresses well. And as you say, definitely, the second half New Afton will be stronger. And as we ramp up from the Q1, but Q1, Q2, but no, I think other than that, our disclosure is addressing, obviously, every aspect to guide of what's going happen there.

Anita Soni -- CIBC World Markets -- Analyst

Thank you.

Operator

[Operator instructions] Your next question comes from Mike Parkin from National Bank. Your line is open. 

Mike Parkin -- National Bank -- Analyst

Guys thanks for taking my questions. On Rainy, you're bumping up against the permit limit on your processing. As you're moving into the second half, you've indicated more favorable kind of mining scenario where you're into a lower strip and also better grades. Can you just give us an update there in terms of what you're thinking about in terms of the permit limit? Are you looking to get that revised? Any kind of details you can shed there?

Renaud Adams -- President and Chief Executive Officer

Of course, the conversation was somewhat initiated. If you look at from what we can peak, Mike, I mean, we can peak up to 32, right? And the average is 27. I'm not saying we're peaking 32 every day. Of course, it depends the hardness.

But generally speaking, we've been for two quarters in a row where you take a little more downtime to not surpass the 27, and then you have the life of mine attached to this as well. So expanding the mill capacity to, let's say, something that would be reducing the 20% between the peak and the average could be eventually possible. Very important is not shorting the life of mine and continue to do so in progress and expand as we also extend the life of mine. So this whole exercise in '21 is very important for us because it's about being more efficient, more profitable, but also continue to grow this enterprise in the region, which is very important to us and to everyone and all stakeholders, including the government.

So it's kind of linked to this whole exercise. There is maybe a conversation to be had to increase a bit, but it has to be well captured in all the effort of extending the life of mine as well and bring back more underground as well. And so we'll see where it goes. Second half of the year may be a stretch.

I think we want to fully understand potentially how this whole thing is going to reshape and then you go after the optimization of it. So it could be a more conversation in the second half, but I'm not expecting any increase of the milling capacity, if you will, permitted in '21. And we'll see how as we advance in the exercise. Does that deserve a '22 talking? Maybe.

Mike Parkin -- National Bank -- Analyst

OK. That's great. Thanks so much.

Operator

Thanks. Your next question comes from Mike Jalonen from Bank of America. Your line is open.

Mike Jalonen -- Bank of America Merrill Lynch -- Analyst

Rob and Renaud, I'm sure you noticed that IAMGOLD just sold a bunch of royalties for up to $47 million net of royalties in production and, obviously, have a stream on Blackwater, which is moving to production. I guess, Franco, they probably haven't forgotten your phone numbers, so just wondering what you're thinking on that stream. Is it something that'd be sold? Do you have buyers? Thanks.

Renaud Adams -- President and Chief Executive Officer

We're definitely not questioning ourselves if we could be a buyer out there without more specific. I think, definitely, as you look at the stream where we own on the Artemis, Blackwater in Canada, solid project on its way to be developed. And so we understand the interest. I think Rob and the team did an unbelievable job in 2020 to restructure this balance sheet of the company and maintaining cash, cash liquidity and so forth, with only $100 million to be repaid, if you will, the 425 and all that.

Basically, the whole long-term debt set in '27. So is there any need in the short term to monetize or no? And we sold Blackwater. We sold, if you will, a portion on all of our pipeline and retained very strategic stream on it and some equity and more payment this year. And as we move forward is it would be always a question for us, how do you build more value from those.

So of course, we have this very, very solid stream that you could eventually monetize and maybe, down the road, accelerate some debt repayment. But I would think the stream for us represents something more strategic than this. We work hard in repositioning this company and build on the free cash flow with no need to use this stream for any debt repayment. And if you ask me, I would say, we're very pleased to own it, and we're very pleased with the progress of Artemis, and we see the value increasing over time.

But my preference would be to not just sell for the sake of, even though there is some interest out there, but be a little more strategic about it.

Operator

I don't see any further questions at this time. I would like to turn the call over back to Anne.

Anne Day -- Vice President, Investor Relations

Thank you, operator. Thanks, everyone, for joining us today. As always, should you have any additional questions or require more information, please feel free to reach out. But that completes today's call.

Thanks again.

Operator

[Operator signoff]

Duration: 40 minutes

Call participants:

Anne Day -- Vice President, Investor Relations

Rob Chausse -- Chief Financial Officer

Renaud Adams -- President and Chief Executive Officer

Anita Soni -- CIBC World Markets -- Analyst

Mike Parkin -- National Bank -- Analyst

Mike Jalonen -- Bank of America Merrill Lynch -- Analyst

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