New Gold (NGD) Q2 2021 Earnings Call Transcript

New Gold (NGD)
Q2 2021 Earnings Call
Aug 11, 2021, 8:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning. My name is Sylvie, and I will be your conference operator today. Welcome to the New Gold's second-quarter 2021 earnings conference call. [Operator instructions] Please be advised that today's conference call and webcast is being recorded.

[Operator instructions] And I would like to turn the conference over to Ankit Shah, VP of strategy and business development. Please go ahead, sir.

Ankit Shah -- Vice President of Strategy and Business Development

Thank you, Sylvie, and good morning everyone. We appreciate you joining us today for New Gold's second-quarter 2021 earnings conference call and webcast. On the line today, we have Renaud Adams, president and CEO; and Rob Chausse, our CFO. Should you wish to follow along with the webcast, please sign in from our homepage at newgold.com.

Before we begin the presentation, I'd like to direct your attention to our cautionary language related to forward-looking statements found on Slides 2 and 3 of 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.

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. 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'll now turn the call over to Rob.

Rob?

Robe Chausse

Thanks, Ankit. Slide 5 provides our operating highlights for Q2. Production details are consistent with our July production press release. During Q2, the company produced approximately 105,700 gold equivalent ounces.

The amount consisted of 18.2 million pounds of copper, 52,900 gold ounces from Rainy River and 14,088 gold ounces from New Afton, totaling approximately 66,900 ounces, gold ounces. Higher equivalent gold production as compared to the prior-year quarter is primarily due to higher tonnes and grades at Rainy River and higher copper production at New Afton. Operating expense per equivalent ounce was higher than the prior-year quarter due to planned higher cost at New Afton, a strengthening Canadian dollar and the Canadian Wage Subsidy received in the prior period. Consolidated all-in sustaining costs for the quarter were $1,551 per equivalent ounce higher than the prior-year quarter, primarily due to the higher operating expense, as previously noted, and increase in sustaining capital at New Afton.

Turning to our financial results on Slide 6. Second-quarter revenue was $198 million, driven by sales of 68,000 gold ounces at an average realized gold price of $1,817 per ounce and sales of 16.9 million pounds of copper at $4.43 per pound. Q2 revenue was 54% higher than the prior-year quarter, primarily due to higher sales volumes and metal prices. Operating cash flow before working capital adjustments was $84.7 million or $0.12 per share for the quarter, higher than the prior-year quarter, primarily due to higher sales volumes and metal prices.

The company recorded a net loss of $15.8 million or $0.02 per share during the quarter compared to a loss of $0.07 per share in the prior-year quarter. After adjusting for other certain items, net earnings were $26.7 million or $0.04 per share in Q2 compared to a net loss of $3.3 million or $0.00 per share in the second quarter of 2020. The difference is driven by higher sales volumes and metal prices. Our Q2 adjusted earnings includes adjustments related to unrealized adjustments on our Rainy River stream, mark-to-market and the free cash flow royalty at New Afton.

Our MD&A has additional details on the non-GAAP measures discussed here. Next slide covers, sorry, on the bottom of this slide covers the capital expenditures. Our total capital expenditures for the quarter were $82.4 million, $49.2 million was spent on sustaining capital and $33.2 million on growth capital. Sustaining spend was primarily related to planned tailings work at both operating assets and B3 mine development at New Afton.

Growth capital was focused on project development, specifically the C-zone and the thickened and amended tailings projects at New Afton, and the underground Intrepid Zone at Rainy River. Slide 7 provides details of our capital structure. At June 30, 2021, we had $138 million in cash and $464 million of liquidity. Adding to liquidity will be the receipt this month of the remaining $50 million cap payment related to the Blackwater sale.

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

Renaud Adams -- President and Chief Executive Officer

Thank you, Rob. And again, thank you, everyone, for joining us today. I'm on Slide 9 on Rainy River. So let me start by saying that there are currently no active COVID cases at Rainy, and the mine continue to do the rapid testing and has also implemented vaccination clinic at site.

The asset performed extremely well during the second quarter and was very well positioned at a quarter end to enter the second half of the year, which was to be focused on high grade and lower strip ratio. The mining operations continued to execute very well during the quarter, with over 158,000 tonnes per day mined, a third consecutive quarter at or above the operational target of 151,000 tonnes per day. So the focus really remain on the further operations and cost optimization as we move forward and advance in time. The mill performed at a slightly lower availability this quarter, but we expect the mill to deliver its maximum permit capacity of 27,000 tonnes a day in the second half of the year.

The processing milling rate has been maintained at an interesting average nearly of 26,500 tonnes per day over the last four quarters, this compare with the permit of 27,000 tonnes a day. Very important is on the Intrepid. The Intrepid Zone is the first underground portal located east of the pit. So the Intrepid decline advanced by another 616 meters.

We have now reached the second level in ore, and we're in the process now to implement more definition drilling as we resume and develop on ore. The ramp will continue to advance in the third quarter, with the objective eventually to have a full first panel totally developed in ore prior to initiate production in the later part of 2022, while we would have also advanced the second panel. So parallel to Intrepid development in the full study that would eventually target the conversion of the significant portion of the resources into reserve from the resources located below the pit. The Intrepid, as previously discussed, the full Intrepid Zone was now incorporated in the reserve at the December 2020, and we have now completed a more detailed mine plan that would be incorporated on our next generations of life of mine.

So we're now busy to do to the same exercise. The current reserve as of December 2020 contemplates only the upper portion of the underground resources located below the pit, and we're now in the process and in the use of the $1,400 reserve price to complete the study to prove the conversion of those resources into reserve for -- in corporations on our next life of mine, which is targeted to increase the life of mine and the valuation of the asset. I will now refer you to a short extract of our MD&A and press release with regards to the situation and the challenge that the grade in July 2021. So in July 2021, the production was primarily from the eastern area of the ODM, called the East Lobe, and the realized gold grade from this area was below the expected gold grade in this period.

So the East Lobe represent approximately 50% of the planned productions for the second half of 2021. So if the realized gold grade continue to track below the expected gold grade, it will negatively impact the amount of ounces we expect to produce in the second half of 2021. So the extent of the impact is not yet known, but there is a risk that Rainy River may not achieve the lower end of its gold equivalent production guidance range of 275,000 to 295,000 ounces, or the high end of its all-in sustaining costs guiding range of $1,125 to $1,225 per gold equivalent ounce. So I'm now turning to the Slide 10.

We appreciate that the situation of July is very recent. But I would like to provide some additional comments at this disclosure. So let me start by giving a bit of the background here. So the resources at Rainy are categorized in three groups: the high, medium and low grade, they're called the HGO, MGO and LGO.

So the combination of the HGO and MGO form what we would call the direct feed to the mill, while the LGO is stockpiled for future use. So in other word, the combination of the HGO/MGO is really what you're targeting to feed the mill at a 27,000 tonnes a day, while the LGO are stockpiled for future blend where the underground as we move and transition to the underground. So the reconciliation of the HGO/MGO is really what drive the performance of the mine. So as you could see on the table, historically, the mine has reconciled extremely well with the HGO and the MGO.

In the last three years, as you could see, we have successfully mined and delivered on a neutral to positive reconciliation to total ounces when it compares with the resource model. So with that in mind, the planned 2021 production was done using the reserve of December 2020, which was based on, of course, the resource and the fate and the reconciliation. So as mentioned, the East Lobe represents about 50% of the tonnes to be mined in the second half. So as we initiate the second half of the year at a higher-grade plant and that the production was primarily from the East Lobe and that represents the 50% in H2, so of course, this situation was highlighted.

So the situation of July 2021 is very early stage. There is still quite a bit of work to be done. I'd like to mention that the East Lobe represents approximately only 15%, 1-5, 15% of the remaining open pit of HGO/MGO post 2021. So we're not talking about something of the 50% range in the remaining life of mine.

But this represents a significant portion of the H2, and therefore, the situation is taking, obviously, extremely seriously. So it is really early stage to predict the behavior of the East Lobe in the future months to come. We've been in a situation very similar in the past. So not because we have reconciled on an early basis extremely well in the last three years, that every zone every day, every month, every moment was perfect.

So we've been in a situation before where we've seen similar situations where we had some reconciliation on a sporadic basis. But again, because of the importance of the East Lobe in the second half, this was highlighted in a very early stage. So I'd like as well to notice that the RC drilling was incorporated to our strategy in 2020 and fully incorporated into our operational strategy in 2021. So I'd like to mention as well that the RC drilling that took place below the 433 and ODM earlier this year has confirmed the sources as planned, but RC drilling program for the East Lobe was not yet completed and will be advanced as we advance over time over the next week.

So we'll keep you informed as the information comes to us. And there is some potential modification of the mine plan as well, if needed, to mitigate a portion of the 2021 impact. But again, early stage and more analysis required as we advance in time. I'd like to move on to Slide 11 and the New Afton.

So globally, I'm extremely, extremely pleased with the New Afton solid performance of the second quarter, with approximately 50,500 gold equivalent ounces produced with -- including a copper production of 18.2 million pounds. Unfortunately, we had two recent active cases of COVID in New Afton, but basically, the mines are operated the whole quarter with zero active cases. I'd like to mention as well as you're probably following in the news, the wildfire situation in British Columbia remain active. And at this time, there's been no impact to the operation in New Afton or to the supply chain.

New Afton has an active fire management plan in place and a number of precautionary measure has been implemented here when the risk to our employee, contractor community and infrastructure increased considerably. Again, we're monitoring the situation. We have a very strong plan, but no impact has been noted to date in the asset. So the mine and mill performed within the plan, while the copper grade outperformed in the second quarter so resulting in a very strong quarter for us.

The C-zone development advanced by 919 meters during the quarter, and the site continued to focus on delivering our future on time and on budget. While later than originally planned, the B3 permit was received during the quarter and the extraction has started, and will continue to ramp up over the second quarter of 2021 and 2022. But as a result of the delay, there will be less done from B3 available in our second half of the year, and therefore, a portion of the ore will be replaced by lower-grade ore from the Lift 1 and/or stockpile. But overall, we continue to expect to meet our gold equivalent guidance, with a strong at the midpoint of the copper guidance.

A point as well to note, a very important point at New Afton, is that the reserve of December 2020, which served, of course, for the 2021 mine plan, we're estimating using a gold price of $1,400, but also a copper price is low as $2.75 a pound. So with the current metal prices significantly above the reserve pricing, New Afton is evaluating a potential for additional short-term opportunity using a lower cutoff grade. So we continue to maximize the total value of the asset as we transition to the C-zone in 2023. So this completes the presentation portion of the call, and then I would now turn it back to the operator for the Q&A portion.

Operator?

Questions & Answers:

Operator

Thank you, sir. [Operator instructions] And your first question will be from Anita Soni at CIBC. Please go ahead.

Anita Soni -- CIBC -- Analyst

Hi. Thanks for taking my call or question. And thank you for the disclosure on the reconciliation of the East Lobe. Could you just give us an idea what grade was expected and what your -- I guess if you tell us the grade that was expected we can, from the math, figure out what you're actually getting or what you're reconciling to? But I just want the actual relative, the reference point for what grade you were expecting in the East Lobe.

Renaud Adams -- President and Chief Executive Officer

We've never really, like, disclosed on a detailed basis. But what I could say, as you know, we've been performing in the point -- averaging 0.8 to 0.85 in the first half, and we're expecting a full year around the one gram. So obviously, we're expecting in the second half something along the one, 1.2 grams a tonne, and 50% of the tonnes to achieve that is from the East Lobe. And so again, without breaking down into the detail, the performance of the East Lobe in achieving one to 1.2 grams in the second half of the year contribute for about 50% of that.

Anita Soni -- CIBC -- Analyst

OK. Thank you. And then just moving on to New Afton with the B3 development rates. You've indicated for the second half of this year, you're a little bit behind on that.

Could you just give us an idea of what kind of ore sources and what kind of grades we should perhaps see thinking about going into Q3? And then is it fair to say that this -- can you just give us an idea of how far behind this receipt of the permit was? I'm looking at the technical report and I think it's -- you were supposed to have started developing at the beginning of this year, so I would estimate like three or four months behind. Is that a fair assumption to kick out the access in the B3 zone?

Renaud Adams -- President and Chief Executive Officer

Yes. I think it's a fair assumption. I mean like we were as disclosed -- priorly disclosed, we were hoping for the first -- for the B3 permit in the first quarter. Of course, last year, we were really hoping for early in the year, and then as you know, we were hit with the fatality.

And quite frankly, I mean, our communities and B.C. government has been extremely challenged over the last short while. So we knew that there were some pending conversations to close. So we're patiently waiting.

But unfortunately, really, we were planning for maybe the first quarter and that was expanded to the second quarter. So your assumption is good. There is a three to four months of ramping up that we were hoping in '21 and did that happen and -- which extend basically. But on the other hand, as I mentioned as well, there is numerous opportunity here to relook at some drop point on that were at the east, the Lift 1, that was stopped ore mining back in time on the use of the lower metal prices.

So the tonne will probably continue to come from Lift 1, Anita, and the Lift 1 has been performing very well in the first two quarters, as you could see from the grade, the copper grade. And there is obviously an opportunity to continue to fall beyond the reserve line toward the resource line. Remember that this block cave has a massive resource envelope around the reserve. So all that for 2021, we're very confident.

So in terms of grade, if you do that math and you look at our production, so we definitely see the goal that would probably drop in the point late -- not late, but between maybe the 0.35 to 0.40. So we're fine to drop the gold grade from the 0.43 you've seen. We're fine to drop the copper. Now note that the copper grade in the first half has been outperforming as well, I'm very pleased, but hasn't outperformed.

So that gives us the opportunity, as I said, to go in other area and average maybe more like a 0.65 or so, as was maybe more originally planned. So a lot of opportunities, but there is no point in continuing and try to stretch it to the higher grade and leave opportunity behind. So the first two quarters would allowed us to maximize the use of the lower grade for the second half and still be well positioned in our guidance. So long answer, but -- sorry.

Anita Soni -- CIBC -- Analyst

OK. With lower copper grades targeted, would that also pull in some lower gold grades as well?

Renaud Adams -- President and Chief Executive Officer

Yes, we'll do as well because you cannot decouple both. So by pulling in the lower, but you're still going to be -- you still -- we still expect to meet the gold low end with the combination of midpoint. Now remember as well that our equivalent golds are calculated using a $3.50 copper as well. So we're taking everything into account, and we believe that the right thing to do is to maximize the value of the asset as we transition to C-zone.

Anita Soni -- CIBC -- Analyst

OK. And then would that imply that maybe you would perhaps fill the mills higher than the run rate so far? I think that the run rate that you have is contingent upon the grades that you were seeing in your reserve envelope rather than in the resource envelope. Could we see higher tonnage going through as well?

Renaud Adams -- President and Chief Executive Officer

On that one, I would be very prudent to say that as much as we want to maximize the extractions at the underground and extract the maximum value, we continue to be managing our mill in parallel to the tailings, as well, capacity and managing of the water and storage. Remember that as we transition next year to the in-pit tailings, we're ending the life of the current storage. So it's very important that we do not try to push beyond and then have to manage some tailings situation. So I would say I'm less fuzzy pushing the mill more than pushing the mine.

Anita Soni -- CIBC -- Analyst

OK. And last question and then I'll pass it off. But this is more big picture, when key theme has been inflation and inflationary pressures, could you talk about your relative exposure in terms of energy at both assets, labor and other consumables? And what kind of pressures you're seeing there at this stage going into 2021?

Renaud Adams -- President and Chief Executive Officer

I would pass it on to Rob. But just on the labor side, per se, no, I wouldn't say that we feel the pressure like any other mines, like we're very focused on controlling our turnover and that kind of things. But no, I wouldn't see that we feel pressure on the cost of the labor. But, Rob?

Rob Chausse

Yes. I think the two other areas that you'd look at in that case are fuel and certainly the exchange rates. When we look at fuel, Rainy River is the site that's primarily impacted, that's where we use most of our -- consume most of our fuel. So the impact on an annual basis there is about $3 million to $4 million when we compare what we -- the pricing of fuel that came into at the beginning of the year.

So approximately around $10 an ounce. And as far as FX, right now we're at about CAD 1.25. Our guidance was CAD 1.28. And that delta, that change, represents about $30 an ounce for the remainder of this year.

Or maybe put another way, a $0.05 change in the CAD is around a $10 million impact on New Gold.

Anita Soni -- CIBC -- Analyst

OK. And then is there any difference in the capex -- the pressures that you're seeing on -- or impacts on the capex side of the equation?

Rob Chausse

There's nothing material. We've -- the majority of our, for instance, steel and the thickened and amended tailings, for instances, is past. We've received a lot of that material. So no major material impact on our capital projects.

Anita Soni -- CIBC -- Analyst

OK. So we shouldn't expect the seasonal development to be [ escalating ] into next year then?

Rob Chausse

No.

Anita Soni -- CIBC -- Analyst

OK. All right. Thank you.

Operator

Thank you. [Operator instructions] And at this time, gentlemen, we have no further questions. Please proceed.

Ankit Shah -- Vice President of Strategy and Business Development

Thank you, Sylvie. And thank you, everyone, who joined us today. As always, should you have any additional questions, please do not hesitate to reach out to us by phone or email. And we hope you enjoy the rest of the summer.

Thanks very much.

Operator

[Operator signoff]

Duration: 29 minutes

Call participants:

Ankit Shah -- Vice President of Strategy and Business Development

Robe Chausse

Renaud Adams -- President and Chief Executive Officer

Anita Soni -- CIBC -- Analyst

Rob Chausse

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