New Gold (NGD) Q3 2021 Earnings Call Transcript

New Gold (NGD)
Q3 2021 Earnings Call
Nov 12, 2021, 8:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning, ladies and gentlemen, and welcome to the New Gold Inc. third quarter 2021 earnings call and webcast conference call. At this time, all lines are in listen-only mode. [Operator instructions] This call is being recorded on Friday, November 12, 2021.

And I would now like to turn the conference over to Mr. Ankit Shah, vice president, strategy and business development. Please go ahead.

Ankit Shah -- Vice President, Strategy and Business Development

Great. Thank you, operator, and good morning, everyone. We appreciate you joining us today for New Gold's third quarter 2021 earnings conference call and webcast. On the line today, we have Renaud Adams, president and CEO; and Rob Chausse, CFO.

Should you wish to follow along with the webcast, please sign in from our home page at newgold.com. Before the team begins the presentation, I would like to direct your attention to our cautionary language related to forward-looking statements found 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 cause actual results to differ. In addition, at the conclusion of the presentation, there are a number of endnotes that provide important information and should be reviewed in conjunction with the material presented.

I will now turn the call over to Rob.

Rob Chausse -- Chief Financial Officer

Thanks, Ankit, and good morning. Slide 5 provides our operating highlights for Q3. The details on that slide are consistent with our October production press release. During Q3, the company produced approximately a 105,600 gold equivalent ounces.

This amount consisted of 15.6 million pounds of copper and 58,600 gold ounces from Rainy River and approximately 13,600 gold ounces from New Afton. Total gold ounces of approximately 72,000 ounces. The lower equivalent gold production as compared to the prior quarter is primarily due to lower tonnes processed at Rainy River and New Afton. The operating expense per equivalent ounce was higher than the prior year quarter due to the strengthening Canadian dollar and the Canadian wage subsidy received in the prior quarter.

Consolidated all-in sustaining costs for the quarter were $1,408 per equivalent ounce higher than the prior year quarter, primarily due to the higher operating expense as previously noted, partially offset by lower sustaining capital. Turning to Slide 6 for our financial results. Third quarter revenue was approximately $180 million, driven by sales of 66,982 gold ounces at an average realized price of $1,788 per ounce and sales of 14 million pounds of copper at $428 per pound. The Q3 revenue was 4% higher than the prior quarter primarily due to higher metal prices.

Operating cash flow before working capital adjustments was $81 million or $0.12 per share for the quarter in line with the prior year quarter. The company recorded a net loss of $11.3 million or $0.02 per share during Q3, compared to earnings of $0.02 per share in Q3 of the prior year. After adjusting for certain charges, net earnings were $23.4 million or $0.03 per share in Q3, compared to net earnings of $12.4 million or $0.02 per share in the third quarter of 2020. This difference is driven by higher metal prices and lower finance costs.

Our Q3 adjusted earnings includes adjustments related to unrealized adjustments on our Rainy River stream mark to market and our free cash flow royalty at New Afton. Our MD&A provides additional details on the non-GAAP measures discussed in this presentation. With regard to capital expenditures, our total capex for the quarter was $58 million, $34.9 million was spent on sustaining capital and $23.1 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 project at New Afton, and the underground intrepid zone at Rainy River. Slide 7 provides our capital structure. Cash on hand as September 30, 2021, was $151 million and liquidity at the end of the quarter was $477 million. With that, I'll turn the call over to Renaud.

Thank you.

Renaud Adams -- President and Chief Executive Officer

Thanks, Rob, and thank you, everyone, for joining us today. So first let me start by saying that I had the chance recently to spend quality time at [Inaudible], and I really continued to be amazed by the tremendous level of hard work and commitment of our employees and contractors as we continued to build our company on solid foundations and core values. In terms of our third quarter, on a validated basis, I believe that we responded very well to the challenges experienced in the third quarter, positioning us to meet our updated guidance. I'm really pleased with the global reductions of our all-in sustaining costs of over 9% compared to the first half of the year with Rainy improving by almost 16%.

And I really want to thank everyone at New Gold for their continued effort. At Rainy, I'm on Slide 10, another quarter of nearly 150,000 tonnes per day mine, in line with our objective to achieve approximately 151,000 tonnes per day for the year. The mine has now an average 150,000 tonnes per day for over a year and is now well set for further optimization as we progress toward 2022. It is now about redirecting our efforts in 2022 from ramping up and stabilization to continue to deliver volume but in a more optimized way, unlocking further opportunities for cost reductions, improve OPEEs, all linked to our mobile maintenance capital program.

As originally planned, the mine executed on a much lower strip ratio of 1.83 to one in the quarter, in line with our objective to average approximately 2.7 to one for the year. So accordingly we expect to remain at the low strip ratio in the fourth quarter. The highlight of the quarter at Rainy was sure around the negatives agreed reconciliation in the East Lobe part of the pit, forcing a revised production guidance. But September responded very well to our short-term adjusted grade approach for the zone, and our overall production was -- for the quarter was in line with our revised plans.

With a much lower contribution from the East Lobe plan for the fourth quarter, we expect an increased grade in the fourth quarter over the 0.89 grams a tonne achieved in Q3, which was already approximately 10% higher than the first half of the year. In terms of grade control, we continue to see inline reconciliations for zone outside of the East Lobe area, reconfirming our confidence when looking at our future production profile. The second RC drill arrived on site and more drilling is taking place to continue to assess the East Lobe area and prep for 2022 production plan. The mill average 25,245 tonnes per day, lower the same period of last year of 27,000 tonnes per day, mostly due to extended maintenance in the crushing area.

But looking forward, I'm very confident that the mill will return to its permitted capacity of 27,000 tonnes a day. But also I'm looking forward to seeing potentially improved recovery as we continue to optimize the grinding gravity and back-end circuits. With completion of all deferred construction work in 2020, the mine achieved a reduction of sustaining capital in Q3 compared to the same period of 2020, contributing to lower all-in sustaining costs of $13.7 per gold equivalent versus the $14.69 achieved for the same period of 2020, but also reductions of nearly 60%, 16% compared to the first half of the year. So we remain on track to meet our updated production and cost guidance.

The underground development of the Intrepid Zone continues during the quarter with the objective to initiate long-haul stoping, mining in late 2020 once the first long-haul panel is fully developed in waste and ore. We also continue to advance our Optimized Underground Mine Plan study that will potentially include additional conversion of underground mineral resources into a mineral reserve, all located directly below the pit. The result of the study are expected to be released in the first quarter of 2022, along with our year-end mineral reserve and mineral resources update. At New Afton, I'm on Slide 12.

As a result of the delay and the receiving the B3 permit in 2021, the contribution of tonnes mined from B3 zone was lower than originally planned, resulting in a lower tonnes mined compared to same period of 2020. Other contributor to lower tonnes mined included the limited mining capacity on the recovery level as the marking activities continue in the remote mode following the event of last February. As we complete 2021 and entered in 2022, our focus remains on, first, safe and efficient ramp up of the B3 zone. This is really important to us as it will be the main contributors of 2022.

A safe mining of the recovery level of reserve prior transitioning to the in-pit tailings plan for 2022, so we don't leave anything behind us. And of course, the safe and efficient exhaustions over the East Cape area. The overall grade for the quarter were comparable to the same period of 2020 as the grade mined from the East Cape continued to perform super well in the quarter. The metal recovery at the mill were also comparable to slightly better for gold to the same period of 2020 despite an increase of purging ore volume mill.

The average of nearly 13,000 tonnes per day mill was lower the same period of last year but in line with our mining rates in the quarter in our plan to optimize metal recovery while processing higher volume of supergene ore. So overall we remain on track to meet our gold equivalent production guidance with an all-in sustaining costs expected to be in the higher range -- on the higher [Inaudible] of the guidance range. Our C-Zone underground development advanced by nearly 800 meters in the fourth quarter and the Thickened and Amended Tailings facility was nearly commissioning at the quarter end. In terms of exploration, we had six more holes totaling nearly 3,900 meters that were completed in the quarter in the Cherry Creek trench to explore for deep [Inaudible] system.

The drilling program is expected to be completed by the end of the fourth quarter. Following the very encouraging and exciting results of our underground drilling program testing artificial intelligence targets, more drilling were added and should also be completed by year end. So really looking forward to our next exploration update to market in the first quarter of 2022. This will complete the presentation portion of the call, so I would now hand it back to operator for the Q&A portion of the call.

Operator?

Questions & Answers:

Operator

[Operator instructions] Your first question comes from Anita Soni from CIBC World Markets. Please go ahead. Miss Anita Soni?

Anita Soni -- CIBC World Markets -- Analyst

Hi. Good morning. Sorry, I didn't hear you. Switching from the webcast to the phone, or simply dialing in.

I was just wondering in the Rainy River, did you give us any -- could you give us an update and some color on the amount of East Lobe material that you expect to see next year and perhaps into 2023, if there is any?

Renaud Adams -- President and Chief Executive Officer

What I can say at this stage, Anita, as you would you would appreciate, that we continue to assess and optimize our plan. But if you refer to the 43-101, and quite frankly, the plan remains like somewhere pretty similar. You have about 25% of the ore mined for '22 and '23 completion in the second half to '23 on the East Lobe area. So as we advance and complete, we'll -- yeah.

So well, obviously, in our guidance early in 2022 and update all our plans, but this is what you could see so far as for the 43-101.

Anita Soni -- CIBC World Markets -- Analyst

All right, then. Secondly, could you comment on the inflationary pressures that you guys are, if any, that you're seeing and just give us some color on the magnitude? Just overall and then where are the sources of that in terms of labor [Inaudible].

Rob Chausse -- Chief Financial Officer

Sure. There's no material inflationary pressures we -- any sort of major capital items and components and related steel, etc., were ordered and received pre this inflationary period, if you will. Ultimately, I think our inflationary pressures come down to access to maybe contractors, etc., and labor is within line that 2% to 3% that we're seeing. So as it stands right now, we're not seeing any material impacts on our business related to inflation.

Anita Soni -- CIBC World Markets -- Analyst

Thank you all. I'll pass it over to someone else.

Renaud Adams -- President and Chief Executive Officer

Thanks.

Operator

Your next question comes from Josh Wilson from RBC. Please go ahead.

Ankit Shah -- Vice President, Strategy and Business Development

Josh, you might be on mute.

Josh Wilson -- RBC Capital Markets -- Analyst

Sorry about that. For the upcoming optimize mine plan at Rainy River, you mentioned looking at opportunities for upsized resource conversion. Is there any changes in sequencing that we should potentially expect or is there any ability to maybe incorporate some upside, more near-term rather than mine life extensions?

Renaud Adams -- President and Chief Executive Officer

The the purpose of the study really is to create some sort of stand-alone underground mining, Josh, as we complete the stockpile that is currently 2028. So it's really a continuity because if you look at the current plan in the 43-101, we already -- we had already incorporated the top part of the Center Zone below the pit and the 42-101 together with the stockpile. So really the study is a kind of continuity of the mining stand-alone [Inaudible] with the continuity and just keep mining deeper in the Central Zone and all the intrepid is already in the reserve. So it's not so much about, as you say -- unfortunately, cooperation at the early stage more than creating an extended life of mine beyond 2028.

There'll be some here and there opportunity but the main purpose of the study is an extension of life of mine beyond 2028.

Josh Wilson -- RBC Capital Markets -- Analyst

And when the initial East Lobe issues had come out, there was some discussion maybe of looking at mining some of that material underground. Is that something which could still make sense or that could be incorporated in this plan or is that not a priority right now?

Renaud Adams -- President and Chief Executive Officer

It's not a priority right now. There's not much of the East Lobe in the open pit to complete in '22, '23. I think we -- we're, as I said previously, we're continuing to refine and optimize our plan as we have been storage '22. But at this stage, I think it's fair to say that it still makes more sense to catch it open pit and carry our underground plan as previously planned.

Josh Wilson -- RBC Capital Markets -- Analyst

OK. And when -- last question, when you're looking at year end reserves, Rainy, first off, I guess what sort of price assumptions are you expecting to incorporate? And then how should we think about the impact of East Lobe as well as maybe some exploration efforts that have materialized this past year? The -- we're looking at use $1,400 for our research exercise at the year end. And the exploration at Rainy is still somewhat at the early stage, so not expecting an impact from the exploration program of '21. But as we continue in '22 and '23 and so forth, we'll see and continue to hope for additional resources out of our exploration program but this will not be the case for '21.

Got it. And then to understand the impact for East Lobe, is it fair to assume some loss of answers just from that and depletion?

Renaud Adams -- President and Chief Executive Officer

Very -- honestly, Josh, I mean this is exactly the assessment is taking place. No, we're not. We're decoupling completely -- first of all, we're decoupling completely the open pit from the underground. It's a different and complete mining, as you know, and approach.

And in the mining, the systems, right, on the volume, and bulk. So it's a complete difference, so we're not mixing both here. And for the remaining ounces of East Lobe, that's exactly the assessment we're doing with more drilling and RC and so forth, and we'll be prepping for our 2022 guidance. But I don't have all those answer --

Josh Wilson -- RBC Capital Markets -- Analyst

OK. Those were all my questions. Thank you.

Renaud Adams -- President and Chief Executive Officer

Thanks.

Operator

Thank you. Your next question is from Dalton Baretto from Canaccord. Please go ahead.

Dalton Baretto -- Canaccord Genuity -- Analyst

Sorry. I think I was on mute again. Can you hear me? This seems to be a theme on this call. Good morning.

Thank you for taking my question. Renaud, my question is also on the East Lobe. I wanted to ask, do you understand exactly why you have a grade reconciliation issue at this point in time?

Renaud Adams -- President and Chief Executive Officer

Well, the only thing I can say is for the benches that took place -- the mining that took place on benches into Q3, I think it's fair to say that you're never exactly right on the model, reconciliation day to day, every hours. But I think it's fair also to say that unfortunately for the Q3 period, the benches that took place, fortunately, there reconciliation compared to the resource models were showing less tonnes and ounces. Now why is it like this? Is it just like a localized type of systems? Sometimes that happens in some areas for a period of time and then it switches. So globally, we've been doing extremely well over the last three years.

All the other areas on a global basis continue to perform very well with the model but with nearly -- if you look at our Q3, a big portion of the Q3 was really focused on mining in that specific area. So when you experience a negative reconciliation, and most of your mine plan is from one specific area, it does highlight as a big variance, of course. If it would be more distributed over and -- the year you will have more flexibilities and so forth. So we really need to complete all this RC drilling to look at this in a global basis because there is nothing telling us that things cannot even shifted like as you go.

So I've seen those localized situation in my career and sometimes it's very localized over a few benches, sometimes a little more. But I think our model has responded very well globally but, unfortunately, that very far east area has just not responded well in terms of tonnes and grade. There is nothing really specific more to say. We just need to, at this stage, to continue to drill underneath and assess the remaining ounces and see how does that compare with the model.

But it's a one resource model apply to our cross, the deposit. And sometimes, you have a positive, sometimes negative. But the value effort on those one area on the -- as we experienced in Q3, unfortunately, that the variance hit us stronger. But let's see with the completion of the RC and I'll definitely be in a better position as we complete the year and enter '22 to have all the specifics to that question.

Dalton Baretto -- Canaccord Genuity -- Analyst

OK. Thanks for that. And then maybe as a bigger-picture question, I wanted to ask you about M&A, pretty topical in the gold space right now. On the A side, on the acquisition side, are you seeing anything in the vicinity of Rainy River that could potentially complement the underground once the open pit is done? And then part B, on the M, the merger side, if you were to consider a merger of equals, what would you look for in a partner? Thank you.

Renaud Adams -- President and Chief Executive Officer

Thanks for that very specific question on a Friday morning. I can answer the first one. I think the first one, when it comes to the vicinity, this is an exercise that it's a continuous, like exercise for us to draw our radius around our operations and always look for opportunities for resources that could eventually be. Unfortunately, at Rainy River, I would qualify it like somewhat like not really advance volume ounces type of stories.

It's still more within our land package that we see the best opportunity. New Afton is a bit of a different situation considering the very prolific areas and multiple opportunities and resources around the assets, but Rainy. And I would keep my comments for myself when it comes to a more specific merger. I mean you understand that as we advance, our focus now is ready to deliver on our plan.

We see our cash balance that we've continued to improve over the years. We have the streams and so I think we are extremely well equipped to provide eventually as we advance some growth opportunity to our shareholders, but I would not go any further than that but thanks for asking.

Dalton Baretto -- Canaccord Genuity -- Analyst

Thanks, guys. All the best.

Renaud Adams -- President and Chief Executive Officer

Thanks.

Operator

Thank you. Your next question comes from Mike Jalonen from Bank of Montreal. Please go ahead.

Mike Jalonen -- BMO Capital Markets -- Analyst

Bank of Montreal. I don't even bank there. But still at Bank of America, 32 years, and overall [Inaudible] thanks for the call. And I'm actually drawn to Slide 13, your investment proposition.

A couple of questions there. I noticed the 25% GOE growth 2020 versus '22 to '26. By my math, that's about an average of 546 -- 546,000 ounces for that period. Would that also be guidance for 2022?

Renaud Adams -- President and Chief Executive Officer

No, no, no. We're not referring -- I mean this is the -- this is really for the period, like going toward '26. If you look at our production profile at Rainy, you'll see a constant grade increase over the period of '22 to '26. So you have the C-Zone that is coming at place.

As we advance for, let's say, this year toward '22 first step of increase at Rainy, and you continue to increase over the period going toward the '26 and you incorporate the C-Zone to this, what we're seeing is in that to increase the 25% plus to our current situation. That's that's the way to look at it.

Mike Jalonen -- BMO Capital Markets -- Analyst

So the lowest year will be '22, the highest will be '26 of that five-year period?

Renaud Adams -- President and Chief Executive Officer

The period of '24, '26, specifically '25, '26, very similar, if you will.

Mike Jalonen -- BMO Capital Markets -- Analyst

OK. I'm asking because '22 in the average so that's why I was asking.

Renaud Adams -- President and Chief Executive Officer

Yeah, we're very close to year end here, so we'll have a very comprehensive guidance. And as we complete the study for underground study for Rainy River and enter the year and complete our year-end reserve -- our mineral reserve resources update and eventually we'll update as well our 43-101. So we will provide a more specific detailed plan for the remaining life of mine.

Mike Jalonen -- BMO Capital Markets -- Analyst

OK. Maybe going back to Dalton's question, the foreign gold company, looking at Slide 13, I'm going all right [Inaudible]. Oh, look, they're located in Canada, 100%. Wow.

We should look at New Gold.

Renaud Adams -- President and Chief Executive Officer

I appreciate your appreciate your comment because we're definitely continuing to work hard in positioning this company and we definitely see a very interesting profile down the road. And as we improve the production -- put the capital execution behind us and focus on our investing at the C-Zone, this company has a very interesting profile down the road. And the right jurisdiction, and as you say, we're becoming more and more a rare commodity, if you will.

Mike Jalonen -- BMO Capital Markets -- Analyst

Definitely. All right. Well, thank you and we at Bank of Montreal thank you very much.

Renaud Adams -- President and Chief Executive Officer

Congrats for your promotion. Thanks appreciate.

Operator

Thank you. Your last question comes from John Tumales from John Tumasez Very Independent Research. Please go ahead.

Unknown speaker

Good morning. How much of the four-year capex is capitalized stripping account in dollars? And could you talk a little bit about what normal capex might be the next several years, please?

Renaud Adams -- President and Chief Executive Officer

I just want to make sure that I got your question right with the stripping. Sorry. If you could -- the first portion of the question [Inaudible]

Unknown speaker

How much of the capex is the capitalized stripping in dollars?

Renaud Adams -- President and Chief Executive Officer

So if we look at Rainy, in particular, you have from the sustaining capital of -- year to date of $77 million, about a third of it is around the capitalized item. Just confirming that. A big portion is, obviously, the tailing -- the sustaining tailing construction and the other part has a lot to do with the the maintenance, the mobile -- maintenance and so forth. So as we move forward, very important to rehighlight here that by the end of '23, the biggest part of the stripping will be completed.

So that's it. Yeah, it's about $29 million of capital as mining costs so far out of the $77 million for the nine months. And as you advance in time, two things are going to happen. You're going to continue year after year up to 2025 to complete the raise at the tailings every year like we did this year, '22, '23, and with the last raise in '25.

Your stripping exercise in the pit will be mostly completed at the end of 2023, as highlighted again in our SEC report. So that would be a further contributor to quite a reduction in our sustaining. And as we deplete the pit as well and start operating with less equipment, you will have as well a significant reductions on the your mobile maintenance capital program. So we're showing this year toward like the 110 million.

Next year, we have another phase, very similar to this year, as highlighted in our plan. And as you advance '23, '24, you'll start seeing and dropping the stripping and the maintenance costs and the tailings drop in '25 -- again of '25. So that's that's really the big contributor to the cost reduction as well. As we increase our production on a combined basis, it's a significant margin down the road for us.

Unknown speaker

Are there particular thresholds that investors should look to for New Gold to have a dividend. For example, a particular level of debt reduction or the Rainy transition to underground when the capital needs will be less?

Renaud Adams -- President and Chief Executive Officer

Yeah, to be answered as we advance. I mean we've received that question quite a bit. When you look at our presentation and cash -- building on our cash balance as we advance, at the current metal prices, you could be in excess of the $1 billion of free cash flow generated over the next the next '22 to '26 period. And as you know, we also have the streams and other, and we're cash position.

So yes, we will be building. I think it's important that we keep in mind as well the importance of the growth component in our company as well. So we're not in a position now to answer this with specificity, what's going to exactly happen and how this cash balance will be used toward like growth, debt repayment, and dividend, and all that. This is all to come for us.

The most important now is to deliver on our plan. And as we advance and build, we'll see strategically how this -- best use of our -- for our cash position.

Unknown speaker

Thank you very much.

Renaud Adams -- President and Chief Executive Officer

Thank you.

Operator

There are no further questions at this time. You may please proceed.

Ankit Shah -- Vice President, Strategy and Business Development

Great. Thank you so much and thanks again to everyone for joining us this morning. As always should you have any additional questions, please don't hesitate to reach out to us by phone or email. Have a great weekend.

Operator

[Operator signoff]

Duration: 47 minutes

Call participants:

Ankit Shah -- Vice President, Strategy and Business Development

Rob Chausse -- Chief Financial Officer

Renaud Adams -- President and Chief Executive Officer

Anita Soni -- CIBC World Markets -- Analyst

Josh Wilson -- RBC Capital Markets -- Analyst

Dalton Baretto -- Canaccord Genuity -- Analyst

Mike Jalonen -- BMO Capital Markets -- Analyst

Unknown speaker

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