What happened
Shares of New Gold (NGD) fell by over 14% today after the company announced the surprise sale of its Mesquite gold mine. The business will receive $158 million in cash for the productive asset, which management says will "immediately crystallize several years' worth of future free cash flow as part of our strategy to prudently manage our balance sheet, providing the company with the financial flexibility to focus on our core assets".
Investors are scratching their heads since, well, Mesquite was a core asset. In the first half of 2018 Mesquite was the second most important gold mine in terms of production, all-in sustaining costs (AISC), and cash flow generation. It comprised nearly 32% of the company's total gold output in the first six months of the year. But management's logic might make sense if the bold bet pays off.
As of 3:29 p.m. EDT, the stock had settled to a 9% loss.
Image source: Getty Images.
So what
New Gold stock is down nearly 70% since the beginning of the year. That's mostly attributable to the unexpected delays encountered ramping up production at Rainy River, which is the company's single-most important growth asset and could become its most significant gold mine. The delays forced the company to increase full-year 2018 guidance for production costs and decrease guidance for production volume, revenue, and profit. The mine is so large and so important that the slow start has even weighed on shares of gold streamer Royal Gold, which has an offtake agreement for the mine's production.
It's within that context that management decided to liquidate the Mesquite mine. The asset sale won't help operations in the near term, but it provides an immediate injection of cash to throw at Rainy River, a cushion against additional delays, and the potential to hit the ground running once the growth asset gets back on track. In fact, the transaction will double New Gold's cash balance from the end of June.
Now what
Investors should interpret the news of the Mesquite sale as management going all in on Rainy River. That's probably the best move in the long run, even if it's accompanied by more pain in the next quarter or two. Besides, if things don't work out at Rainy River, then most other issues for the business may not matter. Right now, there's no indication the mine won't live up to expectations eventually, but New Gold has padded the balance sheet just to make sure.
