Mar 1, 2013
Executives
Hannes Portmann – VP, Corporate Development Randall Oliphant – Executive Chairman Brian Penny – EVP and CFO Bob Gallagher – President and CEO
Analysts
Dave Katz – JP Morgan Andrew Kaip – BMO Capital Markets John Kratochwil – Canaccord Genuity
Operator
Good morning, everyone. My name is Sara and I’ll be your conference operator today.
At this time, I’d like to welcome you all to the New Gold Year-End Financial Results Conference Call. All lines have been placed on mute to prevent any background noise.
After the speakers’ remarks, there will be a question-and-answer session. (Operator Instructions) Thank you.
I would now like to turn the call over to our host. Mr.
Hannes Portmann, you may begin your conference.
Hannes Portmann
Thank you, operator, and good morning, everyone. We appreciate you joining us today for the New Gold 2012 fourth quarter and year-end earnings results conference call and webcast.
On the line today, we have Randall Oliphant, Executive Chairman of New Gold; Robert Gallagher, our President and CEO; Brian Penny, our CFO; and Ernie Mast, our Vice President of Operations will be available during the Q&A period at the end of the call. The operator will provide instructions for those who wish to ask questions.
Should you wish to follow along with the webcast, it is available on our homepage at www.newgold.com. If you are participating in the webcast, you can also type your questions through the interface.
Before Mr. Oliphant provides us with an overview of the results, I will go through an abbreviated version of our forward-looking statements, which are also provided in greater detail on slides three and four of the presentation.
Some of today’s commentary may contain forward-looking information from 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 their respective conclusions, forecasts or projections. We refer you to the section entitled Risk Factors in New Gold’s latest MD&A and other filings available on SEDAR, which sets out certain material factors that would cause results to differ.
Regarding references to mineral resources and other technical terms defined in National Instrument 43-101, we refer you to our detailed cautionary note to U.S. readers concerning estimates of measured, indicated and inferred resources in the presentation.
I will now turn the call over to Randall.
Randall Oliphant
Well, thank you, Hannes, and good morning, everyone. Thank you for joining us today to discuss our 2012 fourth quarter and year-end results.
As many of you who follow New Gold closely know, we released our 2012 operational results and 2013 guidance on February 5 as part of our Annual Investor Day. As such, the focus of today’s presentation will primarily be our financial results, where the company set multiple quarterly and annual records.
Slide five provides a few of our quarterly and annual highlights. As anticipated, the fourth quarter proved to be our strongest of the year.
With New Afton hitting full production in late September, the fourth quarter demonstrated the potential of our now four producing mines. Together, the mines produced 113,000 ounces of gold at a cash cost of $254 an ounce.
This cost is the lowest in our history and positions New Gold as one of the lowest-cost producers in the industry. The company’s low operating cost was a key driver in achieving our highest ever quarterly cash flow of $106 million.
Looking now at the full year, we are very proud to have met our operational guidance for the fourth consecutive year. On behalf of Bob, Brian, and Ernie, I would like to acknowledge the operational teams at each of our sites who deserve the credit for this achievement.
It is this operational performance that underpins our strong financial results. During 2012, we had record net earnings of $199 million and cash flow of $236 million.
We also ended the year with our highest-ever year-end cash balance of $688 million. Brian and his team worked hard throughout the year to restructure our debt and simplify our balance sheet.
Importantly, all of our corporate debt is now due in 2020 or beyond, which is well after our portfolio of development projects is scheduled to be in production and generating cash flow. Beyond these key financial achievements, I think we will look back at 2012 as a seminal year in New Gold’s growth as a company.
The successful start-up of New Afton adds a world-class operation to our portfolio of producing mines and further establishes New Gold’s track record as a mine developer. Looking forward, New Afton has the potential to double the cash flow of our company.
We are pleased that our exploration teams have already added two years of life to this great asset and are evaluating alternatives to further increase the throughput of the operation. We are proud of our strong operating and financial results and New Gold’s ability to progress our key growth projects.
Ultimately, however, we need to measure ourselves based on the performance of our equity. We are pleased to report that during 2012, New Gold was able to outperform both the gold price and the gold equity indices.
Slide six shows the progression of our quarterly performance through 2012. The mid-2012 production start-up at New Afton led to a strong finish to the year.
The fourth quarter saw marked increases in both earnings and cash flow. Earnings from mine operations and adjusted net earnings per share increased compared to each of the first three quarters of the year.
The growth in net earnings came despite a $40 million increase in depreciation and depletion largely driven by New Afton’s production start, an $11 million increase in expensed exploration which resulted in continued exploration success at Blackwater and New Afton, as well as an $11 million increase in expensed interest. Net cash generated from operations increased significantly during the fourth quarter primarily from New Afton achieving full production, which resulted in a combination of higher gold sales and lower unit costs.
Overall, the full-year 2012 cash flow was impacted by certain items such as a $32 million increase in working capital, a $12 million cash tax payment related to Cerro San Pedro’s 2011 taxes payable, and an $11 million reclamation expenditure at Mesquite that will now not be required at the end of the mine life. As shown, these items primarily impacted the net cash generated in the first nine months of the year, and they are not expected to be recurring.
Looking ahead to 2013, cash flow is expected to grow significantly. Similar to 2012, cash flow should be weighted to the second half of the year with approximately 65% of the company’s cash flow anticipated to be generated in the final two quarters of 2013.
Slide seven of the presentation shows New Gold’s production, cash costs and margins for the fourth quarter and full year of 2012. New Gold’s four producing mines provided the company with 113,000 ounces of gold production during the quarter.
Fourth-quarter cash costs of $254 an ounce were amongst the lowest in the industry and more importantly, an indication of what our portfolio of four producing mines is capable of. With this low cost, our margins once again increased during both the quarter and the full-year periods.
Slide eight shows the company’s 2013 guidance, demonstrating further gold production growth at lower costs. Our gold production is expected to increase by 12% to a range of 440,000 ounces to 480,000 ounces.
At the same time, our cash costs are expected to decrease by about $146 an ounce to $265 to $285 an ounce. On slide nine, we provide our estimated all-in sustaining cash costs.
The World Gold Council is currently working on establishing the standard for this cost metric. We believe we have been fairly conservative and that we have included virtually all our capital costs excluding those related to our Blackwater growth project.
We are pleased to report that our estimated all-in sustaining cash cost of $875 an ounce is among the lowest in the industry. Importantly, with certain one-time capital initiatives taking place in 2013, we see scope to reduce sustaining capital by approximately $100 an ounce in each of the next few years.
Slide 10 highlights some of our 2012 achievements at New Afton and the initiatives we plan for 2013. We are extremely proud of our team at New Afton for achieving commercial production over a month ahead of schedule.
After hitting full production early, the mill averaged over 11,700 tonnes per day in the fourth quarter. This compares to a design capacity of 11,000 tonnes per day.
We also ended the year with positive news on the exploration front. Through preliminary exploration work, which began in the second half of 2012, our team has already added two years to the mine life, which is now 14 years.
In January of 2013, we successfully commissioned the gyratory crusher which has now allowed our daily mining rate to reach a similar 11,000-tonne-per-day level to the mill. One of the things our geologists are most excited about is the potential to add further gold and copper resources through exploration of the C-Zone.
We started drilling during the latter part of 2012 and have seen some very positive results. We plan to further define this zone through an aggressive exploration program in 2013, and we’ll provide updates as we move forward.
With the mill having successfully operated at throughput rates well above design capacity for various periods of time, our team at New Afton is working diligently to look at ways to run the operation at higher throughput levels on a sustained basis. Our near-term goal is to achieve 12,000 tonnes per day by the end of 2013.
As certain elements of the operation, including the crusher and conveyor, have significant excess capacity, we will then look to move to an even higher rate as we look ahead to 2014 and beyond. We are excited about both the C-Zone and throughput optimization initiatives as together they provide our company with the potential to both further extend the mine life and increase production at New Afton.
Slide 11 provides an overview of our two world-class development projects. At Blackwater, after completing an extensive drilling program, we ended the year with over 8 million ounces in the measured and indicated resource category.
In September of 2012, we completed a preliminary economic assessment which outlined an open pit mine with a potential to produce over 500,000 ounces of gold annually at well below industry average cash cost. Looking ahead, in 2013, we plan to complete a feasibility study by the end of the year and to further explore the regional targets on our 1,000 square kilometer land package.
Our fully-carried 30% interest in El Morro provides our shareholders with further gold and copper leverage, both from the current resource base and the continued exploration potential. Goldcorp, our 70% partner and project operator, is currently working closely with the Chilean Environmental Agency to address the temporary suspension of the project’s environmental permit, which we anticipate could be resolved by the end of this year.
At the same time, the Chilean government is actively looking at alternatives for a power source that would supply the various projects in the northern part of Chile. We look forward to further progress being made on both of these fronts and El Morro ultimately progressing through development and into production.
On slide 12, we highlight some of the key exploration targets we planned to drill this year at Blackwater. Although we drilled over 270,000 meters in 2012, the focus was primarily on infill drilling to prepare for completion of the feasibility study.
We believe 2013 has the potential to be an exciting year, as we step away from the primary deposits to test the potential of our large land package. One area, we will be working to grow and better define is Capoose, which already has a gold and silver resource and is approximately 25 kilometers from Blackwater.
In addition to Capoose, there are three other targets that our exploration teams have identified. We have budgeted for four to six drills to be active through the exploration season, and we will provide periodic updates on the results of this program.
Slide 13 shows our production growth over the next four years. In largely a no-growth industry, we feel very fortunate to be in a position to more than double our production with projects that we already own and are fully funded.
Side 14 compares New Gold’s share price performance with the gold price and gold equities. When looking at 2012, we are pleased that the market has been supportive of the continued progress we are making at both our producing mines and our growth projects.
Importantly, we believe that all the facts that have provided the strong momentum remain in place. We will maintain our focus on generating peer-leading returns.
While the start of 2013 has been challenging for our sector, we feel that with the catalysts we have in place throughout 2013, we are well positioned to continue our track record of outperformance. Slide 15 outlines the catalysts for 2013.
To start the year, we once again delivered on our guidance with increasing production at lower cost. As discussed, we will provide updates on our regional exploration around Blackwater.
The New Afton C-Zone has already demonstrated positive results and we look forward to further exploring this prospective area and reporting on them to you. We successfully completed the Blackwater PEA in 2012.
And this year, our goal is to complete the feasibility study by the end of the year. At New Afton, our team will continue to work on maximizing the mining and milling rate with a goal of reaching 12,000 tonnes per day by the end of the year.
We expect the temporary suspension of the permit at El Morro to be resolved later this year. We will also report on the results of the New Afton increased throughput study.
So when we put this all together, we think that 2013 should be another exciting year for our company. Slide 16 summarizes the key elements that characterize New Gold.
Our board and management team are all remarkably dedicated to shareholder value creation and are proud to be invested in this company alongside all of you. We continually work towards increasing our financial flexibility and to maintain a strong balance sheet.
Our assets are all in favorable jurisdictions. We feel fortunate to have a fully-funded organic growth pipeline that can see our production more than double in the next four years.
Initiatives like the throughput optimization at New Afton and exploration of the C-Zone, as well as regional targets, should provide further scope to increase the NAV of that property. We have delivered on multiple catalysts recently and see many more in the near- and medium-term.
For all these reasons, we continue to believe New Gold is solidifying its position as the leading intermediate gold producer. In closing, I’d like to thank you all for your continued support.
Thank you very much. At this time, Bob, Brian, Ernie and I would be happy to answer any questions you may have.
Operator
(Operator Instructions) Your first question comes from Dave Katz of JPMorgan. Your line is now open.
Dave Katz – JP Morgan
Hi. In the Annual Report or the filings, it seemed to indicate that you had extended the maturity on the credit facility yesterday.
And I was hoping you could go into that. And it also indicated there were some changes in the covenants.
Could you detail those?
Brian Penny
Yes. Thanks, Dave.
Dave, yeah, we did extend the facility by a year. The reason why we did that is just to give us a little bit more time and it ties into some of the contracts out there.
As far as the changes in the covenants, the pricing was reduced. The standby fees were reduced.
LC fees have been reduced and the fees associated with renegotiating this or extending the payback is less than nine months. So it’s a very favorable for the company.
As far as some of the covenant changes, the biggest one was its removed the restriction to pay dividends. So that restricts – I mean, that covenant now ties into the same covenant that’s in the notes that are outstanding.
Dave Katz – JP Morgan
Okay. And it seemed like the leverage test was moved to a gross leverage test.
Is that correct?
Brian Penny
No. It was changed – thank you for reminding me.
It was changed from a gross debt to a net debt. So we’ll benefit from the lower fees much longer.
Dave Katz – JP Morgan
Okay. And what are the new levels for the net one?
Brian Penny
The new levels?
Dave Katz – JP Morgan
Yeah.
Brian Penny
I don’t have those with me. I can get back to you.
Dave Katz – JP Morgan
Okay. That’d be great.
And then on the warrants, it looks like there’s another set that is due to expire at some point this year. Are you expecting, I guess given where things are priced right now, that that would result in another cash inflow and gain?
Brian Penny
There were only some minor warrants in January that expired; a very small portion were exercised. They related to our acquisition of Silver Quest last year and it’s not a material amount.
So after that, we have one set of warrants that have $15 strike price, and they expire in 2017.
Dave Katz – JP Morgan
Okay. Thank you very much.
Randall Oliphant
Thanks, Dave.
Operator
(Operator Instructions) Your next question comes from Andrew Kaip of BMO Capital Markets. Your line is now open.
Andrew Kaip – BMO Capital Markets
Hi, guys. Look, I’ve just got one question for you and that is, can you give us a sense of what your depreciation or what you expect to depreciate at New Afton through 2013?
Brian Penny
Basically New Afton, the annual depreciation based on the mine life today is about $100 million a year.
Andrew Kaip – BMO Capital Markets
Okay. That’s great.
Thanks very much, Brian.
Randall Oliphant
Thanks, Andrew.
Operator
Your next question comes from John Kratochwil of Canaccord Genuity. Your line is now open.
John Kratochwil – Canaccord Genuity
Hi. Good morning, guys.
I saw on the MD&A that New Afton, you’ve got 54 drawbells completed by the end of year. Could you give us a sense maybe if you’ve completed any more by now and maybe what you would need or how many you would need to get to that 12,000-tonne-per-day level?
Randall Oliphant
Bob?
Bob Gallagher
Yeah. It’s Bob here.
Yeah, we’ve now got 60 drawbells complete and we can get 12,000 tonnes per day out of those.
John Kratochwil – Canaccord Genuity
Oh, okay, excellent. That’s about my question for this morning.
Thanks.
Operator
And I have no further questions queued up at this time.
Randall Oliphant
Okay. Well, ladies and gentlemen, we don’t have any questions coming over the wires either.
So we’d like to thank you very much for joining us this morning. We think the company is off to an excellent start in 2013.
As you know, anytime you have any questions, you’re more than welcome to reach out to us and we’d be happy to help you. But thank you very much for your time.
We hope you have a wonderful weekend and we look forward to our next update. Thank you.
Operator
This concludes today’s conference call. You may now disconnect.