May 2, 2013
Executives
Hannes Portmann - VP, Corporate Development Randall Oliphant - Executive Chairman Robert Gallagher - President & CEO Brian Penny - EVP & CFO Ernie Mast - VP, Operations Mark Petersen - VP, Exploration
Analysts
Dave Katz - JPMorgan John Kratochwil - Canaccord Genuity Dan Rollins - RBC Capital Markets Steve Parsons - National Bank Financial Richard Gray - Cormark Anita Soni - Credit Suisse Frank Duplak - Prudential Alec Kodatsky - CIBC
Operator
Good morning, everyone. My name is Laurel and I’ll be your conference operator today.
At this time, I would like to welcome you all to the New Gold Incorporated 2013 First Quarter Results Conference Call. All lines have been placed on-mute to prevent any background noise.
After the speakers’ remarks, we will have a question-and-answer session. (Operator Instructions) Thank you.
I would now like to turn the call over to Mr. Hannes Portmann, Vice President, Corporate Development.
Please go ahead sir.
Hannes Portmann
Thank you, operator, and good morning, everyone. We appreciate you joining us today for the New Gold’s 2013 first quarter 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; Ernie Mast, our Vice President of Operations and Mark Petersen, our Head of Exploration will be available during the Q&A period at the end of the call. 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
Thank you, Hannes. Good morning everyone.
Thank you for joining us today to discuss our first quarter results. The quarter provided a solid start for the year for our company with our operational and financial performance scheduled to only get stronger as we move through the year.
Slide five provides a few of our first quarter highlights. During the quarter, our four producing mines combined to deliver over 94,000 ounces of gold at costs of $485 an ounce.
Having New Afton as part of our operating portfolio benefited the company's net earnings and cash generation. Net cash from operations increased by 59% compared to the first quarter of 2012.
At the same time, two of our assets demonstrated continued resource growth. As previously announced, our Blackwater project once again increased its mineral resource base.
Measured and indicated gold resources scheduled for direct processing now totaled 8.6 million ounces. This does not include an additional 900,000 ounces of stockpile material which will be processed later in the mine life.
Yesterday, we also announced the 300% increase in gold and copper resources at the New Afton C-Zone; not only did the resource grow in size, but importantly the gold and copper grades also increased. The continued delineation of the C-Zone is just one example of how we see scope to increase the value of our assets organically.
We ended the quarter with a significant cash position of $672 million. We continue to view our company’s financial flexibility as an important competitive advantage particularly given recent market volatility.
Slide six compares our first quarter operating and financial results with the first quarter of 2012. Our first quarter 2013 gold production was similar to last year.
Production increases from New Afton and Peak were offset by planned lower production from Cerro San Pedro and Mesquite. Average grades at Cerro San Pedro were 0.32 grams per ton compared to 0.46 grams per ton in the previous quarter.
At Mesquite, grades were 0.32 grams per ton versus 0.59 grams per ton in the first quarter of 2012. Both open pit operations are scheduled to move into higher grade portions of their ore bodies as the year progresses which should result in higher production and earnings going forward.
New Gold’s cash cost of $485 an ounce declined versus the prior year quarter and remained well below the industry average. The decrease in cash cost was primarily driven by increased copper sales which was partially offset by a combination of lower realized copper prices, lower silver sales volumes and realized silver prices as well as the scheduled mining of lower grade ore.
Earnings from mine operations were lower than last year. They were impacted by the planned mining of lower grades at Cerro San Pedro and Mesquite as well as lower realized commodity prices.
Average realized gold prices declined by 5%, silver prices by 10% and copper prices by 16% when compared to the first quarter of 2012. Net earnings were $36 million or $0.80 a share.
After adjusting for non-cash $23 million pretax gain on the mark-to-market of the company’s share purchase warrants and a pretax foreign exchange loss of $6 million, adjusted net earnings were $21 million or $0.04 a share. Net cash generated from operations increased by 59% during the first quarter, benefiting from New Afton being a meaningful contributor to the company’s cash flow.
In addition, in 2012 New Gold paid $7 million cash expense related to 2011 at Cerro San Pedro which reduced our cash flow in the first quarter of 2012. Slide seven provides an overview of our operational performance on a mine-by-mine basis.
New Afton, Cerro San Pedro, Mesquite and Peak began the year making solid contributions to the company’s earnings, despite mining lower grades at three of the four operations. With New Afton now operating at name plate throughput rate and with higher grades as ore is being sourced from underground we expect to see steady increases in gold and copper production as the year progresses.
Production at both Cerro San Pedro and Mesquite was impacted by planned mining of lower grade ore. Both mines are scheduled to move into higher grade portions of the open-pit which should result in stronger quarters as the year progresses.
Production at our Peak Mines increased by 33% compared to the first quarter of 2012. This was attributable to a 21% increase in gold grade and a 9% increase in ore tons processed.
As we announced on our Investor Day and during our year-end results call, we expect production and cash flow to increase in the second half of 2013 versus the first half. The company’s cost remain well below the industry average and are expected to steadily decline throughout the remainder of this year inline with planned increases in gold, silver and copper production.
Slide eight highlights some of the first quarter achievements at New Afton. As planned, in late January, the permanent underground crusher installation was completed which resulted in the underground mining rates steadily increasing.
The mining rate averaged 11,000 tons per day in March compared to 7,200 tons per day in the fourth quarter of 2012, as such, we are pleased to report that production increase in each consecutive month of the first quarter and we have seen further increases in April. With the mine and mill now running at name plate capacity, the New Afton team continues to look for ways to further optimize and increase throughput levels on a sustainable basis.
Our near term goal continues to be an increase to 12,000 tons per day by the end of 2013. On slide nine, we provide an overview of the New Afton C-Zone mineral resource.
We are excited about the progress that has been made in just eight months of exploration. The New Afton C-Zone gold and copper resources have grown by over 300%.
This update has demonstrated both an increase in the scale of the C-Zone and higher grades of gold and copper, as well as mineralization has been extended down depth of the already 14-year reserve block. Since the late February cut-off for this latest resource, an additional 4248 meters have been drilled in six holes.
As you can see, the new holes continue to demonstrate strong continuity of both gold and copper. We look forward to providing further updates on the value enhancing initiatives underway at New Afton throughout the remainder of this year.
Slide 10 provides an overview of our two world-class development projects. At Blackwater after completing extensive drill program in 2012, we are happy to report an updated mineral resource in early April.
Blackwater currently has 8.6 million ounces in the measured and indicated resource category for direct processing material. And of course we have a further 900,000 ounces to be stockpiled for processing later in the mine life.
This updated mineral resource estimate will be used for the feasibility study which remains on target for completion by the end of this year. The feasibility study will build upon September 2012 preliminary economic assessment, which outlined an open pit mine, with a potential to produce over 500,000 ounces of gold a year with the cost in the mid 500s.
Our fully carried 30% interest in El Morro continues to provide our shareholders with further gold and copper leverage from both the current resource base and the continued exploration potential. Gold Corp.
our 70% partner and the project operator is currently supporting the Chilean environmental agencies efforts to address the temporary suspension of the projects environmental permit. We anticipate this process should be resolved by the end of this year.
At the same time, various alternatives for our power source that would supply the projects in the northern part of Chile are being considered. We look forward to further progress being made on both of these fronts, and El Morro ultimately progressing through development and into production.
In fact on a 100% basis. Project spending at El Morro on the first quarter of 2013 totaled $19 million.
On slide 11, we highlight our 2013 exploration targets on over 1000 square kilometer land package at Blackwater. The current resource is hosted within the Blackwater zone in the center of the page.
We have identified four additional targets and plan to have four to six drills actively exploring these zones during 2013. As part of this, we will also be further exploring to Capoose, which is located approximately 25 kilometers from Blackwater and already has a base gold and silver resource.
We look forward to providing further updates on our exploration efforts throughout the reminder of this year. On slide 12, we show and reiterate the company's 2013 guidance, which demonstrates further gold production growth at lower cost.
Our gold production is scheduled to increase by 12% this year to a range of 440,000 to 480,000 ounces. At the same time, our cash cost are expected to decrease to $265 to $285 an ounce.
Now the company's cost guidance is based on $3.50 copper and $30 silver. While prices have recently dropped below these levels, given the volatility of commodity prices, we feel it is premature to adjust our cost guidance.
The company will monitor these byproduct prices as the year progresses. For additional perspective, at current commodity prices and foreign exchange rates New Gold’s cash cost would continue to be among the lowest in the industry at approximately $350 an ounce.
Slide 13 outlines our catalyst for 2013. Through the first four months of the year we outlined our operational guidance with increase in production and lower cost.
We announced an updated mineral resource of Blackwater with increased gold resources. Then, yesterday we announced a significant increase in the New Afton C-zone resource.
Looking forward, we will have further exploration updates as we look to find the next deposit of Blackwater. We've successfully completed the Blackwater PEA in 2013 and this year our focus is on the completion of 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 the interim goal of researching a sustainable 12000 tons per day by the end of the year. We expect a temporary suspension of the El Morro permit to be resolved later this year.
When combining these catalysts with scheduled increases in production at lower costs over the coming quarters, we think our momentum should only build through the balance of 2013. Slide 14 summarizes the key elements that characterize New Gold.
The collective experience of our Board and management team is a key differentiator, particularly as we navigate periods of increased volatility such as those we have seen in recent weeks. As a group, we remain both committed to and invested in the future success of our company.
The strength of our balance sheet and the significant cash balance provides us with a meaningful competitive advantage in these markets. Collectively, our assets are in jurisdictions with rich mining history.
Together they provide us with a peer leading organic growth pipeline at low cost. Initiatives like the throughput optimization at New Afton, the successful exploration of the C-zone, as well as the drilling of regional targets at Blackwater should provide further scope to increase the NAV of those assets.
We have delivered on multiple catalysts this year, but believe the best is yet to come. For all these reasons, we believe New Gold continues to hold its position as the leading intermediate gold producer.
In closing, I would like to thank you all for your continued support. Thank you.
At this time we would be happy to answer any questions you may have.
Operator
(Operator Instructions) First question comes from the line of Dave Katz with JPMorgan.
Dave Katz - JPMorgan
I recognize and appreciate the resource improvement that you've identified in zone C at New Afton, but I was a little curious about the quarterly flow in production from fourth quarter to first quarter. Would you be able to go into that a bit?
Ernie Mast
Dave Katz - JPMorgan
Okay, but when looking forward to the rest of the year obviously you are expecting an average quarterly, if one were to assume that were for the whole year of about 20, so pushing that through what exactly is allowing the production to go up on the quarter per quarter basis in the back part of the year.
Ernie Mast
Yeah, we feel we have upside on the throughput and on the mining side as well. So as mentioned in the report, we're targeting 12,000 tons a day and as well there is upside on grade compared to what we've seen in the previous quarter.
Dave Katz - JPMorgan
Okay, and then I believe you gave the CapEx that was spent this quarter on El Morro but what about Blackwater?
Brian Penny
As far as Blackwater is concerned, in the first quarter we spent about $15 million.
Dave Katz - JPMorgan
15, how would you expect that to move throughout the year?
Robert Gallagher
Pretty much flat line (inaudible). Pretty much flat line through the whole year.
Dave Katz - JPMorgan
Okay. And then on El Morro, given the weighting on the Chilean government, give any indications on the exact timing when that may occur?
Robert Gallagher
It's Bob again. No, we don’t have exact timing what is progressing now or the formal discussions between the government and the [Vasco] he knows the cooperative group up in the island.
Dave Katz - JPMorgan
Okay, in the absence of timing, do you have any color on how those conversations have been progressing?
Robert Gallagher
We understand from the government, that they are very focused, very positive and only a couple of (inaudible) that are of major concerns to the [Vasco] investment.
Dave Katz - JPMorgan
And this year does it seem surmountable?
Robert Gallagher
Yes.
Operator
The next question comes from the line of John Kratochwil with Canaccord Genuity. Your line is open.
John Kratochwil - Canaccord Genuity
Just going back to New Afton here for a moment, you said the underground is going back at about 11,000 tons per day, which should feed the mill. Do you have capacity do build a stockpile currently?
Robert Gallagher
Yeah, we will. We should be able to build the stockpile as the mine ramps up.
John Kratochwil - Canaccord Genuity
Okay. And do you have any idea, what kind of grades you are looking at towards the end of the year?
Robert Gallagher
We are looking at over 0.9% copper and about 0.7 to 0.9 grams per tonne gold.
John Kratochwil - Canaccord Genuity
Okay. Do you when approximately those might start come in, is that kind of more later half of the year, I guess?
Robert Gallagher
No, we are having those grades right now.
John Kratochwil - Canaccord Genuity
Are you, okay, excellent. So it was only a very short-term issue then.
Robert Gallagher
That’s correct.
John Kratochwil - Canaccord Genuity
Okay, perfect. That was about it for my questions.
Thanks a lot.
Operator
Your next question comes from the line of Dan Rollins with RBC Capital Markets. Your line is open.
Dan Rollins - RBC Capital Markets
Thanks very much. Ernie, may be can answer this on New Afton, how is the drawbell development coming, are you still ahead of schedule or are you right on schedule now?
Ernie Mast
Well, we have a 60 drawbells at the present time and that’s enough for our current production in our -- even our ramp up to over 12,000 tonnes a day.
Dan Rollins - RBC Capital Markets
And are you seeing any issues with the clogging in the drawbells that was not anticipated or is everything going as you had anticipated originally?
Ernie Mast
That’s going all as planned.
Dan Rollins - RBC Capital Markets
Perfect. And Brian, may be you can answer question from me on just with the decline in copper prices as of late, I am assuming now in Q2 we could see a bit of mark-to-market adjustment on the copper [condensate], how much do you currently have sort of unpriced final price right now?
Brian Penny
Basically what we do is every time we shift copper, we put in an offsetting contract to protect us from the drop in price on the copper inventory. So basically 90% of our receivable at the end of the quarter is already covered, so there is price exposure.
Dan Rollins - RBC Capital Markets
And then maybe so we can touch based on just production, I know you mentioned that majority of the cash flow was going to be back-end loaded but what a good estimate for H2 versus H1 on your production based on your original guidance, would it be about 40%, 45% production told in the first half and the remaining in the second half?
Hannes Portmann
Yeah, Dan, it's Hannes Portmann. Yeah, that is a good estimate.
Operator
Next question comes from the line of Steve Parsons with National Bank Financial. Your line is open.
Steve Parsons - National Bank Financial
Maybe also another question for Ernie. Looking at Mesquite and any benefits of the additional two trucks, to achieve the guidance for the year, I’ve got increased the mining rate to about 3.9 million tonnes a quarter from 3.5 and that kind of get me to low end of the guidance range.
Is that what you’re looking at in terms of the benefit of the new trucks?
Ernie Mast
Yes, the new trucks will help with the throughput, but the main increase in Mesquite for the remainder of the year is great. We are getting back into higher rate zones of the ore body.
Steve Parsons - National Bank Financial
Yeah, I got that. I just need the higher throughput to get to the guidance.
So would you expect then you are getting to run these trucks through the end of the mine life and we should be looking at higher run rates for tonnage to the pad through the rest of the mine life?
Ernie Mast
Yes, definitely.
Operator
Your next question comes from the line of Richard Gray with Cormark. Your line is open.
Richard Gray - Cormark
Just on the New Afton, how much ore was actually fell from the old pit in kind of January and February and what grade are you talking about when you are saying it's lower grade?
Robert Gallagher
We fed about 91,000 tonnes of ore and there was 0.4% copper and about 0.3 grams per tonne gold and it had a bit of lower recovery as well. So when you factor that into our throughput for the month you end up with lower production.
Richard Gray - Cormark
I mean is it -- can you say you broke even on that material or is there some profits on those kind of grades?
Robert Gallagher
Actually we profit on that material.
Richard Gray - Cormark
And just in light of what's happened in the market last year, where do you guys stand on a dividend some time this year.
Randall Oliphant
Richard as you know – it's Randall speaking, we've laid a lot of groundwork to be able to do that. You know I think you know seeing scope to be able to potentially increase you know the throughput and mining rate at New Afton, not really knowing what Mark can do at Blackwater in terms of potentially finding something there and just the opportunities that are presenting themselves to us, we feel like our cash is very valuable.
And I think trying to cease one of those opportunities I think long term is probably more valuable to us than the dividend, but we will continue to look at it, but there's no eminent plan put on in place.
Operator
Your next question comes from the line of Anita Soni with Credit Suisse.
Anita Soni - Credit Suisse
Can I get a breakout of some of the sustaining capital costs at each of the mines?
Robert Gallagher
Sure, Ani, Brain is just getting us page so he can make sure that he gives you the exact information.
Brian Penny
Basically we are looking at total capital expenditures for the year unchanged from what we did advise at the end of the year about $290 million. That includes approximately $60 million of Blackwater which we identified.
So you know assuming everything else is sustaining, it’s about $230 million. Biggest one is at New Afton 107, although some of that could be non-sustaining because it’s on the East Cave development, the additional drop at the development.
And the balance, the next biggest one is Peak at $55 million to $60 million and the balance is over the rest of the mines.
Anita Soni - Credit Suisse
Okay. So relatively speaking at all of the other mines that are operating you can assume every capital, the capital that reported was reported with sustaining capital except for New Afton there maybe a slight difference in split?
Brian Penny
Yeah, that's correct.
Anita Soni - Credit Suisse
Did you spend any at New Afton on that east drawbell this quarter?
Brian Penny
The East Cave development we did you know I think it was you know around $10 million.
Operator
(Operator Instructions) Your next question comes from the line of Frank Duplak with Prudential. Your line is open.
Frank Duplak - Prudential
Just to follow on the last question, any idea yet for where you might spend in 2014, I know a lot of things have to line up, but just if there's any thoughts out there it would be great to hear for CapEx?
Brian Penny
Yeah, Frank, we haven't provided 2014 capital guidance, but in order to be helpful to you, we expect our both our sustaining capital to be significantly lower in 2014 than it was -- than we expect in 2013. And the reason for that is we are building the last heap-leach pad expansion at Cerro San Pedro which will take care of the rest of the mine life, so that won't happen again.
We are buying two trucks at Mesquite and we don't plan on buying them next year. We are spending about $90 million on underground development at New Afton on drawbells and while that will take us up to 90 drawbells, that’s approximately half of the drawbells for the entire mine life.
So we just can’t spend at that rate going forward. So I think our capital should come down substantially and it will also be a function are we doing something at New Afton in terms of expansion of throughput capacity there, what are we going to do at Blackwater based on the results that come out of this year, but at our operating mines the capital should certainly be significantly lower than it was in 2013.
Frank Duplak - Prudential
If I take 150 to 175, is that reasonable with the drop from 230 this year?
Brian Penny
At this point, that’s probably fine number to use but recognize that it's a ballpark number as opposed to precise.
Operator
And your next question comes from the line of Anita Soni with Credit Suisse. Your line is open.
Anita Soni - Credit Suisse
Just one question, there was a follow-up on New Afton, do you anticipate having to use your lower grade stockpile at any time this year?
Robert Gallagher
No.
Anita Soni - Credit Suisse
So you are basically, I mean what's the April average rate right now?
Robert Gallagher
April average, where those figures which I mentioned previously, about 0.9% copper, 0.7% to 0.9 grams per ton gold.
Anita Soni - Credit Suisse
Okay, no, I met on the tonnage side, throughput tonnage on the underground mine is averaging in April.
Robert Gallagher
Yeah, 11,000 tonnes a day.
Operator
Next question comes from the line of Alec Kodatsky with CIBC. Your line is open.
Alec Kodatsky - CIBC
Just a couple of questions, first on New Afton, with the success of season, what more is it that you need to see before you start formalizing expansion plans, is it exploration or is it something on the engineering side and what would be a timeline?
Robert Gallagher
Well, we will have to finish off the block model and then do the engineering. So in terms of the timeline, I would say at some point during next year, we could finalize plans on how we will incorporate the C-Zone into the current mine plan.
Alec Kodatsky - CIBC
Okay. And I guess more of a high level question, just with your cash stockpile, I wondered if you could sort of comment on the opportunities that you see out there and sort of how you way that versus the risks that we’re seeing in the commodity price?
Randall Oliphant
Yeah, Alex, it's Randall Oliphant speaking. The nice thing for us is not only you have a lot of cash now, but our cash balance will build through this year or it should be higher at the end of 2013 than it was at the beginning and then should build again in 2014, with strong production, low cost and even less capital being spend.
And our time to really commit to Blackwater in terms of when we pull the trigger, we will probably be late 2014, because 2014 is really a permitting year for us and we can't spend a lot of money until we have the permits. Now while Blackwater gives really robust returns if you recall it, the PEA was done a $1275 gold generating after-tax return of 14% a year compounded for 17 years.
So we will see how the next 18 months progress. We are not overly concerned about the volatility that we have seen in commodity prices, we don't think any of the fundamentals have changed with gold at 1400 and whatever dollars, those are still high prices from our perspective that can give us significant margins, but long term I think gold is going to continue on its rise.
Operator
Your next question comes from the line of Dan Rollins with RBC Capital Markets. Your line is open.
Dan Rollins - RBC Capital Markets
Two quick questions, just on the C-Zone, what are the dimensions of that zone currently versus the current block cave, is that investment the same size?
Mark Petersen
No, not quite but the zones remains -- this is Mark Peterson speaking. We don't have it.
We haven't grown it to the same size as the main zone and main zone reserve and resource block up above, we called that the B Block. But it’s average with is about 50 meters now that range is right now with some still fairly loosely lineated, but that range is from upwards of 100 meters, why like we have up in the main zone reserve and then in another areas it can pinch down on its fringes, but it is totally open down plunged to the west and also slope vertically that’s about 500 meters or more below our lowest planned extraction level on the current timeframe.
Dan Rollins - RBC Capital Markets
Okay, great. So you are sort of envisioning this could potentially be down as a block cave, do you think you have the (inaudible) there to cave?
Mark Petersen
It’s still very early days but yes initial indications and talking with our technical guys out at New Afton is, so they are feeling good about what they are seeing and they are already flashing out some kind of preliminary design scope.
Dan Rollins - RBC Capital Markets
And then maybe just generally, what are guys seeing cost-wise, are you seeing pressure on consumables or are you starting to see on slide note, or are you now actually maybe seeing a little give on your suppliers and cost?
Mark Petersen
Basically it’s flat to a little bit positive as in reductions. On the fuel side, we are seeing obviously the pump price for diesel at Mesquite is down from where it was six months ago.
So we are seeing some benefits there as well.
Operator
[Technical Difficulty] I will turn the call back over to Mr. Oliphant.
Randall Oliphant
Well, thank you very much operator. I think we've got the first quarter behind us where we were able to generate quite a bit of cash, but what excites me the most is what we are going to be able to build on as we go through each successive quarter of the year.
Our mines are moving into higher grade zones. We've got New Afton matched to 11,000 tonnes a day coming out of the mine and the same rate going through the mill.
We see lots of potential to continue to expand our resources and will provide you with updates as we get through the year. Thank you very much for taking time to join us this morning.
And of course if you have any questions, please don't hesitate to call or email us. Thank you very much.
Operator
This concludes today's conference call. You may now disconnect.