Jul 31, 2014
Executives
Hannes Portmann – Vice President, Corporate Development Randall Oliphant – Executive Chairman and Director Robert Gallagher – President, Chief Executive Officer and Director Brian Penny – Executive Vice President and Chief Financial Officer
Analysts
Rahul Paul – Canaccord Genuity Inc. Andrew Quail – Goldman Sachs Anita Soni – Credit Suisse Dan Rollins – RBC Capital Markets
Operator
Good morning. My name is Michelle, and I will be your conference operator today.
At this time, I would like to welcome everyone to the New Gold Second Quarter Financial Results. 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 Mr.
Hannes Portmann. Please go ahead.
Hannes Portmann
Thank you, operator, and good morning, everyone. We appreciate you joining us today for the New Gold 2014 second 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; and Brian Penny, our CFO will also be available during the Q&A period at the end of the call. Should you wish to follow along with the webcast, please sign-in from our Homepage at www.newgold.com.
If you’re 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 would like to direct your attention to our cautionary language related to forward-looking statements found on Slide 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.
Slide 3 provides 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 sets 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 it should be reviewed in conjunction with the material presented. 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 quarterly results. The second quarter built on our strong start to 2014 and enabled us to set several operational and financial records for New Gold.
While we are proud of our year-to-date performance, we're even more excited that our strongest gold production and cash flow quarters of 2014 are now directly in front of us. Slide 4 provides a few of our quarterly highlights.
Consistent with the first quarter, we produced approximately 9,000 ounces of gold. Importantly, we continue to deliver this production at industry leading costs.
Our strong operational results led to $59 million or $0.12 per share of cash flow, which represents a 33% per share increase over the 2013 quarter. In the first-half of 2014, we produced over 180,000 ounces of gold at all-in sustaining costs of $707 an ounce, including cash costs of $253 an ounce.
This led to a $141 million of cash flow. The first-half of 2014 set multiple company records, including the highest copper production, highest byproduct revenue, lowest costs, highest per ounce cash cost margins, and most importantly, highest cash flow.
We are proud to establish these records despite commodity prices in the first-half of the year, being below those of the last few years. We finished the quarter with $414 million of cash.
Significant progress was also made at our growth projects. At New Afton, work on the mill expansion continue to pace.
The project remains on time and on budget for its mid-2015 commissioning. At the same time through our successful exploration efforts, we announced a significant increase in the measured and indicated resources in the C-zone.
We will use this updated resource to further our valuation of New Gold, New Afton's future potential. At Rainy River, we have now ordered all of the critical long lead time equipment and have made $180 million of capital commitments.
This equates to approximately 20% of the total development capital estimate. As the Rainy River project advances, we have continued to benefit from the limited development activity taking place in the industry.
These benefits have come in the form of both competitive pricing dynamics for equipment and access to high quality project development personnel. We look forward to providing you with further updates on our advancements at Rainy River in the quarters to come.
Slide 5 provides the summary of our quarterly and first-half operating performance, both on a consolidated basis and for our individual mines. On a consolidated basis, we delivered the lowest cash costs in our history with an average realized gold price of a little over $1,300 an ounce.
This enabled us to generate a cash cost margin of over $1,000 an ounce. Our low cash costs were also the key driver of our leading all-in sustaining costs, which resulted in a margin of over $550 an ounce.
Looking at the mines individually, New Afton simply continues to deliver. Second quarter gold and copper production remained in line with the record setting first quarter.
The quarterly all-in sustaining costs continue to be among the lowest in the mine's history whether on a byproduct or co-product basis. With total per tonne costs for mining, processing, and G&A below C$20 a tonne, New Afton is uniquely positioned cash flow generator in our industry.
The balance of our operating mines also performed in line with expectations. As noted in our 2014 guidance both Mesquite and Cerro San Pedro were scheduled to work through elevated stripping campaigns in the first-half of the year, which is reflected in their quarterly production and costs.
As we look forward to the second-half and particularly to the fourth quarter, production at our heap leach operations is expected to benefit significantly from increased ore tonnes being placed on the pad. Peak had a very strong quarter benefiting from planned higher grades and a continued focus on maximizing operational efficiencies.
Based on our first-half performance and our second-half targets, we are very pleased to reiterate our guidance for the year of 380,000 to 420,000 ounces of gold production, had record low all-in sustaining costs of $815 to $835 an ounce, including cash costs of $320 to $340 an ounce. Slide 6 provides a summary of our financial results.
Revenues and operating margin both remained in line with the prior year quarter. The impact to revenues of planned lower gold sales volumes was largely offset by a combination of increased copper sales volumes and slight increases in realized gold and copper prices.
Our quarterly operating margin increased relative to the prior year despite lower revenues. The increase was driven by $10 million decrease in operating costs, which was primarily due to the depreciation of the Canadian and Australian dollars, as well as further operational efficiencies being gained at our mines.
Adjusted earnings of $8 million or $0.02 a share were doubled those of the prior year quarter. The increase in earnings was due to a combination of the previously mentioned increase in operating margin, as well as lower exploration and finance costs.
This was partially offset by an increase in depreciation due to New Afton's increased production. Recorded net earnings of $16 million, or $0.03 a share were consistent with the prior year period.
The adjustments between reported and adjusted earnings during the quarter included a $16 million pre-tax gain on foreign exchange, which was partially offset by the combination of a $7 million pre-tax loss on the mark-to-market of the company's warrants, a $7 million non-cash accounting charge resulting from the unwinding of our legacy hedge position in 2013, and the $6 million tax impact associated with these adjustments. On the back of our strong operating performance, New Gold's cash flow per share increased by 33% to $59 million, or $0.12 per share from $43 million, or $0.09 a share in the prior year quarter.
The second quarter of 2013 included a $66 million charge related to the unwinding of the company's legacy hedge, whereas there were no adjustments in the current quarter. We are particularly proud in the first-half of 2014 we generated the highest cash flow in the company's history despite commodity prices being lower than those experienced in the same periods in the last few years.
Slide 7 provides an update on some of our near, medium, and long-term growth initiatives. At New Afton, the detailed engineering for the mill expansion is now over 50% complete.
We have also started the early construction works, as well as the excavation of the area immediately adjacent to the mill building that will house the tertiary grinding equipment. We remain on time with commissioning to the 14,000 tonne per day throughput level targeted for mid-2015.
The total capital budget of $45 million also remains unchanged. Important progress is also made at Rainy River.
Our internal project development team has been working closely with our EPCM partner AMEC on advancing the engineering for the project. In total, we have now made C$180 million capital commitments, which primarily consist of the initial mobile fleet and the milling equipment.
Consistent with our permitting schedule, we expect the environmental assessment review reports later in the third quarter and we anticipate the receipt of permits either in late 2014 or very early in 2015. Also after completing 39,000 meters of drilling in the first-half of 2014, our exploration team has identified two near mine areas that have the potential to host additional underground resources.
We will continue to follow up on these areas and provide updates as the year progresses. At Blackwater, our primary focus continues to be on permitting.
We recently achieved a significant milestone as we submitted out environmental assessment for review in early July. We also initiated our field exploration program late in the second quarter and are now actively drilling six key perspective targets.
We look forward to sharing the results of this drilling with you as they come in over the coming months. On Slide 8, we have Rainy River, which is located in Ontario.
It's our priority development project and Slide 8 provides an overview of the key attributes that make us feel so fortunate to have this great asset in our pipeline. Rainy River provides our company with an asset that combines a location close to infrastructure and skilled labor, manageable capital requirement that we expect to fund internally, production potential of over 300,000 ounces annually with solid grades, a very competitive cost profile, and a current resource base of over 6 million ounces of gold with significant and continued exploration potential.
Adding this project to our portfolio last year for $300 million, when valuations of development companies were among the lowest levels they have ever been is something we will believe, we'll look back on as a key moment in our company's history. With Rainy River now less than 30 months from targeted first production, we look forward to successfully advancing its development as we have done with our previous development projects, Cerro San Pedro, Mesquite, and New Afton.
Slide 9 provides an overview of our growth profile over the coming years. From 2014 base of 380,000 to 420,000 ounces, production in the coming years will benefit from Mesquite returning to its run rate annual production level of approximately 150,000 ounces, as well as the New Afton mill expansion.
In 2016, these benefits will be partially offset by Cerro San Pedro moving to residual leaching. Then in 2017, our production is expected to increase significantly as Rain River enters its first full year of production.
Thereafter, we will continue to have two significant growth options in Blackwater and our 30% interest in El Morro. We view both of these assets as being of great strategic value to our company.
This value is only been further substantiated by some of the recent valuations paid for assets of similar quality and scale in both the gold and copper spaces. Slide 10 highlights New Gold's targeted cash flow growth at current commodity prices.
With $141 million of cash flow in the first-half of 2014, New Gold is well on its way to delivering the expected 20% increase in cash flow over 2013. Then the targeted increases in production at lower costs, the coming years are scheduled to provide further cash flow growth, but 2017 cash flow expected to be double that of 2014.
Looking at our targeted 2017 cash flow in the context of our current enterprise value, excluding the consensus value of Blackwater and El Morrow demonstrates the value potential that we as shareholders ourselves see at New Gold. This is the potential to double our cash flow in a flat commodity price environment.
That was the key factor that led to our insider ownership growing by about a million shares during the second quarter. In closing, slide 11, summarizes the key attributes that leads New Gold so well positioned within the gold industry.
Our assets are located in countries with the fast mining histories and our critical masses increasingly shifting to Canada. Our team has gotten stronger with some key additions and our personal commitment to the company has increased with the recent insider buying.
Our first-half cost enabled us to deliver record per ounce margins and cash flow despite the gold price being below level seen in the past few years. Our organic pipeline enables us to provide shareholders with potential for growth both in gold production and cash flow per share.
And finally, by maintaining a consistent strategy and delivering both on our development projects and operations, we are proud to have a history of creating value for our shareholders. Thank you again for joining us today and for your continued support of New Gold.
This concludes our formal remarks. Should you have any questions or comments, we would be happy to answer them now.
Thank you.
Operator
Thank you. (Operator Instructions) Your first question comes from Rahul Paul from Canaccord Genuity.
Your line is open.
Rahul Paul – Canaccord Genuity Inc.
Hi, everyone. A question on Cerro San Pedro, if I look at the grade that you start in Q2 was 0.18 grams.
That seems to be a lot lower than your reserve grade. How should we expect the grade profile to change over the next few quarters and when do you expect to get back up to the reserve grade?
Robert Gallagher
Yeah, it's Bob here. Thanks for your question.
We'll see in the third quarter, we'll see that grade start to ramp up and we'll finish with a very, very strong fourth quarter.
Rahul Paul – Canaccord Genuity Inc.
Okay. Thanks.
Thanks, Bob. That's helpful.
And then a similar question, at Mesquite when do you expect to start mining in (inaudible) close to reserve grade?
Robert Gallagher
The grade is increasing now as we speak and we'll start to see the impact of the gold coming off those heap leaches as we go forward for the remainder of the year and then there will be a steady increase – there'll be just steady increase in grade as we go into next year.
Rahul Paul – Canaccord Genuity Inc.
So, I mean, 2015, should I assume that reserve grade should be attained in 2015?
Robert Gallagher
We'll be at reserve grade by the second-half of that year.
Rahul Paul – Canaccord Genuity Inc.
Okay. Thanks, Bob.
That's all that I had.
Operator
Your next question comes from Andrew Quail from Goldman Sachs. Your line is open.
Andrew Quail – Goldman Sachs
Good morning, Randall, Bob (inaudible) team, guys, thanks for taking my question and congratulations on a good quarter. Just a couple of questions, first on Rainy River, are there any sort of visible catalyst you guys see over the next sort of six to nine months that whether be in permitting or construction milestones that's sort of – that we should watch out for?
Robert Gallagher
Yeah, I think, permitting will be a great catalyst for us. We – as Randall mentioned the government's reports on environmental assessment are forthcoming in a matter of weeks and we've worked a lot with the government and with the communities and we don't expect any surprises there.
So I think you'll see very quickly what progress through the getting those required permits. And then early next year we'll actually get the final permits required for construction and you'll see we'll actually move into the construction phase early next year.
Randall Oliphant
And I think we're in exactly that base as we move through the process and again we're 30 months away from full production.
Andrew Quail – Goldman Sachs
Yes, and I agree. And just one on exploration, how much you guys spending at Rainy River versus something like New Afton, because they sort of – both of them seem like they would be competing for those – the money for rigs [ph]?
Brian Penny
As far as – it's Brian speaking, as far as the exploration for New Afton, it's about $12 million for the year, and Rainy River is about $10 million. There is really no competition.
We have great financial flexibility and we just want to do what's right for the long term for these projects.
Andrew Quail – Goldman Sachs
Great. I'm assuming with the other projects.
And as far as with say the other three: Peak, CSP and Mesquite, is it fair to say, obviously we should say, is it fair to say that where we are in Q2 of sustaining CapEx that level considered to be pretty much extrapolated out through the next two quarters and even to the (inaudible)?
Robert Gallagher
Well, at the Peak, yes. At CSP, a lot of the phase IV [ph] pushback happened in the first half of the year – will drop as we outlined in the news release in the second-half of the year.
Robert Gallagher
Okay.
Operator
The next question comes from Anita Soni from Credit Suisse. Your line is open.
Anita Soni – Credit Suisse
Hi, good morning, guys. Most questions have been answered, but just in terms of the New Afton growth capital spend, could you please get that [ph] for me on how much was exploration and how much was mill expansion?
Randall Oliphant
Sure, Anita. Brian is just picking up those numbers for you now.
Anita Soni – Credit Suisse
Okay. I have a second question then.
On the Peak grades that you experienced, they were pretty strong grades, how do you expect that to evolve over the course of the year?
Randall Oliphant
I'm sorry, I couldn’t – I missed your question.
Anita Soni – Credit Suisse
Sorry. Second question was Peak grades, I was just wondering how that evolved over the course of the year, you're sort of batting above the guidance that was above four gram per tonne material.
Do you expect this…
Randall Oliphant
We had some pleasant surprise in the tail-end of the last quarter, we expect to come in on guidance for the reminder of the year, so the grades will deliver as we expected.
Anita Soni – Credit Suisse
All right. Thank you.
And then just a question on the capital?
Brian Penny
Yes, for the first-half of the year, the significant portion of the capital expenditures was associated with the mill expansion, should we have the continued underground development, but the biggest chunk of it is mill expansion and our exploration efforts were a smaller portion of that.
Anita Soni – Credit Suisse
Thank you.
Operator
Your next question comes from Jim Harrison from BMHL [ph]. Your line is open.
Unidentified Analyst
Thank you very much. I just wanted to know if you could talk a little bit more about the potential for the extension of the mine life at New Afton.
Randall Oliphant
What we're looking at is, what we call the C-zone, which is immediately below and slightly to the west of the ore-body we are currently developing. And we are looking at in the range of six to eight years of additional ore and what the work plan for this year is to continue drilling that, get more confidence in those numbers and also to do the engineering, preliminary engineering with layouts and access and whatnot.
So by the end of the year, we'll come up with an economic analysis, it will be able to report more on in early 2015.
Unidentified Analyst
Early upbeat about what you are finding so far, but I gather that there is the potential for an extension to about 2030?
Randall Oliphant
Yes, in that order, yes.
Unidentified Analyst
Okay. Thank you.
Operator
Your next question comes from David Barila [ph] from JPMorgan. Your line is open.
Unidentified Analyst
Hi, guys. I just wanted to know or get an idea of whether you have changed your view on whether free cash flow generation and your current liquidity position is enough to funding future growth CapEx?
Robert Gallagher
Yes, thank you for the question. As far as we are concerned, we look forward – we look at our development plans, we look at the sequencing of Rainy River and ultimately building Blackwater at some point in the future once we know what metal prices are and where we are.
We are fully funded. The current cash balance plus the cash flow over the next two years will fully fund Blackwater.
We don’t – I mean, Rainy River, pardon me. We don’t see significant changes in our net debt to EBITDA going forward, it actually improve particularly when Rainy River comes into production, because as Randall said earlier our cash flow basically doubles.
Operator
The next question comes from Dan Rollins from RBC Capital Markets. Your line is open.
Dan Rollins – RBC Capital Markets
Yes, thanks very much. Paul, maybe you can just touch base, you've been tracking pretty well with reconciliation on, I guess, both gold and copper grades at New Afton.
How was that during the quarter and are you at a point in time where you are getting confidence on block model maybe underestimating grades?
Robert Gallagher
We're pretty much right on where we expect it to be and we like the block model.
Dan Rollins – RBC Capital Markets
Perfect, thanks.
Robert Gallagher
You're welcome.
Operator
We have no further questions at this time. I'd like to turn the call over to the presenters for closing remarks.
Robert Gallagher
Okay. Well, thank you very much operator.
Well, all of you who joined us today, thank you once again for spending time with us. On behalf of the entire New Gold team we hope you enjoyed the rest of the summer and look forward to our next opportunity to meet.
In the meantime should you have any questions, we are always accessible by phone or e-mail. Thanks you once again for joining us today.
Operator
Thank you, everyone. This concludes today's conference call.
You may now disconnect.