Oct 30, 2014
Executives
Hannes Portmann - Vice President, Corporate Development Randall Oliphant - Executive Chairman of the Board David Schummer - Chief Operating Officer, Executive Vice President Robert Gallagher - President, Chief Executive Officer, Director
Analysts
Rahul Paul - Canaccord Genuity Andrew Quail - Goldman Sachs Dan Rollins - RBC Capital Markets Mike Parkin - Desjardins Trevor Turnbull - Scotia Bank
Operator
Good morning. My name is Chrissie, and I will be your conference operator today.
At this time, I would like to welcome everyone to the New Gold third quarter 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).
I would now like to turn the call over to 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 2014 third 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 and David Schummer, our COO 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 are participating in the webcast, you can 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 three 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 three 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 should be reviewed in conjunction with the material presented.
I will now turn the call over to Randall.
Randall Oliphant
Thanks, Hannes. Good morning, everyone, and thank you for joining us today.
The third quarter saw us take the first step in our planned stronger second half operational performance. Importantly, we laid the foundation for the fourth quarter, which is scheduled to be our best quarter of the year.
Slide four provides a few of our quarterly highlights. We produced over 93,000 ounces of gold, which was consistent with the third quarter of 2013 and higher than the second quarter, as planned.
At the same time, we increased our copper production to over 25million pounds. Through the combination of our copper production, the depreciation of commodity currencies and further operational productivity improvements, we continued to deliver our gold production at low cost.
Our operational performance enabled us to generate $79 million of cash flow before working capital and $58 million after working capital. Working capital was primarily related to the increase in recoverable ounce inventory loaded our leach pad.
We are proud to have delivered increased cash flow for our shareholders, despite the lower metal prices being faced by our industry. On the back to this cash flow generation, we finished the quarter with $416 million of cash and equivalents.
We maintained our cash balance even as we advanced our growth projects and continued to progress our exploration initiatives. At Rainy River, we achieved an important permitting milestones.
Both the provincial and federal government released positive environmental assessment reports for public review and comment. The provincial preview period has now concluded.
The federal one is scheduled to close on November 8. We continue to anticipate the receipt of environmental permits for Rainy River late this year or very early in 2015.
Before getting into more details on the third quarter, I would like take this opportunity to welcome David Schumer to the New Gold team. As announced on November 29, he is taking on the role of Executive Vice President and Chief Operating Officer.
Dave further strengthens our senior management team and brings with him a combination of both significant operational and project development experience gained over his 22 years with Newmont Mining. Dave most recently ran Newmont's African division, where he oversaw the successful development of the Akyem project which was delivered on time and on budget, as well as the operation of Ahafo mine.
We view this is a wonderful opportunity to strengthen our operational team, especially given the multiple organic growth initiatives currently underway at New Gold. As we are moving forward with the New Afton mill expansion, furthering our evaluation of the New Afton C-zone opportunity and progressing Rainy River quickly towards development, Dave's experience paid immediate dividends.
Dave will have responsibility for our four operating mines. He will also work closely with Bob Gallagher on the advancement of our exciting development projects.
Welcome, Dave. We are thrilled to have you.
Slide five provides a summary of the quarterly operating performance at each of our mines. New Afton and Peak both continued their excellent performance delivering increased production at lower all-in sustaining costs.
At Mesquite, production increased significantly relative to both the 2013 quarter and the second quarter as planned. Production in the fourth quarter is expected to move even higher, benefiting from a further 35% increase in ore tons placed on the pad at 10% higher grade than the third quarter relative to the second quarter.
Importantly, Mesquite's all-in sustaining cost should also come down meaningfully moving forward due to a combination of increased production and a return to more traditional sustaining capital levels. As noted in our second quarter results announcement, the majority of Mesquite's full-year sustaining capital was in the third quarter which resulted in abnormal quarterly all-in sustaining costs.
Cerro San Pedro's production was below the prior-year quarter as anticipated due to the impact of the elevated stripping campaign through the early part of the third quarter. Similar to Mesquite, Cerro San Pedro saw a marked increase in both tons placed and grade in the third quarter relative to the second quarter.
It is now positioned for a strong fourth quarter. Cerro San Pedro's costs were also impacted as the mine's largely fixed operating cost base was attributed to a lower production base.
Based on performance through the first nine months of the year and on our fourth quarter plans, we are pleased to reiterate our consolidated guidance for the year of 380,000 to 420,000 ounces of gold production at all-in sustaining cost of $815 to $835 an ounce. That includes cash cost of $320 to $340 an ounce.
Slide six provides a summary of our financial results. Though our quarterly gold production remained consistent with the prior-year and copper production increased by 8%, our financial results were impacted by a few important factors.
Consistent with the broader industry, the prices of gold, silver and copper all decreased relative to the prior-year quarter. We were further affected by our sales volumes, which were below production due to the timing of those sales.
New Afton's quarterly gold sales were marked at the quarter-end gold price which was the lowest of the quarter. These impacts to revenue amounted to approximately $13 million.
As a result, our operating margin and adjusted net earnings were also affected. However, a combined $29 million decrease in operating, corporate administration and exploration expenses helped to partially offset the decrease in revenues, as well as an $11 million increase in non-cash depreciation.
The difference between our adjusted net earnings and reported net loss was primarily driven by the combination of a $48 million non-cash expense related to the increase in Chilean tax rate from 20% to 35% as well as a pretax foreign-exchange loss of $23 million, which was partially offset by $9 million pretax gain on the mark-to-market of the company's warrants. As a result of our operating performance and despite lower metal prices, New Gold's cash flow before working capital increased by 16% relative to the adjusted cash flow before working capital in the 2013 quarter.
The third quarter of 2013 cash flow was adjusted for $18 million non-recurring Rainy River related transaction expenses, whereas there were no adjustments in the current quarter. The increase in cash flow was driven by the previously mentioned decrease in expenditures and a $15 million decrease in cash taxes.
This resulted from the combination of a tax refund at Peak and lower overall cash taxes as a greater portion of the company's profits were generated by New Afton in Canada where we have substantial tax base. During the quarter, about 75% of the $20 million in working capital was related to the increase in the inventory of ounces placed on our leach pads, with the balance related to the increase in tax receivables in Mexico.
Our net cash flow increased by 61% relative to the prior quarter. The majority of this increase to the third quarter of 2013 includes the non-recurring transaction expenses.
We are proud that through the first nine months of 2014, we have generated almost $200 million of net cash flow and our strongest operational quarter of the year is yet to come. Slide seven provides an update on some of our organic development projects and exploration initiatives.
At New Afton, we have completed the detailed engineering for the mill expansion and have also poured the first concrete for the tertiary grinding building. We remain on time with commissioning to the 14,000 ton per day throughput level targeted for mid-2015.
The total capital budget of $45 million also remains unchanged. Separately we also continued to drill the C zone with four drills active.
Since our last update in early September, we have received the results of five more holes which have demonstrated strong grades and widths consistent with those previously released. As mentioned during the introduction, important progress was made on the permitting front at Rainy River, with the release of both the provincial and federal environmental assessment reports.
At the same time, detailed engineering and procurement activities also continued to advance. From an exploration perspective, w drilled almost 200 new holes in the first nine months of the year at Rainy River.
Our focus is on identifying additional resources both near surface and underground, which would ultimately have the potential to be incorporated into the Rainy River mine plan and further enhance the project economics. In many ways, these efforts remind us of the early days of the drilling of the C zone at New Afton.
At Blackwater, we filed the first environmental assessment report with regulators shortly after the end of the quarter and advanced our target exploration program. As a result of our team's systematic approach and despite the relatively modest amount of drilling done, our exploration efforts at Blackwater have yielded some very interesting results.
Drilling at two targets located about three kilometers south of the primary Blackwater deposit has intercepted a broad area of intrusive hosted porphyry style mineralization where assays have contained significant levels of gold, silver, copper and moly. While it's early days, our exploration team is excited about the geologic significance of these results, particularly as it then relates to the style of mineralization and at our 9 million ounce Blackwater deposit.
We look forward to providing additional updates as our efforts at Blackwater continue in the future. Rainy River in Ontario remains our priority development project and slide eight provides an overview of its key attributes.
Rainy River provides the company with an asset that combines location close to infrastructure and skilled labor, manageable capital requirements that we expect to fund internally, a current resource base of over 6 million ounces of gold with significant continued exploration potential, expected production of over 300,000 ounces a year underpinned by solid grades. At the bottom of the slide, we show the estimated grade and production contribution from open pit and underground as well as the weighted average combined mill head grades in the first five years of Rainy's mine life.
As you can see, the combination of a higher grade starter pit followed by the addition of five gram underground material helps drive both Rainy River's robust production and low cost profile. In a world where the average grade of undeveloped gold deposits are about half a gram per ton, we feel remarkably well positioned to have this asset in our portfolio particularly given its location in Canada.
Slide nine provides an overview of the key milestones in Rainy River's development timeline. As previously mentioned, we continue to anticipate the receipt of permits either late this year or early next.
Then early next year, equipment is scheduled to begin being delivered to site. Thereafter multiple development initiatives are planned to move forward in parallel.
As you can see on the slide, construction of the process plant, the tailings facility and the power line as well as the pre-stripping are all slated to begin in the first-half of 2015. Commissioning is targeted for very late 2016, with 2017 representing the first full year of production.
Slide 10 provides an overview of our growth profile over the coming years. From our 2014 base, production in the coming years should benefit from the New Afton mill expansion for a half year in 2015 and a full year in 2016 and beyond.
Mesquite will also move towards its historic production levels. In 2016, these benefits will be partially offset by Cerro San Pedro moving to residual leaching.
Then in 2017 our production should increase significantly as Rainy River enters its first full year of production. As highlighted previously, Rainy River on its own has the potential to produce over 75% of the gold that we produce across our four mining assets today.
Most importantly, this additional production is expected to come without us needing to compromise our company's low-cost position. Beyond 2017, we will continue to have two significant growth options, Blackwater and our 30% interest in EL Morro.
Though they maybe longer-term prospects, we continue to view both of these assets as being of great strategic value to the company. At Blackwater, it's important to remember that once permitted, we control the development timeline and can thus move it through to production when the time is right.
At the same time, in the case of El Morro, we continue to remain fully funded through production and then retain a portion of the cash flow from day one. As a result, when looked at in combination, we believe these projects support us tremendous growth optionality at very limited costs.
Slide 11 highlight some of the key items that we have delivered on this year, as well as our upcoming catalyst through the balance of this year and into 2015. Through the first nine months of 2014, our cost have never been lower and our cash flow never higher, despite the lower metal prices.
The New Afton C-zone has continued to grow and take shape. We look forward to updating our resource estimate again at year-end.
Today, we provided an update on our exploration initiatives at both Rainy River and Blackwater where the results have only furthered our belief in the potential of our two very sizable land packages in Ontario and British Columbia. Looking ahead, over the next months, we should receive the Rainy River permits and have an update on the scope of the C-zone opportunity at New Afton.
Then as we move toward mid-2015, we will be nearing the completion of the New Afton mill expansion. We can also look forward to getting Blackwater permitted.
Finally, while we cannot control metal prices, planned increases in production coupled with lower costs should position us to build further on our history of delivering year-over-year cash flow growth. In closing, slide 12 summarizes what we believe differentiates our company, irrespective of the metal price environment we find ourselves in.
Our assets are all in countries with established mining histories. Our critical mass is increasingly shifting to Canada.
Our board and management team has gotten stronger, both in experience with the addition of Dave Schummer and in their personal commitment to the company with the insider buying in 2014. Our low cash cost enable us to deliver strong cash flow even as metal prices have moved lower.
Our organic pipeline enables us to provide shareholders with potential for growth at a pace that is under our control. And finally, by maintaining a consistent strategy in 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. That concludes our formal remarks.
However, should you have any questions, we would be happy to answer them now. Operator?
Operator
(Operator Instructions) Our first question comes from the line of Rahul Paul from Canaccord Genuity. Your line is open.
Rahul Paul - Canaccord Genuity
Hi, everyone. Was is Cerro San Pedro impacted by heavy rains during the quarter?
we saw the other Mexican open pit leach miners talk about this.
Robert Gallagher
Sorry, I didn't catch that.
Rahul Paul - Canaccord Genuity
I am just wondering if Cerro San Pedro was impacted by heavy rains during the quarter because that was one operation where costs were quite high and production was pretty low.
David Schummer
Yes. Actually, this is David here.
Actually it was, and the impact was essentially on the consumable side in higher cyanide lime consumption basically, to get the concentration up to what we had planned.
Rahul Paul - Canaccord Genuity
Okay and then just moving on to Rainy River. With a positive provincial and federal environmental assessment report now released, what would the next steps be on the permitting front?
Robert Gallagher
The next step is the public comment period. It will close during the month of November.
The agencies, both the federal and the provincial agencies, would then make their recommendations to the cabinet level ministers and those ministers would, we believe, will approve the environmental assessment report.
Rahul Paul - Canaccord Genuity
Okay, thanks, and then just one last question. Just wondering if you could tell me what the -- just talk a little bit more about the $20.5 million government grant that you received, I think you received during the quarter?
Robert Gallagher
Yes. That's an incentive which the British Columbia Government, it's called BC Mineral Exploration Tax Credit.
It's based on qualified exploration. We booked this on receipt of it.
It was for us 2012 and for 2013 because of the lower activity compared to 2012. We are expecting to get $3.5 million dollars before the end of the year.
Rahul Paul - Canaccord Genuity
Thank you. That's all that I had.
Robert Gallagher
Thank you.
Operator
Our next question comes from the line of Andrew Quail from Goldman Sachs. Your line is open.
Andrew Quail - Goldman Sachs
Good morning, guys. I have just got a couple of quick ones.
Firstly, I mean you have to move buckets (inaudible) alone. On CSP and Mesquite, obviously you know, it works to $1,200 today.
Is there a price that you guys have in mind that makes (inaudible) to put these on care on maintenance?
Robert Gallagher
No. As we previously announced, we have gone through a lower grade higher strips period at the time and we are now into much higher production and we will see the impact of that as we move forward.
Andrew Quail - Goldman Sachs
Okay and also on Rainy River. It looks like this is a visible positive catalyst coming up.
I know it's at the early stage, is there any sort of unforeseen cost or obstacles that might push that timeline out to produce production 2017?
Robert Gallagher
I think the key timeline issue at this time is the permitting and that's moving on schedule. So we don't anticipate a delay on that.
We recently announced that we signed our first stop IBAs with the two principal First Nations. So we have got their full support.
There is a consent from them. And that is a very important consideration for the government going forward in granting the permits.
Andrew Quail - Goldman Sachs
Obviously you follow the cost, the accrued base is viable given the shelf in Canadian Dollar. Is that something that will be realized in the next 12 months, as you guys provide equipment?
Or is that something later on?
Robert Gallagher
Yes. That will continue as we execute on the project over the next couple of years.
Andrew Quail - Goldman Sachs
So thanks guys.
Robert Gallagher
Thanks, Andrew.
Operator
Our next question comes from the line of Dan Rollins from RBC Capital Markets. Your line is open.
Dan Rollins - RBC Capital Markets
Yes. Thanks very much.
Brian, I guess just a couple of tie up questions for you. I guess at the beginning to year you had expect to spend about $105 million at Rainy of the free capital in this year.
It means you have got spend about around $60 million for Q4. Is that still a reasonable estimate?
Or should we expect some of that to get pushed into 2015?
Robert Gallagher
It's still a reasonable estimate. But it should come in a little bit lower because the original guidance was based on $0.95/dollar and obviously it's a little less with 70% of the cost denominated in Canadian dollars.
But roundabout same number.
Dan Rollins - RBC Capital Markets
Okay and then again at Peak, $40 million budget for the year. Obviously you have an Aussie impact there.
But $20 million for Q4, is that reasonable? Or again you are seeing more cost savings than you have seen year-to-date?
Robert Gallagher
Yes. It's still reasonable because we have got a couple of equipment purchases, suite additions coming in the fourth quarter that will make the fourth quarter a little high.
Dan Rollins - RBC Capital Markets
Okay and then moving on. Obviously at New Afton, you were impacted by prior period settlements on the gold.
You have been hedging the copper on a short term basis to take out that volatility. Have you guys, as a company management team, put any though into maybe hedging out the gold on a go forward basis, just given the volatility we are seen?
Or are still happy with letting that flow to market?
Robert Gallagher
Well, Dan, if you look at the six month results, our average realized -- I mean the nine month results, our average realized price on gold is within $3 of the market average. So to put together a complicated QP hedging program on gold, which is first of all, against our DNA as a gold producer, to try and protect quarter-by-quarter volatility, when over the longer term, it really doesn't exist.
That's why we haven't done anything and that's sort of where we are landing on this.
Dan Rollins - RBC Capital Markets
Okay and of that price, was all that actually realized cash? Or was part of that the non-cash mark-to-market impact?
Robert Gallagher
Those are all realized cash that marked us $6.8 million in the quarter for the realization of the historic Mesquite loss of the hedge monetization is outside of that calculation.
Dan Rollins - RBC Capital Markets
Okay, perfect, and then just with Rainy River, given that where the Canadian Dollar is, any thought of locking in the Canadian Dollar rate to provide a little bit more protection on the capital budget? Maybe allow it to be under budget?
Robert Gallagher
Well, we are looking at that all the time. as we get closer to permitting, that's something we have to look at.
What's the simplest things that we could is what we did when we were building New Afton. We are long on U.S.
dollars. Maybe we part some of it into Canadian Dollars to take advantage of the rates as with the existing cash we have and as cash flow comes in.
Dan Rollins - RBC Capital Markets
Great. Thanks very much.
Congrats, guys.
Robert Gallagher
Thanks, Dan.
Operator
(Operator Instructions). Our next question comes from Mike Parkin from Desjardins.
Your line is open.
Mike Parkin - Desjardins
Hi, guys. Just a question on the funding of Rainy River with the follow-up trend of some of the questions earlier.
With the CapEx mostly not spent at this point and although you have a good balance sheet right now, is there any work being done to look at potentially securing a bit of a credit facility or something like that, just in case if we sustain these low metal prices over the next couple of years?
Robert Gallagher
Well, in August, we announced the expanded revolver, a $300 million revolver. And basically that was put in place that if we get into a softer metal price period, it provides us flexibility.
Our projections still show Rainy River fully funded with the cash we have and the cash flow and the credit facility is our insurance policy. Although $50 million roughly is already drawn for Letters of Credit for a closure obligations but they have lots of availability there.
Mike Parkin - Desjardins
All right. Thanks, guys.
Robert Gallagher
Thanks, Mike.
Operator
Next question comes from the line of Trevor Turnbull from Scotia Bank. Your line is open.
Trevor Turnbull - Scotia Bank
Yes. Just a quick question.
You were talking about the agreements that you signed with a couple of the First Nations at Rainy, I thought there was actually even more groups that potentially you were talking to. Are you anticipating any further kind of endorsements from some of the groups up there?
Or anything that we should be watching for ahead of the public comment period?
Robert Gallagher
Yes. We are in discussions with four other First Nations/Métis and those are progressing very well and two of those should be finalized very shortly and the other ones are rolling forward.
But again, as I mentioned, the two key First Nations are signed onboard and we have the full support of them at this time.
Trevor Turnbull - Scotia Bank
And those are the ones, I guess, that are kind of the most proximal and will kind of see the biggest impact from the project, the two that you have already got the letters from?
Robert Gallagher
Yes. That's right.
Basically they have, what they call, the strongest claim to the area. The government likes us to also consult with First Nations that have a history of seasonal use, historically seasonal use of the area.
And those are the discussions we are continuing to have. And again, they are progressing very positively, but there is a certain pace associated with these discussions but this is the second comment period.
And during the first comment period, when we were in discussions, obviously more preliminary, the First Nations expressed that they were in productive discussion with us. So we won't have any issues with the First Nations.
Trevor Turnbull - Scotia Bank
Okay. I appreciate it.
Thanks, Bob. You are welcome.
Operator
There are no further questions in queue at this time. I will turn the call back to our presenters for any closing remarks.
Robert Gallagher
Okay. Well, thank you very much, operator.
To those of you who have joined us today, thank you once again. As we do not have any planned communication between now and the end of the year, on behalf of the entire New Gold team, I would like to wish you and yours a very safe and happy holiday season and all the very best for the New Year.
As always, should you have any questions, please don't hesitate to reach out to us by telephone or email. Thank you very much for your time.
Operator
Ladies and gentlemen, that does conclude today's conference call. Thank you for joining us today.
You may now disconnect.