Apr 30, 2015
Executives
Hannes Portmann - Vice President Corporate Development Randall Oliphant - Executive Chairman and Director Robert Gallagher - President, Chief Executive Officer and Director David Schummer - Executive Vice President and Chief Operating Officer Brian Penny - Executive Vice President and Chief Financial Officer
Analysts
Andrew Quail - Goldman Sachs Rahul Paul - Canaccord Genuity Inc. Anita Soni - Credit Suisse
Operator
Good morning. My name is Jeremy, and I will be your conference operator today.
At this time, I would like to welcome everyone to New Gold Inc., First Quarter 2015 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 turn the call over to Mr.
Hannes Portmann, Vice President Corporate Development. Please go ahead, sir.
Hannes Portmann
Thank you Jeremy and good morning everybody. We appreciate you joining us today for the New Gold 2015 first quarter earnings results conference call and webcast.
On the line today we have Randall Oliphant, Executive Chairman of New Gold; Bob Gallagher, our President and CEO; Dave Schummer, our COO; 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 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 statement.
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 set 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
Thank you, Hannes. Good morning everyone and thank you for joining us today.
The first quarter of 2015 has been an active one for our team. The year is off to a solid start.
Slide 4 provides a few of the highlights. Strong production from our two heap leach operations resulted in production of 95,000 ounces of gold in the quarter an increase of 4% over last year.
Our costs was still below industry average were higher than last year, primarily due to lower byproduct revenues due to lower copper and sliver prices. Despite lower metal prices we generated $70 million of cash flow or $0.14 of share.
As a result of our robust cash flow generation our cash balance of over $360 million remain largely unchanged from the year end of 2014. Despite investing in the advancement of our growth projects, two key growth initiatives we focused on during the quarter were the completion of the New Afton mill expansion and the initiation of construction activities at Rainy River.
At New Afton we are very proud of our project development team; they are currently finalizing the commissioning of the expansion, which is both ahead of schedule and under budget. At the same time after receiving our environmental approval at Rainy River in January activities have steadily ramped up, they will continue to accelerate as we move through the balance of this year.
Slide 5 provides a summary of our first quarter mine-by-mine operating results. New Afton continued its strong performance generating $50 million of operating margin despite lower gold and copper production relative to the first quarter of 2014.
The decrease in production was a result of lower gold and copper grades as well as lower recoveries which were primarily related to the increased throughput and the resulting Coarse grind. New Afton’s costs were impacted by about $266 an ounce due the decrease in copper byproduct revenue due to a combination of lower volumes and prices.
On a per ton basis New Afton costs remained remarkably attractive they averaged under $18 a ton in the first quarter from mining, processing and G&A. At the same time quarterly sustaining capital decreased by $6 million or a $140 an ounce offsetting a portion of the copper byproduct impact.
Mesquite had a strong operating quarter with production and costs remaining consistent with the prior year. However, all-in sustaining costs were unusually high.
The mines quarterly capital was $23 million relative to $4 million a year ago. The increased spending was a result of the leach pad expansion that is underway and capitalized waste stripping to position the operation for a strong second half.
Peak also had a solid start to 2015 despite some geo-technical challenges at depth in the Perseverance ore body late in the quarter. This resulted in lower throughput versus the prior year.
The team at Peak has done a great job adapting its plans to source ore from other production headings, while mining activity in perseverance is temporarily limited. Consistent with New Afton, Peak’s costs were impacted by a $103 an ounce due to the decrease in copper byproduct revenue which was partially offset by the depreciation of the Australian dollar.
At Cerro San Pedro after focusing on waste stripping in 2014 to position the mine for its final year of active mining, 2015 is off to a good start. Cerro San Pedro has the highest production quarters since 2013, it is also benefiting from limited capital expenditures this year.
Slide 6, provides a summary of our quarterly financial results as metal prices decreased by 6% to 18% relative to the same quarter of last year, our financial results were similarly impacted. The company’s revenues decreased by $22 million relative to the first quarter of 2014 with 50% of the decrease related to the lower metal prices and the balance due to lower metal sales volumes.
At the same time our operating expenses remain consistent with the prior year. The depreciation of the Canadian and Australian dollars as well as lower diesel prices combined to offset the incremental cost associated with our increased mining activity.
As a result the decrease in operating margin was consistent with that of our revenues. Importantly, each one of our four operations generated a positive operating margin and contributed to our consolidated quarterly margin of $69 million.
The company had an adjusted net loss of $5 million or $0.01 per share in the first quarter. The loss was the result of the decrease in operating margin coupled with an increase in non-cash depreciation of $3 million and an increase in finance cost of $3 million as well.
As we are no longer capitalizing a portion of our interest cost to Blackwater. Our reported net loss of $44 million or $0.09 a share was primarily driven by $36 million pretax foreign exchange loss.
We generated $70 million in cash flow during the first quarter despite lower metal prices. Our cash flow generation was underpinned by our solid operating performance and the receipt of a tax refund for historical installment overpayments at Cerro San Pedro.
As a result of our cash flow generation, our four operations once again delivered the free cash flow that we were able to reinvest in our portfolio of growth assets. Slide 7, provides an update on two growth initiatives at New Afton.
Together, the New Afton mill expansion and C-zone give our more significant cash flow generator the potential to generate even more cash flow and for a longer period of time. We are particularly proud of our project development team who delivered the mill expansion a head of schedule and below budget.
Earlier in April, the Vertimill has commissioned and we have started commissioning the flotation cells. The total project cost is tracking below $35 million relative to the initial budget of $45 million.
About half of the savings was due to lower Canadian dollar spending and the other half is a result of the depreciation of the Canadian dollar compared to the – when the budget was set. I would like to personally thank the team for their project execution.
Over the next few weeks we will continue to optimize the mill circuit with the goal of operating at a substantially higher throughput well also benefiting from a finer grind. This should help drive production and cash flow in the coming quarters.
Looking further to the future, our evaluation of C-zone remains on scheduled for delivery of the feasibility study in early 2006. The feasibility study will build upon the results of the scoping study we announced earlier this year.
That study outlined the potential to extend New Afton’s mine life by five years over and above the current eight-year reserve life. Slide 8 summarizes the evolution of New Afton’s value is a transition from a development project in early 2010 to first production in mid-2012 and finally to today.
We view this slide is important for two primary reasons. First, it allows us to track the net value that has been created at New Afton relative to our initial $790 million capital investment.
I am very pleased that after factoring in New Afton’s first quarter free cash flow and based on the current analyst consensus NAV we have now doubled the value of our investment. And second, it provides a roadmap of the opportunities that we have in front of us as we execute on the development to Rainy River were production is now less than 2.5 years away.
We look forward to continuing the development to Rainy River through its targeted mid-2017 startup. Then consistent with our experience at New Afton, we can explore the multiple avenues available to further increase the value of this asset.
Slide 9 provides an update on our progress at Rainy River. After receiving an approval of our environmental assessment early in the year activity at the site has continued to accelerate.
Our focus during the quarter was on further advancing detailed engineering, site clearing and construction of the temporary accommodation facility. All of these initiatives are progressing on schedule.
In March, we were accepted into the Ontario, Industrial Electricity Incentive Program which enables the project to receive a reduction in power cost through the end of 2024. This should further benefit our already competitive operating costs over the first 7.5 years of the mine life.
Finally, after the completion of our acquisition of Bayfield Ventures at the beginning of this year, we incorporated their historical drill results into our Rainy River resource estimate. This added about 10 million tonnes of additional gold and silver inventory to our measured and indicated resource and our team is now turning its attention to how this can be incorporated into our open pit and underground design.
Construction activity site is schedule to continue to advance in the coming quarters. We look forward to providing you with more updates as we move through the balance of 2015.
Slide 10 summaries our portfolio of organic growth initiatives. They spend various stages of the development lifecycle and provide us with multiple embedded options.
In addition to the New Afton projects and Rainy River, we also have our Blackwater project in British Columbia which is working through permitting in 2015 as well as our fully carried 30% interest in El Morro located in Chile. Similar to other Canadian projects, Blackwater’s developments and operating costs will benefit significantly from the deprecation of the Canadian dollar.
Based on today’s commodity price environment the startup development at Blackwater is scheduled to commence after Rainy River is in production. With annual production potential of 485,000 ounces a reserve life of 17 years and low cost, we feel fortunate to have it in our pipeline.
At El Morro our partner Goldcorp is revisiting its engineering and planning concept with a goal of both optimizing project economics and facilitating permitting. Collectively our projects provide our shareholders with exposure to significant gold, copper and silver, mineral reserves in jurisdictions with established mining history.
Importantly from our already solid foundation, they also provide us with an opportunity to transition into progressively longer-lived, larger scale and lower cost assets. Slide 11, highlights some of our key catalysts, the first three related to the permitting and commencement of construction at Rainy River.
I am pleased to report that all three were successfully achieved on schedule during the first quarter. We are also proud to have delivered the New Afton mill expansion ahead of schedule and under budget.
Our investment of $35 million should enable New Afton to further increase its mill throughput while also optimizing recoveries with a finer grind thus resulting on a quick payback and a robust rate of return. Looking ahead to the summer months our exploration teams activities at both Rainy River and Blackwater is set to ramp up we look forward to providing updates on their progress.
Then towards the end of 2015 the C-Zone permitting process is scheduled to start. Finally, we remain on track to announce the results of the C-zone feasibility study in the first quarter of 2016 and Blackwater should have its key permits in place early next year.
In closing, Slide 12 summarizes the five key attributes that combine to provide New Gold with its solid foundation and bright future. Our assets are all in countries with established mining histories.
Our Board and Management team have the experience to execute on our plans and importantly, are significantly invested in our company along side all of you. Our low cost enable us to deliver $70 million of cash flow in the first quarter even as metal prices moved lower.
Our portfolio of organic growth assets includes projects at various stages of development, providing us with flexibility as we move forward. And finally, by reinvesting the free cash flow generated from our operations in longer-lived, larger scale and lower cost assets, we believe we are well-positioned to create long-term shareholder value.
Thank you again for joining us today and for your continued support of New Gold. That concludes our formal remarks.
And now, we would be happy to answer any of your questions.
Operator
[Operator Instructions] Your first question comes from the line of Andrew Quail with Goldman Sachs. Your line is open.
Andrew Quail
Good morning Randall and team. Thanks very much for taking my question.
Just a couple of one CapEx I think, first New Afton obviously it’s good to come under budget, how much is left sort of Q2 at New Afton for the expansion.
Brian Penny
As far as the remaining CapEx at New Afton is little less than $10 million on the mill expansion.
Andrew Quail
Correct. And New Gold is obviously – after spending some money at the C-zone which is positive, how much do you think you will spend for the rest of the year on the C-zone?
Brian Penny
Our spend for the year is unchanged from what we guided before, above $5 million I believe on the – some engineering and getting the feasibility study done, but for New Afton we are guiding to little bit lower than what we guided at the beginning year because of the savings anticipated on that mill expansion.
Andrew Quail
Great. Thanks Brian.
One – moving to Rainy, on the CapEx I think you guys invested $300 million with the spend for 2015, is that still what you are targeting because it will be a big ramp up obviously coming to Q2 and to the residual of the year?
Randall Oliphant
Yes, we haven’t changed our guidance, our spending is will have and over the next three quarters obviously we spent about $20 million in the first quarter and if you were to average that over the next three quarters of remaining that’s probably a good proxy.
Andrew Quail
Great. Last one on Mesquite, not so much on tons, but more so on the grade but why reserve obviously is and expected that we should say that improving as we head into the second half of the year and even to 2016?
David Schummer
Yes, this is David, we do – we are in the stripping of V1 right one and seem obviously more weights than over tons that grade should improve at depth as we advance throughout the year.
Andrew Quail
Back to sort of like a second half of 2014 or which was above 0.4?
David Schummer
Yes, we are looking for in the – in that 0.4, 0.45 range.
Andrew Quail
Okay. Thanks very much.
That’s it from me guys.
Brian Penny
Thanks Andrew.
Operator
Your next question comes from the line of Rahul Paul with Canaccord Genuity. Your line is open.
Rahul Paul
Hi, everyone. Good to see the New Afton mill expansion being completed ahead of the schedule – budget that said I’m just little bit surprise that despite the fact the mill expansion is ahead of schedule you’re expecting production for the full-year to come in at a low end of guidance just what to know the reasons for that?
Brian Penny
Yes, at this point we’ve seen slightly lower grade than expected given the positive preliminary indications on how the mills performing and coupled with the throughput we’ve achieved to date and other plan debottlenecking optimization works that we have, we have in play right now, we are expecting throughput to be in that 14,500 range by the end of the year perhaps a bit higher, but the grade is slightly lower than expected right now.
Rahul Paul
Okay, and then in terms of mill recoveries eventually are you still targeting 83% and 85% for gold and copper respectively and how long do you think it takes to get that?
Brian Penny
We do have the early commission as you mentioned. I would be looking for those recoveries to come in over the next couple of months as we fully commission and those are the correct ranges, yes.
Rahul Paul
So I mean Q2 and beyond I mean it should be sort of a steady state with respect to recovery?
Brian Penny
Yes, between Q2 and Q3 I would expect those ranges to be achieved.
Rahul Paul
Okay, and then just quickly moving on to Blackwater you did indicated the province requested more information on the tailings design. Just wondering if you could talk a little bit more on that I mean do they have any concerns regarding the current design, do you anticipate having to make any changes and could that be an impact on capital?
Robert Gallagher
It’s Bob here, the main outcomes from the Mount Polly occurrence are that we need to do our independent technical review of our design which is underway at this time. And secondly, we have to look harder at alternatives to conventional tailings particularly dry stack, we did an initial look at that, but the regulators are looking at more design – more detailed design [working costing].
We don’t anticipate that there will be a change in the concept that we have in our feasibility study at this time.
Rahul Paul
Okay, so when is that review process expected to be complete?
Robert Gallagher
That will be in the course of the next six months will be through that as and it will coincide with our environmental assessment public review conducted by the government.
Rahul Paul
Okay thanks that’s all that I had.
Operator
[Operator Instructions] Your next question comes from line of Anita Soni with Credit Suisse. Your line is open.
Anita Soni
Good morning gentlemen my questions are with regard to on the Mesquite what is the life of mine waste strip at Mesquite I think you guys were saying that it was extraordinarily high at over nine quarter and should trend down towards life of mine?
Brian Penny
Excuse me its Brian speaking Anita you know the life of mine strip ratio is above 3 to 1, we are in a higher strip cycle because we’re the pit is BW1 we are in a prestrip to get to the ore that will happen obviously it happened in the first quarter and into the second quarter which sets up us up very well for the balance of the year. The balance of the year the strip ratio will be well below the life of mine averages.
So you know more or on leach pad more ounces and that’s way Mesquite is weighted significantly to this third and fourth quarter.
Anita Soni
And then just I was a little confused about whether or not any of that 9.2 was being capitalized or was it all expensed?
Brian Penny
Well, we are capitalizing it when we put our budget or guidance together we assumed we would be finished with BW1 by the end of the year and as a result it was all through the income statement. We determine we are going to mine that into 2016 so over the year we will capitalize above $20 million but our operating costs will be $20 million lower so it’s a push through as far as your all in sustaining cost we don’t expect that to change at all, but its just in different buckets because the logic behind capitalizing it based on what we know today make sense.
Anita Soni
Okay so when you are talking about $20 million if you had to bucket the whole sort of stripping how much is expensed and how much is capitalized $20 million as what the proportion of – to $80 million.
Brian Penny
$20 million is what will be capitalized throughout the year as far as the expensed portion is embedded in the operating cost and I really don’t have that number handy but you know maybe I can get it for you.
Anita Soni
Okay that would be great thank you. That’s it from my questions.
End of Q&A
Operator
We have no further questions on the line at this time. I would like to turn the call back to the presenters for closing remarks.
Randall Oliphant
Thank you very much operator. To all of you who have joined us today thank you again.
As always, should you have any additional questions, please do not hesitate to reach out to us by phone or e-mail. Thank you very much and have a good day.
Operator
And this concludes today’s conference call. You may now disconnect.