Jul 29, 2015
Executives
Hannes Portmann – VP, Corporate Development Randall Oliphant - Executive Chairman Robert Gallagher – President and CEO David Schummer - EVP and COO Brian Penny - EVP and CFO
Analysts
Rahul Paul - Canaccord Genuity Andrew Quail - Goldman Sachs Don MacLean - Paradigm Capital Anita Soni - Credit Suisse John Bridges - JPMorgan Trevor Turnbul - Scotia Capital Phil Russo - Raymond James
Operator
Good morning. My name is Jessica, and I will be your conference operator today.
At this time, I would like to welcome everyone to the New Gold Second 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] Thank you.
I would now like to turn the call over to Hannes Portmann, Vice President of Corporate Development. Mr.
Portmann, you may begin your conference.
Hannes Portmann
Thank you, Operator, and good morning everyone. We appreciate you joining us today for the New Gold 2015 second 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 newgold.com.
If you’re participating in the webcast, you can also type your questions online 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 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 for New Gold second quarter earnings webcast. Slide 4 provides a few of the highlights from the quarter.
Strong performance from our two heap leach operations resulted in production of over 86,000 ounces of gold in the quarter. Our solid first half production and planed stronger second half give us potential to deliver full year production at the high end of our guidance range.
Our costs while still below by industry average were higher than last year primarily due to lower byproduct revenues driven by lower copper and silver prices. As expected, our per ounce cost were above our full year guidance due to our planned second half production being higher than the first.
Cash cost and all-in sustaining costs are expected to decrease significantly in the second half of the year. As full year copper production may be at the low end of the range and a higher percentage of our gold production is expected from our open pit mines, cost may be approximately $50 an ounce above our guidance range.
Despite lower metal prices, our cash flow remained consistent with the 2014 quarter at $63 million. We finished the quarter with cash of $327 million.
We also recently added a further $175 million of liquidity with our Rainy River streaming transaction. We are proud to announce the New Afton mill expansion is complete.
As expected, we are seeing increases in the recovery of both gold and copper. The project came in both ahead of schedule and under budget.
We thank our project team for their continued solid execution. Finally, Rainy River construction continues to advance quickly.
We had multiple milestones in the quarter and most recently had our first concrete pour for the processing facility. Slide 5 provides a summary of our second quarter mine-by-mine operating results.
New Afton had another solid quarter. Gold and copper production were slightly below the second quarter of 2014 due to lower grade and recovery.
The mill expansion was successfully commissioned which resulted in higher recoveries when compared to the first quarter of 2015. The completion of the expansion positions us well for a strong second half.
New Afton's costs were impacted by a $286 an ounce of less copper byproduct revenue due to a decrease in the realized copper price. Relative to the 2014 quarter, sustaining capital increased by $3 million or $111 an ounce.
This resulted in all-in cost of minus $235 an ounce. Mesquite also had a strong quarter with gold production of 23,000 ounces, a 22% increase relative to the second quarter of 2014.
Cash cost decreased by $154 an ounce relative to the prior year quarter. However, significantly higher than normal sustaining capital resulted in all-in sustaining cost remaining well above historical levels.
Quarterly sustaining capital of $15 million was $10 million higher than the 2014 quarter. The spending was associated with the leach pad expansion, as well as the capitalization of waste stripping in April.
Looking forward to the second half of 2015, Mesquite’s all-in sustaining costs are expected to come down significantly. This is due to the combined benefit of approximately 60% of the mine’s production being in the second half and only 40% of the full year sustaining capital is left to be spent in the final two quarters of this year.
Peak continues to recover from the geotechnical challenges they faced in the first quarter. This contributed to lower tonnes mined and processed.
The team continues to successfully work through the rehabilitation of the impacted area with the mining activity now at 60% to 70% of historic levels at Perseverance. Peak's cost during the quarter was higher than the prior year period due to a 50% decrease in gold sales volumes.
The decrease in copper by product revenue was largely offset by the depreciation of the Australian dollar. Similar to Mesquite, Peak’s second half per ounce cost should decline meaningfully as approximately 60% of the mine’s full year gold production is targeted for the second half of 2015.
Cerro San Pedro emerged as our largest gold producer during the quarter. Our focus on waste stripping in 2014 positioned the mine well for a strong 2015 and the team is delivering.
Costs remain low and continue to benefit from the limited capital expenditures this year. In aggregate, our mines are off to a good start and we are well positioned for a strong second half of the year.
Slide 6 provides a summary of our quarterly financial results. The Company's revenues decreased by $10 million relative to the second quarter of 2014.
The impact from decreases in metal prices was partially offset by the higher gold and silver volumes at our operations. The decrease in operating margin during the quarter was driven by lower revenues.
Second quarter operating expenses remained in line with the prior year, as cost associated with increased mining activity at each of our operations was largely offset by the combined benefit of the depreciation of the Canadian and Australian dollars. The company had an adjusted net loss of $1 million in the second quarter of 2015.
The loss was a result of the decrease in operating margin, coupled with an increase in finance cost. This is partially offset by lower depreciation and lower corporate administrative costs.
Net earnings for the quarter were $10 million or $0.02 a share. We generated cash flow before changes in working capital of $63 million or $0.12 a share during the quarter despite the lower metal prices.
This brings our total net cash generated from operations to $130 million in the first half of the year. On January 20, we entered into Rainy River streaming transaction with Royal Gold for $175 million.
Slide 7 provides a few of the key highlights of this transaction. The streaming transaction enables us to secure over 20% of the total development cost for less than 6% of the future revenue.
Under the terms of the agreement, $100 million was paid at signing, with the remaining $75 million to be paid when 60% of the development capital has been spent. We expect this to be in mid-2016.
Importantly, the stream provides our Company with an attractive cost of capital, it increases the projects rate of return to our equity holders by approximately 3%. We will deliver 6.5% of the gold production up to a total of 230,000 ounces and 60% of the silver production up to a total of 1.3 million ounces.
Once these thresholds have been satisfied, the stream percentage will decrease by 50%, thus minimizing the impact of the continuous project upside. In addition to the upfront deposit, Royal Gold will make ongoing payments of 25% of the spot gold and silver prices, enabling us to participate in any increase in the commodity prices.
We are delighted that Royal Gold's enthusiasm for the project is consistent with ours, and we look forward to completing the development of Rainy River for the benefit of all of our stakeholders. Slide 8, further illustrates the financial flexibility derived from the stream proceeds.
We currently have approximately $760 million of remaining development capital. By completing the stream transaction, we have secured proceeds of $175 million, which represents over 20% of that balance.
Once in full production, Rainy River is expected to generate approximately $390 million in annual revenue. Of this total, about $20 million per year or less than 6% is scheduled to be delivered to the stream.
Overall, we view the stream as a compelling way in which to further enhance our financial flexibility today in exchange for a relatively modest annual outlay over the next 15 to 20 years. Slide 10, illustrates the four key components of our current liquidity position, relative to our remaining development capital at Rainy River.
With our current cash balance of $327 million, the proceeds of $175 million from our transaction with Royal Gold, and our available credit facility of $236 million, we already have the vast majority of the capital required to fund the remaining development of Rainy River. Over and above this of course, our four operations continue to generate free cash flow after taking into account the sustaining capital.
The amount of free cash flow we generate over the next two years, will determine the amount, if any, we will need to draw from our credit facility. Based on our historical net cash generated from operations and our current projections, we are well-positioned to fund the Rainy River project.
Production is on schedule from mid 2017. Slide 10, provides an update on our development project at Rainy River.
After permits to start major earthworks we received in May, activity at the site continued to accelerate. We have advanced detailed engineering which is now about 95% complete.
Construction of the temporary accommodation facility is 80% complete. Our first major earthworks for the process plant site commenced in May.
In fact about a week ago we reported our first concrete for the processing facility. We're on track to receive delivery of our initial equipment fleet during the third quarter and delivery of the mills later in the year.
Our team has also identified five prospective areas for potential drill testing. We look forward to providing further updates on this, as well as our construction progress as we move through the balance of 2015.
Slide 11, summarizes our portfolio of organic growth initiatives. To expand various stages of the development cycle and provide us with multiple embedded options for increased gold production.
In addition to the now completed New Afton mill expansion, the C-zone project and Rainy River, we also have our Blackwater project in British Columbia, and our fully carried 30% interest in El Morro located in Chile. Together, our projects provide our shareholders with exposure to significant gold, copper and silver mineral reserves, in jurisdictions with the established mining histories.
Importantly, from our already solid foundation, mills will provide us with an opportunity to transition into progressively longer life, larger scale, and lower cost assets. In closing, Slide 12 summarizes the five key attributes that combine to provide new gold with a solid foundation and bright future.
Our assets are all located in top jurisdictions 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 alongside all of you.
Our low-cost enables us to deliver $63 million of cash flow in the second quarter, even as the 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 and longer life, 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] And your first question comes from the line of Rahul Paul with Canaccord Genuity. Your line is open.
Rahul Paul
Hi, everyone. Question on New Afton, at New Afton we saw a material improvement in gold and copper recoveries from Q1 to Q2.
Do you expect any further improvements through the years?
David Schummer
This is David, I think it's always an opportunity, we'll continue to try to optimize the balance between throughput and recovery and - at this point we're actually slightly outperforming expectations, that really drove the investment. So there's a slight opportunity upside.
Rahul Paul
But what I'm getting at is, have you seen the full - do you think you've seen the full impact of the finer grind?
David Schummer
It's really early days, we need to get some more time behind this and see how things go. We have a belt here, that kind of upset things a little bit, we've got that fixed quickly and now we're just looking at what we can do going forward.
I do expect a little bit of upside potential.
Rahul Paul
Okay, thanks Dave. And just a follow-up on that, to what extent are the recoveries dependent on head grade?
David Schummer
Say that again.
Rahul Paul
To what extent are the recoveries dependent on the head grade or the grade that you're putting through the mill?
David Schummer
Obviously there's a close tie between head grade and recovery. We've seen slightly lower grades which we are rebalancing in our draw strategy to improve.
Beyond that, we're seeing the results that are expected so far on grade and recovery.
Rahul Paul
Okay. And then just one last question.
You recently announced the three-month Rainy River, from a strategy standpoint would you consider selling a gold stream with a royalty on one of your other projects, say Blackwater for instance?
Randall Oliphant
I don't think so, Rahul, it's Randall speaking. We're set now for financing to build Rainy River.
We'll see down the road what we do with respect to, let's say Blackwater, I think it's pretty mature the Blackwater project, I think Rainy River the timing was about perfect sitting on the board of a streaming company, it had all the attributes that a streamer looks for. It's located in Canada.
So is Blackwater, fully permitted, constructions begun, it's a brand-new gold district and I think Blackwater is just a little bit earlier in the queue. So maybe few years down the road when - or couple of years down the road when Blackwater is permitted and again, is more de-risked that may be an optimal time to look to do something.
Rahul Paul
Okay, thanks. Thanks Randall.
Thanks David.
Operator
Your next question comes from the line of Andrew Quail with Goldman Sachs. Your line is open.
Andrew Quail
Good morning everyone. Thanks very much for taking my question, congrats on a solid quarter.
Just on the costs. I know it's a moving target at the moment.
And maybe this is for Brian, I think Randall mentioned that– it’s $50 an ounce, might be at risk to this year. Is there any sort of sensitivity you can give us on sort of copper prices, and how that might translate to a cash cost by the end of the year?
Brian Penny
One thing I'll say is that, we've always talked about over the years of how, when copper prices were rising, the Aussie and Canadian dollar exchange rates were rising and there was a natural hedge there, and that natural hedge still exist today. If you look at what the assumptions went into our guidance compared to where we are at spot today, with their weakness in the Aussie, Canadian dollar and Mexican peso it offsets the change in copper from 275 to 240.
So it’s sort of a push on our unit costs. But as far as the sensitivity, they haven’t changed from what we provided in previous disclosure.
A $0.25 change in copper is $65 an ounce, but at the same time a nickel change in the Aussie is $20, Canada a nickel is $25 and a peso is $10. So over history and recently we have a natural hedge here, so it’s really all just a focus on maximizing production and throughput and sales.
Andrew Quail
Right. As far as my other question is just more about a bit longer term at sort of Peak, CSP and even Mesquite, I suppose once time it might have been a funding option to maybe divest some of - portfolio, is it - how do you guys balance maybe - how do you guys balance that saying that, a few of these mines are coming to the end of their lives versus cutting CapEx and cutting exploration versus maybe divesting these I suppose maximize value and sort of preserve cash?
Randall Oliphant
Andrew, there's few elements to it. I think one of the things this quarter showed was having four operations.
There's a benefit to diversity of our production, as some of them are bit ahead, others are bit behind but together the portfolio does well. So I think that thing, CSP is the easiest one, it’s going to just close on its own, I don’t think it’s very salable today and we'll reclaim it.
Peak who knows what the life is there, it’s been about six year life for the past 25 years and we’re getting promising exploration results out of Peak this year and it has a history of replacing its reserves. So Peak every year dividends us money.
And I just don't think it’s a right point in the cycle right now of where we’re in gold prices to really consider selling something like that, which shows promise, generates cash and gives us that portfolio diversification. And then Mesquites has in the order of eight years ahead of it.
It's production is going to be higher we expect in 2016 and 2017, I think earlier this year we showed all-in cost of about $800 an ounce in those years. So it will generate significant cash even at these prices.
So we’re comfortable with where we are in the portfolio today and don't plan any changes.
Andrew Quail
Right. And just last one on debt, is your debt floating or…?
Randall Oliphant
No, it’s fixed. The only thing that floats is the revolver, which is undrawn, but if we were to draw it at today's rates it will be at 3% so it’s very attractive cost of capital.
Andrew Quail
Thanks very much guys.
Robert Gallagher
Thank you, Andrew.
Operator
Your next question comes from the line of Don MacLean with Paradigm Capital. Your line is open.
Don MacLean
Good morning, guys. A few questions for David.
Maybe could you just give us a little bit more granularity on what's happening with the New Afton grades, it didn't quite live up to expectations and why that is. And you had mentioned that there's been adjustments to the draw bells to try to compensate?
David Schummer
Sure, Don. As we worked towards exhausting the West Cave, we started to see slightly lower grades than expected.
I think you have to look at reconciliation in terms of grade, looking at the timeframe and over the long-term it’s reconciled very well, in fact this time last year it was quite positive. So as we turn to exhaust the West Cave, we started to see slightly lower grades.
We’ve adjusted the draw strategy such that we’re pulling more from the East Cave now, so about 70% from the East and 30 from the West and the grades are starting to pick up.
Don Maclean
Right. So you don’t expect that reconciliation to stand out on a negative?
David Schummer
No, we really don’t Don. We expect to come in within guidance at New Afton.
Don Maclean
Okay. And then looking at Rainy River now you’ve had a chance to get into some of the civil work, any surprises on that front?
Robert Gallagher
No, Don, it’s Bob here. It's progressing very, very well.
The first contractors, both local and from the Greater Ontario area, are fully mobilized and performing well. We're progressed to a point where we’re able to start pouring concrete on schedule.
So we’re very pleased with that progress.
Don Maclean
Okay. And as far as the engineering Bob, you had 95% completed, has this gone smoothly?
Robert Gallagher
Yes, very well. Very well done.
Don Maclean
Okay. And then maybe just lastly for Brian on the project for Rainy River.
Roughly what portion of the $760 million is U.S. based?
Brian Penny
About 20%, 80% is Canadian. So we benefit from that as well and that’s why we’ve - when we close the stream transaction we part that in Canadian dollars to lock in some of the devaluation in Canadian dollar.
So we do whole part of our treasury in U.S. in Canadian dollars to hedge that exposure.
Don Maclean
Sure. And while I got you Brian, can we get a sense of what, before the Rainy River expenditures what roughly the net free cash flow was in the second quarter?
Brian Penny
It was - I think it was after servicing debt and paying interest I think it was above $30 million to $35 million positive.
Don Maclean
Okay, great. Thanks guys.
Robert Gallagher
Thank you, Don.
Operator
Your next question comes from the line of Anita Soni with Credit Suisse. Your line is open.
Anita Soni
Hi, good morning guys, thanks for taking my call. First question is with regards to New Afton, just a follow-up from Don's question there.
Do you think that the grade in copper is related to small variances just from mining different areas and so I just sort of smoothing out of – sort of block model or is it - was it due to something like over break from mining too much in one area is that?
Robert Gallagher
Not really mining too much in one area, it was really - as you get towards the outer extent of your ore body, you start to get some variability with respect to when ways comes in. And that’s really what we encountered and then we just started to adjust our strategy from that.
Anita Soni
All right, okay. Thank you very much.
And then also just could you remind me what the lead cycle times for Cerro San Pedro and Mesquite?
Robert Gallagher
Lead cycle time, let’s see. We’re about 90 days at Mesquite and it really depends on where you are at in the heap elevation wise.
So at CSP we've got some ore being placed very close to the liner. So the lead cycle can be in a 30 day range to get the average recovery expected and if you are up hiring, the heap it can be as much as three months.
Anita Soni
Thank you very much for answering my questions.
Operator
[Operator Instructions] Your next question comes from John Bridges from JPMorgan. Your line is now open.
John Bridges
Good morning Randall and everybody. Just on Peak, like the in-sections you show there, how far is that from current infrastructure, would it need capital to get out?
David Schummer
John, this is Dave, good to hear from you. Are you talking about some of the intercepts that we're seeing?
John Bridges
Yes, you published some on Page 6.
David Schummer
It's only John - it’s only about a 100 meters away, it's called [indiscernible] and we’re seeing some very interesting results there and it's up in good rock above variance about – it's a 400 or 500 meter level. So quite a bit above - we’re about a kilometer down there so quite a bit above we’re at right now and it’s very encouraging.
John Bridges
Okay, it's nice. And you did say in the early call that you might consider selling it to generate cash obviously Rainy River, the royalty was preferred option.
But I just wonder how far along you got, did you consider - did you get as far as a data room to some players there or how far along does that process get?
David Schummer
John, we're periodically get enquires from Australian companies about Peak. They really like it because of its long productions history, its cost being below average for Australian mines, and we'll entertain them.
But it’s been a long time since we had any sort of activity on that front. And our view is with metal prices where they are today, if we were to do something there will be a more favorable environment.
And again with the new exploration results that we’re seeing, we want to see how those pen-out going forward so there’s not activity on the Peak sales now.
John Bridges
Okay. First, they won their assets back again.
Anyway thanks for that. Good luck.
David Schummer
Thank you, John.
Operator
And your next question comes from Trevor Turnbul from Scotia Capital. Your line is now open.
Trevor Turnbul
Yes, I just had a question about the budget at Rainy, I hope you didn't touch on it already. But if you did, I missed it.
I was wondering, I think you said originally, you are thinking about $300 million would get spent this year, and just given what's been spent to the midpoint, is that number still accurate or there is some deferral we should look at for CapEx into next year?
Brian Penny
We're still tracking them inline with the original estimate.
Trevor Turnbul
Okay. Thank you, Brian.
And then I guess the other question is, you've used letters of credit, I guess, against the revolver at different times. Is there any other types of expenditures that you might want to do that, put a letter of credit up against the revolver?
Brian Penny
Generally, we used that from time to time, we'll put a letter of credits for the Hydro supply contract, we're required to do that. But generally it's for stuff like that.
And then, that's where we leased over time, as well as closure obligations, that's generally what we use it for. And we're working hard to keep the availability to provide us that financial flexibility.
Trevor Turnbul
And not real material in any case, I assume?
Brian Penny
No.
Trevor Turnbul
Okay. Thanks Brian.
That's all I had.
Operator
And your next question comes from Phil Russo from Raymond James. Your line is now open.
Phil Russo
Thanks operator, good morning Randall, everyone. Sorry to have another question on liquidity here on Page 9.
What's the minimum sort of cash balance that you got - you want to maintain I guess to keep that business over the next couple of years, what's the minimum cash balance?
Randall Oliphant
Generally we work to a minimum cash balance of about $50 million because you know, some of our concentrate shipments are a bit chunky and we just need to make sure we have the liquidity between shipments.
Phil Russo
Okay, great. And then theoretically then, you got $226 million left in available credit there, what's the comfortable debt load for New Gold, since theoretically you had to draw down from that, you start to get over $1 billion, is that – are you comfortable with that type of level initially and Rainy River has a fast ramp up there, but how comfortable with this debt over $1 billion.
Randall Oliphant
Once Rainy River is up and running, our EBITDA doubles, our debt to EBIT gets cut in half. For the company it is, with the four producing assets we have, I'm comfortable with these levels.
I wouldn't recommend adding much to it, but once Rainy River is up and running, the company changes gives us a lot more flexibility and then we can start thinking about the timing of building Blackwater and how we finance it, all that kind of stuff.
Phil Russo
Okay, great. Thanks, that's all I had.
Operator
And your next question comes from Don Maclean from Paradigm Capital. Your line is now open.
Don Maclean
I just want to follow up on John's question about Peak and the new area that's been identified. How long do you think it will take to sort of scope out what this could be and at this stage given its proximity, could it come into the sort of the mind plan outlook for the next couple of years?
Robert Gallagher
We'll know a lot more by the end of the year. To be honest with you we're seeing in Nicobar area we're seeing encouraging results and really when we pull things together towards the end of the year, first question next year, we'll know more detail
Don Maclean
Okay. We'll look forward to that update.
And then Randall, you talked about the all-in sustaining costs from Mesquite beyond 2015. Can you give us a rough sense of what they might be for Peak?
And what the copper price assumption might be for that?
Randall Oliphant
Don, I'm going from memory but I think it's in the order of about $1,000 an ounce. But in our Analyst Day presentation we outlined for what Peaks costs we expect both cash and all-in sustaining for 2016 and 2017.
So I'd rather refer to those numbers so I don't remember them now.
Don Maclean
Okay. Sure, I can go back, take a look at that.
Thanks guys.
Randall Oliphant
Thank you, Don.
Operator
We have no more questions in the queue. I would like to turn the call back over to Randall Oliphant.
Thank you.
Randall Oliphant
Thank you, Jessica. Thank you to all of you who've joined us today.
On behalf of the entire New Gold team, we wish you a great rest of the summer and look forward to our next opportunity to meet and speak with you. As always, should you have any additional questions, please do not hesitate to reach out to any of us by phone or e-mail.
Thank you very much.
Operator
And this concludes today's conference call. You may now disconnect.