Oct 29, 2015
Executives
Hannes Portmann - VP, Corporate Development Randall Oliphant - Executive Chairman Dave Schummer - COO
Analysts
Rahul Paul - Canaccord Genuity Andrew Quail - Goldman Sachs David Haughton - CIBC Mike Parkin - Desjardins
Operator
Good morning. This is Steve.
And I will be your conference operator today. At this time, I would like to welcome everyone to New Gold Inc.
Third Quarter 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 like to turn the call over to Hannes Portmann, Vice President, Corporate Development. Please go ahead.
Hannes Portmann
Thank you, operator, and good morning everyone. We appreciate you joining us today for the New Gold 2015 third 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, 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 three of our 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
Thank you, Hannes. Good morning everyone and thank you for joining us today for New Gold’s third quarter earnings webcast.
Slide four provides a few of the highlights from the quarter. Strong performances from New Afton and our two heap leach operations led to a 31% increase in gold production to 123,000 ounces.
In addition, we produced 25 million pounds of copper in the quarter. Our year-to-date Gold production of over 300,000 ounces leaves us well-positioned to deliver full year gold production towards the high end of our guidance range.
Our costs, while down from the first half of the year and well below industry average, were higher than last year. This is primarily due to the lower byproduct revenues from lower copper and silver prices.
Cash costs and all-in sustaining costs are expected to decrease further in the fourth quarter of the year. We generated over $50 million of cash flow in the quarter despite lower metal prices.
We finished the quarter with cash of $385 million. We are also scheduled to receive an additional $135 million, as result of the anticipated closing of our El Morro sale in the fourth quarter and the remaining stream deposit from Royal Gold, expected by mid-2016.
At Rainy River, construction activity continues to move forward on schedule. We had multiple milestones in the quarter with detailed engineering now a 100% complete and earthwroks over 50% complete.
Slide five provides a summary of our third quarter results, mine-by-mine. New Afton had another solid quarter.
Gold and copper production increased relative to the third quarter of 2014 due to a 5% increase in throughput to over 15,300 tonnes per day. Grade and recovery remained consistent with last year.
We continue to see benefits from the mill expansion with gold recovery remaining at 83% and copper recovery increasing by 1% to 86%, despite the increased throughput. New Afton’s costs were impacted by $687 an ounce decrease in copper byproduct revenue due to a decrease in the realized copper price.
Sustaining capital of $12 million remained in line with the third quarter of 2014, resulting in all-in sustaining cost of minus $20 an ounce. The third quarter was Mesquite’s highest quarterly production since the first quarter of 2012.
Gold production increased by 65% to 43,000 ounces. The increase in production was due to more ore tonnes mined and faster recoveries, resulting from our investment in the leach pad expansion.
Cash costs were $233 an ounce lower than in 2014 quarter. Sustaining capital cost of $6 million was $11 million lower than the prior year quarter.
This resulted in all-in sustaining cost of $892 an ounce, which were $733 an ounce lower than the third quarter of 2014. Peak’s third quarter gold production of 21,000 ounces increased relative to the second quarter as planned, however was lower than the prior year quarter.
As you know, the mine faced few technical challenges in the first quarter of this year. Since that time, there’s been a focus on rehabilitation and remediation resulting in a decrease in tonnes mined and processed from the impacted area.
Peak’s costs during the quarter were higher than the prior year period due to a decrease in gold sales volumes, copper byproduct revenue and increased costs relating to the rehabilitation. The increase in cost was partially offset by a depreciation of the Australian dollar.
Peak’s fourth quarter however is expected to be the mine’s strongest production quarter of the year. Cerro San Pedro continued the strong year with third quarter gold production of 32,000 ounces.
The increase from 13,000 ounces from the third quarter of 2014 was driven by the combined benefit of higher ore tonnes mined and higher grade. Cost remained low and continued to benefit from the limited capital expenditures this year.
In aggregate, our mines have produced over 300,000 ounces of gold through the first nine months. We expect the strong fourth quarter providing for the potential for full year gold production to be towards the high end of our guidance range.
Copper production is expected to be at the low end of the guidance range and silver production in line with guidance. Costs continued to track above guidance for three reasons, the prices of our byproduct metals have been below those assumed at the beginning of the year; our copper production being at the low end of the guidance range; and a higher percentage of the company’s gold production coming from Mesquite.
We expect both our full year cash cost to be in the range of $430 an ounce to $450 an ounce and all-in sustaining cost to be in the range of $840 per ounce to $860 per ounce. Slide six provides a summary of our quarterly financial results.
The company’s revenues increased by $8 million relative to the third quarter of 2014. The impact from decreases in metal prices was more than offset by higher gold and silver volumes at our operations.
Operating margin remained in line with the prior year quarter despite lower metal prices. Higher operating expenses associated with the increased mining activity during the third quarter were largely offset by increased metal sales volumes and the combined benefit of depreciation of the Canadian and Australian dollars.
The company had an adjusted net loss of $9 million or $0.02 per share in the third quarter of 2015. The loss is a result of the slight decrease in operating margin coupled with an increase in depreciation and finance costs as we capitalized less interest this year than in 2014.
This is partially offset by lower corporate administrative costs. The net loss for the quarter was $158 million or $0.31 per share.
The loss included a non-cash $100 million after-tax loss related to our sale of El Morro and a 31% pretax foreign exchange loss. We generated cash flow before changes in working capital of $58 million or $0.11 per share during the third quarter, despite the lower metal prices.
This brings our total net cash generated from operations before changes in working capital to a $189 million in the first nine months of 2015. Slide seven provides a summary of the two corporate development initiatives we were working on during the summer which gave us greater financial flexibility.
In July, we announced the sale of our $175 million Rainy River stream to Royal Gold and in August we announced the sale of our 30% interest in El Morro to Goldcorp. The transactions increased the company’s liquidity position by approximately $235 million and eliminated $94 million of debt.
We’re proud to have improved our financial position by a third of $1billion without issuing equity or taking on additional debt. Slide eight 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 $385 million, the remaining $135 million of proceeds from our Rainy River stream transaction and the sale of El Morro and our available credit facility of $238 million, we have the capital required on the remaining development of Rainy River. Over and above this however, our core operations continue to generate free sustaining cash flow.
The amount of free cash flow we generated over the next two years will determine the amount, if any, we will need to drop from our credit facility to complete the development of Rainy River. To put our sustaining free cash flow generation in perspective, over the last two years, we have generated over $270 million after-tax and sustaining capital expenditures.
Based on our historic net cash generated from operations in our current projections, we’re well-positioned on the Rainy River project. Slide nine provides an update on our development progress at Rainy River.
Development activity continues to advance on schedule with first production remaining on target for mid-2017. Detailed engineering and the temporary accommodation facility are both complete.
Relocation of Highway 600 is over 45% complete. Plant site earthworks are over 50% done.
Concrete placement is over 15% complete. And our first structural steel was erected on October the 7th.
Everything continues to advance as planned and importantly, we’ve been able to do this with no lost time accidents. Slide 10 provides a breakdown of Rainy River’s development costs and the total amount spent and committed to-date.
We initially presented the slide at our Rainy River analyst investor tour this past September, since that time we have committed an additional $30 million to the project. At the end of the quarter we’ve spent a $168 million with an additional $342 million committed.
Slide 11 summarizes our portfolio of organic growth initiatives. With the New Afton mill expansion complete, the focus now moves to Rainy River and the C-zone.
Longer term, we’re advancing the permitting of our Blackwater project in British Columbia. Together, our projects provide our shareholders with exposure to significant gold, copper and silver mineral resources in jurisdictions with established mining histories.
Importantly, from our already solid foundation, they also provide us with an opportunity to transition into progressively longer life, larger scale, and lower cost assets. In closing, slide 12 highlights key attributes from this year and why we are so excited about the future.
Our assets had a strong third quarter and we see this momentum continuing into the fourth quarter, which is expected to be our lowest cost quarter of the year. Even in the current commodity price environment, our low cost mines were able to generate solid free cash flow.
We further strengthened our balance sheet with the two corporate development initiatives completed this summer, the focus now turns to the continued successful development of Rainy River which is fully funded. Construction remains on schedule and we look forward to the mines starting up just 20 months from now.
Importantly, once up and running, Rainy River will add 325,000 ounces to our production and do so at lower cost. Thank you again for joining us today and for your continued support of New Gold.
That concludes our formal remarks. And now we’d 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 now open.
Rahul Paul
Question on New Afton, are we at steady state now for gold and copper recoveries or do you see some upside from here?
Dave Schummer
Basically -- this David. Steady state, there’s always opportunities and we’ll explore those in terms of optimizing our grind and looking at the relationship between throughput and recovery but you can assume a steady state going forward.
Rahul Paul
So, 83% for gold and 85% for copper?
Dave Schummer
86% for copper. Yes.
Rahul Paul
Yes, 86%, sorry, yes. And then just moving on to Peak, Dave, have you restored access to the main stoping area perseverance?
If not, when do you expect to have access?
Dave Schummer
We’re in the range of 65% to 75% restored and there’s some upside there to increase that above that 75%. We’re looking at different ways from a sequencing standpoint, we can maximize the fraction of as many tonnes out there as we can given the higher grades, but you can assume about 75% at this point.
We’re making up the difference from New Gold. [Ph]
Operator
Your next question comes from the line of Andrew Quail of Goldman Sachs. Your line is open.
Andrew Quail
A couple of questions, I had one on that recovery but that’s been answered. On Rainy River, can you just remind us if all the appropriate approvals have been received ahead of moving forward sort of the project to commissioning in 2017?
Randall Oliphant
I’m sorry, the appropriate what?
Andrew Quail
Approvals.
Randall Oliphant
Approvals?
Andrew Quail
Yes.
Randall Oliphant
A series of permits are required as we continue and we are getting all of them on schedule, we don’t anticipate any issues there.
Andrew Quail
Second question was, do you guys know -- I mean we’re heading into November, do you guys know what sort of copper price assumption you guys will be using in 2016? I think you were at $275 this year.
Can you give us any sort of transparency on what we expect next year?
Dave Schummer
I think we still haven’t made a final decision, but I think for short-term planning, we’re going to use 250 copper price, long-term reserves and resources, like reserve price, I think we’re going to use 275.
Operator
Your next question comes from the line of David Haughton with CIBC. Your line is now open.
David Haughton
Thank you for being brief on a very busy morning. Having a look at Rainy River, saw the CapEx was just shy of $50 million for the quarter, what’s your expectation for the spend for the balance of the year?
Randall Oliphant
Our plan was to spend $300 million, we will still spend $300 million this year, but the actual cash that will be spent is 250 with -- obviously December stuff will be paid in January. So when -- it’s according to what we laid out earlier.
David Haughton
I was somewhat surprised to see that number come in at that lower level, so I thought there might have been some slippage out of 2015 into 2016 just with payment receipts and invoices, et cetera.
Randall Oliphant
There’s no slippage in completion of physical works, it’s just you get the invoice in December, you pay it in January.
David Haughton
And your expectation of the spend into 2016, do you have -- can you give us a bit of a feel as to what you think there?
Randall Oliphant
We’re continuing on the plan we laid out with the payment in January will probably be a little bit higher than what we indicated in the past but generally this trend will continue, little -- $300 million again.
David Haughton
So, if I went to maybe $325 million or $330 million with just the slippage out of December into January as far as the cash payment goes, is that okay?
Randall Oliphant
No, I think it’s close to 400.
David Haughton
Close to $400 million?
Randall Oliphant
Yes.
David Haughton
And also New Afton, there seems to be a bit of a timing difference between production and sales, do you expect that to be caught up in the fourth quarter?
Randall Oliphant
Generally what we do at the end of each quarter is we have a trader that takes possession at the port; because that in this month we had a large export shipment going to India, we didn’t have that privilege. So, there’s probably about three or four days that was in inventory at the ports that we would sell in October, so yes.
Operator
Your next question comes from the line of Don MacLean with Paradigm Capital. Your line is now open.
Don MacLean
Just a couple quick questions. New Afton, Dave, can you give us a bit more color on what’s happening with the grade there, particularly in the copper?
What we should be looking forward to and just how things are coming along?
Dave Schummer
Don , as you well know, when you look at reconciliations, the timeframe is really important, in the recent quarter so we’ve seen lower copper grades. If you look at -- just pick a point in time, Q1 of 2014, it was significantly positive.
So, long-term the deposit is reconciling really well and continues to -- we were just slightly lower than the plan right now, Don but we’re doing some things about it. We’re shifting to the east cave a bit more in terms of our draw strategy and trying to balance that out.
That’s working for us so far. So we expect those grades to pick up a bit in the fourth quarter and then we’re obviously -- there’s some opportunities to put throughput on the mill as well and that’s really what’s going to help I mean on the low end of guidance.
Don MacLean
Just on the Peak, can you give us a bit more color onto what proportion of the resource is now sort of tied up with the ground issues and whether or not that will have any impact on the resource that you can actually mine out of it, i.e. any kind of a resource sterilization?
Dave Schummer
We’re still working through that Don, I think we can give a better update towards the end of the year or early next year. Right now, we’re confident we can get 75% of that resource but there’s opportunities.
Again we’re looking at sequencing, mining methodology and so on. So, just like to update on that, update later in the year.
Don MacLean
Can maybe put it into context a bit, Dave, as to how important that part of the resource is to Peak as a whole?
Dave Schummer
Well, I don’t have the exact…
Don MacLean
It doesn’t have to be numerical, but it just, you know is it substantial or…?
Dave Schummer
If you just look at the 25%, we might not be able to get it, it’s not terribly substantial. I don’t have the exact reserve number in front of me, but I can get that for you.
Operator
Your next question comes from the line of Mike Parkin with Desjardins. Your line is now open.
Mike Parkin
Thanks. My questions have been answered.
Operator
And I’m showing there are no further questions at this time.
Randall Oliphant
Okay, then thank you operator. For all of those who’ve joined us today, thank you again for spending some time with us and your questions.
As we do not have plans further communication between now and the end of the year, on behalf of the entire New Gold team, I’d like to wish you and yours a very safe and happy holiday season. And we wish you all the best for the year.
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.
Operator
Ladies and gentlemen, this concludes today’s conference call. You may now disconnect.