Feb 19, 2016
Executives
Brian Penny - CFO Dave Schummer - COO Hannes Portmann - EVP, Business Development Bob Gallagher - President and CEO Mark Petersen - Head of Exploration Peter Marshall - Head of Project Development Randall Oliphant - Executive Chairman
Analysts
Randall Oliphant
I'd also like to welcome the people on the web who are joining us and in light of that, if you do have questions and we'll have all sorts of different Q&A periods, I'd like to ask you if you can speak into the microphone, so that the people on the web can hear you. So, a rough outline of the afternoon is, we'll probably present for an hour-and-a-half, but as I mentioned, during that period, you're most welcome to ask us questions as we go through each section and then sort of a general Q&A for half-an-hour afterwards and then we've got some refreshments for you and we hope to be onto those at 4 o' clock.
Sort of the outline for the day and to introduce some of the people, I'll start off with a bit of a gold market overview, because it's been quite dramatic what's happened, not only in the last few years, but in the last month. Then, Bob and I will give you an update on the company from a management perspective and an overall view of where we think we're going and Bob, as you know, is right here on my left, to your right.
Hannes will get up and talk to you about some of the overview of New Gold and a lot of the highlights that are going on. Dave Schummer, who is sitting beside Bob, our COO will talk about our operational results and the outlook for 2016 and a lot of our New Afton plants and as you know we announced the results of our feasibility study there.
Mark Petersen who I think you know is sitting at the table there, our Head of Exploration, will talk about our reserves, our resources, our exploration results from 2015 and our plans for 2016. Peter Marshall, who heads up our project group that's sitting right next to Mark there, will bring up to date on what's happening at Rainy River, what we achieved in 2015, our plans for 2016 and as we move towards production in 2017.
Brian Penny, our CFO, who is up here at the head table with me, will tell you how we plan to pay for all the stuff that Peter is going to do and then we'll come back and wrap it up. As you know, a lot of the things that we'll be talking about are forward-looking and you have our cautionary statement there.
But in terms of the gold market itself, as you know, because you follow it so closely, there has been a tremendous amount going on and part of the reason why we want to talk about this is, I have a slightly different vantage point, chairing the World Gold Council, as many of you know, yet to see a lot more about what's going on in different parts of the world. So, what I'd like to talk about are some of the factors influencing the gold price, what the fundamentals are of the gold market, and particularly what's happening in India and China where, at the World Gold Council, we have our two most significant offices because that's where all of our customers are.
This shows the world of gold and how it’s really moved from west to east, you can see how little gold is actually consumed in North America. You may find it interesting, because you see the ads on TV of turning your gold, but almost all the demand in North America is satisfied by those recycling programs, but you can see increasingly where we are in India, China and the rest of Asia.
You can see how gold demand has grown over the course of the past 10 years, it's gone from about 3000 tonnes to 4000 tonnes, despite the fact that gold is at a much higher price. But also, it's interesting the changing composition.
We've seen central banks that have been sellers of gold now for five straight years being buyers of gold and they seem to show no signs of letting up doing that. The jewelry demand has been reasonably steady over that period and technology, but then we've seen a lot more in gold investment than what we had 10 years ago.
Of course, China is a big part of the story, because China is consuming about five times the gold that they were 10 years ago. I think maybe one of the stories that we didn't tell very well through the world Gold Council is, we liked people talk too much in 2014 about how gold demand in China dropped from 2013.
But as you can see on this graph, 2013 was really an anomaly, in fact, it was great that there was someone who was able to hoover up all that gold that came out of the ETS that year and still in 2014 by more than they did in 2012. So the trend continues to be up in China and this isn't just jewelry, there is gold savings accounts there.
China is becoming very significant, where the Shanghai bullion exchange expects to become the busiest bullion exchange in the world, Singapore has set up, India is starting to set up bullion exchanges, so they are becoming increasingly important to us in the gold space. And of course the supply has changed, we had lots of hedging.
Back in the old days than the de-hedging, but we've got mine production as you all know, is starting to really plateau. And on the right-hand side of this slide, you can see in the blue line, the amount of expenditure that we've been making as an industry, looking for gold, but frankly, how unsuccessful we've been in terms of major discoveries.
So it appears that some of the discoveries that we hear a lot about or things like Rainy River or Blackwater that are in our portfolio are sort of anomalies in the exploration space. In terms of China, it's now 15% of the world gold stock, 24% of demand, as I mentioned, it's the biggest consumer and the biggest producer today and wants to be the biggest trader of gold.
India, gold is really significant there. As you probably know, there is 22,000 tonnes of gold held in India, worth about $1 trillion, and there is different ways of how they are trying to bring gold into the monetary system, because it's an awful lot of money to have tied up sitting underneath the mattresses and religious institutions.
But India, it’s fortunate that these two countries who are the most populous on earth who have growing economies have such great affinity for our product. Here is a slide I think you might find a bit encouraging.
And what we've done is looked at bull and bear markets for gold and I think the bear markets are probably the most interesting because they are a lot more consistent than the length of the bull markets. But as you can see, the median is 52 months and we just went through a 52 month down period for gold and of course, gold has started to pick up so far this year, so I’m particularly encouraged for our industry that maybe the worst days are behind us and the best days are ahead.
So sort of a backdrop is great to have central banks who are net purchasers of gold whereas years ago, they were sellers of gold, the investment demand seems to be very strong from the most populous countries, the jewelry demand continues to increase, and at the same time, mine supply seems to be plateauing or potentially could go down. Is there anything that anybody wants to talk about with respect to gold before I move onto more New Gold specific things?
If not, Bob and I would like to give you a bit of an update on the company. As you know, we have all of our executive management team here today.
We have a Board of Directors that we are very proud of and I know Jim Estey is here in the room with us. We just had board meetings yesterday, and it's a team that has significant investment in our company, and cares a lot about it.
Perhaps most importantly, they have a history of creating a lot of value in the gold space. In terms of our team, as you know, Bob, we announced back in September, is going to retire in June of this year.
We've reconfigured some things, but it's been a very smooth and steady process. Dave Schummer who joined us in the fall of 2004 [ph] or about a year-and-a-half ago, has steadily been taking on not just our operations, but Bob has been passing on our development projects, and he now have spent a lot of last week with Bob up at Rainy River, he's getting more familiar with our First Nations relationships, he’s started some great business improvement initiators, he probably won’t tell you, but we had the best health and safety record in the history of our company last year, what I believe is the best safety record in the entire global gold industry.
And he was able to deliver record results by all sorts of different measures in 2015. Brian Penny, who you know well will continue to be our CFO and will be part of this team of three who will be largely running the company, and then Hannes who I think you know well from an Investor Relations perspective, who also his principal thing was heading up corporate development, has also taken on responsibility for exploration, because that's a big part of how we plan to grow our business and also human resources, because I believe today we have a stronger team than we've ever had, but we’re always looking for ways to add key players to it.
But Bob after 35 years in the mining space has decided to retire from the company, but he is not going away. Bob will continue to stand as - for election as a Director of our company, which delights us, he will continue to work alongside the team that he’s always worked with.
I think one of the things that I like about the group of guys that we have is they are always looking for a good idea or an opportunity to bounce and to have someone like Bob with all of his experience to walk out the door I think would be a real shame for our company. So I’m delighted that he’s staying.
But Bob, if you want to talk for a minute about your thoughts on these things and why a guy who loves our company and our people so much and believes so much in our projects, why you’ve decided to formally retire, I’d appreciate if you would share with some of these guys.
Bob Gallagher
Thanks, Randall. I actually, I know some of you have heard this before, but I’m turning 65 and there is a lot of physically active things I want to do and I figure I don't have a lot of years to get those things done.
So about two years ago, we started on this succession planning exercise and Randall mentioned, Dave has been with us almost a year-and-a-half, and really a kind of a legacy issue for me and New Gold was really to make sure we've got a better team at this time two years later than when we started looking at the moves for this succession. And I think the results you’ve seen in this last year, both in operations and safety, are illustrative of the kind of team we're putting to place to continue behind me.
Not only has Dave joined the team, but Dave has brought some people in, we've really increased our bench strength at the sites and our results were great this year, but as is - stuff happens in mines and Dave has got a team that's geared up to react to those unexpected events and compensate for them and so well, I’m very confident that we’ll continue to deliver the results that we told the world we’re going to deliver on. At the project sites, by the time I leave here in about four months now, we will basically have all of our permits in place at Rainy River.
The relationships with the community there are outstanding. We've got agreements with the principal First Nations there, we should have the rest of them wrapped up by the time I'm gone here and Grant and his team have really developed that relationship with the community that needs to be done.
As far as the construction goes, we’ll have basically all of our big contracts awarded, the manpower will be peaking at about the time I leave and so I think it's - with Peter, it’s just, his team pushing through and getting things build. We’re in a great position there.
So I’m stepping back and as Randall mentioned, I’ll be staying around and I very much look forward to continuing to participate with the team that's in place behind me.
Randall Oliphant
Well, thank you, Bob. In fact, one of Bob's first things is to go and height the Pacific Trail, I don't know if you guys have seen the movie, Wild, I don't know if you really want to do it or you're hoping to meet Reese Witherspoon.
But I think we're pretty happy with where we are, we've got a portfolio of assets in jurisdictions that we like, increasingly focused in Canada, we think we've got the right team to be able to execute on these plans and people as I mentioned before, who are shareholders themselves, we like the low-cost that we've got and it gives us a lot of free cash flow from our operations in order to build our mines, even in this low price environment and we think that we've got a pipeline that distinguishes us from other companies in the gold space. If you think about where we are today with production guidance for 2016 of 360,000 to 400,000 ounces, the fact that we’ve got in-house projects that can bring us another 800,000 ounces really excites us.
But of course, because you are from the investment community, delivering for shareholders is important, and even though the gold price has been soft recently, we've been able to outperform the gold index by 150% and probably more importantly, in absolute terms, generate a compound return of about 9% or 10% a year since the company came to its current form in early 2009. So we generate a lot of free cash flow from our operations, you can see last year, it was $340 an ounce beyond our all-in sustaining costs and there are choices of what to do with that money.
We could buy back shares with that, we can pay it out in dividends, but we believe that we can create the most value long-term by executing on our projects, which are longer life, larger scale and lower cost basically, by every measure, better quality than what we are currently operating today. So the majority of that money has been poured into Rainy River.
We've announced the results of the C-zone feasibility study, which we think will take our current biggest cash flow generator and enable us to do that for much longer period of time and then we've got Blackwater, which is in the permitting phase, which we like to have shove already to be able to bring on that, which is an even bigger project than Rainy River. In terms of some of our updates, I think you're familiar with a lot of the metrics of Rainy, which is well underway.
It will be a significant producer for us. Again, relative to our production this year, 325,000 ounces of gold production a year.
Although we're very proud of our all-in sustaining cast last year, Rainy will be a couple of hundred dollars an ounce cheaper than that. We’re benefiting from the good grades that we have from both the open pit and from the higher grade undergrounds.
We’re benefiting as well from the devaluation of the Canadian dollar, but we believe that this brand new gold district, that this is more of a base case scenario, because we’ll probably be finding gold here for many years to come, perhaps we can consider mill expansions like what we did at New Afton30, which we just completed last year. At New Afton, we’ve got the feasibility study completed for that.
Mark Petersen was able to increase the size of the resource, move it into reserves. As you know, it's a higher gold grade than what we have at the current New Afton B zone that we’re mining today, we show these economics based on $2.75 gold, which is pretty consistent with what the industry is calculating reserves at.
We sort of compare that to the three-year average that the SEC looks at, which is about $2.96 a pound, and with consensus, which is about $2.88 a pound. So we believe that this will produce a lot of cash for us for a long time.
In rough numbers, it costs about $400 million to build in each year that it operates to generate about $200 million a year of cash flow. So each year that we add onto this is really a big deal for our company.
And then Blackwater, of course, is about double the capital of Rainy River, it's about double the metal, because although it isn’t quite double the annual gold production, there is a lot more silver comes out of Blackwater, but what's exciting me about this is, it's about $100 cheaper on an all-in sustaining cost basis than what Rainy is, which is already low. This again is another brand-new gold district, where Mark Petersen is more qualified than me to make this comment, but I think we'll be finding gold there for decades, so as something to start out with, which is 8 million ounces of reserves and a little under 0.5 million ounces of production is remarkably exciting.
So with that, I'd like to turn the podium over to Hannes Portmann who will walk you through some of our corporate development initiatives and some of the highlights on the company.
Hannes Portmann
Thank you very much, Randall and good afternoon, everyone. 2015 was certainly a very active year for our company, with a number of important achievements.
We’re particularly proud to have delivered gold production in excess of our guidance and in doing so, we also achieved the highest quarterly and full-year production in our company's history. At the same time, copper and silver production were in line with guidance and our all-in sustaining costs remain among the lowest in the industry.
From a corporate development perspective, we completed two successful transactions that further strengthened our financial position. At New Afton, which is currently our most significant cash flow generator, we completed the mill expansion ahead of schedule and under budget and as Randall mentioned last night, announced the results of the C-zone feasibility study that should position us to extend the mine life of New Afton.
Finally, at Rainy River, construction is moving ahead on schedule and we now have less than $600 million left to spend to complete the project by mid-2017. On slides 24 and 25, I'll provide a bit more detail on the two transactions that we completed in 2015.
About a year ago, we initiated a process to gauge the interest in a stream on Rainy River. We knew that all of the royalty companies had a significant amount of cash to deploy, and we’re being quite competitive on the terms they were willing to offer.
At the same time, we felt that we had an asset that would be coveted by the royalty companies because of its location, its scale, its cost profile and its continued exploration potential. Fortunately, the thesis proved to be true, which resulted in us being able to run a very competitive process.
Ultimately, we sold the gold and silver stream to Royal Gold for $175 million that will have us delivering 6.5% of the project to annual production and 60% of the silver production, both of which will be reduced by half of those amounts, once certain threshold ounce deliveries are met. At today's metal prices and based on the feasibility study, the cost of capital to us of that $175 million was about 3%.
However, we think that over time between higher metal prices and the continued exploration potential, Royal Gold's return on their investment will be much higher and that's just fine with us because it will mean the return of Rainy River to our own shareholders will be that much higher as well. With El Morro, Goldcorp and Teck had long been discussing the potential to combine their Relincho and El Morro projects and we were participants in those discussions.
As a result of the joint venture structure we had at El Morro, we found ourselves in a unique position to potentially influence that transaction a little bit more than our relative weighting in terms of interest in the project. Though we certainly had the option to roll into the pro forma Relincho El Morro project at a 15% level, we felt that this was the right time to exit and focus on the balance of our portfolio.
Through the sale of our 30% interest in El Morro, we’re able to surface $62 million of cash after tax, have a $94 million carried funding debt cancelled and we also retained a 4% gold stream on 100% of the El Morro project. So in total, these transactions enabled us to improve our financial position by over $300 million without the need to issue any equity.
On the sale of El Morro, we felt that the $150 million improvement in financial position from the cash received and the cancellation of the debt was quite significant. But from our perspective, the most valuable piece may ultimately be the stream that we retained.
When set aside the gold portion of the Rainy River stream that we sold for $175 million, certain factors really begin to stand out. You can see that both streams are expected to yield 16,000 ounces of gold annually and though both assets are extremely significant in terms of their gold scale, El Morro actually has the larger gold reserve and resource.
And maybe most importantly, after the threshold ounces are delivered, the Rainy obligation drops down to 3.25%, while the El Morro one remains at the 4% for the life of the asset. While El Morro is certainly quite a bit further away from production than Rainy River was when we sold the stream in the middle of last year, we believe that as project corridor, which is what they've called the combined El Morro and Relincho project, completes its feasibility studies, goes through permitting, the value of our stream should only continue to increase in value.
While we will speak to each of our assets in more detail throughout the day, slide 26 provides a very useful overview. Our assets are all located in top-rated jurisdictions for mining investment with our three most significant assets located here in Canada.
One aspect of our portfolio that may not be as appreciated is the fact that with the exception of Peak, members of the New Gold team have been involved in the construction of all of the other assets, including the development of Cerro San Pedro, the restart of the Mesquite mine and most recently the successful development of New Afton. Most importantly, all of these assets were delivered on or ahead of schedule and performed in line with or better than what was outlined in their respective feasibility studies.
Though our jurisdictions are certainly key attributes that differentiate New Gold, it is our low-cost that generates the healthy margins that drive our business forward. In 2015, we delivered a 60% cash cost margin and a 30% all-in sustaining cost margin, despite the decrease in copper, gold and silver prices.
Looked at on a gross basis, in 2015, our four operations generated over $140 million of sustaining free cash flow that we were able to reinvest into our business for the growth in the future. Looking ahead to 2016, we expect to produce between 360,000 and 400,000 ounces of gold and our costs should once again enable us to deliver significant free cash flow.
Our cash costs are expected to remain in line with 2015, our sustaining capital on a gross basis is expected to decrease by $10 million to $15 million, which is a continuation of the steady decreases we've seen in sustaining capital over the last three years. On a per ounce basis, it will stay relatively consistent.
Our G&A is also expected to remain consistent with last year and has been coming down or staying flat over the last three years and finally, our exploration is expected to remain relatively consistent as well as we continue to look for opportunities for organic growth like that of the C-zone and the new discoveries we've had at Peak last year. So with that, I’ll pass it over to Dave Schummer to go through our operational results.
Dave Schummer
Thanks very much, Hannes and it's certainly a pleasure to be able to address everyone today. You've seen the numbers on how we performed last year, you've seen what we are going to do this year, so I won't read those to you, because I know you've been through, but I’ll try to add some color to the various slides on just facts that may not be on the slides or that you may have questions about, but just moving over to the first slide, we’re proud of a lot of things in terms of how we performed last year and first and foremost is our health and safety performance.
If you just look at the improvements in our total reportable incident frequency rate and our lost time incident frequency rate at 27% and 91% respectively, that's truly outstanding performance and as Randall touched on earlier, it’s industry-leading performance and there is a number of ways we went about this, but primarily, it's really about getting people to do field risk assessments properly and just to stop and actually go slower to go faster. In other words, stop and assess how you can actually get hurt doing a given task, and we've put a lot of focus into that and really into the qualitative piece of things as well, so you can do as many inspections as you like, but if you don't do them properly, they are pretty irrelevant.
So we really focus on the qualitative side of things, and those are really the two things that have led to the better improvement, better performance overall. It's not every year you can stand up and talk about exceeding gold production and meeting your other metal production targets, but this is one of those years for us.
We had a great year with gold production and we came in in the range in silver and in the range in copper as well, albeit slightly on the low-end. But what we're really focused on and just backing up a bit, what I found when I came to New Gold was there is a culture of lean operation of continuous improvement and what we tried to do is take it out to the next level.
So we hired a Director of business improvement, with Barry and some of the other parts of the people in the finance team, we’ve put together a cost optimization program and we’re just focused on, not so much looking backward, although we want to learn from the past, but looking at where we’re at right now and how we can get better each and every day, challenging the status quo, seeing how we can improve our efficiencies across the business and we've had some great success there and that's really why you see these industry-leading costs at the bottom of the page here. We can't affect the copper price and the impact it has from a byproduct standpoint on our overall cost, but we can and did control the things that we can control and focused on efficiencies and really had a strong year from a cost performance standpoint.
This next slide, this is something you are probably becoming familiar and we probably show a bit more information than maybe some companies do, but there is really no secrets about this information. We did really well in terms of production.
Obviously, we did well on recoveries. Some of the areas in grey are highlighted down in the blue boxes at the bottom.
I won't go into all the details, but to slightly lower grade at New Afton, but nothing serious. We had slightly higher tonnes at Mesquite and slightly lower grade which balance itself out, really strong year at Mesquite as we will get into in a minute.
But all in all a very, very strong year operationally. And this slide just highlights the fact that we had a record quarter and we had a record year and that’s been communicated.
And you can see the breakdown in terms of production and costs at all the sites. So it's pretty self-explanatory really, but outstanding performance.
Maybe now we will just look at next year in terms of what we're going to achieve and I think the general message is expect more of the same, so we are in that 360,000 to 400,000 ounce range on gold, 1.6 million, 1.8 million on silver and about 81 to 93 in terms of million pounds of copper, a very competitive cost. So this is a year much like the year we just completed.
And it's all about what we're going to do going forward and we need this cash flow obviously and we need to steady production and execution of the plan to fund the project Rainy River, which is going to double our EBITDA as we mentioned and double our production. So quite a lot of focus on executing this year for sure.
If we look at the sites, if you look at Mesquite, expect more of the same and I hate to reiterate, but that’s how all the sites look going forward, so 130,000 to 140,000 ounces of gold, very similar cost and next year production increasing to 150,000 ounce range, and something interesting that’s not on the slide with respect to Mesquite is we're actually - we’ve got permitting cap in terms of the amount of material that we can move at 65 million tonnes and through increased efficiencies and we’ve never been able to do this in the past. We actually reached that cap on the 22nd of November from memory and we're actually able to shut down operations and save a huge amount of operating costs in December.
And we're looking at doing the same thing this year and if we can finish faster we will. There is not much we can do about that cap.
We’ve already worked to increase it over the past. We will continue to look at that, but it's a huge opportunity for us and there has been some huge efficiency improvements at Mesquite and specifically on the loading and hauling fleets.
If you look at Peak, very similar this year and expect more of the same going forward, something I always like to communicate is if you look at the reserves at Peak, they are about the same now as we were when the company was formed in 2009. I think to expect anything different going forward would be unreasonable and then you will hear about some of the upside when Mark gets up and speaks about the expiration.
There is some pretty interesting and exciting things going on at Peak of going forward. And looking at Cerro San Pedro, the key point here, we are going to finish mining in April or May timeframe.
And we will go into residual leach, so expect 60,000 to 70,000 ounces this year and 25,000 in subsequent years on a reasonable decline in profile as you would expect, but essentially our big focus is going to be closing that mine down properly and leaving the legacy that's consistent with our values. Looking at New Afton, it’s again more of the same, 90,000 to 100,000 ounces of gold, similar copper production and expect more of the same going forward in the 85,000 ounces of gold per year and 80 million pounds of copper.
If you look at capital, this slide, slide 40 really sums up the total amount of capital. I think I will move to slide 41 which breaks it down a bit, but it’s - most of the capital is at Rainy River, about $500 million of the $615 million.
And there may be some questions out there around how or why we move from $375 million which was communicated in January to $500 million now. And when we get into the projects piece and Mark is going to speak to this, or Peter, sorry, and we will get into more detail on that.
But from an operator standpoint, getting back on to schedule gives me high level of confidence that we can deliver this project in terms of what we communicated externally and that's the middle of 2017. So we'll get into more detail about that a bit later.
Mesquite, we’ve got some capitalized stripping. We’ve got some developments at New Afton and I think the key thing we touched on earlier was Blackwater getting that 8 million ounce deposit shovel or dig ready so that when the opportunity presents itself, we can go develop it.
So looking at New Afton, we will talk a bit about some of the successes there. The mill expansion, if you remember, last year when I spoke to you, we were expecting 3% increase in gold recovery and 4% in copper and we achieved that.
And I also alluded to the fact that we would be targeting 15,000 tonnes per day by the end of the year and we certainly achieved that and I would expect more of the same going forward. With huge success, it was ahead of schedule, it was under budget as Randall alluded to earlier.
So this next slide is a - it’s a 3D image of the C-zone. I think the main takeaway is that it's open to the west and it’s open at depth and when Mark gets into his section he can talk in more detail about it, but - and we will talk about the sensitivities in terms of if we add a year of mine life what that actually means to us financially.
But just breaking it down, 25 million tonnes, we did a fair amount of drilling and one thing to point out here is that if you look at the gold grade, it is 50% higher than the reserve grade of the current ore bodies that we're mining right now, so it's quite significant and a fair amount of upside in terms of the additional drilling that we have planned. I think the thing to look at here is just the blue boxes on the right.
If you look at the percentage increases in ore tonnes of 16%, 12% in contained gold, 14% copper. Maybe just to speak a bit about the capital, that's not just an imposed injection of conservatism.
There's just been some mild chances into the scheduling. There has been some escalation included, but as an operator where we're at now with respect to the capital estimate in that project gives me a high level of confidence that the economics that we're proposing are definitely achievable.
And the last slide just shows the schedule. So in 2022 we are looking to have the C-zone into production.
What we are actually doing is ramping down to the B3 zones. We're currently mining B1 and B2 area, we’re ramping down to B3 and what we’ll actually do is, we develop C-zone.
It will be a continuation of the current decline, so that takes place over the coming years. And that's it for operations.
Unless there is any questions I will introduce Mr. Mark Petersen, our VP of Exploration.
Thanks.
Q - Unidentified Analyst
Dave, on the C-zone, I think you had those sentence in the press release taking about the fact that permit for the C-zone will involve amendments to the Mines Act, just wondering if you can talk a little more about that.
Dave Schummer
Yeah, maybe I will defer that one to you, Bob.
Bob Gallagher
Could you just restate the question, sorry?
Unidentified Analyst
In the press release, it states that the permit for the C-zone development involve an amendment to the Mines Act. I am just wondering if you could talk a little more about that.
Bob Gallagher
Yeah. No, we’ve got our permanent amendment applications are going forward as we speak now, so we don’t see that as an issue.
Unidentified Analyst
The press release also talks about stabilizing the tailings pond underneath, what does that involve? Maybe you can give us a sense of that, because we are all trying to assess what kind of risk might be involved with that?
Dave Schummer
Yeah, I mean, I can start that one and Bob can add some color, but essentially the technology that we're planning there, Don, is nothing that - is nothing new. It’s very well-known and utilized in civil construction, we are putting wet drains and actually we're loading the moisturized area and the wet area with rock and then we're drilling wells into it and essentially dewatering the whole zone.
And the test work that we have done so far has indicated exactly what we expected and that said it’s completely possible and achievable.
Unidentified Analyst
Just to explain that a little bit better, can you go back to slide 44 which is the 3D image. So I think it has to do with the propagation of the post cave for C-zone to surface?
Dave Schummer
Yes, in terms of the dewatering that we have to do? Yes.
Unidentified Analyst
So, looking at that portion of the tailings dam sit above in the grey area that’s shown on the surface there.
Dave Schummer
Not our existing tailings dam, but the old historic New Afton, yes.
Unidentified Analyst
And just thinking about the way you are mining at the moment, has the cave propagation gone to surface? Do you expect it to do so?
Dave Schummer
Yeah, we can see the area obviously that’s come down, yeah.
Unidentified Analyst
And would you end up with a linkage of the C-zone cave with the mines open cave or you have to plan a little bit.
Dave Schummer
No, you will get the linkage.
Unidentified Analyst
Okay. And what’s the implication then if you want to go out more to the west or perhaps a depth on the C-zone and the implications for that cave?
Bob Gallagher
The area depression would continue to propagate westward and the east direction it’s into the pit. It will propagate westward and take in more of the old abandoned tailings pond which would mean we would expand our dewatering program on that pit.
Unidentified Analyst
Okay. Thank you.
Unidentified Analyst
Just further question, when you did the original New Afton study, did you do the geotechnical work for the C-zone as well like in the area above and between the old tailings dam?
Dave Schummer
The original, when you are talking about when New Afton was recently built? I don’t think there was detailed geotechnical done on that but it was a big part of this last year’s feasibility study.
We focused on - series of consultants working on all that geotech test works. And all the modeling, the modeling on the propagation over there is pretty much spot on what we had predicted.
Unidentified Analyst
Oka, so you’ve done geotechnical work to do that model?
Dave Schummer
Yeah.
Unidentified Analyst
And then the second question. Just with regards to the dilution that’s included within the C-zone in the reserve calculation, what do you use there?
Bob Gallagher
Internal dilution is 7% and external, in other words, side I believe it’s 15, something in that order.
Unidentified Analyst
And how does that compare with the rest of the -
Bob Gallagher
Same.
Unidentified Analyst
Same. Thanks.
Unidentified Analyst
You have a 3.8 year payback at five and a half year projects, but you have a lot of tonnes sitting on M&I. What do you need to do to get that into the C-zone project to extend the mine life to actually take advantage of the capital you are going to put in here?
Bob Gallagher
I think when you go through that in the expiration piece that’s going to be a lot more apparent, but there additional drilling essentially here.
Unidentified Analyst
And then maybe just moving on, just Mesquite, last year at this - when we came here, you got $20 million sustaining capital, for this year we see that sustaining capital, but what we are seeing is a big capitalized strip. Could you maybe give a little color on what’s happening there, are you in a high strip ratio of period and what you will be assuming going forward to split between capitalized strip and expense stripping going forward?
Brian Penny
Excellent question. Clearly under IFRS, you have the ability to capitalize stripping where under US GAAP you are almost prohibited from doing it.
Basically you look at this and if the benefit of the betterment to the ore body is for a future period, you capitalize it. If it isn’t, you expense it as incurred.
From time to time over the rest of life of Mesquite there will be periods where we will have a higher strip period which we will capitalize. There will be one this year, there will be one I think at the end of next year and then as the mine life go on, it becomes less and less frequent as we get closer to the end of mine life in eight years or so.
Unidentified Analyst
Okay, thanks a lot.
Dave Schummer
Mark, on your dilution, it was 3.7% internal dilution and 17.8% external dilution.
Mark Petersen
Thank you, Dave, and good afternoon everyone. As we do every year, we're pleased to provide a summary high level update on our current state of reserves as well as our own mineral resource inventory.
At the end of 2015, net of the El Morro sale that Hannes and Randall have already described, we're actually ending up with the same reserve base that we had at the end of 2014. That's largely due to new the conversion of the C-zone resource into reserves as already described, net of 2015 mine depletion.
Down in the lower left, our copper reserves actually again net of El Morro have incrementally increased again because of the addition of C-zone to reserves and also net of a bit of a decrease in Peak copper reserves which decreased due to both mine depletion during 2015 as well as a $0.25 lower copper price assumption. Silver reserves largely unchanged except for the completion of mining at CSP which causes that to 6 million ounce decrease year-on-year that’s shown in the graph.
Our metal price assumptions for year-end 2015 are essentially in line with our peers as well as Street consensus. $1,200 per ounce gold is essentially unchanged from the end of 2014.
Our $15 per ounce silver price is $3 lower than we had at the end of ‘014 and our copper price is $0.25 lower. Our Canadian-US FX rate of 1.25 is somewhat more favorable.
I believe at the end of ‘014 we were using 1.11. This waterfall graph is just another way of depicting the changes year-on-year.
We had 17.7 million ounces in reserves, 2.7 million of that was El Morro itself. Back that out, 700,000 ounces of mine depletion which were offset by around about 600,000 ounces coming in from C-zone as well as some incremental additions at Rainy River with the addition of the Bayfield Burns Block resource into our underground reserves at Intrepid and off of ODM as well as some creative mine planning with our team at CSP in pulling in some - and resources into the reserve plan for the first portion of this year.
This is just a geographic breakdown. As has already been pointed out, the vast majority of our reserves are in North America, mostly in Canada with the balance in friendly jurisdictions, US and Australia.
The breakdown into M&I, measured and indicated resources, exclusive of reserves, 6.7 million ounces. That inventory is effectively largely leveraged to the future upside price in gold.
Copper shows a similar story. The vast majority of our reserves of course are at New Afton with the balance being at Peak and our M&I inventory of copper resources are likewise leveraged to future increases in the price of copper.
Turning our attention to exploration, 2015 was really truly a pivotal year especially with respect to our Peak Mines operation. We made two new discoveries at opposite ends of the 9 kilometer mine corridor there that are for Peak very, very significant and it really demonstrates that even after 25-year history, new discoveries happen right in the shadow of the head frame and at the end of the drill bit.
At the southern end of the mine corridor, over the - up above the Perseverance ore body which has been the key driver and gold producer out of the peak mix of Peak Mines, we discovered an extension named Chronos that projects upward toward the surface and includes a system of high-grade gold copper lenses intermixed with some high-grade lead, zinc, silver lenses that so far remain open to surface and we believe it may project upwards of 300 to 400 meters toward the top of Perseverance. We are drilling it now.
Nine kilometers to the north and just adjacent, a few hundred meters south of the historic Great Cobar mine, we likewise made a new discovery on another lens. It’s part of the Great Cobar system named Anjea.
And it too is a system of stacked ore lenses, in this instance high-grade copper with some byproduct gold as well as some high-grade lead, zinc, silver lenses that we're also continuing to aggressively drill. But it doesn't end there.
In addition to Chronos and Anjea, our geologists, our exploration team down there have really challenged the conventional thinking that’s been in place for the past 25 years and really turned it on its head and developed some new thoughts and targeting principles that have resulted in the recognition of multiple new targets along the rest of the mine corridor in between Chronos and Anjea. I will take a little bit more about those later, but we see a lot of upside for Peak and unlike a couple of years ago when we weren't sure how much longer Peak’s life might end up being, I think we have a much more favorable view toward Peak at least being around for another at least 10 years in my view.
At Rainy River, we also brought in the Bayfield Burns Block resource into our end of life reserves. I think I already mentioned that.
And at Blackwater and as Randall indicated, and I affirm, we continue to see a lot of upside potential long-term on that 1,000 square kilometer patch of very prospective and underexplored ground. And slide 55 provides a bit of a breakdown on our 2016 exploration program.
It's a $16 million program that’s broken out, 12 million are captured under our all-in sustaining cost and the balance $4 million are captured under our company's growth capital profile. You've seen this 3D diagram of the New Afton deposit already.
The colors just relate to resource classification with the majority of the measured and indicated being up in the main zone, but down below we've got the C-zone block cave volume shaded in there and as Dave pointed out, it is open to the west and open down plunge at depth. We just started drilling a week ago trying to test the potential to push that cave volume laterally to the west and as a general rule of thumb, if we're successful with every 75 to 100 meters of lateral step out along strike, could translate into one more year of reserve life, one more year of production, which I believe we mentioned previously is on the order of - could produce on the order of an additional $200 million in cash flow, undiscounted cash flow to the existing mine life profile.
To the question that I think Dan you had the question, what will it take to pull in the balance of our measured and indicated resources on C-zone into reserve. There is not a clean answer to it.
It's largely a question of leverage to the price of copper and goal in the sense of being able to push the cave along long strike laterally and add draw bells either to the west or to the east and also evaluating the potential to go deeper on C-zone longer-term. At Rainy River, we're continuing to advance at more of a district reconnaissance level while Peter and the construction team get the mine built, we're continuing to prospect out around from the central mine development area to generate new targets and as results warrant, we may opt to drill test them as these things emerge.
At Peak, as I mentioned, we're actively drilling to delineate the limits of the Chronos shoot down on the southern end of the mine corridor, above Perseverance and likewise doing the same thing up at the north end on the Anjea zone next to Greg Cobar. In the meantime, three of the five mine corridor targets that we've got slated to drill test this year, the initial holes on Burrabungie, Gladstone and Dapville have all hit visible high-grade copper or high-grade polymetallic mineralization.
At Gladstone, we hit 8.4 meters at 2.6% copper plus another interval 3.7 meters at 5.2% copper, so real proof of concept that that target has significant - offer significant upside. As you can see in the long section, Burrabungie as well as Gladstone are right next door to our operating mines at Chesney and New Cobar, so just a stone’s throw right inside of existing mine infrastructure we could leverage off of.
At Dapville, we just hit a 4 meter intercept of copper, lead and zinc mineralization. We don't have assays on it yet, but it does look suspiciously similar to the style of mineralization we have at Chronos.
So I'm very, very keen to see what will come back not only in the copper, lead, zinc grades but will it have any gold. Any one of these shoots can transition down from a base metal play into a precious metal play over a very short distance.
At Gladstone, we also had a 7 meter intercept of high-grade copper mineralization, so we're often running our conversion rate from inferred to measured and indicated at Peak is over 25 years, very consistent at about 75% ability to convert what you see in the inferred statement, we will eventually end up in reserves. I'm also very optimistic about our ability to be predictive with our drill targeting as we step out on our Young Australian and Mount Pleasant targets farther out.
And collectively this cluster of blue shaded shoots are actually part of a more - of a broader system of deposits that has a very similar sized footprint to the Great Cobar system just up to the north. So stay tuned, we believe a year from now, we’ll have a lot more to tell on this exciting new story on Peak and its future.
With that I guess I'll pass it along to Peter, who will provide an update on Rainy River project.
Peter Marshall
Thanks Mark, Rainy River project. There is a series of slides to look at.
April 2015, site clearing and process plants, it's right in the middle of that. And then you see over on the right-hand side the advancement by August, the plant site excavation.
And just up to the left is where the open pit sits, so we haven't even started at that point. Next slide you see the - in the middle the mill foundation, it started to be poured by October.
And I think for those of you who were on the tour, it’s just probably a few weeks after you had been on the tour. So we’re doing those mass foundations, I know we want to have a look at them and it was actually kind of one of the real successes I think.
The amount of concrete we got placed early on has really set it up for a nice success for us and actually we saved money on that side on the heat pouring as well. Next picture, you can see the structural steel erection just getting started on that building in November 2015.
We jump to the next slide, in December, you see the building up. And now in February, we’ve got that major grinding building which is a huge milestone for us.
So it’s fully cladded, the roof is on now. The two big cranes that you have to get into a grinding building are both up and in place now.
So what we are is completely set up to start the erection of the mill and that's always a critical path through the building in one of these projects is getting that building up, getting that cranes in place, getting those commission. We’re going to start mill erection here just in a few weeks.
So it's just actually just a very exciting time to be out here at Rainy River today, it’s great. And you see just on the right-hand side of that picture, you’ll see two little columns going up and that's the start of the major process building which now carries on from there.
So we’ll now move the crew off of the grinding building, they started erecting the next one, the mechanic and piping comes into that grinding facility and we are really off and running for 2016. When you look at that picture from April and then you look at where we are at Christmas, so really it was six months of pretty serious construction.
There has been 500 to 600 people up there and New Gold direct hire employees and contractors and building trades contractors, they have worked so hard for us and I think really New Gold owes those workers a huge debt for getting us to where we are at this project, so much appreciate their efforts to-date. Thank you.
Right into my next slide. Ontario is a great place to be building a gold mine and we are delighted that’s where we are building this one right now.
The bottom point there, support of local government, support of community, support of regulators up there and most important really are our First Nation partners that we have in place. We have a lot of contacts, we have a lot of relationships that’s going extremely well at this point, it's become a very much a value add.
So much thanks to the people of that Fort Frances and Emo region, it’s been great to be part of that community. And I think that's the way we look at it, as we are becoming a very significant part of that community and working hard to maintain that socialize license to be working there.
We have Grant Goddard who is the general manager, who is staying there with me. I would say probably 80% of Grant’s time is now spent working on maintaining that socialize license as well.
So the project update, we have some really significant milestones. Engineering is complete.
We’re currently at 25% construction completed on the ground having spent $312 million through December 31, 2015. Impact and benefit agreements completed with key First Nation and Métis are all in place.
We secured low power rates to the Industrial Electricity Incentive Program to end of 2024. And just to show the value of that the indicative price if we have been running today it would have been $0.024 per kilowatt hour and our economics carried in the our feasibility study was $0.045.
So it’s a really big boost and once again thanks to the government of Ontario for supporting the mining industry in this manner. Commissioning, we are on track for mid-2017.
Now our development capital, we are holding steady at US$877 million. Projected increases that we have faced have been offset by the depreciation of the Canadian dollar and I’ll talk about that in the next slide.
$500 million capital program for 2016, we’ll detail that as well on the subsequent slide. So, as our project construction has advanced, capital costs of some items have come in spot on budget, we have been very pleased with that, our initial mining fleet, process equipment, the contracts for steel supply and installation, supply and installation of leach tanks.
These all came in pretty much spot on budget. So, where we have seen cost pressures?
And it's kind of 50-50 here. Some of the contracts like the concrete supply and installation and the bids we just recently have gotten in the fall on the mechanical, piping, electrical instrumentation we had thought when we were doing our strategy for the estimates that these would be a very aggressively bid contracts due to the current climate market.
The fact is they pretty much come in, in what would have been expected in a normal time period. Now, we did include the more aggressive numbers in our estimates, hence is where we are seeing this overwriting write-down Canadian dollars.
We also elected on the mechanical piping electrical go for lump-sum bids which I think is very important concept is that when these are awarded those are locked in prices. So we are not sharing any kind of labor risk to go out, those would be locked in firm prices.
Okay, other areas we’ve had some challenges on and it’s about half of the overrun is to deal with the earthworks, the plant side earthworks at the water management pond. All the detailed earthworks around the plant site, the water divergence, the plant side excavation, it’s a very different I would say complex civil items that we had to do.
We ran over budget on those and trying to kind of bring it up to what’s the main factors I think our assumption at a lot of the construction materials will be far more readily available locally at site. And what we have run into is they were not there in the volumes, in quantity and quality we expected.
So we ended up having to haul material further from off-site. We had to do additional processing of drill, blast, screen materials.
And some of the clay materials that we had on site just proved to be more difficult from a civil construction point of view than what we had seen. So we ended up bringing in some smaller trucks to do that.
And then really I think and we mentioned even earlier is changed foundation conditions, not quite exactly what we had thought has taken some more work and effort. So, importantly what we have done, so all of this challenges we have had on the earthworks, we have taken that and we’ve trended that forward now through all the remaining earthworks that’s going to happen on the tailings dam.
And actually the remaining civil earthworks is easier than what we’ve done but we’ve trended those unit costs, we’ve trended the quantity overruns. We have now included all the lump-sum prices on the mechanical, piping, electrical that we received and we’ve trended all those to our final estimate and that’s what you’re seeing now in our current cost estimate.
And just for fun that is the mill shells in the bottom right-hand corner to be enlisted into place. Yes.
Q - Unidentified Analyst
[indiscernible].
A - Peter Marshall
100% complete now.
Q - Unidentified Analyst
[indiscernible].
A - Peter Marshall
25% of all the construction work is completed at site. Just jump into my next picture, slide 65.
This is where we are now. We have $518 million in the spent/committed category out of an estimate of $877 million.
Breaking that down further on the right-hand side $312 million spent to-date of the committed amount not spent, $95 million is lump-sum fixed and that’s mostly the process equipment that we have been delivered to site right now. So that will be the balance of those payments so that’s pretty well guaranteed.
The $111 million are our construction contracts or we may have fixed unit price contracts and then the quantities are subject to variance. And now just talking a bit about 2016.
And as Dave said, we had released that we would be spending $375 million in 2016 and we’re now projecting $500 million spend. The $500 million spend for us just means that we can get a lot more done this year and significantly derisk our construction.
In just with the recent events that come up and I'm going to credit that really to two groups, our operating mines what they delivered for us in the last half of last year. And then our finance team with I think some of the very innovative creative approaches they’ve taken to securing finance for us has really given us this opportunity to get a lot of work done and to really accelerate our program to herein.
We're not saying we're going to get commissioned any sooner but we’re going to say it’s going to reduce that construction risk. So by the end of year, we’re going to be advanced overall construction to 75% complete, ramp up of preproduction mining activities, continue commissioning of the mobile fleet.
And although Grant is not up here talking this year, I guarantee you he will be next year because the success to-date of our mining operations is just really outstanding. We've got - we have an absolute tier 1 of people now for mine operations.
He’s moved there, relocated there, become part of the community. We met or exceeded all of our early operating targets by about 15% and we’re up to about 2.4 million tonnes, I would say a material move today.
We've gotten now into a 24-hour continuous operation and we have a continual training and development program on the operation side going. So we’re going to be in good shape come start-up.
Process plant construction, we’ll have all the concrete, all the structure, steel all done by mid-year. We will be advanced our mechanical, piping electrical installation to at least 50%.
And I think we are going to be passed that actually by year-end. Transmission lines scheduled to be energized and completed this year and the tailings dam construction will be up to the 60% mark.
And just a final slide, just a simplistic schedule, really what we're saying is that we're going to have all of the construction wrapped up in that first month of Q2 leaving us two complete months for commissioning and ramp up. And for those of you who have done commissioning plants before we will actually be starting a great deal of commissioning here in the fourth quarter of 2016, but leaving ourselves two clear months for final commissioning and ramp up.
Q - Unidentified Analyst
On the preproduction mining, you said 2.4 million tonnes moved to date?
A - Peter Marshall
Yes.
Q - Unidentified Analyst
I think the last time you were on site; you were just starting up preproduction mining. Is that on schedule, behind schedule or ahead of schedule?
A - Peter Marshall
We are about 15% - in terms of tonnes moved, we are about 15% ahead of what we had planned at this stage.
Q - Unidentified Analyst
Again, when do you start, when do you plan to start mining ore?
A - Peter Marshall
We’ve hit some of our first low grade ore already, so we've created a low-grade ore stockpile now. So we'll start.
Grand, when do we start hitting major ore benches?
A - Grant Goddard
Now we are targeting that in our sequencing more towards the end of the year as we enter 2017. Right now we are focused on both opening up the pit to provide that access to the different ore sources but also to provide construction material so we have to service our construction customer as well.
A - Peter Marshall
We think of the mining department as an extension of our construction team right now.
Q - Unidentified Analyst
Thanks Peter. Two questions, firstly with your [indiscernible] to be spent next year, what sort of profile should we just assume even throughout the year or you got something else in mind?
A - Peter Marshall
It is a pretty steady profile, probably weighted more to this front end. We have some higher spends in the front end and then we’ll be kicking off our MPEI packs in the pretty much steadies out after that.
Q - Unidentified Analyst
Second question is recruitment and training, how are you going for getting all personnel you need?
A - Peter Marshall
It's probably a success story for us, it’s just a huge success story. We have - I can even quote the thousands of applications we had, it wasn't hundreds, thousands of applications went out.
And one of the things I’m really proud to say is we have nearly 70% of all our current direct recruits are from the immediate region. So we’re getting local people and we’re getting high quality local people who are kind of excited to be on the project like to live there and the training program is going well.
I think our number right now is overall 30% First Nation engagement in our construction contracts as well as in our operating side. So it's going very, very well.
We are always looking for an analyst or two who might come and work for us so.
Q - Unidentified Analyst
So Peter, we recognize it’s a massive project that’s undertaken by the Company. Trying to build in the winter time is not the easiest thing either.
But I think a lot of us are looking for some comfort here about - we toured the site not that long ago and then we are back again and the cost in Canadian dollar terms has gone up substantially. So I guess we are looking for some comfort about why is that given that you're only a quarter build is not going to be repeated in the other three quarters?
A - Peter Marshall
Excellent question.
Q - Unidentified Analyst
And in particular going back to your accelerated spending, you made a comment about that reducing the construction risk?
A - Peter Marshall
I think if you look at this overrun as we say. Most of that overrun is what we’re projecting forward.
So it's not overrun that we’ve actually hit yet. So it's stuff that we have now taken and trending going forward.
So I would say that’s 70% of it. If you look at our big spends and you go to that committed table, what is left for us to actually spend and commit that we could have a surprise on.
The one that got us surprise was that MPEI that $40 million is just really came out of the blue, we didn't expect that. However, we’ve not got that in there and that in that cost estimate and we are actually taking one of those back out for bid because we think we can get a better price on currently have on that.
So it's going back out for bid, so we are going to see if we can save some on that. But that number is now in there and that’s going to be a firm lump-sum locked in number.
And if you take that half of it, there is really only the four contracts left, so the three MPEIs and one tailings dam contract which they’ve all now been bid, tendered, awarded, reviewed so this whole concept of estimating error is over now and we now have all firm prices into the balance of this work.
Q - Unidentified Analyst
So just a question on lump-sum contracts. The tailings, I guess - how much is - like how much of the tailings do you have when that’s complete ahead of you like it’s sufficient to the mine life or is it sort of 50% of the capacity or --?
A - Peter Marshall
When we build this tailings dam, so we’ll build all the foundation works in all the areas And that will give us two years tailings capacity and then it becomes an ongoing process where we are taking rock from the mine taking it out there and placing it on the dam so it becomes a continuous build process.
Q - Unidentified Analyst
And what happens if the contractor comes behind and starts to become behind schedule?
A - Peter Marshall
On the tailings dams itself? Well, the tailings dam we’re doing with three groups.
So the mine department as Grant said is probably our biggest most important contractor out there because 70% of the material on the tailings dam has been replaced by your own contracting forces. Another chunk of that work we've taken on ourselves what we call our direct forces so we did pick up the small fleet of equipment in our own team.
So we are building a second portion out ourselves. So there is about $18 million of that tailings dam that needs to be constructed, it’s being constructed with a third-party contractor.
And that third-party contractor has done a lot of our other work for us on the site. They are the right people to have there, they’ve got the people, the skills, the equipment, so I have a lot of faith in exactly how well they can do.
We are going to be well past 60% constructed on that tailings dam by Christmas and we are just trying to and we are engaging the pace of that just to match the rock availability from the mine. That still leaves us another six months before we get to a point where we will start to discharge tailings, so we’re actually quite a well ahead of schedule on that.
Q - Unidentified Analyst
And then two more questions with regards to the tailings dam. What’s the design, what kind of tailings dam is it?
A - Peter Marshall
Our tailings dam is really an interesting is where we sit on a large clay layer. So, and then what will have is a centered clay core, and then we’ll have rock buffers on either side.
Q - Unidentified Analyst
So it’s centralized?
A - Peter Marshall
Centralized.
Q - Unidentified Analyst
And then is there a dewatering that’s required with that?
A - Peter Marshall
Not extensively, no. There will be a - there is a dewatering system that comes through the center of the dam, it comes out along the bottom and the drain filters that we pick up.
But there is no major dewatering that needs to go on around the dam. No, Don you’ve had your question.
Q - Unidentified Analyst
Just go back to your accelerated spending Peter --. Well, most of us know when we do things faster doesn't usually end up going better.
So maybe you can give us some more color on that?
A - Peter Marshall
I'll definitely give you color on that, thing a bit more as that was our base plan, we always wanted to spend 500 that's how the original plan was build, that it what we were intending on doing. I think when December came along and we were starting to look at Gold going down to $1,000 and some other challenges and frankly as I say, before the finance team did some of the pretty unique stuff that they did for us here.
We’re having a look at ways of possibly doing a reduced spent, I think if we had been on the 375 it might have pushed our commissioning out past the mid-year that we are hoping for now. So I hope it gives you relief that's actually what our base plan was.
Q - Unidentified Analyst
Okay, back to your schedule, you’ve kept the same schedule? So that does that give you more cushion shall be say for your schedule?
A - Peter Marshall
Yes.
Q - Unidentified Analyst
And then the last question at least for now, it will be operating cost implications of what has happened? Now you’ve lived through a number of experiences including the mining conditions, what are the implications to your operating costs that come through what we've seen in construction?
A - Peter Marshall
I think if you break operating costs down into some of those variables, our labor we are getting our labor good quality experience labor at the kind of prices we need to hit our targets. When you look at some of those big cost inputs steel, grinding, media, cyanide we are going to get those right on where we had anticipated.
When you look at power, we are significantly below what we had in the feasibility study. So, we are really pleased with that, the rock hardness is coming in where he had expected.
So on mill operating costs, we should be very, very dialed in on that. I don't see anything that I've experienced yet to-date that would have me say that’s different.
I differed to Grant on his mine operating cost but really as he said to-date, we’re 15% ahead based on plans. So I think that and I won’t corner him yet because he has only had a few months having his equipment running but I don't see anything that we've seen so far to-date that would say we won’t hit our mine operating costs.
Q - Unidentified Analyst
Question looking out to 2018, 2019. Where does the mill become hungry and what’s the critical path point would it be construction of the tailings and having materials to construct the tailings or I mean obviously, 2018 there is going to be a whole lot of stuff going converging on one and it’s going to --.
A - Peter Marshall
Well, you figured it, its mid-2017 we commission right. So we’re going to have a good stockpile of ore in place.
We have some hard work to do to make sure that we have the high grade and the low grade stockpiles properly sorted out. But we will have a large stockpile of ore available.
So I think where could you run into pinch points in terms of a mill getting hungry we got to make sure that we keep our advancement going at the proper rate that we keep the pit opened up. So, I don't see pinch points in 20 - if we get off and I think the way Grant always put it to me before without putting words in your mouth, he says, Peter if you let me get done what I need to by mid-2017 then we're not going to run into those negative pinch points in 2018, ‘19.
Grant is that a fair way to put it?
A - Grant Goddard
Peter that’s an excellent way to put it. Our whole focus right now, Peter in our press release said, by end of 2015 we are 15% ahead of plan and we continue to be 15% ahead of plan up till yesterday.
Part of our intent is we move forward with pit development to use that performance and it’s really driven by continuous improvement as we open the ground up and discover what Mother Nature really has there. Using your creativity you see how we can advance our performance.
And also seize upon the training systems we have in place but it’s really as we would call let the pit breath open it up, so we have not only the sustainable advancement of the waste movements so we are opening reserves but also have multiple phases of ore, so we are all able to provide [indiscernible] to the mill and let it perform the best way it can.
Q - Unidentified Analyst
Just a question on the capital, how much of that is Canadian dollar related and the rest US dollar?
A - Peter Marshall
I should have that number of the top of the head, I think.
A - Brian Penny
About 80%.
A - Peter Marshall
Did you say 80? Good, I agree with him.
A - Bob Gallagher
He is the CFO; you got to agree with them.
Q - Unidentified Analyst
Just back on the capital question, for the projections you've incorporated in terms of capital increases, are you considering that to be your contingency amount going forward.
A - Peter Marshall
What we have in terms of our contingency is we keep a portion of contingency against every contract that we have awarded and then we also give some contingency for specific unspecified risk. So not all of that is in contingency some of that is in just stuff we’re acknowledging right now, we're going to spend it.
So I don't know if that answers your questions clearly or not.
Q - Unidentified Analyst
So if you had to estimate what that dollar value or percentage would be going forward what would that be for the contingency cost?
A - Peter Marshall
If it is fair to say we probably have approximately $50 million US contingency still remaining in our estimate.
Q - Unidentified Analyst
And in terms of working capital requirements following commissioning, what are you budgeting at that point?
A - Peter Marshall
I will have to get that number back to you. But I mean we have our working capital budget in there.
Q - Unidentified Analyst
Sorry, is it included in the 877 or is it beyond that?
A - Brian Penny
Yeah, the first phase, the critical spares, all that is included in the capital estimate and I think that's about, correct if I am wrong Barry, about $10 million.
A - Peter Marshall
Okay, well thank you very much and thanks for the questions that makes it a lot of fun. And with that I will hand it to Brian Penny.
Sure.
Q - Unidentified Analyst
You are talking about 75 meters to 100 meters extension gives you an extra year of mine life, what would the capital associated to the development be, 35 million [ph]?
A - Peter Marshall
I have to go and check that. Should have that number but I have to pull that number, I've been just guessing too much.
It's not as significant, you’ve got your declines down there, we've got all the drop bells up to that point, the heating, the cooling, so all the systems we have to take down there are done. So, I mean without making it too obvious, a very lucrative when we add that extra 75 meters on but I can pull out some numbers on development capital.
Q - Unidentified Analyst
I guess another question further would be what point do you have to start putting in more, like how far can you go before that number starts to bump up?
A - Peter Marshall
We've planned it, we plan for success on this and that’s included in the cost estimate in terms of the planning of the decline, the ventilation and refrigeration studies. And, matter of fact in terms of our tailings dam storage on top and the tailings stabilization, all of those are planned for success, so we’re assuming we’re going to find multiple years more for that.
Q - Unidentified Analyst
And last question would be the $200 million that you talked about in cash flow was that free cash flow after all of that or was it just like cash flow looking at the operating cost?
A - Peter Marshall
It’s pre-tax free cash flow when the C-zone is in full production.
Q - Unidentified Analyst
Okay. Thank you.
Q - Unidentified Analyst
Mark, you got off lately without any questions and since we are on that same topic, can you give us a sense of what you think geologically the odds are of being able to have that 75 meters of - what gives you confidence or not so much confidence?
A - Mark Petersen
What gives me confidence, Don, is that we do have some drill holes off in that direction that tell us that the geology, the permissive geology that controls the ore body does continue off out there for another, I will just say few hundred meters. Beyond that we don’t know because there is no drilling.
So I am pretty optimistic that at least pushing it out another 75 to 100 meters is within reach. Of course, it will depend on what is the geology actually doing in detail over that stretch of strike length.
But our first hole went into the zone actually a little bit sooner in the drill hole than predicted. But it came out right about where we expected.
So our projection of the model on this first hole, which is a 50-meter step out is holding together. But we are going to swing for the fences, and if we can get - if we can just add a year I will feel pretty good.
But we are going to see what we can do.
End of Q&A
Peter Marshall
Okay. With that I introduce Brian Penny.
Brian Penny
Thanks, Peter. Just couple of things Don, further up to your question on cost Rainy River, feasibility study was done at a $1.25 exchange rate, clearly the Canadian dollar is much weaker today, so that could be very positive.
Also the energy cost on the fuel side was probably about 20% to 30% higher than where we are today. So I think there is a lot of opportunities to work on that cost profile going forward and continue to de-risk a project.
Moving on to the best part of the presentation, the financial highlights. Although it’s always great to present this stuff, but the reality is, our team puts the numbers together, we help out a lot, but really New Gold had a spectacular year.
Dave, as he outlined in his presentation, we had a record year as far as production and cost and doing that with very low accident frequency rate. Hannes mentioned some of our corporate initiatives, whether it was the stream transaction we did earlier this year or the sale of El Morro.
We review the funding model on a regular basis. This year we reviewed it quarterly - I mean, last year, we reviewed it quarterly, this year we are reviewing it monthly.
We get months in the bag, we review the numbers and we project going forward and see what’s changed and what flexibility we have. As a result of last year’s review when prices were dropping, we said, maybe we should talk about the Treasury a little bit and did the stream transaction, which we thought gave us the cushion we needed until prices fell further later in the year.
And then we are fortunate to sell El Morro to add more money to the Treasury as well. Our production for the year, met or exceeded guidance.
If you look at the slide, revenues, operating margin and operating cash flow, all remained relatively constant to the prior year, which is absolutely amazing considering what happened to spot metal prices during the last 12 months. You look at our balance sheet, we closed the year with a very strong cash balance of $336 million and I can tell you that money is in very safe hands.
If you look at our consolidated financial summary on page 70, you can see the impacts on realized prices on gold and copper, and silver, but the interesting line on the slide is, if you go down to the second last line - no the last line, pardon me, cash generated from operations. It hung in pretty well to last year.
And why did that happen? Well, first of all, we had the production input.
Secondly, as you have probably heard from some other Mexican producers, there is an issue with collecting your VAT. Well, we hit this head-on in our team in Mexico as well as our Toronto tax team, basically we met and we said, let’s volunteer for an audit.
If they are not going to give us input tax credits, come in and audit us and tell why you can’t. Well, they came in and audited us and came up with a few minor adjustments, and I said, okay, we accept.
And then the money started flowing back to us. Our tax receivable is down 60% from the end of ‘14 to where we are today.
So proactively looking at our balance sheet, proactively working with our business partners, it worked out well. Similarly with the addition of the expanded leach pad at Mesquite.
We got material on the new plastic, sooner recycled, speed it up, and we didn’t have the inventory build that we have had in prior years. If you look at our cash flow statement for the year, our working capital increased by a couple of million dollars, not bad.
So we’re effectively managing it. Plus, we got some tax refunds from CSP on the income tax side as well.
So that’s why our operating cash flow was holding pretty steady. On page 71, which is the next page, our favorite pie chart, you can see that we closed the year with a strong cash balance.
We have an undrawn credit facility in the next slide. I will talk about the change in the ratios as to why we are very confident that this is secure for us of $184 million.
That doesn’t include the $50 million accordion that is available, but it’s not at our control. The banks would have to consent to that, but one bank could come up if we wanted $50 million, so we will take it and it’s done.
We are due to receive $75 million of the second payment and the final payment on the Royal Gold stream agreement that will be received when we have 60% project completion. And that is probably somewhere around mid-next year, and the project completion defined by the agreement as cash spent based on the estimated completion.
On top of that, we have ongoing free cash flow with a low all-in sustaining cost that leaves us in great shape. Just to talk a little bit of the credit facility.
At today’s metal prices, we didn’t need any of these changes to our ratios. We were fully funded, we could draw the facility we needed and we probably wouldn’t need to draw it other than to maintain a minimum cash balance for liquidity purposes, because money from time to time is in foreign jurisdictions, it takes time to pay a dividend to get it back home through the corporate office.
So from time to time, we may have to draw it for a little bit, but it’s just to maintain a minimum cash balance. Earlier this year, when metal prices were weaker, we approached our partners, our banks in the kit, which is four Canadian banks, two US banks and EGC [ph] and we have said, if metal prices stay lower or go lower, we are going to need really, so price we’re chasing with Rainy River is, it almost doubles our production because of the local cost profile, it more than doubles our EBITDA, so basically a net debt to EBITDA, which now at today’s metal prices will peak around 3.3 times.
Fast forward 12 months after Rainy River and that’s cut in half. That’s an investment grade rating for our company.
And the only reason why we don’t get that is because we are small company. We have disclosed to revise ratios, we sat down, we received unanimous consent from the [indiscernible] our streaming partner Royal Gold consented to the same ratios pursuant to their agreement, so we have one number to measure against.
And the funny thing was, everybody signed off this last Friday, and Thursday one of the banks called us and called Martin and said, remind you why we are doing this. And it’s just to provide us the flexibility we need that if metal prices get lower.
We are very comfortable to about a $1,000 an ounce gold that this revolver is available to draw in the accordion if we needed to. And then every month that goes by, we get more flexibility because gold is over $1,200 today.
So every month that goes by, we get more flexibility and that $1,000 gets eroded by almost $10 an ounce. So lots of flexibility here.
We do manage our liquidity monthly. We will sit down and go through the numbers monthly.
But as I said for the price at Rainy River is a game-changer for the company, it’s going to open the doors for other opportunities in the future and we got to make sure we hit the storm on time and on budget. On page 73, I love these waterfall charts.
My team, there are two things they hate when they come up to me as proposal. First thing, I ask for is a white paper, the second thing is, make sure there is a waterfall chart, and they shake their heads and say, this guy is nuts.
But anyhow, looking at our continuity schedule, just to give you some comfort in these statements, and based on all the public numbers we have disclosed is we started the year with $336 million in the bank, that’s in our audited statement, we got the stream receivable from Royal Gold, which we will get mid-year. Our all-in sustaining cost margin is - well, for this analysis, we are using $1,200 gold which is probably $20 less than what spot prices are today.
We got our midpoint of our all-in sustaining cost at $845 [ph] gives us a margin at $355 an ounce. The midpoint of our guidance is 380,000 ounces of gold, so that’s how you get the math behind your $135 million.
On the working capital side, the $45 million is there. Two very interesting components here.
When commercial production ends at CSP, every ounce of gold production from that point going forward has a value on the balance sheet of $350 as inventory. So we included, again, CSP’s cash cost number is a component of inventory, which has been - we see it from prior periods.
The benefit of that in the second half of 2016 and on into 2017, but just focusing on the second half of 2016, it’s probably about $25 million of working capital, we are going to take off the balance sheet and put it in the bank account just because the definition of cash cost, it’s a funny one, because really is the operating cost per ounce and truly if you’re talking true cash cost, you would take out the working capital component, but you don’t. And so just to provide some clarity on that.
We went through an extensive tax audit in the States last year. The IRS gave us a clean bill of health.
We have already got a $4 million refund on the January 2, and we have refiled some returns carrying back some of those tight pre-stripping cost into the year as we just started it, to carry back and file back some of that. And that looks like it will be about another $7 million.
We are expecting that by the end of the year. So just a couple of points here is, there is a positive working capital component to our cash flow that just doing this simple math and all-in sustaining costs may be missed.
The credit facility is available. That doesn’t include the accordion.
We do have bonds outstanding. We pay about $50 million a year of interest, we have got the Rainy River capital that Peter talked about.
And then other growth capital and some of the stuff we are looking it, whether it’s the further advancement of C-zone and other things that’s about $10 million. So at the end of the year, we will have $200 million of liquidity.
$90 million to spend on Rainy River to get to commercial production in mid-’17. Obviously in the front part of the year, we got the start-up revenues that produced it, but it’s like $90 million out.
And the reason why there is such a small number in 2017 is, we are tying things in together and hooking everything up. So a lot of this materials and supplies and stuff is either installed there in the process of finally installing it and it’s the fine tuning to get everything working and functioning.
Q - Unidentified Analyst
Just to play it lately Brian, just to be clear, you guys don’t project a drawdown from the revolver this year?
A - Brian Penny
It all depends. We might be able to scrape by with a small minimum cash balance, because if we do the reverse engineering, it says, we are going to have $20 million to $30 million in the bank at the end of the year.
We may have to draw to make sure there is enough liquidity at the parent level to pay the interest on the bonds or whatever. But it will result in a higher cash balance, and so it won’t affect the net debt number.
And we believe that sort of the minimum cash balance needed to run this company on a go-forward basis is about $50 million.
Q - Unidentified Analyst
Okay. And so you talk about your peak out here at 3.3, you don’t need to change these covenants in our deal world here, but obviously it gives you more room here, like - it feels like the schedule slips, you have to spend more to catch up, you needed the room on the covenants [indiscernible]
A - Brian Penny
I am not so sure the statement of schedule slipped is correct. Our original thoughts were that we are going to spend about $500 million.
This time last year that was our plan. As a result of the drop in metal prices and the fact that we are getting tight on the ratios we set, let’s look at the plan and commit to $375 million, so that we have a liquidity cushion at the end of the year.
And then once we negotiated these revised covenants, plus the higher metal prices, we said, okay, we can get back to where we were.
Q - Unidentified Analyst
Again, just one more. It sort of feels like there is a lot of pressure on Rainy River to have a real success from start-up here, lot of projects that stumbled in that area.
But given where your financials are projected to fit here, is the team comfortable here that this launch is going to have a successful startup concerned where you sit today, because it feels like a lot rides on it from a financial perspective?
A - Brian Penny
Well, a lot does ride on it. And I can’t comment on the technical side of things, but what I will say is, it’s a smaller plant, it’s not a 600,000 ton a day plant, so there is less risks with that commissioning.
Even if the startup is slower, it more than compensates for the lost production at CSP, so our net debt to EBITDA ratio, even if it takes us two quarters to get instead of longer, it still improves the ratio and we still have a lot of flexibility. So I am quite comfortable in the position that we are in.
A - Peter Marshall
This is really a simplified New Afton, it’s a single line grinding circuit, instead of a complex rotation circuit, it has got a simple lead circuit. So we don’t anticipate I mean, any issues with start-up.
Continuing with the 50% higher than expected mining rate is going to just add us more cushion in the stockpile and probably more opportunity to blend different size material that comes out of the early stages of the pit. So I am very confident we will have a good startup for this.
A - Brian Penny
As he said, we are outperforming our assumptions at this point and know it’s not simple, but there is available rock at this mine, and built a few over the years and some of them didn’t have rock available at the start and that’s a much more difficult environment than when you have it. And we have got plenty of it.
It’s a high quality. We are outperforming assumptions again.
I have no doubt about a strong startup at this point.
Q - Unidentified Analyst
And just on the addition of the headroom, of course, that’s a - I think we all think that’s a very positive thing to do, but banks aren’t known to give away things for free, Brian, what did this cost you? And maybe if you could just put it in dollars and cents instead of beeps and that sort of thing?
A - Brian Penny
Here you go, Martin, you gave comment, was telling in beeps [ph] I have to protect the confidentiality of our lenders because they are talking to a lot of people about similar things, but I will tell you Don, it was substantially less than a $1 million.
Q - Unidentified Analyst
Brian, [indiscernible] because the question comes up every now and then. I guess, longer term, once Rainy River is up and running, you have got the other projects, you have got the C-zone development and then you have got Blackwater, but then if I look at your bonds today, I mean, the yielding well in excess of 10%, another opportunity could be to repurchase your bonds at some point of time, has that talk ever come up?
A - Brian Penny
We see how the bonds trade. We see there is an opportunity there.
But our prime directive right now is to get Rainy River built, to get the game-changers, to get the higher cash flow going forward, and then we can figure out what’s the best investment at that point in time, is it to buyback bonds, is it to continue and expand with the C-zone, which I think it will be, what’s the timing on Blackwater, what our metal prices at that time. So we have time to figure it out.
The no call period is about to end on the bonds, but they have got four more years to run on them, and then the other bonds are 2022. So we have got some time to figure this out.
Q - Unidentified Analyst
Okay. And then I think you touched on this just a little bit, when you have Rainy River up and running, that will be a lowest cost mine, lots of cash flow.
I mean, do you think at that point, you could raise money in much better terms than right now, than the last financings that you did, the debt financings that you did?
A - Brian Penny
The high yield market today is a mess. I am not telling you anything you probably don’t know.
It all depends on where the high yield market goes from here. But just look at fundamentals, we have another big chunky asset, we have it in a same jurisdiction, our net debt to EBITDA should be half of where we peak.
That tells me assuming metal prices stay where they are today that should tell us that hopefully the rating agencies will upgrade us, hopefully our cost to capital gets cheaper. But right now, with the amount of investment grade products that are now being downgraded into high yields, there is a bit of an over - there is under-capacity in the high yield market.
So it is not today.
Q - Unidentified Analyst
Thanks, Brian.
A - Brian Penny
If there are no further questions, Mr. Oliphant?
End of Q&A
Randall Oliphant
Well, thank you, Brian. And just too sort of pull some of the pieces together and we will have a chance for some questions at the end here and also we have got a lot of our team available to speak to you about anything.
But we like where we are. I think we’ve talked a lot about how much we like operating in Canada and how we have had good success here and we are becoming an increasingly a Canadian producer, which works for us for a lot of different reasons, whether it’s permitting, First Nations relationships, tax synergies, all that sort of thing.
And of course the heart of the company today is New Afton. Rainy River will probably take over as our flagship and then after that we will have Blackwater, which are multi-million ounce new districts, where you’ve got everything sort of tied up around them.
In terms of value creation, I think you may have seen this slide before, but we remember the lead-up to New Afton, all the questions that people have, the uncertainties, but what’s amazing is at the time when we were building it, of course Gold was $800 an ounce, when we were discussing the IRR at $800. But since then we have pulled out over $400 million dollars of free cash flow from mine.
We didn’t have envisioned at that time the mill expansion that we have done, there was no C-zone that anyone was factoring in, let alone the C-zone that we think that we can continue to grow. So we believe that with Rainy River, we will be able to create similar value as to what we have done with New Afton.
We got the same team in the same country executing as we know we will. In terms of Rainy, again, about 4 million ounces of gold and reserves.
You can see the remaining capital. We have looked at all the different ways of financing this.
And I think part of the reason why the bank so readily responded to Martin and Brian’s request is they are getting lots of request from resource companies for covenant releases. But something where the ratio is going to drop in half until the comment why do you even need this for, I think just it speaks to the relationships that these guys have established with the banks going to about a year earlier than we had to and maybe never would had talk to them, it’s just why they so readily agreed to this.
And I know Brian is working hard to honor his confidentiality with the banks, but it was a real nominal amount. So we look forward to Rainy starting up in the middle of 2017, I think you have heard enough of these different features that I won’t repeat them.
Blackwater of course follows. You can see the capital cost there at CAD1.25 to the US dollars, but I think that this will be just Rainy River, but on a much larger scale and it’s just a free option for us, because we can’t do anything until we have the permits for it, we won’t do anything until we have got Rainy River completed.
But it will be ready to go. So looking at where we are in terms of the pipeline, as you have heard the New Afton mill expansion came on stream early, came in well under budget.
Rainy River is on stream to startup in the middle of 2017. From a permitting perspective we have Blackwater there, then beyond that we have got the C-zone and we hope our partners at El Morro and Relincho are now called Corridor, continuing to advance.
That project is pretty significant to both of the companies to increase the value of our stream that we have at El Morro. But when we sort of step back, the portfolio that we have operating today has an average life of about 7 years.
Our new projects have lives of - in excess of 15 years or more than double that. Our average producer today, in fact, all of them are around 100,000 ounces, the new projects on average are about 400,000.
So much bigger scale, and then interestingly at much lower cost than what we have today. That’s what makes us so excited about the futures, the quality is going up in every dimension.
I mentioned stock price performance. Again, the reason why picked the beginning of 2009 is that’s when the merger of New Gold and Western Goldfields was announced and came together.
When the company sort of took the current form that it’s in, the stock price has more than doubled what it was then even though the gold price was only up 43%. And the reason why we focus on this we said, what enabled us to not only outperform gold, but to outperform our peer group.
And I think it goes back to the core of who we are. We have got a portfolio of assets in top-rated jurisdictions, all that have lots of optionality and potential to make them more valuable.
We had right team who were able to deliver for us, whether it was on the development side, the operational side, or the financial side, we had low cost ounces in terms of production, which enabled us to generate cash flow to continue to build our portfolio even in a tough market. And we have got a brand new pipeline, because with New Gold tomorrow, it always looks like it is going to be better than today, and we believe that we have got a program in place to be able to continue to deliver that.
We believe, if we just keep doing that, we will continue our history of value creation, which means a lot to us, because we are all significant shareholders ourselves. So with that we would be happy to answer any additional questions that you have, in addition to Martin, our Treasurer is here, Barry O'Shea, VP of Finance is with us, if you want to talk about anything to do with that, and of course, Grant Goddard in the midst of all of this construction and Peter Marshall made the trip to Toronto.
So we want them to be available to you to answer any questions that you have got. But I would like to thank you very much for your patience.
I would like to thank Julie Taylor and Ankit, who - you know Ankit well, who put this together, and what you may not know is how instrumental Ankit was working with all the other guys on this power deal that we struck in Ontario. So in addition to fielding your calls and preparing presentations, he is the key part of saving us about $100 million.
We would be happy to have any additional questions that you have. If there aren’t any, thank you very much for coming.
We have refreshments set up at the back here, and maybe a good opportunity to just sort of mingle with our guys, talk to them about anything that you want and thank you very much.