Oct 28, 2016
Executives
Hannes Portmann - EVP, Business Development Randall Oliphant - Executive Chairman and Director David Schummer - EVP and COO
Analysts
Rahul Paul - Canaccord Genuity Michael Parkin - Desjardins Securities David Haughton - CIBC Anita Soni - Credit Suisse
Operator
Good morning. My name is Christi and I will be your conference operator today.
At this time I would like to welcome everyone to the New Gold Third Quarter Results Conference Call. All lines have been placed on mute to prevent any background noise.
After the speakers' remarks there will be a question-and-answer session. [Operator Instructions].
I would now like to turn the call over to Hannes Portmann, Executive Vice President of Business Development. Please go ahead, sir.
Hannes Portmann
Thank you, operator and good morning, everyone. We appreciate you joining us today for the New Gold 2016 third quarter earnings results conference call and webcast.
On the line today we have Randall Oliphant, Executive Chairman; David Schummer, our COO; Brian Penny, our CFO and I will also be available during the Q&A period at the end of the call. Should you wish to follow along with the webcast, please sign in from our home page at newgold.com.
If you are participating in the webcast, you may type your questions online through the interface. Before Mr.
Oliphant provides us with an overview of the results, I would like to direct your attention to our cautionary language related to forward-looking statements found on slide three of the presentation. Today's commentary includes forward-looking statements relating to New Gold.
In this respect we refer you to our detailed cautionary note regarding forward-looking statements in the presentation. You are cautioned that actual results and future events could differ materially from those expressed or implied in forward-looking statements.
Slide three provides additional information and should be reviewed. We also refer you to the section entitled Risk Factors in New Gold's latest MD&A and other filings available on SEDAR which set out certain material factors that could cause actual results to differ.
In addition, at the conclusion of the presentation there are a number of end notes that provide important information and should be reviewed in conjunction with the material presented. I will now turn the call over to Randall.
Randall Oliphant
Thanks, Hannes. Good morning, everyone.
Thank you for joining us today for New Gold's third quarter earnings call. Slide four provides a few of the highlights from the quarter.
New Afton had another solid quarter, while higher production from our Peak Mines largely offset a weaker quarter at Mesquite, resulting in consolidated gold production of 96,000 ounces. Copper production increased to over 25 million pounds.
Cost during the quarter were significant lower than in 2015, through the combined benefit of significantly improved operating performance at Peak, as well as the higher production rating from our low cost New Afton Mine. In the second quarter, we lowered our cost guidance by $75 an ounce.
Based on three strong quarters of operating results and assuming current commodity prices and foreign exchange rates, we expect to achieve our lower cost guidance ranges. Total cash cost should be between $360 and $400 an ounce, all-in sustaining costs should be between $750 and $790 an ounce.
The significant decrease in costs enabled our company to generate a very robust all-in sustaining cash margin of $646 an ounce or 49%. This represents our highest quarterly margin since 2012.
Our strong margins led to a 76% increase in cash flow to $90 million or $0.17 a share. We finished the quarter with cash of $151 million.
In addition, we should receive the remaining $75 million stream deposit from Royal Gold in November. Earlier this month, we announced an increase in our credit facility from $300 million to $400 million.
We also entered into additional gold option contracts for the first six months of 2017, including a floor price of $1,300 an ounce. Finally, at Rainy River construction activity continues to move forward.
After spending $131 million during the quarter and approximately $50 million in October, we’re pleased to report that overall construction is currently 60% complete. We have $365 million left to spend with first production now only eight months away.
Slide five provides a summary of our third quarter consolidated and mine-by-mine operating results. All four of our operations continue to perform well, with every operation generating free cash flow this year.
We are well positioned to meet full year gold production guidance of 360,000 to 400,000 ounces. At New Afton, both gold and copper production were in line with the third quarter of 2015.
New Afton’s average mill throughput during the quarter was over 15,900 tons per day, which help to offset a planned decrease in gold grade. Both cash costs and all-in sustaining cost were significantly lower than last year.
Cash costs benefiting from higher copper sales, which more than offset the decrease in the copper price. At the same time sustaining costs decreased by $3 million to $8 million during the quarter.
At Mesquite gold production decreased in the quarter, mining activities were focused on waste stripping the impact of which was only partially offset by higher grade material being mined. In addition a higher portion of ore tons mined were from a transition zone, which has lower overall recovery.
Mining has since moved from this zone and we expect a strong fourth quarter. Mesquite’s all-in sustaining cost increased this quarter due to the combined impact of increased capitalized waste stripping and lower gold sales.
Peak had another very strong quarter gold production of 38,000 ounces was almost double the prior year, it represents the highest quarterly production since New Gold has owned the asset. The increase in gold production was driven by higher tons processed and higher gold grades.
Copper production also increased by over 30% to 4 million pounds. Peak’s costs during the quarter were significantly lower than the prior year primarily due to the increase in gold production.
As planned, Cerro San Pedro's gold production decreased to 15,000 ounces active mining as you know was completed in June and the mine transition to residual leaching during the quarter. Slide six provides a summary of our quarterly financial results.
Revenue for the quarter was a $179 million remaining consistent with last year. Operating margin for the quarter increased by 31% due to lower operating expenses.
The decrease in operating expenses was primarily due to the planned slowdown of activity at Cerro San Pedro. The company reported adjusted net earnings of $13 million or $0.03 a share.
The increase in earnings relative to 2015 was primarily due to the increase in operating margin, a decrease in finance cost, which were partially offset by an increase in depreciation. New Gold reported net earnings of $5 million or $0.01 per share.
The current quarter included a $10 million pre-tax foreign exchange loss and a $9 million non-cash pre-tax charge and the revaluation of the Rainy River gold stream, partially offset by a $3 million gain on the revaluation of the gold price option contracts. Last year’s net loss included a non-cash $100 million after-tax charge associated with the sale of El Moro and a $40 million pre-tax foreign exchange loss.
Underpinned by our solid operating performance, we generated quarterly cash flow of $90 million or $0.17 a share, this represents a 77% increase versus last year was our highest quarterly cash flow since 2013. Slide seven highlights the free cash flow generation of our assets over the first nine months of 2016.
Our operating mines continue to generate free cash flow to help fund our development projects. We are very proud that all four of our operations have generated free cash flow this year and had expanding margins.
The increase margin is resulted from both higher gold prices and more importantly from our significantly lower costs. Slide eight provides an overview of our liquidity position, at the end of the third quarter we had $151 million in cash, as well as the remaining $75 million due from Royal Gold and $276 million undrawn from our credit facility.
Combining these provides us with over $500 million in liquidity, which greatly exceeds the remaining Rainy River capital even before considering the free cash flow from our operations. Slide nine provides an overview of our Rainy River project, development activity continue to advance and overall construction is currently 60% complete.
We spent $131 million during the quarter and approximately $50 million in October. The total remaining capital on the project is approximately $365 million.
The photos on the right show the significant progress that continues to be made across all facets of the project. Slide 10 provides further details on our development progress at Rainy River.
Construction of all the structural components of the process facilities is largely compete. The team is now setting mechanical equipment and installing piping, electrical and instrumentation services, which is now over 30% complete.
Both the Sag and Ball mill shells are in place with mechanical installation expected to be completed later in the fourth quarter. The pre-leach thickener tank is complete and the leach tanks are over 95% complete.
In addition to the progress that’s been made on the construction side, our mining activities continue to advance. To-date the team has moved over 16 million tons of waste and overburden and is currently mining at a rate of approximately 85,000 tons a day.
The daily mining rate is scheduled to increase in November with the commissioning of an additional shovel and three more haul trucks. After receiving approval from the Ontario Ministry of Natural Resources and Forestry in mid-August, construction restarted on the water management facility.
Currently two of the five dams are complete with the remaining three expected to be completed in November. In late August, we submitted our final redesigns of the tailing management facility.
Yesterday we had a review meeting with the MNRF and they asked for some supplementary analysis supporting our design under certain conditions, specifically an earthquake occurring. We anticipate receiving approval to recommence construction of the tailings facility in the fourth quarter.
We continue to target first production in mid-2017. Slide 11 summarizes the significant contribution Rainy River will have on our company whether it is from a production, cost, EBITDA or cash flow perspective.
The addition of Rainy River will increase the quality of New Gold's existing portfolio of assets. Most importantly Rainy River should increase our already significant margins and double our annual cash flow and double our average mine life.
In closing, slide 12 highlights the New Gold investment thesis from which we have not deviated. We have a portfolio of operating assets, generating free cash flow with our focus increasingly in Canada.
In an industry that is challenged for growth given the lack of investment over several years we are uniquely positioned with Rainy River and Black Water. With these two assets we are not only moving to bigger scale assets, but importantly we are also moving to lower cost operations which should have compounding positive impact on our cash flow.
By reinvesting the free cash flow generated from our operations into our organic projects. We believe we are well positioned to continue our track record of long-term shareholder value creation.
Thank you again for joining us today and for your continued support of New Gold. That concludes our formal remarks.
And now we would be happy to answer any of your questions.
Operator
[Operator Instructions]. And our first question comes from the line of Rahul Paul from Canaccord Genuity.
Your line is open
Rahul Paul
Hi, everyone. Question at New Afton the cost -- site cost there on a per ton basis were quite impressive.
I am just wondering if you could break that down into mining, processing and site G&A. And also do you think those cost are sustainable?
Randall Oliphant
Well the costs are certainly sustainable because they are result of the business improvement work that we have in place for right now. The exact breakdown we'll have to get for you in just a few minutes.
So we're looking at about $6 on mining, $8 on processing and $2 in G&A overall.
Rahul Paul
Perfect that's good to hear. And then Peak seems to be doing well from a grade point as well as on tonnage.
Just wondering could we see the high grades continue into next year? And also what should be assume for throughput going forward you did quite well this quarter close to 2,400 tons a day is that a sustainable run rate?
Randall Oliphant
So what's happening in that peak is we were conservative in terms of how we looked at the result of the seismic event we had last March. And we’re outperforming those expectations in terms of throughput.
So I would look more towards the 600,000-700,000 tons a year rate going forward and grades not exactly as they are right now, but more consistent with what we've seen over the last year or so. We are seeing positive results though off of the drill bit, so there is potential there.
Rahul Paul
Dave just to clarify. So are you -- when you do your reserve update at year end will you take these factors into account?
David Schummer
Of course. And we still have to do that work and we'll provide an update here so.
Rahul Paul
Okay. I guess we'll have a better idea at that point then.
David Schummer
Yeah.
Rahul Paul
Okay, thanks. That's all that I had.
David Schummer
Okay.
Operator
Our next question comes from the line of Mike Parkin from Desjardins Securities. Your line is open.
Michael Parkin
Hi guys congrats on the good quarter. Just a couple of questions here, on CSP we’re into the residual leaching roughly 15,000 ounces this past quarter.
What should we can have expect on a declining rate for fourth quarter?
David Schummer
I think the fourth quarter will be similar to third quarter. And then going forward it roughly gets cut in about a half each year is an approximation again we’ll update all these numbers when we provide guidance and do our year end working through January.
Michael Parkin
Okay. And is there any thought towards putting like an adjusted cash cost from CSP given that almost half of that cash cost was a non-cash inventory item?
David Schummer
That’s outside the standard, it’s a good point, we’ll take that under consideration. Maybe what we’ll do is basically going forward the inventories on the books were $600 an ounce gold so depending how you marrow with that the non-cash component.
And maybe we’ll consider providing that clarity in future MD&A going forward. So, it’s a great idea Mike.
Michael Parkin
Alright, thanks. And Mesquite you’re into happy stripping campaign is that rolling into the fourth quarter or is that pretty much done now and we are back to kind of a regular stripping rate and thus more ore going to the pads for the fourth quarter?
Randall Oliphant
It’s basically the ladder, it’s basically done at this point that we’re always stripping some waste, but that’s the way to look at it going forward. We just went through a major campaign is the short story.
Michael Parkin
Okay super. That’s it from me.
Thanks guys.
Operator
Your next question comes from the line of David Haughton from CIBC. Your line is open.
David Haughton
Good morning, Randall and team thank you for the update. If I could just go back to Peak if you don’t mind and Dave you’re talking about expectations of throughput, but the grade is really quit above the reserve level.
I’m just trying to understand is that the shoes that you are in at the moment or can we expect that grade to taper off or drop-off or what kind of profile should we be thinking about?
David Schummer
Long term silver profile I wouldn’t recommend projecting exactly how our performing going forward because we are seeing some higher grades than expected. I would again go back to how we’ve done over the last say six months to a year and look at that going forward, but is there potential and going forward for sure and we’ve seen higher performance out of perseverance in particular because we have been able to get more tons through their David than expected because again we took a bit of a conservative view post the seismic event back in March of last year.
David Haughton
So, when I look at the last six months or a year, I mean it’s nearly 50% to nearly double the reserve grade. So, I’m just wondering the sustainability of that?
Hannes Portmann
Hey David, it’s Hannes speaking. As Dave mentioned, we are getting a lot more tons out of Percy, which is by far highest gold grade ore body as you know Peak is comprised of a number of different ore bodies with varying grades and Percy is running at, I believe at about 8 to 10 grams a ton.
I think as we head into next year the biggest driver of ability to replicate this year’s going performance will be how much of Chronos which is one of the new discoveries we can get into our mine plan, we have infield drilled Chronos and anticipate that being added to our reserves at year-end ‘16. So, needless to say we’ll get as many of those high grade Chronos tons into our 2017 mine plan as well.
But as David mentioned that work is in the midst of being completed.
David Haughton
Okay. Thank you, Hannes.
That’s useful.
Operator
[Operator Instructions]. And our next question comes from the line of Anita Soni from Credit Suisse.
Your line is open.
Anita Soni
Hi, could you just give me a little bit more color on Mesquite and the out years in terms of what you’re expecting for recovery rates?
Randall Oliphant
As we noted we work through a bit of a transaction zone between the oxide and non-oxide material during this quarter, which did have lower recoveries. Typically the oxides have recovered at a over a longer term timeframe about 75%, whereas the non-oxides are around 35%.
So, we are doing some drilling currently on the future mining areas just to better define exactly where that oxide non-oxide transition zone is. And we’ll incorporate that into our longer term plans, but there is a chance that roughly 10% of the remaining life of mine reserve could shift from that 75% recovery towards something like 35%, but we’ll again do that drilling here in the next couple of months and have an update early next year.
Anita Soni
Alright. So, how much of the transition material did you go through in this quarter as a percentage?
Randall Oliphant
That we would have to get back to you on in terms of what percentage of the tons. So let me follow-up with you on that Anita if that’s okay.
Anita Soni
Sure that sounds good. and then just of the notice that you guys had given in the press release that the ministry had required that you guys do additional design analysis under earthquake loading.
When do you expect to have that done and could you just give us a little bit more color on that?
David Schummer
Yeah sure, that analysis is large done and over the next seven to ten days we’ll work with our Independent Tailings Review Board to come up with the final submission and discussion with the MNRF. So that’s more of a short-term resolution.
And I think the last point between -- the last point of contention around receiving our final permit.
Anita Soni
Okay. Alright, thank you very much.
David Schummer
Okay.
Operator
There are no further questions in queue at this time, I’ll turn the call back over to our presenters for any closing remarks.
Randall Oliphant
Thank you. To all of you who have joined us today thank you again.
As we do not have any planned communication between now and the end of the year on behalf of the entire New Gold team we wish you a very safe and happy holiday season and all the best for the New Year. As always should you have any additional questions please do not hesitate to reach out to us by phone or email.
Thank you very much.
Operator
And ladies and gentlemen this does conclude today’s conference call. Thank you for joining us today.
You may now all disconnect your lines.