Feb 16, 2017
Executives
Julie Taylor – Director, Communications and Investor Relations Hannes Portmann – President and Chief Executive Officer Brian Penny – Executive Vice President and Chief Financial Officer
Analysts
Rahul Paul – Canaccord Genuity Mike Jalonen – Bank of America/ Merrill Lynch Anita Soni – Credit Suisse Dan Rollins – RBC Capital Markets Mike Parkin – Desjardins Securities
Operator
Good morning ladies and gentlemen. My name is Sally and I will be your conference operator today.
At this time, I would like to welcome everyone to the New Gold 2016 Year-End Financial Results Conference Call. All lines have been placed on mute to prevent any background noise.
After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions].
Thank you. I will now turn the conference over to Julie Taylor, Director of Investor Relations.
Please go ahead.
Julie Taylor
Thank you, operator and good morning, everyone. We appreciate you joining us today for the New Gold’s 2016 Fourth Quarter and Full Year financial conference call and webcast.
On the line today we have Hannes Portmann, President and CEO; Ray Threlkeld, our Interim COO; and Brian Penny, our CFO who 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 the homepage at newgold.com.
If you are participating in the webcast, you may type your questions online through the interface. Before the team begins the presentation, 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, Hannes.
Hannes Portmann
Thank you very much, Julie. Good morning, everybody and thank you for joining us today.
Slide four provides a few key highlights from 2016 and other recent developments. 2016 delivered gold production of 382,000 ounces at record low all in sustaining cost of $692 an ounce.
Strong operational performance translated to equally strong financial performance, including consolidated revenues of $684 million and an operating margin of $318 million. Despite a plant slowdown at Cerro San Pedro, we’re proud to have delivered $26 million or 9% increase in cash flow to $302 million.
We finished the year with cash and cash equivalents of $186 million. During the fourth quarter, we received the remaining $75 million of the stream deposit from Royal Gold and drew $100 million from our credit facility.
As of December 31, an additional $122 million of the facility was used to issue letters of credit for future closure obligations, leaving $178 million of the facility undrawn. Last week, we announced that we entered into an agreement with Goldcorp to sell New Gold’s 4% gold stream on El Morro for $65 million.
We finalized the definitive agreement yesterday and expect to receive the payment by the end of this week. Goldcorp’s been a great partner to us over the past several years at El Morro and we wish them continued success as they advance the asset.
Finally, after announcing our updated plan at Rainy River in late January, I’m very pleased to report that both our daily mining rates and construction activities are tracking slightly ahead of our updated schedule. Start up is targeted for September 2017 with commercial production scheduled for November.
Slide five provides additional details on our financial results. Revenues of $684 million were slightly lower than last year as Cerro San Pedro transitioned into residual leaching.
We are pleased that through a dedicated focus on cost control, our teams were able to deliver a higher operating margin, despite the slight decrease in revenues. The company reported adjusted net earnings of $24 million or $0.05 per share.
The increase in earnings relative to 2015 was primarily due to the increase in operating margin and a decrease in finance cost which were only partially offset by a slight increase in general and administrative expenses. New Gold reported net earnings of $3 million or $0.01 per share.
This includes $27 million heap leach inventory write-down at Cerro San Pedro and a non-cash $6 million after-tax impairment charge related to the Rio Figueroa exploration property. Underpinned by our solid operating performance and record low cost, we generated full year cash flow of $282 million.
This represented a 7% increase versus last year. Including $21 million New Afton concentrate receivable that was paid in early January, we are proud to have generated over $300 million in cash last year.
Slide six highlights the free cash flow generation of our portfolio of assets during 2016. Our operating mines continue to generate to help fund the advancement of our development projects.
All four of our operations generated free cash flow in 2016 and in expanded margins. The 66% increase in our per ounce margin resulted from both higher gold prices and more importantly, from our significantly lower cost during the year.
Slide seven provides key highlights of our progress at Rainy River. As previously disclosed, our Rainy River leadership team completed a thorough review of both the project schedule and capital cost in January.
Based on this update, first production is targeted for September of this year with commercial production scheduled for November. Mining activities have progressed well for start of the year.
I’m happy to report that from the beginning of the year through last week, the company mined over 4 million tons of overburden and waste from the pit which was slightly ahead of our updated plan. We have also placed approximately 350,000 cubic meters of construction material at the starter tailing cell which is also slightly ahead of schedule.
In addition, the contractor hired to mine the peat and basal till layers has been mobilized and is scheduled to begin operating in the pits today which should drive further increases in our mining rigs. All of the key structural components of the process facilities have been completed.
The team is setting mechanical equipment and installing piping, electrical and instrumentation services, which are now over 65% complete. The primary cut pressure in conveyor system are over 80% complete.
Commissioning of the crusher is scheduled to commence at the end of the first quarter and commissioning of the Ball and Sag mills during the second quarter. Dry and wet commissioning of the full process facility is scheduled for August, leaving one month before targeted first production.
We are executing on our updated plan and look forward to updating you on our continued progress in the coming months. At full production, Rainy River should enhance New Gold’s growth significantly, producing an average of 325,000 ounces of gold annually at low cost.
Slide eight provides an overview of our liquidity position. At the end of the year, we had $186 million in cash and $178 million undrawn on our credit facility.
Combining these, along with the $65 million of proceeds from the El Morro stream sale, we have $429 million in pro forma liquidity before taking into account the free cash flow that will be generated from our current operations. In late 2016, we took steps to enhance our cash flow certainty over the first six months of 2017 with both our gold pricing option contracts at a floor price of $1,300 an ounce and our copper hedges.
We also continue to evaluate opportunities to further enhance our financial flexibility during the remainder Rainy River construction period. In addition to considering various financing alternatives, we are actively pursuing cash flow optimization opportunities at New Afton, Mesquite, and the Peak Mines.
In aggregate, these initiatives could have the potential to increase 2017 cash flow by approximately $20 million. Slide nine provides an overview of our consolidated year-end 2016 mineral reserves.
Total gold reserves of 14.7 million ounces remained in line with last year. We were able to partially offset approximately 500,000 ounces of mining depletion through the addition of 100,000 ounces to the reserves at our Peak Mines and 100,000 at Rainy River as a result of updates to the open pit and underground mine plans.
Peak Mines not only had a great year operationally, but the mine base metal inferred resource increased significantly as well. The mine was able to add approximately 100 million pounds of copper through exploration success at Great Cobar and Anjea and approximately 400 million pounds of combined lead/zinc from the recently discovered Chronos zone.
Peak Mines continue to be a source of annual growth for New Gold’s resource phase. Slide 10 provides a summary of our 2017 guidance which was released in late January.
As previously discussed, 2017 gold production is expected to increase relative to 2016 due to the planned third quarter start up of Rainy River. Consolidated production from New Afton, Mesquite and the Peak Mines should remain in line with 2016.
However, Cerro San Pedro will decrease as the mine enters its first full year of residual leasing. Copper production for the year should remain in line with 2016 at over 100 million pounds.
We expect a slight increase in copper production at New Afton due to the higher copper grades, while Peak should remain consistent. Our operating expense per gold ounce for 2017 should also remain in line with 2016.
However, our all in sustaining cost are expected to increase from the record low established in 2016 primarily due to the impact of the higher cost start up period at Rainy River and increased sustaining cost associated with underground development at New Afton and the Peak Mines. We’ve faced some challenges at Rainy River.
New Gold’s investment thesis remains intact and directly supports our goal of long-term shareholder value creation. We have a strong portfolio of operating assets generating free cash flow with our focus increasingly in Canada.
We are uniquely positioned with Rainy River and Blackwater providing organic growth to our portfolio. With these two assets, we are not only moving to larger scale assets, but importantly, we are also moving to lower cost operations.
This should have a compounding positive impact on our cash flow and position us to create shareholder value over the long-term. Thank you again for joining us today and for your continued support of New Gold.
We look forward to providing you with updates on our operations and our progress at Rainy River throughout the year. That concludes the presentation and now we’d be happy to answer your questions.
Operator
[Operator Instructions]. And your first question comes from the line of Rahul Paul with Canaccord Genuity.
Your line is open.
Rahul Paul
Hi, everyone. Hannes on Rainy River, we saw a modest increase in reserves mostly on grade, like you said, the ounces weren’t down much but the gold grade is approximately 3% higher, silver grade 7% higher.
Can you tell us what the reasons were for the increase?
Hannes Portmann
Yeah, Rahul it’s Hannes. What we did is we did a whole update of both our open pit and underground block models to underpin our 2016 year-end reserves.
And what those incorporated with all the historical drilling done on the property which is over 700,000 meters as well as about 90,000 that New Gold has done over the time its owned it, since 2013. And then finally, also incorporated over 100,000 meters of drilling the company Bayfield that we acquired in very late 2014 have done.
And while all of those meters were also included in our year-end 2015 reserves, we did a comprehensive review of the two block models and also updated our open pit and underground mine plans post-completion of those block models which led to the reserve changes that you saw, which overall you’re right, we’re fairly modest at an increase of 100,000 ounces to the overall reserve. But it’s a far more detailed comprehensive model.
Rahul Paul
Fair enough. And just following up I mean it looks, a number of things have changed with Rainy River, the revised timeline, you optimized the open pit for cash flow in the initial years, pushing out the timing on the underground.
Do you plan to file a full updated technical report that might help us get a better understanding of the mine plan as it stands now?
Hannes Portmann
Yeah, Rahul, that’s one of the things that we’ll think about as we move towards the end of this year, early next year once we continue to progress the construction towards first production in September, because you’re right, a fair bit has changed. I mean everything in terms of the changes of the construction and the updated mine plan are reflected in our public documents including the site tour presentation from last year.
So there’s no changes from that perspective, but just putting it all in one package is something that we’ll think about.
Rahul Paul
Yeah. And then last question, I mean you also indicated that you might be able to generate an additional $20 million in cash flow from your producing assets this year.
Just wondering if you could talk a bit more about where you expect savings to come from and what the drivers might be?
Hannes Portmann
Yeah, sure, Rahul, happy to do that. So it’s a combination of things, may be starting with New Afton, we’re looking at continued opportunities to see if we can optimize the mill throughput there, as you’re well aware, we’ve had tremendous success post the mill expansion which was supposed to enable us to do about 50,000 tons a day and we’ve steadily moved to higher rates than that.
So looking at opportunities to see if we can just further push that mill, which has been exceptional. From the standpoint of capital cost at New Afton, looking at potentially deferring a portion of the development down to the B3 block, but again that wouldn’t have necessarily a long-term impact on future production, it’s just shifting some capital potentially out of 2017 and into early 2018.
At Mesquite, as well looking at few million dollars of capital savings and deferrals and then finally at Peak, this is outside of the sustaining cost but looking at potentially deferring and exploration drive that we were considering out to the Great Cobar/Anjea area that was about $7 million or $8 million instead of doing that in late 2017, doing that in early 2018 once Rainy River is up and running and it’s contributing its significant cash flow.
Rahul Paul
Fair enough. So it looks like most of it, the majority of it [indiscernible] do with deferring some extent into the future years.
Hannes Portmann
Yeah, that’s fair.
Rahul Paul
Okay. Thanks, Hannes.
That’s all that I had.
Hannes Portmann
No problem. Thank you, Rahul.
Operator
Your next question comes from the line of Mike Jalonen with Bank of America/Merrill Lynch. Your line is open.
Mike Jalonen
Hi, Hannes, welcome to the job.
Hannes Portmann
Thank you, Mike.
Mike Jalonen
And so maybe I’ll bring back Randall into the equation with a question on Blackwater where as you know, Randall was talking about Blackwater being the next project after Rainy River. And your balance sheet won’t be as strong now when you finish Rainy River and I was just wondering what’s after Rainy River and for New Gold under your leadership, your corporate strategy?
Hannes Portmann
Yeah sure, Mike. Thanks.
Yeah, so maybe I’ll, there’s a fair bit to unpack in that question but just may be start with Blackwater specifically. The priority of Blackwater for the time being is ensuring we get our environmental assessment approvals both provincially and federally which are slated to be received towards the middle of this year.
From there, as we’ve articulated previously, we’re looking at various alternatives for the asset, one of which could be to look at a smaller scale build-out than the currently contemplated 50,000 tons per day scenario that’s the basis of the feasibility study we completed a few years ago. So, looking at scaling down with the option to expand in the future to make the upfront capital, maybe bit more right-sized.
The other option is looking at potential partnerships, but again, the focus for the time being is the permitting so that it becomes an actualized project from that perspective. But in general Mike, we feel very fortunate to have almost 10 million ounce deposit in Canada with lots of exploration potential in an industry that’s otherwise pretty challenged from a growth perspective.
So we have a lots of other things to focus on outside of Blackwater which is also good news in the C-zone at New Afton which is the mine life extension opportunity there. We talked about during the call, the exploration success we had at Peak and the fact that there’s a very significant base metal resource emerging just about eight kilometers from our mill.
So we have lots of different options of different capital scales to look at in comparing contrast and pursue what is right for the company and building long-term value.
Mike Jalonen
Well, thank you. Good luck.
Hannes Portmann
Thanks, Mike.
Operator
Your next question comes from the line of Anita Soni with Credit Suisse.
Anita Soni
Hi, just another question o reserves. So at Mesquite, could you just talk about some of the changes that went on there with the reserve update, just the depletion that you had about 18 million tons last year and then mine grade above 0.38, head grade should have gone up but it seems like it’s gone down.
So I’m just wondering what happened there even though tonnage was added?
Hannes Portmann
Yeah, Anita, I mean as you sort of stated in your question, a few different moving parts. You may recall that in the third quarter of last year, we encountered some challenges, with respect to the recoveries associated with some of the transition zone material.
So we updated our models to reflect that in the go-forward period so what that did is -- and that stuff bears lower overall recoveries so we took, more of that out of the long-term and the associated grade that went with it resulted in the change in the weighted average rate.
Anita Soni
Okay. And then just further on Peak, I think you’ve had some exploration success over the course of last year.
I was just expecting a little bit more on that side in terms of [indiscernible]. Is that going to be in the next year or two in terms of adding to Peak’s reserves?
Hannes Portmann
Yeah, Anita, we -- from the standpoint of gold, we’re able to add, it was about 80,000 to 100,000 ounces from the Chronos zone which is that higher grade gold area that sits effectively right underneath our mill. So that was in effect with largely almost entirely offset the mine depletion from a gold perspective from last year.
So that zone that Chronos has very, very little copper in it, so you wouldn’t have seen any addition on the copper side. Where we did have a very significant increase at Peak was on the inferred resource side as I mentioned during the call about 100 million pounds of copper and 400 million pounds of combined lead/zinc.
So one of the initiatives that we’ll pursue as part of our exploration budget in 2017 is to further tighten the drill spacing on that Great Cobar/Anjea area and bring that first into M&I and then ultimately, with the benefit of a mine plan into reserve. So it’s sort of the – first stage of the process in terms of building the resource inventory has been completed, now it’s matter of upgrading it into the higher categorization.
Anita Soni
Okay, and then lastly on New Afton and the C-zone. Could you just give us an idea of where in the plan or this is my plan[ph] you would expect to see some C-zone coming into the plant?
Hannes Portmann
Well effectively, it would be may be a bit too specific but the day after the B-zone ore is depleted because of the orientation of the block and the fact that seasonal sits down to the side of the B-zone mining them sequentially is simply not – not sequentially, simultaneously is simply not an option. So effectively once the B-zone ore is depleted which is in about the 2022 timeframe, we would then have the seasonal development completed, begin driving the C-zone conveying it up to surface and processing it in the exact same mill facility that we have there today.
Anita Soni
All right. Thank you very much.
Hannes Portmann
Yeah, no problem, Anita. Thank you.
Operator
Your next question comes from the line of Dan Rollins with RBC. Your line is open.
Dan Rollins
Yeah, thanks. May be Hannes or Ray, just wondering, just back on Mesquite, any changes on the life of mine recoveries or strip ratios that we should be aware of for the operation?
Hannes Portmann
Dan, it’s Hannes. No, the overall mine plan remains consistent, the life of mine strip averages right around 3:1.
The grade reflected in our year-end reserves, maybe needless to say it’s reflective of the life of mine average grade as I mentioned to in response to Anita’s question, what we have done is looked at the overall recoveries of some of those transition materials and some of those tons were removed from the plant, where they didn’t make the cut off grade. So I would still think of Mesquite as from a life of mine perspective about 70% life of mine recovery and that includes the long tail of the residual leach.
Dan Rollins
Okay, great. And then maybe on hedging, we’ve seen – you’ve been pretty active and you’ve had some very good success hedging putting in basically no cost collars on gold and hedging copper prices.
Just given the – potential liquidity short ball which acknowledging has been reduced by the sale of the El Morro stream. What are you thinking corporately now, hedging going out specifically in H2 and then into H1 ‘18, just given the potential for again challenges during the ramp up or unforeseen additional work in capital.
Are you still looking at that as an option to reduce the overall risk on the revenue line?
Brian Penny
Thanks, Dan. This is Brian speaking.
You’re absolutely right. There is an opportunity to put some of the operating cash flow risk on somebody else’s balance sheet, we will look at it.
We are recessing the copper market. We’re pleased with 272 copper and that could be an easy way of giving us a better comfort over our cash flow going forward, particularly for the second half of this year.
So it’s something we always look at and we will continue to review it and act accordingly.
Dan Rollins
Okay. And Brian, just an accounting question, we always see a bit of a trough up here once the tax been, actually once the – reviews you’re filing, do you expect any sort of elevated tax payments or rebates coming to you in Q1 or Q2 of the year that we should be aware?
Brian Penny
No, our – if you look at our tax provision in this year, the trough up was less than $1 million. So our team has done a great job in tracking this going forward and right now, we have a lot of bases in Canada, in the U.S.
the only place we paid cash taxes income taxes was in Australia, about 30%, in a British company we pay about 2% money cash tax rate. So taxes going forward are a very small component of our operating cash flow.
Dan Rollins
Okay. And then you were able to repatriate the 18 rebates that you had worked on as a team going to ‘15 into ‘16 there’s nothing left I presume?
Brian Penny
We’ve had an incredible success there. We actually have a tax payable with our Mexican subsidiary.
So we managed to get that all back.
Dan Rollins
Great. Thanks very much.
Good luck this year guys.
Hannes Portmann
Yeah, thank you, Dan.
Operator
Your next question comes from the line of Mike Parkin, Desjardins Capital Markets. Your line is open.
Mike Parkin
Hey guys, all my questions are answered. So thanks anyway.
Hannes Portmann
Thanks, Mike.
Operator
And there are no further questions at this time, I’ll now turn the call back over to Mr. Portmann.
Hannes Portmann
Yeah, thank you very much, Sally. To all of you who have joined us today, thank you again.
As always should you have any additional questions, please do not hesitate to reach out to us by phone or email. Speak to you soon and have a good day.
Operator
Thank you, ladies and gentlemen for your participation. This concludes today’s conference call.
You may now disconnect.