Feb 21, 2018
Executives
Ankit Shah - Director, Business Development Hannes Portmann - President & CEO Paula Myson - EVP & CFO Cory Atiyeh - VP, Operations
Analysts
Rahul Paul - Canaccord Genuity Limited David Haughton - CIBC Capital Markets Steven Butler - GMP Securities Matthew Fields - Bank of America Merrill Lynch Dan Rollins - RBC Capital Markets Frank Duplak - Prudential
Operator
Good morning, my name is Chris, and I will be your conference operator today. At this time, I would like to welcome everyone to the New Gold 2017 Year-End Financial Results Conference Call.
[Operator Instructions]. Thank you.
Ankit Shah, Director, Business Development, you may begin your conference.
Ankit Shah
Thank you, operator, and good morning, everyone. We appreciate you joining us today for New Gold's 2017 Fourth Quarter and Full Year Earnings Results Conference Call and Webcast.
On the line today, we have Hannes Portmann, President and CEO; Paula Myson, our CFO; Cory Atiyeh, our Vice President of Operations will also be available during the Q&A period at the end of the call. Should you wish to follow along with the webcast, please sign in from our homepage at newgold.com.
If you 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 relating to forward-looking statements found on Slide 3 of the presentation.
Today's commentary includes forward-looking statements relating to New Gold. In this respect, we refer you to our detailed cautionary note regarding forward-looking statements in the presentation.
You are cautioned that actual results and future events could differ materially from those expressed or implied in forward-looking statements. Slide 3 provides additional information and should be reviewed.
We also refer you to the section entitled Risk Factors in New Gold's latest MD&A and other filings available on SEDAR, which 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 endnotes that provide important information and should be reviewed in conjunction with the material.
I will now turn the call over to Hannes. Hannes?
Hannes Portmann
Thanks for, Ankit. Good morning, everybody, and thanks for joining us today.
Slide 4 provides a few of the highlights from 2017. In the fourth quarter of 2017, New Gold delivered record quarterly gold production of 155,000 ounces, resulting in full year gold production of 431,000 ounces.
The combination of Rainy River start up very strong year and solid operating results at New Afton and Peak enabled the company to exceed its guidance range of 380,000 to 430,000 ounces. With strong fourth quarter copper production of 28 million pounds resulted in full year copper production of 104 million pounds, which achieved the 2017 guidance range of 100 to 110 million pounds.
Although cost during the fourth quarter were higher with the start of the Rainy River, New Gold's full year operating expense was $646 an ounce, achieving its guidance range. All-in sustaining costs were $727 an ounce, beating the previously lower guidance range.
In 2017, we generated $342 million of after tax cash flow or $0.61 per share. This represented an 11% increase in cash flow per share when compared to 2016.
We finished the year with cash and cash equivalents of $216 million and we further increased the company's 2018 cash flow certainty with copper option contracts covering approximately 60 million pounds of our 2018 production. We are particularly pleased that Rainy River reached commercial production in the fourth quarter.
Importantly, the project capital cost and timeline we set in January 2017 were achieved. Finally, on January 16, we released our company guidance for 2018, benefiting from Rainy River's first full year of operation, gold production is estimated to increase by 30%.
At the same time, costs are expected to increase due to higher sustaining capital at Rainy River as the mine completes construction of the full tailings dam footprint. As part of our 2018 guidance, we also provided an update on the life of mine cost at Rainy River.
The combination of increased all in sustaining costs and the higher development costs incurred over the construction period, led us to assess the carrying value of Rainy River at the end of the year. Our review resulted in an impairment charge of $181 million at Rainy River, which negatively impacted our reported earnings.
Paula will provide additional details on our financial results in a few moments. Slide 5 provides a summary of our mine-by-mine operating results.
Rainy River achieved commercial production in mid-October and I'm very pleased to be in a position to report the mine's inaugural production. Total gold production for 2017 was 37,000 ounces.
In addition, there is approximately 9,000 ounces of gold inventory in circuit at year-end. Total production was slightly lower than the guidance range of 50,000 to 60,000 ounces as the mill ramp up began hitting nameplate capacity of 21,000 tonnes per day, slightly later in the fourth quarter than expected.
As a result, both operating expenses and the all in sustaining cost for 2017 were above their guidance ranges, primarily due to lower gold sales volumes. At New Afton, 2017 gold production decreased relative to the prior year due to a planned decrease in grade and recovery.
However, New Afton gold's production exceeded the guidance range of 70,000 to 80,000 ounces. Full year copper production was higher than the prior year and achieved the guidance range of 85 to 95 million pounds.
Operating expenses for 2017 at New Afton were in line with the prior year, we achieved the guidance range. 2017 all in sustaining costs decreased relative to the prior year as the benefit of higher byproduct revenues was only partially offset by an increase in sustaining costs.
All in sustaining costs beat the guidance range for the year. At Mesquite, 2017 gold production increased relative to the prior year due to increased ore tonnes mined as well as the accelerated drawdown of Leach pad inventory.
Mesquite's full year production significantly exceeded the guidance range of 140,000 to 150,000 ounces. Because of higher process solution flow and the drawdown of Leach pad inventory, operating expenses for the year increased and were above our guidance range.
All in sustaining cost for the year decreased, primarily due to higher gold ounces sold and lower sustaining costs, and they achieved our guidance range. At Peak, 2017 gold production was in line with the prior year and exceeded the guidance range of 85,000 to 95,000 ounces.
Copper production was also in line with the guidance range of approximately 15 million pounds. All in sustaining costs increased during the year, primarily due to higher operating costs and lower sales volume.
However, all in sustaining costs were below the guidance range. I would now like to turn the call over to Paula to discuss our financial performance.
Paula?
Paula Myson
Thank you, Hannes. Good morning, everyone.
Starting on Slide 6, our financial summary slide. I'd like to provide some additional commentary on some of the key elements of the financial results.
2017 revenue shown on a continuing operations basis, which means excludes Peak mine, increased by $82 million or 16% during the year. This was due to the higher gold sales volume and higher gold and copper prices.
Our operating margin also shown on a continuing operations basis increased by $36 million, driven by the increase in revenue, which was only partially offset by the higher operating expenses. As Hannes mentioned, New Gold reported the net loss shown on a total operations basis of $108 million or $0.19 per share.
This was primarily due to a net impact of $181 million Rainy River impairment charge, a $44 million noncash foreign exchange gain and a $33 million pretax gain on the disposable [indiscernible] stream earlier in the year. On the impairment, we evaluate mining interests for indicators impairment at the end of each reporting period.
In January, we announced higher operating and capital expenditures over Rainy River's first 9 years of operation. The increased expenditures served as an indicator of impairment and result of our analysis was the impairment of Rainy River of $181 million after tax.
We reported adjusted net earnings of $49 million for the year or $0.09 a share. The increase in earnings relative to 2016 was primarily due to Peak's strong performance in the last months of the year.
As a result of higher gold prices, solid operating performance and low cost, we generated annual cash flow of $342 million or $0.61 per share. This represents a 21% increase from 2016 and an 11% increase on a per-share basis.
And moving to Slide 7, this slide provides an overview of our liquidity position. In the quarter, we drew an additional $30 million from our credit facility.
At the end of the year, we had $216 million in cash and $31 million undrawn on our credit facility for a total of $247 million in liquidity at the end of the year. So we start 2018 with a strong liquidity position that will be bolstered during the year by the cash flow generated from our operations as well as the Peak proceeds we expect in March.
We'll look to deploy the cash that's beyond the needs of our operations to opportunistically reduce our leverage. While we have a comfortable maturity profile for our debt and plenty of room covenants, we're prudently looking to maintain and enhance our financial flexibility over the future cycles.
With that, I'll turn the call back to Hannes.
Hannes Portmann
Thanks, Paula. Slide 8 identifies the key milestones that we set at Rainy River at the beginning of 2017.
All of these key milestones that were set regarding mining rates, earthworks and processing plant commissioning were either completed on time or ahead of schedule. The Rainy River's development certainly came with some significant challenges through early 2017.
The team was able to complete the balance of the development at the capital cost we laid out in January of last year and achieved commercial production ahead of schedule. Our focus at Rainy River has now shifted to optimizing our operational performance and maximizing free cash flow.
Slide 9 provides an overview of our consolidated year-end 2017 reserves. Total gold reserves of 14.8 million ounces increased by 300,000 ounces relative to last year.
New Gold was able to offset approximately 400,000 ounces of depletion through the addition of a combined 700,000 ounces at Rainy River, New Afton and Mesquite. The increase in reserves at Rainy River was due to a combination of higher gold and silver pricing assumptions and an updated mineral resource model.
This was partially offset by the impact of the previously announced increases to operating and capital cost estimates. The primary change in reserves was for the Rainy River underground.
In estimating our reserves at year-end, we reduced the cut-off grade, which in turn increased the underground tonnes and lowered the overall grade. The objective of this was to maximize NPV by leveraging off, of a fairly fixed amount of underground development capital that was already required and to reduce risk associated with grade-related variability, when we begin mining be underground.
This lower cut off strategy is consistent with the approach we've taken successfully for our underground reserve estimation and mine planning at Peak over the last several years. Slide 10 provides a summary of our 2018 guidance, which was released in mid-January.
As previously discussed, the 2018 gold production is expected to increase by approximately 30% relative to 2017, with the full year of operations at Rainy River more than offsetting the planned decreases gold production in New Afton, Mesquite and Cerro San Pedro. Copper production for the year is expected to decreased relative to 2017, primarily due to the sale of Peak Mines and the planned lower throughput at New Afton.
Our operating expense per gold ounce in 2018 is expected to decrease as a higher proportion of gold sales will be from the lower operating expense per ounce Rainy River mine. All in sustaining costs are expected to increase relative to 2017, primarily due to higher sustaining capital at Rainy River as the mine completes construction of the full tailings dam footprint.
As we look forward, sustaining capital at Rainy River should step down over each of the next 2 years, ultimately hitting a normalized annual sustaining capital of $40 million to $50 million. As previously reported, New Gold's 2018 full year gold production is not scheduled to be evenly distributed across the 4 quarters.
Approximately 60% of the company's consolidated gold production is expected to occur evenly in the second and fourth quarters. In addition, sustaining capital is not scheduled to occur evenly across the four quarters, approximately 40% of the full year sustaining capital is expected to occur in the first quarter, with remaining 50% to occur evenly over the following 3 quarters.
As a result, with lower production and higher sustaining capital, we wanted to be clear, that we expect the first quarter to have significantly higher all in sustaining costs relative to the full year guidance range. In closing, Slide 11 highlights New Gold's key attributes, which underpin our focus on long-term shareholder value creation.
We are fortunate to have a portfolio of assets that are primarily located in Canada, deliver a strong margins and provide us with future growth opportunities. By combining these portfolio characteristics with our focus on operational execution, we are positioned to deliver on our targeted per share growth in production, EBITDA and free cash flow.
Thank you, again for joining us today and for your continued support of New Gold. That concludes our presentation and now we will be happy to answer any of your questions.
Operator
[Operator Instructions]. Your first question comes from Rahul Paul with Canaccord Genuity.
Rahul Paul
So the raise of the ramp up so far seems to have done recently well. Although you could say it's still early days, are you able to comment on mine and performance in January and February, in particular, have you been able to sustain and may be improved a bit on throughput and grade?
Hannes Portmann
Yes, sure Rahul, it's Hannes speaking, and I'll let Cory follow-up with any additional details but as you say, it is early days, but things are heading and continue to head in the right direction. So relative to the grade we saw in November, December we've seen an uptick of about 20% in that grade for the first part of this year, which is quite consistent with our expectations of a steady and marked increase over time in the grade.
The mill is running very well. Of course, there are the normal start up, things we are working through, but the mill has run as high as 23,000, 24,000 tonnes a day in certain days, and in other days, it's below 21,000, but through month-to-date in February, we're averaging over 20,000 tonnes per day in the mill.
And then the mining rate continues to hover right around the 140,000 to 150,000 tonnes. So overall, each component is heading in the right direction.
Rahul Paul
That's great to hear. And then, with guidance earlier this year, you provided us with an update on long production in EISC for the next seven years.
You've updated reserves as well, but at this point, have you done further update of the resource modeling mine plan in cooperating production cost and perhaps even reconciliation data based on your actual experience so far? Or is that something that still needs to be done?
Hannes Portmann
Yes, I guess, there's two answers to that question. So yes, we have incorporated a full updated life of mine plan reflecting everything we know to date, but of course, what we know to date is predicated on really now, three months of commercial production being November, December and January.
So our intent is articulated in the January 16 news release, is to gather more real-life evidence of operating conditions, costs et cetera and continue to refine that but I emphasized the word refine and that the big picture items and updates were incorporated, and that updated guidance for both production and all in sustaining costs. So we don't see anything meaningful changing from that guidance that we provided.
But what we want to do is provide all of our stakeholders with as clear a picture of the future as we can, and of course, there's no better information than what's really happening. But in order to do that well, we need to get some operating history under our belt.
Rahul Paul
Okay. And I think you answered this somewhat, it looks like you're fairly comfortable with the numbers that you've put out, and that's why you've decided to put it out before you've -- before Rainy River's introduction for a few quarters, but as you see it now and looking at the numbers that you release to the market, what do you see as a key risk associated with some of these parameters?
Hannes Portmann
Yes, Rahul, I guess, most importantly, is simply execution risk and our teams led by Corey and Greg Melt [ph], our General Manager, executing on the plans we've laid out. I think there's similarly a number of opportunities that offset that execution risk namely, can be pushed throughput in the mill, which is something that we've talked about in the past, and increase the volume of ore going through, which of course would mean by definition, the overall grade stepping back a little bit, because we've been feeding with some lower grade supplemental ore.
But it's really striking that balance of optimizing this operation. Our focus right now is getting it to 21,000 tonnes a day, every day, steadily and just really kind of making it a smooth operation, the way our other operations are and from there, we'll look to improve upon those numbers that we laid out in mid-January.
Operator
Your next question comes from David Haughton of CIBC.
David Haughton
For the Rainy River's sustaining CapEx, we've got guidance of $195 million this year. You said that if normalized, will be about $40 million or $50 million in 3 to 4 years, what happens in the intervening years, Hannes, for 2019, 2020, 2021?
What's your expectation for sustaining CapEx?
Hannes Portmann
Yes, sure David. So maybe I'll try to break this down simplistically as I can.
This year at Rainy, as you correctly pointed, our guidance for sustaining capital is $195 million, of which approximately $50 million is capitalized stripping. So really that's a -- I guess, a reclass from what would otherwise been operating expense.
So if we just -- if you bear with me and let's take that out for a second, because that magnitude of capitalized stripping is not something we envisioned being part of sustaining capital going forward, so $195 million less that $50 million is $145 million. We envisioned or estimate that 2019 would step down to right around $100 million of sustaining capital, so down about $50 million.
Then in 2020, down another $50 million towards that $50 million, and then, you are into more of that run rate $40 million to $50 million that we articulated.
David Haughton
And the capitalized stripping '19, '20 would that also be reducing?
Hannes Portmann
Yes. I mean, it would be certainly sub $10 million, if not sub- $5 million.
So that the $50 million is quite anomalous this year.
David Haughton
Okay. And you've also got project CapEx, $20 million this year, it looks like most of that's for the underground, what sort of spend should we be thinking about for the next few years to get that underground up and running?
Hannes Portmann
Sure. So David, as you again, correctly point out, $20 million this year, that would step up to about $40 million next year and then about $60 million in the year after.
So call it $20 million increments each of the next few years as we get the underground developed.
David Haughton
Okay. And one last thing, the tailings dam closure, what's the status of that?
And when do you expect for that to be completed, please?
Hannes Portmann
Sure. As noted in both the news release and in our commentary today, David, the development of the full tailings, sort of first footprint, will take us through to early Q4 this year.
However, the next phase of the tailings footprint that was predicated on completion of the sheet piling, that sheet piling actually just this week, has been completed. We will now get the engineer record to come in to do that construction, now will enable us to begin filling that next phase of the tailings once the starter cell has been exhausted, which continues to be expected around mid-April.
So the starter cell which is currently being used until mid-April. The second cell that was using the sheet piling is in the final stages of being completed, so call that, it will be ready close to 4 to 6 weeks in advance.
Operator
Your next question comes from Steven Butler of GMPS.
Steven Butler
Yes, GMPS. The question on New Afton, with respect to your ongoing investigation of the C-zone approach to development or nondevelopment.
I guess, it comes down to mining method and looking at the geotechnical aspects of the C-zone, do you expect to be it in a greater position of knowledge on that at the end of this year? Would the decision to follow not too long thereafter?
Or what's your sense of timing there?
Cory Atiyeh
David, this is Cory. We'll wrap up some more -- sorry, Steven, this is Cory.
We'll wrap up some work on New Afton season, probably about Q2 and then be in a position toward end of Q3 to make a decision on C-zone and what we plan to do going forward.
Steven Butler
And you referenced the sublevel versus maybe full on blockade, is that the idea whether the rock will be able to stand at a greater kind of [indiscernible] or not?
Cory Atiyeh
Yes, it's just a question of what is our geotechnical expectations underneath there. Right now, the plan going -- the plan had always been to block cave, we've investigated a couple of alternative methods such as sublevelcating but I think we're probably gearing towards a block cave in the end.
We just need to make sure that all the drives can hold of the stresses of that depth.
Steven Butler
Okay. Hannes or Paula, just coming back to the Rainy $181 million impairment charge and the expectation of higher ASIC for the next on years of the $875 an ounce, could you maybe give us any high-level assumptions on any of your input costs?
Was it more in the OpEx side? And/or on the sustaining capital side, in terms of unit cost changes that were put into the model versus the previous life of mine plan?
Paula Myson
Steven, the cost in terms of the impact on the DCS, it was pretty evenly split between the OpEx and sustaining capital. And we're very comfortable with the estimates going forward, that they are quite conservative and very achievable.
So in terms of future valuation, it's basically on what marketplaces will come about, we're less concerned on capital and operating side.
Hannes Portmann
Yes I think, Steve just to add to that, Paula is exactly right in terms of the overall quantum and sort of undiscounted terms, but of course on the present value basis, the near term to the $50 million to $100 million of incremental tailings associated had a big present value impact.
Steven Butler
Sure. I mean your life of mine, [indiscernible] your life of mine assumptions were for mining costs per tonne, Hannes, were they in the range of $2 to $2.20 a tonne, has that gone to a higher number here?
Hannes Portmann
Yes. I mean for 2018, our guidance Steve, is predicated on Canadian, about $3 a tonne mining so at an $0.80 exchange rate, that's kind of $2.40.
So we have seen a little bit of an uptick there. Processing has stayed very stable, about CAD 10 a tonne, and we're hitting those numbers now, steadily.
So there is a, as I mentioned, a heavy impact as a result of the incremental tailings capital in the near term.
Operator
Your next question comes from Matthew Fields of BoA.
Matthew Fields
Just wanted to ask about, you know I know the bulk of the CapEx for Rainy River is behind us now, but I wanted to ask about how comfortable you are with your current liquidity position. I know it's a little bit lower than it has been in the past.
Obviously, CapEx burden going forward is a little less, but do you feel comfortable? Do you think you'd want to do something to bolster that?
Can you give me a little color on where you stand?
Paula Myson
Matthew, it's Paula. We are very comfortable with our liquidity position now.
Q1 will be -- we'll see the highest pressure on the liquidity position because as Hannes alluded to, it's our lowest production quarter and we're actually spending a little more this quarter than others. But once we execute one, we'll be building cash reserves at a pretty nice clip because of the increased production out of Rainy River.
And so we're quite comfortable going forward, as we mentioned earlier, that we'll be in a position to start delivering this year. The timing -- actually being the last half of the year in all likelihood, should things turn out as they are presently unfolding, but we are very comfortable where we set from a liquidity position.
Matthew Fields
A follow-up, if I may on the capital structure, your six on the quarters are currently cull-able, yields are pretty reasonably attractive in the bond market, do you think that you want to term those out to a longer date and lock in a lower rate for the next 10 years or so? Or do you think you're going to kind of let that slide?
Paula Myson
Well right now, we are looking at the -- going forward, the overall liquidity position or pardon me, the leverage position, we're looking at a growing EBITDAR profile and we're looking at targeting somewhere between 1 to 1.5x EBITDA in terms of our optimal capital structure and that's given an increasing. -- pardon?
Matthew Fields
Net or gross?
Paula Myson
Net. So going forward, as we increase our EBITDA profile, the amount of net debt will keep on the balance sheet will be a little bigger than it will be right now, but we wouldn't probably go -- we'd be $500 million to $750 million in long-term debt in all likelihood.
So we'll opportunistically reduce the 2022s if we can, that's our most expensive debt out there. Our credit facility is much cheaper, so we'll opportunistically reduce the most expensive debt first.
Operator
Your next question comes from Dan Rollins of RBC Capital Markets.
Dan Rollins
Hannes, just going back to Rainy River and the change to the underground reserves with the lower cut off, have you decided to change the mining method underground to go a little bit lower cost to deal with the lower grade? Or you're continuing to use the same underground mining method?
Hannes Portmann
So I guess, I mean, by definition, by going after more tonnes Dan, we look at it from more of a bulk perspective, however, we are still using long haul as the mining method. Really, what the change in cut off approach reflects more than anything is under the old method, we would be driving development drives and then taking -- almost picture a checker board, kind of taking every second still targeting what was the higher grade, but of course, you got to develop the whole drive.
So there's sort of a significant fixed costs component to all of this. So and -- with our team reviewing the mine plan and getting input from the team at Peak that had similar approaches considered over the last several years of do we actually raise the cut off and go for a very, very targeted high-grade or lower and get more of a volume based approach in the case of Peak, as evidenced by the results that we've had over the last 2 to 3 years, actually lowering the cut off has led to greater predictability overall from a year-over-year basis in grade and production.
So hence, we applied that same thinking methodology to our underground reserves at the end of this year.
Dan Rollins
Okay. That's very helpful, and then just on the open [indiscernible] with the March [indiscernible] any change to the strip ratio?
Or you just picked up some more ounces within the peripheral?
Hannes Portmann
No meaningful change, Dan. The life of mine strip is still right at that 3.9 or 4.1.
Operator
Your next question comes from Frank Duplak of Prudential.
Frank Duplak
Just a quick question on how we might want to think about working capital in the coming year? It looks like in the course of '17, you had about 20,000 ounces that you produced but didn't sell and obviously, you're ramping -- you're kind of ramping at Rainy River, just curious as we think about -- is there an opportunity here to have a significant kind of online working cap in 2018?
Or not?
Paula Myson
No. I wouldn't think that's highly likely.
We're going to -- we're managing it very carefully, we're not likely going to have that overhang again at the end of the year, we manage that with all these certificates that largely related copper concentrate sales and that's actually the lumpiest part of our working capital, but we manage that by utilizing holding certificate, if necessary. So I wouldn't expect more volatility in that, this year.
Frank Duplak
And then was that part of the reason for sort of the shortfall relative to sales versus production in 4Q?
Paula Myson
I'm sorry, I couldn't hear you.
Frank Duplak
If you might, there is a bigger gap between sales and ounces produced here in the fourth quarter than typical, just curious if there was -- is that a one shipment things? Was there anything else going on there as far as sold versus produced ounces?
Hannes Portmann
I guess, there was one nuance thing, Frank, in the fourth quarter, in that the Rainy River production that we noted in there, there is a footnote in the news release, but given the volume, this is really [indiscernible] understand why you may have missed it. Whereas the 37,000 ounces of production at Rainy River is inclusive of -- it's either 8,000 or 9,000 ounces of precommercial production.
So both -- while that gold would have been sold, it would have been meted against the capital cost. So there's, call it, 8,000 ounces that was allocated differently and therefore, isn't reflected in our P&L gold sale.
Operator
There are no further questions at this time. I will now return the call to Mr.
Portman.
Hannes Portmann
Thank you, Chris. To all of you who joined us today, thanks again.
As always, should you have any additional questions, please do not hesitate to reach out to any of us by phone or e-mail. Have a good day.
Operator
This concludes today's conference call. You may now disconnect.