Earnings Call Transcript - NGD Q1 2022

Operator, Operator

Good morning. My name is Michele, and I'll be your conference operator today. Welcome to New Gold's First Quarter 2022 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. Please be advised that today's conference call and webcast is being recorded. After the speakers' remarks, there will be a question-and-answer session. I would now like to hand the conference over to Ankit Shah, VP of Strategy and Business Development. Please go ahead, sir.

Ankit Shah, VP of Strategy and Business Development

Thank you, Michele, and good morning, everyone. We appreciate you joining us today for New Gold's first quarter 2022 earnings conference call and webcast. On the line today, we have Renaud Adams, President and CEO; and Rob Chausse, our CFO. Should you wish to follow along with the webcast, please sign in from our home page at newgold.com. Before the team begins the presentation, I would like to direct your attention to our cautionary language related to forward-looking statements found on Slides 2 and 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. Slides 2 and 3 provide 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 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 presented. I'll now turn the call over to Renaud.

Renaud Adams, President and CEO

Thanks Ankit and good morning everyone. So before I pass it to Rob to discuss our quarterly financial results, I just wanted to take a moment to discuss some of the changes we've made at our company, and the challenges we've experienced, like many of our peers during the quarter. Over the past two years, our teams have adapted quickly to make changes in light of COVID. I'm very proud of our group, and the health and safety focus at our operations. Like many of our peers, we've also experienced a higher level of COVID cases earlier in the year, which impacted productivity levels to start 2022. But despite this, our teams were resilient and we delivered a good quarter. Inflation has challenged many of us in the industry, and we're no exception. We felt the same pressure as our peers, mainly on diesel, consumables, but also electricity at Rainy River. However, I have been able to partially offset these higher prices with the benefit of having two Canadian assets in a period of weakening Canadian dollar. We continue to evaluate potential optimization and assess cost reduction initiatives in an effort to mitigate these pressures. We remain committed to delivering on our guidance. During the quarter we also continued to advance on our longer-term priorities. At Rainy River, Intrepid development advanced, and we look forward to initiating mining later this year. I'm also very pleased with the updated Rainy River technical report we completed in March, which has expanded our mine life to 2031. I will discuss this later in the presentation, but this is a significant accomplishment for the team and a positive milestone for our business. At New Afton, the B3 ramp-up continues; we've made good progress on the C-Zone development and we completed the commissioning of our Thickened and Amended Tailings facilities. I'm very pleased to welcome Pat Godin as the new COO of New Gold. Pat brings extensive technical, operational, and capital execution experience in the mining sector and I'm sure his addition to our team will be invaluable as we continue to advance key projects of our company and unlock potential organic opportunities. I'm really looking forward to hearing from Pat in our Q2 review and more to come as we move forward. I'm looking forward to building on our first quarter and continuing to deliver value for all our stakeholders. And with that, I will now pass it to Rob Chausse, CFO. Rob?

Rob Chausse, CFO

Slide 5 provides our operating highlights for Q1. Production details are consistent with our April production press release. During Q1, the company produced 87,600 gold equivalent ounces, which consisted of 8.2 million pounds of copper, and approximately 58,800 gold ounces from Rainy River, along with 9,267 gold ounces from New Afton for a total of 68,100 gold ounces. The lower equivalent gold production as compared to the prior year is primarily due to lower grade and tonnes processed at New Afton. Our operating expense per ounce was in line with our prior quarter. Consolidated all-in sustaining costs for the quarter were $1,778 per equivalent ounce, higher than the prior quarter primarily due to higher sustaining capital spend, and lower sales volume at New Afton partially offset with higher sales volume at Rainy River. As Renaud mentioned, during Q1, we experienced inflationary challenges that have been felt across the industry, particularly regarding fuel prices, but with the benefit of a weaker Canadian dollar, along with optimization and cost reduction initiatives, we are offsetting a good portion of the inflationary pressures. Going forward, we'll continue to work on minimizing any impacts. Turning to Slide 6, first quarter revenue was $175 million, driven by sales of approximately 70,500 gold ounces, at an average realized gold price of $1,897 per ounce, and sales of 9.2 million pounds of copper at $4.53 per pound. Q1 revenue was 6% higher than the prior quarter primarily due to higher metal prices, partially offset by lower copper sales volume. Operating cash flow before working capital adjustments was $66.4 million or $0.10 per share for the quarter, in line with the prior year quarter. The company recorded a net loss of $7.8 million or $0.01 per share during Q1, compared to net earnings of $0.02 per share in Q1 2020. After adjusting for certain charges, net earnings were $10.3 million or $0.02 per share in Q1 compared to net earnings of $0.01 per share in the first quarter of '21. Our Q1 adjusted earnings include adjustments related to unrealized gains and losses on the Rainy River stream mark-to-market and the free cash flow royalty at New Afton. Our MD&A has more details on these measures. Capital Expenditures: Our total capital and leases for the quarter was $78.4 million with $55.5 million spent on sustaining capital and $22.9 million on growth capital. Sustaining spend was primarily related to planned tailings work at both operating assets, capital stripping at Rainy River, and the B3 mine development at New Afton. Growth capital was focused on project development, specifically, the C-Zone at New Afton and the underground Intrepid zone at Rainy River. Slide 7 provides details of our capital structure. During the quarter, we announced that we will be redeeming the remaining $100 million of our 2025 senior secured notes in mid-May. Cash on hand as of March 31, '22, was $432 million. The decrease in cash from the year-end is primarily due to interest paid and cash settlements on noncurrent derivative financial liabilities. With that, I'll turn the call back to Renaud.

Renaud Adams, President and CEO

Thanks, Rob. I will now make some additional remarks on operational performance in the first quarter. I'm on Slide 10. The Rainy River mine had a lighter quarter in terms of total tons mined, mainly due to higher COVID cases at the start of the quarter which improved as the quarter progressed. We had a strip ratio of approximately 5:1, which was in line with our strategic approach to use winter months for the main capitalized waste, focusing on positioning the face for mining. The lower ton mined did not have a meaningful impact on grades and total production of nearly 60,000 gold equivalent was up from the same period of 2021. The milling rate was impacted by additional downtime due to crushing and conveying circuit, along with adverse weather conditions impacting the stockpile movement. All of which returned to normal as the quarter progressed. All in all, the team was very resilient and navigated around adverse conditions, delivering a good quarter. Despite inflationary pressures, the team delivered lower operating expenses compared to the same period of 2021 and a free cash flow of approximately $15 million for the quarter. Rainy River continues to look for ways to reduce costs and improve productivity, so increases in fuel and consumables can be mitigated. For example, the mining team delivered an improved tire life year-over-year of nearly 40%, offsetting potential future tire price increases. Efforts continue to improve other consumable uses such as grinding media and cyanide. We continue to see potential improvement in our overall pit operational efficiency, with the objective to achieve production with the use of fewer trucks to reduce operational and maintenance costs in the present and future. Bringing the mill back to the expected 27,000 tons a day mark will also be a huge contributor to our overall cost performance. I have just returned from Rainy and I remain very positive about our ability to deliver on our 2022 plan. The Intrepid development continued in the first quarter with over 500 meters of total development achieved. We are now developing in ore on levels 175, 150, and 125 in preparation for the first long-hole stopping to take place in the second half of the year. The reconciliation today is in line with the resource model. On Slide 11, I'm very pleased with the result of our updated technical report at Rainy River, which has extended the mine life to 2031. The updated mine plan illustrates an attractive average production profile of 310,000 gold equivalent ounces over the period from 2020 to 2027 and over 250,000 gold equivalent ounces for the entire life of the mine, with a full transition from open pit to underground during the period from 2021 to 2026 for an estimated growth capital of only $71 million to complete the underground pre-production work for both Intrepid Zones. A very attractive cost approach utilizing in-pit portal design to access mineralization with minimal development required. For the open pit portion, there is a significant reduction of the strip ratio and sustaining capital post-2023 when all capitalized stripping is complete, reducing total mining and maintenance requirements. Thus, the overall life of mine all-in sustaining costs are nearly $1,050 per gold equivalent ounce, providing excellent margins and free cash flow as we deliver on our execution. On Slide 13, performance at New Afton was in line for the quarter, and the lower ton mined was perfectly aligned with the planned completion of the Lift 1 activities. With the exception of recovery levels, which will continue until we initiate the in-pit tailings disposition plan later this year. The B3 development and production ramp-up continued in Q1, and all efforts are being made to accelerate completion of development ahead of schedule, which is currently planned for the fourth quarter of this year. The C-Zone development continued to progress in the first quarter, with nearly 930 meters of total development achieved and the successful commissioning of the newly built TAT facilities months ahead of the initiation of our intensive position. During the quarter, we completed 32 diamond drill holes totaling nearly 10,500 meters of underground infill or AI-targeted drilling from last year, and also one hole in exploration on the Cherry Creek Trend. The company intends to release an exploration update in the latter part of the second quarter, which will also include an update on our exploration efforts at Rainy. On Slide 14, as I conclude the presentation of this call, at Rainy River, we continue to build on our recently filed updated technical report, and while we continue to seek opportunities to improve margins on remaining open pit ounces, we are not turning our strategic efforts towards delivering a strong transition to underground mining. We're bringing the first Intrepid into production. At New Afton, the completion of the B3 development and ramp-up remains our key priority, while we continue to deliver the C-Zone on time and on budget, which includes receiving the permit in the second half of '22. I want to thank all our employees and contractors for their relentless efforts and commitment in executing our 2022 guidance. Also, thanks to our board of directors, community partners, and shareholders for their continued support during these challenging times. In my opening remarks, I mentioned that Pat is joining us and his first day sitting right next to me today. Pat, if you have just one first comment, I welcome you.

Pat Godin, COO

Thank you, Renaud. I'm really pleased to join New Gold. I have experience working with Rob in the past, and joining Renaud and the team is really exciting for me. I'm mainly focused on the Open Pit approach, which I think is crucial. The team is doing great work on-site, and I will do my best to reinforce that and provide a safe working environment for our workers. It's also crucial to continue to maintain and improve our relationship with our local stakeholders and First Nation groups for support at both assets. My main investment will be to stabilize and ensure sustainability in operations for New Gold to deliver guidance. I'm very excited to work with the team.

Renaud Adams, President and CEO

Thank you so much, Pat. As I said, we'll be hearing from Pat in our second quarter review. I will now turn it back to the operator for the Q&A portion of the call. Michele?

Operator, Operator

Your first question comes from Mike Parkin of National Bank.

Mike Parkin, Analyst

To speak on labor availability at the assets during shutdowns, are you noticing any kind of challenges staffing contractors for shutdowns? Are you pulling from further and further away cost pressures, that kind of thing?

Renaud Adams, President and CEO

Thanks, Mike, for your comment and questions. As I mentioned, operationally, it was a tough start. We did not have any significant maintenance shutdowns planned during that period, so that's good. We usually plan our shutdowns well ahead of schedule, giving contractors flexibility to adjust and adapt. So, I wouldn't say shutdowns have been severely impacted, but when it comes to our own plant shutdowns, any issues can create slowdown, especially in a COVID situation. Overall, I believe that it hasn't significantly impacted maintenance and shutdowns, more like regular operations primarily around the mine at the start of the quarter. This has improved significantly as we advanced through the quarter.

Mike Parkin, Analyst

Slide 14 notes that you're looking to receive the C-Zone permit in the second half of 2022. Is there any wiggle room on that; could it drift into early 2023? Are there any issues with getting it delayed due to government backlogs or COVID?

Renaud Adams, President and CEO

I appreciate that because as everyone knows, we were impacted with the B3. We had some delays due to COVID, but also the B3 required addressing the in-pit tailings, sterilizations, and tailings water management—all of which were involved in technical discussions. There were longer conversations and consultations with our First Nations partners during these challenging times. So, everything happened during the B3. When it comes to the C-Zone, I like to say that there's nothing really new about it; it's a little bit of everything we have already permitted. The process is advancing extremely well; we have completed our initial round of questions on time, now answering the second round. Quite frankly, we're not expecting delays. We've completed our internal discussions and support from our partners and communities is in place. We feel very strong that the process is following its due course and that we could wrap this up in the second half of the year.

Lucas Pamatat, Analyst

So just thinking about costs at Rainy River, obviously, the costs this quarter were above your guidance, and I believe you had also guided to lower costs in the first half of this year. So how should we interpret those going forward for the rest of the year?

Renaud Adams, President and CEO

We did not really guide by half. We mentioned at the time of guidance that the first half will reflect what occurred at Rainy River. The first quarter had a higher strip ratio, more waste, and slightly lower grade. The second half, which represents about 55% of the production, will have a lower strip ratio, hence lower costs to achieve higher production. Yes, there are inflationary pressures, but all in all, we're following our strategic approach of managing waste and pushback. So no, we did not guide by quarter; we executed strategically as planned.

Lucas Pamatat, Analyst

You mentioned that the B3 Zone is on track for Q4 of this year. Do you have an estimate of how many tons we can expect from that area this year?

Renaud Adams, President and CEO

Regarding the B3 technical approach, once all development and draw points are completed, and once the caving reaches its full capacity, we could be looking at about 5,000 to 10,000 tons per day. Currently, we're about 40% complete. As we advance, the goal is to accelerate completion of development ahead of schedule, allowing for earlier caving and ramp-up to full capacity by year-end instead of early next year. That's our objective—accelerating and completing development ahead of schedule will significantly impact our output this year.

Anita Soni, Analyst

The first question I have is regarding the unit mining cost per ton at both New Afton and Rainy River. At New Afton, from quarter to quarter it jumped pretty significantly, I think it was around 11 to 26. Can you provide some clarity on why it increased so much this quarter?

Renaud Adams, President and CEO

The increase is due to the type of mining required. The shutdown of the Lift 1 activities means that free caving draw point picking is no longer available. The recovery level is all remote and, as a result of the accident last year, we have increased our safety and operational protocols. The tons coming from B3 are in the early stages, reflecting a transition zone. I have no doubt that as we progress, ramp up, and put B3 development behind us, we'll see an improvement as costs stabilize. But this is indeed a transitional phase. Similarly, with sustaining capital, we're incurring costs but not yet benefiting from them. It's a challenging transition, but it's temporary and will normalize.

Anita Soni, Analyst

And can you remind me when the B3 Zone will be complete?

Renaud Adams, President and CEO

If we follow our plan, we expect to complete this in the fourth quarter, but there is an opportunity here to potentially advance this sooner.

Anita Soni, Analyst

On Rainy River, a similar question: costs were similar, but mining costs per ton were a little higher. The process costs were similar to last year, but I guess my question is—relative to the technical report, you expected process costing $7 per ton for this year. I’m trying to understand the discrepancy between the mid-9s versus the mid-7s you projected in the process given the technical report that was just released a few weeks ago?

Renaud Adams, President and CEO

The first quarter costs were driven by maintenance. Yes, there were some additional installations, and consumables and electricity costs increased this quarter. Generally, when you operate at 27,000 tons a day but run at 24, the costs diverge during downtime, which incurs expenses while not generating revenue. I know we have the capacity to bring these costs back down, but stability is key to achieving that. We need to bring the mill back to the 27,000 tons a day target to align with our operational efficiency costs, as highlighted in our 43-101 report. The costs per ton that you mentioned were achieved last year, but Q1 was somewhat unstable.

Operator, Operator

Ladies and gentlemen, there are no further questions. I will turn the conference back to Ankit Shah for closing remarks. Please go ahead, sir.

Ankit Shah, VP of Strategy and Business Development

Thank you, Michele. And thanks again to everybody who joined us today. As always, should you have any additional questions, please do not hesitate to reach out to us by phone or email. Thank you and have a great day.

Operator, Operator

Ladies and gentlemen, this concludes your conference call for this morning. We would like to thank you for participating and ask you to please disconnect your lines.