Earnings Call Transcript - NGD Q2 2022

Operator, Operator

Good morning. My name is Chris, and I'll be your conference operator today. Welcome to the New Gold Second Quarter 2022 Earnings Conference Call. Please be advised that today's conference call and webcast is being recorded. I would now like to hand the conference over to Ankit Shah, VP of Strategy and Business Development. Thank you.

Ankit Shah, VP of Strategy and Business Development

Thank you, Chris, and good morning, everyone. We appreciate you joining us today for New Gold's Second Quarter 2022 Earnings Conference Call and webcast. On the line today, we have Renaud Adams, President and CEO; Rob Chausse, our CFO; and Patrick Godin, our COO. Should you wish to follow along with the webcast, please sign in from our homepage at newgold.com. Before the team begins the presentation, I'd 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 our 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 hand the call over to Renaud.

Renaud Adams, President and CEO

Thanks, Ankit, and good morning, everyone. Production and mine sequencing were impacted by heavy rainfall resulting in the flooding of the pit. While significant progress has been made to date to restore the situation and optimize each step moving forward, we have to replan our last 6 months, and Pat will provide more detail on that. The equipment was relocated and the capital waste stripping events resulting in the strip ratio for the quarter of nearly 8:1. When you can access ore at the bottom of the pit resulting from the flooding, then you have managed your waste as a dissolved part of the same overall. Our in-pit mineral reserve at the start of the year was nearly 44 million tonnes of ore or approximately 1 gram a tonne gold including in-pit, all of which contained in the mining strip ratio of 2.32:1, which has been further reduced now as a result of the Q2 execution, a very attractive plan moving forward. On a very positive note, our gold grade milled moved positively to reserve model in Q2, and our mill recovery is up for the first half of the year compared to the prior year. We've made great progress in preparing Intrepid for mining to start in the fourth quarter of this year, and Pat will discuss more in detail about it. Low-grade higher cost recovery level was low, earlier than planned, impacting our short-term mine plans and production for the year but with no impact on the future. At the start of the project, there was already a gap in the production that was identified as the transition from Lift 1 to the B3 and eventually, the rewarded C-Zone. Some zones were made as an assumption to support that gap and pillar zone in Lift 1. We've done extremely well in depleting Lift 1. And we had a little more difficulties with some zones at such recovery level and some pillar and recovery areas. But as such, the future has no impact and the closing of the recovery level represented the execution as a core value in protecting health and safety and minimize the cost and distraction to what are the true value of the C-Zone project. Returning the mill at its full capacity, processing ore of high quality, better rate, better recovery and very low cost to be mined at the very minimal sustaining capital, benefiting from in-pit tailing with no need for further tailings rates, all of which has not been impacted to date. During the third quarter, B3 development advanced on plan with focus on ramping up the production in the fourth quarter, and our C-Zone continued to advance with first ore planned for the second half of 2023. Pat again will provide more detail on those. Our 2022 operational and cost guidance were updated to reflect the changes in respect of plan and related cost impact and other factors, and Rob will touch on it. We continue to maintain a very healthy balance sheet while also paying down $100 million of our debt in the quarter with no additional due until 2027. And we'll continue to maintain the strong cash and liquidity position, allowing us to execute on our plans and position both assets for free cash flow generation. We continue to be very encouraged with our drilling program and in particular, with the underground program in New Afton that is truly focused on providing potential organic growth as we move forward. We had originally thought of providing a comprehensive update on our plan in Q2. But given some further delays in assets, we are now ramping up and plan to release a comprehensive update on our exploration and drilling program in the third quarter. I will now turn it over to Rob Chausse, CFO.

Rob Chausse, CFO

Thanks, Renaud. And I'll start on Slide 7, which provides our revised operational outlook with details that are in line with our July press release. This short-term guidance reflects our lower production profile for 2022 and our continued capital investments, which have resulted in higher AISC. The company's mid- to long-term strategy of increasing production and decreasing cost remains intact. Moving on to the next slide, which provides our operating highlights for Q2. Details are consistent with the July press release. During the quarter, the company produced 70,500 gold equivalent ounces. The amount consisted of 7.4 million pounds of copper, 42,500 gold ounces from Rainy River and 9,900 gold ounces from New Afton for a total of 52,430 gold ounces. Lower equivalent gold production as compared to the prior year quarter is primarily due to lower grade and tonnes processed at both of our operations. Operating expense per equivalent ounce was higher than the prior year quarter primarily due to lower production, which resulted in lower sales volume. Consolidated all-in sustaining costs for the quarter were $2,373 per equivalent ounce, higher than the prior year quarter primarily due to lower sales volume at our operations and higher sustaining capital spend. I'd highlight that New Afton sales in the quarter were lower than production due to timing of shipments with approximately 7,500 gold equivalent ounces deferred to the third quarter. The impact was approximately $700 per gold equivalent ounce on New Afton's AISC and $140 on the consolidated AISC. The sale was completed in July. We continue to invest in sustaining capital at our operations during the second quarter with the impact of sustaining capital spend per ounce being $950 in the quarter. During Q2, we experienced inflationary challenges across the industry particularly concerning fuel, electricity, grinding media, and cyanide. The financial impact of these noted categories was approximately $10 million or 7% on AISC for the quarter. Going forward, we continue to work on minimizing any inflationary impacts through optimization at our operations. Turning to Slide 9 for our financial results. Second quarter revenue was $115.7 million driven by sales of 51,200 gold ounces at an average realized price of $1,879 per ounce and sales of 4.4 million pounds of copper at $414 per pound. Q2 revenue was lower than the prior year quarter primarily due to lower sales volumes as already mentioned, and noted in our production release due to the timing issues at New Afton sales of 7,500 gold equivalent ounces would defer to the third quarter and as noted, it was completed in July. Operating cash flow before working capital adjustments was $27.4 million or $0.04 per share for the quarter, lower than the prior year quarter due to lower sales volumes. The company recorded a net loss of $37.9 million or $0.06 per share during Q2 compared to a net loss of $0.02 per share in Q2 '21. After adjusting for certain charges, net loss was $16.7 million or $0.02 per share in the quarter compared to earnings of $0.04 per share in the second quarter of 2021. Our Q2 earnings adjustments include adjustments related to our gains and losses concerning unrealized adjustments on the Rainy River stream mark-to-market and the free cash flow royalty at New Afton. You can look at our MD&A for additional details on those non-GAAP measures. Our CapEx and leases for the quarter were $78.8 million. $59.9 million was spent on sustaining capital and $18.9 million on growth capital. Sustaining spend was primarily related to the planned tailings work at both operating assets, capital stripping at Rainy River, and B3 mine development at New Afton. Our growth capital was focused on project development, specifically C-Zone and New Afton and the underground Intrepid Zone at Rainy River. Slide 10 provides our capital structure. During the quarter, we redeemed the remaining $100 million of our 2025 senior secured notes. Cash on hand at June 30, '22 was $277 million and liquidity was $649 million. The decrease in cash from the prior year quarter is primarily due to the above-noted bond repayment along with continued capital investments at our operations. Now I'll turn the call over to Pat.

Patrick Godin, COO

Thank you, Rob. So we direct you to Slide 13 where I will start to cover the Rainy River highlights. In Q2, mainly in the open pit, we achieved the production of 110,000 tonnes per day. That is slightly lower than the previous years and previous quarters mainly due to the heavy rainfall and the major flooding that we had to deal with in the Fort Frances region. The company also has to support our stakeholders mainly to sandbag houses and to support people because we had to deal with major floods. This caused, as previously explained by Renaud, some issues with the open pit operation where the bottom of the pit was flooded mainly the north lobe that was in the mining sequence to be extracted during this period. We relocated the equipment in the upper part of the pit to increase and maximize the value of our teams, and it helped to accelerate this strategy during the quarter. The mill averaged 23,000 tonnes per day. It is slightly lower compared to the previous year. However, mainly due to the fact also that we had to handle a lot of material and repair some mechanical issues; 50% of the pit was mainly coming from the low-grade stockpiles. That is what is explaining the lower grade. However, what is a positive note that the recovery was 90% for 0.69 grams per tonne. I think the plant performed very well in terms of gold recovery during this period. As discussed previously at the beginning of Q3, our production guidance for year-end was between 230,000 to 250,000 ounces and approximately 50% of the total year production will remain in the second half of the year. Actually, we are trending positively in terms of production at Rainy River in the pit. Intrepid is going very well in terms of development, and we'll cover that later. We developed 774 meters and development remains on track to start commercial production in Q4 of this year. What is important before I go to Slide 14 is to keep in mind that the mine is remaining in the ground. The value of the ore body will show up in the next quarter going forward. On Slide 14, I just want to take some time to explain to you what happened in terms of water events. You have on the right side the graph of the precipitation. The dark gray line is the normal precipitation curve. The light gray is the worst ever of the year. And the green line is the precipitation that we are facing this year in the region. You can see that in May and June, we received a lot of rain and compared to other regions, if you compare it to the last 2 years. Here, the rain is significant. It has been heavy rain, and it's more difficult to manage in terms of continuous precipitation on the ground. It was really intense and combined with snowmelt, it caused a lot of issues, mainly in the pit but also in the water management on-site. The team did excellent work to control the impact on the environment as we were fully compliant. Consequently, we worked really hard. We made slight improvements and adjustments to the water treatment to increase our treatment capacity by 40%. We also added an additional dewatering line and dewatering system to double our capacity in terms of pumping. The construction of the tailing dam is on time. It's a continuous project for us. We are raising the tailing dams every year. The project is ongoing, and we intend to complete all the infrastructures by the end of October, beginning of November. I'll guide you to the Slide 15 now, where you can see the open pit as it stands at the beginning of this week. You can see that the north lobe is dry. All the water is where we are mining now. We are in bench 140 is completed, and we'll mine the 130 during August. It's positive for us because the grade is good. The work index is higher, but the grade is excellent. We are also looking at opportunities in the pit; we slightly reduced our mining rate to reflect the fact that it's narrower in the pit, at the bottom of the pit and also that we have longer distances. We optimized our mining sequence to reduce the rehandling. We aim to feed the mill with 85% of ex-pit material to be much more efficient and reduce our costs and our fuel consumption. I'll guide you to Slide 16, where I'm covering Intrepid. In terms of Intrepid, actually, we have access to the ore. We developed the same level. What is nice is that we record what we see and what we expect is what we get. In terms of volume, we are still on track. In terms of grade, we are slightly higher. The first mining horizon is really for production. We will start to extract the ore in the next weeks. We also work hard to make our mining more efficient and more fluid. We changed our mining method. Originally, we contemplated the use of a cemented fill approach. We want to avoid as much as possible using cement in terms of cost and inflation. So we will replace the mining method with pillars filled with raw fill or another combining method. It will be a combination of both, making it more efficient in terms of cost and manpower. I will guide you now to Slide 18, covering New Afton. During the quarter, the underground mine averaged 6,500 tonnes per day. We stopped the mining at the recovery level during this quarter earlier than planned, mainly because it was more difficult in terms of reconciliation and health and safety due to facing mud rushes. We had an exceptional year in terms of rain, but the ore will remain in place, and we are contemplating recovering the material that we left behind in lower level extraction. From the mill point of view, the mill is operating really well. We processed slightly more than 11,000 tonnes per day. The additional tonnage is coming from a low stockpile and the stockpile is now totally depleted. We average 0.37 grams per tonne in terms of gold. In copper, we report 42. The recovery is in the brackets that we are familiar with. The C-Zone development is performing well. We reached the C-Zone in May, which was a great achievement for our teams. The exploration is going remarkably well at New Afton. During the quarter, underground, we completed 73 holes. We are completing the analysis and the resource model for the Upper East extension. This information will be communicated to you before the end of Q3. On the Slide 19, the B3 is a great achievement for the team at New Afton. They did remarkably well on this. They are on time. During the quarter, the team did significantly more than 5 rounds per month, which is excellent. The undercut is totally completed. The interesting part for us is that the guys did very well with B3; it will allow us the possibility to extract earlier at B3 and increase the throughput of B3 to compensate for the tonnes and higher quality tonnes that remain in the recovery level. Construction activities remain on schedule. We are still planning, as you can see in the figure on the lower left. What is in green is the draw point that needs to be completed in terms of construction. The development will be completed slightly by the end of December or the beginning of October. What we did on the B3 is to learn lessons from the upper case incident. We have additional ground support and cables, and we did cabling of the apex pillar. This will drastically reduce the rehabilitation time to complete the full recovery of the B3. On the picture, you can see our second electric battery-operated truck. We utilized this to re-handle the material from the lower part of the mine. Regarding the C-Zone, as I said before, we achieved the C-Zone in May. We are on time to complete the undercut to initiate the undercut in mid-2023. We are on track to extract ore in Q4 2023. In terms of construction and development progress, the mineral sizer is fully commissioned. We are much more efficient in terms of material handling. We completed all major construction contracts to install the crusher and dewatering systems. The team made amazing strides in optimizing the extraction level. B3's longitudinal approach continues to show positive design results for the draw points. For the C-Zone, our approach will be transverse, and we will start from one extremity to the other, starting from the middle, allowing for much more efficiency in development and construction. We primarily made this decision due to the shape of the ore body. I am very confident that the future C-Zone will deliver on time, and we derived the approach for that. I will hand over to Renaud to close the call.

Renaud Adams, President and CEO

Thank you so much, Pat. It is truly a pleasure to welcome Pat to our organization. I've known Pat for as long as I worked in this industry, but it is truly the first time that we had the chance to combine our efforts and mutual experience in value creation. I am very much looking forward to his partnership. In closing remarks, as I mentioned in my opening comments, we intend to release in the third quarter a comprehensive exploration update and provide more details about our intentions on organic growth at New Afton over the next years. We've discussed optimization and cost initiatives. I've repeated my vision for the company and reaching our goals over the 2020 to '26 timeframe and I believe that everything has remained intact. When you look at the Rainy River asset earlier this year, we filed a 43-101, which supported our increase in reserves on the ground and the central zone with a slightly different approach in open pit execution, allowing for a little more smoothing but also a lot of rehandling. We know the cost pressure on certain consumables. At Rainy River, the increase in fuel prices has been, without a doubt, the most impactful increase in consumables. However, when I look forward with the remaining strip ratio of approximately 2:1 and the tremendous opportunity of reusing the rehandling, over 20 million tonnes have been added in the rehandling in our 2022, '26 plan as it stands. There is no doubt in my mind that it offers a significant opportunity for optimization as we deplete the remaining capital waste and reduce the strip ratio along with optimization in sequencing that Pat discussed. As we move forward, it is about our ability to extract the remaining 44 million tonnes at nearly 1 gram a tonne gold at the lowest cost possible, starting with addressing rehandling and lowering our fuel costs moving forward. More optimization remains possible in some consumables. We will continue our efforts on grinding media, oxygen, cyanide, and tire consumption, all of which could provide even further optimization. It can be very challenging, at times, to control the prices of some consumables, but we will focus on consumption. We're working hard to reduce the most impactful consumables in our operations and continue our global procurement efforts. I remain extremely positive about Rainy River from 2020 to 2026, and our ability to extract at lower costs and be more efficient as we move forward, allowing Pat and his team to implement efficiencies to improve our overall operations while reducing the consumption of the main cost drivers. As we move forward and continue optimizing the mill, returning to more capacity of 27,000 tonnes a day that we enjoyed back in 2020 remains a tremendous opportunity to ramp up the underground and use incremental or traditional value. Pat touched on our underground progress. Everything is in place for success. While we had challenges in the last couple of years, our intention and vision remain focused on positioning this asset for high free cash flow. This has not changed. At New Afton, you've heard Pat discuss the tremendous progress on the B3 and the C-Zone. As I mentioned in my opening comments, the reward of the C-Zone project remains a great opportunity to return operations to very low cost, higher grade, better recovery, and higher free cash flow. We had some short-term challenges recently bringing certain secondary zones into production to help offset the gap, but all of that is short term. As we ramp-up B3 and reach the C-Zone, none of our original vision for returning these assets to high free cash flow has been affected by recent events. We are committed to executing our updated guidance for 2022. I will now hand it back to the operator for the Q&A portion of the call.

Operator, Operator

Your first question comes from Trevor Turnbull, Scotiabank.

Trevor Turnbull, Analyst

Yes. I just wondered if you could talk a little bit about how next year is going to look at New Afton. You'll have B3 starting to come into production. Obviously, the C-Zone getting there in 2023. But your comments talked about really how things will look much different in 2024 with the C-Zone fully in production. I'm just wondering how we get from the second half of this year into 2024. Just kind of how does that bridge look in terms of the cost at New Afton?

Renaud Adams, President and CEO

Everything that Pat is working on is to bring the B3 ramping up to its maximum capacity. So in 2023, we will feed the mill with better quality ore than currently. Stockpiles will be over by then. Our goal is to feed the mill with B3, and all efforts at this stage focus on bringing B3 to its max capacity. Early stage, we are reviewing certain aspects of our costs. But in terms of capital, once you reach your capacity in B3, you're able to reduce sustaining costs moving forward. You will complete your capital project for the C-Zone which, when you reach production in Q4, will not necessarily require all capital from day one. There will be some remaining ramp-up. However, when you start looking into 2024 and beyond, this is where you will see significant improvements. But again, all efforts for now are concentrated on B3 for 2023. I hope that answers your question.

Trevor Turnbull, Analyst

And I guess with respect to that effort with the B3, does that mean that 2023 won't really need any of the low-grade stockpiles?

Renaud Adams, President and CEO

Low-grade stockpiles will be gone by then, so that's an easy answer. Moving forward, it's all about feeding the mill with low-cost, high-grade types.

Trevor Turnbull, Analyst

Okay. That's good. And then maybe just one other question with respect to Rainy and the Intrepid zone. You talked about having some production later this year, and we saw the pictures in the presentation. I just wondered if you could talk about how fast you expect it to ramp up from that first production and then to the capacity that you're trying to reach?

Renaud Adams, President and CEO

I will pass it over to Pat for more comments on that.

Patrick Godin, COO

Thank you, Trevor, for the question. Intrepid is not a big operation. We are targeting something around 1,000 tonnes per day. The ramp-up will be pretty short because if you look at the design of the stock, we will mine one and drill one stock. We will have mostly three to four stocks ongoing. One will be in extraction. One will be in backfill, while the other will be in drilling and blasting and in the mining sequence. I think that we will reach the throughput of 1,000 tonnes per day pretty quickly in Q4.

Operator, Operator

Your next question comes from Mohamed Sidibe, CIBC.

Mohamed Sidibe, Analyst

So my question is on the CapEx guidance. With 46% of CapEx spent to date, which is the midpoint of guidance, should we expect an uptick in spending in the second half? If so, what would be the drivers of that?

Renaud Adams, President and CEO

Yes. As you have seen in the strip ratio, you look at the sustaining capital. Q2 had a higher impact overall. However, we are still targeting to be within the guidance for the sustaining capital. Our gross capital is limited to the work we are doing in Intrepid, so it has not significantly impacted the 10%. But it's all about the sustaining capital, and I believe that we will stay within our guidance at the end of the day.

Operator, Operator

There are no further questions at this time. Please proceed.

Ankit Shah, VP of Strategy and Business Development

Thanks, Chris, and to everyone who's joined us today, thank you again. As always, should you have any other questions, please do not hesitate to reach out to us by phone or email. Enjoy the rest of your summer. Thanks very much.

Operator, Operator

Thank you. Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.