Earnings Call Transcript - NGD Q4 2023

Operator, Operator

Good morning. My name is Mark, and I will be your conference operator today. Welcome to New Gold's Fourth Quarter 2023 Earnings Conference Call. I would now like to hand the conference over to Ankit Shah, Executive Vice President of Strategy and Business Development. Thank you.

Ankit Shah, Executive Vice President of Strategy and Business Development

Thank you, Mark, and good morning, everyone. We appreciate you joining us today for New Gold's fourth quarter and full year 2023 earnings conference call and webcast. On the line today we have Patrick Godin, President and CEO; Yohann Bouchard, our COO; and Keith Murphy, our CFO. In addition, we have Luke Buchanan, Vice President, Technical Services; and Jean-Francois Ravenelle, Vice President, Geology; available for the Q&A portion of the call. 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 would like to direct your attention to our cautionary language related to forward-looking statements found on Slide 2 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 2 provides additional information and should be reviewed. We also refer you to the section entitled Risk Factors in New Gold's latest AIF, MD&A, and other filings available on SEDAR Plus, 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 presented. I'll now turn the call over to Pat for some opening remarks.

Patrick Godin, President and CEO

Thanks, Ankit, and good morning, everyone. 2023 was an excellent year for New Gold. The authorizing health and safety through our Courage to Care campaign led to an industry-leading total reportable incident frequency rate of 0.8%. We safely achieved the top end of our production guidance range, which was a 20% increase over 2022. And we met our all-in sustaining cost guidance range delivering an 18% cost reduction over 2022. We delivered key project milestones on time, such as completing the first draw bell at New Afton's C-Zone as well as advancing the underground main zone at Rainy River. And when the operations well stabilize, we're able to return our focus to exploration, which was highlighted by a 74% replacement of Rainy River's Mineral Reserves and a strategic pipeline for mine life extension at New Afton. In short, New Gold met or exceeded all stated objectives in 2023. Last week, we presented our three years operational outlook as well as our long-term strategic outlook. We thank everyone who participated in the webcast. The presentation and webcast are still available on our websites, and I encourage everyone who was unable to participate to review. I will reiterate the highlights from the roadmap we presented on Slide 5. We outlined polishing growth over the next three years of 35% in gold and 50% in copper, as well as a corresponding 51% reduction in ASIC and 77% reduction in growth capital over the next three years, which will drive significant margins in cash. We also discussed our strategic objectives beyond 2026 of targeting a production platform of 600,000 gold equivalent ounces per year with line-of-sight until at least 2030 as well as our pipeline of opportunities and exploration upside to extend mine lives well into the next decade with modest capital investment. Before I pass things over to Keith, I'll conclude on Slide 6. First, our current liquidity position remains strong. We had $186 million of cash at year-end 2023, and we have $373 million undrawn of our credit facility. Based on the three years outlooks presented last week, we expect to generate significant free cash flow over the next three years with the inflection point taking place in the second half of 2024. As a result, we are incredibly well positioned to achieve our strategic outlook to at least 2030. We will have the financial flexibility to repay our 2027 bonds and advance several opportunities to add mine life beyond 2030. To reiterate, we are entering a very exciting period for New Gold. With that, I will turn the call over to Keith.

Keith Murphy, CFO

Thank you, Pat. I'm on Slide 8, which has our production highlights. Q4 was another solid quarter. We produced over 105,000 gold equivalent ounces, which put us right at the top of our guidance range. Rainy River produced approximately 63,000 gold ounces, bringing full-year production to approximately 254,000 gold ounces, a 10% increase when compared to 2022. New Afton produced approximately 16,500 gold ounces and 12 million pounds of copper, bringing full-year production to approximately 67,000 gold ounces and over 47 million pounds of copper. This represents a 46% increase in gold equivalent production compared to 2022. Gold produced at New Afton also includes 553 ounces from the ore purchase agreements in the quarter and approximately 4,800 ounces for the year. Slide 9 outlines our cost highlights. Consolidated all-in sustaining costs were $1,575 per equivalent ounce for the quarter and $1,545 for the year at the midpoint of the guidance range. This represents a 15% decrease when compared to 2022, primarily driven by the increase in production and sales. Operating expense per gold equivalent ounce at Rainy River was above the guidance range, primarily due to higher operating tonnes and lower strip ratio. This is offset by lower sustaining capital, bringing Rainy River's all-in sustaining costs in line with the guidance range. At New Afton, full-year all-in sustaining costs was at the low end of the guidance range due to higher production and sales. Turning to our financial results on Slide 10, fourth-quarter revenue was approximately $199 million, Q4 revenue was higher than the prior-year quarter, primarily due to higher metal prices and sales volumes. Cash generated from operations before working capital adjustments was $65 million or $0.09 per share for the quarter. This was higher than the prior year period, primarily due to higher revenue. The company generated $1 million of positive free cash flow in the quarter, which again continues to underscore that the company can generate free cash flow while still investing in our growth projects. Rainy River continued to deliver free cash flow and generated $55 million in the year. The company recorded a net loss of approximately $27 million or $0.04 per share during the fourth quarter. The increase in net loss as compared to the prior year quarter was primarily driven by higher non-cash unrealized losses on the revaluation of the Rainy River Gold Stream obligation and the New Afton free cash flow interest obligation, partially offset by the higher revenue. After adjusting for certain other charges, net loss was $4.7 million, or $0.01 per share, in Q4, an improvement when compared to an adjusted net loss of $6.3 million in the fourth quarter of 2022. The improvements in adjusted net earnings were primarily due to those higher revenues. Our Q4 adjusted earnings include adjustments related to other gains and losses. Our total capital expenditures for the quarter were approximately $61 million with $24 million spent on sustaining capital and $37 million on growth capital. At Rainy River, sustaining capital spend was below the low end of the guidance, primarily due to lower capital stripping with $25 million deferred to 2024. Spend related primarily to the tailings dam raise and capital stripping. Growth capital related to underground development. At New Afton, sustaining capital spend primarily related to tailings management and stabilization activities, while growth capital primarily related to the ongoing C-Zone development. Total capital was at the low end of the guidance range. Turning to Slide 11, we had cash on hand at the end of Q4 of $186 million, an increase of $7 million from the previous quarter, driven by free cash flow generated at Rainy River, which offset the investments we made in C-Zone. The company's liquidity position was $559 million. We continue to execute short-term hedges on CAD and fuel and are hedged at around 75% for Q1 2024. To sum up, our financial position is strong with an increase in cash and available liquidity following a solid operating quarter, all while continuing to invest in our growth projects. Now, I'll turn the call over to Yohann to walk through our operating highlights.

Yohann Bouchard, COO

Well, thanks, Keith. Well, commencing by Rainy River on Slide 13. Rainy continued to perform well, achieving another quarter in line with plan. As a result, Rainy River achieved the top end of the gold equivalent production guidance range for the year with an all-in sustaining cost at the midpoint of the cost guidance. The operation is well positioned to continue this trend into 2024. The Q4 operating expenses and all-in sustaining costs were higher than the full year 2023 average due to the non-cash impact of processing stockpile and lower sales. In Q4, the operation focused on mining the last benches of Phase 3, which was completed earlier this year. In the Underground Main, extraction from Intrepid is as planned and the development of the Main Zone is on schedule. And we're getting ready to develop the main ventilation route from the surface. Looking back at the full year, we're pleased with the processing and mining performances. The operation demonstrated operational discipline which gives high confidence in the years to come. As Pat previously noted, it is also worth mentioning that we replaced the position of mining by a factor of 74%. Those additional mineral reserves are from the Underground Main zone and the west open pit extension called Phase 5. Looking to 2024, on Slide 14, we are expecting a gold production of 250,000 ounces to 280,000 ounces for the year compared to 254,000 ounces in 2023. As we discussed last week, approximately 60% of the production is expected in the second half of the year, mostly because of the open pit mining sequence. We are transitioning from Phase 3 to Phase 4, so we'll reclaim some lower-grade stockpile tonnes through Q1 and Q2, while reducing higher-grade ore in the pit for the second half of the year. For the same reason, sustaining capital related to the waste stripping will be weighted in the first half of the year. In the Underground Mine, lateral development meters will ramp up throughout the year as we access additional Underground Mining Zones and more headings become available. As a result, about two-thirds of growth capital is expected in the second half. Turning now to New Afton on Slide 15. The excellent production is supported by B3 continuing to deliver about above 8,000 tonnes per day and the operation is showing stable operating expenses and all-in sustaining cost profile. At C-Zone, the first draw bell was completed earlier in Q4 and the project is on track to ramp up to 5,000 tonnes per day at year-end 2024, supporting the production profile that was presented last week in the guidance and outlook presentation. The stabilization of the New Afton Tailings Storage facility is progressing above expectation with consolidation happening much faster than predicted by our model, which is very good. Most of the investment related to the stabilization is behind us and the project is on time with a comfortable contingency to accommodate the C-Zone production profile. Looking forward at New Afton on Slide 16, we are transitioning from the B3 cave to C-Zone. The year 2024 will see a significant ramp-up in C-Zone mining rates achieving commercial production in the second half of the year although, most of the production will still come from B3. The crusher and thunder system conditioning is scheduled in the second half of the year. This will eliminate all-in requirements and positively impact costs going forward. Throughout the year, B3 will provide a stable mill feed of approximately 8,300 tonnes per day as we establish the cave footprint and, as previously mentioned, C-Zone is expected to ramp up to about 5,000 tonnes per day by the end of the year. Overall, we're looking at a 27% decrease in tonnes processed compared to 2023. The higher throughput in 2024 will be partially offset by lower feed grade due to the cave draw sequence. Total gold production for the year is expected to be 60,000 ounces to 70,000 ounces, while copper production is expected to be 50 million to 60 million pounds, with production expected to be relatively stable throughout the year. I will now turn the call back to Patrick.

Patrick Godin, President and CEO

As I said at last week's presentation, I can say with certainty and confidence that operationally we have made incredible progress. We'll continue to deliver on our stated strategic goals for 2024. This includes delivering on production cost guidance with the same attention to health and safety. At New Afton, we will achieve commercial production at C-Zone and commission the crusher and conveyor. At Rainy River, we will reach first ore from the Underground Main Zone. We will increase our exploration efforts targeting reserve replacement. 2024 will be a busy year, but it will be a transformative one for our Company, our stakeholders, my teammates and our shareholders. This completes our presentation. I will now turn it back to the operator for the Q&A portion of the call.

Operator, Operator

Our first question comes from Anita Soni of CIBC World Market. Please go ahead. Your line is open.

Anita Soni, Analyst

Hi, good morning, Patrick and team, and thank you for addressing my questions. Last week, you provided a thorough three-year outlook, which I appreciate. Many of the questions I had have already been answered. However, I am interested in understanding the fourth quarter costs and how they will adjust with future costs. The results from Rainy met my expectations, but I noticed that costs at New Afton increased in the fourth quarter. I'm trying to grasp how these costs will decrease over the next three years. I realize there are several factors involved, including mining from different zones, but could you provide some directional, qualitative, and quantitative insights regarding both mining and processing costs at New Afton?

Yohann Bouchard, COO

Anita, Yohann here, thanks for the question. Just want to say here, I mean, that — basically our unit costs, I mean, on a per tonne basis, Anita, are pretty much the same, nothing changed there. This is mostly related to grade and by tonne that we pushed through the mill in Q4. And it goes, I would say as well, it goes as well for 2024, since based on the mining, the extraction sequence, we're going to see kind of a lower grade and — but that's going to be offset by higher throughput over the year. So I would say — and I think that was — we put a comment on that aspect. But overall, this is what you should, I would say, the way that you calibrate your model in the lower grade, higher throughput. And I think that was well — assets well written in the presentation. And to answer your question going forward about the longer-term costs, as you know, I mean, we're going to commission the crusher and conveyor circuit at the end of this year. And based on that, we're going to see a drastic decrease in operating costs in 2025. So I'm expecting basically the cash costs and the operating costs to go down in 2025 significantly. And overall, if you assume that we're going to ramp up to about 14,500 to 15,000 tonnes per day processed, the impact is going to be massive. Hopefully, that answered your question.

Anita Soni, Analyst

Yes. What I understand from that is that on the processing side, as you increase throughput in the latter half of 2024, your processing costs may decrease, leading to a significant reduction in 2025 when the crusher and conveyor are operational.

Yohann Bouchard, COO

That is correct, Anita.

Patrick Godin, President and CEO

And also, Anita, in 2025, we're still adding sustaining capital for the construction of the draw bell itself and the draw point. This construction will be completed at the end of 2025. So in 2026, it will mostly be extraction only. So this is why, going forward, 2025 will deplete and 2026 will be mainly just OpEx.

Anita Soni, Analyst

Okay. I had a question about the copper grade. The grade you've guided to seems a bit low. Considering the tonnage, recovery, and grade you've provided, you're at the lower end of the copper guidance range. Is there any positive grade reconciliation or potential for better recovery rates that you're being conservative about? Is that a fair assessment?

Yohann Bouchard, COO

I think, Anita, the way to think about that is with a block cave, the mining sequence is really dictated basically by the shape of your cave. So I mean, but we didn't change the reason of grade. We don't feel that the model needs to be adjusted. The low grade that we see for a short period of time is really due to the extraction sequence, but we don't expect — we don't experience any additional dilution at this moment. This is just what we get from the model. And I would say when we compare, I would say the extraction model versus reality, we're pretty much spot on. So we have very high predictability on that.

Anita Soni, Analyst

All right. Okay. Thank you. That's it for my questions.

Yohann Bouchard, COO

Okay. Thank you.

Operator, Operator

Thank you. Our next question comes from the line of Don DeMarco at National Bank Financial. Please go ahead. Your line is open.

Don DeMarco, Analyst

Thank you, operator, and good morning, New Gold team. A couple of questions. You know with free cash flow projected to increase over the next couple of years, could you give us some indications in your plans for capital allocation, how that may change or shift from investing internally or considering other options?

Patrick Godin, President and CEO

I think we — last week we highlighted our capital investment profile for the next three years as for sure this year we need to complete major projects at New Afton, the C-Zone. We are developing and I think you only explained that, that in terms of growth capital, we deployed more money in Rainy River in the second half of this year, mainly because we'll have more headings and more opportunity to speed up the development. And after that, the capital expenditures will decrease going forward drastically, up to 2026. So you have upgradation of our investment in the next three years. It's mostly, I think, I don't know what, I think it's — when we did the split between both sides and we did the split between sustaining and growth, I think nothing is different today than it was last week.

Don DeMarco, Analyst

Okay. So, I mean, you've got a little bit of debt. It's pretty manageable. Would you be targeting with the additional free cash flow and strengthening of the balance sheet maybe targeting paying down some of that debt or looking at dividend options? Or potentially expanding the C-Zone looking ahead a few years or rather expanding the Eastern Extension looking ahead?

Keith Murphy, CFO

Yes, this is Keith Murphy. You know, I think over the next couple of years, we're really focused on that, operating ramp-up, and you see the free cash flow profile that we presented over the three years. With that, that's going to give us a lot of financial flexibility to look out at all those options.

Don DeMarco, Analyst

Okay. Great. We'll look for clarity on that, I guess, in the quarters to come. Now, one of the items on the last slide there was that you provide market clarity on the Teacher's Buyback. Can you give us any updates on that with regard to maybe the timing of the clarity and what that clarity might involve?

Ankit Shah, Executive Vice President of Strategy and Business Development

Hi, Don, it's Ankit. Yes, you know, last week at our presentation, we did provide some clarity on that a bit. So the timing of the Buyback, the fourth anniversary is March 31st and then we have a 60-year window after that period. So we plan to provide clarity to the market on our intentions in the second quarter of this year. I think what should be noted is we've worked really hard at getting our leverage to the position it's at and we're really focused on maintaining our financial flexibility. So any decision that we make in the second quarter and come to the market will have that in the back of our minds as well.

Don DeMarco, Analyst

Okay, Ankit. Thanks. So basically, we expect maybe an update from the company within the 60-day period that follows the end of Q1. Is that it? So the — so it'd be sort of within the first 60 days of Q2. Is that when you might provide an indication, for example, whether or not you choose to buyback a portion of their free cash flow interest?

Ankit Shah, Executive Vice President of Strategy and Business Development

Yes, Don, I think, you know, there's a 60-day window and a 30-day financing period, so sometime in the second quarter.

Don DeMarco, Analyst

Okay. Fair enough. Thanks so much, guys, and good luck with 2024.

Patrick Godin, President and CEO

Thank you.

Operator, Operator

Okay. There do not appear to be any additional questions on the phones at this moment. I will now turn it over to our speakers for their closing remarks.

Ankit Shah, Executive Vice President of Strategy and Business Development

Great. Thank you, Mark. And thank you to everyone who has joined us today. As always, should you have any follow-up questions, please don't hesitate to reach out to us by phone or email. Have a great day.

Operator, Operator

Thank you. This now concludes the conference. Thank you all very much for attending. You may now disconnect your lines.