Earnings Call Transcript - NGD Q2 2020

Operator, Operator

Thank you for joining us today for the New Gold 2020 Second Quarter Earnings Conference Call. I would like to now turn it over to Anne Day, Vice President of Investor Relations. Please proceed, ma'am.

Anne Day, Vice President of Investor Relations

Thank you, Operator and good morning, everyone. We appreciate you joining us for New Gold's Second Quarter 2020 Earnings Conference Call and Webcast. We have with us today Renaud Adams, CEO; and Rob Chausse, CFO, who will present our Q2 operational and financial results. After the presentations have been completed, we will open the lines for a brief Q&A period. Before the team begins the presentation today, we would like to direct your attention to our cautionary language related to forward-looking statements found in 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 presentations. You are cautioned that results and future events could differ materially from those expressed or implied in forward-looking statements. Slide 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 could cause actual results to differ. Please note that all amounts are presented in U.S. dollars. In addition, included in the presentation, there are a number of end notes that provide important information and should be reviewed in conjunction with the material presented. I will now turn the call over to Renaud Adams.

Renaud Adams, CEO

Thank you, Anne, and thank you all for joining us today. We're extremely pleased with our overall operational and financial performance in this unprecedented quarter. A quarter that included enormous challenges presented by COVID-19, but also a quarter that will be remembered for its significant achievement. While positioning the safety of our employees and our key partners as our priority number one, we were able to report strong operational performance. During the quarter, the company executed enormous key strategic opportunities, including the closing of the $300 million partnership with the Ontario Teachers' Pension Plan, the divestment of the Blackwater project for CAD190 million cash and an 8% Gold Stream, and the restructuring of our balance sheet through the $400 million bond offering due 2027 that funded the redemption of our senior notes due 2022. Over the balance of the year, our operations will return to pre-COVID levels and will complete all non-recurring capital projects at Rainy River and advance the development of the season as we position the company for free cash flow generation beginning in 2021. New Gold's future will be supported by profitable operations, a stronger balance sheet, and as our current hedges expire at year-end, we will be fully exposed to gold price.

Robert Chausse, CFO

Thanks, Renaud, and good morning. Turning to Slide 5, which provides our operating highlights for Q2 2020, details are consistent with our July production press release. During the quarter, the company produced approximately 98,000 gold equivalent ounces. The amount consisted of 16.9 million pounds of copper, 48,800 gold ounces from Rainy and 15,500 gold ounces from New Afton for a total of 64,294 gold ounces. Lower gold production compared to the prior year quarter is primarily due to lower grades at Rainy and New Afton. Our operating expense per equivalent ounce was higher than the prior year quarter due to lower metal grades and lower sales volumes. Consolidated all-in sustaining cost for the quarter was $12.83 per equivalent ounce, 18% higher than the prior year quarter due to the previously mentioned lower grades and also higher sustaining capital. Turning to Slide 6 for our financial results. Second quarter revenue from continuing operations was $128.5 million driven by sales of approximately 60,850 gold ounces at an average realized gold price of $1,560 per ounce, and sales of 15.3 million pounds of copper at $2.51 per pound. Q2 revenue was 17% lower than the prior year quarter due to lower grades, partially offset by higher gold prices. Our operating cash flow before working capital adjustments was $51.6 million or $0.08 per share for the quarter, lower than the prior year quarter primarily due to lower grades. The company recorded a net loss of $45.6 million or $0.07 per share during Q2 compared to a loss of $0.06 per share in Q2 2019. As a result of the previously announced transaction during Q2, our Blackwater asset was reclassified as held for sale, and as a result, a $38 million unrealized impairment loss was recorded. After adjusting for the Blackwater impairment and other certain charges, net loss was $3.3 million or $0.00 per share in Q2 compared to a net loss of $7.2 million or $0.01 per share in the second quarter of 2019. Our Q2 adjusted earnings also include adjustments related to unrealized adjustments on our gold price option contracts, our Rainy River stream and the free cash flow royalty we recently entered into. Our MD&A has details on these non-GAAP measures discussed here.

Renaud Adams, CEO

Thank you, Rob. I'm on Slide 10. Before I discuss some key aspects of each of our assets, I'd like to make some quick comments around the management and permit. Recently and after a few months of hard work in collaboration with Precision Biomonitoring, three COVID-19 rapid testing devices were purchased and received at Rainy River with the purpose to significantly improve our capacity for screening and detection of potential infected people, and in particular when it comes to asymptomatic cases, which are difficult to detect with only physical screening. Only proactive testing would allow for rapid and timely detection. The training and calibration of the unit is currently underway prior to rolling out for permanent use at Rainy River, but also potentially extended to surrounding communities and New Afton over time. On another note, and as mentioned by Rob, New Gold is now well-positioned with sufficient liquidity of approximately $560 million to support operations during this crisis. On Slide 11, we're extremely pleased with the outcome of the divestment of Blackwater, which marks a significant milestone in the repositioning of New Gold. The transaction further enhanced our balance sheet with a total cash payment of CAD190 million, while keeping significant upside in the asset via a gold stream production and an equity position. The asset is now our core focus of a dedicated management team with a proven track record that will unlock its potential, which will greatly benefit New Gold shareholders. Current reserves at Blackwater stand at 8.2 million ounces of gold, which could represent a potential 460,000 ounces of gold delivered to New Gold via the gold stream over time. On Slide 12, we're pleased to provide our revised 2020 outlook. The total estimated gold production is between 284,000 to 304,000 ounces of gold, combined with estimated copper production of 65 million to 85 million pounds of copper. Production estimates for the year at Rainy River have been lowered, mainly related to the impact of COVID-19 in the first half of this year, resulting in lower tons and slightly lower grade mill for the full year. While at New Afton, gold and copper production estimates for the full year have been lowered, mainly due to lower planned gold and copper grades. Coming to more comments on the greater New Afton section of the presentation, the combined operating expenses and cash costs per gold equivalent ounce are estimated respectively at $780 to $860 and $830 to $910 per ounce for the year. The increase, which is minimal at Rainy River in operating expenses and cash costs on a per gold equivalent basis at both assets compared to the original plan, is mainly due to lower sales resulting from lower estimated production. The total capital for the year at Rainy River has increased by less than $10 million due to a portion of the tailings management area construction that was originally scheduled for completion in 2021, now planned for completion in 2020. On Slide 13, at Rainy River, the mine operations resumed on April 3. Focusing on the safety and well-being of our employees, locals and partners against the transmission of COVID-19, by June, the mine had returned to pre-COVID performance while the mill performed at pre-COVID levels from day one of the suspension, including successful execution of the planned shutdown. In particular, our team at Rainy River was able to safely ramp up the operation while delivering excellent performance on cost with cash costs of $890 per gold equivalent ounce. The unit costs and cash costs year-to-date trend lower than the original plan. Finally, our capital projects are underway and expected to be completed in 2020, with an additional tailings capital less than $10 million that has been brought forward from 2021. A total of $67 million has been spent to date in sustaining capital over the revised guidance of $145 million to $160 million. It is expected that the capital execution will be more intense in the third quarter and will reduce in the fourth quarter. On Slide 14, I'm very pleased with the operational performance achieved in the second quarter, considering that the challenge of ramping up the mine and mill operation posed a 14-day self-imposed suspension in using a gradual and safer introduction of the non-local workforce. In particular, the mine returned to its pre-COVID daily rate of 140,000 tons per day in June and is now targeting 150,000 tons per day in July. The highlight of the quarter includes a lower head grade, which was due to a higher proportion of the medium grade or tons processed due to the gradual ramp up in mine operation. The mill availability of 90% was in line with plan, while the recovery of 89% was slightly ahead of plan despite the lower grade processed. On Slide 15, I thought I would just provide some more details around the mine plan and the execution to date as of the end of Q2, but also as we see it at the end versus the original plan. As you could see, in the first half of the year, there was more mining taking place in the North Slope versus the East Slope. Now, I'd like to clarify that the East Slope is the area of the pit that was controlling higher grade in the second half of the year. Early in the year, there was some relocation of a power line that needed to take place on the east side and as we were executing the Wick draining with COVID-19, there was a delay in the Wick Drain execution limiting the West overburden mining. But globally, the mine is planned to mine about 50 million tons or 55 million tons originally planned. We'll be well-positioned at year-end; we are now mining on the east side, but as a result of some delays, the East Slope will most likely end at the level of 290, about 40 meters above what was originally planned as the level of 250, and as a result, some better grade from the East Slope will not be seen in 2020 and will be postponed to 2021. Overall, it's a very good execution with about 10% fewer tonnes for the year. When considering all the impacts of the first half as a result of COVID, we're extremely pleased with the execution, even though the end result for 2020 is a slightly lower grade mine compared to the original plan. On Slide 16, at New Afton, I'm extremely pleased as well to report that the mine reached a significant safety milestone, achieving three million person hours, lost-time injury-free. Congratulations to the whole team at New Afton. The lower production reported for the quarter and year-to-date is mainly due to lower gold and copper grades from the East and West Gate. The lower grades are expected to continue over the balance of 2020. The mine delivered excellent performance on costs with cash costs of $644 per gold equivalent ounce. The unit cost and cash cost year-to-date trend lower than the original plan. Finally, while capital projects were slightly delayed in the first half of the year, it is expected that all projects initially planned will be completed during the second half—an aggressive but absolutely achievable task. On Slide 17, the overall mine and mill productivity is slightly lower than the prior quarter due to lower availability resulting from mine and mill maintenance shutdowns with the original completion date expanded due to the COVID-19 safety protocols. The overall mill availability was lower at 92% as a result of that in the quarter. I'm very pleased with the underground development of the B3 C-zone achieving 1,253 meters in the quarter with approximately now 95% of the planned levels realized in the year-to-date. The recoveries remain in line with our original plan despite the lower grades. On Slide 18, regarding the lower grades. This is a quick snapshot comparing the plan in the first half of 2020 with the actual. As you can see in 2020, it's a mix of extraction from the blockade, areas of rehabilitation, and some pillars as well recovery. The blending of all these sources formed the plan for 2020. To the right, you see the actual, and as you can appreciate, in some areas like the East Cave Line 41, we have suffered more dilution resulting in the lower grade, but in another area, we have benefited from a better rate. The West execution and the East Cave recovery levels are at lower productivities limiting some access to better grades. Globally, while we are experiencing some higher dilution resulting in lower grades in some areas, we have also benefited in the West Gate where we had a much better grade. Moving forward to the end of the year and based on the current texture in the mine, we've taken the approach that the lower grades will remain until the end of the year. But we are currently actively engaged in improving the situation and as we move forward, of course, improving our productivities as on the East Cave recovery, for instance, and assessing and hopefully improving the dilution situation in some areas. So in closing, a lot has been said and done since the launch of our repositioning strategy in late 2018. The Rainy River Mine is not performing at design and planned criteria. As we complete our capital execution in 2020, the mine will be positioned for a bright future and short-term high free cash flow generation starting in 2021 as our gold hedges end at the end of 2020 combined with projected increases in productions and lower costs at Rainy. The New Afton ceded allotment is well underway with a continued focus on delivering a self-funded execution. With the restructured balance sheet, proper runway on our long-term debt, cash on hand, and significant liquidity, we are now well-positioned to enter our next phase of value creation. This concludes the presentation portion of the call. I will now turn it over to the operator for the Q&A portion of the call.

Operator, Operator

Your first question comes from the line of Nick Jarmoszuk of Stifel.

Nicholas Jarmoszuk, Analyst

Could you discuss your approach to free cash flow generation and how it relates to paying down debt and exploring opportunities at Rainy River and New Afton?

Renaud Adams, CEO

Yes. Let's start with the exploration. I can tell you that we're absolutely excited and ready to go. I think at this stage, it's a matter of permit completion. We acknowledge and understand that in BC, there has been some prior operating operations and others. I think it's a matter of time. But we have an excellent project ready to go, a program ready to go at New Afton, and as soon as we receive the permit, we'll be significantly engaged in completing this drilling to unlock the value. In drilling this exploration, you have to drill to figure it out, but we're very excited with the quality of the target in New Afton. At Rainy River, we're also ready to go in the Northeast exploration program, but we too are waiting for some permitting there that is most likely to occur this year. I wouldn't term our free cash flow. I mean this is the opportunity here. Rainy River is well-positioned. We know our costs will be much lower in 2021. We're fully exposed to gold price. We continue to focus on executing a self-funded approach at New Afton while benefiting from unlocking the free cash flow. I can pass it over to Rob if he has any extra comments there.

Robert Chausse, CFO

Yes, I think with existing cash we are going to look to reduce our debt in the near term. As we generate free cash, we'll continue to look at debt reduction along with other opportunities. But for now, I think we're focusing on near-term debt reduction, and then moving forward, we'll let the market dictate how we approach our balance sheet.

Nicholas Jarmoszuk, Analyst

Do you have a target for how much debt you'd like to pay down?

Robert Chausse, CFO

Yes. We're looking to take down about $200 million in the near term, and that would come from our existing liquidity and leave us with a very strong liquidity balance after that.

Nicholas Jarmoszuk, Analyst

Okay. Thank you.

Renaud Adams, CEO

In our exploration program, if we were to execute, let's say starting tomorrow, I think we'll be capable of spending maybe $10 million in the second half. And of course, it depends on the results, but we intend to start as soon as we get the permit, including in 2021 to have exploration and drilling as a significant part of our organic growth.

Nicholas Jarmoszuk, Analyst

That's great. Thank you.

Renaud Adams, CEO

Thank you.

Robert Chausse, CFO

Thanks.

Operator, Operator

Your next question comes from Lee Halla of Scotiabank.

Unidentified Analyst, Analyst

Yes. Hi. Sorry. Actually my question just got answered.

Renaud Adams, CEO

Okay. Thanks, Lee. I thought we couldn't hear you. We were panicking a bit. Thank you.

Unidentified Analyst, Analyst

Thanks, everyone.

Renaud Adams, CEO

Thanks.

Operator, Operator

We have a question from a newcomer. Please state your name and company followed by your question.

Matthew Fields, Analyst

Oh. Hey, this is Matt Fields from Bank of America. I'm sorry, I jumped on late. I might not have heard it. In the recent bond deal, you said that you'd be looking to take out, redeem $200 million of 2025 notes later in the year presumably when you've got proceeds from the Blackwater sale. Is that still your intention to redeem $200 million of that issue? And apologies if someone has asked this already.

Robert Chausse, CFO

No worries. Yes, that's still our intention, and we'll take a measured approach. But, yes, the $200 million is definitely our target.

Matthew Fields, Analyst

And the timing is still this year?

Robert Chausse, CFO

Yes, I would expect that to happen this year.

Matthew Fields, Analyst

Okay, thanks very much.

Robert Chausse, CFO

Thank you.

Operator, Operator

And at this time there are no further questions in the queue. I would like to turn the call back over to Ms. Anne Day.

Anne Day, Vice President of Investor Relations

Thank you, Operator, and thank you, everyone, for joining us today. I appreciate your time. If you have any further questions, please contact me; I'd be happy to help. Thanks very much. Bye-bye.

Renaud Adams, CEO

Thanks.

Operator, Operator

This does conclude today's conference call. Thank you for your participation; you may now disconnect.