Earnings Call Transcript - NGD Q2 2023

Operator, Operator

Good morning. My name is Michelle and I will be your conference operator today. Welcome to the New Gold Second Quarter 2023 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, Executive Vice President, Strategy and Business Development. Please go ahead.

Ankit Shah, Executive Vice President, Strategy and Business Development

Thank you, Michelle and good morning everyone. We appreciate you joining us today for New Gold's second quarter 2023 earnings conference call and webcast. On the line today we have Patrick Godin, President and CEO; and Keith Murphy, our VP Finance. 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 slides two and three 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 two and three provide additional information and should be reviewed. We also refer you to the section titled Risk Factors in New Gold's latest Annual Information Form, 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 turn the call over to Pat for some opening remarks.

Patrick Godin, President and CEO

Thanks Ankit and good morning everyone. I want to welcome Keith Murphy, our VP of Finance to the call. Keith will cover the quarterly results going forward, and we are excited to have him joining us. I wanted to give a few brief remarks before turning the call over to Keith to discuss the quarter. We had an excellent quarter and continued to build on the momentum from the beginning of the year. I noted on our first quarter call that Q2 would see planned major maintenance performed at Rainy River. I also noted at that time that our team prepares for the worst, but we plan for the best. And I'm proud to say our team showed great resilience. Because of the proactive measures taken at the site, Rainy River not only completed the maintenance on schedule, but also delivered strong production results by accomplishing our goals all without sacrificing safety. During the quarter, we had no lost-time injuries at both of our operations. Both sites reached impressive milestones with New Afton exceeding 1.5 million hours since its last lost-time injury and Rainy River surpassing 2 million hours. I want to take a moment to further recognize the team at New Afton for receiving the GT Ryan CT Award for British Columbia and Yukon as well as British Columbia's Safest Large Underground Mine Award. These two awards are incredible recognitions of New Afton's hard work and our company's commitment to safety and health. As a result, we are well-positioned to meet our production and cost guidance set out earlier in the year. In short, we are executing our 2023 plan strongly and safely. Looking to our future, we also continued to make progress advancing our growth initiatives. We continue to advance underground development at Rainy River with the development of the ramp access to the underground main zone commencing, which I will expand on in the coming slides. Seasonal development at New Afton continued well in the quarter, our development rate increased over the first quarter, and I remain confident in our ability to achieve first production ore during the fourth quarter with commercial production planned for the second half of 2024. With that, I will turn the call over to Keith.

Keith Murphy, VP Finance

Thank you, Pat. I'm on slide seven, which has our operating highlights. Q2 was another strong quarter. We produced 102,374 gold equivalent ounces, 45% higher when compared to the prior year quarter. Rainy River produced approximately 60,000 gold ounces. The increase over the prior year quarter is primarily due to higher gold grades. New Afton produced approximately 16,600 gold ounces and 12 million pounds of copper. The increase over the prior year quarter is due to higher gold and copper grades and recovery, partially offset by lower tons processed. Gold produced at New Afton also includes approximately 940 ounces from the ore purchase agreements. Operating expense per gold equivalent ounce decreased over the prior year periods, primarily due to higher production and sales. Consolidated all-in sustaining costs for the quarter were $1,657 per equivalent ounce. This decrease compared to the prior year quarter is primarily due to lower sustaining capital spending and higher sales volumes at both sites. Turning to our financial results on slide eight. Second quarter revenue was $184 million, driven by sales of over 74,200 gold ounces at an average realized gold price of $1,970 per ounce and sales of 10 million pounds of copper at $3.82 per pound. Q2 revenue was higher than the prior year quarter, primarily due to higher gold and copper sales volumes, partially offset by lower copper prices. The second quarter revenue split saw gold contribute around 80% to our quarterly revenue and copper around 20%. Cash generated from operations before working capital adjustments was $65 million or $0.10 per share for the quarter. This was higher than the prior year period due to higher revenue. The company recorded a net loss of $2.6 million or $0.00 per share during Q2, an improvement compared to a net loss of $0.06 per share in Q2 2022. After adjusting for certain other charges, net earnings were $11.5 million or $0.02 per share in Q2, an improvement compared to a net loss of $16.7 million in the second quarter of 2022. The improvements in net earnings and adjusted net earnings were primarily due to higher revenues and lower finance costs, partially offset by higher operating expenses and depreciation and depletion. Our Q2 adjusted earnings included adjustments related to other gains and losses. Our MD&A has additional details on the non-GAAP measures discussed here. Our total capital expenditures for the quarter were $72 million with $36 million spent on sustaining capital and $36 million on growth capital. The decrease over the prior year period is due to lower sustaining capital as Rainy River had lower capital stripping and New Afton had B3 development capital in the prior year, partially offset by higher growth capital at both sites. Sustaining capital spend at Rainy River was primarily related to capitalized waste, capital maintenance, and the annual tailings dam raise. And at New Afton, it's primarily related to tailings management and stabilization activities. Growth capital was invested in the C zone at New Afton and the underground Intrepid and main zones at Rainy River. Slide nine provides details of our capital structure. We had cash on hand at the end of Q2 of $174 million and our liquidity was $547 million. We have $373 million available on our credit facility. We continued to execute short-term hedges on CAD and fuel and our hedge at 75% on both for Q3. We will continue to evaluate short-term hedge options on CAD and fuel and utilize them as we see fit. In summary, we remain in a healthy financial position following a strong quarter while advancing our growth initiatives. Now, I'll turn the call back to Pat.

Patrick Godin, President and CEO

Thank you, Keith, and welcome again. So slide 11 provides additional details on the second quarter at Rainy River. During the quarter, the mine and mill performed well and delivered solid production increases over the second quarter of last year. The Rainy River team completed all previously discussed planned maintenance activities in the quarter. Rainy River's open pit mining sequence was optimized to maintain a consistent production profile throughout the year, leading to ounces being mined ahead of schedule. As a result of the production ounces pulled forward in the quarter, we now expect production in the second half to be approximately 50% of annual production. Throughput was in line with the second quarter from last year and an increase from the first quarter of this year. I remain confident that we can reach the target rate for the year with the recently completed maintenance of the processing plant. The average gold grade at Rainy River was 0.97 grams per ton, well above the second quarter from last year. The grade normalized from the first quarter as expected. Turning to the underground development, we advanced 524 meters in Q2. Production in the quarter included over 99,000 tons of ore from the intricate underground zone at a grade of 3.11 grams per ton gold equivalent. Underground production continues to ramp up, and tons and grade continue to reconcile well. As I mentioned in my opening remarks, development of the underground main zone was completed during the quarter as planned, with the development advancing approximately 100 meters. Following a detailed review of optimization opportunities over the last six months, the underground main zone will initially be reached via Intrepid instead of through the in-pit portal. This will allow for efficiencies and further optimization of the existing open pit for its remaining mine life. This will reduce haulage distance by allowing us to use the North Lobe as an in-pit waste storage facility. In addition to further facilitating access to the underground main zone, this will allow us to preauthorize underground exploration activities between the Intrepid and main zone through the ramp access. I am very happy with the progress made in the underground, and I remain confident that we are well-positioned to meet our annual production and cost guidance at Rainy River. Slide 12 provides further details of New Afton's second quarter results. The underground mine has reached over 8,500 tonnes per day of ore mined in the quarter, an increase over the previous year period. B3 is now comfortably operating at three-state mining rates, plus completion of construction activities in 2022. The mill averaged over 8,300 tonnes per day, relatively in line with the daily mining rate, incorporating B3 ore mined exclusive of ore purchases from our agreements. B3 continues to deliver as planned, and New Afton remains well-positioned to meet its annual production and cost guidance set out at the start of the year. Key zone development continued to advance with 1,415 meters in the quarter. Completion of the ventilation raises in the second quarter contributed to increased development rates, substantially higher than in the first quarter. Development on the extraction level to achieve first dry bulk was completed in the quarter, positioning the company well for first production ore in the fourth quarter with commercial production planned for the second half of 2024. Before I close out the presentation today, I want to reiterate what I said on the Q1 call regarding what I view to be the key priorities for the company. First, continue to stabilize our operations. The open pit and underground at Rainy River continue to reconcile well and the New Afton B3 is operating to plan. Second, continue to advance our organic growth opportunities. We made good progress at the underground main zone at Rainy River and C Zone at New Afton. Third, we have safety as the highest priority to deliver on our guidance set out earlier in the year. This was another consecutive quarter with no lost-time injuries and strong operating results. This quarterly result shows we are well on our way to executing these priorities. I'm incredibly proud of the effort shown by our team in the first half of the year, and we will continue to build on these results as we look to the second half of 2023. This completes our presentation. I will now turn it back to the operator for the Q&A portion of the call.

Operator, Operator

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. The first question comes from Fahad Tariq with Credit Suisse. Your line is open. Please proceed.

Fahad Tariq, Analyst

Hi, good morning. Thanks for taking my question. Patrick, just going back to your comments about the main zone and accessing it from underground versus an in-pit portal. Does that have any impact on costs or timing development rates, things like that?

Patrick Godin, President and CEO

Not really because it's the opposite. First, the ramp to build an in-pit portal in the North Lobe will require building a portal, which is not necessarily an easy thing, and also to bring services there. So, the fact that we will start from Intrepid is beneficial since everything is already in place and we will be attached to all the services, such as compressors and installation, etc., that is coming from Intrepid. So, it's more of a saving. From a timing point of view, all our mining crews are based on Intrepid, thus centralizing the activities. It's mostly the same meters of development. What is interesting is that we are at 300 meters deep at Intrepid, so it's going to speed up access to the main portion of the ore body of the main zone. So, it's mainly a scarcity opportunity for us. The second opportunity is we have a gap zone. There is a gap between Intrepid and the main zone for exploration. So, the ramp itself will give us the opportunity to explore this area. Another saving opportunity is that we are using the North Lobe as a waste dump facility. So, this significantly reduces haulage distances, consequently lowering costs and fuel consumption. So, it has improved our situation.

Fahad Tariq, Analyst

Okay. That's really clear. And then maybe just switching gears. Can you talk a little bit about just inflationary pressures? We've been hearing from some of your peers that maybe on the consumable side, we're starting to see some easing. I'm actually more curious to hear about what you're seeing on the mining labor side, particularly a tight labor market in Canada? Thanks.

Patrick Godin, President and CEO

To be honest, the big jump in terms of inflation on consumables and spare parts was mainly in 2022. We had significant increases from suppliers. This year, I can say that it has mostly moderated and is within our planned budget regarding cost increases for supplies and consumables. For manpower, we are generally seeing increases of about 3% to 4%. I believe we are more stable this year than we were two years ago and last year. So, we are quite comfortable with our costs here. These escalations are already included in our all-in sustaining costs.

Fahad Tariq, Analyst

Okay, great. That’s it for me. Thank you.

Operator, Operator

The next question in the queue comes from Anita Soni. Please proceed.

Anita Soni, Analyst

Good morning, Patrick and team. My first question is to understand how the rest of this year will unfold. In your original guidance, you mentioned a strong second half and a weaker first half after maintenance, but then you optimized the mine plan. Should we expect grades to level off in the second half of the year, or is it more of a tonnage concern?

Patrick Godin, President and CEO

I think we anticipate that ore will be in the grade. So, I'm talking about the grade. So, I think the same tonnage, but we are trying to smooth the gold production. So it's going to be a 50/50 going forward. We are pleased with this. In terms of all-in sustaining costs, we had less capitalized waste in Q2 and more sustaining capital because of the changes we made to the mine plan. However, we are still trending to be within our all-in sustaining costs guidance for this year.

Anita Soni, Analyst

Okay. So, does that mean that in the second half, this would reverse; you would have more capitalized waste and less sustaining capital? I'm sorry, did I say that wrong?

Patrick Godin, President and CEO

But yes, mostly, yes.

Anita Soni, Analyst

Okay. Maybe I’ll take it offline because I confused myself. Secondly, to follow up on the first question about the Intrepid zone, what impact does that have on the amount of stripping? I assume you’re going further into the bottom of the pit and experiencing lower strip ratios. Does that indicate that next year, you might have a lower strip ratio at Rainy than what was previously planned?

Patrick Godin, President and CEO

Yes. The change, the fact that we start the ramp from Intrepid instead of in the portal does not change the strip, but it will reduce our mining costs as it will reduce the average distance. Thus, it is a huge operational efficiency improvement for us. Additionally, it has a double impact because it will eliminate or reduce our impact on the landscaping.

Anita Soni, Analyst

Okay. And then just in terms of impact on sustaining capital or development capital, in 2023 and 2024 as a result of the change in the way you are accessing the Intrepid zone. Can you give some color on that?

Patrick Godin, President and CEO

To be honest, I'm not providing that detail actually, but we are trending towards slight improvements that will be to our advantage. You will have the cost increase in development that will be on the counterpart, but I think the 43-101 remains something that represents what we are dealing with.

Anita Soni, Analyst

Okay. So, you're going to deliver a 43-101, so you're saying the original 43-101 is still okay, or are you going to deliver a new one?

Patrick Godin, President and CEO

It's still okay. Yes.

Anita Soni, Analyst

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

Patrick Godin, President and CEO

Thank you.

Operator, Operator

Thank you. Hi, Michelle. We received a few questions via email because some individuals had trouble connecting. I will read a couple of the questions for the team. The first question is for Pat. What was the underground grade in the second quarter at Rainy River? And how does it compare to our plan?

Ankit Shah, Executive Vice President, Strategy and Business Development

The underground grade at Rainy River was 3.11 grams per ton for 91,000 tons from stope and development, and we are right on. The reconciliation compared to the reserve of what we mined is historically, since we started the mine at Rainy River and Intrepid underground zone. We are mostly right; we are bang on the grade and mostly 2%, 3% above in tonnage, and it's still the case. We reconcile at 100%. Okay, great. And one more question was also emailed to me. C Zone continues to be on track for the fourth quarter, but what other milestones can we look for in the C Zone development over the next few months?

Patrick Godin, President and CEO

Actually, the first significant milestone for us is the first drawdown. We complete the development for the undercut and the extraction level. So, we are right on time to deliver the first drawdown for Q4, specifically the beginning of Q4. This is one of the milestones. We need to continue to be at full capacity in terms of development at C Zone. We will complete the excavation of the crusher chamber in the coming days, and crews will jump in to build the crusher and all the equipment attached to it, including conveyors. We are targeting Q3 next year to be fully commissioned and operational. The hydraulic radius will be a trigger for between commercial production and completing the investment in the C Zone, with a target for the second half of 2024. This means that we are pushing development close to 475 to 500 meters per month to expose the ore and increase production for C Zone, aiming for full capacity by the end of 2025.

Operator, Operator

Thank you. We do have one more question in the queue from Anita Soni from New Gold. Please proceed.

Anita Soni, Analyst

I'm actually from CIBC, but anyway. For a follow-up, I'm sure CIBC would be pleased to hear about the change. My question is regarding the Intrepid zone. I wanted to understand what 2024 looks like. You're currently running at about 400 tons per year, and I believe you mentioned 91,000 tons this quarter. Will you ramp up to around 607,000 tons per year next year and then to 1.2 or 1.3 million tons in 2025? Is that still the plan at approximately 3 grams per ton material?

Patrick Godin, President and CEO

Yes, you discussed the all-in. Yes, the grade is all-in well because in Phase 3 going deeper, the grade is likely around one, and we have the grade from the underground, with its meeting, yes. Intrepid is mostly 1,000 tons per day, and we are bang on the 43-101, the same. The reconciliation is good, so basically, the grade that we have in the 43-101 is the same.

Anita Soni, Analyst

Yes. I was just looking for an idea of the out years, like the 2025 years, what they look like.

Patrick Godin, President and CEO

Yes. We are working on that. The fact that we have new colleagues who joined New Gold increases our capacity to improve our engineering process, and we will provide more details in the 2024 guidance.

Anita Soni, Analyst

All right. Okay. Thank you very much.

Operator, Operator

There are no further questions at this time. Speakers, do you have any closing remarks?

Ankit Shah, Executive Vice President, Strategy and Business Development

Thank you, Michelle. And again, thank you 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. Have a great rest of your summer.

Operator, Operator

Thank you. Ladies and gentlemen, this will conclude your teleconference. Please disconnect your phone lines.