Earnings Call Transcript - NGD Q1 2020

Operator, Operator

Ladies and gentlemen, thank you for standing by, and welcome to the First Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentations, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would like to now hand the conference over to your speaker today, Anne Day, Vice President of Investor Relations. Please go ahead.

Anne Day, Vice President of Investor Relations

Thank you, operator. And good morning, everyone. We appreciate you joining us today for New Gold's first quarter 2020 earnings conference call and webcast. I hope everyone is well and staying safe. We will begin today’s session with Rob Chausse, CFO of New Gold, who will present our Q1 financial results, and then follow with Renaud Adams, CEO, to present our operational results. After the presentations have been completed, we will open the lines for a brief Q&A period. Before the team begins the presentations today, I 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 presentation. You are cautioned that actual results and future events could differ materially from those expressed or implied in forward-looking statements. Additionally, we 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. Included in the presentation, there are several endnotes that provide important information and should be reviewed in conjunction with the material presented. I will now turn the call over to Rob Chausse.

Rob Chausse, CFO

Thanks, Anne. Good morning. I will turn you to Slide 5, which provides our operating highlights for Q1 2020. The details are consistent with our April production press release. Overall, our quarter was impacted by lower grades and higher sustaining capital when compared to the prior year quarter. During Q1, the company produced 103,435 gold equivalent ounces. This amount included 18.5 million pounds of copper, 50,381 gold ounces from Rainy River, and 16,409 gold ounces from New Afton. Total gold production was 66,790 ounces. Lower gold production compared to the prior year quarter is primarily due to planned lower grades at Rainy River and the 12-day suspension at the Rainy River Mine. The 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 were $14.46 per equivalent ounce, 33% higher than the prior year quarter due to lower grades and lower sales volumes. Turning to our financial results on Slide 6, first quarter revenue from continuing operations was $142 million, driven by sales of approximately 68,800 gold ounces at an average realized gold price of $14.58 per ounce and sales of 17.7 million pounds of copper at $2.56 per pound. Q1 revenue was 15% lower than the prior year quarter due to lower grades, partially offset by a higher gold price. Operating cash flow before working capital adjustments was $47 million or $0.07 per share for the quarter, lower than the prior year due primarily to lower grades. The company recorded a net loss of $28.3 million or $0.04 per share during Q1, compared to a loss of $13.4 million in Q1 2019. After adjusting for certain charges, the net loss was $17.8 million or $0.03 per share in Q1, compared to net earnings of $0.00 per share in the first quarter of 2019. Our Q1 adjusted earnings include adjustments related to our inventory write-down and other gains and losses, including the unrealized adjustments on our gold price option contracts and the stream mark-to-market. Our MD&A has additional details on the non-GAAP measures discussed here. Slide 7 provides a breakdown of our Q1 2020 capital expenditures. Our total sustaining capital and leases for the quarter was $49.1 million, primarily related to tailings work and wick drains. Growth capital was focused on project development at New Afton. As of March 31, 2020, we had approximately $400 million in cash and about $600 million in liquidity. With that, I’ll turn the call over to Renaud.

Renaud Adams, CEO

Thank you, Rob. Good morning, everyone. I am on Slide 10. Before we touch base on the operating performance, I would like to discuss some aspects of COVID-19. At the early stage of the pandemic, we established our common goal of preserving and protecting the health and safety of our people, the environment, and the community while maintaining the viability and integrity of our mines and business. Thanks to the tremendous commitment and involvement of all, we’ve been quite successful to date in delivering on that statement. When it comes to the protection of all our employees, contractors, and community health and safety, this is where true sustainability takes place. As CEO of New Gold, I am extremely proud of what we have achieved to date. While we are physically separated, I truly feel much closer than ever to our employees and communities. I won’t go through the details of everything we have put in place, but I would summarize by saying that I feel we have implemented best practices recommended by local governments and health agencies. You could see more on our website under COVID-19 on the New Gold website. Just in terms of the supply chain continuity, somewhat surprisingly, I am very happy to see that the supply chain has not been impacted. We have the proper inventory on hand, and the required quantities have been maintained. Our long-term schedule also remains as planned. Creative business continuity plans at both sites are fully modernized with response teams. We have different scenarios for ramping up and down and adapting as needed for capital execution. On our financial status under this COVID-19 crisis, while our two mines are currently operating, we feel that we have significantly raised the bar regarding our financial preparedness to navigate through this crisis. The only release suspension in site activities to date has to do more with the exploration regional program due to governmental prioritization of operating permits. We expect a slight delay there, but nothing material to our plans, and we continue to believe we can execute. As spring arrives, the execution of our capital project timelines will also be crucial. As a closing remark, I would say that we are currently actively engaged in initiatives to improve testing capacity at our sites, which we believe is crucial to significantly enhance our health and safety protocols as we continue to ramp up activities. On Slide 11, on February 13, we released our updated 43-101 report. The release was quite detailed, and I will discuss it in our presentation. The results were year-by-year based. I am pleased with our production results for Q1, considering the 12-day suspension at Rainy River due to COVID-19. Our cash cost and all-in sustaining costs are aligned with our plan and somewhat below. While we have withdrawn our guidance, we continue to focus on executing our disposal plan, which remains our internal scorecard for the time being. Operating at Rainy River restarted on April 3, after a total of 14 days of suspension and is currently ramping up operational capacity as well as capacity for capital execution, primarily using the local workforce, which composes about 70% of the total workforce. As we advance, we will need to bring in more specialized employees and contractors to execute our capital projects and continue ramping up operations to normal levels. The mill has been performing exceptionally well, using direct feed from stockpiles as planned. On Slide 12, in terms of key performance indicators for Rainy River Mine, the highlight is the mine's great performance in terms of total tonnes, efficiencies, and unit costs compared to our plan prior to suspension. The open pits were operating at an average of 140,000 tonnes a day, and we were very pleased with that performance. Our strip ratio was lower in Q1 compared to last year as planned. The mill was effective in terms of availability and recovery. The only minor issue in Q1 at Rainy, if any, was the ramp of the mill to 24,000 tonnes a day at much harder rock, which was challenging at the start. In January, we improved fragmentation in the pit and commissioned a pebble crusher, improving performance relative to our plans. Capital projects advanced in Q1 as planned, and we anticipate an increase in Q2 and Q3 as the core of the tailing management and wick drains and water management efforts will be completed, potentially by Q4. I am on Slide 13. At New Afton, we also released a new technical report on February 13, updating capital execution and operations for the B3 and C-zone, extending the life of mine to 2030. We are very pleased with the advancement at New Afton, where operations were uninterrupted during the quarter and continued during COVID-19 conditions. One key action taken was implementing the 14/14 schedule instead of 7/7, ensuring proper self-isolation every 14 days. While our guidance has been withdrawn, we continue to focus on executing our new plan. Our gold production cash costs and all-in sustaining costs were aligned with our plans. Production was below our plans due to lower grade milled than anticipated. Sustaining and growth capital were slightly below the original plan, but there is nothing specific to discuss beyond the timing of certain activities. Our capital spending is expected to increase in Q2 and Q3 as more schedules take place. On Slide 14, in terms of key performance indicators for our New Afton Mine, I would say, comparing to our plan, we are pleased with our underground mining and milling productivities. Both recoveries for gold and copper were as planned despite lower copper grade milled in the quarter. We are reviewing some potential operational aspects causing the higher dilution than expected in Q1, resulting in the lower copper grade. We are proud of the 1,231 meters of B3/C zone development achieved in Q1, but believe that the new safety protocols implemented will temporarily slow productivity. The BC government stated that, prior to what we are currently dealing with, they were focused on more pressing operating permits, leading to expected delays concerning regional exploration permits. On Slide 15 regarding Blackwater, we’ve completed our internal scoping study. We are satisfied with the results and hope to make a decision before the end of Q2 regarding the next steps, potentially leading to a new 43-101 compliance study based on the new scoping. As a closing remark on Slide 16, a lot has been accomplished in the last 12 to 18 months regarding repositioning New Gold. We are now on a clear path forward to achieve operational profitability and grow free cash flow. Additionally, the closing of our recent strategic deal with Ontario Teachers’ significantly improved our financial position and balance sheet while exploration and revaluation at Blackwater continue to provide optionality for our shareholders. This concludes the formal presentation, and we will now turn the call back to the operator for the Q&A portion of the call. Thank you.

Operator, Operator

Your first question comes from the line of Matthew Fields from Bank of America. Your line is now open.

Matthew Fields, Analyst

Hi. I understand the expectations are probably not where you wanted to be coming into the quarter, but under the circumstances, I wanted to ask about your balance sheet. Now that you have the extra $300 million of cash from the Ontario Teachers’ transaction, is there a priority towards doing some kind of refinancing transaction on those 2022 bonds, maybe using some of those proceeds for that purpose?

Rob Chausse, CFO

Yes, certainly. As you mentioned, the market is interesting as we sit here. It is definitely a priority to address the 2022 bonds, which are still 2.5 years away from maturity. We can be patient and prudent as we address those bonds and watch the market for opportunities, being opportunistic when we see favorable conditions. We want to reduce our debt level and also deal with any stub bonds through an opportunistic capital markets move.

Matthew Fields, Analyst

Okay. I mean, just for the record, maybe the market was not favorable a month ago at the end of March, but your bonds have certainly rallied back significantly along with the rest of the markets. So, I would say the market is there, and other metals and mining companies are trying to come to the market now, anticipating it may not be available in the future. I am not a leveraged finance banker, but they usually say you should take the money when it’s available, not wait for the right time. But, good luck, and hopefully, you can address those short-term maturities to buy yourself more time if the recovery isn’t as quick as people think. Thank you.

Rob Chausse, CFO

Thank you.

Renaud Adams, CEO

Thanks.

Operator, Operator

Your next question comes from the line of Fahad Tariq from Credit Suisse. Your line is now open.

Fahad Tariq, Analyst

Hi, good morning. Thanks for taking my question. Just a modeling query for me. On Rainy River, how should we be thinking about grades in the second quarter given that a proportion of the mill feed will be from reduced mining but also stockpiles? I am trying to get a sense of whether we are back at Q4 levels for grades. Any insight there would be helpful. Thanks.

Renaud Adams, CEO

Yes, good question. The reason I am cautious in answering is that we’ve withdrawn guidance for a reason. We're ramping up as we speak. It’s all about how quickly we can get back to feeding the mill with 100% from the mine. Our original plan considered using mid-grade stockpiles in blending. If we remain at about 70%-75% of the mine's capacity, you should expect lower grades, as we will be feeding the mill primarily with lower grade stockpiles. However, the exact levels will depend on our progress in the upcoming weeks. We will be in better position to discuss this later in Q2.

Fahad Tariq, Analyst

Okay, great. That’s helpful. And a quick follow-up. Has there been a change in the cadence of the CapEx at Rainy River for Q2 to Q4, or has that not really been impacted?

Renaud Adams, CEO

Not significantly. Of course, if the situation were to worsen, it might lead to adjustments, but this is not our current outlook. We are focused on ramping up and executing. We plan to execute most, if not all, of the capital that we originally planned for 2020, with perhaps a little delay into Q4. Our original objective was to achieve free cash flow at $1,300 by Q4, and we are not interested in postponing or pushing everything to the end of the year. We are closely collaborating with the community, which has to consider bringing in external personnel. In summary, there may be minor timing adjustments, but our objective remains to execute our plan.

Fahad Tariq, Analyst

Thank you.

Renaud Adams, CEO

Thanks.

Operator, Operator

Your next question comes from the line of Anita Soni from CIBC Bank. Your line is now open.

Anita Soni, Analyst

Hi guys, this is Anita Soni. The deal closed on March 31 for the Ontario Teachers’ pension. Does that mean that…

Operator, Operator

Anita Soni from CIBC Bank. Your line is now open.

Anita Soni, Analyst

I am on. Can you hear me? Hello?

Renaud Adams, CEO

Sorry, operator. I am sure it’s the same for you, but I cannot hear the question.

Anita Soni, Analyst

Hello. Hello.

Operator, Operator

I don’t hear anything either. Should I move on?

Renaud Adams, CEO

Yes, please.

Operator, Operator

Your next question comes from the line of Don MacLean from Paradigm Capital. Your line is now open.

Don MacLean, Analyst

Thank you, operator. And thanks, guys, for hosting the call. I was hoping you could provide a bit more color on the dilution of the New Afton Mine. What can you do, given it is a block cave, and how critical is that source of feed for the overall production profile?

Renaud Adams, CEO

Good question, Don. There is definitely more to evaluate. There are two aspects to consider. Remember, we are balancing between the B3 and completing the east cave and west cave, along with pillars recovery and rehab. There are several components to consider as we speak. I absolutely agree with you regarding the block cave. However, there are specifics; it can be radio across, or some dilutions can be more spotty. What about the pillars recovery? What about the plan? What about the mandate throughput as well? There is a lot to analyze and, it’s still early to provide definitive details. But we are closely monitoring the parameters and will inform you of any updates we have in the future.

Don MacLean, Analyst

So the bottom line is that you are optimistic that you have enough parameters and levers to pull to address at least part of this extra dilution?

Renaud Adams, CEO

Yes, that’s a fair comment at this stage.

Don MacLean, Analyst

Okay. Great. Thank you.

Renaud Adams, CEO

Thank you.

Operator, Operator

Your next question comes from the line of Mike Parkin from National Bank. Please state your company and your line is open.

Mike Parkin, Analyst

Hi, thanks for taking my question, guys. Following up, can you give us an idea of what the New Afton Q1 budget grade was?

Renaud Adams, CEO

It was pretty much aligned with the full year. Referencing our technical report, you are looking at the very low 80s or 0.8%, and we are assessing the details here. So we are about 10% below what we anticipated.

Mike Parkin, Analyst

Okay. And are you seeing that continue into the month of April? Or was it just Q1?

Renaud Adams, CEO

It’s fair to say that we do not turn the corner in 24 hours. As I mentioned in previous questions, we are closely monitoring it. Last year, we had quarters where copper was lower, but gold was higher on an equivalent basis, as we run the business on that basis. In Q1, our gold was mostly aligned with our plan, but unfortunately, we saw copper below plan. We need to closely assess this moving forward.

Mike Parkin, Analyst

Can you remind me again on the period where you transition into supergene copper material? Is that where you are at right now?

Renaud Adams, CEO

We are currently in the supergene zone, producing concentrate with copper separated from the sulfur concentrate. That’s happening now, and we’ve effectively maintained recovery and adjusted our sales strategy accordingly.

Mike Parkin, Analyst

What’s the grade of the medium-grade stockpile at Rainy River?

Renaud Adams, CEO

The average of the medium stockpile is usually between 0.5 and 0.9. So, we assume the average is around the midpoint. We sometimes have zones that are higher and sometimes closer to 0.5, but technically, the average is about 0.75.

Mike Parkin, Analyst

That's it for me.

Renaud Adams, CEO

Thank you.

Mike Parkin, Analyst

Thanks, guys.

Renaud Adams, CEO

Thanks.

Operator, Operator

Your next question comes from the line of Trevor Turnbull from Scotiabank. Your line is now open.

Trevor Turnbull, Analyst

Yes, thanks, Renaud. Following up on the question regarding CapEx at Rainy.

Operator, Operator

Trevor Turnbull, your line is now open.

Trevor Turnbull, Analyst

Can you hear me, guys?

Renaud Adams, CEO

Okay. I hope we're not having an IT issue here, but I can hear you now.

Operator, Operator

Would you like me to move on to the next question?

Renaud Adams, CEO

Yes, please.

Operator, Operator

Your next question comes from the line of Anita Soni from CIBC Bank. Your line is now open.

Anita Soni, Analyst

So let’s try this again. I spoke with Trevor, and people could hear me on the call. So, let’s see if you can hear me. It’s Anita Soni from CIBC. So, can you hear me?

Renaud Adams, CEO

I can hear some background noise and don't have a clear line. Just to clarify, Anita, why don’t you reach out to Anne directly after the call, and we can take your question one-on-one? Sorry about that. Just can't hear you.

Anita Soni, Analyst

All right. Thanks.

Anne Day, Vice President of Investor Relations

Hello everyone. We are experiencing some technical issues, and we are not hearing the calls. Please feel free to reach out to me directly, and we will schedule something offline. At this time, we will close the call. If you need any follow-ups, please reach out to me, and we will schedule something. Thank you.

Renaud Adams, CEO

Thank you.

Operator, Operator

Ladies and gentlemen, this concludes today’s conference call. Thank you for participating. You may now disconnect.