Earnings Call Transcript - NGD Q2 2021

Operator, Operator

Good morning. My name is Sylvie and I will be your conference operator today. Welcome to the New Gold's Second Quarter 2021 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.

Ankit Shah, VP of Strategy and Business Development

Thank you, Sylvie, and good morning, everyone. We appreciate you joining us today for New Gold's Second Quarter 2021 Earnings Conference Call and Webcast. On the line today, we have Renaud Adams, President and CEO, and Rob Chausse, our CFO. Should you wish to follow along with the webcast, please sign in from our homepage at newgold.com. Before we begin the presentation, I would 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 the section entitled Risk Factors in New Gold's latest MD&A and other filings available, which set out certain material factors that 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 will now turn the call over to Rob.

Robert J. Chausse, CFO

Thanks, Ankit, good morning. Slide 5 provides our operating highlights for Q2. Production details are consistent with our July production press release. During Q2, the Company produced approximately 105,700 gold equivalent ounces. This consisted of 18.2 million pounds of copper, 52,900 gold ounces for Rainy River, and 14,088 gold ounces from New Afton totaling approximately 66,900 gold ounces. Higher equivalent gold production compared to the prior-year quarter is primarily due to higher tons and grades at Rainy River and higher copper production at New Afton. Operating expense per equivalent ounce was higher than the prior-year quarter due to planned higher costs at New Afton, a strengthening Canadian dollar, and the Canadian wage subsidy received in the prior period. Consolidated all-in sustaining costs for the quarter were $1,551 per equivalent ounce, higher than the prior-year quarter primarily due to increased operating expense, and increased sustaining capital at New Afton. Turning to our financial results on Slide 6, second-quarter revenue was $198 million driven by sales of 68,000 gold ounces at an average realized gold price of $1,817 per ounce, and sales of 16.9 million pounds of copper at $4.43 per pound. Q2 revenue was 54% higher than the prior quarter primarily due to higher sales volumes and metal prices. Operating cash flow before working capital adjustments was $84.7 million or $0.12 per share for the quarter, higher than the prior-year quarter, primarily due to higher sales volumes and metal prices. The Company recorded a net loss of $15.8 million or $0.02 per share during the quarter compared to a loss of $0.07 per share in the prior-year quarter. After adjusting for certain items, net earnings were $26.7 million or $0.04 per share in Q2 compared to a net loss of $3.3 million or $0.00 per share in the second quarter of 2020. The difference is driven by higher sales volumes and metal prices. Our Q2 adjusted earnings includes adjustments related to unrealized variations on our Rainy River stream mark-to-market and the free cash flow royalty at New Afton. Our MD&A has additional details on the non-GAAP measures discussed here. Next slide covers capital expenditures; our total capital expenditures for the quarter were $82.4 million. $49.2 million was spent on sustaining capital and $33.2 million on growth capital. Sustaining spend was primarily related to planned tailings work at both operating assets and B3 mine development. Growth capital was focused on project development, specifically the C-Zone, and the Thickened and Amended Tailings project at New Afton, and the underground and tropic zone at Rainy River. Slide 7 provides details of our capital structure. At June 30th, 2021, we had $138 million in cash and $464 million in liquidity. Adding to liquidity will be the receipt this month of the remaining $50 million CAD payment related to the Blackwater sale. With that, I'll turn the call over to Renaud. Thank you.

Renaud Adams, President and CEO

Thank you, Rob. And again, thank you, everyone for joining us today. I'm on Slide 9 regarding Rainy River. Let me start by saying that there are currently no active COVID cases at Rainy, and the mine continues to use rapid testing. We have also implemented a vaccination clinic at the site. The asset performed extremely well during the second quarter and was very well-positioned at quarter-end to enter the second half of the year, which will focus on high-grade and lower strip ratio. The mining operations continued to execute very well during the quarter with over 158,000 tons per day mined, marking a third consecutive load above the operational target of 151,000 tons per day. The focus remains on further operations and cost optimization as we move forward.

Robert J. Chausse, CFO

The mill performed at a slightly lower availability this quarter, but we expect the mill to deliver its maximum permit capacity of 27,000 tons a day in the second half of the year. The processing milling rate has been maintained at an average of nearly 26,500 tons per day over the last 4 quarters, compared with the permit of 27,000 tons a day. Very importantly, the Intrepid zone is the first underground area located east of the pit.

Renaud Adams, President and CEO

The Intrepid decline advanced by another 616 meters. We have now reached a second level in ore, and we're in the process of implementing more definition drilling as we resume development of the ore. The ramp will continue to advance in the third quarter with the objective of eventually having a fully developed panel in ore prior to initiating production in the later part of 2022. Additionally, we would have advanced the second panel. Parallel to Intrepid development is the full study that would eventually target the conversion of a significant portion of the resources located below the pit into reserves. The fall Intrepid zone was incorporated into the reserves as of December 2020, and we have now completed a more detailed mine plan that will be included in our next generation life of mine projections. In July 2021, production was primarily from the eastern area of the ODM called the East Lobe. The realized gold grade from this area was below the expected gold grade in this period. The East Lobe represents approximately 50% of the planned production for the second half of 2021. If the realized gold grade continues to be below expected, it will negatively impact the amount of ounces we anticipate producing in the second half of the year. The extent of this impact is not yet known, but there is a risk that Rainy River may not achieve the lower end of guidance for gold equivalent production. The resources at Rainy are categorized into three groups: high, medium, and low grade, referred to as HGO, MGO, and LGO. The combination of the HGO and MGO forms what we call the direct feed to the mill, while the LGO is stockpiled for future use. The reconciliation of the HGO and MGO drives the mine's performance. Our planned production for 2021 was based on the reserves from December 2020. The East Lobe represents about 50% of the tonnage to be mined in the second half. We are initiating the second half of the year at a higher grade plan, but the impact of the East Lobe is being taken very seriously as it represents a significant portion of our H2 production.

Robert J. Chausse, CFO

I'm extremely pleased with the New Afton. We had a solid performance in the second quarter, with approximately 50,500 gold equivalent ounces produced, including copper production of 18.2 million. Unfortunately, we had two recent active cases of COVID at New Afton, but the mines have effectively managed the situation. The mining mill performed as planned while the copper grade outperformed in the second quarter, resulting in a very strong quarter for us. The C-Zone development advanced by 919 meters during this quarter, and the site continues to focus on delivering our future projects on time and on budget. The B3 permit was received during the quarter, and extraction has started and will continue to ramp up in the second half of 2021 into 2022. However, due to the delay, there will be less from B3 available in our second half of the year, and a portion of the ore will be replaced by lower grade ore from Lift 1 and/or stockpile. However, we continue to expect to meet our gold equivalent guidance with strong contribution from the midpoint of the copper guidance. It's important to note that the reserves from December 2020 serve as the basis for the 2021 mine plan. We estimated using a gold price of $1400 and a copper price as low as $2.75 per pound. With current metal prices significantly above the reserve pricing, New Afton is evaluating potential short-term opportunities using a lower cut-off grade. We continue to maximize the asset's total value as we transition to the new phase in 2023. This completes the presentation portion of the call, and I will now turn it back to the Operator for the Q&A.

Operator, Operator

Thank you, sir. And your first question will be from Anisha Soni at CIBC. Please go ahead.

Anisha Soni, Analyst

Hi. Thanks for taking my question right now. And thank you for the disclosure on the reconciliation with the East Lobe. Can you just give us an idea of what grade was expected and what you were reconciling to? I just want the actual relative reference point for what grade you were expecting from the East Lobe.

Robert J. Chausse, CFO

We never really disclose in detail, but we've been averaging between 0.8 to 0.85 in the first half, and we're expecting a full-year around 1 gram. So we're expecting in the second half something along the lines of 1 to 1.2 grams a ton, with 50% of the tons coming from the East Lobe.

Anisha Soni, Analyst

Okay. Thank you. And then moving onto New Afton with the B3 Development rates. You have indicated that you are a little behind on that. Could you give us an idea of the ore sources and what grades we should think about going into Q3? Also, is it fair to say that you are about 3 or 4 months behind on this?

Robert J. Chausse, CFO

Your assumption is good; we were originally hoping for the B3 permit in the first quarter, but it was delayed due to several challenges. So your assumption of being three to four months behind is accurate. We will continue ramping up as we move forward.

Renaud Adams, President and CEO

We're confident that the ongoing production from Lift 1 will help offset some of these challenges. The mining in Lift 1 has been performing well, and we see opportunities to maximize the resource beyond the current reserve line.

Anisha Soni, Analyst

Okay. Would lower copper grades target also produce some lower gold grades?

Robert J. Chausse, CFO

Yes, it will. You cannot decouple both, so we will see a drop in both grades as we move forward.

Anisha Soni, Analyst

When it comes to inflationary pressures, could you describe your exposure in terms of energy, labor, and other consumables?

Robert J. Chausse, CFO

The areas of major impact are fuel and exchange rates. For Rainy River, fuel costs impact operations significantly, representing about $3 to $4 million annually. For exchange rates, we're currently at about 1.25, which has about a $30 per ounce impact on the remainder of this year.

Anisha Soni, Analyst

Is there any difference in the Capex pressures you're seeing?

Robert J. Chausse, CFO

There hasn't been a material impact on our capital projects. Most of our steel and materials required have already been received.

Anisha Soni, Analyst

So we shouldn't expect to see the C-Zone development escalating into next year?

Robert J. Chausse, CFO

Correct.

Ankit Shah, VP of Strategy and Business Development

Thank you, Sylvie. And thank you everyone 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. We hope you enjoy the rest of your summer.

Operator, Operator

Thank you. Ladies and gentlemen, this concludes your conference call for today. Once again, thank you for attending. And we do ask that you please disconnect your lines.