Earnings Call Transcript - NGD Q3 2021

Operator, Operator

Good morning, ladies and gentlemen. And welcome to the New Gold Inc. Third Quarter 2021 earnings call and webcast conference call. At this time, all lines are in listen-only mode. Following the presentation, we will conduct a question-and-answer session. If at any time during this call you require immediate assistance, please signal for the Operator. This call is being recorded on Friday, November 12, 2021. And I would now like to turn the conference over to Mr. Ankit Shah, Vice President, Strategy and Business Development. Please go ahead.

Ankit Shah, Vice President, Strategy and Business Development

Thank you, Operator. And good morning, everyone. We appreciate you joining us today for New Gold's Third Quarter 2021 Earnings Conference Call and webcast. On the line today, we have Renaud Adams, President and CEO, and Rob Chausse, CFO. 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'd 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. To our caution 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 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 Rob.

Robert J. Chausse, CFO

Thanks, Ankit, and good morning. Slide 5 provides our operating highlights for Q3. The details on that slide are consistent with our October production press release. During Q3, the Company produced approximately 105,600 gold equivalent ounces. The amount consisted of 15.6 million pounds of copper and 58,600 gold ounces from Rainy River, and approximately 13,600 gold ounces from New Afton. Total gold ounces were approximately 72,000 ounces. The overall equivalent gold production compared to the prior-year quarter is primarily due to lower tons processed at Rainy River and New Afton. The operating expense per equivalent ounce was higher than the prior-year quarter due to the strengthening Canadian dollar and the Canadian weight subsidy received in the prior quarter. Consolidated all-in sustaining costs for the quarter were $1,408 per equivalent ounce, higher than the prior-year quarter, primarily due to the higher operating expenses previously noted, partially offset by lower sustaining capital. Turning to slide 6 for our financial results. Our third quarter revenue was approximately $180 million driven by sales of 66,982 gold ounces at an average realized price of $1,788 per ounce and sales of 14 million pounds of copper at $4.28 per pound. The Q3 revenue was 4% higher than the prior-year quarter, primarily due to higher metal prices. Operating cash flow before working capital adjustments was $81 million or $0.12 per share for the quarter, in line with the prior-year quarter. The Company recorded a net loss of $11.3 million or $0.02 per share during Q3, compared to earnings of $0.02 per share in Q3 of the prior year. After adjusting for certain charges, net earnings were $23.4 million or $0.03 per share in Q3, compared to net earnings of $12.4 million or $0.02 per share in the third quarter of 2020. This difference is driven by higher metal prices and lower finance costs. Our Q3 adjusted earnings include adjustments related to unrealized adjustments on our Rainy River Stream mark-to-market and our free cash flow royalty at New Afton. Our MD&A provides additional details on the non-GAAP measures discussed in this presentation. With regards to capital expenditures, our total CapEx for the quarter was $58 million. $34.9 million was spent on sustaining capital and $23.1 million on growth capital. Sustaining spend was primarily related to planned tailings work at both operating assets and B3 mine development at New Afton. Growth capital was focused on project development, specifically the C-Zone and the Thickened and Amended Tailings Project at New Afton, and the underground Intrepid Zone at Rainy River. Slide 7 provides our capital structure. Cash on hand as of September 30th, 2021, was $151 million, and liquidity at the end of the quarter was $477 million. With that, I will now turn the call over to Renaud. Thank you.

Renaud Adams, President and CEO

Thanks, Rob, and thank you, everyone for joining us today. So first, let me start by saying that I recently had the chance to spend quality time at our sites, and I continue to be amazed by the tremendous level of hard work and commitment from our employees and contractors as we continue to build our Company on solid foundations and core values. In terms of our third quarter, on a consolidated basis, I believe that we responded very well to the challenges experienced in the third quarter, positioning us to meet our updated guidance. I'm really pleased with the global reductions of our all-in sustaining costs of over 9% compared to the first half of the year, improving by almost 16%, and I really want to thank everyone at New Gold for their continued efforts. On Slide 10, we showed another quarter of nearly 150,000 tons per day mined, in line with our objective to achieve approximately 151,000 tons per day for the year. The mine has been averaging 150,000 tons per day for over a year and is well set for further optimization as we progress towards 2022. It is now about redirecting our efforts in 2022 from ramping up and stabilization to continue to deliver volume, but in a more optimized way, unlocking further opportunities for cost reductions and improved operating efficiency related to our mobile maintenance capital program. As originally planned, the mine executed on a much lower strip ratio of 1.83 to 1 in the quarter, in line with our objective to average approximately 2.7 to 1 for the year. So accordingly, we expect to remain at the low strip ratio in the fourth quarter. The highlight of the quarter at Rainy was the negative grade reconciliation and the East Low part of the pit, which forced revised production guidance. However, September responded very well to our short-term adjusted grade approach for the zone, and our overall production for the quarter was in line with our revised plans. With a much lower contribution from the East Low plan for the fourth quarter, we expect an increased grade in the fourth quarter over the 0.89 grams per ton achieved in Q3, which was already approximately 10% higher than the first half of the year. In terms of grade controls, we continued to see in line reconciliations for zones outside of the East Low area, reconfirming our confidence looking at our future production profile. The second RSV drill arrived on site, and the margin drilling has been put in place to continue to assess the East Low area and prepare for our 2022 production plan. The mill averaged 25,245 tons per day, lower than the same period last year of 27,000 tons per day, mostly due to extended maintenance in the crushing area. However, looking forward, I'm very confident that the mill will return to its permitted capacity of 27,000 tons a day. I'm also looking forward to seeing potential improved recovery as we continue to optimize the grinding gravity and back-end circuits. With the completion of all deferred construction work in 2020, the mine achieved a reduction of sustaining capital in Q3 compared to the same period of 2020, contributing to lower all-in sustaining costs of $13.7 per gold equivalent versus the $14.69 achieved for the same period of 2020, and also reductions of nearly 16% compared to the first half of the year. We remain on track to meet our updated production and cost guidance. The underground development of the Intrepid Zone continues during the quarter, with the objective of initiating long-hole stopping mining. We are also continuing to advance our optimized underground mine plans study, which will potentially include additional conversion of underground mineral resources into mineral reserves, all located directly below the pit. The results of the study are expected to be released in the first quarter of 2022, along with our year-end mineral reserve and mineral resources update. While on slide 12, I want to address New Afton. As a result of the delay in receiving the B3 permit in 2021, the contribution of tons mined from the B3 Zone was lower than originally planned, resulting in a lower ton mined compared to the same period of 2020. Other contributors to lower tons mined included the limited mining capacity on the recovery level. As mining activities come in remote mode, following the events of last February. As we complete 2021 and enter into 2022, our focus remains on: first, to safely and efficiently ramp with the B3 Zone; this is really important to us as it will be the main contributor in 2022, ensuring safe mining of the recovery level reserve while transitioning to the in-pit tailings plan for 2022, so we don't leave anything behind us. And of course, the safe and efficient exhaustion of the East Cave area. The overall grades for the quarter were comparable to the same period of 2020, as the grade mined from the East Cave performed very well during the quarter. The recoveries were also comparable or slightly better for gold than the same period of 2020, despite an increase in supergene volume. The mill averaged nearly 13,000 tonnes per day, which was lower than the same period of last year but in line with our mining rates for the quarter, aimed to optimize metal recovery while processing higher volumes of supergene material. Overall, we remain on track to meet our gold equivalent production guidance, with all-in sustaining costs expected to be in the higher end of the guided range. Our C-Zone underground development advanced by nearly 800 meters in the third quarter, and the thickened amended tailings facility was nearly commissioned at the quarter end. In terms of exploration, we completed six more holes totaling nearly 3,900 meters in the Cherry Creek trend to explore for deep porphyry-style systems. The drilling program is expected to be completed by the end of the fourth quarter. Following the very encouraging and exciting results from our underground drilling program testing artificial intelligence targets, we added more drilling, which is also expected to be completed by year-end. We are really looking forward to our next exploration update to market in the first quarter of 2022. This will conclude the presentation portion of the call, so I would now hand 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. You will then hear a greeting prompt acknowledging your request and your question will be pulled in the order that they are received. And if you are using a speakerphone, please lift the handset before pressing any keys. One moment, please, for your first question. Your first question comes from Anisha Soni from CIBC World Markets, please go ahead.

Anita Soni, Analyst

Hi. Good morning. I'm sorry I didn't hear you. Sorry, I switched from the webcast to the phone; there's some delay in style. I was just wondering, in the Rainy River, could you give us an update and some color on the amount of East Low material that you expect to see next year and perhaps into 2023 if there's any?

Renaud Adams, President and CEO

What I can say at this stage, Anita, is that we continue to assess and optimize our plan. But if you refer to the 43-101, the plans remain somewhat similar. You have about 25% of the ore to be mined for '22 and '23, with completion expected in the second half of '23. As we advance and complete, we'll obviously update all our plans in our guidance early in 2022.

Anita Soni, Analyst

All right. Could you comment on the inflationary pressures that you are seeing, if any, and give us some color on the magnitude overall and the sources of it in terms of labor and consumables?

Robert J. Chausse, CFO

Sure. There are no material inflationary pressures. We have not faced any major capital items or components related to steel, etc., since they were ordered and received prior to this inflationary period. Ultimately, I think our inflationary pressures come down to access to contractors, etc. Labor remains within the 2% to 3% range we are seeing. As it stands right now, we're not encountering any material impacts on our business related to inflation.

Anita Soni, Analyst

Okay. Thank you, I'll pass it over to someone else.

Robert J. Chausse, CFO

Thanks.

Operator, Operator

Your next question comes from Josh Wilson from RBC. Please go ahead.

Ankit Shah, Vice President, Strategy and Business Development

Hey, Josh, you might be on mute.

Josh Wilson, Analyst

Sorry about that. For the upcoming optimized mine plan at Rainy River, you mentioned looking at opportunities for resource conversion. Are there any changes in sequencing that we should potentially expect, or is there any ability to maybe incorporate some upside more near-term rather than life extensions?

Renaud Adams, President and CEO

The purpose of this study really is to create a standalone underground mining plan, Josh, as we complete the stock buyout that is currently slated for 2028. This is a continuity plan because if you look at the current plan in the 43-101, we had already incorporated the top part of the center zone below the pit and the 43-101 together with the stockpile. The study is a continuity of the mining standalone, ensuring we keep mining deeper in the central zone, and all the resources are already in the reserves. Therefore, it is not so much about corporations at the early stage but rather about creating an extended life-of-mine beyond 2028.

Josh Wilson, Analyst

When the initial East Low issues came out, there was some discussion around potentially mining some of that material underground. Is that something which could still make sense, or could it be incorporated in this plan or is that not a priority right now?

Renaud Adams, President and CEO

It's not a priority right now. There isn't much of the East Low in the open left to complete in '22 or '23. As I previously mentioned, we continue to refine and optimize our plan as we have been heading towards '22, but at this stage, it's fair to say that it makes more sense to extract it via open pit while maintaining our underground plan as originally schemed.

Josh Wilson, Analyst

And last question, when you're looking at year-end reserves for Rainy, what sort of price assumptions are you expecting to incorporate, and how should we think about the impact of East Low, as well as any exploration efforts that materialized this past year?

Renaud Adams, President and CEO

We are looking at a price assumption of $1,400 for our reserves exercise this year-end. As for exploration at Rainy, it is still somewhat in the early stages, so we do not foresee an impact from the exploration program of '21. However, as we move into '22 and '23, we continue to remain hopeful for additional resources stemming from our exploration program, but that will not be the case for '21.

Josh Wilson, Analyst

Is it fair to assume some loss of ounces, just from depletion due to East Low?

Renaud Adams, President and CEO

Very honestly, Josh, this is exactly the assessment that is taking place. No, we are not mixing the open pit with the underground; it is a completely different mining approach. And as we focus on the remaining ounces from East Low, we are conducting further drilling and will be preparing for our 2022 guidance. However, I do not have all those answers as we speak.

Josh Wilson, Analyst

Okay. Those are all my questions. Thank you.

Renaud Adams, President and CEO

Thanks.

Operator, Operator

Thank you. Your next question comes from Dalton Barretto from Canaccord. Please go ahead.

Dalton Barretto, Analyst

Sorry. I think I was on mute again. Can you hear me? This should be a theme on this call. Good morning. Thank you for taking my question. My inquiry is also regarding East Low. I want to know if you understand exactly why you have a grade reconciliation issue at this point in time?

Renaud Adams, President and CEO

The only thing I can assert is that from the ventures that took place in Q3, it’s fair to say that you're never exactly right on the model reconciliation day-to-day, every hour. I can say that during Q3, the ventures that took place unfortunately saw a reconciliation compared to the resource models showing less tons and ounces. Why this occurred could be localized issues with the systems; sometimes, this occurs in specific areas. Globally, we've been performing extremely well over the last three years. However, with Q3, a significant portion of efforts focused on mining in that specific area. If most of your mine plan is from one area, a negative reconciliation will present as a sizable variance, of course. If it were more evenly distributed over the year, you would have more flexibilities. We really need to complete all this reverse circulation drilling to assess this on a broader basis. Sometimes, localized issues happen for periods, and things can switch. Our model has been effective globally, but unfortunately, that far east area did not perform well in terms of tons and grades. There's nothing specific more to say; we just need to drill underneath to assess the remaining ounces and compare it with the model. But it's a one resource model applied to every deposit, and sometimes there are positives and sometimes negatives. When your efforts are concentrated in one area during Q3, it highlights as a significant variance. But let's see what happens with the completion of reverse circulation drilling; I'd definitely be in a better position as we complete the year and move into '22.

Dalton Barretto, Analyst

Thanks for that. And then, from a bigger picture perspective, Renaud, I wanted to ask you about M&A. It's topical in the gold space right now. On the acquisition side, are you seeing anything in the vicinity of Rainy River that could potentially complement the underground once the open pit is done? And for part B regarding potential mergers, what would you look for in a partner?

Renaud Adams, President and CEO

Thanks for that very specific question on a Friday morning. Regarding the first point, we continuously assess opportunities within our operation's radius. Unfortunately, around Rainy, I would describe the resources available as not very advanced volume ounces or pipeline stories. However, within our land package, we see the most promising opportunity. In contrast, New Afton presents a different situation, with numerous opportunities and resources in the area surrounding the asset. I’d prefer to avoid specifics regarding potential mergers, but as we move forward, our focus is on delivering our plan. We see our cash balance continuing to improve, and we are well equipped to explore opportunities to grow for our shareholders as we advance.

Dalton Barretto, Analyst

Thanks, guys. All the best.

Renaud Adams, President and CEO

Thanks.

Operator, Operator

Thank you. Your next question comes from Mike Jolin from Bank of Montreal. Please go ahead.

Mike Jolin, Analyst

Good morning. Thank you for taking my questions. I'm drawn to Slide 13, your investment proposition, and I have a couple of questions. I noticed the 25% gold equivalent growth from 2020 to '26. By my math, that's about an average of 546,000 ounces for that period. Would that also be guidance for 2022?

Renaud Adams, President and CEO

No. We're not referring to that as guidance for 2022; this is really for the period leading up to '26. If you look at our production profile at Rainy, you'll see a gradual grade increase over the periods from '22 to '26, with the season coming into play. As we advance from this year into '22, we expect the first step-up increase at Rainy, and to continue increasing over the period leading up to '26, including the C-Zone in the mix. What we're looking at is growth beyond 25% at the current situation.

Mike Jolin, Analyst

So the lowest year will be '22, and the highest will be '26 within that five-year period?

Renaud Adams, President and CEO

Correct. The period from '24 to '26 will be very similar, though.

Mike Jolin, Analyst

I'm asking because '22 is an average, which is why I was asking.

Renaud Adams, President and CEO

Yes. We're very close to year-end, so we'll have a comprehensive guidance as we complete the underground study for Rainy River and enter the year, as well as complete our year-end mineral reserves and resources update. We will eventually provide a more specific detailed plan for the remaining life-of-mine.

Mike Jolin, Analyst

Going back to Dalton's question on foreign gold companies, I'm looking at slide 13. Are you considering Canadian companies? We should look at New Gold?

Renaud Adams, President and CEO

I appreciate your comment, as we are working hard to position this company for long-term success. We see a compelling profile down the road and, as we improve production, execute our capital projects, and focus on developing the C-Zone, this company could become a rare asset in the right jurisdiction.

Mike Jolin, Analyst

Definitely. All right. Well, thank you, and we at Bank of Montreal thank you very much.

Renaud Adams, President and CEO

Congratulations on your promotion.

Ankit Shah, Vice President, Strategy and Business Development

Thanks. Appreciate it.

Operator, Operator

Thank you. Your last question comes from John Tumazos from John Tumazos Very Independent Research. Please go ahead.

John Tumazos, Analyst

Good morning. How much of the full-year CapEx is the capitalized stripping account in dollars? Could you also discuss what normal CapEx might look like in the next several years?

Renaud Adams, President and CEO

I'd just like to ensure I understood your question regarding the stripping. If you could clarify the first portion?

John Tumazos, Analyst

How much of the CapEx is capitalized stripping in dollars?

Renaud Adams, President and CEO

In terms of Rainy, you'll see that from sustaining capital year-to-date, out of the $77 million, about a third of it is around capitalized items. I can confirm that a significant portion relates to the tailings — the sustaining tailings construction. The other part relates to our mobile maintenance and other factors. As we move forward, it's essential to highlight that by the end of '23, the majority of the stripping will be done. This amounts to about $29 million of capitalized mining costs out of the $77 million for the nine months. Moving forward, two things will happen: firstly, you will continue year-after-year until 2025 completing the raises at the tailings, like we did this year and will do next year, and by the end of 2025. Stripping will mainly be completed. That will contribute to a noticeable reduction in sustaining capital. As we reduce the pit's size and reduce equipment, you will also see significant reductions on mobile maintenance capital. We've seen this year about $100 million to $110 million; next year will mirror this year closely, as outlined in our plans. As you advance into '23 and '24, you will start seeing reductions in stripping and maintenance costs as we finish tailings by the end of 2025. This is a big contributor to the cost reductions, alongside increased production that could mean a significant margin improvement for us in the future.

John Tumazos, Analyst

Are there particular thresholds that investors should look at for New Gold to introduce a dividend? For example, a particular level of debt reduction or transitioning Rainy?

Renaud Adams, President and CEO

We will address that as we advance. I mean, we've received that question often. When you look at our presentation and free cash balance building, at current metal prices, you could foresee an excess of $1 billion of free cash flow generated over the next period from '20 to '26. We have the streams and also great cash position. We will build on this. It's vital that we remember the importance of growth within our company too. So right now, we are not ready to answer with details about how that cash balance will be allocated towards growth, repayments, dividends, etc. This is all to come. The focus is to deliver our plan, and we would see strategically how to best utilize our cash position.

John Tumazos, Analyst

Thank you very much.

Renaud Adams, President and CEO

Thank you.

Operator, Operator

There are no further questions at this time. You may please proceed.

Ankit Shah, Vice President, Strategy and Business Development

Great. Thank you so much. And thanks again to everyone for joining us this morning. As always, should you have any additional questions, please don't hesitate to reach out to us by phone or email. Have a great weekend.

Operator, Operator

Ladies and gentlemen, this concludes your conference call for today. We thank you very much for participating and ask that you please disconnect your lines.