New Gold Inc. (NGD)

[JohnCM]

I'll be darned. New Gold's earnings reflect lower GOLD price ...

Ben Kramer-Miller - SA
Gold & precious metals, macro, research analyst, deep value

Update: New Gold's Q3 Earnings Reflect Rising Costs, Lower Gold Price
Oct. 31, 2014 8:41 AM ET

"New Gold reported weak earnings that were hit by a higher-than-expected cost of production with lower gold prices.
I had anticipated a higher-than-expected production cost in my March article.

I remain on the sidelines, although New Gold is starting to become attractive.

New Gold (NYSEMKT:NGD) just reported its third-quarter earnings results. It reported gold production that was relatively flat given a sharp drop-off in the company's Cerro San Pedro Project, offset by slightly higher production at its other mines. In all, gold production fell 600 oz. to 93,400 for the quarter. The company's reported all-in sustaining costs (AISC) were $848/oz. vs. $779/oz. last year. The low cost is largely due to copper offsets at the company's largest producing asset - New Afton - which saw AISC at ($700)/oz. using this accounting trickery.

In all, however, the company's costs weren't so low, with earnings coming in at $5 million, and since the company realized just $1,239/oz., its total cost of production is closer to $1,185/oz. Investors should also note that New Gold's realized gold price was lower than several of its peers (e.g. Goldcorp (NYSE:GG) realized $1,266/oz. and Barrick Gold (NYSE:ABX) realized $1,285/oz.). Higher costs can be attributed to a large interest expense due to the company's $870 million debt load, weakness in the copper market, and forex-related losses (i.e. a weak CADUSD).

This fits with the thesis I put forth in March, which is that New Gold unreasonably advertises itself to investors as a low-cost producer, when in fact, it isn't. From high interest expenses to high taxes, investors need to be wary of the headline AISC number when it comes to any gold mining company, but New Gold is one of the worst offenders on this front.

I remain on the sidelines for now, as I see potential for this to be a growth company should the gold price rise, but it has too much debt and its development projects are too big to be taken seriously with the gold price at $1,200/oz."