New Gold Inc. (NGD)

[Tommy]

$NGD - New Gold's Cash Costs Are Lower Than Ever

http://seekingalpha.com/article/1783122-new-golds-cash-costs-are-lower-than-ever?source=email_rt_article_readmore

Introduction

New Gold (NGD) has just released its quarterly results, and I'm keen to see if the company still is one of the lowest cost producers in the Americas. I'll provide my view on the Q3 financial results and the updated balance sheet, and I will also give my opinion about the outlook of the company for the foreseeable future.

My view on the financial results

First of all, investors might be disappointed by the lower than expected production results, as New Gold produced just 94,000 ounces in the third quarter of this year, compared with almost 105,000 ounces of gold in the same period of last year. Even though the New Afton mine recorded an increased output of 25,000 ounces for the quarter, this was not good enough to compensate for the much lower gold production at the company's Cerro San Pedro and Mesquite mines which saw a 33% output reduction. The lower output of these mines also had a huge impact on the total cash cost of the company, as especially Cerro San Pedro saw its all-in sustainable cash cost rise threefold to $723/oz. The decrease in output -- and corresponding raise in AISC -- was caused by a lower amount of ore (caused by a pit wall slide) on the leach pads and a lower-than-expected recovery rate. Fortunately the low-cost New Afton project (which had a negative cash cost in the quarter) was able to offset those higher costs, so New Gold's overall average AISC came in at a very respectable $779/oz.

Moving on to more numbers, New Gold reported a revenue of $196M and earnings from mining operations totaled $51M, which isn't bad considering the 13% lower gold price compared to the same quarter as last year. This led to $20M of adjusted net earnings in Q3 or $0.04/share. This might sound very low, but as I explained in other articles, it's more important to look at the cash flow statements to see the real impact of the operating results.

In the cash flow statements, we see that NGD generated almost $48M in pre-tax cash flow from its operations, which isn't bad at all, and corresponds to an operating margin of almost $500 per produced ounce of gold. Unfortunately (well, actually, fortunately in the long term) the company saw a net cash outflow of $170M, as it invested in its properties and had to cough up $107M for the acquisition of Rainy River Resources.

I'm relatively happy with New Gold's quarterly results, as the New Afton mine is delivering on its promises and seems to be NGD's new cash cow, as the mine is producing at a negative All-In Sustaining Cost, which is unheard of in the sector and truly remarkable. I was a bit disappointed with the Mesquite output, but I trust the company's management team when it says that Q4 will be the best quarter for Mesquite.

My view on the balance sheet

As of the end of September, the company had a working capital position of $564M and an extremely impressive current ratio of in excess of 6 (keep in mind a ratio higher than 1 means the company has sufficient current assets to cover its current liabilities.)

The current book value of the company is $5.89/share, so at this moment New Gold is trading just a little bit higher (6%) than its book value.

I think New Gold has one of the best balance sheets in the sector, as the company has always made sure its balance sheet isn't constrained so it can take advantage of possible opportunities in the sector.

My view on the outlook

I'm a bit disappointed with the production results at Cerro San Pedro and Mesquite, but I'm hopeful especially Mesquite will show a big improvement in the fourth quarter, as New Gold says this quarter should be Mesquite's strongest quarter of the year. If New Gold is correct, this means that Mesquite will produce in excess of 25,800 ounces of gold this quarter, which will have a positive impact on the Q4 financials. Assuming a production of 26,000 ounces, I expect an increase of $2-3 million in operational cash flow coming from this project.

New Gold is guiding for a total production of 390-400,000 ounces of gold this year, but has not provided an expected output for 2014 yet, but I'm hoping it will be north of 450,000 ounces of gold at an AISC of $875 per ounce.

Investment thesis

This was another very decent quarter for New Gold, considering the operational problems at Cerro San Pedro and the disappointing production at Mesquite. This caused NGD to lower the production guidance for 2013, but I expect the guidance for 2014 to be 10-15% higher than this year's output.

New Gold still is a very low-cost gold producer, as its Q3 AISC is approximately 20-25% lower than what we may expect from Barrick Gold (ABX) which is guiding for an AISC of $950-1050 for this year.

An interesting possibility to get exposure to New Gold might be by writing put options. I'm particularly looking at the P6 January 2014 for $0.40 and a P5 May 2014 also at $0.40.

Additional disclosure: I currently have no position in New Gold, but might write put options as explained in the article.