New Gold (NGD) Q2 2024 Earnings Call Transcript

adminJuly 31, 2024

NGD earnings call for the period ending June 30, 2024.

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New Gold (NGD 14.08%)
Q2 2024 Earnings Call
Jul 31, 2024, 8:30 a.m. ET

Prepared Remarks:

Operator

Good morning. My name is Ludy, and I will be your conference operator today. Welcome to the New Gold’s second quarter 2024 earnings conference call. (Operator instructions) I would now like to hand the conference over to Ankit Shah, executive vice president of strategy and business development.

Please go ahead.

Ankit Shah — Executive Vice President, Strategy and Business Development

Thank you, Ludy, and good morning, everyone. We appreciate you joining us today for New Gold’s second quarter 2024 earnings conference call and Webcast. On the line today, we have Patrick Godin, president and CEO; and Keith Murphy, our CFO. In addition, we also have Luke Buchanan, vice president technical services; and Jean-François Ravenelle, vice president geology available for the question-and-answer portion of the call.

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 Slide 2 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. Slide 2 provides additional information and should be reviewed. We also refer you to the section entitled Risk Factors in New Gold’s latest AIF, 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 Pat for opening remarks.

Pat Godin — President and Chief Executive Officer

Thanks, Ankit. Before discussing the quarter, I would like to take a moment to discuss last week’s events when we experienced a fatality at the Rainy River mining. More specifically, we lost the colleague. Our thoughts continue to be with his family and friends.

Every quarterly call, I’ll start by talking about safety. I’ll talk about our Courage to Care culture. I do this because I believe that the key to consistent and disciplined production starts with safe production. It starts with the Courage to Care for our colleagues.

Looking out for one another, stopping work if it’s not safe, and answering everyone goes on to their family and friends safely at the end of every shift. I’ve been proud of the health and safety performance by our operations and by the commitment of all employees. We have been able to celebrate the awards and milestone together, but in the instance, we more together with the family, friends and colleagues who have been impacted by this tragic incident. I will now talk about our second quarter.

The second quarter’s New Gold delivered another quarter as planned. During the quarter, our New Afton Mine won two separate award for having the lowest total recordable injury frequency rate in 2023. The first being the safest large underground mine in BC presented by the BC Ministry of Energy Mines and Low Carbon Innovation; and the second being the John T Ryan Regional Safety Award in Mines in BC and Yukon presented by the Canadian Institute of Mining. I am pleased to take a moment to recognize their accomplishments.

Operationally, we delivered on the quarterly plan with a strong adherence to our operational outlook release from February. New Afton delivered strong quarterly production result at low cost. Rainy River made excellent progress on the planned waste stripping program, and the open pit is well positioned to deliver on our increasing production profile for the second half of the year. On our first quarter call, I know that we were one quarter away from securing the increase in production and cash flow expected in the second half of the year.

I am pleased to say that only we entered that period when we do so having finished the first half of the year with free cash flow positive. And with the company exiting the first half of 2024, free cash flow positive, I am pleased to see that New Gold has now entered a sustained free cash flow generation period. We also made excellent progress on key growth projects. Importantly, all key growth projects remain on track for completion in the second half of the year.

We made significant progress with our exploration efforts at both operations during the second quarter. At New Afton, the company provided a positive exploration update on K-Zone. The team there also completed the exploration drift early in the quarter and immediately began advancing priority near mine targets. At Rainy River exploration drilling continues to make meaningful progress from both surface and underground.

Through the first half of 2024, the company has drilled approximately 20,000 meters at Rainy River, testing various high priority targets. We are anticipating providing an exploration update later in the third quarter. The company also achieved a number of corporate milestones in the quarter. We announced the publication of our 2023 ESG report, something the company has published annually since 2015 as well as our 2023 task force on climate-related financial disclosure report.

All reports are available on website. As a last point, I’m extremely pleased to underline that we successfully delivered an accretive transaction for our shareholders by increasing our free cash flow interest in New Afton to 80.1%. To sum up the second quarter and the first half of the year met expectations and the company is well positioned to deliver on guidance and sustaining free cash flow generation going forward. With that, I will turn the call over to Keith. Keith?

Keith Murphy — Chief Financial Officer

Thank you, Pat. I’m on Slide 6, which has our operating highlights. Q2 was another solid quarter, produced approximately 69,000 gold ounces and 13.6 million pounds up. Rainy River produced approximately 50,300 gold ounces as planned while advancing waste stripper.

New Afton produced approximately 18,300 gold ounces and 13.6 million pounds of copper. This represented a 10% increase in gold and 13% increase in copper production compared to Q2 2023 as C-zone ore processing is ramping up. Consolidated all-in sustaining costs for the quarter were $1,381 per gold ounce on a byproduct basis, in line with plan. We expect costs to trend lower in the second half of the year.

At New Afton, all-in sustaining costs for the quarter of negative $433 per gold ounce was significantly lower than the prior-year period due to the increased copper production and sales. At Rainy River, costs were higher compared to Q2 2023 were in line with plan and are expected to trend lower in the second half as production increases. Turning to our financial results on Slide 7. Second quarter revenue was approximately $218 million.

Q2 revenue was higher than the prior-year quarter, primarily due to higher metal prices and higher copper production, partially offset by lower planned gold production. Cash generated from operations before working capital adjustments was $90 million or $0.14 per share for the quarter. This is higher than the prior-year period primarily due to higher revenues and positive working capital adjustments. Company recorded net earnings of approximately $52 million or $0.07 per share during Q2.

The increase is primarily due to additional revenues resulting in higher metal prices and a net gain on the derecognition of the New Afton free cash flow obligation. In connection with the amended Ontario Teachers’ agreement, the liability related to the original agreement that was recorded at fair value was extinguished. The updated agreement did not constitute a financial liability for accounting purposes and was accounted for as a partial disposition of mining interest. The net impact of this was a $42 million.

After adjusting for certain other charges, net earnings was $17 million or $0.02 per share compared to adjusted net earnings of $12 million in the second quarter of 2023. Our Q2 adjusted earnings include adjustments related to other gains and losses. Our total capital expenditures for the quarter were approximately $72 million, with $32 million spent on sustaining capital and $41 million on growth capital. At Rainy River, total capital increased over the prior-year period due to higher growth capital spend.

Sustaining capital is primarily related to capitalized waste, capital components, tailings management and construction. Sustaining capital is trending lower as a proportion of waste tons are capitalized and a higher proportion remain remains an operating cost with no net impact on ASIC. Growth capital is related to underground development as the underground main continues to advance. At New Afton, total capital decreased over the prior-year period due to both lower growth and sustaining capital spend.

Sustaining capital is primarily related to tailings management and stabilization activities. Growth capital is primarily related to the C-Zone underground development. At the end of Q2, we had cash on hand of $184 million, with a liquidity position of $461 million. This is after increasing new goals effective free cash flow interest in New Afton to 80.1% for an upfront cash payment of $255 million, financed with $100 million from our existing revolving credit facility and net proceeds from a concurrent equity financing.

We anticipate repaying the credit facility with free cash flow generated in the second half of 2024. Sum up, we remain in a very healthy financial position, all while continuing to invest in growth projects. As we successfully executed on half 1 objectives, we have entered the sustaining period of free cash flow generation, and we are well positioned to leverage the higher metal price environment. Now I’ll turn the call back to Pat to walk through our operating highlights.

Pat Godin — President and Chief Executive Officer

Thanks, Keith. Starting with Rainy River on Slide 9. Rainy River continues to perform well, achieving another quarter in line with our plan. On the mining front, waste stripping was the focus during the quarter and increased as planned from Q1.

I’m pleased to mention that the open pit is in an excellent position as we start the second half of the year. Waste stripping is expected to decline to the remainder of the year as we access greater quantities of high-grade ore. In the underground mine, extraction from the Intrepid zones continued as planned and the development to main zone is schedule for first ore from development in the second half of 2024. The mill performed very well, progressing over 26,000 tons per day, a 12% increase compared to the Q2 of last year.

We continue to operate above the guide mill throughput rate of 24,700 tons per day. The right side of this slide outlines our 2024 outlook as presented in February and the previously guide split between the first and the second half of the year. This information is still valid six months into the year and well positioned to meet our guidance production and cost objectives for 2024. We remain on track for second half production, representing approximately 60% of our annual production, mostly due to the open pit mining sequence.

We will continue to reclaim some lower-grade stockpile in Q3, while we release higher-grade ore in the open pit for later in the year. The strip ratio is to decrease in the second half of the year as planned, which result in higher operating costs and lower sustaining capital. However, no net impact on ASIC, which will trend lower in the second half of the year with the higher gold production. Lateral development meters in the underground mine will continue to ramp up through the year as we access additional underground mining zone and more addings become available.

Slide 10 outlines progress we have made underground. The underground main zone remains on track for first ore from development in the second half of 2024. As previously mentioned, the priority for 2024 is to establish a primary ventilation circuit and access multiple mining zones. These two events will be key to ramping up mining rate to 5,500 tons per day by 2027.

The team at Rainy River did an excellent job advancing underground lateral development. Underground development continues to increase quarter over quarter, and I expect this trend to continue into Q3 and Q4 as additional headings open and initial underground mining equipment is delivered. The raise-boring of a 5-meter diameter, 420-meter long fresh air raise has commenced in the second quarter. At the end of Q2, both the ODM East ventilation loop and the fresh air raise were approximately 50% complete, in-line with the plan.

In addition, I am pleased to report that the construction of the in-pit portal offering a second means of egress and decrease waste all-in distance will commence in a few days early August. Turning now to New Afton on Slide 11. New Afton delivered to plan. B3 continued to deliver above 8,300 tons per day and the seasonal ramp-up has been going to plan, leading to a 34% increase in ton milled and a corresponding increase in gold and copper production compared to Q2 last year.

The increased copper production is the primary driver of the reduced all-in sustaining costs compared to the prior-year period. Looking now at the information on the right side of the slide. Similar to Rainy River, the first half delivered according to plan, and we are trending in line with the annual plan. We continue to transition from the B3 cave to C-zone and expect to see a continued ramp-up in C-zone mining rates throughout the year.

We continue to expect the higher mill throughput in the second half to be partially offset by the lower feed grade due to the cave draw sequence, leading to a fairly consistent quarterly gold and copper production profile as planned. C-zone progress is shown on Slide 12. Commissioning of the gyratory crusher and conveyor system is on track for the second half of this year. This will eliminate hauling requirement and impact positively on costs going forward.

We are on schedule to complete the C-zone construction phase this year, which include the C-zone cave reaching hydraulic radius and commissioning of the gyratory crusher and conveying systems. Lateral development continued to advance on plan with over 80% of the development meters now complete. I’m really pleased with the progress the team has made and C-zone development is no longer a critical path item for C-zone commissioning. These two milestones will be transformative for New Afton, increasing production and decreasing costs to generate meaningful cash flow.

Just to sum up, operationally, we delivered a first half as planned. We will continue to deliver on our stated strategic goals. For 2024, this includes delivering on production and cost guidance. We have now delivered eight consecutive quarters to plan.

As I’ve said before, safe production, technical excellence and operational discipline or new goals keys to enter in consistent quarter-over-quarter results. Exploration continues to advance at both sides, and we’ll share those results with you in the coming months. We continue to focus on both extending our mine lives and identifying new prospective targets to achieve our strategic objective of a sustainable production platform of approximately 600,000 gold equivalent ounces per year. We delivered an accretive transaction for our shareholders by increasing our free cash flow interest in New Afton to 80.1%.

At New Afton, we will achieve commercial production at C-zone and commission the crusher and conveyor. At Rainy River, we will establish a ventilation system and the second mean of egress while continuing preparing the mining inventory leading us to first ore from main zone development this year. We exit the first half of the year free cash flow positive with the free cash flow inflection point behind us. We have now entered a sustained cash generation period.

This continues to be a transformative year for our company and our shareholders, and we look forward to providing more positive updates on our third quarter call later this fall. This completes our presentation. I will now turn it back to the operator for the Q&A portion of the call.

Questions & Answers:

Operator

(Operator instructions) Your first question comes from the line of Eric Winmill with Scotiabank. Please go ahead.

Eric Winmill — Scotiabank — Analyst

Hi, Patrick and team. Appreciate you taking my question. Maybe just a quick question here on New Afton. The mining cost per ton was down over Q1.

Any additional commentary there in terms of onetime items that might have caused that? Or how are you thinking about the mining costs here throughout the year? Obviously, should sort of stabilize these lower levels as the cave ramps up?

Keith Murphy — Chief Financial Officer

Yeah. It’s Keith. Yeah, as we continue to increase the throughput at New Afton with D and C-zone or coming online, we will decrease our cost per ton. And have a lot of fixed costs at New Afton and we’re well leveraged to that increase throughput.

So yes, as we continue to increase throughput, that cost per ton will continue to go down.

Eric Winmill — Scotiabank — Analyst

OK. Great. And just turning to Rainy River for a moment. Obviously, in the shutdown last week, my condolences on the fatality there.

Any sort of broader read-throughs we should think in terms of pit stability or any other issues in the open pit at Rainy?

Pat Godin — President and Chief Executive Officer

Yes. Thank you for your question. So yes, it was not an easy week for all of us. And it’s nothing compared to the family, but this remains an ongoing investigation and in respect of the process, again — I will not go into the specific detail of the incident.

So what I can confirm to you, however, is that — it’s not related to pit slope, it was isolated incident with a piece of equipment. So it was an equipment that was loading a truck. So we have no stability concern, no technical issues or nothing regarding the infrastructure of the pit or whatever. So it’s — if I can ring sense the incident, it’s related to the operation of an equipment.

Eric Winmill — Scotiabank — Analyst

All right. Thank you very much for that. I know not an easy situation. And then so obviously, sort of a week of downtime, is that what we should expect here? And I guess, the operations have resumed more or less?

Pat Godin — President and Chief Executive Officer

Yes. But we — first, we started the operation when the incident happened in the morning of last Wednesday. And we start on Saturday. So basically, we stop mostly over three days.

And we — so when we ramp up after that as smoothly on Saturday, the operation. So — but we are on track to deliver guidance. So it’s mostly three, four days, it’s the range that we can absorb and to deliver our — in the range of our guidance for 2024. So we’re not impacted for this, just we took the appropriate time to do the first, I would say, the — to gather the data for the investigation.

And it would be — so we are always doing an investigation within something like this. So no matter the incident that we are facing and after that we’re doing none of this. So it was important for us to gather all the data. We collaborate with the minister of mine, the chief inspector, and also we are doing the investigation in partnership with our employees and of our team.

So in the time to gather all this to sort it out and to care for the family, and to care also to restart the operation with our people. So we mostly lost three days, but I’m not seeing that as a loss. I’m saying that as a care for my colleague.

Eric Winmill — Scotiabank — Analyst

Absolutely. No, I really appreciate the added commentary. Thank you very much. I’ll hop back in the queue.

Operator

And your next question comes from the line of Anita Soni with CIBC World Markets. Please go ahead.

Anita Soni — Analyst

So firstly, my condolences on the loss of life at New Afton — sorry, at Rainy River. And then my question, I’ll start with the capex at New Afton. It seems that you’re a little under spending there relative to the guide. Is that as a result of cost savings or are you just a little bit behind on the spend? Will that catch up in the back half of the year? I think the guide was more like $130 million to $145 million for growth capital and you guys are kind of averaging more sub $120 million so far?

Pat Godin — President and Chief Executive Officer

It’s mainly related to two — good morning, Anita. It’s mainly related to two items. So the first item is we have a bit of, I would say, offset the quarter to quarter for the delivery of the equipment for the extraction zone and the rehandling of the crushers. So — but it’s not having an impact on our operation as we are using the previous equipment actually, so equipment delivery.

And the other item is it because we are really proud of the fact that the Yohann with the team here are working really hard to optimize net asset value. So we invest a lot of time and effort to optimize the developments. We are performing better on development. And we delayed some openings to next year, so a slight adjustment because it’s only the — it’s good management in the planning of the development on a timely manner, reduce the number of contractors and decreasing our costs and improving our productivity.

So that’s mainly the two reasons why we are on a construction point of view and a capex point of view, we slightly delayed, but we will have to spend this money in a timely matter just from a quarter to a quarter on quarter, but it’s not an extra expense. It’s just — it’s not an underperformance. It’s a great performance.

Anita Soni — Analyst

OK. So a little bit of better unit cost optimization a little bit of deferral and a little bit of catch-up spend in the back half. Is that…

Pat Godin — President and Chief Executive Officer

Yes.

Anita Soni — Analyst

OK. All right. And then that actually leads me to my next question. Both of the — both New Afton and Rainy River outperformed not just on the mining cost but on all of the unit cost.

Is that — was that something that was just a onetime thing? Or is that better — good optimization on behalf of Yohann and his team?

Pat Godin — President and Chief Executive Officer

Yeah. I think first, I can say to you that we are — because Yohann actually is at Rainy River. This is why I’m taking his part of the call, he’s taking care of our colleagues there. But he is really proud of this achievement that Rainy River because on a total cost point of view, we mine more tons for less money.

So we are at a point that we optimize the open pit. We fully maximize the fact that we are not using the waste dump anymore because we are doing inter-dumping for the waste, reduce all the distance, optimize the drilling in the blasting. So we have a new mine manager in place that is improving — he is a big — he’s a part with his team — is a big part of the success, too. It’s a team work, but we improved drastically the productivity in the pit.

So we mine more tons for less money. So we are really pleased by this. Really pleased. And for Rainy River — for New Afton, as I said to you, we managed really well our performance.

And so we are pushing really hard to deliver our crushing and material ending in advance. So we are in advance actually on the schedule. And the day that we will start it up, it will reduce our opex because we eliminate all the trucking because we’re trucking up all the material from C-zone to the mineral sizer. So we’ll not have to do that anymore.

So in terms of manpower, fuel, operational equipment, maintenance of the equipment, it will be an immediate gain for us.

Anita Soni — Analyst

All right. And that’s it for my questions. Congratulations on achieving a positive free cash flow. I’ll get back in the queue.

Thank you.

Pat Godin — President and Chief Executive Officer

Thank you.

Operator

And your next question comes from the line of Jeremy Hoy with Canaccord. Please go ahead.

Jeremy Hoy — Canaccord Genuity — Analyst

Hi, Pat and team. Thanks for taking my question. Condolences for you colleague at Rainy River. I think I’ll touch on the ramp-up at New Afton.

When we were there back in May, the progress of the project was going quite well. I think you had four drawbells completed, and we’re looking to complete them at a rate of about four per month. So with hydraulic radius being 18, we’re looking at achieving that potentially August or September, I believe. Could you guys give a bit more detail on when you expect to achieve it because things seem to be moving at quite a good pace.

Pat Godin — President and Chief Executive Officer

Yeah. So for the hydraulic radius, it’s actually on — because we have experience with blockade, it’s — if you look at the fourth one. In theory, we need to achieve — to have 18 drawbells development and function to reach the hydraulic radius. And actually, we’re trending for the beginning of Q4.

So we’re doing well on that. We’re still trending to have three drawbells for year-end. And so as we discussed, and we are in plan. So we’re trending — it can start the case by itself with 17.

It can start with 21. So it’s not an exact science, but actually, we’re trending for the beginning of Q4. So really pleased by this because — and also for the conveyor system and the crusher. So I think that we present some — a picture of the ore fixing the bottom part of the gyratory crusher.

It’s a picture of that. So actually, it’s metal and spider are probably in place. So it’s worth looking more. So we’re mostly — instead to look at the end of Q4, we’re looking middle Q4, so it’s excellent for us, doing well.

Jeremy Hoy — Canaccord Genuity — Analyst

OK. That’s great to hear. And my next question was going to be on the conveyor and the crusher. So I appreciate the detail there as well.

That’s it for me. Thank you very much.

Pat Godin — President and Chief Executive Officer

So we are installing the last build this week. So basically, the airplane is in place under the BIM. So I think it’s — we will probably sort it out in shortly. So the next item on term of infrastructure and — the construction of infrastructure will be the crusher.

So this will be the focus from the following weeks up to the end in November. So we are really well positioned. The guys did a good job. They did also a safe job.

So I was there with them on Sunday and nothing to add to you. It’s perfect.

Jeremy Hoy — Canaccord Genuity — Analyst

Great. Thanks for the additional color.

Operator

And your next question comes from the line of Mike Parkin with National Bank. Please go ahead.

Mike Parkin — National Bank Financial — Analyst

Hi, guys. All my questions have been answered. So thank you.

Pat Godin — President and Chief Executive Officer

Thank you, Mike.

Keith Murphy — Chief Financial Officer

Thanks, Mike.

Operator

And there are no further questions at this time. I’d like to turn it back to Ankit Shah for closing remarks.

Ankit Shah — Executive Vice President, Strategy and Business Development

Thank you, Ludy. And to everyone who joined us today, thanks again. As always, should you have any additional questions, please do not hesitate to reach out to us by phone or email. Have a great rest of your summer.

Operator

(Operator signoff)

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