New Gold Inc.
Q4 2014 Earnings Call Transcript

Published: 20 Feb 2015

[Operator:]

Good morning. My name is Sharon, and I will be your conference operator today. At this time, I would like to welcome everyone to the New Gold Year End 2014 Financial Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session [Operator Instructions] Thank you. Hannes Portmann, Vice President Corporate Development, you may begin your conference.

[Hannes Portmann:]

Thank you Sharon and good morning everyone. We appreciate you joining us today for the New Gold 2014 fourth quarter and full year earnings results conference call and webcast. On the line today we have Randall Oliphant, Executive Chairman of New Gold; Bob Gallagher, our President and CEO; Dave Schummer, our COO; and Brian Penny, our CFO will also be available during the Q&A period at the end of the call. Should you wish to follow along with the webcast, please sign-in from our Homepage at www.newgold.com. If you’re participating in the webcast, you can also type your questions through the interface. Before Mr. Oliphant provides us with an overview of the results, I would like to direct your attention to our cautionary language related to forward-looking statements found on Slide 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. Slide 3 provides additional information and should be reviewed. We also refer you to the section entitled the Risk Factors in New Gold’s latest MD&A and other filings available on SEDAR, which sets out certain material factors that could cause 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 Randall.

[Randall Oliphant:]

Thank you, Hannes. Good morning everyone and thank you for joining us today. As many of you are aware, on February 4, we announced our 2014 operational results, 2015 guidance, and provided updates on our portfolio of projects. As many of you spent two hours with us, a couple weeks ago, the focus of today’s conference call will be primarily on the financial results we released yesterday afternoon. As always Bob, Dave, Brian and I are available to answer any questions you may have. Slide 4 provides a few highlights. Over the course of 2014, we are very proud to have delivered the highest cash flow in our company’s history, a $310 million before working capital, $269 million after working capital adjustments. Our ability to generate record cash flow was underpinned by our operational performance. Our full-year production met our guidance range despite some operational challenges late in the year and our cost came in below guidance. We finished the year with $371 million of cash and further enhanced our financial flexibility by closing a $300 million credit facility in August of last year. Beyond our operational and financial results, we also made significant progress in all the projects. To highlight just a few, at New Afton, we are focused on two value enhancing initiatives. In the near-term, our mill expansion project remains on schedule for commissioning in mid-2015. Looking further ahead, we continue to grow the C-zone resource and completed a scoping study, which provides the framework of what New Afton’s mine life extension could look like. At Rainy River, we achieved a very significant milestone with the receipt of both the Provincial and Federal environmental assessment approvals. We look forward to commencing work at the site in the coming weeks. Slide 5 provides a summary of our quarterly and full-year financial results. Revenues in the fourth quarter remained in line with the prior year as consistent gold sales volumes and increased copper sales volumes largely offset the decrease in the prices of gold, copper and silver relative to the prior year quarter. For the full year, a 19% increase in copper production partially offset the combination of lower metal prices and of gold production, resulting in lower revenues. Our full-year operating margin remained over $300 million as lower revenues were partially offset by a $24 million decrease in operating expenses. Fourth quarter adjusted net earnings of $13 million, or $0.03 a share, led to full year adjusted earnings of $45 million, or $0.09 a share. Relative to 2013, 2014 adjusted net earnings were impacted by lower revenues. A $40 million increase in non-cash depreciation was partially offset by the combination of $24 million of lower operating cost and a $23 million reduction in administration, exploration and business development expenses. As disclosed on February 4, our preliminary review of the carrying value of our assets indicated the potential for an impairment. Upon completion of our evaluation, we have taken a $394 million after-tax impairment expense, $335 million of which is related to Blackwater. The impairment of Blackwater is due to the combination of lower metal prices and the extended development timeframe currently contemplated for the project. The balance of the impairment expense is related to our Cerro San Pedro mine, which is entering its final year of active mining. The difference between our 2014 adjusted net earnings and reported net loss was primarily driven by the impairment expense, as well as pretax foreign exchange loss of $48 million, a pretax non-cash charge to revenue related to the monetization of our legacy hedge position of $27 million and an inventory write-down at Cerro San Pedro of $11 million. As a result of our solid operating performance and despite lower metal prices, New Gold’s full-year cash flow before working capital of $310 million increased by $52 million, or 20%, relative to the adjusted cash flow before working capital in the previous year. For greater comparability, the 2013 cash flow was adjusted for three non-recurring items. These included a $66 million payment related to the monetization of the company’s legacy hedge position, $18 million in Rainy River related transaction expenses and a $7 million tax refund to Peak Mines. There were no adjustments for one-time items in 2014. Our 2014 net cash generated from operations increased by $97 million, or 56%, to $269 million despite the previous mentioned decrease in revenues. The increase in cash flow was driven by the combination of a net $77 million in one-time 2013 expenses, not happening in 2014, a $42 million decrease in cash taxes and the $23 million reduction in corporate, administration, exploration and business development costs. Slide 6 provides a summary of our cash flow generation over the past three years. We are proud to have delivered increased cash flow for our shareholders both on an absolute and per share basis despite the decrease in gold, copper, and silver prices. Our ability to generate higher cash flow over the last few years was underpinned by the successful development in the start of – start up of New Afton in mid 2012. As we are now set to advance in the development of Rainy River, we feel fortunate to be in a position to generate similar production and cash flow growth in the future. Slide 7 provides a summary of our operating results at each of our mines. The fourth quarter delivered the highest quarterly production of the year. As a result, our full year production achieved the low end of our guidance range despite challenges associated with the timing of placing ounces at Mesquite and unscheduled mill downtime at Peak. Importantly both our cash costs and our all-in sustaining cost beat guidance and we’re significantly lower than in 2013. New Afton and Peak both had strong years with production at the midpoint of their targeted ranges and costs below guidance. New Afton continues to be a standout in the portfolio. As shown in the lower half of the slide, New Afton is uniquely positioned with very low costs and very high margins weather as viewed on a byproduct or coproduct basis. Mesquite’s production was below target due to recoverable ounces being placed on the lease pads towards the end of the year. However, the mines costs were lower than guidance. And finally, Cerro San Pedro production came in at the low end of its range and costs were above guidance. This is due to increased reagent costs and the silver price realized being below the level set in our guidance for 2014. Slide 8 summarizes our 2015 guidance for production and costs. We are scheduled to deliver production increase in all three metals we produce with New Afton, Mesquite and Cerro San Pedro, all expected to contribute higher gold production. Importantly, our costs should also remain among the lowest in the industry. The slight expected increase in cash costs is driven by the combination of a lower copper price assumption relative to the price realized in 2014, which creates a difference of $60 an ounce and an increased percentage of our production coming from our higher cost mines. At the same time, our 2015 all-in sustaining costs are expected to be at or below 2014 levels as our aggregate spending on sustaining capital, exploration and administration are expected to be approximately $65 an ounce below that 2014. Slide 9 provides an overview of two value enhancing initiatives we have underway at New Afton. The near-term project is the mill expansion. It is now over 70% complete. Importantly, we remain on schedule for a mid 2015 commissioning and have the potential come in under the original $45 million capital budget. The expansion should enable us to produce approximately 10,000 more ounces of gold and 10 million more pounds of copper per year than our initial operating plan. This results in a short payback period and compelling economics. On February 4, we announced the results of our New Afton C-zone scoping study. The study outlined an opportunity to extend New Afton’s life by 5 years with an average annual production of over 100,000 ounces of gold and 75 million pounds of copper at costs similar to those being realized today. The development capital is estimated to be approximately $350 million resulting in base case economics of $138 million of NAV and an IRR of 13.5%. Our plan is to build from the scoping study towards the completion of the feasibility study in early 2016. As a scoping study incorporates only a subset of the measured and indicated resources and the C-zone remains open laterally to the west, we look forward to evaluating opportunities to include more resources in the C-zone economics as we progress the project. Rainy River located in Ontario is our key development project and Slide 10 provides a summary of its main strengths. Rainy River is a unique asset that combines a great location in Canada, a sizable gold reserve with 3.8 million ounces, manageable capital of about $800 million, robust annual production of 325,000 ounces, and well below industry average cost, and a long initial mine life of 14 years. Importantly, we view these attributes very much as a base case. As shown on the slide, we have an additional 2.7 million ounces of measured and indicated resources and inventory and 190 square kilometer land package to further explore. The value enhancing options at New Afton that I spoke about just a few minutes ago are evidence of the opportunity that can be surfaced as our mines move through development and into production. With our environmental assessment approvals now in hand, we look forward to beginning work at the site in the coming weeks. Slide 11 summarizes our portfolio of our organic growth initiatives. In addition to the three projects already discussed, we also have our Blackwater project in British Colombia, which is working through permitting in 2015, as well as our fully carried 30% interest in El Morro located in Chile. Similar to our Canadian projects, Blackwater’s development and operating costs benefit significantly from the depreciation of the Canadian dollar. However, based on today’s commodity price environment, the start up development at Blackwater is scheduled to commence after Rainy River is up and running. With annual production of 485,000 ounces, we feel very fortunate to have it in our pipeline. At El Morro, our partner Goldcorp is revisiting its engineering and planning concepts to look at alternatives to relocate certain infrastructure with the goal of both optimizing project economics and facilitating permitting. Together Blackwater and our 30% share of El Morro provides New Gold shareholders with an interest in over 10 million ounces of gold reserves, 61 million ounces of silver reserves, and 2 billion pounds of copper reserves. Slide 12 shows why we, as shareholders ourselves, are so excited about New Gold’s future. But the gold price over $1,200 an ounce and all-in sustaining costs of approximately $765 an ounce, we continue to generate a strong margin of about $450 per ounce, resulting in robust free cash flow from our operating mines. Fortunately, we are in the unique position of being able to reinvest this cash flow in a collection of longer-lived, larger scale and lower cost mines. It was the execution of the same strategy that's on Mesquite, Peak and Cerro San Pedro combined to help fund the development of New Afton, which is now our highest cash flow generating assets and longest lived operation. Looking forward, relative to our current operations, our development projects are expected to average more than twice the mine life, four times the annual production and with lower costs. Slide 13 highlights some of the key catalysts we have planned for this year. We started the year achieving a significant milestone with the approvals of Rainy River’s environmental assessment. This positions us to commence construction soon, which will be an exciting moment for both our company as well as the local communities. At the same time, the New Afton mill expansion remains on track. We look forward to a successful commissioning in the middle of this year. After completing our summer exploration programs, we anticipate providing an update on our progress. Then towards the end of 2015, the C-Zone permitting process is scheduled to start and Blackwater should have its key permits in place. Finally, in early 2016, we should be in a position to announce the results of the C-zone feasibility study. In closing, Slide 14 summarizes the five defining characteristics that form New Gold’s foundation. Our assets are all in countries with established mining histories. Our board and management team have both the breadth and the depth of experience to execute on our plans and importantly, are significantly invested in the future success of our business. Our low cost enable us to deliver strong cash flow even as metal prices moved lower. Our portfolio of organic growth assets includes projects at various stages of development, providing us with multiple options as we move forward. And finally, by reinvesting the free cash flow generated from our operations and longer lived, larger scale and lower cost assets, we are well positioned for the future to continue our history of creating value for our shareholders. Thank you again for joining us today and for your continued support of New Gold. That concludes our formal remarks. Now, we would be happy to answer any of your questions.

[Operator:]

And we have no further questions at this time. I turn the call over to the presenters.

[Randall Oliphant:]

Thank you, Operator. To all of you who have joined us today thank you very much. We look forward to working with all of you through 2015. As always, should you have any questions, please do not hesitate to reach out to any of us by telephone or e-mail. Thank you very much.

[Operator:]

This concludes today’s conference call. You may now disconnect.