New Gold Inc. (NGD) Earnings Call Transcript & Summary

Oh, good afternoon or good morning or good evening, wherever our listeners are on this virtual conference. It's Mike Jalonen from Bank of America Securities with our latest company, New Gold. We have Renaud Adams, President and CEO, here. And it's going to be a fireside chat. Renaud has slides uploaded to the site for those who wish to take a review of them. But this will be an entire fireside chat. I will ask questions and certainly I encourage questions from the audience.

I'll start off by, Renaud, again, thank you and New Gold for attending and in this different type of format. But my first question is, on the Q1 call you noted that after 18 months of hard work by yourself and your management team, New Gold has repositioned to succeed going forward. So what steps did you and your management team take to get to this successful position? And what's left to complete the repositioning? Thank you.

Thank you very much, and thank everyone for listening. And I think our approach has always been like a phased approach. Before we would look at too much down the road and when we started to turn around, mostly at Rainy River, at the end of 2018, we looked at the business as, okay, let's reset the button here. Let's stabilize the asset. Let's making sure we meet the design criteria at the mill. Let's prove the capacity. Let's fully understand the impact of the geotechnical complexity due to the [ tail horizon,] the 30, 40 meters. Let's adjust properly capital and costs as we see it, then looking and building a new plan that would really trigger profitability. And that's what we did as a Phase 1 at Rainy River. And by the end of 2019 we had positioned the asset perfectly aligned to turn the corner in 2020, looking at the gold price of $1,300, and turning the assets as a free cash flow entering 2021 with no hedging and fully exposed to higher gold price and very confident that the asset will be a very interesting free cash flow asset for us. At New Afton, it wasn't so much about stabilizing the asset, the New Afton, them delivering systematically for the last 7, 8 years. It was about protecting the future and making sure we put a sound plan out there that would allow us to put in place the $500 million of capital execution for the C-zone, the next block cave located below the current one, and making sure we could do so in what I call self-funded, where you can even generate some free cash flow at the higher gold price exposure. And the starting point was to create a liquidity of $400 million back in 2018. And we did so, mostly by divesting the Mesquite Mine in the United States and we created a $400 million liquidity so we could properly inject the amount of capital at Rainy River to really reposition the asset. We were very pleased that at the end of the year of 2019 we were still sitting on a $400 million liquidity. And then, with a better view on our future, and a positive view on our future, came the need to, okay, how do we really address the balance sheet of the company, which ended with the very interesting deal we made with the Ontario Teachers bringing $300 million. Currently, as of the end of Q1, we have secured now $600 million liquidity, of $400 million in cash, well positioned to address our balance sheet and really deleverage our situation there. So I feel that 2020 is definitely the last year of any -- of repositioning. And, again, very excited with turning the corner later this year, making the asset a free cash flow when entering 2021, free of hedging and fully exposed. So that's been just like a very disciplined, phased approach where stabilization, creating new plans and de-risking the balance sheet. And we've been executing on every single step.

Well, thank you for that overview. Maybe going to New Afton, not too often when you see companies sell a part of their core operations. I know it was for balance sheet repair. You addressed your balance sheet. But maybe you can go over more of the rationale for the transaction. And I guess you have the buyback option of 4 years, I believe. So just wondering how that looks for you.

Well, we're looking at this transaction in a different way, Mike, to be very frank. I mean, for us to have the opportunity -- when you look at our new plant and you're looking at the cash flow that we'll be generating out of New Afton in '28 -- '25, '30 -- 2025, 2030, you're looking at the cash flow that will be generated as well at the Rainy River. So we were in a situation where -- it has never been a question is about can we generate enough cash flow to address our balance sheet, the debt situation. It was a timing event. The debt was [ as of ] '22 and then '20 and 2025, while most of the cash flow were coming post-'25. So really this deal, what was doing is to just fast track, fast forward a portion of that cash flow up front and use it to de-risk our balance sheet. But it's really what we did. The second is, we're a gold company with copper byproduct. The copper has done extremely well for us. But we haven't changed our view. I was always very vocal that from the start of when we joined the company, this new management, we were always very positive that the copper side of the business could on its own address the balance sheet. But not to the point, of course, you would divest the asset, but you would use, strategically use, the cash flow out of the copper to fix your balance sheet and not impact, if you will, your gold exposure to the future. And this is really the way we've looked at that deal. And we were very pleased. And because the asset was not really going to be a cash contributor to the company [ until ] 2024, very low net free cash flow impact for us over the next 4 years, but with the ability to reduce our debt and the interest fees and so forth, we really see that this deal really for the next 4 years does not cost money. We have not reduced our -- significantly reduce, if you will -- the gold exposure to this company looking forward. And, again, we look at it as we've used mostly the copper side of our business to fix our balance sheet.

That makes certainly a lot of sense. And there's a buyback, right, I believe in 4 years?

This is correct. We have the option to buy back. Too early stage, as you can imagine, but we are very pleased with that optionality that we have on this deal. And there will be a lot of effort deployed over the next year as well in terms of drilling next door. The exploration concessions out of the main mining right are not within that deal, as we speak. So we have still the flexibility, the opportunity, to continue to grow potentially our resource base. Next door we're going to be also looking at organic growth within the mining package on the ground there, the SLC Zone, the potential expansion and so forth. So it's all about execution in the next 4 years, but also some strategic drilling and to be in better position, as we advance toward '24, to make a very sound and strategic decision about the future.

And most CEOs, just about all of them are being -- discussing how they've been dealing with COVID impacts at their operations, with their employees and surrounding community. So just maybe give a brief overview how it's going with New Gold. And Rainy River is back up and running, so that's great to see. So just want to hear your thoughts.

Yes. Let me tell you that we're extremely pleased with how we've been -- the overall outcome so far, understanding the dynamic of operating Rainy River in Northwest Ontario and our obligation and working closely with our indigenous communities around Rainy River, making a step-by-step approach, putting health and safety and environmental protection in the community first. We did take a 2-week suspension as a result of the closure of the border, understanding that our mine is pretty much on the riverside, separating with the U.S., so we provided with proper quarantine and so forth. But since April 3rd, we've been ramping up nicely. Equally important, very important here to understand that ramping up, yes, you have the operating side, but you also have all those very important capital execution, starting in spring, to secure the integrity of the asset when it comes to the tailings capacity, water management and the wick drains to stabilize and complete the sterilization of the east waste dump as well. So as we were ramping up, started with our local workforce, nearly 70%, and then slowly incorporating others that we call, are not from the local area but we could drive in, avoiding airports and so forth. We've done that. And then look aside and said, okay, now let's secure as well capital execution. We've been doing this over the last couple of weeks and mobilizing the contractors for the execution of the tailing, wick drains and so forth. So we're advancing well, always of course with strong safety protocol. And now we're going to be turning back at some point in Q2 and say, okay now, our capital are ongoing. The mine is ramping up, so let's look at now how do we -- we can bring the remaining of our employees, understanding that some key operators and the bits for drills and then loading unit and some specialized maintenance as well, we'll have to incorporate if we want to -- and as we ramp up to the max. So our objective really is to be in a position later this quarter to be called for all the capital projects are ongoing and we're ramping up towards our full capacity. Meanwhile, the mill has been operating at its full capacity using, yes, a little more low-grade, mid-grade stockpile. But the Q2 in a way was not a quarter of high grade; it was a quarter of advancing the stripping and mining and sending to the mill some mid-grade -- a larger portion of the medium grade. So on that aspect it's not significantly different now what the mill is processing. And, again, now that we have significantly advanced in de-risking capital execution, we're turning back now. It's really just a mine component, really, we need to ramp up here, because all the other components are pretty much up to speed now. New Afton was never really impacted. But we've put, like in the other places, very strong and numerous safety protocols in place. There was some need to adjust some loss of productivities as we have more strict safety protocol and we've been working a lot on improving the cycles and the development and so forth. So as a result, I would say very, very minimum, our COVID impact at the New Afton mine. And just like Rainy River, we've been busy as well to ramp up as well all capital execution capacity as we would start the civil work around the [indiscernible] project and raising the dam and the tailing as well at New Afton. So I'm very, very confident that, as we advance into Q2 we would have mitigated as much, if not all.

Another question has come up that CEOs have discussed at this conference, is the capital allocation question. I think you've kind of answered parts of it, with the debt repayment. On the second -- first quarter call I remember you mentioning that New Gold as a company could be free cash flow positive by the fourth quarter, for sure 2021. So was wondering. Where do you want to allocate that free cash flow?

Well, that would be, first of all, first in a few years. Right? I mean, we're going to be very disciplined when it comes to how we're going to allocate this cash flow. We will restructure our debt. But we would have some -- even though we're going to pay down some debt, we're still going to have some remaining debt of course to address. So we want to be very disciplined there. We're going to be looking at organic growth within our companies as well. We'll be active in the drilling as well, to unlock and build our resource base as well. We're looking [ at ] Blackwater with a view to maybe complete a new updated study as well. Yes, we would -- we see ourself turning the corner and becoming free cash flow at Rainy River. We've made our plan at $1,300 and, of course, even though with the hedging in place, with our actual sales we're averaging more $1,450. So we're doing slightly better than the plan, even though there is a bit of a COVID. So when we look at our projection and the plans that we have put out there, the 2024 for Rainy River at $1,300 is some sort of a $0.25 billion of free cash flow and pretty much double as you get to the current price. So depending on which gold price horizon you could be very well positioned to address the further growth within the company as well. Early stage, but definitely the idea will be to use a portion of the free cash flow of course to really create value on the equity side for our shareholders.

So maybe sticking with Blackwater, it's been interesting this conference that, as you know, there's a number of megaprojects, multimillion-ounce, [ open biddable ] projects out there. And most companies appear just to -- they're just focused on studying the projects, doing trade-off studies. Nobody -- unlike 2010, '12 ago, when all these big projects, they'd be built the next day, that's not happening this time. So just wondering what your view on Blackwater is.

Well, even though we're sitting under $1,700 right now, we're still sitting on consensus, so way below than that. And if there is one thing we should have learned from the 2010, as you said, is the disconnect from spot price and long-term view. And I can speak for New Gold and as much as there is an opportunity here of value creation at the higher gold price, I can assure you that we've made our plan very disciplined in 2020, looking at as a $1,300 and enjoying more -- better margin as the gold price -- remaining, making sure we're fully exposed, starting in 2021. When you're looking at the long term, if you refer, like a Blackwater in particular, I think the priority would be to update the study first. There is the at least 4 years, if not 5 years, type of execution. So what you see in the gold price today is one thing. What will be the 4, 5 years down the road is a different thing. And I think if there is one thing, again, we should have learned from the last cycle is it never lasts forever. So you've got to be very careful when you look out to the future, and continue to use more realistic long term in your approach and not to bet the farm that everything's going to be all right 5 years down the road. But, again, first thing first would be, as a Blackwater per se, the potential to update our study with a new view on it.

I just -- I'm sure you're aware Premier Gold tried to buy 50% of the Greenstone project from Centerra for $210 million. So I thought that was quite interesting. [Indiscernible] . . .

Yes. We follow the news, obviously. And it's good to see that a project like Blackwater could be showing more optionality for us. But, again, at this stage we're still really much engaged in restructuring and creating a clean balance sheet with some good runway. And as we advance and become free cash flow and understand better the future of this company and what's possible, not possible, we'll see how does that fit. But I would expect, as you say, that as the gold price stays and remains strong, there will be obviously more optionality out of Blackwater for us.

And, as you mentioned, consensus -- I don't know if you're aware of it, BofA, our commodities team, have an 18-month price target of $3,000 for gold.

Yes. If you can sign this on the back of a document, you know I'll buy it. I like it. Anyone would like it. But, yes, I mean, there is a lot of very positive view out there on gold, and so very good timing for us to get out of the hedging. And, again, I don't want to talk negative about hedging because it has been a part of our very disciplined approach at the early stage. We were not always sitting on $1,700. As your remind- -- I remind you, when we started the turnaround of this company and it was very, very important to secure the downside and making sure that there was no way we would lose $1 more than planned, maybe short term leaving a little bit of upside aside, but making sure we would not get worse in terms of balance sheet. And we've accomplished that. But looking in the future and seeing us fully exposed to gold price, with Rainy at this stage we're turning the corner, it's very exciting, very exciting. And I really -- I like your $3,000. We're good.

Turning to M&A, again, I'm sure you've noticed there have been a number of mergers or mine acquisitions by intermediate gold producers, mid-tiers craving larger mid-tiers, the latest, of course, Alacer and SSR. And it doesn't leave too many intermediate gold producers at your space, which I define 200,000 to 500,000 ounces. Just wonder what your view on M&A is or whether you're happy with where your company is proceeding at this point.

No, obviously, because we're facing this approach, I mean I think you would, with or without what's happening out there -- it's nice to see what's happening out there. It's nice to see that there is an open mind to create value. And been obviously following what's happening. I was always very open and a big supporter of consolidation when it comes to smart M&A. And every time I was asked, I was always saying the same thing. But New Gold is a stage approach and repositioning. And we believe in our future. We believe this company, as we advance in '20, we reposition as a clean balance sheet, lower our ratios and turning it as a free cash flow at Rainy River, good exposure in copper, diversify in 2 assets, a lot of [ answers ] and optionalities as well. So we're not there yet. We're still kind of in transitions of completing Stage 2 and so forth. But being located in Canada and diversify in metals and diversify in type of mining and diversify in different -- having more than one asset and with some upside potential here, looking out on the project side, all being located in Canada, yes, we definitely see New Gold positioning itself to strategically create value. But I would say this is not the focus as we speak. There is way more to do to our shareholders before we think of that phase for us.

Well, yesterday on the Alamos call, John McCluskey spoke very well of Island, which obviously you managed there for a few years at Richmont. So he was very complimentary about that acquisition for Alamos. So must reflect well on yourself and your team.

Well, I appreciate that. And I'm really, really pleased to see that Island Gold has just continued to create so much value. And this is what I think we do well, is we see opportunity. We understand value creation and we're disciplined. And you mentioned Island Gold. That was a past life and eventually the asset ended in the hands of Alamos and they've done a great work with it. And now we've joined New Gold and we're looking at this. And we always believed in the capacity of turning this company around. Different product, obviously, but more diversification, more [ answers ] and some coppers at play. More difficult in the short term, but in the long run way more potential, definitely.

Speaking of that, you touched on in your capital allocation discussion exploration potential around Rainy River and New Afton. What's the plan there and the targets for this year? I guess exploration may have slowed down with COVID, but all the companies that we've been talking to it's picking back up for the second half.

Yes. I think the slowdown has been -- like in our case, because it's a lot of a kind of mix of brownfield. Greenfield, yes, but kind of around the mine. As much as we've been capable to operate and ramping up and securing capital execution, there is no doubt in my mind that we could take on exploration with or without COVID and put all the safety protocol in place. I think it has more to do, like in our case, with the permitting processes for exploration, both in Ontario and B.C. kind of slowing down, which we can understand. Priority first [indiscernible] and I would rather secure the permitting in a C-zone rather than say, well, the exploration is a priority. In term of potential, we're talking about 2 things, in a way, that we've been -- on New Afton it's been several years already we've been working on those targets inside and outside the mine, with events even more so by the understanding of the potential. So we're very excited to go and drill next door at New Afton because it's a result of already a lot of work done in geophysics, geochemistry, understanding the regional geology and some mapping and so forth. Good overlap between some geochemistry and geophysic work. So we don't have a crystal ball, but I would call our target there way more advanced and with more information behind. Inside the mine we know that the deposit remains open below the C-zone, but we need better angles. So it's a matter of time and discipline, not drilling for the sake of drilling, and be more efficient. Meanwhile we're very focused to the SLC zone and see if organically we could create some more value in 2024 by adding more ounces and pounds of copper there. While at Rainy River it's -- in the past the drilling effort has been really always at the deposit level, really. And last year we kind of restarted in the more regional and mapping and doing some basic work. We have some good targets from the work that we've done in 2019 to start working on the northeast part of the land package. But it's early stage. But on the positive side, if I look at Rainy River today and I look at the real true effort of drilling and exploration in the past 5 years around the asset, I say, "Why not?" It's a wide open land package and there is nothing at this stage telling us that we won't be capable to expand on our resources as we reenter. And, again, we need to do some permitting around that. So, hopefully, by the end of 2020 we would have been in position to have executed on our drilling program at both assets and be in position to better understand what's the potential at both places.

Well, thank you for that comprehensive answer on exploration. And unfortunately, Renaud, we're at the end of our time. And I had a lot more questions. I apologize. But I do appreciate you taking the time, and New Gold, and we hope to see you, and all of us, in Barcelona May 18th and 20th of 2021. And, otherwise, thank you again.

No, thank you so much. Appreciate it. And have a good day, everyone. Thank you.

Thanks.