New Gold - Q2 2024

Transcript

Operator (participant)

Good morning. My name is Ludy, and I will be your conference operator today. Welcome to New Gold's second quarter 2024 earnings conference call. All lines have been placed on mute to prevent any background noise. Please be advised that today's conference call and webcast is being recorded. After the speakers' remarks, there will be a question-and-answer session. If you would like to ask a question during this time, simply press the star followed by the number one on your telephone keypad. If you would like to withdraw your question, please press the star followed by the number two. 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 (EVP of Strategy and Business Development)

Thank you, Ludy. 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 two 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.

We recall that actual results and future events could differ materially from those expressed or implied in forward-looking statements. Slide two provides additional information and should be reviewed. We also refer you to the section entitled 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'll now turn the call over to Patrick for remarks.

Patrick Godin (President and CEO)

Thanks, Ankit. Before discussing the quarter, I would like to take a moment to discuss last week's events when we experienced the fatality at the Rainy River Mine. More specifically, we lost a colleague. Our thoughts continue to be with his family and friends. Every quarterly call, I start by talking about safety. I 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 ensuring everyone goes home to their family and friends safely at the end of every shift. I've been proud of the health and safety performance by our operation and by the commitment of all employees.

We have been able to celebrate the awards and milestones together, but in the instance, we mourn 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 saw New Gold deliver another quarter as planned. During the quarter, our New Afton Mine won two separate awards 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'm pleased to take a moment to recognize their accomplishments. Operationally, we deliver on the quarterly plan with strong adherence to our personal outlook release from February.

New Afton delivers 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 note that we were one quarter away from securing the increase in production and cash flow expected in the second half of the year. I'm pleased to say that not only have we entered that period, but we do so having finished the first half of the year with free cash flow positive. With the company exiting the first half of 2024 free cash flow positive, I'm pleased to say 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 effort at both operations in 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 m 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 the 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 in 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 (CFO)

Thank you, Pat. I'm on slide six, which has our operating highlights. Q2 was another solid quarter. We produced approximately 69,000 gold ounces and 13.6 million pounds of copper. Rainy River produced approximately 50,300 gold ounces as planned while advancing waste stripping. New Afton produced approximately 18,300 gold ounces and 13.6 million pounds of copper. This represented a 10% increase in gold and a 13% increase in copper production compared to Q2 2023 as seasonal 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 -$433 per gold ounce was significantly lower than the prior year period due to increased copper production and sales.

At Rainy River, costs were higher compared to Q2 2023, but in line with plan, and they're expected to trend lower in the second half as production increases. Turning to our financial results on slide seven, 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 adjustment 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. The company reported net earnings of approximately $52 million or $0.07 per share during Q2. The increase is primarily due to additional revenues resulting from 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 interests. The net impact of this was a $42 million gain. After adjusting for certain other charges, net earnings were $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 quarters 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 spent.

Sustaining capital is primarily related to capitalized waste, capital components, and tailings management and construction. Sustaining capital is trending lower as a proportion of waste tons are capitalized and a higher proportion remains in operating costs, with no net impact on AISC. 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 spent. 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 Gold's 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. To sum up, we remain in a very healthy financial position, all while continuing to invest in growth projects. As we successfully executed on H1 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.

Patrick Godin (President and CEO)

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 excellent position as we start the second half of the year. Waste stripping is expected to decline through the remainder of the year as we access greater quantities of high-grade ore. In the underground mine, extraction from the Intrepid Zone continued as planned, and the development to Main Zone is scheduled 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 guided 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 objective 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 results in higher operating costs and lower sustaining capital. However, no net impact on AISC, 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 headings 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, as 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 additional underground mining equipment is delivered.

The raise boring of a 5 m diameter 420 m long fresh air raise 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'm pleased to report that the construction of the in-pit portal, offering a second means of egress and decreased waste haulage 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 C-Zone ramp-up has been going to plan, leading to a 34% increase in tonnage 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 rate 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 includes the C-Zone cave reaching hydraulic radius and commissioning of the gyratory crusher and conveying system. 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 deliver 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 are New Gold's keys to ensuring consistent quarter-over-quarter results.

Exploration continues to advance at both sites, 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 deliver 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 means of egress will continue 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.

Operator (participant)

Thank you. Ladies and gentlemen, we will now begin the question and answer session. If you would like to ask a question at this time, simply press the star followed by the number one on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press the star followed by the number two. One moment, please, for your first question. Your first question comes from the line of Eric Winmill with Scotiabank. Please go ahead.

Eric Winmill (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 one-time 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 (CFO)

Yep. It's Keith. Yeah. As we continue to increase the throughput at New Afton with C-Zone and ore coming online, we will decrease our cost per ton. We have a lot of fixed costs at New Afton, and we're well leveraged to that increased throughput. So yeah, as we continue to increase throughput, that cost per ton will continue to come down.

Eric Winmill (Analyst)

Okay, great. Thank you very much. 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 River?

Patrick Godin (President and CEO)

Yeah, thank you for your question. So yes, it was not an easy week for all of us. It's nothing compared to the family, but this remained an ongoing investigation. In respect of the process, I'll 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 a related incident with a piece of equipment. So it was equipment that was loading a truck. We have no stability concern, no technical issues, or nothing regarding the infrastructures of the pit or whatever. If I can ring-fence the incident, it's related to the operation of any equipment.

Eric Winmill (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?

Patrick Godin (President and CEO)

Yeah, but first, we stopped the operation when the incident happened in the morning of last Wednesday. And we restarted on Saturday. So basically, we stopped mostly over three days. And we ramp up after that smoothly on Saturday, the operation. 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 in the range of our guidance for 2024. So we're not impacted for this. We took the appropriate time to do the first, I would say, to gather the data for the investigation. And with the—and so we're always doing an investigation when it's something like this. So no matter the incident that we are facing, and after that, we're doing an analysis. So it was important for us to gather all the data. We collaborate with the Minister of Mines, the Chief Inspector.

Also we are doing the investigation in partnership with our employees and with our team. 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. We mostly allow three days, but I'm not seeing that as a loss. I'm seeing that as a care for my colleague.

Eric Winmill (Analyst)

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

Operator (participant)

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

Keith Murphy (CFO)

Anita, we can't hear any of your questions.

Operator (participant)

Be on mute?

Anita Soni (Managing Director)

Yeah, [crosstalk] mute. Keeping yourself on mute.

Patrick Godin (President and CEO)

Okay, thanks.

Anita Soni (Managing Director)

Sorry about that. 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 underspending 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-$145 for growth capital, and you guys are kind of averaging more sub $120 so far.

Patrick Godin (President and CEO)

Well, it's mainly related to two—sorry, good morning, Anita. It's mainly related to two items. So the first item is we have a bit of, I would say, upset quarter to quarter for the delivery of the equipment for the extraction zone and the rehandling at the crusher. 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 mostly because we are very 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 development. We are performing better on development. And we delayed some openings to next year. So it's a slight adjustment because it's only this.

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, which slightly delayed. But we will have to spend this money in a timely manner.

Anita Soni (Managing Director)

Okay.

Patrick Godin (President and CEO)

Just offset from a quarter to a quarter to another quarter. But it's not an extra expense. It's not an underperformance. It's a great performance.

Anita Soni (Managing Director)

Okay. 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 right?

Patrick Godin (President and CEO)

Yes. Yes.

Anita Soni (Managing Director)

Okay. All right. And then that actually leads me to my next question. Both New Afton and Rainy River outperformed not just on the mining cost, but on all of the unit costs. Was that something that was just a one-time thing, or is that better, good optimization on behalf of Yohann and his team?

Patrick Godin (President and CEO)

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, is taking care of our colleagues there. But he's really proud of this achievement at Rainy River because on a total cost point of view, we mine more ton 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 in-pit dumping for the waste, reduce haulage distance, optimize the drilling and the blasting. So we have a new mine manager in place that is a big part with his team. It's a big part of the success too. It's a teamwork, but we improve drastically the productivity in the pit. So we mine more ton 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 manage really well our performance. And so we are pushing really hard to deliver our crushing and material handling in advance. So we are in advance actually on the schedule. And the day that we'll start it up, it will reduce our OpEx because we'll 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, operation equipment, maintenance of the equipment, it will be an immediate gain for us.

Anita Soni (Managing Director)

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

Patrick Godin (President and CEO)

Thank you.

Keith Murphy (CFO)

Your next question comes from the line of Jeremy Hoy with Canaccord, please. Go ahead.

Jeremy Hoy (VP of Equity Research)

Hi, team. Thanks for taking my question. Condolences for your 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 were 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.

Patrick Godin (President and CEO)

Yeah. So for the hydraulic radius, it's actually on the—because we have experience with block cave, if you look, it's the fourth one. In theory, we need to have 18 drawbells developing in 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 30 drawbells for year-end. And so as we discussed, and we are in plan. So we're trending. It can start the cave 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 a picture of the—we're fixing the bottom part of the gyratory crusher. It's a picture of that.

So actually, the mantle and the spider are probably in place. So it's worth looking more, so we're mostly, instead of looking at the end of Q4, we're looking middle Q4. So it's excellent for us. Doing well.

Jeremy Hoy (VP of Equity Research)

Okay. That's great to hear. My next question was going to be on the conveyor and the crusher. Appreciate the detail there as well. That's it for me. Thank you.

Patrick Godin (President and CEO)

Yeah. So we are installing the last belt this week. So basically, the apron is in place under the bin. So I think we will probably sort it out shortly. So the next item in terms of construction, the construction of infrastructure, will be the crusher. So it will be the focus from the following weeks up to the end, mid-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 there. It's perfect.

Jeremy Hoy (VP of Equity Research)

Great. Well, thanks for the additional color.

Operator (participant)

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

Mike Parkin (Head of Mining Research)

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

Patrick Godin (President and CEO)

Thank you, Mike.

Operator (participant)

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

Anita Soni (Managing Director)

Thank you, Ludy. 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 (participant)

Thank you, presenters. Ladies and gentlemen, this concludes today's conference call. Thank you all for participating. You may now disconnect.